ROBERT E. WIER, District Judge.
The Freshway Defendants,
For the following reasons and under the applicable standards, the Court
Freshway bases the challenged counterclaims on the following factual allegations.
DE 22 at 13, ¶ 15; see also DE 22-1 (4/20/2007 e-mail in support of alleged promise). In addition to this so-called "Rittman Agreement," Freshway, in March 2007, signed a "Customer Application and Agreement" that set out further terms for Laurel's supply of the Rittman store. DE 1-1 at 22 (Laurel Ex. 2); see also DE 22 at 13, ¶ 17 (describing Ex. 2 as a "true and accurate copy" of the subject agreement).
Per Freshway, the 2007 agreements terms concluded in 2009, when Freshway purchased a new store, West Salem IGA. See DE 22, at 14-15, ¶¶ 26-29. In December 2009, Freshway and Laurel entered two new agreements governing Freshway's grocery purchases. See id. at ¶¶ 29-30 (describing Laurel Exs. 1 & 3 as "true and accurate" copies); DE 1-1 at 16-20 & 25-26 (Laurel Exs. 1 & 3). The 2009 terms included a 2% rebate "for the first five (5) years[.]" DE 1-1 at 16.
Relatedly, Freshway contends that Laurel employed a "staff of accountants and associates to serve independent retailers' accounting needs[,]" to include providing "financial statements and information to assist [Laurel's] customers in making informed decisions regarding growth and profitability." DE 22 at 12, ¶¶ 6-7. In early 2007, Freshway gave Laurel "exclusive control over [its] books and finances"; Laurel from that point, and for the remainder of the parties' relationship, was Freshway's "accountant[.]" Id. at 14, ¶¶ 21, 25. As Freshway tells it, Laurel never applied, and never intended to apply, the 3% rebate during the period of the 2007-09 Rittman Agreement. DE 22 at 17 & 19, ¶¶ 48, 66. Further, Laurel, as accountant, covered up its alleged overcharging by providing Freshway only "sporadic[,] . . . irregularly prepared[,] . . . incomplete and inaccurate" financial records. DE 22 at 16 & 19, ¶¶ 42-43, 60.
Based on these facts, Freshway levels seven state law theories against Laurel. DE 22 at 17-24. Laurel pursues Rule 12 dismissal of Freshway's breach of contract, breach of fiduciary duty, fraudulent inducement, fraudulent misrepresentation, and promissory estoppel claims (Counts 1-5, respectively). See DE 23. The motion—fully briefed, see DE 24 (Response), DE 25 (Reply)— stands ripe for review.
A Rule 12(b)(6) motion targeting counterclaims is subject to the familiar Twombly/Iqbal plausibility rubric. See Static Control Components, Inc. v. Lexmark Int'l, Inc., 697 F.3d 387, 401 (6th Cir. 2012). To survive a motion to dismiss, "a complaint must contain sufficient factual matter, accepted as true, to `state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009) (quoting Bell Atl. Corp. v. Twombly, 127 S.Ct. 1955, 1974 (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. However, "a formulaic recitation of a cause of action's elements will not do[.]" Twombly, 127 S. Ct. at 1965. Courts "must construe the complaint in the light most favorable to the plaintiff and accept all allegations as true." Keys, 684 F.3d at 608. Yet, courts need not accept "legal conclusion[s] couched as [ ] factual allegation[s]." Papasan v. Allain, 106 S.Ct. 2932, 2944 (1986). The Court evaluates and tests the well-pleaded Complaint contents. Peterson v. Ostrander, No. 17-2160, 2018 WL 4739692, at *2 (6th Cir. Apr. 6, 2018) ("[T]he court must confine its analysis to the pleadings and accept all well-pleaded allegations as true.").
