Dotcom Associates I, LLC v. United States , 2013 U.S. Claims LEXIS 1388 ( 2013 )


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  •             United States Court of Federal Claims
    No. 12-102 C
    September 23, 2013
    DOTCOM ASSOCIATES I, LLC,
    Failure to state a claim;
    Plaintiff,
    Implied covenant of good
    faith and fair dealing; Leave
    v.                                                                  to amend a complaint
    UNITED STATES OF AMERICA,
    Defendant.
    Jason W. Burnett, Reed Longyear Malnati & Ahrens, PLLC, Seattle, Washington, for
    plaintiff.
    Alex P. Hontos, Civil Division, United States Department of Justice, Washington, DC, for
    defendant.
    OPINION and ORDER
    Block, Judge.
    Plaintiff filed suit in this court seeking relief based on a disagreement over rental money
    allegedly owed to plaintiff. In its complaint, plaintiff claims that defendant, inter alia, breached
    the implied covenant of good faith and fair dealing. Now before the court is defendant’s motion
    to dismiss plaintiff’s claims relating to breach of the implied covenant for failure to state a claim
    upon which relief may be granted. See Rule 12(b)(6) of the Rules of the United States Court of
    Federal Claims (“RCFC”). Plaintiff opposes that motion and has moved for leave to amend its
    complaint. See RCFC 15(a).
    To state a claim for breach of the implied covenant of good faith and fair dealing, a party
    must do more than allege a simple breach of contract. Specifically, and as explained in more
    detail below, a party generally must allege some kind of “subterfuge[]” or “evasion[],” such as
    “evasion of the spirit of the bargain, lack of diligence and slacking off, willful rendering of
    imperfect performance, abuse of a power to specify terms, [or] interference with or failure to
    cooperate in the other party’s performance.” Restatement (Second) of Contracts § 205 (1981).
    Moreover, to survive a RCFC 12(b)(6) motion to dismiss, a complaint must “contain sufficient
    factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft
    v. Iqbal, 
    556 U.S. 662
    , 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 
    550 U.S. 544
    , 570
    (2007)). Conclusory allegations that the defendant acted unreasonably will not suffice.
    In this case, plaintiff alleges in its proposed amended complaint that defendant breached
    the implied covenant of good faith and fair dealing by withholding rental money under a
    provision of the rental agreement and “failing to acknowledge,” inter alia, that the provision
    does not apply. While not perfectly clear, plaintiff seems to be alleging that defendant’s
    interpretation of the rental agreement—and its refusal to agree with plaintiff—is so unreasonable
    as to constitute a breach of the implied covenant of good faith and fair dealing.
    The problem is that plaintiff has failed to inform the court what precisely the contested
    provision of the rental agreement says. The court cannot simply accept at face value that
    defendant’s interpretation is so unreasonable that it breaches the implied covenant of good faith
    and fair dealing. This failure to specify why or how defendant’s interpretation is unreasonable is
    fatal to plaintiff’s argument. Because plaintiff, even in its proposed amended complaint, has
    failed to state a claim for breach of the implied covenant upon which relief may be granted, the
    court will deny plaintiff’s motion for leave to amend its complaint as futile and grant defendant’s
    motion to dismiss.
    I. BACKGROUND
    Plaintiff, a Washington state limited liability company, is the owner of the Kress/Payless
    Building in Tacoma, Washington. Proposed Amended Complaint (attached to plaintiff’s motion
    for leave to amend) ¶¶ 2.1, 2.2. Plaintiff leased approximately 26,790 square feet of the
    Kress/Payless Building to the United States in a written lease dated October 19, 2005, id. ¶ 2.3,
    following a Solicitation for Offer (SFO) dated August 5, 2004 and proposals received through
    June 22, 2005, id. ¶ 2.4.
    Because the SFO expressed a preference for buildings listed as eligible for inclusion in
    the National Register of Historic Places and historically-significant buildings in historic districts
    listed in the National Register, plaintiff proposed to undertake a $6.8 million restoration of the
    Kress/Payless Building as a Historic Preservation project under Washington state law and
    Tacoma municipal ordinances. Id. ¶¶ 2.5, 2.6. Because such a project has tax consequences
    under Washington and Tacoma law, the lease included a specifically negotiated terms to deal
    with those tax consequences. See id. ¶¶ 2.7, 2.12, 2.13. First, Paragraph 9 of the lease provides
    for a base rental rate for one to ten years of $24 per square foot. Id. ¶ 2.8. Second, Paragraph 12
    of the lease estimates the base real estate taxes to be $1.60 per square foot per year. Id. ¶ 2.9.
