Lincoln Savings Bank v. Open Solutions, Inc.Lincoln Savings Bank v. Open Solutions, Inc.
RULING ON MOTION TO STRIKE AND DISMISS
TABLE OF CONTENTS
I. INTRODUCTION.......................................................1036
II. PROCEDURAL HISTORY..............................................1036
III. RELEVANT FACTS....................................................1037
IV. DISCUSSION..........................................................1038
A. Are Lincoln’s Counterclaims to Open Solutions’ Counterclaims a Permissible Pleading?............................................1038
C. Did Lincoln’s Counterclaims State Claims Upon Which Relief Can Be Granted?.....................................................1041
1. Did Lincoln Adequately Plead Claims for Fraud and Negligent Misrepresentation? ...........................................1041
2. Are Lincoln’s Counterclaims Barred By the Economic Loss Rule?........................................................1044
V. SUMMARY............................................................1046
VI. ORDER ...............................................................1046
I. INTRODUCTION
This matter comes before the Court on the Motion to Strike and Dismiss Plaintiffs Counterclaim to the Counterclaims (docket number 36) filed by the Defendant on May 20, 2013, the Resistance (docket number 37) filed by the Plaintiff on June 6, and the Reply (docket number 38) filed by the Defendant on June 17. Pursuant to Local Rule 7.c, the issue will be decided without oral argument.
II. PROCEDURAL HISTORY
On October 3, 2012, Plaintiff Lincoln Savings Bank (“Lincoln”) filed a Complaint against Defendant Open Solutions, Inc. (“Open Solutions”). Lincoln is an Iowa banking corporation that operates twenty banking and financial services locations within Iowa. Open Solutions, a Delaware limited liability corporation, provides consulting services, software, and technology to banks and financial institutions, including systems for handling deposits and loan documentation.
Lincoln sued on the Agreement, bringing claims for breach of written contract (Count I), breach of express warranty (Count II), breach of statutory express warranty (Count III), negligent misrepresentation (Count IV), and declaratory relief (Count V). Lincoln alleges the software it purchased from Open Solutions was unusable, and Open Solutions failed to provide the services or maintenance necessary for the software to function as intended. Complaint (docket number 2) at 3. On November 14, 2012, Open Solutions filed a motion to dismiss Counts in and IV of Lincoln’s Complaint, which were based on parol statements allegedly made before the parties entered into the Agreement. Because the terms of the Agreement disclaimed any warranties or representations not expressly set forth in the contract, the Court granted Open Solution’s motion and dismissed Counts III and IV with prejudice.
On March 27, 2013, Open Solutions filed an Answer and Counterclaim generally denying Lincoln’s allegations, and asserting certain affirmative defenses. In its counterclaims, Open Solutions asserts claims for breach of contract (Count I) and declaratory relief (Count II). On April 26, 2013, Lincoln filed an Answer and Coun
Meanwhile, on February 4, 2013, the Court adopted a proposed Scheduling Order and Discovery Plan that set a March 29, 2013, deadline for amending pleadings. The trial is scheduled before the undersigned on February 1, 2014.
III. RELEVANT FACTS
The issue raised by the instant motion is whether the Court should dismiss Lincoln’s counterclaims to Open Solutions’ counterclaims. As part of the Agreement, Lincoln purchased implementation services and a software license to use the “Velocity” software. The counterclaims are based on representations allegedly made by representatives of Open Solutions in regard to the implementation of the Velocity software product Lincoln purchased under the Agreement. The alleged misrepresentations concern Open- Solutions’ “ability to fully implement the Velocity software to fit [Lincoln’s] needs.” Lincoln’s Answer and Counterclaim (docket number 31) at 9. The counterclaims allege that:
a. On or about October- 4, 2011, Lynn from [Open Solutions] represented to Erik Skovgard at [Lincoln] that the forms [Lincoln] needed to fully implement the- Velocity product would be complete and ready for full testing in November of 2011.
b. On or about November 3, 2011, Andy Kain from [Open Solutions] guaranteed to the “lending and Lincoln Savings Bank Velocity conversion Team” that the forms [Lincoln] needed to fully implement the Velocity product would be complete by the end of November.
c. On or about November 3, 2011, Andy Kain and Darlene Loucks from [Open Solutions] represented to the “Lending and Lincoln Savings Bank Velocity Conversion Team” that it would be easy to map forms to use within the Velocity product.
d. On or about November 3, 2011, Andy Kain and Darlene Loucks from [Open Solutions] represented to the “Lending and Lincoln Savings Bank Velocity Conversion Team” that [Lincoln] would be able to build risk based pricing trees and rate sheets within the decision engine component of Velocity.
e. On or around November 4, 2011, Lynn from [Open Solutions] represented that Velocity had no problem incorporating and handling check-boxes in its forms, which was a feature that [Lincoln] needed to fully implement the Velocity product.