Generally, "matters outside of the pleadings are not to be considered by a court in ruling on a . . . motion to dismiss." Weiner v. Klais & Co., 108 F.3d 86, 88 (6th Cir. 1997). However, the Court may "consider other materials that are integral to the complaint, are public records, or are otherwise appropriate for the taking of judicial notice." Ashland, Inc. v. Oppenheimer & Co., 648 F.3d 461, 467 (6th Cir. 2011) (internal quotation marks and citation omitted).
Hinging on Rule 8's minimal standards, Twombly and Iqbal require a plaintiff to "plead facts sufficient to show that her claim has substantive plausibility." Johnson v. City of Shelby, 135 S.Ct. 346, 347 (2014). Where plaintiffs state "simply, concisely, and directly events that . . . entitle[ ] them to damages," the rules require "no more to stave off threshold dismissal for want of an adequate statement[.]" Id.; El-Hallani v. Huntington Nat. Bank, 623 F. App'x 730, 739 (6th Cir. 2015) ("Although Twombly and Iqbal have raised the bar for pleading, it is still low.").
Laurel argues that the Kentucky UCC's
In Kentucky, the sales article of the UCC applies to "transactions in goods[.]" KRS 352.2-102; see Riffe v. Black, 548 S.W.2d 175, 177 (Ky. Ct. App. 1977).
The Court finds that Freshway unambiguously alleges a contract predominantly concerned with the sale of goods. Freshway pleads that Laurel "set forth the terms of the Rittman Agreement in" an April 20, 2007, e-mail. See DE 22 at 13, ¶ 16. The subject e-mail directly speaks to purchases of goods from Laurel. See DE 22-1 at 4 ("Opening Inventory purchased from Laurel"). Moreover, the crux of Freshway's breach counterclaim is Laurel's alleged promise to grant a "3% rebate on
Freshway does not dispute Laurel's contention that, per the pleading, any breach of the alleged Rittman Agreement must have occurred in or before 2009. See DE 23-1 at 5. Freshway's factual claims fully support this contention.
Three state-law provisions frame the balance of the parties' timeliness dispute. Under KRS 355.2-725(2), "[a] cause of action accrues when the breach occurs, regardless of the aggrieved party's lack of knowledge of the breach." Thus, in the Commonwealth, a sales contract "breach can occur before the aggrieved party actually knows of it and is damaged by it." Willits v. Peabody Coal Co., 188 F.3d 510 (6th Cir. 1999) (table). Notwithstanding this unflagging accrual rule, per subsection (4), "the law on tolling" persists. KRS 355.2-725(4). Thus, Freshway contends, DE 24 at 11, that it has pleaded facts to justify tolling under KRS 413.190:
KRS 413.190(2). Laurel argues that KRS 413.190 is inapplicable because the tolling statute's cross-referenced coverage—KRS 413.090 to 413.160—does not include KRS 355.2-725. DE 25 at 3. Laurel, however, cites no authority for its interpretation of KRS 355.2-725. Further, the Court notes that KRS 413.190 extends to "
Equitable estoppel, as a tolling mechanism, remains vital in the Commonwealth despite the statutory option:
Fluke Corp. v. LeMaster, 306 S.W.3d 55, 62 (Ky. 2010). Further,
Gilley v. Dunaway, 572 F. App'x 303, 306-07 (6th Cir. 2014) (internal alterations and citation omitted).
