Hansen v. Rhode Island's Only 24 Hour Truck & Auto Plaza, Inc. et al

Filing 55

Judge Nathaniel M. Gorton: ORDER entered. MEMORANDUM AND ORDER: " In accordance with the foregoing, plaintiff's motion for judgment on the pleadings (Docket No. 16 ) is DENIED. So ordered."(Moore, Kellyann)

United States District Court
District of Massachusetts
________________________________
)
)
)
)
v.
)
)
RHODE ISLAND’S ONLY 24 HOUR
)
TRUCK & AUTO PLAZA, INC., BEST
)
NEW ENGLAND, INC., THOMAS A.
)
GOTAUCO, LANTIC ENERGY, LLC
)
Defendants.
)
________________________________ )
ERIC HANSEN,
Plaintiff,

Civil Case No.
12-10477-NMG

MEMORANDUM & ORDER
GORTON, J.
This action arises out of an alleged breach of a purchase
and sale agreement with respect to a truck stop. Plaintiff Eric
Hansen (“Hansen”), the prospective buyer, brings suit against
Rhode Island’s Only 24 Hour Truck & Auto Plaza, Inc., Best New
England, Inc., Thomas A. Gotauco and Lantic Energy, LLC a/k/a
Lantic Green Energy (collectively, “defendants”), the prospective
sellers.

Currently before the Court is plaintiff’s motion for

judgment on the pleadings with respect to Counts I and II, which
defendants have opposed.
I.

Factual Background
Plaintiff and defendants entered into a purchase and sale

agreement (“the P&S”) for the sale of a truck stop in West

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Greenwich, Rhode Island.

The P&S entitled plaintiff 45 days to

conduct due diligence with closing to occur no later than three
weeks after that.

The P&S also required plaintiff to make a

$250,000 refundable deposit to be held in escrow by defendants’
attorneys, Hemenway & Barnes, LLP.
Under the P&S several conditions were to be satisfied prior
to closing, two of which are at issue in this case. First, under
Section 12(b), if plaintiff was unable to obtain financing for 40
percent (or $3,600,000) of the $9,000,000 sale price “from a
conventional bank at such rates upon such terms and conditions as
the Buyer shall deem acceptable,” he would be entitled to
terminate the P&S and obtain an immediate refund of his deposit
upon written notice to the defendants. Second, under Section
12(c) if, in his “sole discretion”, plaintiff “determine[d] that
any environmental hazard exists” he would also be entitled to
terminate the P&S and have the entire deposit returned. Under
Section 20 of the P&S if any of the conditions of sale were “not
met to the Buyer’s sole satisfaction,” the deposit was to be
refunded.

If, however, all enumerated conditions were met and

plaintiff did not purchase the truck stop, defendants were
entitled to keep the deposit as liquidated damages.
The parties also entered into an escrow agreement (“the
Escrow Agreement”) which similarly provided that the deposit
would be “immediately returned” if any of the conditions in the

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P&S were not met.

Although the Escrow Agreement was made subject

to the terms of the P&S, it did not explicitly give plaintiff
“sole discretion” to determine if environmental hazards existed
but instead called for “environmental reports satisfactory to the
Buyer.”
Following execution of the P&S and Escrow Agreements,
plaintiff’s business consultant Kevin King (“King”) visited the
truck stop to conduct due diligence.

His visit raised concerns

that cash income was not being reported to tax authorities and
that there were potential environmental hazards on the site.
King also began exploring financing options. He engaged in
preliminary discussions with Key Bank and TD Bank and filed a
loan application with Bank of America.

In late November, 2010,

King requested additional financial information about the truck
stop from defendants.

The following month King received an

interim financial statement which he forwarded to a Bank of
America loan officer.

King believed the statement showed that

prior financial statements provided by defendants were not
accurate and that the truck stop did not have the necessary cash
flow to finance a bank loan.

On December 9, 2010, King received

a letter from the loan officer advising him to
request an extension of [his] due diligence period
since the presentation of financial information, as it
stands today, presents a financial profile that is not
strong enough to secure bank financing.
Plaintiff did not request additional time.

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On December 14, 2010, plaintiff sent a letter to defendants
advising them that he was unable to secure financing and that
the recent spill and several containers of apparently
environmentally hazardous materials existing on the
site constitute environmental hazards.
Plaintiff explained that he was therefore terminating the P&S
and requested the return of his deposit under the terms of the
P&S and Escrow Agreements.

