MARGO K. BRODIE, United States District Judge.
Plaintiff Marsha Wilchfort commenced the above-captioned putative class action on behalf of herself and all others similarly situated against, inter alia, Defendants Apple Hospitality REIT, Inc., Apple REIT Seven, Inc., Apple REIT Eight, Inc. (collectively "AHR"), and BRE Select Hotels Corp., as successor-in-interest to Apple REIT Six, Inc. ("BRE"), asserting claims under Virginia law for breach of contract and the implied covenant of good faith and fair dealing, and tortious interference with contract. (Compl., Docket Entry No. 1.) Defendants AHR and BRE separately move to dismiss the Complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure for failure to state a claim upon which relief may be granted.
The facts alleged in the Complaint are assumed to be true for the purpose of deciding Defendants' motions. Wilchfort, a resident of Sarasota County, Florida, was a shareholder of three separate real estate investment trusts (entities that own and operate income-producing real estate or "REITs"): Apple REITs Six, Seven, and Eight ("A-6," "A-7," and "A-8"). (Compl. ¶ 13; Civil Cover Sheet, annexed to Compl., Docket Entry No. 1-1.)
Beginning in 2006, 2007, and 2008, respectively, A-6, A-7, and A-8 each instituted a Dividend Reinvestment Program ("DRIP"). (Compl. ¶¶ 15-17, 49.) Under DRIP, shareholders were "offered ... the choice of receiving additional units in lieu of [cash] dividends." (Id. ¶ 43.) The initial Forms S-3
(Compl. ¶ 50; 2006 A-6 Form S-3, available at https://www.sec.gov/Archives/edgar/data/1277151/000119312506026519/ds3d.htm; 2007 A-7 Form S-3, available at https://www.sec.gov/Archives/edgar/data/1329011/000119312507156224/ds3d.htm; 2008 A-8 Form S-3, available at https://www.sec.gov/Archives/edgar/data/1387361/000119312508087581/ds3d.htm.)
Relying in part on a SEC Administrative Order imposing penalties on the Apple REITS for various violations of federal securities law,
In reviewing a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure, a court must construe the complaint liberally, "accepting all factual allegations in the complaint as true and drawing all reasonable inferences in the plaintiff's favor." Kim v. Kimm, 884 F.3d 98, 103 (2d Cir. 2018) (quoting Chambers v. Time Warner Inc., 282 F.3d 147, 152 (2d Cir. 2002)); see also Tsirelman v. Daines, 794 F.3d 310, 313 (2d Cir. 2015) (quoting Jaghory v. N.Y. State Dep't of Educ., 131 F.3d 326, 329 (2d Cir. 1997)). A complaint must plead "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). A claim is plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Matson v. Bd. of Educ., 631 F.3d 57, 63 (2d Cir. 2011) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009)); see also Pension Ben. Guar. Corp. ex rel. St. Vincent Catholic Med. Ctrs. Ret. Plan v. Morgan Stanley Inv. Mgmt. Inc., 712 F.3d 705, 717-18 (2d Cir. 2013). Although all allegations contained in the complaint are assumed true, this principle is "inapplicable to legal conclusions" or "[t]hreadbare
Under Virginia law, "[t]he elements of a breach of contract action are (1) a legally enforceable obligation of a defendant to a plaintiff; (2) the defendant's violation or breach of that obligation; and (3) injury or damage to the plaintiff caused by the breach of obligation."
Plaintiff argues that the Forms S-3 provide enforceable obligations on which their contract claims are based. (See generally Compl.) Defendants do not argue that the Forms S-3 cannot form the basis of an enforceable obligation or contract.
Plaintiff asserts that Defendants breached the obligations provided in the Forms
"A material breach is a failure to do something that is so fundamental to the contract that the failure to perform that obligation defeats an essential purpose of the contract." Virginia Elec. & Power Co. v. Bransen Energy, Inc., 850 F.3d 645, 655 (4th Cir. 2017) (quoting Horton v. Horton, 254 Va. 111, 115, 487 S.E.2d 200 (1997).
