Germain Real Estate Company, LLC et al v. HCH Toyota LLC et al
MEMORANDUM OPINION AND ORDER. This case is DISMISSED WITH PREJUDICE. Judgment to be entered contemporaneously with this order. Signed by Honorable P. K. Holmes, III on August 21, 2013. (jas)
IN THE UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF ARKANSAS
GERMAIN REAL ESTATE COMPANY, LLC;
and GM ENTERPRISES, LLC
Case No. 5:13-CV-05069
HCH TOYOTA, LLC and
METROPOLITAN NATIONAL BANK
MEMORANDUM OPINION AND ORDER
Currently before the Court are two motions to dismiss the amended complaint, filed by
Defendants HCH Toyota, LLC (“HCH”) (Doc. 20) and Metropolitan National Bank (“Metropolitan”)
(Doc. 22). With the exception of a statute-of-limitations claim made by Metropolitan, both HCH
and Metropolitan move to dismiss the amended complaint on the same grounds. Plaintiffs Germain
Real Estate Company, LLC (“GREC”) and GM Enterprises, LLC (“GM”) filed a joint response in
opposition to both motions (Doc. 24), Metropolitan and HCH filed separate replies (Docs. 27 & 28),
and GREC and GM filed a joint sur-reply (Doc. 30). For the reasons discussed herein, Defendants’
motions to dismiss (Docs. 20 and 22) are both GRANTED.
Metropolitan and HCH contend that the amended complaint should be dismissed pursuant
to Federal Rule of Civil Procedure 12(b)(1) for lack of subject matter jurisdiction, or, in the
alternative, pursuant to Rule 12(b)(6) for failure to state a claim.
Dismissal of a case pursuant to Rule 12(b)(1) may occur through a challenge to the
complaint “on its face or on the factual truthfulness of its averments.” Titus v. Sullivan, 4 F.3d 590,
593 (8th Cir. 1993). The basis for Defendants’ claim that the Court lacks subject matter jurisdiction
is the Rooker-Feldman doctrine. That doctrine states that “with the exception of habeas corpus
petitions, lower courts lack subject matter jurisdiction over challenges to state court judgments.”
Lemonds v. St. Louis Cnty, 222 F.3d 488, 492 (8th Cir. 2000) (citing District of Columbia Court of
Appeals v. Feldman, 460 U.S. 462, 476 (1983); Rooker v. Fidelity Trust Co., 263 U.S. 413, 316
(1923)). Defendants argue that Plaintiffs are asking this Court to review and overturn a state-court
decision that resolved all of the claims at issue in the instant case. The Rooker-Feldman doctrine
precludes a district court from reviewing any final state court decision on the merits, as “federal
jurisdiction to review most state court judgments is vested exclusively in the United States Supreme
Court.” Id. at 492 (citations omitted).
If the Court finds that the Rooker-Feldman doctrine does not apply and the Court properly
has jurisdiction over this matter, Defendants move in the alternative for the case to be dismissed
pursuant to Rule 12(b)(6) for failure to state a claim. Rule 12(b)(6) affords a defendant an
opportunity to test whether, as a matter of law, the plaintiff would be entitled to legal relief if
everything alleged in the complaint were true and all reasonable inferences were made in favor of
the plaintiff. Crumpley-Patterson v. Trinity Lutheran Hosp., 388 F.3d 588, 590 (8th Cir. 2004). In
deciding a 12(b)(6) motion, the complaint should be construed liberally in the plaintiff’s favor and
“should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff
can prove no set of facts in support of his claim which would entitle him to relief.” Rucci v. City of
Pacific, 327 F.3d 651, 652 (8th Cir. 2003) (quoting Conley v. Gibson, 355 U.S. 41, 45-46 (1957)).
Although the general rule is that a court may not consider matters outside the pleadings in
deciding a motion to dismiss, the Federal Rules of Civil Procedure allow an exception for “‘matters
incorporated by reference or integral to the claim, items subject to judicial notice, matters of public
record, orders, items appearing in the record of the case, and exhibits attached to the complaint
whose authenticity is unquestioned’ without converting the motion into one for summary judgment.”
Miller v. Redwood Toxicology Lab., Inc., 688 F.3d 928, 931 n.3 (8th Cir. 2012) (quoting 5B Charles
Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1357 (3d ed. 2004)).
