ADF MidAtlantic, LLC v. Klein Enterprises, LLC
Filing
27
MEMORANDUM. Signed by Judge William M Nickerson on 11/12/13. (apls, Deputy Clerk)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
ADF MIDATLANTIC, LLC
v.
KLEIN ENTERPRISES, LLC
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Civil Action No. WMN-13-559
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MEMORANDUM
Before the Court is a motion to dismiss, ECF No. 14, filed
by Defendant Klein Enterprises, LLC (Klein) and a motion for
partial summary judgment, ECF No. 17, filed by Plaintiff ADF
MidAtlantic, LLC (ADF).
Klein has also filed a motion to strike
an affidavit which was submitted by ADF in conjunction with its
motion for partial summary judgment.
are all ripe for decision.
ECF No. 22.
The motions
Upon review of the parties’
submissions and the applicable case law, the Court determines
that no hearing is necessary, Local Rule 105.6, and that all
three motions will be denied.
I. FACTUAL BACKGROUND
This action arises out of a November 28, 2011, contract
(the Contract) relating to the sale of ADF’s leasehold interest
(the Leasehold Interest) in a particular parcel of improved real
property in Charlestown, West Virginia (the Property) on which
ADF or its predecessor in interest had operated a Pizza Hut
Restaurant for about twenty years.
There is at least general
agreement as to the facts relevant to the pending motions.
The
primary dispute in these motions turns on the applicability of a
liquidated damages clause in the Contract.
The applicability of
that liquidated damages provision depends, in part, on whether
the Contract was an option contract, as ADF contends, or a
bilateral sales contract, as Klein contends.
The facts giving
rise to this action are as follows.
At the time that the parties entered into the Contract, the
Property was owned by First Charles Town Group, Inc. (First
Charles) and was occupied by ADF pursuant to an August 15, 1991,
lease agreement (the Lease Agreement).
The Lease Agreement was
for an initial term of approximately twenty years and that
initial term was set to expire on September 30, 2012.
The lease
would automatically renew for an additional five years, however,
unless either First Charles or ADF provided notice, 60 days
prior to September 30, 2012, of its intent not to renew.
The
Lease Agreement contained a second five-year automatic extension
subject to a similar provision, allowing either party to prevent
the extension simply by giving notice 60 days prior to the
expiration of the first extension.
Lease Agreement ¶ 2.
The Lease Agreement also contained a “Right of First
Refusal” provision.
Id. ¶ 18.
Under this provision, before
selling the Property to any third party, First Charles was
obligated to give written notice to ADF of the terms and
2
conditions of its desire to sell the Property and to offer the
Property to ADF on those same terms.
Upon receipt of that
notice, ADF had ten days to either accept or reject that offer.
If ADF rejected the offer, First Charles would be free to sell
the property to the third party on those same terms and
conditions.
In late 2010 or early 2011, Klein became interested in
purchasing the Property and expressed that interest to First
Charles.
In conjunction with the intended purchase of the
Property from First Charles, Klein sent ADF, on February 4,
2011, a Letter of Intent proposing terms for the purchase of
ADF’s Leasehold Interest in the Property.
Klein and ADF then
continued to negotiate the purchase of the Leasehold Interest
from February 2011 through November 2011.
On November 28, 2011, Klein and ADF executed the Contract
that is at the center of this controversy.
The Contract
established a sales price of $850,000 for ADF’s Leasehold
Interest.
An initial deposit of $40,000 was due within three
days of the execution of the Contract.
After execution of the
Contract, Klein was provided with a 90 day “Due Diligence
Period” during which it could study the Property to determine
its suitability for Klein’s intended purpose.
During that Due
Diligence Period, Klein could terminate the Contract and the
initial deposit would be returned and the Contract deemed null
3
and void.
If, however, Klein did not elect to terminate the
Contract within the Due Diligence Period, it was required to
deliver an additional deposit of $45,000 and “the Contract shall
continue in full force and effect and the [now $85,000] Deposit
will become non-refundable in accordance with the terms of the
Contract.”
Id.