Lincoln’s Counterclaim to Counterclaims (docket number 3Í).at 9-10; ¶ 5.
Lincoln alleges that each of the representations were false in that the Velocity product was not ready by November 2011, Velocity could not handle checkboxes, and Lincoln was never able to build risk based pricing trees and rate sheets with Velocity. Lincoln’s Answer and Counterclaim (docket number 31) at 13. Lincoln alleges that Open Solutions knew the representations were untrue, and it made them “with the intent to induce [Lincoln] to spend extra time, energy, and money to implement Velocity to finance [Open Solutions’s] development of the Velocity software instead of getting a refund for a product that would never work.” Lincoln claims that as a result of Open Solutions’ alleged misrepre
Open Solutions asserts that Lincoln’s counterclaims to the counterclaims are not a permitted pleading, but rather constitute “an improper attempt to amend the pleadings without leave of court” in order to evade the March 29, 2013 deadline for amending pleadings. Open Solution’s Motion to Strike and Dismiss (docket number 36) at 1. Open Solutions further asserts that even if counterclaims to counterclaims are permissible, Lincoln did not state a claim upon which relief can be granted. Open Solutions argues that Lincoln’s counterclaims fail because Lincoln did not allege reliance on the misrepresentations, it did not plead particularized facts to support its claims of promissory fraud, and the counterclaims are barred by the economic loss rule.
IV. DISCUSSION
Resolution of Open Solutions’ Motion to Strike and Dismiss Lincoln’s Counterclaims to the Counterclaims requires the Court to address three questions: First, are Lincoln’s counterclaims to Open Solutions’ counterclaims a permissible pleading; second, were Lincoln’s fraud and negligent misrepresentation counterclaims timely; and third, did Lincoln state a claim upon which relief can be granted?
A. Are Lincoln’s Counterclaims to Open Solutions’ Counterclaims a Permissible Pleading?
The Federal Rules of Civil Procedure enumerate the pleadings parties are allowed to make in Rule 7(a). The Rule does not expressly provide for counterclaims in reply to counterclaims. Erickson v. Horing,
Some courts, including the district courts in the Eighth Circuit that have considered the validity of counterclaims to counterclaims, have allowed plaintiffs to file counterclaims in reply when such counterclaims are compulsory and in response to permissive counterclaims. See Feed Mgmt. Sys., Inc. v. Brill,
Lincoln argues that it should be allowed to assert its counterclaims because Open Solutions’ counterclaims are permissive rather than compulsory. Lincoln’s Brief (docket number 37-1) at 6. Under Federal Rule op Civil Procedure 13(a), a compulsory counterclaim is a claim that “arises out of the transaction or occurrence that is the subject matter of the opposing party’s claim.” The word “transaction” as used in Rule 13(a) refers to a series of occurrences that have a logical relationship. Tullos v. Parks,
Applying the logical relation test, the Court in Tullos concluded that the defendant’s counterclaim arose out of the same transaction or occurrence as the plaintiffs claims. Tullos,
Here, Lincoln argues that Open Solutions’ counterclaims do not arise out of the same transaction as Lincoln’s claims. Lincoln asserts that although there appears to be a logical relationship between the two sets of claims, the relation is superficial because the facts and evidence' necessary to prove each claim are distinct. Lincoln’s Brief (docket number 37-1) at 7-8. However, as Open Solutions points out, Open Solutions’ counterclaims arise out of the same contract as Lincoln Savings’ initial claims. Lincoln brought claims for breach of contract (Count I), and Open Solutions counterclaimed for breach of the same contract. See Complaint (docket number 2) at 2; Answer and Counterclaim (docket number 27) at 11. Lincoln brought a claim for declaratory relief (Count V) to “ascertain, establish, and declare” the parties rights in relation to the yearly maintenance fees described in the Agreement, and Open Solutions’ second counterclaim seeks a declaratory judgment on the same contract provision. See Complaint (docket number 2) at 7-8; Answer and Counterclaim
Lincoln argues that even if the Court finds that Open Solutions’ counterclaims are compulsory, Lincoln’s counterclaims are still permissible. Lincoln cites Southeastern Industrial Tire Co., Inc. v. Duraprene Corp.,
