Court Opinion

ID: 2816403
Source: CourtListenerOpinion
Date Created: 2015-07-10 20:12:35.951324+00
Date Added: 2024-06-11T11:30:39.752206
License: Public Domain

In the United States Court of Federal Claims
                         NOT FOR PUBLICATION
                               No. 14-1176C
                           (Filed: July 10, 2015)

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SHANNA CLEWLEY and COLT
CLEWLEY
                                               Rule 12(b)(1); Rule 12(b)(6);
                     Plaintiffs,
                                               Rule 9(k); Jurisdiction; Failure
                                               to state a claim upon which relief
v.
                                               can be granted; Breach of duty
                                               of good faith and fair dealing
THE UNITED STATES,

                     Defendant,

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                                   _________

                                   OPINION
                                   _________

BRUGGINK, Judge.

       In their complaint, plaintiffs allege that the United States breached its
contractual duty of good faith and fair dealing. Pending before the court is
defendant’s motion to dismiss under Rules 12(b)(1) and 12(b)(6) of the Rules
of the United States Court of Federal Claims (“RCFC”). The motion has been
fully briefed, and we deem oral argument unnecessary. As more fully
explained below, we grant the motion to dismiss in part and give plaintiffs
leave to file an amended complaint.
                               BACKGROUND 1

        In 2005, the Rural Housing Service (“RHS”), an agency within the
United States Department of Agriculture (“USDA”), loaned $174,890 to
plaintiffs to facilitate the construction of a single-family home in Florissant,
Colorado, pursuant to Section 502 of the Housing Act of 1949. 42 U.S.C. §§
1441-1490t (2012). To receive the loan, plaintiffs signed a series of
documents that consisted of a promissory note, deed of trust, subsidy
repayment agreement, and a payment assistance/deferred mortgage assistance
agreement (the “loan documents”). After the house was completed, plaintiffs
moved in and discovered numerous construction defects, such as faulty
plumbing, protruding screws and nails, a leaky bathtub, and mold spreading
throughout the property. Over the next six years, plaintiffs made their monthly
payments despite the condition of their home.

       In the spring of 2011, plaintiffs’ monthly payments increased beyond
what they could afford. Plaintiffs requested a lower monthly payment amount,
but RHS refused. Plaintiffs stopped meeting their monthly mortgage obligation
in October 2011. In January 2012, RHS denied plaintiffs’ request to restart
their monthly payments and demanded that the loan be brought current in one
lump sum, as was RHS’s prerogative under the provisions of the loan
agreement. Unable to pay the lump sum, plaintiffs sold their home for
$101,000 in March 2012, roughly $85,000 less than the remaining mortgage
balance.

       Plaintiffs allege that they received oral assurances from an unnamed
individual at RHS prior to that sale that the remainder of their debt would be
forgiven if they closed the short sale and completed an application to settle
their loan.2 Plaintiffs promptly submitted the application. RHS did not
respond to plaintiffs’ application for debt settlement. In a letter dated June 19,
2012, RHS agreed to release its mortgage lien on the property to allow the sale
to close, but reminded plaintiffs that they remained responsible for the

1
 The facts in this opinion are drawn primarily from the complaint and from the
loan documents attached to defendant’s motion to dismiss.
2
 Plaintiffs’ complaint does not specifically identify when this communication
occurred. Given that plaintiffs submitted the documents requested by RHS “on
or about June 9, 2012,” we assume the communication occurred during the
Spring of 2012. See Compl. 5.

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outstanding balance owed. On July 10, 2012, the sale of plaintiffs’ home
closed with no objection by RHS. During the ensuing fifteen months,
plaintiffs received no communication from RHS.