Given the applicable four-year limitations period, Freshway needed to viably claim that it could not have, with due diligence, discovered the alleged breach until approximately 2014. The Court, properly viewing the pleaded facts in a Freshway-favorable light, sees plausible allegations that Laurel not only had a legal duty to disclose,
Certainly, Freshway had a persisting duty to exercise "reasonable care and diligence to discover whether [it] had a viable legal claim[.]" Gilley, 572 F. App'x at 308-09 (citation omitted). And, "there is no fraudulent concealment if the plaintiff is aware of facts that should have aroused her suspicion of the claims[.]" Id. (alterations, quotation marks, and citation omitted). However, Rule 12 dismissal on statute of limitations grounds is appropriate only when "the allegations in the [pleading] affirmatively show that the claim is time-barred." Cataldo v. U.S. Steel Corp., 676 F.3d 542, 547 (6th Cir. 2012). The counterclaim does not positively demonstrate (and Laurel does not argue) that Freshway failed to exercise reasonable care or that it was aware of facts that should have put it on notice of the alleged breach. Rather, Freshway's claim is, essentially, that "the information asymmetry between [Laurel] and [Freshway] and [Laurel's] active ability to conceal were such that [Freshway] could not have" discovered the alleged non-payments until 2016. Dodd v. Dyke Indus., Inc., 518 F.Supp.2d 970, 976 (W.D. Ky. 2007); see DE 22 at 18, ¶ 52 ("Due to Laurel[`s] concealment and misrepresentations, Freshway was unable to discover Laurel Grocery's breaches[.]"). In this scenario, the general rule that a 12(b)(6) motion is "an inappropriate vehicle for dismissing a claim based upon the statute of limitations" controls. Cataldo, 676 F.3d at 547. Count 1, for now, survives.
Laurel offers two categories of dismissal argument concerning Freshway's Counts 2 through 5. First, Laurel contends that the economic loss rule bars Freshway's fraudulent misrepresentation and breach of fiduciary duty claims. Second, Laurel argues that Freshway's fiduciary duty, fraudulent inducement, and promissory estoppel claims are improper attempts to duplicate the breach of contract theory.
The Court finds the promissory estoppel claim dismissibly duplicative of the contract claim, but finds the other targeted causes permissibly state alternative theories of recovery.
This Court has previously articulated the scope of Kentucky's foundational decision on the economic loss rule:
Kamps, Inc. v. Mustang Aviation, Inc., No. 5:18-CV-430-REW, 2018 WL 6709714, at *2 (E.D. Ky. Dec. 20, 2018). Since Giddings, the Commonwealth's highest court has commented further on the topic.
In Superior Steel, Inc. v. Ascent at Roebling's Bridge, LLC, 540 S.W.3d 770, 792 (Ky. 2017), the Court, though noting the non-binding nature of the opinion, found the rationale of the two-justice concurrence in Presnell Constr. Managers, Inc. v. EH Constr., 134 S.W.3d 575 (Ky. 2004) persuasive and "consistent with" a prior published decision from what was then Kentucky's court of last resort, Alberti's Adm'x v. Nash, 282 S.W.2d 853, 854 (Ky. 1955). Further, in Nami Resources Co., LLC v. Asher Land and Mineral, Ltd., 554 S.W.3d 323 (Ky. 2018), involving a challenge to a punitive damage award and lease agreements governing natural gas extraction, the Kentucky Supreme Court "reaffirmed" what that Court characterized as a Superior Steel "holding":
Id. at 336 (emphasis in original). As the parties' briefing makes clear, federal courts interpreting Giddings have varied widely in their predictions on the doctrine's ultimate scope under Kentucky law. The latest statements from the Commonwealth, Superior Steel and Nami, strongly suggest that, as Justice Keller referenced in his Presnell concurrence, the best "indicator of whether an action is appropriate in tort" or barred by the economic loss rule "is the source of the duty upon which the tort claim is premised." Presnell, 134 S.W.3d at 589 (Keller, J., concurring).
The gist of Freshway's fraudulent misrepresentation theory is that Laurel, "throughout [the parties'] contractual relationship," allegedly represented, consistently and falsely, that the 3% rebate "had been applied as agreed." DE 22 at 20-21, ¶¶ 74-81. Freshway claims it detrimentally relied on such representation by continuing to "purchase products from Laurel" under the contracts and refraining from "collection and demand of payments and credit to which it was owed" under the agreements. Id. at 21, ¶ 78. Laurel contends that the economic loss rule bars the claim.