B. Were Lincoln’s Fraud and Negligent Misrepresentation Counterclaims Timely?
Although the Court concludes that Lincoln’s counterclaims to Open Solutions’ compulsory counterclaims are not a permitted pleading, several courts have treated counterclaims to counterclaims as an amendment to the pleadings. In Erickson v. Horing,
Rule 15(a) allows a party to amend a pleading after the time for amending as a matter of course “only with the opposing party’s consent or with the court’s leave.” When a party asks for leave to amend outside of the court’s scheduling order, meaning that the deadline for amending pleadings has passed, the party must show good cause under Rule 16(b). Popoalii v. Corr. Med. Serv.,
Here, Lincoln filed its counterclaims on April 26, 2013, nearly a month after the March 29 deadline to amend pleadings had passed. If Lincoln’s counterclaims are construed as an application to amend its complaint — an approach taken by some courts that have addressed counterclaims to compulsory counterclaims — Lincoln asked for leave to amend the pleadings outside the Court’s scheduling order. That is, Lincoln’s counterclaims were not timely because they were effectively an application to amend a pleading after the deadline for amending pleadings had passed. Further, Lincoln cannot show good cause to amend its complaint under Rule 16(b). As in Barstad,
C. Did Lincoln’s Counterclaims State Claims Upon Which Relief Can Be Granted?
Even if Lincoln’s claims are permitted and timely, Open Solutions argues that Lincoln’s counterclaims for negligent representation and fraud fail to state a claim upon which relief can be granted. Open Solutions’ Brief (docket number 36-1) at-5. First; Open Solutions asserts that Lincoln failed to adequately plead its counterclaims’ because it did not plead reliance on the alleged misrepresentations or assert the particularized facts necessary to support fraud and negligent misrepresentation claims based on promises. Second, Open Solutions asserts that even if adequately pled, the claims are barred by the economic loss doctrine.
1. Did Lincoln Adequately Plead Claims for Fraud and Negligent Misrepresentation ?
Under Delaware law, the elements of a fraud claim are:
1) a false representation, usually one of fact, made by the defendant;
2) the defendant’s knowledge or belief that the representation was false, or was made with reckless indifference to the truth;
3) an intent to induce the plaintiff to act or to refrain from acting;
4) . the plaintiffs action or inaction taken in justifiable reliance upon the representation; and
•5) damage to,the plaintiff as a result of ■such reliance. . .
Gaffin v. Teledyne, Inc.,
Under Delaware law, statements that are “merely promissory in nature and expressions as to what will happen in the future” generally cannot form the basis of a fraud or negligent misrepresentation claim. Grunstein v. Silva,
Open Solutions contends that Lincoln has failed to state a claim upon which relief can be granted because it failed to allege reliance, and it asserted claims based on promises without providing the necessary particularized facts to support an inference that Open Solutions did not intend to perform. Under Federal Rule of Civil Procedure 9(b), plaintiffs must meet a heightened pleading standard when asserting a fraud claim. BJC Health Sys. v. Columbia Cas. Co.,
Here, as Open Solutions points out, Lincoln did not expressly allege that it relied on the statements purportedly made by Open Solutions’ representatives. In other words, Lincoln did not specifically state “what was obtained or given up” as the result of the alleged fraudulent representation. See Abels,
However, Open Solutions alleges that Lincoln’s pleading also fails because the fraud and negligent misrepresentation allegations are based on promises, and Lincoln did not plead particularized facts showing that Open Solutions did not intend to perform the promises when it made them. Lincoln counters that the representations were made “as present facts regarding the functionality of the Velocity software, which [Lincoln] could enjoy once the software was fully implemented.” Lincoln’s Brief (docket number 37-1) at 12. Lincoln asserts in allegations (a) and (b) of the counterclaim that Open Solutions represented it would perform certain obligations by certain dates. These representations clearly constitute promises as they express Open Solutions’ intent to carry out actions in the future. Similarly, allegations (c) and (d), that Open Solutions represented that Lincoln would be able to use Velocity for certain functions once it was implemented, also appear promissory. Allegation (c) asserts that Open Solutions represented that “it would be easy” to use Velocity to map forms, and allegation (d) asserts Open Solutions represented that Lincoln “would be able to build risk based pricing trees and rate sheets.” These statements seem to be promises concerning what Lincoln would be able to do with the Velocity software once it was implemented, and do not constitute representations of currently existing fact.