        Around October 2013, plaintiffs attempted to purchase a home in South
Dakota. Before the closing of the sale, however, the USDA disclosed to credit
reporting agencies that plaintiffs were still in debt to RHS, behind in their
payments, and subject to a lien of foreclosure, which prevented plaintiffs from
closing on the new home. Plaintiffs inquired about the status of their
application for debt settlement from June 2012, and RHS instructed them to
resubmit the application. In response to this new application, RHS countered
with an offer to lower the amount owed from $79,713.31 to $59,784.98.
Plaintiffs sent a counteroffer in February 2014 to which RHS never responded.
Plaintiffs sent the same counteroffer again in May 2014. In June 2014, RHS
provided another offer of settlement, which plaintiffs did not accept.

       In July 2014, plaintiffs requested a formal determination on their
original application for debt settlement and sought information on how to
appeal any adverse decision. The complaint does not mention whether RHS
ever responded to this inquiry. Plaintiffs instituted the present action on
December 8, 2014. Plaintiffs allege that defendant breached a contractual duty
of good faith and fair dealing through a series of actions, including “failing to
timely respond to Plaintiffs’ request for debt settlement” and “making
misrepresentations to the credit reporting agencies regarding Plaintiffs’
financial condition.” Compl. 8. On February 6, 2015, defendant filed a motion
to dismiss for lack of jurisdiction and failure to state a claim for which relief
can be granted.

                                DISCUSSION

        The necessary threshold inquiry in any case is whether we have
jurisdiction over the claims presented. Steel Co. v. Citizens for a Better Env’t,
523 U.S. 83, 94-95 (1998). If we find jurisdiction, we then determine whether
plaintiffs have stated claims upon which relief can be granted. A mere
“formulaic recitation of the elements of a cause of action” is insufficient to
survive a motion to dismiss under Rule 12(b)(6). See Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 555 (2007). Rather, “the complaint must allege facts
‘plausibly suggesting (not merely consistent with)’ a showing of entitlement
to relief.” Cary v. United States, 552 F.3d 1373, 1376 (Fed. Cir. 2009)
(quoting Twombly, 550 U.S. at 557).

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       In considering a motion to dismiss, “the allegations of the complaint
should be construed favorably to the pleader.” Scheuer v. Rhodes, 416 U.S.
232, 236 (1974); Hamlet v. United States, 873 F.2d 1414, 1416 (Fed. Cir.
1989). We assume that the plaintiff’s undisputed factual allegations contained
within the complaint are true. Miree v. DeKalb Cnty., 433 U.S. 25, 27 n.2
(1977); Reynolds v. Army & Air Force Exch. Serv., 846 F.2d 746, 747 (Fed.
Cir. 1988). Plaintiff bears the burden of proving that the court has subject-
matter jurisdiction, and we may consider evidence outside the pleadings in
deciding the issue. Reynolds, 846 F.2d at 747-48.

        In its motion to dismiss, the United States argues that this Court lacks
jurisdiction because plaintiffs have failed to pursue a remedy through the
administrative review procedures mandated by the Federal Crop Insurance
Reform and Department of Agriculture Reorganization Act of 1994 and its
implementing regulations. See 7 U.S.C. §§ 6991, 6999 (2012) (the
“Reorganization Act”). Because plaintiffs received an “adverse decision”
from RHS, plaintiffs are required to appeal that decision administratively
before seeking judicial review in a district court. Id. § 6999. Thus, according
to defendant, plaintiffs’ claim is premature, and even if it were not, it is in the
wrong forum. Finally, defendant argues that plaintiffs’ claim based on the
USDA’s misrepresentation to the credit reporting agencies is a tort claim,
outside the jurisdiction of this Court.

        Assuming the Court does have jurisdiction, defendant argues that
plaintiffs have failed to plead the existence of a contractual duty breached by
the government. Plaintiffs’ application for debt settlement is not a contract;
at most, it is an offer by plaintiffs that was never accepted by RHS, reasons
defendant. Defendant cites the series of offers and counteroffers between
plaintiffs and RHS to show that the parties never reached agreement, and, even
if the loan documents constituted a contract, RHS breached none of its
provisions. In the absence of any identified contractual obligations, defendant
argues that plaintiffs’ claim of a breach of the implied covenant of good faith
must be dismissed. Defendant also argues that plaintiffs’ failure to expressly
identify provisions of the contract in their complaint violates Rule 9(k).