    Third, and most importantly, Paragraph 12 of the lease further provides that “[p]ursuant to SFO
    Paragraph 3.16 Tax Adjustments, the benefits of the Historic Tax Credits are to be assumed by
    Lessor,” that is, plaintiff. Id. ¶¶ 2.10, 2.11. For reasons unknown, neither party has seen fit to
    quote SFO Paragraph 3.16 or even to hint at what the paragraph says.
    On November 28, 2006, the City of Tacoma Landmarks Preservation Commission
    granted plaintiff’s petition for a Special Valuation Tax Covenant, thus exempting the
    Kress/Payless Building from real estate taxes effective January 1, 2008. Id. ¶¶ 2.12, 2.13.
    Meanwhile, defendant paid the base real estate taxes from 2006 through 2010. Id. ¶ 2.14.
    That changed in March 2011 when the contracting officer unilaterally decided (1) to
    prospectively cease payment of the $1.60 per square foot base real estate taxes, and (2) to
    withhold $145,889.48 from future rental payments in order to recoup base real estate taxes paid
    to plaintiff for the years 2007 through 2010. Id. ¶ 2.15. Apparently, the contracting officer did
    not seek or obtain the advice of legal counsel before making this decision. Id. ¶ 2.16. In May
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    2011, defendant set forth the legal basis for its decision to withhold rent: the elusive Section
    3.16 E.2 of the May 23, 2005 Amendment to the SFO. 1 Id. ¶ 2.20.
    Also in May 2011, defendant proposed a supplemental lease agreement to “reimburse the
    Government $156,268.66 of over payment for real estate taxes . . . .” Id. ¶ 2.17. According to
    plaintiff, the proposed supplemental lease agreement, “failed to meet basic accounting and math
    standards insofar as it expressly contemplated [plaintiff] not only refunding to [defendant]
    alleged overpayments, but also expressly contemplated [plaintiff] paying additional monies to
    [defendant] that were not related to or part of any alleged overpayment by [defendant].” Id. ¶
    2.18.
    Without ever withdrawing this proposed supplemental lease agreement, id. ¶ 2.19, the
    contracting officer and other officials met with representatives of plaintiff on or about October
    26, 2011 to discuss a possible resolution of the lease interpretation dispute. Id. ¶ 2.26.
    According to plaintiff, the meeting was a “charade” in which defendant simply reaffirmed its
    position without having “sought or obtained any legal opinion regarding the validity of [that]
    position.” Id. ¶¶ 2.27, 2.28.
    On February 14, 2012, plaintiff filed this suit alleging various claims, including breach of
    the implied covenant of good faith and fair dealing. There are five ways in which plaintiff
    alleges defendant breached the implied covenant of good faith and fair dealing:
    1. By withholding rental money. Id. ¶¶ 3.3-3.6, 3.8.
    2. By “[f]ailing to acknowledge that Paragraph 12 of the Lease was drafted,
    negotiated and executed after Section 3.16 E of the Lease.” Id. ¶ 3.18.
    3. By “[f]ailing to acknowledge that Paragraph 12 of the Lease was drafted
    specifically to apply to this and only this Lease.” Id. ¶ 3.18.
    4. By “[f]ailing to acknowledge that Section 3.16 E was a printed boilerplate
    term not drafted specifically to apply to this and only this Lease.” Id. ¶ 3.18.
    5. By “[f]ailing to acknowledge that Defendant’s course of conduct from 2007
    through and including 2010 constitutes acceptance of an acquiescence to the
    terms of Paragraph 12 of the Lease.” Id. ¶ 3.18.
    On May 16, 2012, defendant moved to dismiss those portions of plaintiff’s complaint
    relating to breach of the implied covenant of good faith and fair dealing for failure to state a
    1
    The lease, as quoted in plaintiff’s complaint, refers to “SFO Paragraph 3.16 Tax Adjustments.”