In the “Representations and Warranties” section of the
Contract, there was a provision that “[s]o long as this Contract
remains in full force and effect, [ADF] shall not, without the
written consent of [Klein], [] effect any change in the Lease,
[] renew, cancel, or otherwise modify in any way the term of the
lease, or [] enter into any new lease or other agreement with
respect to the Property.”
Id. ¶ 5(a)(i).
ADF also warranted
that as long as the Contract was in effect, including as of the
date of the closing, ADF would have “no outstanding option
rights or other arrangements with respect to the Leasehold
Interest.”
Id. ¶ 5(a)(xii).
In Klein’s view, by making these
warranties, ADF contracted away its right of first refusal for
purchasing the property.
Klein’s Mot. at 13.
Finally, the Contract contained a “Default” provision, the
application of which is at issue in these pending motions.
This
clause provides that, if ADF “wrongfully fails” to deliver the
Leasehold or otherwise breach the Contract, Klein would be
entitled to the return of the full deposit but would also “be
4
entitled to exercise any and all rights and to seek any and all
remedies” which Klein might have against ADF, including a suit
for specific performance of the Contract.
In contrast, the
Contract provided that, if Klein “wrongfully fails” to pay the
Purchase Price or otherwise breaches the Contract and ADF is
ready, willing and able to perform then,
as [ADF’s] sole remedy, [Klein] shall forfeit the
Deposit and it shall be and become the property of
[ADF], which sum shall be deemed by the parties to be
liquidated damages for the failure of [Klein] to
perform the obligations imposed upon it pursuant to
the terms of this Contract, such damages not otherwise
being ascertainable, and [Klein] shall be relieved of
all further liability and obligations in connection
with this Contract.
Id. ¶ 20.1
The Contract was executed; Klein made the initial deposit;
Klein allowed the 90 day Due Diligence Period to expire, without
terminating the Contract; and Klein made the second deposit.
Klein then entered into a contract with First Charles to
purchase the Property.
On April 20, 2012, Klein sent a letter
to ADF stating that, pursuant to the November 28, 2011,
Contract, “this letter shall serve as notice that [Klein] is
exercising our right to close on Monday, May 21, 2012.”
Ex. 3 (the Closing Letter).
Compl.
Although closing was initially set
1
The Contract also included a provision under which both parties
waived the right to a jury trial of any claims arising under the
Contract. Id. ¶ 25. The parties seem to concede the
applicability of this provision as neither party has pled a jury
trial.
5
for May 21, 2012, ADF indicates that it was “postponed by mutual
agreement.”
Compl. ¶ 11.
On May 1, 2012, consistent with the right of first refusal
provision in the Leasehold Agreement, First Charles sent a
letter to ADF: (1) informing ADF that it had entered into a
contract with Klein for the sale of the Property; (2) providing
the terms and conditions of the sale; and (3) giving notice that
ADF had ten days from that date to exercise its right of first
refusal.
ADF did not exercise that right, relying on Klein’s
declared intention to purchase ADF’s Leasehold Interest, and
proceeded to make and carry out provisions to move its Pizza Hut
restaurant to another location.
Klein, through an affiliate
entity, Charles Town DP, LLC (Charles Town), purchased the
Property on May 17, 2012.
Sometime in June of 2012, after ADF had waived its right of
first refusal and Klein had purchased the Property, Klein
advised ADF that it had recently discovered the provision in the
Leasehold Agreement that permits either party to prevent the
automatic five year extensions to the Leasehold Agreement by
simply giving written notice to the other party of the desire
not to extend the lease.
Hardy Aff. ¶ 11.
On July 25, 2012,
Charles Town sent a letter to ADF stating that Charles Town, as
the new landlord, was electing not to extend the term of the
Lease beyond the initial 20-year term expiring September 30,
6
2012, pursuant to the terms of the Leasehold Agreement.
Then,
on September 13, 2012, Klein, through counsel, informed ADF that
“Klein has determined that for good and sufficient business
reasons, it will not be closing for the purchase and paying the
Purchase Price under the Contract.”
Hardy Aff., Ex. 4.
It
further acknowledged that “Klein is willing to treat this
failure to close and pay the Purchase Price as a default by the
Buyer.”