Plaintiff has sufficiently alleged a breach only as to A-7 and A-8 based on Defendants' failure to reprice DRIP units following purchases by unrelated persons. This theory of breach has already been addressed in Moses, 2016 WL 8711089, at *6. In Moses, the plaintiffs asserted the same breach of contract claims, as here, against A-7 and A-8. Id. As the Moses court explained, absent a contrary determination by the board of directors, the Forms S-3 expressly state that the fair market value is set at "the most recent price at which an unrelated person has purchased [the] units." Id.; (Compl. ¶ 50.) Further, the Forms S-3 explain that eleven dollars per share is the last price at which an unrelated person purchased the shares.
AHR Defendants attempt to distinguish Plaintiff's claims from those in Moses by arguing that the Complaint's references to tender offers of A-7 and A-8 shares are only "offered as support" for the allegation that eleven dollars per share was not reflective
The Court disagrees with AHR Defendants' construction of Plaintiff's claims as to this theory of breach. Although the Complaint is not entirely clear, the section on breach of contract does incorporate earlier allegations that encompass the theories of breach as clarified in the opposition submission. For example, the Complaint states that "[a]s part of the contract, A-6, A-7, and A-8 agreed to value the units at `fair market value' deemed to be the last arms-length transaction in the units and further agreed to re-evaluate the worth of the units in good faith and adjust same to be equal to fair market value." (Compl. ¶ 2 (emphasis added).) The Complaint also separately notes the failure of A-7 and A-8 to reprice the shares after the tender offers. (Id. ¶¶ 66-69.) Moreover, even the allegation in paragraph eighty-three of the Complaint, on which AHR Defendants rely, can be read to support either theory of liability. The allegation explains that Defendants breached their contracts "by failing to change the price of units ... when the arbitrary [eleven dollars] per unit price was no longer indicative of the actual fair market value of the units, as required by the contracts." (Id. ¶ 83 (emphasis added).) Even under this theory of breach, eleven dollars per unit could be considered "arbitrary" and "no longer indicative of actual fair market value" because of a failure to reprice "as required by the contracts" following the tender offers. Read as a whole, the Complaint sufficiently states a claim for breach of contract based on a failure to reprice the shares after the tender offers to unrelated persons.
Plaintiff's second theory of breach as to all Defendants is without merit. Under this theory, Plaintiff asserts that Defendants were expressly required to revalue the shares in good faith from "time to time." (Pl. Opp'n 10.) This argument has already been raised and rejected in Wenzel v. Knight, No. 14-CV-432, 2015 WL 3466863, at *4 (E.D. Va. June 1, 2015), addressing claims against A-7
The Court agrees with the reasoning in Wenzel and finds no enforceable obligations to revalue the shares from time to time. See id. Instead, reading the entire language in the Forms S-3 together, the contracts conferred discretionary power to the boards to reconsider the fair market value of the shares through valuation methods different from the "most recent price at which an unrelated person has purchased [the] units." See id.
Plaintiff attempts to distinguish Wenzel by asserting that dismissal in that action was premised on a theory that "was not grounded in any contractual language or factual statements made by the defendants." (Pl. Opp'n 10.) Plaintiff asserts that the theory asserted in Wenzel was "that the [eleven dollars per share] price was... based on the underlying value of the assets in the real estate investment trust." (Id.) By contrast, Plaintiff alleges that her claims are not only based on the failure of the units to "accurately reflect fair market value" but also Defendants' "abdicat[ion] [of] their contractual duty to determine the fair market value of units offered under the DRIP in good faith." (Id.) Under this latter "new" theory, Defendants are allegedly required to reassess fair market value in good faith from time to time. (Id.)
The Court finds Plaintiff's attempt to distinguish the holding in Wenzel unpersuasive. As discussed above, the Wenzel court rejected both theories of breach, including this "new" theory of liability. While Plaintiff in this action has worded her claims slightly differently from those presented in Wenzel, both actions articulate fundamentally the same theories of liability.