The following day, Bank of America

officially denied plaintiff’s loan application.
Defendants have refused to release the escrow funds on the
grounds that plaintiff terminated the P&S in bad faith.
II.

Procedural History
Plaintiff filed his Complaint in March, 2012. He seeks a

declaratory judgment that he is entitled to the return of the
$250,000 refundable earnest-money deposit (Count I) and brings
claims for breach of contract (Count II), breach of the covenant
of good faith and fair dealing (Count III), fraud (Count IV),
negligent misrepresentation (Count V) and violation of the
Massachusetts Consumer Protection Act, M.G.L. c. 93A (Count VI).
Defendants’ answer denies all material allegations and asserts
that plaintiff violated the covenant of good faith and fair
dealing by exploiting his discretionary rights under the P&S as a
pretext to terminate.
Plaintiff has moved for judgment on the pleadings which
defendants have opposed.

The Court heard oral argument on the

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motion at a scheduling conference and took the motion under
advisement.
III. Analysis
A.

Legal Standard

While it differs from a Rule 12(b)(6) motion to dismiss in
that it is filed after the close of pleadings and “implicates the
pleadings as a whole,” a Rule 12(c) motion for judgment on the
pleadings is governed by the same standard. Perez–Acevedo v.
Rivero–Cubano, 520 F.3d 26, 29 (1st Cir. 2008).

To survive a

motion for judgment on the pleadings, a complaint must contain
sufficient factual matter to state a claim for relief that is
actionable as a matter of law and “plausible on its face.”
Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (quoting Bell
Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)).

Assessing

plausibility is a “context-specific task that requires the
reviewing court to draw on its judicial experience and common
sense” to determine whether the well-pled facts alleged in the
complaint are sufficient to “permit the court to infer more than
the mere possibility of misconduct.” Iqbal, 129 S. Ct. at 1950.
In considering the merits of a motion to dismiss, the Court
accepts all factual allegations in the complaint as true and
draws all reasonable inferences in favor of the non-moving party.
Langadinos v. Am. Airlines, Inc., 199 F.3d 68, 69 (1st Cir. 2000).

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B.

Application

In support of his motion, plaintiff asserts that 1) he had
absolute discretion to terminate the contract if he was unable to
obtain the necessary financing or determined that the property
contained environmental hazards and 2) even if he did not have
absolute discretion, he acted in good faith in terminating the
P&S. Defendants argue that plaintiff’s discretion was
circumscribed by the duty of good faith and fair dealing and that
the plaintiff did not act in good faith when he terminated the
P&S.

Plaintiff responds that defendants’ allegation of bad faith

fails to comport with the pleading requirements of Fed.R.Civ.P. 8
and 9(c), and, as such, he is entitled to judgment on the
pleadings.
The Court first considers whether defendants’ affirmative
defense was properly pled and then addresses plaintiff’s
discretion and his covenant of good faith and fair dealing.
1.

Affirmative Defenses Under the Twombly Pleading
Standard

In their Answer defendants “deny that plaintiff acted in
good faith in undertaking his duties under the Agreement, inter
alia, to seek financing.”

Plaintiff claims that this denial is

legally insufficient under Fed. R. Civ. P. 9(c) because the
requirement to act in good faith is a condition precedent and
defendants were therefore required to plead with particularity.
The Court is not persuaded by plaintiff’s argument.
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The duty of

good faith is not a condition precedent and is therefore not
subject to Rule 9(c).
Plaintiff also argues that defendants did not plead their
good faith affirmative defense with sufficient specificity to
satisfy the heightened pleading standard of Fed. R. Civ. P. 8 as
interpreted by the Supreme Court in Twombly and Iqbal. Twombly,
550 U.S. 554; Iqbal, 556 U.S. 662.

