Davis v. 24 Hour Fitness Worldwide Inc.

Filing 123

MEMORANDUM. Signed by Judge Gregory M. Sleet on 12/3/2014. (mdb)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
CHRIS A. DAVIS,
Plaintiff,
V.

24 HOUR FITNESS WORLDWIDE, INC.,
a Delaware corporation,
Defendant.

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Civil Action No. 12-1370-GMS

MEMORANDUM
I.

INTRODUCTION
The plaintiff, Chris A. Davis ("Davis"), filed this diversity action on October 29, 2012,

against the defendant, 24 Bour Fitness Worldwide, Inc. ("24HFW"), alleging breach of contract
and unjust enrichment. (D.I. 1.) On November 21, 2012, 24HFW filed its Answer, along with
counterclaims against Davis-seeking declaratory judgment and alleging breach of fiduciary
duties, fraud, equitable fraud, negligent misrepresentation, and fraudulent concealment-and
affirmative defenses. (D.L 7.) 24HFW voluntarily dismissed its counterclaims for fraud and
equitable fraud on May 1, 2014. (D.I. 73.) On September 30, 2014, the court granted Davis'
motion for summary judgment and held that the remainder of24HFW's counterclaims were timebarred by statute oflimitations. (D.I. 110-11.) Presently before the court is Davis' letter request
for summary judgment on 24HFW's affirmative defenses as well. (D.I. 118.) For the reasons
stated below, the court will grant Davis' request for summary judgment.

II.

BACKGROUND
The court outlined the background facts in its memorandum and order addressing Davis'

previous motion for summary judgment. (D.I. 110 at 1-3.) These facts were drawn primarily

from 24HFW's pleadings. The court incorporates this background to address the instant summary
judgment request as well.

III.

STAND ARD OF REVIEW

Under Federal Rule of Civil Procedure 56(c), summary judgment is appropriate "if the
pleadings, depositions, answers to interrogatories, and admissions on file, together with the
affidavits, if any, show that there is no genuine issue as to any material fact and that the moving
party is entitled to a judgment as a matter oflaw." See also Celotex Corp. v. Catrett, 477 U.S.
317, 322 (1986). The moving party bears the burden of proving that no genuine issue of material
fact exists. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 585 n.10 (1986).
A fact is material if it "could affect the outcome" of the proceeding. Lamont v. New Jersey, 637
. F.3d 177, 181 (3d Cir. 2011 ). There is a genuine issue "if the evidence is sufficient to permit a
reasonable jury to return a verdict for the non-moving party." Id. When determining whether a
genuine issue of material fact exists, the district court must view the evidence in a light most
.favorable to the nonmoving party and draw inferences in that party's favor. Wishkin v. Potter, 476
·F .3d 180, 184 (3d Cir. 2007). If the moving party is able to demonstrate an absence of disputed
material facts, the nonmoving party must then "come forward with 'specific facts showing that
there is a genuine issue for trial."' Matsushita, 475 U.S. at 587 (citing Fed. R. Civ. P. 56(e)).
Importantly, the mere existence of some evidence in support of the nonmoving party will
not prove sufficient for denial of a summary judgment motion. See Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 249 (1986). Rather, the nonmoving party must present enough evidence to

enable a jury to reasonably find for it on that issue. Id. Specifically, the party opposing summary
judgment "must present more than just 'bare assertions, conclusory allegations or suspicions' to
show the existence of a genuine issue." Podobnik v. US. Postal Serv., 409 F.3d 584, 594 (3d Cir.

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2005) (quoting Celotex Corp., 477 U.S. at 325). Thus, a nonmoving party asserting that a material
fact is in dispute must support this assertion by: "(A) citing to particular parts of materials in the
record, including depositions, documents, electronically stored information, affidavits or
declarations, stipulations, ... admissions, interrogatory answers, or other materials; or (B) showing
that the materials cited [by the opposing party] do not establish the absence ... of a genuine
dispute...." See Fed. R. Civ. P. 56(c)(l). If the nonmoving party fails to make a sufficient
showing on an essential element of its case for which it has the burden of proof, the moving party
is entitled to judgment as a matter oflaw. See Celotex Corp., 477 U.S. at 32.