The Court finds that Plaintiff has sufficiently pled breach of obligations to price the shares at fair market value, defined as the most recent price an unrelated person has purchased Defendants' units, as to A-7 and A-8 but not A-6. (See Compl. ¶¶ 2, 66-69.) Plaintiff has sufficiently pled a failure to re-price A-7 and A-8, but not A-6, following tender offers of units at less than eleven dollars per unit. Accordingly, Plaintiff has sufficiently alleged breach of contract claims against Defendants AHR but not BRE.
Defendant BRE argues that the claims as to A-6 also fail for lack of injury.
Under Virginia law, "[t]he general rule is that damages are to be determined at the time of breach of a contract." United Virginia Bank of Fairfax v. Dick Herriman Ford, Inc., 215 Va. 373, 375, 210 S.E.2d 158 (1974) (citation omitted). "Evidence of fluctuations in value after the breach is irrelevant." Id. (first citing Simon v. Electrospace Corp., 28 N.Y.2d 136, 145, 320 N.Y.S.2d 225, 269 N.E.2d 21 (1971); and then citing Gaylord Builders v. Richmond Metal Mfg. Co., 186 Pa.Super. 101, 140 A.2d 358 (1958)).
Here, the alleged injury is that Plaintiff received DRIP units that were not equivalent in value to the dividends for which they were exchanged. (See Compl. ¶ 86.) Under Virginia law, Plaintiff is entitled to damages equal to the difference between the dividends she exchanged and the value of the units at the price they should have been priced at the time of breach. See United Virginia Bank of Fairfax, 215 Va. at 375, 210 S.E.2d 158; see also Simon, 28 N.Y.2d at 145, 320 N.Y.S.2d 225, 269 N.E.2d 21 ("The rule is precisely the same when the breach of contract is nondelivery of shares of stock." (citation omitted)). Because commodities are expected to fluctuate in value, Plaintiff, in fact, likely has the stronger argument that she, rather than Defendant BRE, should benefit from any rise in value of A-6 shares.
Plaintiff's allegations are not clear as to the theories of breach of the implied covenant of good faith and fair dealing. Plaintiff appears to assert the following bases for liability: (1) Defendants were dishonest in failing to price the units at actual fair market value,
Defendants contend that the good faith claim fails for three reasons: (1) Virginia law only recognizes such causes of action under the Uniform Commercial Code ("UCC"); (2) even under the UCC, good faith claims give rise to a breach of contract, not an independent, stand-alone cause of action; and (3) the allegations are duplicative of the contract claims or any implied duties cannot contradict express contractual terms. (AHR Mem. 2, 15-16; BRE Mem. 18-20.)
"Under Virginia law, `every contract contains an implied covenant of good faith and fair dealing; however, a breach of those duties only gives rise to a breach of contract claim, not a separate cause of action.'" Moses, 2016 WL 8711089, at *7 (citing Frank Brunckhorst Co., LLC v. Coastal Atl., Inc., 542 F.Supp.2d 452, 462 (E.D. Va. 2008)); see also Stoney Glen, LLC v. S. Bank & Tr. Co., 944 F.Supp.2d 460, 465 (E.D. Va. 2013) ("[T]he Fourth Circuit has consistently held that Virginia does recognize an implied duty of good faith and fair dealing in common law contracts."). Thus, a "breach of the implied duty of good faith and fair dealing must be raised in a claim for breach of contract, as opposed to a claim in tort." Moses, 2016 WL 8711089, at *7 (citing Stoney Glen, 944 F.Supp.2d at 465). In addition to a contractual relationship, a viable claim requires a breach of the implied covenant that can be demonstrated in two ways: "(1) where a party has a clear contract right, even if its exercise would arguably be arbitrary, that party is only forbidden from acting dishonestly, (2) but where a party has discretion in performance, that party cannot act arbitrarily or unfairly." Id. (citations omitted).