       Plaintiffs respond that the administrative review procedures contained
within the Reorganization Act are not applicable because plaintiffs are not
challenging an “adverse decision.” Instead, they are challenging RHS’s
“wrongful conduct” throughout the course of the parties’ relationship.
According to plaintiffs, a contract was formed after they submitted their
original application for debt settlement following the short sale. Plaintiffs

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allege that the fifteen months of silence by RHS was an acceptance of
plaintiffs’ offer and the $101,000 from the short sale served as the
consideration. Furthermore, plaintiffs point to the original loan documents
themselves as constituting a contract between plaintiffs and RHS.

        Plaintiffs also reject the argument that their allegations concerning the
misrepresentation to the credit agencies are tortious. Id. at 19. They maintain
that a tort claim that is the result of a breach of contract is ultimately a contract
claim within the jurisdiction of this Court. See Kenney Orthopedic, LLC v.
United States, 88 Fed. Cl. 688 (2009). Given the existence of a contract,
plaintiffs argue that the USDA’s disclosure to the credit reporting agencies and
its repudiation of its oral assurances to forgive plaintiffs’ debt were a breach
of the covenant of good faith and fair dealing. Plaintiffs also argue that the
proper remedy for noncompliance with Rule 9 is to allow them to amend their
complaint rather than dismissing the case.

I. Jurisdiction

        The Housing Act of 1949 and the Reorganization Act authorize RHS
to provide financing to rural homeowners. 7 U.S.C. §§ 6901-7035; 42 U.S.C.
§§ 1471-1490t. The program furnishes mortgage payment assistance to
families at qualifying low-income levels.         Under the terms of the
Reorganization Act, a participant may appeal an “adverse decision” by RHS
via the administrative review process specified within the statute. 7 U.S.C. §§
6995-99. Judicial review of this administrative appeals process is limited to
district courts. Id. § 6999.

       An “adverse decision” is defined as an “administrative decision made
by an officer, employee, or committee of an agency that is adverse to a
participant. The term includes . . . the failure of an agency to issue a decision
or otherwise act on the request or right of the participant.” Id. § 6991(1).
Section 6912 mandates that “a person shall exhaust all administrative appeal
procedures established by the Secretary or required by law before the person
may bring an action in a court of competent jurisdiction.” Id. § 6912(e).
Judicial review is limited to only the district courts. See 7 U.S.C. § 6999.

       Although plaintiffs argue that they are not seeking review of an
“adverse decision,” the complaint alleges that defendant “fail[ed] to timely
respond to Plaintiffs’ request for debt settlement.” Compl. 8. That allegation
certainly falls within the statute’s definition of an “adverse decision.” See 7
U.S.C. § 6991(1). To the extent that plaintiffs’ complaint seeks a review of

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RHS’ decisions, the complaint is within the exclusive jurisdiction of the
district courts.

        Furthermore, actions sounding in tort are explicitly excluded from this
Court’s jurisdiction. 28 U.S.C. § 1491(a)(1) (2012). Plaintiffs’ allegations
regarding the “wrongful conduct” of the agency throughout the parties’
relationship, and specifically that the USDA “made misrepresentations to the
credit reporting agencies,” are primarily tort claims.3 Compl. 8. Thus,
plaintiffs’ claims regarding tortious conduct, standing alone, are not within the
Court’s jurisdiction and must be dismissed.

       However, plaintiffs are correct that their complaint lies within this
Court’s jurisdiction to the extent it alleges a contract claim. See 28 U.S.C. §
1491(a)(1). Plaintiffs allege the existence of two contracts with RHS, at least
one of which–the mortgage itself–is uncontroverted. Breach of the duty of
good faith and fair dealing is a contract claim, and this duty is “implied in
every government contract.” Detroit Hous. Corp. v. United States, 55 Fed. Cl.
410, 417 (2003).

