Fountain Leasing, LLC v. Kloeber (TV3)

Filing 13

ORDER that Fountain Leasings Motion to Dismiss Counterclaim 5 will be GRANTED and Kloebers claims against Fountain Leasing will be DISMISSED. Signed by Chief District Judge Thomas A Varlan on 8/28/13. (ABF)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF TENNESSEE
AT KNOXVILLE
FOUNTAIN LEASING, LLC,
Plaintiff/Counter-Defendant,
v.
DAVID N. KLOEBER, JR.,
Defendant/Counter-Plaintiff.

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No.:

3:12-CV-317
(VARLAN/GUYTON)

MEMORANDUM OPINION & ORDER
This civil matter is before the Court on plaintiff and counter-defendant Fountain
Leasing, LLC’s (“Fountain Leasing”) Motion to Dismiss Counterclaim [Doc. 6], in which
Fountain Leasing seeks dismissal of defendant David N. Kloeber, Jr.’s (“Kloeber”)
counterclaim filed in this case [Doc. 3], asserting claims for breach of contract,
misrepresentation, and negligence against Fountain Leasing. Kloeber has submitted a
response [Doc. 9], to which Fountain Leasing replied [Doc. 10]. For the reasons stated
herein, Fountain Leasing’s motion [Doc. 6] will be granted.
I.

Background
In 2008 and 2009, Fountain Leasing entered into two separate equipment lease

agreements with Montie’s Resources, LLC (“Montie’s”) [Doc. 6 at 1]. The first lease
agreement, dated November 6, 2008, provides for the lease by Montie’s of a “Cat D10N
Dozer – SN:2YD1201/7T-2630” [Id. at 2]. The second agreement, dated February 20,
2009, provides for the lease by Monties of a “92 Cat D10N [D]ozer w/ multi shank ripper

– SN:2YD00335” [Id.]. Kloeber, who had an interest in the business of Montie’s, signed
two “Continuing Guaranty of Lease” agreements with Fountain Leasing in relation to the
two bulldozer leases [Id.]. Montie’s subsequently defaulted under the terms of the lease
agreements and filed for bankruptcy, as did Bart Montanari (“Montanari”), a principal of
Montie’s. When Fountain Leasing attempted to collect the defaulted payments from
Klober, Kloeber refused to make such payments, prompting the filing of this lawsuit.
In his response/counter-complaint, Kloeber alleges that in November 2008,
Montanari received an invoice on the first D10 bulldozer from Frattalone Tractor
Company (“Frattalone”) for $175,000, but altered the invoice to indicate that the
purchase price of the bulldozer was $275,000 [Doc. 3 ¶ 5]. This altered invoice served as
the basis for the first lease agreement between Montie’s and Fountain Leasing [Id. at ¶ 6].
Kloeber was unaware of the alteration at the time he entered into the guaranty contract
with Fountain Leasing, and claims that both Fountain Leasing and Montanari concealed
the true value of the bulldozer from him [Id. at ¶ 8]. Kloeber claims that Fountain
Leasing knew that the invoice overstated the purchase price for the bulldozer [Id. at ¶ 9],
and that Fountain Leasing later admitted that the $275,000 purchase price exceeded the
value of the bulldozer to an associate of Kloeber [Id.]. When Frattalone received the
check for $275,000, Kloeber claims a $100,000 check was remitted to Montanari prior to
Montie’s filing for bankruptcy [Id. at ¶¶ 13, 14].
Kloeber alleges that Fountain Leasing permitted Montie’s to continue to use the
bulldozer despite the company having filed for bankruptcy, and by the time Fountain
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Leasing allowed the bulldozer to be sold, it had greatly depreciated so that Fountain
Leasing received less than it could have had the bulldozer been sold earlier, which
prompted Fountain Leasing to seek more from Kloeber as guarantor [Id. ¶ 16].
As a result of these actions, Kloeber asserts several specific claims against
Fountain Leasing: 1) breach of contract for breaching the duty of good faith and fair
dealing; 2) misrepresentation, since Fountain Leasing represented the bulldozer to be
worth more than it was; and 3) negligence for Fountain Leasing’s failure to act “as a
reasonably prudent lender/lessor” [Doc. 3 ¶¶ 33-34].
II.