As this case involves the interpretation of contracts, the Court observes that it may properly
examine contract documents in deciding a motion to dismiss. Stahl v. U.S. Dept. of Agriculture, 327
F.3d 697, 700 (8th Cir. 2003). Under Arkansas law, which governs the interpretation of the contracts
at issue in this case, if the meaning of a written contract is unambiguous and does not depend on
disputed extrinsic evidence, the construction and interpretation of the contract are questions of law
that may be decided by the court. Duvall v. Massachusetts Indem. and Life Ins. Co., 295 Ark. 412,
The underlying facts and request for relief in this breach of contract action were previously
asserted in a state court case filed by Plaintiff GREC against Defendant HCH on October 25, 2012,
in the Circuit Court of Benton County, Arkansas. See Doc. 13-5. Plaintiff GM was not a party to
the state court action, but GM’s authorized manager, Kenrick Morrand, was a plaintiff in state court,
and Defendant Metropolitan eventually intervened in the state court action as a defendant. See Doc.
GREC alleged in state court that it was granted an option to purchase certain real property
located in Benton County, Arkansas, which housed a Toyota automobile dealership known as
Northwest Arkansas Toyota (“the Property”). In the state court lawsuit, GREC alleged that it was
given its purchase option in 2005 in the context of a lease agreement entered into by GREC’s
affiliate, GM, and the Property’s then-owner, H2 Holdings, LLC (“H2”). Soon after H2 transferred
ownership of the Property in 2008 to its affiliate, HCH, the Property was mortgaged to Metropolitan.
In 2012, GREC tried to exercise its purchase option but was refused. GREC then sued HCH for
specific performance of the purchase option in state court.
As the state court case progressed, HCH and Metropolitan filed motions to dismiss the case
for failure to state facts upon which relief could be granted, pursuant to Arkansas Rule of Civil
Procedure 12(b)(6). The state court then held a hearing on these motions on March 1, 2013. Prior
to the hearing, the parties had the opportunity to submit briefs to the court, and during the hearing,
all parties were invited to present their respective oral arguments to the court. On April 9, 2013, the
state court granted HCH and Metropolitan’s motions to dismiss and entered an order of dismissal
“without prejudice.” (Doc. 13-8). The state court also made three findings in the dismissal order
that, among other things, interpreted as a matter of law the meaning of certain contracts entered into
by the parties over a five-year period.
On April 2, 2013, just days before the state court’s order of dismissal was entered, GREC and
GM filed the instant case in this Court against HCH and Metropolitan, asserting almost verbatim the
same set of underlying facts that were pleaded in the state court lawsuit, relying on the same
contracts between the parties concerning the Property, and again requesting specific performance of
GREC’s alleged purchase option.
Initially the Court observes that there are three major differences between the state court case
that was filed in October 2012 and the federal case that was filed in April of 2013. First, GM was
not a plaintiff in state court but is a Plaintiff in federal court. Second, Morrand was a plaintiff in
state court but is not a Plaintiff in federal court. Third, the only cause of action pleaded in state court
was for specific performance of GREC’s option to purchase, but in federal court other claims were
added for deceit/constructive fraud, tortious interference with contract/business expectancy, civil
conspiracy, and declaratory judgment, all arising from the same nucleus of operative fact as was
alleged in state court.
To understand the rights and interests of the parties in the case at bar, the Court is called upon
to interpret three contracts that have been attached to the pleadings in this case and were also a part
of the state court record. The earliest-made contract at issue is a lease agreement executed on May
23, 2005, between GM, the Property’s tenant, and H2, the Property’s then-owner. See Doc. 18, pp.
13-36. As part of the consideration supporting the lease between GM and H2, it was agreed that
after a five-year period of leasing, H2 would extend an option to purchase the Property to two parties
related to GM: Morrand and GREC.
Morrand, who signed the 2005 as GM’s “Authorized Manager,” was granted the first option
to purchase the Property. Morrand could exercise his option to purchase “at any time during the
sixty (60) days period immediately following the Fifth Anniversary [of the commencement date of
the lease].” Id. at p. 21. The party with the second option to purchase was GREC, described in the
lease agreement as “a limited liability company affiliated with Tenant [GM].” Id. at p. 22. The
2005 lease stated that GREC’s option to purchase could only be exercised after Morrand’s option
expired and “during the remaining period of the Original Term or the Renewal Term [of GM’s
According to the plain language of the 2005 agreement, all rights and obligations related to
the two purchase options flowed from GM’s tenancy. The agreement did not state that Morrand or
GREC had provided separate consideration for their options to purchase. Furthermore, the lease
agreement vested GM—not Morrand or GREC—with the authority to investigate and accept all
terms of sale involving the exercise of the purchase options; stated that if either purchase option were
exercised, GM would be responsible for obtaining an appraisal of the premises to be sold and would
have the authority to agree or disagree with H2 as to the amount of the appraisal; and obligated H2
to obtain “a commitment for title insurance by a company reasonably satisfactory to Tenant [GM].”
