Automotive Holdings, LLC v. Phoenix Corners Portfolio, LLC et al, No. 2:2009cv01843 - Document 25 (D. Ariz. 2010)
Court Description: ORDER granting 7 Motion to Dismiss denying with respect to COUNT IV (Rescission) and DENIED with respect to COUNTS I-III (Breach of Contract,Fraud, Negligent Misrepresentation) and COUNT V (Breach of Duty of Good Faith and Fair Dealing). IT IS FURTHER ORDERED denying 17 Motion for Leave to File Surreply. FINALLY ORDERED that the Clerk of Court should enter judgment accordingly. Signed by Judge James A Teilborg on 5/4/10.(LAD)
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Automotive Holdings, LLC v. Phoenix Corners Portfolio, LLC et al 1 Doc. 25 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA 8 9 10 11 12 13 14 15 16 17 Automotive Holdings, L.L.C., a Nevada) ) limited liability company, ) ) Plaintiff, ) ) vs. ) ) Phoenix Corners Portfolio, L.L.C., a) Delaware limited liability company; John) and Jane Does I-V; ABC Corporations I-) V; ABC Partnerships I-V; ABC Limited) ) Liability Companies I-V, ) ) Defendants. ) ) No. CV-09-01843-PHX-JAT-PHX-JAT ORDER 18 19 BACKGROUND: 20 Pending before the Court is Defendant’s Motion to Dismiss. (Doc. #7). Plaintiff has 21 filed a Response and Opposition to Defendant’s Motion to Dismiss (Doc. #11); Defendant 22 has filed its Reply (Doc. #15). Plaintiff has also filed a Motion for Leave to File Surreply. 23 (Doc. #17) For the following reasons the Motion to Dismiss is DENIED in part and 24 GRANTED in part. 25 LEGAL STANDARD: 26 To survive a 12(b)(6) motion for failure to state a claim, a complaint must meet the 27 requirements of Federal Rule of Civil Procedure 8(a)(2). Rule 8(a)(2) requires a “short and 28 plain statement of the claim showing that the pleader is entitled to relief,” so that the Dockets.Justia.com 1 defendant has “fair notice of what the . . . claim is and the grounds upon which it rests.” Bell 2 Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 3 (1957)). 4 Although a complaint attacked for failure to state a claim does not need detailed 5 factual allegations, the pleader’s obligation to provide the grounds for relief requires “more 6 than labels and conclusions, and a formulaic recitation of the elements of a cause of action 7 will not do.” Twombly, 550 U.S. at 555 (internal citations omitted). The factual allegations 8 of the complaint must be sufficient to raise a right to relief above a speculative level. Id. 9 Rule 8(a)(2) “requires a ‘showing,’ rather than a blanket assertion, of entitlement to relief. 10 Without some factual allegation in the complaint, it is hard to see how a claimant could 11 satisfy the requirement of providing not only ‘fair notice’ of the nature of the claim, but also 12 ‘grounds’ on which the claim rests.” Id. (citing 5 C. WRIGHT & A. MILLER, FEDERAL 13 PRACTICE AND PROCEDURE §1202, pp. 94, 95 (3d ed. 2004)). 14 Rule 8’s pleading standard demands more than “an unadorned, the-defendant- 15 unlawfully-harmed-me accusation.” Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009) (citing 16 Twombly, 550 U.S. at 555). A complaint that offers nothing more than naked assertions will 17 not suffice. To survive a motion to dismiss, a complaint must contain sufficient factual 18 matter, which, if accepted as true, states a claim to relief that is “plausible on its face.” Iqbal, 19 129 S.Ct. at 1949. Facial plausibility exists if the pleader pleads factual content that allows 20 the court to draw the reasonable inference that the defendant is liable for the misconduct 21 alleged. Id. Plausibility does not equal “probability,” but plausibility requires more than a 22 sheer possibility that a defendant has acted unlawfully. Id. “Where a complaint pleads facts 23 that are ‘merely consistent’ with a defendant’s liability, it ‘stops short of the line between 24 possibility and plausibility of ‘entitlement to relief.’” Id. (citing Twombly, 550 U.S. at 557). 25 In deciding a motion to dismiss under Rule 12(b)(6), the Court must construe the facts 26 alleged in the complaint in the light most favorable to the drafter of the complaint and the 27 Court must accept all well-pleaded factual allegations as true. See Shwarz v. United States, 28 234 F.3d 428, 435 (9th Cir. 2000). Nonetheless, the Court does not have to accept as true -2- 1 a legal conclusion couched as a factual allegation. Papasan v. Allain, 478 U.S. 265, 286 2 (1986). Dismissal is appropriate where the complaint lacks either a cognizable legal theory 3 or facts sufficient to support a cognizable legal theory. See Balistreri v. Pacifica Police 4 Dep’t, 901 F.2d 696, 699 (9th Cir. 1988); Weisbuch v. County of L.A., 119 F.3d 778, 783 n.1 5 (9th Cir. 1997). 