Resource Recovery Systems, LLC et al v. City of Ann Arbor

Filing 19

OPINION and ORDER Granting 10 Motion for Partial Dismissal; and Finding as Moot 11 Motion for Extension of Time to Answer. Signed by District Judge Stephen J. Murphy, III. (DPar)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
RESOURCE RECOVERY SYSTEMS, LLC
and FCR, LLC,
Case No. 2:16-cv-12771
Plaintiffs,
HONORABLE STEPHEN J. MURPHY, III
v.
CITY OF ANN ARBOR,
Defendant.
/
OPINION AND ORDER GRANTING MOTION FOR PARTIAL DISMISSAL [10]
AND FINDING MOTION FOR EXTENSION OF TIME TO FILE ANSWER [11] MOOT
Plaintiffs Resource Recovery Systems, LLC ("RRS") and FCR, LLC (collectively,
"ReCommunity") sued the City of Ann Arbor for alleged violations of Michigan law that
arose from the parties' contractual relationship. Before the Court are the City's motions for
partial dismissal, and for an extension of time and stay of discovery. The Court has
reviewed the briefs, and finds that a hearing is not necessary. See E.D. Mich. LR 7.1(f).
BACKGROUND1
From 1993 to 2016, ReCommunity operated a City-owned materials recycling facility
and transfer station (the "Plant") pursuant to a recurrently amended Operating and
Management Contract (the "Contract") between the City and RRS. The most recent
amendment extended the Contract through 2021. ECF 1, ¶ 14. At some point, the City
encouraged ReCommunity to enter into materials-recycling contracts with public and
private third parties, and the Contract was amended to include a revenue-sharing
agreement. Pursuant to the agreement, revenue sharing was "triggered" when net revenue

1

The recitation of the complaint's allegations is a summary, and does not constitute a
finding of fact.