Id. (emphasis added). In addition, in the context of exercising a purchase option, the 2005 lease gave
GM the authority to object to title, with the caveat that if GM’s objection were not satisfactorily
addressed by H2, GM had the authority to terminate any pending obligation to purchase the Property.
On June 10, 2008, H2 transferred its ownership interest in the Property to HCH. GM’s lease
was renegotiated to reflect that HCH was the new owner and landlord. See id., pp. 37-45. Most of
the provisions of the 2005 lease remained in effect after the 2008 revision was signed. The purchaseoption provision, however, was specifically amended. Id. at pp. 38-39. The changes made to the
original purchase-option paragraph of the 2005 lease included a new date for the commencement of
Morrand’s purchase option and a new purchase price for the Property. Id. at p. 39. GREC’s second
option to purchase was not specifically addressed in the 2008 revision, and the parties agreed that
unless specifically modified, the remainder of the purchase-option paragraph of the original lease
was to “remain in full force and effect.” Id.
On June 19, 2008, HCH, the new owner of the Property, mortgaged it to Metropolitan. HCH,
GM, and Metropolitan then entered into a “Subordination, Non-disturbance and Attornment
Agreement” (“SNDA”) to clarify how the existence of the new mortgage would affect the terms of
GM’s lease. See Doc. 13-3. The SNDA stated that since the Property was now encumbered by a
mortgage issued by Metropolitan, “[t]he Lease and all terms thereof, including, without limitation,
any options to purchase, rights of first refusal, rights of set off, and any similar rights, are and shall
be subject and subordinate to the Mortgage . . . .” Id. at pp. 1-2 (emphasis added). The SNDA
provided that Metropolitan’s mortgage was secured, in part, by HCH’s assignment to Metropolitan
of all rents and leases associated with the Property. Id. at p. 1.
HCH and Metropolitan both assert in their separate motions to dismiss that this Court lacks
jurisdiction over the case due to the Rooker-Feldman abstention doctrine. The Rooker-Feldman
doctrine only applies in the limited circumstance in which a party “seeks to take an appeal of an
unfavorable state-court decision to a lower federal court.” Lance v. Dennis, 546 U.S. 459, 466
(2006). The doctrine bars a losing party in state court “from seeking what in substance would be
appellate review of the state judgment in a United States district court, based on the losing party’s
claim that the state judgment itself violates the loser’s federal rights.” Johnson v. De Grandy, 512
U.S. 997, 1005-1006 (1994). Rooker-Feldman abstention is not the same thing as issue preclusion
or claim preclusion. Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280, 283 (2005).
Rooker-Feldman abstention only applies when a party files a federal lawsuit complaining of injuries
caused by a state court’s judgment and invites the federal court to review and reverse the state court.
The amended complaint filed by GREC and GM does not even mention the state court
proceedings that came before the instant one, nor does the amended complaint discuss any injuries
caused by the state court’s judgment. See Doc. 18. Plaintiffs do not ask this Court to review the
judgment of the state court. For these reasons, the narrow application of Rooker-Feldman abstention
is improper here, and this Court will retain jurisdiction over this matter.
Res Judicata and Collateral Estoppel
“[C]ongress has specifically required all federal courts to give preclusive effect to state-court
judgments whenever the courts of the State from which the judgments emerged would do so.” Allen
v. McCurry, 449 U.S. 90, 96 (1980). A comparison of the complaints filed here and in state court
reveals that the two cases involve the same set of facts, the same contracts between the parties, and
the same claim by GREC for specific performance. With the sole exception of Plaintiff GM, all the
same parties in the case at bar were parties to the state court action.
Arkansas law bars the relitigation of a claim in a subsequent lawsuit when the first suit (1)
resulted in a final judgment on the merits, (2) was based on proper jurisdiction, (3) was fully
contested in good faith, (4) involved the same claim or cause of action, and (5) involved the same
parties or their privies. Powell v. Lane, 375 Ark. 178, 184 (2008).