Standard of Review
Under Rule 8(a)(2) of the Federal Rules of Civil Procedure, a complaint must

contain “a short and plain statement of the claim showing that the pleader is entitled to
relief.” Fed. R. Civ. P. 8(a)(2). A party may move to dismiss for failure to state a claim
pursuant to Rule 12(b)(6). In order to survive a Rule 12(b)(6) motion, a complaint must
contain allegations supporting all material elements of the claims. Bishop v. Lucent
Techs., Inc., 520 F.3d 516, 519 (6th Cir. 2008). In determining whether to grant a motion
to dismiss, all well-pleaded allegations must be taken as true and must be construed most
favorably toward the non-movant. Trzebuckowski v. City of Cleveland, 319 F.3d 853,
855 (6th Cir. 2003).

Detailed factual allegations are not required, but a party’s

“obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief’ requires more than
labels and conclusions and a formulaic recitation of a cause of action’s elements will not
do.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). Nor will an “unadorned, the3

defendant-unlawfully harmed-me accusation.” Ashcroft v. Iqbal, 556 U.S. 662, 678
(2009). Rather, the complaint must contain “enough facts to state a claim to relief that is
plausible on its face.” Twombly, 550 U.S. at 570. “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.” Iqbal, 556 U.S. at 678. A
pleading must “contain either direct or inferential allegations respecting all the material
elements to sustain a recovery under some viable legal theory.” Scheid v. Fanny Farmer
Candy Shops, Inc., 859 F.2d 434, 436-37 (6th Cir. 1988) (quoting Car Carriers, Inc. v.
Ford Motor Co., 745 F.2d 1101, 1106 (7th Cir. 1984)).
III.

Analysis
Fountain Leasing argues that all three of Kloeber’s counterclaims fail to state a

claim upon which relief can be granted. As this action involves a dispute over a guaranty
agreement, the Court first notes that guaranties on commercial leases or loans “are special
contracts under Tennessee law.” Suntrust Bank v. Dorrough, 59 S.W.3d 153, 156 (Tenn.
Ct. App. 2001). “In order to facilitate the extension of credit, Tennessee does not favor
guarantors and will construe a guaranty against the guarantor as strongly as the language
will permit.” Id. (citing Squibb v. Smith, 948 S.W.2d 752, 755 (Tenn. Ct. App. 1997)).
With this background in mind, the Court will address each of Kloeber’s counterclaims in
turn.

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A.