Id.
Furthermore, the letter stated that, once ADF
confirms that it was ready, willing, and able to perform its
obligations under the Contract, Klein would instruct the escrow
agent to disburse the $85,000 deposit to ADF as liquidated
damages.
This course of dealings reveals some anomalous and somewhat
inexplicable elements.
First, while both ADF and Klein appear
to be sophisticated business entities, they entered into a
contract whereby Klein agreed to pay $850,000 for ADF’s
Leasehold Interest, presumably with the expectation that the
Lease would be extended through both additional five-year terms,
despite the fact that the owner of the Property could simply
terminate the Leasehold Interest at the fast-approaching end of
the original term with no payment, whatsoever, by simply giving
timely written notice.
Second, it seems surprising that Klein
would have been unaware, until June 2012, of this ephemeral
aspect of the Leasehold Interest, given that the Lease Agreement
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was attached to the Contract when it was executed in November
2011.
On the other hand, it is equally surprising that ADF
thought it could sell for significant consideration a Leasehold
Interest it did not have the power to preserve.2
Notwithstanding the somewhat inexplicable motivations
behind the formation of the Contract, the Court disagrees with
Klein’s conclusion that ADF could not have been harmed by its
breach.
Observing that the owner of the Property could
terminate the Lease at the end of soon-to-be-expiring original
term at no cost, Klein concludes that permitting ADF “to walk
away with $85,000” should be considered “a windfall.”
Def.’s
Mot. at 16; see also, Def.’s Reply at 3. n.2 (opining that “ADF
is actually in a better position as a result of entering into
the Leasehold Contract with Klein than it would otherwise have
been” because it received $85,000 for something it would have
had to give up, regardless).
What Klein ignores throughout its
2
While ignoring their own failures to discern this relatively
obvious aspect of the Lease Agreement, both sides accuse the
other of either a lack of diligence in failing to discover this
term, or of knowing about the term but purposely concealing it.
See ADF’s Mot. at 12 (“Klein claims it did not know that the
Lease allowed termination at the time Klein entered the
Contract. That assertion is not plausible. . . . The Lease was
attached to the Contract as an exhibit, and Klein conducted 90days of due diligence.”); Klein’s Reply at 8 n.4 (“To the extent
that ADF made what it now views as a bad business deal because
it did not anticipate the situation where the Owner would
terminate the Lease before Klein paid the purchase price, it
should blame itself, not Klein. ADF was in a superior position
as the long time tenant to know the terms of the Lease inside
out . . . .”).
8
argument is that ADF, by entering into this Contract and relying
on Klein’s performance, gave up the right of first refusal to
purchase the Property outright that it once had under the terms
of the Lease Agreement.
The potential value of that right, or
whether ADF actually would have exercised it, is not apparent on
the current record.
Nevertheless, ADF can plausibly claim that
Klein, whether inadvertently or intentionally, created the
scenario whereby ADF lost that right of first refusal.
On the basis of these allegations, ADF has asserted the
following claims: Specific Performance (Count I); Breach of
Contract (Count II); Promissory Estoppel/Detrimental Reliance
(Count III); Unjust Enrichment (Count IV); and Fraudulent
Misrepresentation (Count V).
In moving to dismiss all counts of
the Amended Complaint, Klein’s primary argument is that the
“Default” or liquidated damages clause in the Contract limits
ADF’s recovery to the $85,000 deposit.
Klein also raises some
additional arguments related to individual claims that will be
set out and addressed below.
ADF’s cross motion for partial
summary judgment is limited to a request that summary judgment
be entered in its favor with respect to Klein’s liquidated
damages defense.
II. LEGAL STANDARDS
Klein has moved to dismiss the Complaint under Rule
12(b)(6) of the Federal Rules of Civil Procedure.
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To survive
such a motion, a complaint must “contain sufficient factual
matter . . . to ‘state a claim to relief that is plausible on
its face.’”
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)
(quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570
(2007)).
“A claim has facial plausibility when the plaintiff
pleads factual content that allows the court to draw the
reasonable inference that the defendant is liable for the
misconduct alleged.”
Id.