IV.

DISCUSSION
Davis asserts that, based on the court's September 30, 2014, ruling, 24HFW cannot prevail

on its affirmative defenses as a matter oflaw. In essence, Davis' argument rests on three grounds:
(1) 24HFW's affirmative defenses are repackaged versions of its time-barred counterclaims and
therefore are barred as well, (2) 24HFW was on inquiry notice of Davis' alleged wrongful conduct
and therefore cannot prevail on its defenses sounding in fraud, and (3) 24HFW defenses all seek
rescission of the Phantom Stock Agreement ("PSA"), which is untimely. The court discusses each
of these arguments.
A. Statute of Limitations
Both Davis and 24HFW acknowledge that, generally, affirmative defenses are not subject
to statutes oflimitations. See United States v. W. Pac. R.R. Co., 352 U.S. 59, 72 (1956) ("To use
the statute of limitations to cut off the consideration of a particular defense in the case is quite
foreign to the policy of preventing the commencement of stale litigation."); City of Saint Paul,
Alaska v. Evans, 344 F.3d 1029, 1033 (9th Cir. 2003) ("[C]ourts generally allow defendants to
raise defenses that, ifraised as claims, would be time-barred."); Wells v. Rockefeller, 728 F.2d 209

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(3d Cir. 1984) ("Although expiration of the limitations period may not be used to deny the assertion
of an affirmative defense, a claim for affirmative relief that relies on the same factual basis
nevertheless comes within the limitations ban.").
Davis asserts, however, that an exception to this maxim applies in this case. In particular,
Davis cites the Ninth Circuit's opinion in Evans, holding that affirmative defenses that are "mirror
images of ... time-barred claims" are similarly barred. Evans, 344 F.3d at 1035-36. In Evans,
the Ninth Circuit took a nuanced approach to examining whether affirmative defenses should be
barred:
It is important that the party asserting the defense is not,

simultaneously or in parallel litigation, seeking affirmative recovery
on an identical claim. Thus, whether affirmative defenses are
exempt from statutes of limitations largely hinges on a realistic
assessment of the parties' litigation posture.
Id. at 1035. As part of this "realistic assessment," the court examined which party is the true

"aggressor" in the litigation, based on who "disturbed the equilibrium between the parties." Id.
(citing 118 East 60th Owners, Inc. v. Bonner Props., Inc., 677 F.2d 200, 203-04 (2d Cir.1982)).
The court recognizes that the only cases Davis cites in support of this exception·to the
general rule come from courts within the Ninth Circuit, and therefore their reasoning is not binding
upon this court. Indeed, neither party cites any case from within the Third Circuit addressing this
exception, thus presenting an issue of first impression. Notwithstanding the fact that Evans is nonbinding authority, the court is convinced that its analysis (and result) should apply in this case.
In its pretrial submissions, 24HFW stated: "24 Hour Fitness's asserted counterclaims are
both claims and affirmative defenses. Even if the Court strikes any of the counterclaims as
untimely, the Court still should consider all of these doctrines and legal theories as affirmative
defenses." (D.1. 108, Sched. I(i)(b) at 12 n.3.) Therefore, there is at least the possibility that

