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FREMONT FIN. CORP. v. IPC/LEVY

March 9, 1998

FREMONT FINANCIAL CORP., Plaintiff,
v.
IPC/LEVY, INC., Defendant.



The opinion of the court was delivered by: ALESIA

 Before the court is defendant IPC/Levy, Inc.'s motion to dismiss plaintiff Fremont Financial Corporation's complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). For the following reasons, the court denies defendant's motion to dismiss.

 I. BACKGROUND

 The complaint alleges the following facts which, for the purpose of ruling on this motion, are taken as true. Hishon v. King & Spalding, 467 U.S. 69, 73, 81 L. Ed. 2d 59, 104 S. Ct. 2229 (1984). Plaintiff Fremont Financial Corporation ("Fremont") is in the secured lending business. Defendant IPC/Levy, Inc. ("IPC") is in the business of appraising and conducting auctions of industrial machinery and equipment and, as of 1992, was on Fremont's list of approved appraisers.

 Two other entities are also involved in this case: North American Wood Products ("North American") and NAWP Acquisition Corp. ("NAWP"). North American was a manufacturing company which had three separate divisions, two which manufactured particle board and one which manufactured veneer. NAWP purchased North American in 1996.

 In 1992, Fremont loaned money to North American based on an appraisal of equipment owned by North American. The appraisal was prepared by IPC. In October of 1994, North American requested some changes to the existing lending relationship between it and Fremont. Before approving the requested changes, Fremont required that a new appraisal be performed on the equipment. IPC prepared a second appraisal of North American's equipment. Based on that appraisal, Fremont approved the requested modifications to the lending relationship.

 North American's performance in 1995 was poor and, in early 1996, North American requested additional financing support from Fremont either to effectuate a turnaround or to provide time for North American to find a buyer for the company. In conjunction with the request for additional financing support, North American had IPC prepare a third appraisal of North American's equipment. IPC prepared the appraisal in March of 1996 ("the 1996 appraisal"). The 1996 appraisal indicated that the forced liquidation value of the equipment was between $ 1,530,000 and $ 1,600,000. Based on the 1996 appraisal, Fremont agreed to several credit changes requested by North American, including an agreement to finance NAWP's purchase of North American's personal property assets and to provide working capital financing to NAWP thereafter and to release the three principals of North American from their personal guarantees.

 On January 16, 1997, NAWP ceased all business operations because it was unable to turn the company around. NAWP, with Fremont's permission, entered into an auction agreement with IPC, pursuant to which IPC agreed to conduct an auction of the equipment used in connection with NAWP's Evanston, Indiana particle board operation ("the Evanston particle board equipment"). The auction was scheduled for February 27, 1997.

 On January 29, 1997, NAWP and Fremont entered into a letter agreement pursuant to which NAWP acknowledged the existence of certain events of default under the loan documents and surrendered possession of the collateral to Fremont for disposition. Fremont decided to proceed with the auction and entered into an auction agreement with IPC.

 On several different occasions between December of 1996 and February 27, 1997, IPC represented to both NAWP and Fremont that the auction of the Evanston particle board equipment would generate at least $ 600,000 after expenses. Based on IPC's representations, Fremont proceeded with the February 27, 1997 auction. The auction only generated approximately $ 46,500 net of expenses.

 After the auction, Fremont contacted two nationally prominent equipment appraisers and liquidators to discuss the 1996 appraisal. According to both appraisers, the 1996 appraisal greatly overstated the value of the equipment.

 On June 27, 1997, Fremont filed suit against IPC in this court. This court has subject matter jurisdiction over this case pursuant to 28 U.S.C. § 1332, as there exists complete diversity between the parties and the amount in controversy exceeds $ 75,000. In its complaint, Fremont alleges that IPC negligently misrepresented that (1) the value of the equipment owned by North American in March of 1996 was worth $ 1,500,000 and (2) the auction of the Evanston particle board equipment would generate at least $ 600,000 in proceeds. IPC has filed a motion to dismiss Fremont's complaint pursuant to Federal Rule of Civil Procedure 12(b)(6), arguing that Fremont's complaint fails to state a claim for negligent misrepresentation. *fn1"

 II. DISCUSSION

 A. Standard for deciding Rule 12(b)(6) motion ...


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