The Court finds unviable two of Plaintiff's theories of breach of the implied covenant of good faith and fair dealing: (1) that Defendants dishonestly failed to price the units at fair market value and (2) that Defendants failed to establish any re-evaluation procedures. The first theory effectively duplicates the arguments made in support of Plaintiff's breach of contract claim. As discussed supra, the Complaint sets forth sufficient allegations of breach of contract claims arising out of a failure to reprice the units upon sales to unrelated
However, the Plaintiff sufficiently alleges a breach of the implied covenant of good faith and fair dealing under the theory that Defendants declined to re-price the shares, despite knowledge of their overvaluation, solely out of self-interest. (Compl. ¶¶ 105, 107.) Under the Forms S-3, Defendant had the initial contractual right to price the shares at eleven dollars per unit, based on the last sale to an unrelated person, while retaining sole contractual discretion to reassess the price and methods of valuation. Consistent with this understanding, Defendants are not liable for breach of contract for merely declining to exercise such discretion. (See supra pp. 71-73.) However, Defendants may be liable for breach of the implied covenant of good faith and fair dealing if their refusal to do so was arbitrary or unfair. See Virginia Vermiculite, Ltd. v. W.R. Grace & Co.-Connecticut, 156 F.3d 535, 542 (4th Cir. 1998) ("[I]t is a basic principle of contract law in Virginia, as elsewhere, that ... a party may not exercise contractual discretion in bad faith, even when such discretion is vested solely in that party.").
As at least one court has acknowledged, "Virginia law on the implied duty of good faith and fair dealing is not exceptionally clear." Stoney Glen, LLC v. S. Bank & Tr. Co., 944 F.Supp.2d 460, 465 (E.D. Va. 2013). Nevertheless, the facts and reasoning in Virginia Vermiculite, 156 F.3d at 535, appear to squarely address this issue. In Virginia Vermiculite, a family contracted with a mining company for mining rights to their land in exchange for a lump sum and royalties of the amount of mine produced. Virginia Vermiculite, 156 F.3d at 537-38. Under the contract, the company had "sole discretion" whether to mine the land. Id. at 541. Despite such discretion, the Fourth Circuit held that donating the land to a trust, so that it could never be mined for the purpose of frustrating a competitor, breached a duty of good faith owed to the family. Id. at 542. The court also explained that the "implied duty of good faith is particularly important in the context of mining leases, where the landowners must necessarily leave the decisionmaking process to the expertise of mining companies." Id. (quoting Historic Green Springs, Inc. v. Brandy Farm, Ltd., 32 Va. Cir. 98, 1993 WL 13029827, at *3 (1993)).
As in Virginia Vermiculite, Defendants retained the "sole discretion" to act or not act to reassess the price of units, impacting
Here, Plaintiff asserts that Defendant declined to exercise their discretion,
Defendants argue in their motions to dismiss that, absent some form of tolling, Plaintiff's claims in their entirety are barred by the applicable statutes of limitations. (See AHR Mem. 18, 20; BRE Mem. 9, 10.) AHR Defendants assert that Plaintiffs' claims accrued either when (1) the value of the DRIP units were set in 2007 or 2008 or (2) when the DRIP unit value prices were no longer indicative of fair market value — a time period ranging between late 2008 to 2011. (AHR Mem. 18.) Defendant BRE asserts that Plaintiff's claims as to BRE accrued on May 14, 2009, when the 2006 A-3 Form S expired through amendment. Plaintiff contends that A-6, A-7, and A-8 DRIPs are best understood as divisible contracts, with a new breach occurring at each dividend distribution date. Therefore, accrual began anew and separately for each breach. (Pl. Opp'n 16.) Plaintiff argues that, as a result, the statute of limitations does not bar claims based on dividend reinstatements made after February 24, 2012 — five years prior to the filing of this action. (Id. at 19.)