Breach of Contract Claim

Kloeber claims that Fountain Leasing “breached its duty of good faith and fair
dealing, and therefore breached the Guaranty, by either knowingly or recklessly paying
Frattalone $275,000.00 for the Bulldozer, which had a market value of no more than
$175,000,” and similarly breached the Guaranty “by failing to timely repossess the
Bulldozer and prevent significant depreciation” [Doc. 3 ¶¶ 21, 22]. In support of its
motion to dismiss, Fountain Leasing argues that breach of the implied duty of good faith
and fair dealing cannot serve as an independent basis for a breach of contract claim.
Fountain Leasing also argues that there are no terms in the guaranty contract or lease
agreement related to the price of the bulldozer or related to a specific time for
repossession. Kloeber, in response, argues that the breach of contract claim is not solely
based upon the covenant of good faith and fair dealing but also upon “implied duties,”
specifically, Fountain Leasing’s duties to perform due diligence prior to purchasing the
bulldozer, to not overpay for the price of the bulldozer, and to timely repossess the
bulldozer. Fountain Leasing replies that there are no implied duties alleged in the
complaint, and that, even if those duties could have been imposed, the express terms of
the guaranty override them.
“[T]he basic elements of a breach of contract case under Tennessee law must
include (1) the existence of a contract, (2) breach of the contract, and (3) damages which
flow from the breach.” Life Care Ctrs. of Am. v. Charles Town Assocs. L.P., 79 F.3d
496, 514 (6th Cir. 1996). Under Tennessee law, “contracts may be accompanied by
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implied duties, which can result in a breach.” Fed. Ins. Co. v. Winters, 354 S.W.3d 287,
291 (Tenn. 2011). Implied obligations, however, are not favored in Tennessee, and
“[t]hey ‘can be justified only upon the ground of legal necessity arising from the terms of
the contract.’” Field v. Ladies’ Hermitage Assoc., No. M2011-01736-COA-R3-CV, 2012
WL 5193368, at *4 (Tenn. Ct. App. Oct. 19, 2012) (quoting Kroger Co. v. Chem. Sec.
Co., 526 S.W.2d 468, 471 (Tenn. 1975)). “[B]efore a covenant will be implied in the
express terms of the contract, or in view of the customs and practices of the business to
which the contract relates, it must appear therefrom that it was so clearly in the
contemplation of the parties that they deemed it unnecessary to express it . . . .” Id.
(quotation omitted). “It is well established that a court cannot add an implied contract
term that is inconsistent with an express contract.” Tenn. Valley Auth. v. Exxon Nuclear
Co., Inc., 753 F.2d 493, 497 (6th Cir. 1985) (citation omitted).
While Kloeber alleges the breach of several “implied duties,” or terms, of the
contract in his response to Fountain Leasing’s motion to dismiss, the Court concludes that
none of these gives rise to a claim for which relief could be granted. Kloeber has not
alleged that the implied duties of due diligence, paying market value, and timely
repossession are legal necessities under the guaranty agreement between Kloeber and
Fountain Leasing, so as to permit the Court to read them into the guaranty. Nor does
Kloeber allege that it is common practice or custom in the business of equipment
financing for the commercial lender-lessor to conduct due diligence on behalf of a
guarantor. Moreover, if the Court were to incorporate these implied duties, or covenants,
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into the terms of the guaranty, they would be inconsistent with the express terms of both
the guaranty as well as the underlying lease agreement. In pertinent part, the guaranty
provides as follows:
[g]uarantor consents that without notice to or further assent by Guarantor,
the obligation of Lessee or of any other party for the liabilities hereby
guaranteed may be renewed, extended, modified, prematured, released,
settled or compromised by Lessor in liquidation, adjustment, or otherwise,
as it may deem advisable, and that any security or securities which Lessor
may hold may be exchanged, sold, released, or surrendered by it, as may
deem advisable, without impairing or affecting the obligation of Guarantor
hereunder.
[Doc. 1-1 at 6]. An implied term requiring Fountain Leasing to pay a certain price for the
bulldozer or timely repossess the bulldozer would be inconsistent with this consent clause
which permits Fountain Leasing to modify the lease agreement as well as dispose of the
bulldozer in a number of ways. Similarly, the underlying lease agreement provides
numerous remedies available to Fountain Leasing in the event of a breach, including not
only repossession but also resale and/or suit for monetary damages [Doc. 1-1 ¶ 15]. As
neither the guaranty nor underlying lease agreement require Fountain Leasing to
repossess the bulldozer, incorporating a term that required timely repossession would
contradict the language of the contracts themselves and create obligations outside of the
scope of the parties’ agreement. Moreover, reading any implied term into the lease
agreement would offset the merger clause which states that the lease “constitutes the
entire agreement between [the] parties” [Id. at ¶ 27]. Thus the Court concludes that
Kloeber cannot base a breach of contract claim on any implied terms of his agreement
with Fountain Leasing.
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To the extent that Kloeber alleges a breach of contract claim solely on the basis of
a breach of the covenant of good faith and fair dealing, the Court finds that this alone is
insufficient grounds to state a claim upon which relief may be granted. As this Court has
stated previously, a “‘[b]reach of the implied covenant of good faith and fair dealing is
not an independent basis for relief.’” Almanza v. Baird Tree Serv., No. 3:10-CV-311,
2012 WL 4758276, at *12 (E.D. Tenn. Oct. 5, 2012) (Jordan, J.) (quoting Duke v.
Browning-Ferris Indus. of Tenn.,Inc., No. W2005-00146-COA-R-3-CV, 2006 WL
1491547, at *9 (Tenn. Ct. App. Nov. 13, 2006)). Although Tennessee law does permit
such a claim, it serves as part of a breach of contract action rather than serving as a cause
of action in and of itself. Lyons v. Farmers Ins. Exch., 26 S.W.3d 888, 894 (Tenn. Ct.
App. 2000).
For these reasons, the Court finds that Kloeber has not alleged a breach of the
guaranty other than the covenant of good faith and fair dealing, so that his contract claim
will be dismissed.
B.

Misrepresentation

Kloeber also asserts a claim for misrepresentation against Fountain Leasing for
misrepresenting the fair market value of the bulldozer. In support of its motion to dismiss
this claim, Fountain Leasing argues that Kloeber has failed to meet the specificity
requirements of Rule 9(b) of the Federal Rules of Civil Procedure. Fountain Leasing
contends that Kloeber does not allege any representation beyond Fountain Leasing’s act
of entering into the guaranty and lease agreements, neither of which can serve as a
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“representation” to establish a fraud claim. Kloeber also could not have reasonably relied
upon any alleged representation as to price, Fountain Leasing contends, because the
guaranty agreement allowed Fountain Leasing to dispose of the collateral at any price or
for no value at all.