The Nami Court approved the following explication of the economic loss rule's rationale:
554 S.W.3d at 335-36 (quoting Foster Poultry Farms v. Alkar-Rapidpak-MP Equip., Inc., 868 F.Supp.2d 983, 991-92 (E.D. Cal. 2012)) (internal citations and quotation marks omitted). Here, Freshway's claim largely tracks Nami's application of the economic loss rule. That is, Freshway claims a "breach of contract `accomplished through fraud,' as was the case in Nami." New London Tobacco Mkt., Inc. v. Kentucky Fuel Corp., No. 6:12-CV-91-GFVT-HAI, 2019 WL 4597500, at *6 (E.D. Ky. Sept. 23, 2019).
However, Nami applied the rule only to exclude a punitive damages recovery for fraud; the holding did not bar the fraud claim entire. That is, Nami "reiterate[d] the rule in Kentucky to be that when a plaintiff
To summarize, Kentucky's economic loss rule does not bar claims predicated on a non-contractual duty. The Commonwealth further recognizes that fraud claims, premised on, at bottom, a duty of honesty in qualifying circumstances,
Laurel also argues that the economic loss rule bars Freshway's fiduciary duty claim. Alternatively, Laurel relies on the Presnell concurrence and the "general rule" that "failure to perform a contractual obligation typically does not give rise to a cause of action in tort[.]" See DE 23-1 at 6 (quoting Mims v. W.-S. Agency, Inc., 226 S.W.3d 833, 836 (Ky. Ct. App. 2007)). However, Laurel's economic loss and alternative Mims/Presnell arguments collapse to the extent that a viably alleged non-contractual duty would defeat both.
Again, Kentucky's economic loss rule applies only in the absence of a non-contractual duty. See Nami, 554 S.W.3d at 336.
Despite Laurel's assertion that Freshway alleged only a contractual duty, the counterclaim's express terms are to the contrary. See, e.g., DE 22 at 18, ¶ 57 (Laurel "was in a particularly unique position of trust and confidence, and therefore, owed fiduciary duties to Freshway."). Further, Freshway's factual claims are, at this stage, entitled to a presumption of verity and Freshway-favorable, rather than Laurel-proposed, inferences. Applying the generous Rule 12 rubric, Freshway essentially claims: Laurel offered to handle its clients' books purely to assist them "in making informed decisions regarding growth and profitability[,]" Laurel maintained "a staff of accountants and associates" solely to serve client needs, Freshway accepted this offer "around the same time as the Rittman Agreement[,]" and, from 2007 through 2016, Laurel was both Freshway's supplier and accountant. Id. at 12, ¶¶ 6, 7; id. at 14, ¶ 20; see also id. at 14, ¶ 21 (Laurel "had exclusive control over Freshway's books and finances[.]"); id. at ¶ 25 (claiming Laurel's position was "accountant for Freshway").
It remains to be seen whether Freshway, an admittedly "independent" business, can actually marshal proof to support the claimed accountant-client relationship. See DE 22 at 12, ¶¶ 6 & 7 (describing Laurel accountants as serving "independent" retailers); id. at ¶ 8 ("Counterclaim Plaintiffs[ ] are independent retailers[.]"). However, Laurel does not, at least for now, dispute the affiliation alleged, and the Court sees no basis to find that such a relationship is non-fiducial as a matter of law. See Smith v. State Bd. of Accountancy of Ky., 271 S.W.2d 875, 877 (Ky. 1954) ("[T]he high stand[a]rds of a certified public accountant must be maintained in business transactions where he
Next, Laurel contends that Freshway's fraudulent inducement theory is "entirely predicated upon . . . failure to perform a contractual obligation." DE 23-1 at 10 (quoting Federation of Appalachian Housing Enterprises, Inc. v. Parker-Hannifin Corp., 5:13-CV-181, 2014 WL 1093100, at *3 (E.D. Ky. Mar. 19, 2014)). Laurel thus argues that Freshway's fraudulent inducement claim is an improper "reassertion of [the] breach of contract claim." DE 23-1 at 10 (citing Parker-Hannifin, 2014 WL 1093100, at *3). There is some non-binding authority for Laurel's theory:
Derby City Capital, LLC v. Trinity HR Servs., 949 F.Supp.2d 712, 727 (W.D. Ky. 2013) (citations omitted). Nonetheless, two factors convince the Court that the claim should (at least temporarily) survive.