was higher than $54.00 per ton, and the City would receive a certain percentage of
recycled tons from the City and third parties. When the net revenue fell below the trigger
price, however, the difference in revenue would be added to the amount the City owed
ReCommunity. The City also promised to take responsibility for the costs borne by
ReCommunity for transporting those materials to the Plant. For example, the City approved
the purchase of a new baler to reliably compact recyclables for transport. ReCommunity
purchased one for $550,000 and the City confirmed that it would cover the entire cost.
The parties profited handsomely from the third-party contracts until failing commodity
prices dropped per-ton revenues below the trigger price and "shift[ed] the historical flow of
payments (from ReCommunity to the City) in the opposite direction." Id. ¶ 27.
ReCommunity claims that the City owes it $183,566.33 as a result of the reversal,
and—despite ReCommunity's offers to amend the Contract—the City has yet to pay.
As commodity prices continued to fall, the parties' relationship deteriorated, and
various disputes precipitated back-and-forth communications. Id. ¶¶ 41–70. On July 7,
2016, the City sent ReCommunity a letter purporting to terminate the Contract, and
eventually "barred ReCommunity from entering the Plant and providing its recycling
services to the City." Id. ¶¶ 71, 81. On July 19, 2016, ReCommunity sent the City a letter
terminating the Contract.
The instant complaint alleges state-law claims of breach of contract (Count I and II),
promissory estoppel (Count III), and unjust enrichment (Count IV).
LEGAL STANDARD
Federal Rule of Civil Procedure 12(b)(6) provides for dismissal of a complaint that
fails to state a claim upon which relief can be granted. The Court may grant a Rule 12(b)(6)
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motion to dismiss only if the allegations do not sufficiently "raise a right to relief above the
speculative level" and "state a claim to relief that is plausible on its face." Hensley Mfg. v.
ProPride, Inc., 579 F.3d 603, 609 (6th Cir. 2009) (quoting Bell Atl. Corp. v. Twombly, 550
U.S. 544, 555, 570 (2007)). In evaluating the motion, the Court presumes the truth of all
well-pled factual assertions. Bishop v. Lucent Techs., 520 F.3d 516, 519 (6th Cir. 2008).
Moreover, the Court must draw every reasonable inference in favor of the nonmoving party.
Dubay v. Wells, 506 F.3d 422, 427 (6th Cir. 2007). But a "pleading that offers 'labels and
conclusions' or 'a formulaic recitation of the element of a cause of action will not do.'"
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 555).
DISCUSSION
The City argues that ReCommunity's promissory estoppel and unjust enrichment
claims should be dismissed because the Contract governed the parties' relationship, and
the claims are barred by Michigan's Governmental Tort Liability Act ("GTLA").
"The courts of Michigan will imply a contract when a plaintiff can establish that no
express contract concerning the subject matter exists and that the defendant has received
a benefit from the plaintiff and retained it, resulting in an inequity." Solo v. United Parcel
Serv. Co., 819 F.3d 788, 796 (6th Cir. 2016) (citations omitted). "A plaintiff can only plead
breach of contract and implied contract claims in the alternative if there is doubt as to the
existence of a contract." Llewellyn-Jones v. Metro Prop. Grp., LLC, 22 F. Supp. 3d 760, 794
(E.D. Mich. 2014). "If the parties admit that a contract exists, but dispute its terms or effect,
an action will not also lie for quantum meruit or implied contract. In other words, alternative
pleading of an implied contract claim is only allowed in a contract setting where a party
doubts the existence of a contract." Id. (citations omitted).
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Among other things, the City states that the Contract "is a part of the Complaint for
all purposes" because ReCommunity incorporated it by reference, the "procedures and
obligations of both [ReCommunity] and the City relative to third party tonnages is [sic]
explicitly spelled out in the [C]ontract," the Contract explicitly addresses the requirements
for ReCommunity "to be able to enter into contracts with non-City customers who seek to
bring [] recyclable materials" to the Plant for processing, and "it is undisputed that at all
relevant times in the Complaint, the parties had an express and comprehensive contract
governing their relationship with respect to all aspects of the operation and management"
of the Plant. ECF 10, PgID 52–57.
ReCommunity argues that it pleaded its claims in the alternative under Rule 8 to
preserve its rights "in the event [the City] argued once again that the contract's relevant
provisions were not binding and enforceable." ECF 12, PgID 282–83. The point is welltaken. While the City's assertions regarding the non-binding or unenforceable nature of the
Contract may be true, it would be premature for the Court to dismiss ReCommunity's unjust
enrichment and promissory estoppel claims now, on that basis. The City moved for partial
dismissal of the complaint, and has yet to file an answer, which is to say it has yet to
formally acknowledge the existence and force of the Contract. ReCommunity's alternative
pleading anticipates the possibility that the City will deny that an enforceable contract
governs.
Even if the City admits to the existence and force of the Contract in its answer, "[t]he
course of litigation . . . is never certain, and there is no guarantee that" the City will not
attempt to repudiate its concession at a later date. Son v. Coal Equity, Inc., 122 F. App'x
797, 802 (6th Cir. 2004). By allowing alternative or hypothetical claims to proceed at this
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early point in litigation, the Court recognizes ReCommunity's right to "state as many
separate claims or defense as it has, regardless of consistency." Fed. R. Civ. P. 8(d)(3).
In its reply brief, the City appears to concede the point. ECF 14, PgID 306.
Nevertheless, the City claims its second argument mandates dismissal—namely, that
ReCommunity failed to plead its claims in such a way as to meet "the very narrow
'proprietary function' exception" to the City's "broad grant of immunity" under the GTLA. Id.
Subject to few exceptions, the GTLA protects a governmental agency from tort liability
so long as the agency "is engaged in the exercise or discharge of a governmental function."
Mich. Comp. Laws § 691.1407, et seq. The immunity is broad, "and the statutory
exceptions thereto are to be narrowly construed." Yono v. Dep't of Transp., 499 Mich. 636,
648 (2016) (quotation omitted).
The "proprietary function exception" applies when a party seeks to "recover for bodily
injury or property damage arising out of the performance of a proprietary function." Mich.
Comp. Laws § 691.1413. When analyzing the exception, Michigan courts have defined
"property damage" as "injury or harm to one's rights or interests associated with an object,"
and a "proprietary function" as "any activity which is conducted primarily for the purpose
of producing a pecuniary profit for the governmental agency" so long as the activity is not
"normally supported by taxes or fees." Laurence G. Wolf Capital Mgmt. Tr. Agreement v.
City of Ferndale, 269 Mich. App. 265, 270–71 (Mich. Ct. App. 2005).
An agency's generation of profit is not dispositive as to its purpose, but the existence,
place of deposit, and use of that profit are all relevant to its intent. Goodhue v. Dep't of
Transp., No. 332467, 2017 WL 2131518, at *2 (Mich. Ct. App. May 16, 2017) (quotation
omitted). An agency's continued pursuit of a consistently unprofitable activity, for example,
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"may be evidence that the primary purpose is not to make a pecuniary profit." Coleman v.
Kootsillas, 456 Mich. 615, 621 (1998) (quotation omitted).
The instant question before the Court is: Taking ReCommunity's well-pled factual
assertions as true, does the "proprietary function exception"—construed narrowly—subject
the City to liability for ReCommunity's promissory estoppel and unjust enrichment claims?
To answer "yes", the following questions must be answered in the affirmative:
(1)

Did ReCommunity suffer "property damage" under the GTLA?2

(2)

Did the property damage arise from the City's generation of profit?

(3)

Did the City's place of deposit and use of that profit demonstrate that it
conducted the activities primarily to produce a pecuniary profit?

(4)

Were the activities not "normally supported by taxes or fees"?