In examining these five res judicata factors, it is evident that the second and third factors are
satisfied here, as GREC’s legal right to exercise its option to purchase the Property was fully
contested in state court and was based on the state court’s proper jurisdiction. As for the fourth
factor, this is also satisfied even though GREC asserts state law claims in the federal lawsuit that
were not previously asserted in state court, including claims for constructive fraud, tortious
interference, and civil conspiracy. These additional state-law claims, which purportedly arise from
Defendants’ alleged wrongdoing in failing to honor GREC’s alleged purchase option, could have
been asserted in state court, but GREC simply chose not to do so. According to the Arkansas Court
of Appeals, “[c]laim preclusion bars not only the relitigation of claims that were actually litigated
in the first suit but also those that could have been litigated.” Sutton v. Gardner, 2011 Ark. App.
737, *6 (Ark. Ct. App. 2011) (“Where a case is based on the same events as the subject matter of a
previous lawsuit, claim preclusion will apply even if the subsequent lawsuit raises new legal issues
and seeks additional remedies.”).
The fifth factor in the res judicata analysis is also satisfied in the case at bar. This fifth factor
provides that res judicata will apply when an earlier-decided action involves “the same parties or
their privies” as the later-filed action. HCH and Metropolitan were defendants in state court and are
Defendants in these proceedings. GREC was also a plaintiff in state court and is a Plaintiff here.
The relevant issue, therefore, is whether Plaintiff GM, which was not a plaintiff in state court, was
represented by or in legal privity with Morrand, who was a plaintiff in state court. “Privity of parties
within the meaning of res judicata means ‘a person so identified in interest with another that he
represents the same legal right . . . .’” Spears v. State Farm Fire and Cas. Ins., 291 Ark. 465, 468
(1987) (quoting Missouri Pac. R.R. Co. v. McGuire, 205 Ark. 658 (1943)).
There is substantial evidence from the pleadings in this case that Morrand and GM were in
legal privity during the state court proceedings.
First, the 2005 lease refers to GM as
“Germain/Morrand Enterprises, LLC,” and it further names Morrand as “an individual and related
party of Tenant [GM].” (Doc. 13-1). More convincingly, Morrand signed both the 2005 and 2008
leases on behalf of GM as the company’s “Authorized Manager.” (Docs. 13-1 and 13-2). He also
signed the SNDA on behalf of GM as the company’s “President.” (Doc. 13-3). Finally, the SNDA
included a separate provision titled “Joinder,” which was signed by Morrand and named him,
individually, as a guarantor of GM’s lease “to assume all of Tenant [GM]’s liability arising under
the Agreement . . . .” Id. at p. 7. The totality of the evidence therefore indicates that Morrand—the
principal, president, authorized manager, and personal guarantor of GM—was in privity with GM
in the state court action.
As for the first factor in the res judicata analysis, it states that in order to have preclusive
effect, the earlier-entered judgment must be a final judgment on the merits. The Court concludes
after careful consideration that this final factor is not satisfied, and thus res judicata cannot apply.
Though HCH and Metropolitan argue that the state court’s judgment should be treated by the Court
as a final judgment due to the state court’s findings regarding the construction and interpretation of
the contracts at issue, the Eighth Circuit has definitively held that any dismissal “without prejudice,”
made pursuant to Arkansas Rule 12(b)(6), cannot be considered a final judgment for purposes of res
judicata. Percefull v. Claybaker, 312 Fed. Appx. 827, 827 (8th Cir. 2008) (per curiam) (“Because
the prior state court complaint was expressly dismissed without prejudice, we conclude that it was
not a final judgment on the merits for purposes of res judicata.”).
Defendants correctly point out that in some cases, a dismissal without prejudice may be
converted into a dismissal with prejudice; however, this exception is reserved for a case in which
a plaintiff has chosen to appeal the state court judgment, thus waiving his right to plead further. See
Sluder v. Steak & Ale of Little Rock, Inc., 369 Ark. 293, 298 (2006). Since GREC did not appeal the
state court’s judgment, the state court’s dismissal order cannot be considered a final judgment under
Arkansas law. See Middleton v. Lockhard, 344 Ark. 572, 578 (2001) (finding that dismissal without
prejudice is not considered an adjudication on the merits under Arkansas law). For this reason, res
judicata does not apply.
