Friedlam Partners, LLC v. Lerner and Company Real Estate et al

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF NORTH CAROLINA
CHARLOTTE DIVISION
CIVIL ACTION NO. 3:22-CV-335-RJC-DCK
THIS MATTER IS BEFORE THE COURT on “Defendants’ Motion To Dismiss”
(Document No. 7). This motion has been referred to the undersigned Magistrate Judge pursuant
to 28 U.S.C. §636(b), and is ripe for disposition. Having carefully considered the arguments, the
record, and applicable authority, the undersigned will respectfully recommend that the motion be
denied without prejudice.
I. BACKGROUND
Friedlam Partners, LLC (“Plaintiff” or “Friedlam”) and Defendants entered into a
“Purchase And Sale Agreement” (Document No. 1-1) (the “Contract”) on or about February 15,
2022. (Document No. 1, p. 5). “Plaintiff owns, develops, and manages multi-family residential
properties throughout the United States.” (Document No. 1, p. 2). “Defendants are a variety of
limited liability companies and individuals that own individual multi-family residential properties
located in North Carolina, family real estate trusts with ownership interests in various multi-family
properties, and individual family members.” (Document No. 1, pp. 2-3). Under the Contract,
Plaintiff would acquire from Defendants ten (10) multi-family properties located in Charlotte,
North Carolina. Id.; see also (Document No. 1-1, pp. 29-30).
FRIEDLAM PARTNERS, LLC, )
)
Plaintiff, ) MEMORANDUM AND
) RECOMMENDATION
v. )
)
LERNER AND COMPANY REAL ESTATE, et al., )
)
Defendants. )
)
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The Purchase price for the properties under the Contract was $198,500,000.00, and
required an initial payment (“Earnest Money”) of $1,000.000.00. (Document No. 1, p. 5) (citing
Document No. 1-1, p. 3). Plaintiff later submitted an additional payment of $1,000.000.00,
bringing the total Earnest Money to $2,000,000.00. Id. “Under Paragraph 3.1, Purchaser had the
right until the Closing Date to enter onto the various properties at issue to conduct inspections in
a variety of issues, including environmental inspections.” Id. (citing (Document No. 1-1, p. 4-5).
If an inspection identified a “Material Adverse Condition,” “Plaintiff had the right to immediately
terminate the agreement and receive a complete refund of its Earnest Money.” (Document No. 1,
p. 6); see also (Document No. 1-1, p. 4).
As a part of the inspection process, BBG Assessments (“BBG”) was
retained to conduct a Phase I Environmental Site Assessment for the
Lake Hill Apartments site. In its March 24, 2022, report (“Phase I
Report”), BBG identified a 17.5 acre “Brownfields property” (report
at P. 2) extending along the northwest boundary of the Lake Hill
Apartments property.
(Document No. 1, p. 7). A sub-surface assessment was then done that “revealed that multiple
drycleaners as well as a gas station utilized the adjacent property” and that “[t]he release of dry-
cleaning chemicals and above ground and underground storage tanks have created a plume
impacting the groundwater under adjacent properties impacting the subject properties including
the Lake Hill property.” Id.
Plaintiff asserts that “remediation and cleanup of such plume and related environmental
matters or impacts on the property, would cost well over $50,000.00, and thus, Plaintiff is entitled
to return of its Earnest Money.” (Document No. 1, p. 8). Plaintiff further asserts that “Defendants
were aware or should have been on notice of environmental issues and impacts on the subject
properties because a ‘Notice of Brownfields’ [was] filed with the Mecklenburg County Register
of Deeds on March 19, 2007, related to the subject properties and property adjacent the subject
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properties.” Id. The Complaint indicates that Harry Lerner, as President of Lake Hills
Corporation, signed an acknowledgment “of the Notice of Brownfields Agreement concerning the
Lake Hill Apartment property” on or about December 7, 2006. Id. (citing Document No. 1-2).
As such, “Defendants knew or should have known of the environmental contamination of the
property in question.” Id.