    (first emphasis added). But plaintiff later states that defendant’s asserted basis for withholding
    rent was “Section 3.16 E.2 of the May 23, 2005 Amendment to [the] SFO.” (emphasis added).
    Both parties’ various representations assume that “Paragraph” 3.16 and “Section” 3.16 are just
    different names for the same provision. The court cannot independently verify that these
    representations are correct since the parties have not provided the court with a copy of the rental
    agreement. The court will nonetheless assume that different nomenclature refers to the same
    provision, since none of either parties’ arguments would be comprehensible if it were otherwise.
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    claim upon which relief can be granted. Def.’s Motion to Dismiss, ECF Dkt. 6. Plaintiff then
    moved to amend its complaint, Pl.’s Motion for Leave to Amend, ECF Dkt. 8, which motion
    defendant opposed as futile, Def.’s Response to Motion for Leave to Amend, ECF Dkt. 9.
    Plaintiff also opposed the motion to dismiss arguing that it has stated sufficient allegations to
    support a finding of breach of the implied covenant of good faith and fair dealing. Pl.’s
    Response to Motion to Dismiss, ECF Dkt. 11. Both parties filed replies in support of their
    respective motions. Pl.’s Reply in Support of Motion for Leave to Amend, ECF Dkt. 10; Def.’s
    Reply in Support of Motion to Dismiss, ECF Dkt. 12.
    II. DISCUSSION
    A. Motion to Amend the Complaint
    Pursuant to RCFC 15(a), a party who fails to amend a complaint within 21 days after
    service of a motion to dismiss for failure to state a claim “may amend [its complaint] only with
    the opposing party’s written consent or the court’s leave.” RCFC 15(a)(2). When a party moves
    for leave to amend, “[t]he court should freely give leave when justice so requires.” Id.; see
    Mitsui Foods, Inc. v. United States, 
    867 F.2d 1401
    , 1403 (Fed. Cir. 1989). However, “the
    existence of such factors as ‘undue delay, bad faith or dilatory motive on the part of the movant,
    repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the
    opposing party by virtue of allowance of the amendment, [or] futility of amendment’” may
    justify denial. 
    Id. at 1403-04
     (quoting Foman v. Davis, 
    371 U.S. 178
    , 182 (1962)) (alteration in
    original); see also Wolfchild v. United States, 
    101 Fed. Cl. 54
    , 64 (2011).
    “Regarding futility, a motion to amend may be deemed futile if a claim added by the
    amendment would not withstand a motion to dismiss.” Wolfchild, 101 Fed. Cl. at 64 (internal
    quotations and citation omitted). Thus, “[w]hen a party faces the possibility of being denied
    leave to amend on the ground of futility, that party . . . must proffer sufficient facts supporting
    the amended pleading that the claim could survive a dispositive pretrial motion.” Kemin Foods,
    L.C. v. Pigmentos Vegetales Del Centro S.A. de C.V., 
    464 F.3d 1339
    , 1354-55 (Fed. Cir. 2006);
    see also Sanofi-Aventis v. Apotex, Inc., 
    659 F.3d 1171
    , 1181-82 (Fed. Cir. 2011); 6 Charles Alan
    Wright, et al., Federal Practice and Procedure § 1487 (3d ed.).
    Accordingly, whether the court grants or denies plaintiff’s motion for leave to amend, it
    will have to consider whether the proposed amended complaint would survive a motion to
    dismiss for failure to state a claim. It is to that question the court now turns.
    B. Motion to Dismiss for Failure to State a Claim
    To survive a RCFC 12(b)(6) motion to dismiss for failure to state a claim upon which
    relief can be granted, a complaint must contain “a short and plain statement of the claim showing
    that the pleader is entitled to relief.” RCFC 8(a). To do this, a complaint “must contain
    sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’”
    Iqbal, 
    556 U.S. at 678
     (quoting Twombly, 
    550 U.S. at 570
    ); see also In re Bill of Lading
    Transmission and Processing System Patent Litigation, 
    681 F.3d 1323
    , 1331-32 (Fed. Cir. 2012).
    “While [the court] generally construe[s] the complaint in the light most favorable to the plaintiff,
    accept[s] its allegations as true, and draw[s] all reasonable inferences in favor of the plaintiff,
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    [the court is] not required to accept as true legal conclusions or unwarranted factual inferences.”