As Open Solutions points out, Lincoln did not plead particularized facts to support its assertion that Open Solutions did not intend to carry out these promises when it made them. See Grunstein v. Silva,
Lincoln’s allegation (e), however, that Open Solutions represented “Velocity had no problem incorporating and handling checkboxes” is not clearly promissory. While the alleged representations made in allegations (a) — (d) relate to future events or what Lincoln would be able to do "with Velocity once Open Solutions completed implementation, the alleged representation in allegation (e) appears ,to be a statement of currently, existing fact about Velocity’s ability to handle checkboxes. In fact, while Open Solutions asserts that allegations “a., b., c, and d. cannot support claims for fraud or negligent misrepresentation” because they are “self-evidently promises or statements of future intent,” Open Solutions failed to address allegation (e). See Open Solutions’ Brief (docket number 36-1) at 7-8.
However, even if the alleged misrepresentation asserted in allegation (e) constitutes a false representation of fact rather than a promise, Lincoln still had to satisfy the heightened pleading standard of Federal Rule of Civil Procedure 9(b). Under Rule 9(b), a party must plead the “who, what, where, when, and how” of the alleged fraudulent representation. BJC Health Sys. v. Columbia Cas. Co.,
2. Are Lincoln’s Counterclaims Barred By the Economic Loss Rule?
Even if Lincoln adequately stated claims for fraud and negligent representation, Open Solutions argues that the claims are barred by the economic loss rule. The economic loss rule is a judicially created doctrine that “prohibits certain claims in tort where overlapping claims based in contract adequately address the injury alleged.” Brasby v. Morris,
Delaware courts have recognized fraud claims as an exception to the economic loss rule, however, in some circumstances. Brasby,
Here, as Open Solutions points out, Lincoln alleges only economic losses. It has not alleged damage to persons or property other than the bargained for software, but rather seeks to recover for monetary losses sustained in attempting to implement the software purchased under the Agreement.' Although Lincoln points out that fraud claims can be an exception to the economic loss rule, Lincoln’s counterclaims do not allege fraud in the inducement of the contract.
V. SUMMARY
In conclusion, the Court finds that Lincoln’s counterclaims to Open .Solutions’ counterclaims should be dismissed. Counterclaims in reply to counterclaims are permissible only as a response to permissive counterclaims, but here Open Solutions asserted compulsory counterclaims. Open Solutions’ counterclaims were compulsory because they arose out of the same transaction as the claims asserted in Lincoln’s complaint. Thus, Lincoln’s counterclaims to the counterclaims are not a permissible pleading. If the Court treats Lincoln’s counterclaims as an application to amend the complaint, the claims are untimely because the deadline for amending pleadings passed. Thus, Lincoln must show good cause to amend its pleading under Federal Rule of Civil Procedure 16(b), and Lincoln cannot do so because it knew of the facts giving rise to its claims in plenty of time to comply with the Court’s scheduling order.
Even if the Court concluded that Lincoln’s counterclaims were permissible and timely, the counterclaims would still fail as a matter of law because they do not state claims upon which relief can be granted. Lincoln appears to have inadequately pled its fraud and negligent misrepresentation claims by failing to assert the particularized facts necessary to sustain promissory fraud claims, and by neglecting to state the location of the alleged misrepresentations, thus failing the particularity requirement of Federal Rule op Civil Procedure 9(b). Finally, if Lincoln had adequately pled its claims, they would be barred by the economic loss doctrine. Lincoln has alleged only economic losses resulting from the alleged misrepresentations, and the allegations relate directly to the performance of the contract between the parties. Lincoln’s claims do not fall under the fraud exception recognized by Delaware courts because they do not arise from a breach of duty independent of the contract. Therefore, Lincoln’s fraud and negligent misrepresentation claims must be dismissed.
VI. ORDER
IT IS THEREFORE ORDERED that the Motion to Strike and Dismiss (docket number 36) filed by Defendant Open Solutions is GRANTED.
Notes
. In its Resistance, Lincoln complains that the Answer and Counterclaim were filed by Open Solutions, LLC, not Open Solutions, Inc. Lincoln entered into the software contract at issue with Open Solutions, Inc. and named Open Solutions, Inc. as the defendant in its Complaint. However, in its Answer and Counterclaim, the defendant states that it is now known as Open Solutions, LLC.
. In Cochrane v. Iowa Beef Processors, Inc.,
. In Lincoln’s Complaint, Counts III and IV allege that Open Solutions made false representations about the Velocity software in order to induce Lincoln into entering the Agreement. However, because the terms of the Agreement disclaimed any representations or warranties not expressly set forth in the contract, the Court dismissed Counts III and IV with prejudice. See Order Granting Motion to Dismiss (docket number 26).