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24HFW's affirmative defenses "are simply time-barred claims masquerading as defenses and are
likewise subject to the statute oflimitations bar." Evans, 344 F.3d at 1035-36. The court must
engage in a "realistic assessment of the parties' litigation posture" to determine whether to apply
the exception. Id. at 1035. The court finds that 24HFW is indeed the initial aggressor in this case,
despite being the defendant in litigation. 24HFW is correct that in Evans and in subsequent district
court opinions applying the Evans exception, the courts have held that the plaintiff, by filing the
lawsuit, is the "initial aggressor." Id. at 1035-36; see also Karoun Dairies, Inc. v. Karlacti, Inc.,
No. 08cv1521 AJB (WVG), 2014 WL 3340917, at *9 (C.D. Cal. July 8, 2014). 24HFW asserts
that it is "absurd" to view 24HFW as the initial aggressor, simply because it repudiated the PSA.
(D.I. 121 at 5.)
The court disagrees with this unnecessarily sensational. characterization. 1 In keeping with
Evans' direction to make a "realistic assessment" of the litigation posture, the court cannot merely

look at the parties' statuses as "plaintiff' or "defendant." See Evans, 344 F.3d at 1035. 24HFW
stated in its trial briefing: "This case arose when the Board of Djrectors ... of [24HFW] repudiated
as invalid [the PSA]." (D.I. 108, Sched. l(i)(b) at 1.) This repudiation "disturbed the equilibrium"
between the parties, as it had existed for several years while the PSA was presumed valid. See id.
(finding that the plaintiff was the initial aggressor because, "[a]t bottom, this lawsuit boils down
to the City's effort to invalidate the Agreement"). As the court views it, rather than initiate a
lawsuit of its own, 24HFW elected simply to repudiate the PSA and invite a lawsuit from Davis.
And after the lawsuit was filed, 24HFW asserted identical affirmative defenses and counterclaims

1 The court would advise counsel for 24HFW against using inflammatory language like "absurd." (D.I. 121
at 5.) Indeed, counsel used the same word and other language in its previous briefing. (D.I. 85 at 18.) In both
situations, the court has agreed with the "absurd" positions. This rhetoric does not advance 24HFW's (or any client's)
cause.

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for affirmative relief, seeking declaratory judgment and damages. 2 Under these circumstances, the
court finds that 24HFW "abandoned its right to seek solace in the status of a defendant" and
"cannot hide behind the maxim applicable to defenses asserted in the normal course nor may it
sidestep the temporal bar to its claims." Id. at 1036.
As discussed in depth in the court's previous memorandum, 24HFW's counterclaims were
barred by a three-year statute of limitations.

(D.I. 110.) Although the general rule is that

affirmative defenses face no such time bar, the court is persuaded that an exception applies here.
See Evans, 344 F.3d at 1035-36. It did not affirmatively file the lawsuit, but 24HFW set this case

in motion when it repudiated the PSA in September 2012. 24HFW is properly viewed as the initial
aggressor. Moreover, its affirmative defenses mirror the time-barred counterclaims. The court
considers the Ninth Circuit's

rea~oning

in Evans to be precisely on point. 24HFW's affirmative

defenses are similar barred by statute of limitations. 3
B. Fraud Defenses

Although the court finds that 24HFW's affirmative defenses are barred by statute of
limitations, it will consider Davis' remaining arguments for the sake of completeness. 24HFW
asserts several defenses sounding in fraud (i.e., negligent and intentional misrepresentation,
fraudulent concealment). The parties agree that an essential element of these defenses is justifiable
or reasonable reliance. In its September 30, 2014, memorandum, the court found that 24HFW was
on inquiry notice of its potential fraud claims when the PSA was executed on June 15, 2009;

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The affirmative defenses identify several different reasons why 24HFW believes the PSA to be void ab initio.
The court does not see any meaningful difference between these defenses and 24HFW's counterclaim seeking a
declaratory judgment of invalidity. As such, although the language is different, the court views the counterclaims and
affirmative defenses as being identical.
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"The purpose of [statutes oflimitations] is to keep stale litigation out of the courts. They are aimed at lawsuits,
not at the consideration of particular issues in lawsuits." W Pac. R.R. Co., 352 U.S. at 72. Although this quote tends
to support the "general rule" against barring affirmative defenses, the court views it in a different light in this case:
24HFW's affirmative defenses embody claims (and a lawsuit) that should have been filed years ago, when the claims
first arose.