6 Plaintiff alleges five counts in its First Amended Complaint: Breach of Contract; 7 Fraud; Negligent Misrepresentation; Rescission; and a Breach of the Duty of Good Faith and 8 Fair Dealing. (Doc. #1-1). All five counts arise from the same nexus of alleged facts. In 9 deciding a motion to dismiss, the Court assumes all well-pleaded facts to be correct. Schwarz, 10 234 F.3d at 435. The following represents that factual background, as pleaded in the amended 11 complaint. Plaintiff purchased commercial property from Defendant in April 2006. Prior to 12 the close of Escrow, Defendant was obligated under the terms of the purchase agreement to 13 disclose all communication between Defendant and the current tenants of the commercial 14 property. In addition, Plaintiff specifically requested the disclosure of all emails between 15 Defendant and its current and future tenants. (Doc. #1; Exhibit B). Defendant did not comply 16 with this requirement and withheld communications from the tenants; the most significant 17 of which was a series of communications where Pro Medical, a tenant with a five-year lease 18 commencing in 2007, informed Defendant that its company was experiencing financial 19 difficulties. In these communications, Pro Medical explained that it would likely close the 20 store or declare bankruptcy. Shortly after the close of escrow, Plaintiff learned of Pro 21 Medical’s financial difficulties as well as the communications with Defendant. By July, Pro 22 Medical had shut down its store, ceased paying rent, and vacated the property. Plaintiff 23 alleges that had it received the required communications, then it would not have purchased 24 the property. 25 Significantly, section 19 of the purchase contract is a choice of law provision that 26 requires the contract to be governed, construed, and enforced in accordance with Arizona 27 law. Neither party argues that this provision does not control, therefore the Court views 28 Plaintiff’s claims through the lens of Arizona’s substantive law. -3- 1 COUNT 1 Breach of Contract: 2 Defendant first contends that Plaintiff delayed too long in asserting its claim for 3 Breach of Contract. Plaintiff initially brought this lawsuit in June 2009, more than one year 4 after learning of the undisclosed communications. In support of its argument, Defendant 5 points to a portion of the purchase agreement that states the “covenants, representations and 6 warranties of Buyer and Seller . . . shall survive”1 to one year following the end of escrow. 7 Plaintiff filed its complaint seven days after the close of this one-year period. Defendant in 8 its reply identifies how other courts have identified similar language as contractual 9 agreements to shorten the period in which claims can be brought. See e.g., State St. Bank v. 10 Denman Tire, 240 F.3d 83, 87 (1st Cir. 2001) (statute of limitations can be shortened when 11 applying Illinois law); TakeCare, Inc. v. Lincoln Nat’l. Corp., 1995 U.S. Dist. LEXIS 21721 12 *22 (C.D. Cal., Dec. 18, 1995) (similar language limited an indemnification agreement’s 13 window of application). 14 In its Response, Plaintiff argues that the correct calculation should be based on 15 Arizona’s statute of limitations for breach of contract. A.R.S. § 12-548 (requiring filing 16 within six years). In some areas, Arizona law permits parties to bargain to shorten the period 17 of the statute of limitations; for insurance contracts this right is expressly provided by statute. 18 Zuckerman v. Tansamerica Ins. Co., 650 P.2d 441, 445 n.5 (Ariz. 1982); A.R.S. § 20- 19 1115(A)(3). Neither party cites authority suggesting that Arizona courts recognize a 20 reduction of the statute of limitations for contractual disputes outside of the context of 21 insurance. Although, recognized in other states such as California and Illinois, it is not clear 22 that Arizona law generally permits the shortening of statute of limitations by contract when 23 not explicitly authorized by statute. 24 25 26 27 28 1 The language is contained in section 29 of the agreement and is entitled “Survival of Covenants.” The full language states “[t]he covenants, representations and warranties of Buyer and Seller set forth in this agreement shall survive the recordation of the Deed and the Close of Escrow for a period of one year and shall not be deemed merged into the Deed upon its recordation.”