Dotcom Associates I, LLC v. United States

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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