    Id. at 1331 (internal quotation marks and citation omitted)
    Because the factual matter plaintiff must allege here must support a claim for breach of
    the implied covenant of good faith and fair dealing, it is necessary to understand the nature of
    such a claim. To start off, it is important to note that every contract includes an implied covenant
    of good faith and fair dealing. Precision Pine & Timber, Inc. v. United States, 
    596 F.3d 817
    , 828
    (Fed. Cir. 2010); Centex Corp. v. United States, 
    395 F.3d 1283
    , 1304 (Fed. Cir. 2005). This
    implied covenant “imposes obligations on both contracting parties that include the duty not to
    interfere with the other party’s performance and not to act so as to destroy the reasonable
    expectations of the other party regarding the fruits of the contract.” Centex, 
    395 F.3d at 1304
    .
    The implied covenant also imposes obligations of diligence and cooperation and includes the
    duty not to hinder the other party’s performance. See Essex Electro Eng’rs, Inc. v. Danzig, 
    224 F.3d 1283
    , 1291 (Fed Cir. 2000); C. Sanchez & Son, Inc. v. United States, 
    6 F.3d 1539
    , 1542
    (Fed. Cir. 1993); Malone v. United States, 
    849 F.2d 1441
    , 1445 (Fed. Cir. 1988).
    Beyond these general descriptions, the specific duties of parties under the implied
    covenant of good faith and fair dealing depend on the particular circumstances of the case. See
    Milmark Servs., Inc. v. United States, 
    731 F.2d 855
    , 859 (Fed. Cir. 1984); Commerce Int’l Co. v.
    United States, 
    338 F.2d 81
    , 86 (Ct. Cl. 1964). The Restatement (Second) of Contracts is
    illustrative:
    Subterfuges and evasions violate the obligation of good faith in performance even
    though the actor believes his conduct to be justified. But the obligation goes
    further: bad faith may be overt or may consist of inaction, and fair dealing may
    require more than honesty. A complete catalogue of types of bad faith is
    impossible, but the following types are among those which have been recognized
    in judicial decisions: evasion of the spirit of the bargain, lack of diligence and
    slacking off, willful rendering of imperfect performance, abuse of a power to
    specify terms, and interference with or failure to cooperate in the other party’s
    performance.
    Restatement (Second) of Contracts § 205; see also 23 Williston on Contracts § 63.22 (4th ed.)
    (“A breach of the implied obligation of good faith and fair dealing is obviously present where a
    party acts in bad faith, but it may also be found where the defendant acts in a commercially
    unreasonable manner while exercising some discretionary power under the contract.”).
    Moreover, breach of the implied covenant of good faith and fair dealing may consist of
    “dishonest conduct such as conjuring up a pretended dispute, asserting an interpretation contrary
    to one’s own understanding, or falsification of facts.” Restatement (Second) of Contracts § 205.
    A breach of the implied covenant of good faith and fair dealing may be found when the
    government undertakes a sovereign action “specifically designed to reappropriate the benefits the
    other party expected to obtain” under a contract. Precision Pine, 
    596 F.3d at
    829 (citing Centex,
    
    395 F.3d at 1311
    ); see also Fireman’s Fund Ins. Co. v. United States, 
    92 Fed. Cl. 598
    , 677
    (2010).
    Applying these standards to the instant case, it is evident that none of plaintiff’s five
    allegations of breach of the implied covenant of good faith and fair dealing state claims upon
    which relief can be granted. Take, first, plaintiff’s claim that defendant breach the implied
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    covenant of good faith and fair dealing by withholding rental money. Whether or not this is a
    breach of Paragraph 12 of the rental agreement, it is—standing alone—plainly insufficient to
    establish a breach of the implied covenant of good faith and fair dealing. Every breach of
    contract suit in this court involves a plaintiff who alleges that a defendant owes the plaintiff
    money. If withholding rental money by itself was enough to establish a breach of the implied
    covenant of good faith and fair dealing, every breach of contract would also be a breach of the
    implied covenant.
