Winthrop Resources Corporation v. Apollo Education Group, Inc.
MEMORANDUM OPINION AND ORDER. 1. Apollo Education Group, Inc.'s counterclaim for unjust enrichment is DISMISSED WITHOUT PREJUDICE. 2. The remainder of Plaintiff's Motion is DENIED. (Written Opinion) Signed by Judge Donovan W. Frank on 8/16/2017. (BJS)
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
Winthrop Resources Corporation,
Civil No. 17-1448 (DWF/SER)
OPINION AND ORDER
Apollo Education Group, Inc.,
Shawn M. Raiter, Esq., Larson King, LLP, counsel for Plaintiff.
Aron J. Frakes, Esq., Fredrikson & Byron, PA; and Douglas E. Whitney, Esq., Douglas
Whitney Law Offices LLC, counsel for Defendant.
The defendant-lessee in this case sought to terminate its leaseback agreement with
the plaintiff-lessor for certain equipment. In the process of returning the equipment, the
defendant discovered that some equipment had been lost. The defendant wrote to the
plaintiff explaining the situation, including identifying which equipment was lost. The
defendant also sent a check for the fair market value of the equipment as measured by an
independent third party. The plaintiff refused to discuss how the defendant’s
performance was deficient. Instead, the plaintiff contended that the defendant had
renewed the entire lease (including for the returned equipment) pursuant to a renewal
provision that provided that the lease would be renewed if the equipment was not
When the defendant refused to make payments under the renewed lease, the
plaintiff filed suit. The case is before the Court on the plaintiff’s motion to dismiss the
defendant’s counterclaims for breach of the implied covenant of good faith and fair
dealing and for unjust enrichment. (Doc. No. 9.) The plaintiff also has moved to strike
certain allegations about prior cases accusing the plaintiff of bad faith and deceptive
practices. For the reasons discussed below, the Court grants the plaintiff’s motion to
dismiss the unjust-enrichment claim but denies the remainder of the plaintiff’s motion.
In late 2010, Plaintiff Winthrop Resources Corporation (“Winthrop”) contracted
with Defendant Apollo Education Group, Inc. (“Apollo”). As part of the contract,
Winthrop bought over 1,000 servers selected by Apollo and then leased the equipment
back to Apollo. As relevant here, the lease agreement was in place for an initial term of
60 months and then would continue indefinitely for four-month terms until terminated.
(See Doc. No. 8, Ex. H (“Lease Agreement”) ¶ 1.)
Apollo elected not to renew the lease and undertook the proper notice procedures
to end the lease. Pursuant to the lease, Apollo had to return the equipment to Park City,
Illinois. Under the lease agreement, the notice of termination would be voided if Apollo
did not return the equipment and the lease would be automatically renewed. (Id. ¶ 7.)
When, however, equipment is lost, Apollo must provide Winthrop with written notice
and pay for the lost equipment. (See id. ¶ 12.) The amount that Apollo had to pay would
depend on a formula based on the original costs of the lost equipment, the amount of time
left on the lease, and the amount still owed under the lease. 1
In the process of returning the equipment, Apollo discovered that some of the
equipment had been lost—roughly 3%. Apollo returned the rest of the equipment and
wrote to Winthrop explaining that some equipment was lost. The letter identified the
equipment and included a check for $58,000, which was the fair market value as
calculated by an independent third party. To put the $58,000 in context, Apollo had paid
more than $180,000 per month to lease the equipment. Winthrop refused the check,
refused to negotiate further, and contended that the entire lease agreement had been
renewed (including for the returned equipment) because the lost equipment was not
When Apollo failed to make payments under the renewed lease, Winthrop filed
suit. Winthrop brought a single claim for breach of contract, alleging that Apollo failed
to make lease payments on the renewed lease, failed to return all equipment, and failed to
obtain maintenance agreements on the equipment. Apollo has counterclaimed:
(1) seeking a declaration that the lease has been terminated; (2) for breach of contract;
(3) breach of the implied covenant of good faith and fair dealing; and (4) unjust
enrichment. Winthrop has moved to dismiss Apollo’s claims for implied covenant of
good faith and fair dealing and for unjust enrichment. Winthrop also moved to strike
Based on the allegations in the complaint, it appears that Apollo would owe 22.4%
of the original costs of the lost equipment.
certain allegations regarding old cases about its sales practices (including allegations
made by Winthrop’s current counsel in other cases). 2
Motion to Dismiss
In deciding a motion to dismiss under Rule 12(b)(6), a court assumes all facts in
the complaint to be true and construes all reasonable inferences from those facts in the
light most favorable to the complainant. Morton v. Becker, 793 F.2d 185, 187 (8th
Cir. 1986). In doing so, however, a court need not accept as true wholly conclusory
allegations, Hanten v. Sch. Dist. of Riverview Gardens, 183 F.3d 799, 805 (8th
Cir. 1999), or legal conclusions drawn by the pleader from the facts alleged, Westcott v.