In considering such a motion, the
court is required to accept as true all well-pled allegations in
the Complaint, and to construe the facts and reasonable
inferences from those facts in the light most favorable to the
plaintiff.
Ibarra v. United States, 120 F.3d 472, 474 (4th Cir.
1997).
ADF’s motion for partial summary judgment is brought
pursuant to Rule 56 of the Federal Rules of Civil Procedure.
Summary judgment is proper under that rule if the evidence
before the court establishes that there is no genuine issue of
material fact and that the moving party is entitled to judgment
as a matter of law.
Fed. R. Civ. P. 56(c); Celotex Corp. v.
Catrett, 477 U.S. 317, 322 (1986).
A party seeking summary
judgment bears the initial responsibility of informing the court
of the basis of its motion and identifying the portions of the
opposing party’s case which it believes demonstrate the absence
of a genuine issue of material fact.
10
Id. at 323.
As a general
rule, however, summary judgment is not appropriate prior to the
completion of discovery.
Webster v. Rumsfeld, 156 F. App’x 571,
575 (4th Cir. 2005).
III. DISCUSSION
A. Motion to Strike
Klein has moved to strike the affidavit of ADF’s Chief
Manager and President, Donald Hardy, on the grounds that there
is no indication in the text of the affidavit that Hardy bases
his testimony on personal knowledge and that the affidavit
includes improper legal argument and conclusions.
In response
to the motion to strike, ADF submitted a second affidavit from
Mr. Hardy in which he avers that the statements he made in his
first affidavit were all based upon his personal knowledge.
ECF
No. 26.
With the second affidavit, Mr. Hardy has cured the
technical deficiencies of the first.
Because Mr. Hardy was at
the center of the negotiations at issue in this action, as
evidenced by the fact that he was the recipient named in all of
the correspondence directed to ADF, he certainly had firsthand
knowledge of the substance of his testimony.
In addition, while
it is true that his affidavit drifts, at times, into argument,
the Court can parse those portions from its consideration.
Court will deny the motion to strike.
11
The
B. Applicability of the Liquidated Damages Clause
There is no real question that, if the Contract was an
enforceable contract, it was breached by Klein.
The issue is:
what damages is ADF entitled to recover because of that breach?
In its motion to dismiss, Klein argues that any recovery is
limited to the $85,000 deposit specified in the liquidated
damages clause.
In opposing that aspect of Klein’s motion to
dismiss, ADF makes three arguments.
First, it contends that,
under a particular line of Maryland cases, the Contract should
be treated as an option contract and, once the option was
exercised by Klein’s sending of the Closing Letter, the Contract
became a bilateral contract, binding on both parties, to which
the liquidated damages clause no longer applied.
Second, ADF
contends that the clause is unenforceable because $85,000 is an
unreasonably low estimation of the potential damages for a
breach.
Third, ADF asserts that the clause is unenforceable
because Klein breached the Contract in bad faith.
ADF opposes
Klein’s motion to dismiss on all three grounds, but also argues
in its motion for partial summary judgment that, under its
option contract argument, the Court can determine as a matter of
law that the liquidated damages clause is no longer applicable.
ADF recognizes that its other two arguments would only be
resolvable in its favor after some discovery and thus, ADF’s
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motion for partial summary judgment is limited to that first
argument.
The case on which ADF most heavily relies for its option
contract argument is Dixon v. Haft, 253 A.2d 715 (Md. 1969).
In
Dixon, the Maryland Court of Appeals interpreted the legal
effect of the following provision in a real estate contract,
executed on January 6, 1966:
Time is of the essence of this Contract and within
ninety days from the date of acceptance hereof by the
Seller, or within ninety days after all contingencies
have been eliminated or as soon threafter (sic) as a
report on the title can be secured if promptly
ordered, and an appointment can be made with the Title
Company for settlement, the Seller and Purchaser are
required and agree to make full settlement in
accordance with the terms hereof. If the Purchaser
shall fail to do so, the deposit herein provided shall
be forfeited as the sole remedy of the Seller and the
Purchaser shall thereby be relieved from further
liability hereunder.
