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Larson Manufacturing Company of South Dakota, Inc. v. American Modular Housing Group, LLC

United States District Court, D. South Dakota, Southern Division

January 30, 2018



          VERONICA L. DUFFY United States Magistrate Judge.


         This matter is before the court on the basis of diversity jurisdiction, 28 U.S.C. § 1332, after defendants removed the matter from South Dakota state court. See Docket No. 1, 1-1. The parties have consented to this magistrate judge handling their case pursuant to 28 U.S.C. § 636(c). Now pending is defendants' motion for judgment on the pleadings regarding plaintiffs' fraud claims. See Docket No. 52. Plaintiffs oppose the motion. See Docket No. 63.


         A. Background Facts and Claims

         The court states the following facts from plaintiffs' second amended complaint in order to evaluate defendants' pending motion. Plaintiff Larson Manufacturing Company of South Dakota, Inc. (Larson) is the parent company of plaintiff Superior Homes, LLC (Superior). See Docket No. 58 at p. 1. Both are South Dakota business entities. Id. Superior is in the business of manufacturing and selling modular homes. Id. at p. 2.

         Defendant Western Showcase Homes, Inc. ("Western") is a Nevada corporation in the business of purchasing, reselling, and financing modular homes. Id. at p. 2. Defendant Paul Thomas, a Nevada resident, is the sole member of American Modular Housing Group, LLC (AMHG, LLC), a Nevada company in the business of buying and reselling modular homes. Id. American Modular Housing Group, Inc. (AMHG, Inc.), is a Canadian corporation with its principal place of business in Nevada that also buys and resells modular homes. Id. Thomas is the principal agent and owner of both AMHG entities. Id.

         The defendant entities purchased modular homes from Superior and then re-sold those homes to customers, sometimes arranging for delivery, set and completion of the home at the customer's location. Id. at pp. 2-3. Larson and Superior extended credit to the defendant entities for these purchases; AMHG would then repay the loans when its customer paid the defendant entities. Id. at p. 3.

         The second amended complaint recites that defendant entities placed orders for fourteen modular homes with plaintiffs. Plaintiffs constructed the homes. Of the homes that were delivered to defendants, full payment was never made even though the complaint alleges the ultimate customers who received these homes paid defendants. Other modular homes ordered by defendants were custom-built and never delivered because defendants never paid for the homes. As to the homes plaintiffs retain possession of, plaintiffs allege the custom nature of the homes makes resale of the homes at a reasonable value impracticable.

         In addition, Larson entered into a loan agreement with Western which was guaranteed by AMHG, Inc. This loan agreement ultimately encompassed $14 million in funds. Larson alleges that Western defaulted on the loan and AMHG, Inc. refused to pay pursuant to its guarantee. For all these matters, plaintiffs assert three counts of breach of contract, two counts of fraud, two counts of conversion, one count each of debt and guarantee, and one count of piercing the corporate veil.[1] Plaintiffs also allege defendant Thomas converted money which was received from third parties and intended for plaintiffs, but was instead used by Mr. Thomas for his own personal use. See Docket No. 58 at ¶¶ 15, 20, 49- 51.

         In their answer to the second amended complaint, defendants generally deny nearly all of plaintiffs' allegations. See Docket No. 62. Defendants Western Showcase, Inc., and American Modular Housing Group, Inc., assert five counterclaims against Larson and Superior. Docket No. 57. Those counterclaims include breach of contract (failure to pay rebates, failure to repay personal loans from Thomas and failure to provide future promised business); unjust enrichment (rebates, warranty and service fees); tortious interference with business expectancy (Aspen Links Country Club and Aspen Village Properties); breach of contract (manufacturing defects in modular homes); and fraud and deceit (fraudulent inducement to sign a mortgage in connection with Aspen Village and McKenzie Lane, assignment of mortgage interest in Moose Ridge, fraudulent building practices). See Docket No. 57 at pp. 7-9. Defendants/counterclaim plaintiffs Western Showcase, Inc. and AMHG, Inc. seek compensatory and punitive damages on their counterclaims, pre- and post-judgment interest, attorney's fees, and other remedies. Id. at 9.