City of Omaha, 901 F.2d 1486, 1488 (8th Cir. 1990). A court deciding a motion to
dismiss may consider the complaint, matters of public record, orders, materials embraced
by the complaint, and exhibits attached to the complaint. See Porous Media Corp. v. Pall
Corp., 186 F.3d 1077, 1079 (8th Cir. 1999).
To survive a motion to dismiss, a complaint must contain “enough facts to state a
claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544,
570 (2007). Although a complaint need not contain “detailed factual allegations,” it must
contain facts with enough specificity “to raise a right to relief above the speculative
The Court cites to: the Complaint (Doc. No. 1-1) as “Compl.”; the Counterclaim
(Doc. No. 7) as “Counterclaim”; Plaintiff’s Memorandum in Support of its Motion to
Dismiss and to Strike (Doc. No. 12) as “Pl.’s Memo.”; Defendant’s Memorandum in
Opposition (Doc. No. 17) as “Def.’s Opp.”; and Plaintiff’s Reply Brief (Doc. No. 19) as
level.” Id. at 555. As the Supreme Court reiterated, “[t]hreadbare recitals of the elements
of a cause of action, supported by mere conclusory statements,” will not pass muster
under Twombly. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Twombly, 550 U.S.
at 555). In sum, this standard “calls for enough fact[s] to raise a reasonable expectation
that discovery will reveal evidence of [the claim].” Twombly, 550 U.S. at 556.
Implied Covenant of Good Faith and Fair Dealing
Winthrop moves to dismiss Apollo’s claim for a breach of the implied covenant of
good faith and fair dealing. Apollo alleges that Winthrop has violated the implied
covenant of good faith and fair dealing by acting in bad faith to hinder or frustrate
Apollo’s efforts to terminate the lease agreement. In particular, Apollo hones in on
Winthrop’s refusal to explain why it would not accept the check for the lost equipment.
“Under Minnesota law, every contract includes an implied covenant of good faith
and fair dealing requiring that one party not ‘unjustifiably hinder’ the other party’s
performance of the contract.” In re Hennepin Cnty. 1986 Recycling Bond Litig., 540
N.W.2d 494, 502 (Minn. 1995) (citations omitted). The implied covenant of good faith
and fair dealing serves only “to enforce existing contractual duties, and not to create new
ones.” Allen v. Thom, No. A07–2088, 2008 WL 2732218, at *5 (Minn. Ct. App. July 15,
2008). “Examples of breach of the duty of good faith and fair dealing by unjustified
hindrance include . . . avoid[ing] performance by affirmatively blocking the happening of
a condition precedent.” Cox v. Mortg. Elec. Registration Sys., Inc., 685 F.3d 663, 671
(8th Cir. 2012) (alternation in the original) (internal quotation marks omitted).
Here, Apollo has adequately pleaded a claim for breach of the implied covenant of
good faith and fair dealing. Based on the allegations in the Counterclaim, Winthrop, in
bad faith, hindered Apollo’s efforts to terminate the contract. In particular, Winthrop
allegedly refused to explain why Apollo’s payment for the lost equipment was
insufficient. As alleged, Winthrop’s refusal to respond arose from a bad faith intention to
hinder Apollo’s efforts to terminate the lease agreement. See Columbia Cas. Co. v. 3M
Co., 814 N.W.2d 33, 40 (Minn. Ct. App. 2012) (concluding that the defendant had stated
a claim for breach of the implied covenant of good faith and fair dealing by stating that
the insurers had rejected performance “for unstated and unsupported reasons.”). Thus,
Apollo has adequately pleaded a breach of the implied covenant of good faith and fair
Winthrop’s arguments to the contrary are unpersuasive. First, Winthrop argues
that Apollo’s claim fails because Apollo breached the lease agreement first. Second,
Winthrop argues that Apollo’s claim fails because Winthrop was merely demanding that
Apollo strictly comply with the lease agreement by returning all the equipment. Last,
Winthrop argues that Apollo’s claim fails because the claim would create new contractual
obligations rather than supplement existing ones.