    Plaintiff’s remaining four allegations of breach of the implied covenant of good faith and
    fair dealing consist of averments that defendant as “fail[ed] to acknowledge” various points that
    plaintiff thinks are both true and relevant. As described above, plaintiff alleges that defendant
    failed to acknowledge (1) that Paragraph 12 of the Lease was drafted, negotiated and executive
    after Section 3.16 E of the Lease,” (2) “that Paragraph 12 of the Lease was drafted specifically to
    apply to this and only this Lease,” (3) “that Section 3.16 E was a printed boilerplate term not
    drafted specifically to apply to this and only this Lease,” and (4) “that Defendant’s course of
    conduct from 2007 through and including 2010 constitutes acceptance of an acquiescence to the
    terms of Paragraph 12 of the Lease.” Id. ¶ 3.18. According to plaintiff, “failing to acknowledge”
    the rightness of these arguments is itself in dereliction of the implied covenant of good faith and
    fair dealing.
    This failure-to-agree-with-plaintiff theory of breach of the implied covenant of good faith
    and fair dealing is quite novel. Charitably, one might read these four allegations as presenting
    additional context for the first. Under this view, plaintiff is alleging that the withholding of rent
    is a breach of the implied covenant in view of everything defendant “fail[ed] to acknowledge.”
    With that understanding of plaintiff’s argument, one might further surmise (again, charitably)
    that plaintiff is asserting that defendant’s invocation of Section 3.16 in contravention of
    Paragraph 12 is so outlandish—so contrary to the parties’ expectations—that it qualifies as a
    breach of the implied covenant of good faith and fair dealing. See Restatement (Second) of
    Contracts § 205 (providing that the implied covenant may be breached when one “assert[s] an
    interpretation contrary to one’s own understanding”).
    The problem is that if plaintiff were alleging that defendant’s interpretation of Paragraph
    12 and Section 3.16 is unreasonable, then one would expect plaintiff to at some point tell the
    court what Section 3.16 says. A complaint that bases a claim for breach of the implied covenant
    of good faith and fair dealing on the asserted unreasonableness of the defendant’s interpretation
    of a contract but does not even mention the language of the relevant contractual provision does
    not “state a claim to relief that is plausible on its face.” Twombly, 
    550 U.S. at 570
    . In short,
    from what plaintiff has alleged, no reasonable inference may be drawn that defendant has
    interpreted the lease unreasonably, let alone contrary to its “own understanding.” Restatement
    (Second) of Contract § 205.
    Plaintiff does not help matters when, in its proposed amended complaint, it stresses that
    the contracting officer and other government officials did not seek legal advice before
    withholding rent and did not back down from their position at the October 2011 meeting.
    “Failure to obtain legal advice does not mandate a finding of willfulness or bad faith,” Delta-X
    Corp. v. Baker Hughes Production Tools, Inc., 
    984 F.2d 410
    , 414 (Fed. Cir. 1993), and no
    authority stands for the proposition that a contracting officer’s failure to obtain counsel prior to
    allegedly breaching a contract transforms that alleged breach of contract into a breach of the
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    implied covenant of good faith and fair dealing. There is likewise no authority for the
    proposition that the government must agree with a contractor on contract interpretation so as to
    avoid litigation. To be sure, although some may wish for the contrary, there exists no universal
    rule, court-made or not, that government agents must obtain legal advice before acting within the
    scope of their duties.
    Finally, plaintiff’s insistence in its proposed amended complaint that the proposed
    supplemental agreement “failed to meet basic accounting and math standards” is conclusory, and
    therefore not “sufficient factual matter” for stating a claim for relief. See Iqbal, 556 U.S at 678
    (citing Twombly, 
    550 U.S. at 570
    ). Plaintiff does not say what “basic accounting and math
    standards” it is referring to, how the proposed supplemental agreement violated them, or even
    how a merely “proposed” supplemental agreement has caused plaintiff to suffer any damages.
    Because its allegations are both conclusory and unclear, plaintiff has not stated a claim upon
    which relief may be granted.
    III. CONCLUSION
    For the foregoing reasons, amending the complaint would be futile. Plaintiff’s MOTION
    for leave to amend its complaint is therefore DENIED. Because plaintiff has failed to state a
    claim for breach of the implied covenant of good faith and fair dealing upon which relief may be
    granted, defendant’s MOTION to dismiss plaintiff’s claims relating to the implied covenant is
    GRANTED.
    IT IS SO ORDERED.
    s/Lawrence J. Block
    Lawrence J. Block
    Judge
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