II. Failure To State A Claim

        Defendant argues that plaintiffs have failed to identify a specific
contractual obligation necessary to sustain a claim for breach of the duty of
good faith and fair dealing. Defendant points to several provisions of the
original loan agreement and supporting documentation, which it attached to
support its motion to dismiss, to show that defendant did not have a duty to
forgive plaintiffs’ debt. Defendant argues that the implied duty of good faith
and fair dealing cannot expand the scope of the parties’ duties to one another
and that the duty of good faith must be linked to a substantive, express
obligation under the contract. Defendant also argues that plaintiffs have not
alleged a specific intent to injure plaintiffs or malice on the part of any RHS
officials, which is required for a breach of the duty of good faith and fair
dealing.

       We begin by noting that we cannot consider documents outside of the
pleadings when resolving a motion to dismiss under Rule 12(b)(6). RCFC

3
 We recognize plaintiffs’ argument that a tort which stems from a breach of
contract is ultimately a contract claim. The validity of this position will
depend on the allegations made in the amended complaint.

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12(d). Defendant attached loan documents to its motion. This problem,
however, is caused, as defendant pointed out in its reply brief, by plaintiffs’
failure to meet the specificity requirements of Rule 9 by failing to “identify the
substantive provisions of the contract or treaty on which the party relies” or by
simply attaching the contract to the complaint. RCFC 9(k). Defendant is
correct that the breach of good faith and fair dealing is not a “substantive
provision” within the meaning of Rule 9.

       Looking solely at the complaint, plaintiffs have alleged the existence
of two contracts: the original loan agreement and the “Short Sale Agreement.”
Compl. 2, 5. The only contractual cause of action alleged in the complaint is
one for a breach of the implied covenant of good faith and fair dealing.
Although this cause of action assumes the existence of positive contractual
provisions, plaintiffs must identify those provisions for the duty of good faith
and fair dealing to attach. Detroit Hous. Corp., 55 Fed. Cl. at 417. Plaintiffs’
complaint is currently deficient in this regard.

        However, the remedy for this deficiency is not yet to dismiss the
complaint. Rule 9 notwithstanding, the rules contemplate notice pleading,
rather than fact pleading, Bell, 550 U.S. at 5. According to the Court’s rules,
we should “freely give leave [to amend the complaint] when justice so
requires.” RCFC 15(a)(2); see also Gonzalez-McCaulley Inv. Group, Inc. v.
United States, 93 Fed. Cl. 710, 717 (2010) (allowing the plaintiff to amend its
complaint to remedy failure to plead with specificity under Rule 9(k)). We
will allow plaintiffs to amend their complaint. Plaintiffs have alleged the
existence of two contracts and at least some conduct which they believe was
a breach of one or both of those contracts. The complaint is thus not so
lacking as to warrant dismissal at this juncture. The amended complaint must
meet the particularity requirements of ule 9, however, and plaintiffs will be
well served to plead the elements of each contract they allege was breached
and to identify the provisions that were breached. Failure to do so may result
in dismissal.

                                CONCLUSION

        As explained above, defendant’s motion to dismiss for lack of
jurisdiction is granted as to plaintiffs’ claims for review of RHS’ actions under
the applicable statutes and granted as to plaintiffs’ claims for tortious conduct
apart from a breach of contract. The motion to dismiss is denied without
prejudice as to plaintiffs’ breach of contract claims. We grant plaintiffs leave

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to file an amended complaint to plead their contract claims with more
specificity. Accordingly, the following is ordered:

      1. The clerk of court is directed to dismiss those portions of plaintiffs’
      complaint not alleging a breach of contract.

      2. Plaintiffs are directed to file an amended complaint on or before July
      31, 2015.

      3. Defendant is directed to answer or otherwise respond to the
      amended complaint on or before August 28, 2105.

                                                   s/ Eric G. Bruggink
                                                   ERIC G. BRUGGINK
                                                   Judge

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