Turning to the question of collateral estoppel, also known as issue preclusion, this doctrine
“bars the relitigation of issues of law or fact actually litigated in the first suit, provided the party
against whom the earlier decision is being asserted had a full and fair opportunity to litigate the issue
in question.” Zinger v. Terrell, 336 Ark. 423, 429 (1999). As with res judicata, collateral estoppel
can only apply if the issue or issues sought to be precluded were actually litigated. McWhorter v.
McWhorter, 2009 Ark. 458, *10 (2009). “Unlike res judicata, collateral estoppel does not require
mutuality of parties before the doctrine is applicable.” Riverdale Dev. Co., LLC v. Ruffin Bldg. Sys.,
Inc., 356 Ark. 90, 96 (2004). Also unlike res judicata, collateral estoppel may apply to bar the
relitigation of certain issues that were fully litigated in an earlier-filed suit, even when that suit was
dismissed “without prejudice.” See Pohlmann v. Bil-Jax, Inc., 176 F.3d 1110, 1112 (8th Cir. 1999)
(“[A]n issue actually decided in a non-merits dismissal is given preclusive effect in a subsequent
action between the same parties (in the older terminology, the first adjudication creates a collateral
estoppel)”); Robinette v. Jones, 476 F.3d 585, 589 (8th Cir. 2007) (“[T]he finality requirement for
issue preclusion has become less rigorous.”); In re Nangle, 274 F.3d 481, 484-85 (8th Cir. 2001)
(“[R]ecent decisions have relaxed traditional views of the finality requirement in the collateral
estoppel context by applying the doctrine to matters resolved by preliminary rulings or to
determinations of liability that have not yet been completed by an award of damages or other relief,
let alone enforced.”) (internal quotations and citations omitted).
The state court’s dismissal order, though made “without prejudice,” contained the following
three findings: (1) Morrand claimed no interest in the Property and therefore failed to state a claim
for relief in state court, (2) GREC was not included as a party to the 2008 lease agreement, and (3)
the purchase options included in the original 2005 lease agreement were amended by the SNDA.
(Doc. 13-8). The Court finds that the doctrine of collateral estoppel gives preclusive effect to these
findings because the underlying issue of GREC’s purchase option was already fully litigated in state
court. Plaintiffs are therefore estopped from relitigating the findings the state court made in its order
Alternatively and additionally, the Court agrees with and adopts the state court’s finding that
the SNDA amended the purchase options that were originally contemplated in the 2005 lease
agreement. Specifically, the plain language of the SNDA rendered all options to purchase the
mortgaged Property subordinate to Metropolitan’s rights and subject to Metropolitan’s final
approval. (Doc. 13-3, pp. 1-2). The 2005 lease agreement also demonstrates that GREC never
retained an independent right to purchase the Property. (Doc. 13-1, pp. 9-10). GREC’s purchase
option was a benefit conferred upon GM in exchange for GM’s agreement to lease the Property, and
the purchase option flowed directly from GM’s rights as a tenant. Id. at p. 10.
Because the SNDA did not require HCH or Metropolitan to accept GREC’s offer to purchase
the Property, GREC has failed to state a claim for breach of contract justifying specific performance.
GREC has also failed to demonstrate that HCH or Metropolitan engaged in any wrongdoing that
violated GREC’s rights, as the SNDA made any purchase option previously available to GREC
subordinate to Metropolitan’s mortgage and subject to Metropolitan’s final approval, to the extent
such a purchase option was even legally enforceable. Accordingly, GREC’s claims against HCH and
Metropolitan for deceit/constructive fraud, tortious interference with contract/business expectancy,
and civil conspiracy are dismissed. GREC’s request for a declaratory judgment of its purchase rights
is denied as moot.
Defendants HCH and Metropolitan’s motions to dismiss the amended complaint (Docs. 20
& 22) are GRANTED pursuant to Federal Rule of Civil Procedure 12(b)(6) for Plaintiffs’ failure
to state a claim upon which relief may be granted. All other pending motions are DENIED AS
This case is DISMISSED WITH PREJUDICE, and judgment will enter
contemporaneously with this order.
IT IS SO ORDERED this 21st day of August, 2013.
/s/P. K. Holmes, III
P.K. HOLMES, III
CHIEF U.S. DISTRICT JUDGE
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?