In response, Kloeber argues that he has alleged specific facts

necessary to comply with Rule 9(b)’s specificity requirements, and that Fountain
Leasing’s act of entering into the guaranty and lease is sufficient to state a fraud claim.
Under Rule 9(b) of the Federal Rules of Civil Procedure, “[i]n alleging fraud or
mistake, a party must state with particularity the circumstances constituting fraud or
mistake.” See Advocacy Org. for Patients and Providers v. Auto Club Ins. Ass’n, 176
F.3d 315, 322 (6th Cir. 1999) (“‘[A]llegations of fraudulent misrepresentation[s] must be
made with sufficient particularity and with a sufficient factual basis to support an
inference that they were knowingly made.’”) (quoting Coffey v. Foamex L.P., 2 F.3d 157,
162 (6th Cir. 1993)).
[A] complaint is sufficient under Rule 9(b) if it alleges the
time, place, and content of the alleged misrepresentation on
which [the deceived party] relied; the fraudulent scheme; the
fraudulent intent of the defendants; and the injury resulting
from the fraud, and enables defendants to prepare an
informed pleading responsive to the specific allegations of
fraud.
United States ex rel. Poteet v. Medtronic, Inc., 552 F.3d 503, 518 (6th Cir. 2009) (internal
quotations omitted). “A court need not accept claims that consist of no more than mere
assertions and unsupported or unsupportable conclusions.”

Sanderson v. HCA-The

Healthcare Co., 447 F.3d 873, 876 (6th Cir. 2006) (citing Kottmyer v. Maas, 436 F.3d
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684, 688 (6th Cir. 2006)). Allegations of reliance must also be pled with particularity.
Evans v. Pearson Enters., 434 F.3d 839, 852-53 (6th Cir. 2006).
In order to state a claim for fraud under Tennessee law, a plaintiff must plead the
following elements: (1) a representation of an existing or past fact; (2) the representation
was false when made; (3) the representation was in regard to a material fact, (4) the false
representation was made knowingly, without belief in its truth, or recklessly; (5) the
plaintiff reasonably relied on the misrepresentation; and (6) the plaintiff suffered
damages as a result of the misrepresentation. Walker v. Sunrise Pontiac-GMC Truck,
Inc., 249 S.W.3d 301, 311 (Tenn. 2008); see also Dobbs v. Guenther, 846 S.W.2d 270,
274 (Tenn. Ct. App. 1992) (grouping the requirements into four elements).
In this case, after reviewing the allegations as set forth in Kloeber’s countercomplaint, the Court concludes that, assuming the price set forth in the leasing
application could serve as a representation,1 it was not reasonable for Kloeber to rely
upon this price in agreeing to guaranty the lease, given the language of the guaranty
agreement. As noted above, by agreeing to the terms of the guaranty, Kloeber agreed that
the bulldozer could be exchanged, sold, released, or surrendered by Fountain Leasing, for
less than fair market value or for no value at all. Therefore, it was unreasonable for
Kloeber to rely upon the value of the bulldozer as collateral to offset his potential

1

The Court notes that the only document associating a monetary value with the bulldozer
is the lease application, which states the “equipment cost” as $275,000 [Doc. 1-1 at 7]. From
this, it is unclear if Fountain Leasing ever represented “the fair market value” of the bulldozer to
be $275,000, rather than the merely representing Fountain Leasing’s costs in obtaining the
bulldozer.
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liability, because the bulldozer’s value could have varied widely by the time it was sold,
or could have been released for no value at all.
In addition, the Court finds that Kloeber’s allegations do not meet the heightened
requirements of Rule 9 of the Federal Rules of Civil Procedure. While Kloeber sets forth
the content of the misrepresentation, Kloeber does not provide specific allegations as to
the “fraudulent scheme” involving Fountain Leasing and Montanari, or to Fountain
Leasing’s fraudulent intent.

Kloeber’s counter-complaint is missing a connection

between the misstated price on the lease application and his conclusion that it was part of
a scheme to defraud him as the guarantor. Although Kloeber attempts to set forth
specific allegations to prevent his claim from being dismissed, the Court concludes that
they are only amount to unsupported assertions and are thus insufficient to state a claim
for relief. Accordingly, Kloeber’s fraud claim will be dismissed.
C.