253 A.2d at 716 (emphasis added by Dixon court).
“At the
instance of the purchasers,” id., a settlement was scheduled for
April 6, 1966, but, while the sellers and the agent for the
purchasers met on that date, the purchasers’ agent requested
that the actual settlement be postponed until April 11 to permit
the purchasers to verify certain aspects of the title and land
survey.
Id.
The parties agreed to postpone the settlement and
the purchasers’ agent confirmed that agreement in a letter.
Subsequently, however, the purchasers refused to settle for
reasons unrelated to the title or survey verifications.
13
When
the sellers sued for breach of contract, the trial court limited
their recovery to the retention of the deposit, relying on the
above quoted “sole remedy” language.
Id. at 717.
On appeal, the Maryland Court of Appeals reversed that
decision, holding that “the trial court took too narrow a view
of the effect of the contract entered into on April 6.”
Relying
on two previous decisions, Messina v. Moeller, 133 A.2d 75 (Md.
1957) and Schlee v. Bryant, 234 A.2d 457 (Md. 1967), the court
held that the January 6, 1966, contract was, in actuality, an
option contract.
In language cited here by ADF, the court
observed that, under such a contract, “if the purchaser gave
evidence that he had chosen his option to perform rather than
reject his right to buy the property there ensued a contract
binding on both sides that justified specific performance by
either.”
ADF’s Mot. at 16 (citing Dixon, 253 A.2d at 718,
emphasis added by ADF).
As to what happened to the “sole
remedy” provision, the Maryland Court of Appeals ruled that,
once the option was exercised by a subsequent agreement to
perform, “an executory bilateral contract would come into
existence and [] the clause providing for the forfeiture of the
deposit and relieving the purchaser of further liability, which
related solely to the option agreement, would no longer be the
measure of damages for breach of the newly formed contract.”
14
Kasten Const. Co. v. Jolles, 278 A.2d 48, 50 (Md. 1971)
(summarizing the holding in Dixon).
While this Court finds some support in Dixon for the
conclusion that the Contract at issue here was an option
contract and, with the exercise of that option, the liquidated
damages clause could fall away, the Court is less clear that,
under Dixon, Klein can be said to have exercised the option
simply by sending the Closing Letter.
In Dixon, after
describing the purchaser’s “absolute right under the contract
language . . . to choose between consummating the purchase on
the agreed upon terms or of walking away, for any reason or no
reason, with no obligation or liability whatever save the loss
of his deposit,” the court noted that “these options were still
those of the purchaser in the case before us on April 6 when the
settlement he had called was held.”
added).
253 A.2d at 718 (emphasis
Apparently, simply requesting a settlement was not
sufficient to have been deemed an exercise of the option.
In support of its holding that the option was exercised and
a binding bilateral contract formed, the Dixon court relied on
two decisions from other jurisdictions, Sunset Beach Amusement
Corp. v. Belk, 158 A.2d 35 (N.J. 1960), and Neher v. Kauffman,
242 P. 713 (Cal. 1925), that the Maryland Court of Appeals found
“not too dissimilar on the facts.”
253 A.2d at 718.
The
parties in Sunset Beach had appeared at what the Supreme Court
15
of New Jersey viewed as a “rather typical final closing” and
“the executory contract of sale was consummated subject to some
loose ends which the parties conceived to be too minor to
warrant postponement of the [settlement].”
158 A.2d at 38.
Under those facts, the court found “the die was cast” and
specific performance was called for.
Id.
Similarly, in Neher,
the parties had signed and delivered escrow instructions to each
other which the Supreme Court of California viewed as
supplementing or modifying the terms of the original agreements.
As in Dixon, the contracting parties’ course of conduct in these
cases was far more definitive than Klein’s sending of the
Closing Letter.
On the other hand, in Schlee v. Bryant, one of the Maryland
cases relied upon in Dixon, the Court of Appeals found that the
purchaser’s option was exercised simply by the purchaser’s oral
representation to the seller’s agent that “he was willing to
proceed to settlement and that [the seller’s agent] should order
a title search and arrange for settlement.”