First, Winthrop argues that Apollo’s claim should be dismissed because Apollo
first breached the lease agreement by failing to keep continuous maintenance agreements
on the equipment. Winthrop cites to the black-letter law that a party is excused from
performing the contract once the other party breaches the contract. (See Memo. at 12.)
“[T]he first breach serves as a defense against the second breach.” Winthrop Res. Corp.
v. Eaton Hydraulics, Inc., Civ. No. 01-649, 2002 WL 35453165, at *6 (D. Minn. Apr. 23,
2002), aff’d, 361 F.3d 465 (8th Cir. 2004). Winthrop, however, is not seeking to be
excused from the contract. Instead, Winthrop is seeking to continue to enforce the
contract. Thus, whether Apollo kept maintenance agreements on the equipment has little
to do with whether Winthrop hindered Apollo’s efforts to terminate the lease agreement.
Second, Winthrop argues that Apollo’s claim fails because Winthrop merely
sought strict compliance with the lease agreement. Under the lease agreement, if Apollo
lost any of the equipment, it was required to provide notice and payment for the lost
equipment. (Lease Agreement ¶ 12.) According to the Counterclaim, once Apollo
discovered the lost equipment, Apollo wrote to Winthrop and sent a check for the fair
market value of the equipment. Winthrop never explained why that amount was
insufficient and instead demanded that Apollo continue to make lease payment including
for the returned equipment. As alleged in the Counterclaim, Apollo was trying to comply
with the lease agreement but was hindered by Winthrop’s bad-faith refusal to explain
why Apollo had paid too little. See Columbia Cas. Co, 814 N.W.2d at 40. Apollo’s
claim therefore has little to do with what Winthrop demanded and everything to do with
what Winthrop refused to do.
Last, Winthrop contends that Apollo’s claim seeks to create new contractual
obligations. Specifically, Winthrop contends that Apollo’s claim is based on Winthrop’s
refusal to accept the tendered amount. But again, Winthrop’s argument misstates the
claim. Apollo is contending that Winthrop breached the implied covenant of good faith
and fair dealing by refusing to explain how much was due for the lost equipment pursuant
to paragraph 12 of the lease agreement. Such allegations state a claim for breach of the
implied covenant of good faith and fair dealing. See id. Thus, the Court therefore denies
Winthrop’s motion to dismiss that claim.
Winthrop also moves to dismiss Apollo’s counterclaim for unjust enrichment. “In
order to establish a claim for unjust enrichment, the claimant must show that another
party knowingly received something of value to which he was not entitled, and that the
circumstances are such that it would be unjust for that person to retain the benefit.”
Schumacher v. Schumacher, 627 N.W.2d 725, 729 (Minn. Ct. App. 2001). “Minnesota
does not allow recovery under an unjust enrichment theory when there is an express
contract which governs the parties’ relations.” Marvin Lumber & Cedar Co. v. Marvin
Architectural Ltd., 217 F. Supp. 3d 1009, 1016 (D. Minn. 2016) (quoting Nw. Airlines,
Inc. v. Astraea Aviation Servs., Inc., 111 F.3d 1386, 1392 (8th Cir. 1997)).
Here, Apollo alleges that it made excess contractual payments, which Winthrop
wrongfully withheld. Additionally, Apollo alleges that Winthrop wrongfully withheld
security deposits. Because a contract exists that fully sets forth Apollo’s payment
obligation, Apollo’s unjust enrichment claim for those payments fails. See Sterling
Capital Advisors, Inc. v. Herzog, 575 N.W.2d 121, 126 (Minn. Ct. App. 1998). Apollo
can therefore recover the excess payments, if at all, through its breach of contract claim.
The Court therefore grants Winthrop’s motion to dismiss for the unjust enrichment
Motion to Strike
Rule 12(f) provides that the Court may, on its own or on motion made by a party,
“strike from a pleading an insufficient defense or any redundant, immaterial, impertinent,
or scandalous matter.” Fed. R. Civ. R. 12(f). A district court enjoys “liberal discretion”
under this rule. Stanbury Law Firm, P.A. v. Internal Revenue Serv., 221 F.3d 1059, 1063
(8th Cir. 2000). However, striking a party’s pleadings “is an extreme measure,” and
motions to strike under Rule 12(f) “are viewed with disfavor and infrequently granted.”