First, the Kentucky Supreme Court, after Mario's Pizzeria, held that "the essential element in an action for fraud is
Put differently, Freshway's claim falls within the exception that Laurel cites:
Gulf Coast Farms, LLC v. Fifth Third Bank, No. 2011-CA-000965-MR, 2013 WL 1688458, at *5 (Ky. Ct. App. Apr. 19, 2013) (emphasis added). Given Hanson, and that Freshway's inducement allegations (as a fair inference) concern pre-contract conduct, see DE 22 at 12-13, ¶¶ 12-15, the fraudulent inducement claim survives. See 865 S.W.2d at 307 ("Since a promise necessarily carries with it the implied assertion of an intention to perform it follows that a promise made without such intention is fraudulent and actionable in deceit . . . This is true whether or not the promise is enforceable as a contract. Restatement (Second) of Torts § 530 Comment c (1976).").
Freshway's promissory estoppel claim hinges on, essentially, the same allegations as its fraudulent inducement claim. See DE 22 at 21-22, ¶¶ 82-90. Laurel again contends that Freshway's allegations as to the existence of a contract, here presumed true, foreclose the estoppel theory. See DE 23-1 at 13; DE 25 at 13-15. On this point, the Court agrees with Laurel.
"Estoppel cannot be the basis for a claim if it represents the same performance contemplated under a written agreement." Gonzalez v. Imaging Advantage, LLC, No. CIV.A. 11-243-C, 2011 WL 6092469, at *2 (W.D. Ky. Dec. 7, 2011) (citation and quotation marks omitted). "[T]he real crux in such cases is whether the induced
Moreover, "Kentucky courts have consistently held that promissory estoppel applies to gratuitous promises, unsupported by consideration." Davis, 399 F. Supp. 2d at 797. Here the subject promise, if made, was hardly gratuitous. Logically, a "rebate" promise is contingent on a purchase. Thus, as alleged, and inherently, the purported assurance was inextricably linked to Freshway's grocery purchase consideration. Freshway's side of the bargain was foundational for two contracts. That actual consideration leaves no role for the estoppel gap-filler. See McCarthy v. Louisville Cartage Co., Inc., 796 S.W.2d 10, 12 (Ky. App. 1990) ("The whole theory of a promissory estoppel action is that detrimental reliance becomes a substitute for consideration under the facts of a given case.").
In sum, "it is a widely accepted principle that promissory estoppel is applicable only in the absence of an otherwise enforceable contract[.]" Shane v. Bunzl Distribution USA, Inc., 200 F. App'x 397, 404 (6th Cir. 2006) (citation and quotation marks omitted). Thus, "where a contract exists on the subject matter of the alleged promise sought to be enforced, a claim for promissory estoppel is not cognizable." Jan Rubin Assocs., Inc. v. Hous. Auth. Of Newport, No. 03-CV-160-DLB, 2007 WL 1035016, at *14 (E.D. Ky. Mar. 30, 2007). Because two contracts govern the subject matter of the alleged promise, Freshway's promissory estoppel claim fails as a matter of law. See Derby City, 949 F. Supp. 2d at 730 (collecting cases dismissing, at the Rule 12 stage, promissory estoppel claims on this basis).
For all these reasons, under the applicable standards, the Court, to the extent stated,
United Parcel Serv. Co. v. Rickert, 996 S.W.2d 464, 468 (Ky. 1999).