         The dates of the business transactions alleged by plaintiffs in their second amended complaint go back as far as April, 2012, and extend into the year 2016. See Docket No. 58.

         B. Fraud Allegations in Plaintiffs' Second Amended Complaint

         The defendants move for judgment on the pleadings based upon their assertion that, pursuant to Fed.R.Civ.P. 9(b), the fraud allegations contained within the plaintiffs' second amended complaint are insufficient as a matter of law. Before analyzing the applicable law, therefore, the court extracts the fraud allegations in the second amended complaint. Counts 5 and 8 of the second amended complaint are both entitled “fraud and deceit, ” and are both leveled against Paul Thomas in his personal capacity. Docket 58, p. 7, ¶¶ 53-58 (count 5); pp. 9-10, ¶¶ 75-79 (count 8). Count 5 pertains to the representations Paul Thomas made to defendants regarding the Aspen Units in particular. It states as follows:

Thomas made representations of fact to Larson that he would collect and forward to Larson the proceeds received for sale of the Aspen Units to which Larson was entitled. At the time Thomas made said representations of fact, he knew or had reasonable grounds for believing them not to be true. Thomas made said representations of fact with the intent to induce Larson to fund the purchase of the Aspen Units. Larson relied on said representations of fact and funded AMHG, LLC's purchase of the Aspen Units. As a result of Thomas's deceit, Aspen has been injured in an amount to be proven at trial.

See Docket 58, ¶¶ 54-58.

         Count 8 pertains to the representations made by Paul Thomas to the plaintiffs regarding the intent and ability of Mr. Thomas and his entities to perform their obligations pursuant to credit contracts and money advances granted to Mr. Thomas and his entities by the plaintiffs, as well as the purpose for which the monies received would be used. Count 8 states as follows:

Over the course of the dealings between the Thomas Entities and Plaintiffs, Thomas made representations of fact asserting his intention to perform his and the Thomas Entities' obligations under the respective contracts, asserting the Thomas Entities were able to pay such obligations, and asserting advances provided by Plaintiffs would be used for modular unit purchases and real estate development purchases. Thomas made those representations of fact with the intent to induce Plaintiffs' reliance on those representations. Plaintiffs relied on Thomas's representations by manufacturing and shipping Units to the Thomas Entities without prepayment and by advancing monies under the Credit Agreement to the Thomas Entities. As a result of Plaintiffs' reliance on Thomas's representations they were injured in an amount to be proven at trial.

         Finally, both count 5 and count 8 incorporate the allegations contained within all the other causes of action contained within the complaint. See Docket 58, ¶¶ 53 and 75.


         A. Provisions of Rule 9(b)

         Rule 9(b) of the Federal Rules of Civil Procedure requires that allegations of fraud contained within a civil complaint must be made with sufficient particularity. See Fed.R.Civ.P. 9(b). The circumstances constituting fraud must be alleged with particularity, but Rule 9(b) instructs that “malice, intent, knowledge, and other conditions of a person's mind may be alleged generally.” Id.

         B. Defendants Have Not Waived Their Opportunity to Object to the Sufficiency of Plaintiffs' Fraud Allegations

         Plaintiffs assert the defendants waived their opportunity to move for judgment on the pleadings based upon Fed.R.Civ.P. 9(b). The plaintiffs theorize that because defendants filed an answer to both the amended complaint and the second amended complaint without first or simultaneously making a specific objection/motion to dismiss based upon plaintiffs' allegedly insufficient fraud allegations, the defendants are precluded from doing so now.

         Relevant to this argument are Fed.R.Civ.P. 12(b), (c), (g), and (h). Those Rules provide:

         Rule 12. Defenses and Objections: When and HowPresented; Motion for Judgment on the Pleadings; Consolidating Motions; ...

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