No Circuit Court of Appeals

has addressed whether the plausibility pleading standard of
Twombly and Iqbal applies to affirmative defenses. District
Courts are divided on this question. Falley v. Friends Univ., 787
F. Supp. 2d 1255, 1256-57 (D. Kan. 2011) (collecting cases).
Although a majority of early cases applied the heightened
standard, this is now the minority approach.
In Kaufmann v. Prudential Ins. Co. of Am., CIV.A. No. 0910239-RGS, 2009 WL 2449872, at *1 (D. Mass. Aug. 6,
2009)(Stearns, J.) another Session of this Court “Assum[ed],
without deciding . . . that a defendant has the same Rule 8
obligations with respect to notice pleading as does a plaintiff.”
However, the Court also ruled that listing one of the “general”
defenses named in Rule 8(c)(1) provides “sufficient notice to a
plaintiff of its basic thrust” and is not subject to the
heightened standard.

Although defendant’s affirmative defense is

not a listed defense, this Court nonetheless declines to apply
the heightened standard.

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Courts that have applied the heightened standard have
justified their decision based on the text of Fed. R. Civ. P. 8.
E.g. Hayne v. Green Ford Sales, Inc., 263 F.R.D. 647, 650 (D.
Kan. 2009).

Both 8(a) (governing answers) and 8(b) (governing

defenses) require a “short and plain” description of the claim.
As such, many district courts have determined that the same
standard should govern the requisite factual content in a “short
and plain” statement. E.g., HCRI TRS Acquirer, LLC v. Iwer, 708
F. Supp. 2d 687, 691 (N.D. Oh. 2010); Hayne, 263 F.R.D. at 650.
Those courts also reason that Rule 8(c)(governing affirmative
defenses) simply poses additional requirements to those already
set out by Rule 8(b)’s “short and plain” language and thus
affirmative defenses should not be examined under a different
standard. Hayne, 263 F.R.D. at 650.
The most prevalent argument made by district courts against
the heightened standard, however, relies on the text of Rule 8
and is more convincing to this Court.

Despite the identical

“short and plain” language, there are key textual differences
between the sub-parts of Rule 8. Palmer v. Oakland Farms, Inc.,
No. 5:10CV00029, 2010 WL 2605179, at *5 (W.D. Va. Jun. 24, 2010).
Rule 8(a) requires that the pleading “show[ ] that the pleader is
entitled to relief.”

Subsections 8(b) and (c), on the other

hand, require only that a defendant “state” her defense. Further,
Twombly and Iqbal were decided under Rule 8(a)(2) and the Court

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is therefore hesitant to extend the holding of those cases to
Rule 8(c) given that the drafters used different language in the
sub-sections. See Charleswell v. Chase Manhattan Bank, N.A.,
CIV.A. No. 01-119, 2009 WL 4981730, at *4 (D.V.I. Dec. 8, 2009).
In addition, policy concerns and fairness considerations
counsel against application of the heightened standard.

Courts

that have applied the heightened pleading standard to affirmative
defenses have often done so on the basis that Twombly aimed to
eliminate the high costs of discovery associated with boilerplate
claims and that boilerplate affirmative defenses have the same
detrimental effect on the cost of litigation. E.g., Palmer, 2010
WL 2605179, at *5; HCRI TRS Acquirer, LLC v. Iwer, 708 F. Supp.
2d 687, 691 (N.D. Ohio 2010); Shinew v. Wszola, CIV.A.08-14256,
2009 WL 1076279, at *4 (E.D. Mich. Apr. 21, 2009).

However, the

concerns voiced in Iqbal that high discovery costs will induce
undeserved settlements do not apply in the context of affirmative
defenses. See Leon v. Jacobson Transp. Co., No. 10 C 4939, 2010
WL 4810600, at *1 (N.D. Ill. Nov. 19, 2010) (“The [Supreme]
Court. . . has never once lost sleep worrying about defendants
filing nuisance affirmative defenses.”)

Discovery on affirmative

defenses will add little additional cost and will be borne
equally by both parties because the claim and affirmative defense
involve discovery of many of the same facts.

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Any potential efficiency gained by applying Twombly does not
outweigh the burden on defendants. While plaintiffs have the
statute of limitations period to prepare their complaints and to
find supporting facts, defendants have only 21 days to respond.
Leon, 2010 WL 4810600, at *1; Holdbrook v. SAIA Motor Freight
Line, LLC, 09-CV-02870-LTB-BNB, 2010 WL 865380, at *2 (D. Colo.
Mar. 8, 2010).