(Doc. #1 Ex. A) -4- 1 Even if shortening is permissible, it would not apply here. Although Arizona courts 2 recognize a statute of limitations defense they do not favor it; if a provision can reasonably 3 be interpreted in more than one manner, deference should be given to the interpretation with 4 the longer statute of limitations. Physical Therapy Assoc., Inc. v. Pinal County, 743 P.2d 1, 5 3 (Ariz. Ct. App. 1987). The Ninth Circuit has provided guidance that in jurisdictions that 6 do not favor statute of limitations modifications, clauses that seek to limit the statute of 7 limitations must be strictly construed against the party invoking the limitation. W. Filter 8 Corp. v. Argan, Inc., 540 F.3d 947, 953 (9th Cir. 2008). Provisions seeking to reduce the 9 statute of limitations must be both clear and unambiguous, and contain specific language 10 reducing the statute of limitations. Id. at 954.2 Here, the language contained is clear and 11 unambiguous. However, it does not expressly limit the statute of limitations to a period of 12 one year. Even if such an interpretation was intended by the parties, the lack of specific 13 language shortening the statute of limitations does not allow the Court to “read-in” 14 Defendant’s interpretation. Accordingly, the Court determines that the survival statute only 15 limited the time when a breach of the representations may have occurred, not the period of 16 time in which Plaintiff was required to file suit. 17 Defendant’s next argument is that the disclosure of information was not required 18 under the terms of the agreement. Plaintiff points to section 31(vii) of the lease which 19 requires the disclosure of “material adverse facts or conditions relating to the Property,” and 20 Section 7(a)(i) which required Defendant to provide all “information relevant to [Plaintiff’s] 21 evaluation of the property.” Defendant argues that the statements made by Pro Medical do 22 not constitute “facts” but rather are speculative opinions that it was not required to disclose. 23 24 25 26 27 28 2 The language construed in Western Filter read in pertinent part: “[t]he representations and warranties of [Western Filter] and [Argan] in this Agreement shall survive the Closing for a period of one year, except the representations and warranties contained in Section 3.1(a), (b), (c), and (f) and 3.2(a) and (b) shall survive indefinitely.” 540 F.3d at 949. The court construed this language to mean “that the one-year limitation serves only to specify when a breach of the representations and warranties may occur, but not when an action must be filed.” Id. at 954 (emphasis added). -5- 1 Whether the statements were required to be disclosed because of their unreliability is an open 2 question. However, for purposes of this Motion, the Court is convinced that construed in the 3 light most favorable to the Plaintiff, these statements contained information which would 4 have been relevant to Plaintiff’s evaluation of the property. 5 Finally, Defendant argues that the presence of an “AS-IS” provision eliminated 6 Plaintiff’s ability to rely on Defendant’s representations. “A buyer is not bound to purchase 7 something ‘as is’ that he is induced to make because of a fraudulent representation or 8 concealment of information by the seller.” S. Dev. Co. v. Pima Capital Mgmt Co., 31 P.3d 9 123, 128 (Ariz. Ct. App. 2001) (quoting Prudential Ins. Co. of Am. v. Jefferson Assocs., 896 10 S.W.2d 156, 162 (Tex. 1995)). Affirmative representations often reflect the “heart’ of the 11 transaction. Wagner v. Rao, 885 P.2d 174, 177 (Ariz. Ct. App. 1994). Here, Plaintiff alleges 12 that fraud played a role in the execution of the contract allowing the claim to survive a 13 motion to dismiss. In addition, the language of the AS-IS provision limits the representations 14 and warranties to those not contained in the agreement. Plaintiffs argument, if accepted as 15 true, would have required disclosure under the express terms of the contract. The presence 16 of the AS-IS provision does not relieve that obligation. Accordingly, Plaintiff has stated a 17 claim upon which relief can be granted for breach of contract. 18 COUNT 2 Fraud: 19 A claim for fraud has nine elements: “(1) a representation; (2) its falsity; (3) its 20 materiality; (4) the speaker’s knowledge of its falsity or ignorance of its truth; (5) his intent 21 that it should be acted upon by the person and in a manner reasonably contemplated; (6) the 22 hearer’s ignorance of its falsity; (7) his reliance on its truth; (8) his right to rely thereon, and 23 (9) his consequent and proximate injury.” Wagner v. Casteel, 663 P.2d 1020, 1022 (Ariz. Ct. 24 App. 1983). Defendant first argues that Plaintiff has failed to plead with the requisite 25 particularity. The response identifies statements in the amended complaint that correspond 26 with each of the nine Wagner elements. (Response at 10-11). The Court finds that the 27 amended complaint was plead with sufficient particularity to establish each of the nine 28 elements when taken as true. -6- 1 Defendant’s next argument in the Motion to Dismiss is that “as a general rule, in order 2 to constitute actionable fraud the false representation must relate to a matter of fact, and such 3 fact must be one which exists in the present or which has existed in the past.” Sorrells v. 4 Clifford, 204 P. 1013, 1015 (Ariz. 1922). Plaintiff alleges in part that Defendant informed 5 Plaintiff that it had disclosed all communications in its possession. (Amend. Compl. ¶ 15). 