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Adf Midatlantic, LLC v. Klein Enterprises, LLC

United States District Court, Fourth Circuit

November 12, 2013

ADF MIDATLANTIC, LLC
v.
KLEIN ENTERPRISES, LLC

MEMORANDUM

WILLIAM M. NICKERSON, Senior District Judge.

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. ECF No. 22. The motions are all ripe for decision. 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 AD. the terms and 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 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 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." Compl. Ex. 3 (the Closing Letter). Although closing was initially set 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, 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 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 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. 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 ...


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