956 F. Supp. 2d 1032
N.D. Iowa2013Background
- Lincoln Savings Bank purchased a software license and implementation services for the “Velocity” system from Open Solutions under a written Agreement governed by Delaware law.
- Lincoln sued Open Solutions alleging the software was unusable and asserting breach of contract and warranty claims; some pre-contract warranty-based claims were earlier dismissed under the Agreement’s integration/disclaimer clause.
- Open Solutions filed compulsory counterclaims for breach of contract and declaratory relief related to the same Agreement; Lincoln filed a reply that included counterclaims-to-counterclaims alleging fraud and negligent misrepresentation based on post-contract statements about Velocity’s functionality and implementation timeline.
- Open Solutions moved to strike and dismiss Lincoln’s counterclaims, arguing: counterclaims-in-reply are improper (or untimely amendments), Lincoln failed to plead fraud with requisite particularity/reliance, and the economic loss rule bars the tort claims.
- The court considered (a) whether counterclaims-to-counterclaims are permissible, (b) timeliness under the scheduling order and Rule 16(b)/15(a), and (c) adequacy of the fraud/negligent-misrepresentation pleadings and the economic-loss doctrine under Delaware law.
Issues
| Issue | Lincoln's Argument | Open Solutions' Argument | Held |
|---|---|---|---|
| Whether counterclaims-in-reply are permissible here | Lincoln: reply-counterclaims are allowed; even if counterclaims are compulsory, reply-counterclaims should be permitted | Open Solutions: Rule 7(a) does not authorize counterclaims-to-counterclaims; Lincoln improperly amended without leave | Not permissible here — reply-counterclaims are allowed only in response to permissive counterclaims; Open Solutions’ counterclaims were compulsory, so Lincoln should have sought leave to amend |
| Timeliness of Lincoln’s tort counterclaims | Lincoln: claims should proceed despite timing; treated as pleadings in reply | Open Solutions: Lincoln filed after the scheduling deadline and cannot show good cause under Rule 16(b) | Untimely if treated as an amendment; Lincoln knew facts earlier and cannot show diligence to satisfy Rule 16(b) |
| Adequacy of fraud/negligent-misrepresentation pleadings under Rule 9(b) and Delaware law | Lincoln: alleged reliance and supplied names, dates, and content of statements; at least one statement alleged present fact (checkbox capability) | Open Solutions: Lincoln failed to plead justifiable reliance clearly, failed to plead particularized facts showing promissory fraud (no intent to deceive), and omitted location of statements as required by 9(b) | Pleadings were inadequate: promissory statements lack particularized facts to infer no intent to perform; even the non-promissory checkbox statement failed to allege sufficient particularity (location missing) |
| Whether tort claims survive notwithstanding contract claims (economic loss rule) | Lincoln: fraud alleges duties independent of contract and goes beyond mere contract performance; therefore economic-loss rule should not bar tort claims | Open Solutions: Lincoln seeks only economic losses tied to the bargained-for software; alleged statements relate to performance of the Agreement and thus are barred | Barred by the economic loss rule: damages are purely economic and the alleged misrepresentations relate to contract performance, not an independent duty; fraud exception not met |
Key Cases Cited
- Tullos v. Parks, 915 F.2d 1192 (8th Cir. 1990) (adopts the logical-relationship test for determining whether counterclaims are compulsory under Rule 13(a))
- Cochrane v. Iowa Beef Processors, Inc., 596 F.2d 254 (8th Cir. 1979) (sets out multiple tests for determining compulsory counterclaims)
- Popoalii v. Correctional Medical Services, 512 F.3d 488 (8th Cir. 2008) (explains Rule 16(b) good-cause/diligence requirement for amending scheduling orders)
- Sherman v. Winco Fireworks, Inc., 532 F.3d 709 (8th Cir. 2008) (reinforces that Rule 16(b)’s good-cause standard applies to amendments after scheduling deadlines)
- Gaffin v. Teledyne, Inc., 611 A.2d 467 (Del. 1992) (sets Delaware elements for fraud, including justifiable reliance)
- Brasby v. Morris, 2007 Del. Super. LEXIS 206 (Del. Super. Ct. 2007) (applies the economic loss rule and discusses fraud exception)