6 Taken as true, this constitutes a present representation that was both false, and material. 7 Moreover, Defendant misconstrues the nature of opinion statements forming the basis for 8 fraud. Regardless of Defendant’s belief that Pro Medical’s statement was not reliable or that 9 the statement represented only potential future action, Pro Medical’s communication to 10 Defendant constituted a fact.3 Had Defendant disclosed the communication and given its 11 opinion regarding the possibility Pro Medical would not vacate their lease, Defendant’s 12 opinion would not be actionable. However, a complete non-disclosure is sufficient to 13 establish a case for fraud. See Wells Fargo Bank v. Arizona Laborers, Teamsters & Cement 14 Masons Local No. 395 Pension Trust Fund, 38 P.3d 12, 34 n.22 (Ariz. 2002). Accordingly, 15 Plaintiff has plead a representation sufficient for surviving the motion to dismiss. 16 Defendant’s next argument is that Plaintiff had the opportunity to conduct its own 17 independent investigation. Defendant relies on Spudnuts, Inc. v. Lane, contending that this 18 independent investigation removed Plaintiff’s ability to rely on Defendant’s representations. 19 641 P.2d 912 (Ariz. Ct. App. 1982) (holding that when parties are on equal footing and 20 capable of conducting their own investigation, the presumption is that a party will rely on 21 their own judgment rather than statements of another). Plaintiff conversely contends that it 22 was not obligated to independently investigate Defendant’s express representations. Arizona 23 recognizes that an independent investigation does not excuse a fraudulent representation if 24 25 26 27 28 3 The comments to the Restatement of Contracts provides guidance here. “[T]hough fact and opinion are often contrasted, an opinion is a fact and a statement of opinion is a statement of fact, namely that the person making the statement holds that opinion.” RESTATEMENT (FIRST) OF CONTRACTS § 474 (1932). It continues, “Such a fact, however, is not treated in all respects like other facts, since a misrepresentation regarding opinion is fraudulent or material only in the cases stated in the Section.” Id. -7- 1 statements are “not open to both to make examination and inquires or fair investigation is 2 prevented or there is an inducement not to make investigation.” Springer v. Bank of Douglas, 3 313 P.2d 399, 401-02 (Ariz. 1957). In the amended complaint, Plaintiff argues 4 "Pro-Medical’s financial struggle and intention to close down the leased location at the 5 property rendered the information that was provided by Phoenix Closing misleading.” 6 (Amend. Compl. ¶ 34). Accepting this argument, in addition to Plaintiff’s assertion that they 7 were not required to investigate or were induced not to conduct an investigation because of 8 the misrepresentation (Response at 13:14), is sufficient to state a claim upon which relief 9 may be granted. 10 COUNT 3 Negligent Misrepresentation: 11 Defendant’s next argument is that opinions and promises of future conduct cannot 12 form the basis for a negligent misrepresentation claim. In support, Defendant cites Vint v. 13 Element Payment Services, inc., 2009 U.S. Dist. LEXIS 51341 *17 (D. Ariz., Jun. 18, 2009) 14 and McAlister v. Citibank, 829 P.2d 1253, 1261 (Ariz. Ct. App. 1992) (both holding that 15 statements of opinion regarding future conduct cannot constitute negligent misrepresentation. 16 Plaintiff does not provide any cases for support, but incorporates its arguments from the 17 portion dealing with fraud. 18 Arizona has adopted § 552 of the Restatement (Second) of Torts which provides a 19 cause of action for negligent misrepresentation. See Sage, 209 P.3d 169, 171 (Ariz. Ct. App. 20 2009) (“One who, in the course of his business, profession or employment . . . supplies false 21 information for the guidance of others in their business transactions, is subject to liability for 22 pecuniary loss caused to them by their justifiable reliance upon the information, if he fails 23 to exercise reasonable care or competence in obtaining or communicating the information.”). 24 Defendant appears to misconstrue Plaintiff’s allegation of negligent misrepresentation. 25 Plaintiff requested as seller’s documents all communications between Defendant and its 26 current and prior tenants. (Doc. #1, Exhibit B). Defendant stated that it did not possess “all 27 of the email communication between tenants and past tenants.” (Doc. #1, Exhibit C). 