Negligence

Finally, Kloeber alleges that Fountain Leasing was negligent by breaching similar
duties to those which Kloeber alleged were breached under the guaranty contract, such as
paying in excess of fair market value, failing to perform due diligence, and failing to
timely repossess the bulldozer upon default. Fountain Leasing moves to dismiss this
claim because it had no duty to Kloeber to perform due diligence related to its lease with
Montie’s and because of the language of the guaranty contract, as has been previously
discussed. Kloeber, in response, argues that Fountain Leasing did have a duty “to not
negligently lend money far in excess of the fair market value of the collateral” [Doc. 9 at
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11]. Kloeber also argues that, given the “obvious fraud” of the altered invoice, Fountain
Leasing had a duty to investigate.
To bring a successful negligence claim under Tennessee law, the plaintiff must
establish each of the following elements: (1) a duty of care owed by the defendant to the
plaintiff; (2) conduct by the defendant falling below the applicable standard of care that
amounts to a breach of that duty; (3) an injury or loss; (4) causation in fact; and (5)
proximate, or legal, causation. Staples v. CBL & Assocs., Inc., 15 S.W.3d 83, 89 (Tenn.
2000) (citing White v. Lawrence, 975 S.W.2d 525, 529 (Tenn. 1998)). Under Tennessee
Law, when two parties enter into a contractual agreement, their obligations to each other
arise out of the contract itself, so that a violation of the contractual duty supports an
action in contract rather than in tort. See Permobil, Inc. v. Am. Express Travel Related
Servs., Inc., 571 F. Supp. 2d 825, 842 (M.D. Tenn. 2008) (“[I]f the only source of duty
between a particular plaintiff and defendant is their contract with each other, then a
breach of that duty, without more, ordinarily will not support a negligence action.”)
(quoting Thomas & Assocs., Inc. v. Metro. Gov’t of Nashville, No. M2001-00757-COAR3-CV, 2003 WL 21302974, at *6 (Tenn. Ct. App. June 6, 2003)). This reflects the idea
that “[p]arties engaged in a commercial transaction pursue their own self-interest and
understand and expect that the parties with whom they are dealing are doing likewise.”
Dick Broadcasting Co., Inc. of Tenn. V. Oak Ridge FM, Inc., 395 S.W.3d 653, 674.
Without a breach of a duty, there can be no negligence. Thomas, 2003 WL 21302974 at
*5 (quoting Chattanooga Warehouse & Cold Storage Co. v. Anderson, 210 S.W. 153,
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155 (Tenn. 1919)). In the specific context of guaranty agreements, the Tennessee Court
of Appeals has held that:
unless the guaranty agreement provides otherwise, there is no duty on the
party to whom the guaranty is directed to notify the guarantor of the
business practices or financial difficulties of the party whose performance
is being guaranteed, whether such practices occurred prior to the execution
or during the term of the guaranty and whether such activities were known
or should have been known by the party guaranteed.
Transouth Mortg. Corp. v. Keith, 1985 WL 4677 (Tenn. Ct. App. Dec. 24, 1985).
In this case, Kloeber has not alleged a legal duty that Fountain Leasing owed to
Kloeber beyond the contractual relationship between the parties. Although Kloeber
argues that Fountain Leasing’s duty of due diligence and prompt repossession stem from
its duty as a “reasonably prudent lender/lessor,” the only relationship between Kloeber
and Fountain Leasing is the guaranty agreement. That agreement sets forth the duties
between the parties, as supplemented by any of the applicable duties in the underlying
lease agreement. Kloeber has not pointed to any statute or case law which holds that
commercial lenders, or those who enter into guaranty agreements, owe a duty of care to
others, much less a duty to perform due diligence on behalf of their counterpart in a
transaction. The contract between the two parties served as the basis of their duties to
each other, and Kloeber may not rely now upon tort law to create duties which could
have been made a part of the contract when there is no independent basis for otherwise
imposing such duties upon Fountain Leasing.
In an analogous context, Tennessee courts have held that the law does not
generally “impose fiduciary or similar duties on banks with respect to their customers,
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depositors, or borrowers absent special circumstances.” Power & Tel. Supply Co., Inc. v.
SunTrust Banks, Inc., 447 F.3d 923, 932 (6th Cir. 2006) (citing Glazer v. First Am. Nat’l
Bank, 930 S.W.2d 546, 550 (Tenn. 1996)). This holding is based upon the fact that such
relationships generally involve “arm’s-length dealings.” Id. Here, Kloeber has not
alleged any special relationship with Fountain Leasing beyond the guaranty agreement,
which was part of an arms-length transaction between two parties who were pursuing
their own interests. Permitting a negligence claim in these circumstances would be
inappropriate in light of the agreement between the parties and particularly in light of
Tennessee’s policy of construing a guaranty against the guarantor.

Accordingly,

plaintiff’s negligence claim will be dismissed.
IV.

Conclusion
For the reasons stated herein, Fountain Leasing’s Motion to Dismiss Counterclaim

[Doc. 6] will be GRANTED and Kloeber’s claims against Fountain Leasing will be
DISMISSED.
IT IS SO ORDERED.

s/ Thomas A. Varlan
CHIEF UNITED STATES DISTRICT JUDGE
ENTERED AS A JUDGMENT
s/ Debra C. Poplin
CLERK OF COURT

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