234 A.2d at 459.
The contract at issue in Schlee contained the following clause:
Within 90 days from the date of acceptance hereof by
the owner, or as soon thereafter as a report on the
title can be secured if promptly ordered, the seller
and purchaser are required and agree to make full
settlement in accordance with the terms hereof. If
the purchaser shall fail so to do, the deposit herein
provided for [shall] be forfeited [] in which event
the purchaser shall be relieved from further liability
hereunder[].
16
Id. at 459.3
Finding that the purchaser had effectively
exercised his option to purchase the property, the trial court,
notwithstanding this provision, ordered specific performance of
the contract and the Court of Appeals affirmed that ruling.
Schlee, however, came to the trial court in a very
different posture than the case at bar.
sellers that breached the contract.
In Schlee, it was the
Because the surveyor who
was to survey the property was unable to complete the requisite
survey within the 90 day period set out in the contract, the
settlement was scheduled by the seller’s agent for the 92nd day
after the acceptance of the contract.
The purchaser and the
seller’s agent appeared at settlement, the note and deed of
trust were executed, and the purchaser tendered a check for the
balance due.
The seller did not appear at settlement,
subsequently refused to perform under the contract, and then
demanded the forfeiture of the deposit under the terms of the
above quoted language.
Under these facts, very different from
the allegations here, the Maryland Court of Appeals held that
specific performance of the contract was appropriate.
It is not clear from the current record in this case that
it can be said, as a matter of law, that Klein exercised its
3
The parties had crossed out portions of this provision from
language that appeared on a form contract. The above quoted
language is this provision, after the alteration by the parties.
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option to purchase the Leasehold Interest.4
Klein certainly did
no more here than the purchasers in Dixon had done at a point in
time that the Court of Appeals opined they still maintained the
right to walk away from the contract.
See supra. In each of the
cases relied upon by ADF or cited by Dixon, there was a
substantial course of conduct considered by the court in
determining if the purchasers had given evidence that they had
chosen the option to perform.
Here, we have nothing more than
the sending of the Closing Letter in which Klein proposed a
settlement date of May 21, 2012, and the allegation that the
parties postponed that date “by mutual agreement.”
Compl. ¶ 11.5
The Court notes that, even if Klein is not found to have
exercised its option, there is at least a question of fact as to
4
Klein argues that, were the Court to adopt ADF’s option
contract argument, “the liquidated damages clause may never
apply for a wrongful failure to pay the purchase price, because
Klein would always have taken some action prior to the date the
purchase price was due to exercise the ‘option’ . . . .”
Klein’s Reply at 9. The Court disagrees. Under the Contract,
there are three distinct timeframes within which a decision by
Klein not to go forward with the purchase would lead to three
different results. During the Due Diligence Period, Klein could
decide not to go forward with the purchase for any reason and
would receive back its initial deposit. After the Due Diligence
Period, but before Klein exercised the option, a breach would be
subject to the liquidated damages clause and Klein would forfeit
the entire deposit. Once Klein exercised the option, however,
the liquidated damages clause would no longer be in effect.
5
The Court also notes that, if Klein is found to have exercised
its option, it would not necessarily follow that the remedy
would be specific performance of the Contract. In a technical
sense, ADF no longer possesses an interest in the Property to
convey to Klein.
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whether the liquidated damages clause would be enforceable.
ADF
argues that, just as a liquidated damages clause specifying an
amount too high is void as a penalty, a liquidated damages
clause specifying an amount that is too low is also
unenforceable.
While ADF points to no case law in Maryland
supporting this position, and this Court is aware of none, the
extension of this principle to liquidated damages that are too
low logically follows.
The Restatement (Second) of Contracts
states that liquidated damages are enforceable “only at an
amount that is reasonable in light of the anticipated or actual
loss caused by the breach and the difficulties of proof of
loss.”
Restatement (Second) of Contracts § 356.
While § 356 of
that Restatement provides that a “term fixing unreasonably large
liquidated damages is unenforceable on grounds of public policy
as a penalty,” the comments to that section add, “[a] term that
fixes an unreasonably small amount as damages may be
unenforceable as unconscionable.”
Id., Comment 1.