28 Defendant then stated they had turned over all the “due diligence they had to provide.” (Doc. -8- 1 #1, Exhibit C). Plaintiff contends that this statement was materially false and neglected to 2 include a disclosure that one tenant was planning to either file for bankruptcy or prematurely 3 terminate its lease. This statement represented neither a future promise, nor an opinion, it is 4 a affirmation that Defendant had disclosed all documents within their possession. Taken at 5 face value, this representation if negligently communicated can provide a claim upon which 6 relief may be granted. 7 COUNT 4 Rescission: 8 Defendant argues that rescission is an equitable remedy, not an independent cause of 9 action and that Defendant waited too long before asserting its claim for rescission. The Court 10 sidesteps the first argument because dismissal is warranted on the second. 11 Contracts must be rescinded within a reasonable time. Mahurin v. Schmeck, 390 P.2d 12 576, 580 (Ariz. 1964). A party failing to rescind a contract waives their grounds for 13 rescission if they continue to treat a property as their own despite having knowledge of the 14 grounds for rescission. Smith v. Hurley, 589 P.2d 38, 43 (Ariz. Ct. App. 1978) Normally a 15 question of reasonableness is a question for a jury, however, if the facts permit only one 16 reasonable inference then the decision can be made as a matter of law. Jones v. CPR Div., 17 Upjohn Co, 584 P.2d 611, 615 (Ariz. Ct. App. 1978). In the consumer context, rescission 18 must occur prior to a material change in the property not caused by the alleged defect. 19 Preston Motor Co., Inc. v. Palomares, 650 P.2d 1227, 1232 (Ariz. Ct. App. 1982) (holding 20 that failing to rescind a contractual sale on an automobile suffering from performance issues 21 was barred by the vehicle being in an unrelated accident). 22 Here, Plaintiff learned of the failure to disclose Pro Medical’s statements on May 29, 23 2008. It delayed filing its complaint for more than one year, ultimately filing on June 5, 2009. 24 Plaintiff offers no explanation for this lengthy delay. The Court determines that without 25 explanation, this was not a reasonable period of time. In addition, rescission is inappropriate 26 as the conditions of the underlying property have materially changed for reasons unrelated 27 to the non-disclosure. Defendant identifies that a second “anchor tenant,” Washington 28 Mutual, has also left the rental complex. Plaintiff does not allege that this second vacancy -9- 1 is related to the initial non-disclosure. As Plaintiff delayed its rescission for more than one 2 year, and cannot return the property in a manner similar to its original condition, its claim for 3 rescission fails. 4 COUNT 5 Breach of Covenant of Good Faith and Fair Dealing: 5 Defendant finally argues that the Claims based on Arizona’s implied covenant of good 6 faith and fair dealing does not apply. Defendant alleges that Plaintiff does not articulate a 7 reason, outside of the contract, that would require the disclosure of Pro Medical’s statements. 8 In Arizona, a covenant of good faith and fair dealing is implied in every contract. Bike 9 Fashion World v. Kramer, 46 P.3d 431, 434 (Ariz. Ct. App. 2002). The covenant exists to 10 ensure that “neither party will act to impair the right of the other to receive the benefits which 11 flow from their agreement or contractual relationship.” Rawlings v. Apodaca, 726 P.2d 565, 12 569 (Ariz. 1986). 13 Plaintiff argues that this final count is pled in the alternative. In the event that 14 Defendant was not obligated to disclose these statements under the express contractual terms, 15 it was still obligated under the implied covenant. Plaintiff advances a credible argument to 16 support this contention, that a reasonable buyer would expect to receive these documents. By 17 failing to provide the disclosure, Defendant exercised its discretion to not supply a disclosure 18 typically expected as a seller’s document. Accepted as true, this constitutes a claim upon 19 which relief may be granted. 20 Accordingly, 21 IT IS ORDERED that, the Motion to Dismiss (Doc. #7) is GRANTED with respect 22 to COUNT IV (Rescission) and DENIED with respect to COUNTS I-III (Breach of Contract, 23 Fraud, Negligent Misrepresentation) and COUNT V (Breach of Duty of Good Faith and Fair 24 Dealing). 25 IT IS FURTHER ORDERED that, the Motion for Leave to File Surreply is 26 DENIED. 27 /// 28 - 10 - 1 2 3 IT IS FINALLY ORDERED that, the Clerk of the Court should enter judgment accordingly. DATED this 4th day of May, 2010. 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 11 -
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