In diversity actions, "a federal court sitting in New York must apply the New York choice-of-law rules and statutes of limitations." Stuart v. Am. Cyanamid Co., 158 F.3d 622, 626 (2d Cir. 1998). Generally, New York courts apply New York's statute of limitations, subject to the traditional statutory exception provided in the New York Civil Practice Law and Rules ("CPLR") § 202. Id. at 627. "Under CPLR § 202, when a nonresident plaintiff sues upon a cause of action that arose outside of New York, the court must apply the shorter limitations period, including all relevant tolling provisions, of either: (1) New York; or (2) the state where the cause of action accrued." Id. (citation omitted). "Hence, an action by a nonresident on a foreign cause of action is untimely if it is barred under the law of either New York or the state where the injury occurred." Id. "New York law locates the cause of action for breach of contract causing financial harm at `the place of injury,' which `usually is where the plaintiff resides and sustains the economic impact of the loss.'" Muto v. CBS Corp., 668 F.3d 53, 60 (2d Cir. 2012) (citation omitted).
Under New York law, Plaintiff's claims accrued in Florida where she resides and sustained economic injury. See Muto, 668 F.3d at 60. Therefore, the shorter of either Florida's or New York's statute of limitations applies. Florida imposes a five-year limitations period for breach of contract actions.
Contract claims accrue at the time of breach. See Tech. Packaging, Inc. v. Hanchett, 992 So.2d 309, 313 (Fla. Dist. Ct. App. 2008); see also Barbara G. Banks, P.A. v. Thomas D. Lardin, P.A., 938 So.2d 571, 574 (Fla. Dist. Ct. App. 2006) ("A cause of action on a contract accrues upon breach of the contract."). "Where a contract is divisible, `breaches of its severable parts give rise to separate causes of action,' and `the statute of limitations will generally begin to run at the time of each breach.'" Access Ins. Planners, Inc. v. Gee, 175 So.3d 921, 924 (Fla. Dist. Ct. App. 2015) (citation omitted); 15 Williston on Contracts § 45:20 (4th ed.) ("A contract is divisible where it calls for payments or performance at specific, separate intervals."); see also Legard v. EQT Prod. Co., No. 10-CV-00041, 2011 WL 86598, at *7 (W.D. Va. Jan. 11, 2011) ("Under Virginia law, a contract which calls for payments or performance at specific intervals is a divisible `installment' contract."), report and recommendation adopted, No. 10-CV-00041, 2011 WL 4527784 (W.D. Va. Sept. 28, 2011); Hampton Roads Sanitation Dist. v. McDonnell, 234 Va. 235, 239, 360 S.E.2d 841 (1987) ("[W]hen wrongful acts are not continuous but occur only at intervals, each occurrence inflicts a new injury and gives rise to a new and separate cause of action."); Access Ins. Planners, 175 So.3d at 924 (finding "a continuing contract... contemplat[ing] performance and payments upon the occurrence of separate, distinct events" to be a divisible contract).
Under either Virginia or Florida law, the Forms S-3 are best viewed as divisible contracts, giving rise to a separate breach each time dividends were exchanged for an inadequate number of shares.
Plaintiff argues that her breach of contract claim as to A-7 was tolled by the Moses action. Plaintiff relies on American Pipe & Const. Co. v. Utah, 414 U.S. 538, 554, 94 S.Ct. 756, 38 L.Ed.2d 713 (1974), and its progeny, which have held that "the commencement of a class action suspends the applicable statute of limitations as to all asserted members of the class who could have been parties had the suit been permitted to continue as a class."
In diversity actions, the Second Circuit evaluates the timeliness of state law claims by looking to the law of the relevant state, including state tolling rules.