As a result,

it would be unreasonable to expect defendants to be aware
of all the necessary facts or even to know for sure
whether a particular affirmative defense is applicable,
given that discovery has not occurred.
Baum v. Faith Techs., Inc., 10-CV-0144-CVE-TLW, 2010 WL 2365451,
at *3 (N.D.Okl. June 9, 2010).

For the foregoing reasons, the

Court declines to apply the heightened pleading standard to
defendants’ affirmative defense of bad faith.
2. Plaintiff’s Discretionary Right to Terminate the
Contract
Plaintiff asserts that the P&S gave him absolute discretion
to determine that the sale conditions had not been met because it
provided for the return of the deposit in the event that any
conditions were “not met to [his] sole satisfaction.”

Defendants

maintain that plaintiff used his “sole discretion” as a pretext
to terminate the agreement in violation of his obligation to act
in good faith.

Plaintiff responds that requiring him to exercise

his discretionary rights in good faith changes the substantive
terms of the contract.

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While the contract language does indeed give plaintiff
substantial discretion,
[c]eding discretion in a contract is not tantamount to
subjecting oneself to legalized tyranny. Every contract
contains an implied covenant of good faith and fair
dealing. Consequently, not even the reservation of
absolute discretion can clear the way for a totally
arbitrary and unprincipled exercise of a contracting
party's power.
Okmyansky v. Herbalife Int’l. of Am., Inc., 415 F.3d 154, 158 n.3
(1st Cir. 2005) (internal citation omitted).

While plaintiff had

substantial discretion under the terms of the P&S to determine
whether the sale contingencies were met, his discretion was not
absolute.

He was still obligated to exercise his discretionary

rights under the contract in good faith.
Plaintiff contends that, even if he lacked absolute
discretion, his Complaint contains adequate evidence that his
decision to terminate was made in good faith.

Looking at the

facts in the light most favorable to the defendants and drawing
all reasonable inferences in their favor, it is not certain that
plaintiff terminated the P&S in good faith.
application to only one bank.

He submitted a loan

After that bank received the

interim financial statements and raised concerns that there was
insufficient cash flow, the loan officer recommended the
plaintiff request an extension of the due diligence period.
failed to do so.

He

Instead, the day before his loan application

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was actually denied he notified defendants that he was
terminating the P&S.
Drawing all reasonable inferences in favor of the
defendants, the facts do not conclusively establish that
plaintiff is entitled to judgment at this stage of the case.
First, it is unclear whether plaintiff made an adequate attempt
to gain financing as required under the contract. Even in the
absence of an express requirement to do so, “reasonable efforts
must be made by the plaintiff before his right of cancellation
[under a condition to obtain financing] arises.” Stabile v.
McCarthy, 145 N.E.2d 821, 824 (Mass. 1957).

For example, it is

not clear whether it would have been futile for plaintiff to seek
financing from another bank.

Nor is it apparent whether

extending the due diligence period as suggested by the loan
officer at Bank of America would have allowed for the discovery
of additional financial data that might ultimately have led to
the approval of the loan application.

As a result, additional

information is needed to determine whether plaintiff 1) acted
based on a good faith belief that he was unable to secure
financing or 2) used the implication that he would be rejected by
Bank of America as a pretext to terminate the P&S.
Furthermore, viewing the facts in the light most favorable
to the defendants, it is uncertain whether plaintiff acted in
good faith in seeking to terminate the P&S for the presence of

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environmental hazards.

While the Escrow Agreement called for

“completion of environmental reports” to determine if
environmental hazards existed, the pleadings do not show whether
such reports were ever completed.

Plaintiff’s consultant visited

the truck stop once but the Complaint does not specify the kind
of environmental hazard he encountered.

Further, the plaintiff’s

letter to defendants explaining his reasons for termination of
the P&S identified only the “recent spill” and “containers of
apparently environmentally hazardous materials.”

On those facts

alone, it is not certain that plaintiff acted in good faith in
terminating the P&S based on the presence of environmental
hazards.
Because the resolution of these issues requires further fact
finding to determine whether plaintiff acted in good faith in
exercising his discretionary rights under the contract, the
motion for judgment on the pleadings will be denied.
ORDER
In accordance with the foregoing, plaintiff’s motion for
judgment on the pleadings (Docket No. 16) is DENIED.

So ordered.
/s/Nathaniel M. Gorton
Nathaniel M. Gorton
United States District Judge
Dated October 9, 2012

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