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24HFW's CEO, CFO, and general counsel had all received and reviewed the terms of the PSA..
(D.I. 110 at 6-8.)

Davis argues this inquiry notice determination precludes 24HFW from

establishing the element of reasonable reliance.

24HFW counters that inquiry notice and

reasonable reliance are distinct matters, and therefore summary judgment is inappropriate.
The court agrees with Davis that the inquiry notice determination obviates 24HFW's
defenses sounding in fraud. 24HFW is correct that, generally, inquiry notice and reasonable
reliance do not intersect: Questions of reasonable reliance ask what information a "reasonable
person would consider important in determining his choice of action in the transaction in question."

Lock v. Schreppler, 426 A.2d 856,

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(Del. Super. Ct. 1981) (citing Restatement (Second)

Tort, § 538)). In contrast, questions of inquiry notice ask when a reasonable person should have
been. aware of the existence of a cause of action for the purpose of measuring the statute of
limitations. Wal-Mart Stores Inc. v. AIG Life Ins. Co., 860 A.2d 312, 319 (Del. 2004) ("[T]he
statute will begin to run only upon the discovery of facts constituting the basis of the cause of
action or the existence of facts sufficient to put a person of ordinary intelligence and prudence on
inquiry which, if pursued, would lead to the discovery of such facts." (emphasis in original)
(internal quotation marks omitted)). Thus, a finding of inquiry notice typically has no bearing on
reasonable reliance because it concerns discovery of the fraud and not the actual transaction.
In this case, however, the court determined that 24HFW-through its officers-had inquiry
notice of the alleged fraud prior to and at the time of execution of the PSA. In other words, even
before the PSA was signed by 24HFW, it had sufficient information to place it on notice of the
alleged misconduct. Understanding this, the court finds that 24HFW cannot establish reasonable
reliance. "[T]he recipient of a fraudulent misrepresentation ... is ... required to use his senses,
and cannot recover if he blindly relies upon a misrepresentation the falsity of which would be

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patent to him if he had utilized his opportunity to make a cursory examination or investigation."
Casso v. Pa. R.R. Co., 219 F.2d 303, 305 (3d Cir. 1955) (quoting Restatement (Second) Torts,§

541, cmt. a). In finding that 24HFW was placed on inquiry notice, the court already stated that,
"had they [24HFW's officers] conducted a reasonable inquiry-e.g., asking any Board member,
sending an e-mail, making a phone call, etc.-they would have discovered discrepancies" and the
alleged fraud. 24HFW's reliance on the alleged misrepresentations was not justified because it
could have easily discovered the alleged falsity by taking simple actions. 24HFW's defenses
sounding in fraud fail, and summary judgment as to these defenses is proper.
C. Rescission

Finally, the court groups Davis' remaining arguments under a single heading. Essentially,
Davis argues that 24HFW's defenses all seek rescission of the PSA, which is untimely. Relatedly,
Davis argues that 24HFW ratified or acquiesced to the PSA by failing to object or seek rescission
until Davis filed the lawsuit.
24HFW has raised objections to the timeliness of at least some of these related claims. (D.I.
121 at 9-10.) During the parties' most recent teleconference with the court, the court specifically
stated that issues surrounding these claims need not be addressed in limine but could be handled
at trial. (D.I. 119 at 37-38.) The court maintains its view that the proper forum to address these
claims would be at trial, rather than summary judgment. Davis' request for summary judgment
concerning the timeliness of24HFW's rescission defense and ratification of the PSA is denied.
V.

CONCLUSION

All of 24HFW's defenses are barred by statute oflimitations, and the defenses sounding in
fraud also fail as a matter oflaw. In view of the foregoing, Davis' request for summary judgment
(D.I. 79) is granted.

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Dated: December

J_, 201 4

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