As an initial matter, Florida Statutes § 95.051, the Florida state statute on tolling, "appears to preclude the application of class action tolling." Dineen, 2015 WL 6688040, at *3. Florida Statutes § 95.051 "delineates an exclusive list of conditions that can `toll' the running of the statute of limitations." Id. (citing Major League Baseball v. Morsani, 790 So.2d 1071, 1075 (Fla. 2001)). "Implicit in the court's holding [in Major League Baseball] is the conclusion that in order for a doctrine to `toll' the statute of limitations, it must be included in the exclusive list of conditions set forth in section 95.051(1)." Id. (citing HCA Health Servs. of Fla., Inc. v. Hillman, 906 So.2d 1094, 1100 (Fla. Dist. Ct. App. 2004)). "The commencement of a class is not included among the tolling conditions listed in [section] 95.051[,] ... strongly suggest[ing] that class action tolling is not recognized under Florida law." Id. Indeed, citing to section 95.051, the Second Circuit has held that "Florida does not allow tolling during the pendency of class action lawsuits no matter where they are filed." Becnel v. Deutsche Bank, AG, 507 Fed.Appx. 71, 73 (2d Cir. 2013); Adams v. Deutsche Bank AG, 529 Fed. Appx. 98, 100 (2d Cir. 2013) ("Because Florida so clearly prohibits tolling during the pendency of class action lawsuits, regardless of where filed, the ... Plaintiffs' claims are time-barred."
Despite the language of Florida Statutes § 95.051, the Florida Supreme Court has allowed putative class members to file individual state law claims shortly after the dissolution of a previously filed class action. See Engle v. Liggett Group, Inc., 945 So.2d 1246, 1277 (Fla. 2006); Lance v. Wade, 457 So.2d 1008, 1011 (Fla. 1984). Plaintiff cites no binding authority allowing successive class actions to proceed.
For the foregoing reasons, the Court grants in part and denies in part Defendants' motions to dismiss. As to the breach of contract claims, the Court denies the motion to dismiss as to Defendant AHR, but grants the motion without prejudice as to the Defendant BRE, based on the failure to re-price the units following tender offers below eleven dollars per unit. As to the breach of the implied covenant of good faith and fair dealing claims, the Court denies the motion to dismiss as to all Defendants based on the theory that they declined to exercise their discretion to re-price the shares solely for their own benefit. All claims are limited in time to events occurring on or after February 24, 2012.
SO ORDERED:
The Complaint sets forth the required elements of a legally enforceable agreement. Through their Forms S-3 and other public filings, Defendants "offer[ed] [their] Dividend Reinvestment Plans to ... shareholders." (2006 A-6 Form S-3; 2007 A-7 Form S-3; 2008 A-8 Form S-3; see also AHR Mem. 3 ("The Apple REITS offered their investors the option....") (emphasis added).) Plaintiff accepted the offers by participating in the DRIPs. (Compl. ¶ 13.) Plaintiff also provided valuable consideration by passing up the opportunity to receive dividends in exchange for more shares of A-6, A-7, and A-8. (Id. ¶ 13, 80); see also Moses, 2015 WL 1014327, at *6 (finding Forms S-3 for A-7 and A-8 to constitute valid contracts regarding their respective DRIPs); cf. Wenzel v. Knight, No. 14-CV-432, 2015 WL 3466863, at *4 (E.D. Va. June 1, 2015) (assuming for the purposes of the opinion that Form S-3 for A-8 set out the requirements of an enforceable agreement).
To the extent required to predict the direction of Florida law, this Court finds it more likely that Florida courts will not allow cross-jurisdictional tolling given their limited willingness to deviate from the clear statutory language of Florida Statutes § 95.051. Consistent with this understanding, most, if not all, courts to have considered the issue have concluded that cross-jurisdictional tolling does not exist under Florida law. See, e.g., Adams, 529 Fed.Appx. at 100; Becnel, 507 Fed.Appx. at 73; Dineen v. Pella Corp., No. 14-CV-03479, 2015 WL 6688040, at *4 (D.S.C. Oct. 30, 2015) ("[T]he court finds that Florida law does not allow for cross-jurisdictional class action tolling"); In re Cathode Ray Tube (CRT) Antitrust Litig., 27 F.Supp.3d 1015, 1026 (N.D. Cal. 2014) ("Finally, the fact that Florida law explicitly does not include cross-jurisdictional class-action tolling also counsels rejecting [plaintiff's] argument on this point.").