Similarly,
the section of the Uniform Commercial Code for the sale of goods
provides in the Official Comments, “[a] term fixing unreasonably
large liquidated damages is expressly made void as a penalty.
An unreasonably small amount would be subject to similar
criticisms and might be stricken under the section on
unconscionable contracts or clauses.”
2-718.
19
Md. Code Ann., Com. Law §
Klein argues that, even if a liquidated damages clause can
be held unenforceable if too low, $85,000 is not too low an
estimate of the damages that would flow from a breach of this
Contract, given that the owner of the Property could terminate
ADF’s Leasehold Interest at no cost.
The Court agrees that it
may be very difficult for ADF to prove that any amount was too
low for an interest that could turn out to have no value.
At
the time of contracting, however, the parties apparently agreed
that the fair value of ADF’s interest was $850,000.
Furthermore, the damage caused by the breach of the contract, at
least the kind of breach that subsequently occurred, was ADF’s
loss of its right of first refusal.
On the current record, the
Court cannot assess how the parties would have valued that right
at the time of contract.6
C. ADF’s Quasi-Contract Claims
Klein first argues that ADF’s Promissory Estoppel and
Unjust Enrichment claims must be dismissed under “‘the general
rule [] that no quasi-contractual claim can arise when a
contract exists between the parties concerning the same subject
matter on which the quasi-contractual claim rests.’”
6
Klein’s
Because the Court finds that the liquidated damages clause
could be found unenforceable on other grounds, it need not reach
ADF’s third argument regarding the implications of a “bad faith”
breach of contract. In some ways, this argument begins to
overlap with the arguments regarding the fraud claim, discussed
below.
20
Mot. at 12 (quoting Cnty. Comm’rs of Caroline Cnty. v. J. Roland
Dashiell & Sons, Inc., 747 A.2d 600, 607 (Md. 2000)).
ADF does
not dispute that, if the Contract is enforceable, its quasicontractual claims cannot be maintained.
Anticipating, however,
that Klein will assert the affirmative defense of mutual mistake
when it answers the Complaint, ADF suggests that it should be
able to assert these claims in the alternative should Klein
seek, and the Court grant, rescission of the Contract.
While
the Court agrees with Klein that, if the Contract stands, the
quasi-contractual claims fall, the alternative pleading of these
claims is appropriate in this instance.
Klein also challenges ADF’s ability to factually support
either claim.
To prove a claim of promissory estoppel, a
plaintiff must establish:
1. a clear and definite promise;
2. where the promisor has a reasonable expectation
that the offer will induce action or forbearance on
the part of the promisee;
3. which does induce actual and reasonable action or
forbearance by the promisee; and
4. causes a detriment which can only be avoided by the
enforcement of the promise.
Pavel Enters., Inc. v. A.S. Johnson Co., Inc., 674 A.2d 521 (Md.
1996) (citing Restatement (Second) of Contracts § 90(1)).
ADF
asserts that, in reliance on Klein’s promise to purchase its
Leasehold Interest for $850,000, it did not exercise its right
21
of first refusal to purchase the Property and, subsequently, had
to relocate its business.
To prove a claim of unjust enrichment, a plaintiff must
establish:
“1. A benefit conferred upon the defendant by the
plaintiff;
2. An appreciation or knowledge by the defendant of
the benefit; and
3. The acceptance or retention by the defendant of the
benefit under such circumstances as to make it
inequitable for the defendant to retain the benefit
without the payment of its value.”
Cnty. Comm’rs of Caroline Cnty., 747 A.2d at 607 n.7 (quoting
Everhart v. Miles, 422 A.2d 28, 31 (Md. Ct. Spec. App. 1980)).
ADF alleges that, despite the parties having once agreed that
the value of ADF’s Leasehold Interest was $850,000, Klein will
receive the Property free and clear of the Leasehold Interest
without making any payment to ADF if the Contract is not
enforced (or only one tenth of the value if the liquidated
damages provision is enforced).
While the Court expresses no
opinion as to whether ADF can ultimately establish that it would
be inequitable under these circumstances for Klein to have
obtained everything for which it contracted at no cost (or a
fraction of the cost), at this stage in the litigation, the
Court finds that ADF has adequately stated a claim for unjust
enrichment.