See Coleman, 456 Mich. at 621 (quoting Mich. Comp. Laws § 691.1413).
ReCommunity claims the City's engagement "falls squarely within the proprietary
function exception," because it suffered "property damage" in the form of lost profits, the
City "made nearly $2 million from ReCommunity's sale of third party recyclable materials
collected outside of the city's domain," and the City demonstrated that it "did not use its
profits to support" the Plant by "refus[ing] to timely pay for necessary equipment." ECF 12,
PgID 278–80; see ECF 1, ¶¶ 16–29. According to the City, ReCommunity's promissory
estoppel and unjust enrichment claims fail because ReCommunity's action does not seek
to recover for "property damage" within the meaning of the statute, and, alternatively, the
primary purpose of the City's contract is not to raise profits. ECF 14, PgID 308–10. The
Court need only address the first argument.

2

It is undisputed that ReCommunity does not seek recovery for bodily injury.
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ReCommunity cites Laurence G. Wolf Capital Mgmt. Tr. Agreement v. City of
Ferndale for the proposition that lost profits constitute "property damage" under the statute.
ECF 12, PgID 280. In Laurence, the plaintiffs were property owners who sued a city and
several of its employees for tortiously interfering with their business relationship with AT&T,
which was considering building a cell tower on plaintiffs' roof. 269 Mich. App. at 266. After
the city implemented a special-use permit ordinance, AT&T abandoned the negotiations
and leased space on city-owned property instead. Did the city's attempt to gain a
commercial advantage over plaintiffs (which caused them to lose business) constitute
"property damage" necessary to trigger the proprietary function exception? After discussing
and defining the terms "property" and "damage," the Michigan Court of Appeals held that
it did. "Property," it reasoned, "refers to the various incorporeal ownership rights in a res,
such as the right to possess, to enjoy the income from, to alienate, or to recover ownership
from one who has improperly obtained title to the res." Id. at 271. And "damage" is "injury
or harm that reduces value, usefulness, etc." Id. The plaintiffs sufficiently alleged "property
damage" by claiming "harm to their right of lawful and unrestricted use of their res, as well
as harm to their right to enjoy income derived from their res"—the lost income was
"relevant for the purpose of attempting to measure the resulting damages." Id. at 272–73.
A complete reading of Laurence does not support ReCommunity's assertion that its
lost profits constituted "property damage" under the statute. The promissory estoppel and
unjust enrichment claims at issue here are fundamentally different than the tortious
interference claims in Laurence. In Laurence, the plaintiffs owned the property at issue, and
claimed that the city's tortious interference with that property damaged their right to use it
in a particular fashion. But ReCommunity admits that "[p]ursuant to the Contract, [the City]
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owned the Plant and all of its equipment," while ReCommunity operated the Plant,
"arranged for general maintenance and repairs," and received reimbursement from the City
when the funds were available. ECF 1, ¶¶ 16–17. The alleged breach of that Contract is
squarely addressed in Counts I and II, which are not challenged presently.
Whether explicitly or implicitly, the damaged "interests" cited in ReCommunity's
complaint are primarily economic in nature, and only tangentially related to ownership of
the Plant and the baler. See ECF 1, ¶¶ 108 ("ReCommunity relied on Ann Arbor's promises
that ReCommunity could process the recycling for third parties at the Plant."); 110 ("[T]he
parties reached an agreement . . . regarding the purchase and installation of a new baler,
which ReCommunity purchased for $550,000 in reliance on [the City]'s promises that
ReCommunity would continue to operate the baler at the Plant."); 113 ("[The City] has
reduced ReCommnuity's economic interests and taken those interests for itself by failing
to pay the amounts owed to ReCommunity and preventing ReCommunity from complying
with its third-party contracts."); 115 ("[The City]'s retention of this wrongfully-obtained
financial benefit is inequitable."). The essence of the "property damage" in Laurence was
the harm to plaintiffs' "right of lawful and unrestricted use of their res, as well as harm to
their right to enjoy income derived from their res"—the income lost as a consequence of
that harm was primarily used to measure damages.
But here, as the City points out, "there is no res"—ReCommunity failed to identify
tangible property of theirs that was damaged as a result of the City's actions. Instead, it
alleges that by failing to pay amounts owed and breaching promises upon which
ReCommunity relied, the City "reduced ReCommunity's economic interests" and prevented
ReCommunity from processing third-party materials using a City-owned baler inside the
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City-owned Plant. Ultimately, it is the Court's duty to narrowly construe the proprietary
function exception, Yono, 499 Mich. at 648, not "place governmental agencies on an equal
footing with private tortfeasors." Laurence, 269 Mich. App. at 273. Accordingly, the City's
motion is granted.
ORDER
WHEREFORE, it is hereby ORDERED that Defendant's Motion for Partial Dismissal
[10] is GRANTED and Defendant's Motion to Extend Time for Filing an Answer and to Stay
Discovery [11] is MOOT.
IT IS FURTHER ORDERED that Defendant shall file an Answer within 14 days of this
order. See Fed. R. Civ. P. 12(a)(4).
SO ORDERED.
s/Stephen J. Murphy, III
STEPHEN J. MURPHY, III
United States District Judge
Dated: August 31, 2017
I hereby certify that a copy of the foregoing document was served upon the parties and/or
counsel of record on August 31, 2017, by electronic and/or ordinary mail.
s/David P. Parker
Case Manager

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