In its counterclaim, Apollo recounts other lawsuits where Winthrop allegedly
engaged in bad faith. Specifically, Apollo quoted testimony from a 2007 lawsuit brought
by a former Winthrop employee about Winthrop’s allegedly aggressive sales tactics
(Apollo would call them deceptive). Additionally, Apollo references cases in this District
where Winthrop’s current counsel levels against Winthrop many of the same allegations
here in defense of other businesses being sued by Winthrop. In particular, Winthrop’s
counsel accused Winthrop of “engaging in deceptive and bad faith conduct.”
Apollo also alleges that Winthrop was unjustly enriched because it has re-rented
the returned equipment. Whether Winthrop re-rented the returned equipment will likely
be a factor for damages, but does not support a separate cause of action.
(Counterclaim ¶ 21.) Winthrop has moved to strike these allegations. Winthrop contends
that the allegations are immaterial, impertinent, or slanderous.
The allegations in the counterclaim are not immaterial or impertinent.
“‘Immaterial’ matter is that which has no essential or important relationship to the claim
for relief or the defenses being pleaded, or a statement of unnecessary particulars in
connection with and descriptive of that which is material.” See Charles Alan Wright,
Arthur R. Miller & Edward H. Cooper, 30C Fed. Prac. & Proc. § 1382 (3d. ed)
(footnotes omitted). 4 Matters are impertinent when they consist of “statements that do
not pertain, and are not necessary, to the issues in question.” Id. There is “considerable
overlap” between immaterial and impertinent materials. Id. In its Counterclaim, Apollo
recounts different instances where Winthrop has been accused of bad faith and deceptive
conduct. While superfluous historical allegations will sometimes be stricken, the
allegations can remain when they provide useful background and are not prejudicial. Id.;
see also McLafferty v. Safeco Ins. Co. of Ind., Civ. No. 14-564, 2014 WL 2009086, at *3
(D. Minn. May 16, 2014). Here, the Court concludes that prior allegations that Winthrop
engaged in deceptive practices and bad faith are material and pertinent to whether
Winthrop engaged in bad faith with Apollo. Moreover, Winthrop has failed to show how
At oral argument, Winthrop focused on whether these statements would be
admissible at trial. But the standard is whether the allegations “clearly can have no
possible bearing on the subject matter of the litigation . . . . If there is any doubt whether
the matter may raise an issue, the motion should be denied.” McLafferty, 2014 WL
2009086, at *3 (alternation in the original). Here, past allegations of Winthrop’s bad
faith have some bearing on whether Winthrop acted in bad faith here. Thus, the Court
finds the materials are not impertinent or immaterial.
it will be prejudiced by the background allegations. Accordingly, the Court denies
Apollo’s motion to strike for immaterial or impertinent allegations. 5
Likewise the allegations are not scandalous. “‘[S]candalous’ matter is that which
improperly casts a derogatory light on someone, most typically on a party to the action.”
Wright & Miller, 30C Fed. Prac. & Proc. § 1382. Here, the allegations accurately reflect
the past legal positions of Winthrop’s counsel and are not derogatory. Given Apollo’s
allegations that Winthrop engaged in a pattern of deceptive practices, the fact that Apollo
included prior allegations from Winthrop’s counsel is simply good preparation and
lawyering. Accordingly, the Court concludes that the allegations are not scandalous and
therefore denies Winthrop’s motion to strike for scandalous allegations.
Based upon the foregoing, IT IS HEREBY ORDERED that Plaintiff Winthrop
Resources Corporation’s Motion to Dismiss and Motion to Strike (Doc. No. ) is
GRANTED IN PART and DENIED IN PART as follows:
Apollo Education Group, Inc.’s counterclaim for unjust enrichment is
DISMISSED WITHOUT PREJUDICE.
Winthrop also cites to RSM Prod Corp. v. Fridman, 643 F. Supp. 2d 382, 403
(S.D.N.Y.) for the proposition that courts must strike allegations about other actions if
they were not decided on the merits. RSM relies on the Second Circuit case, Lipsky v.
Commonwealth United Corporation, 551 F.2d 887 (2d Cir.1976). But subsequent cases
in the Southern District of New York make clear that Lipsky made no such
pronouncement. “Instead, [Lipsky’s] holding was limited to complaints that ultimately
resulted in a consent decree or nolo contendere plea protected by FRE 410.” In re OSG
Sec. Litig., 12 F. Supp. 3d 619, 621 (S.D.N.Y. 2014).
The remainder of Plaintiff’s Motion is DENIED.
Dated: August 16, 2017
s/Donovan W. Frank
DONOVAN W. FRANK
United States District Judge
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