22
In what seems a somewhat cyclical argument, Klein suggests
that ADF is unable to establish the central allegation that
supports both claims (i.e., that Klein’s issuance of the Closing
Letter induced ADF to forgo its purchase option) “because ADF
had already relinquished the purchase option in the Leasehold
Contract.”
Klein’s Reply at 19.
That relinquishment, however,
was allegedly in reliance on promises made by Klein when it
entered the Contract, not just when it sent the Closing Letter.
Furthermore, the Court would only reach the quasi-contract
claims if the Contract is declared unenforceable.
Klein cannot
argue that the Contract should be rescinded because it was based
on a mutual mistake, and then seek to bind ADF to the terms of
that Contract.
D. ADF’s Fraud Claim
In order to recover damages in an action for fraud or
deceit in Maryland, a plaintiff must prove
(1) that the defendant made a false representation to
the plaintiff,
(2) that its falsity was either known to the defendant
or that the representation was made with reckless
indifference as to its truth,
(3) that the misrepresentation was made for the
purpose of defrauding the plaintiff,
(4) that the plaintiff relied on the misrepresentation
and had the right to rely on it, and
(5) that the plaintiff suffered compensable injury
resulting from the misrepresentation.
23
Nails v. S & R, Inc., 639 A.2d 660, 668 (Md. 1994).
“Although a
cause of action for fraud may not rest on a statement about
future events, a person may commit fraud if he or she enters an
agreement to do something, without the present intention of
performing.”
First Union Nat. Bank v. Steele Software Systems
Corp., 838 A.2d 404, 426 (Md. Ct. Spec. App. 2003).
Furthermore, fraud claims are subject to the heightened
pleading standard of Rule 9 of the Federal Rules of Civil
Procedure.
Under that Rule, a plaintiff must plead “with
particularity the circumstances constituting fraud.”
Civ. P. 9(b).
Fed. R.
“[T]he circumstances required to be pled with
particularity under Rule 9(b) are the time, place, and contents
of the false representations, as well as the identity of the
person making the misrepresentation and what he obtained
thereby.”
Harrison v. Westinghouse Savannah River Co., 176 F.3d
776, 784 (4th Cir. 1999) (citation and internal quotation marks
omitted). “The second sentence of Rule 9(b) allows conclusory
allegations of defendant's knowledge as to the true facts and of
defendant's intent to deceive.”
Id. (citation omitted).
The basic premise of ADF’s fraud claim is that “Klein never
intended to purchase the Leasehold Interest from ADF for the
Purchase Price.
Instead, Klein intentionally deceived ADF so
that ADF would forgo its right of first refusal and move its
business to an alternative property, so that Klein could take
24
possession of the Property without paying the promised Purchase
Price.”
Compl. ¶ 47.
From this premise and the rest of the
Complaint, it is clear that the alleged misrepresentations were
made where and when the November 28, 2011, Contract was executed
and the April 20, 2012, Closing Letter was sent.
The individual
making the allegedly fraudulent representations was Daniel
Klein, who negotiated and executed the Contract on behalf of
Klein Enterprises.
Furthermore, while these alleged fraudulent
representations relate to a future event, ADF asserts that they
were made with a present intent not to perform.
Klein’s central argument against the fraud claim is similar
to its argument against the quasi-contract claims.
By focusing
only on the issuance of the Closing Letter, Klein contends that,
because ADF represented in the Contract that it had no right of
first refusal, it could not have been induced to give up that
right by the issuance of the Closing Letter.
Klein ignores
ADF’s allegation that Klein “never intended” to purchase ADF’s
Leasehold Interest and, thus, ADF was induced to enter the
Contract itself by a fraudulent representation.
Whether ADF can
prove that Klein always had that fraudulent intent is a question
for another day.
25
IV. CONCLUSION
For the reasons stated above, Klein’s motion to dismiss and
ADF’s motion for partial summary judgment will both be denied.
A separate order will issue.
_______________/s/________________
William M. Nickerson
Senior United States District Judge
DATED: November 12, 2013
26
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