“[D]uring the Phase I Assessment of the Lake Hill Apartment property, Defendants stated
that they had no records or recollections of releases . . . [and] stated that they were unaware of any
environmental issues.” (Document No. 1, p. 9). Plaintiff contends that “[b]y failing to produce
records related to the Acknowledgment Defendants misrepresented the lack of environmental
issues with the property.” Id.
The parties “entered into a First Amendment to Purchase and Sale Agreement (the
“Amendment”)” on April 18, 2022. (Document No. 1, p. 9) (citing Document No. 1-3). In the
Amendment, “Defendants agreed to allow Plaintiff to conduct a ‘Phase II’ environmental
assessment consistent with the recommendations contained in the Phase I Report.” Id. “On May
4, 2022, BBG issued its ‘Phase II Limited Environmental Site Assessment’ (“Phase II Report”),”
finding that “the Lake Hill Apartments property had been impacted by contamination from gas
station and dry-cleaning operations and found that the property had been impacted by hazardous
chemicals.” Id.
As a result of the Phase II Report findings, on or about May 12, 2022, “Plaintiff exercised
its option to terminate under Paragraph 3.1 of the Agreement for the presence of a Material
Adverse Condition and requested return of its Earnest Money.” (Document No. 1, p. 10).
Defendants refused to return the Earnest Money. Id.
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Plaintiff Friedlam initiated this action with the filing of a Complaint on July 25, 2022.
(Document No. 1). The Complaint asserts claims for: (1) breach of contract; (2) negligent
misrepresentation; (3) fraudulent misrepresentation; and (4) unfair and deceptive trade practices.
(Document No. 1, pp. 10-13). The Complaint alleges that Defendants were negligent in failing to
disclose information about environmental contamination, “or alternatively have engaged in a
scheme to withhold Plaintiff’s earnest money, breaching the Agreement, and unjustly enriching
themselves to Plaintiff’s detriment.” (Document No. 1, p. 10).
Now pending before the Court is “Defendants’ Motion To Dismiss” (Document 7) filed on
October 24, 2022, along with a “Memorandum In Support…” (Document No. 8). Defendants seek
dismissal of Plaintiff’s Complaint “in its entirety” pursuant to Fed.R.Civ.P. 12(b)(6). (Document
No. 7, p. 10). Plaintiff’s “Response Memorandum In Opposition…” (Document No. 23) was filed
on November 21, 2022; and “Defendants’ Reply Memorandum In Support…” (Document No.
27) was filed on December 12, 2022.
The pending motion has been fully briefed and is ripe for review and a recommended
disposition to the Honorable Robert J. Conrad, Jr.
II. STANDARD OF REVIEW
A motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) tests the “legal sufficiency of the
complaint” but “does not resolve contests surrounding the facts, the merits of a claim, or the
applicability of defenses.” Republican Party of N.C. v. Martin, 980 F.2d 943, 952 (4th Cir. 1992);
Eastern Shore Markets, Inc. v. J.D. Assoc. Ltd. Partnership, 213 F.3d 175, 180 (4th Cir. 2000). A
complaint attacked by a Rule 12(b)(6) motion to dismiss will survive if it contains “enough facts
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)); see also, Robinson v.
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American Honda Motor Co., Inc., 551 F.3d 218, 222 (4th Cir. 2009). “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.
“Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements,
do not suffice.” Id.
The Supreme Court has also opined that
Federal Rule of Civil Procedure 8(a)(2) requires only “a short
and plain statement of the claim showing that the pleader is entitled
to relief.” Specific facts are not necessary; the statement need only
“‘give the defendant fair notice of what the ... claim is and the
grounds upon which it rests.’” In addition, when ruling on a
defendant’s motion to dismiss, a judge must accept as true all of the
factual allegations contained in the complaint.
Erickson v. Pardus, 551 U.S. 89, 93-94 (2007) (quoting Twombly, 550 U.S. at 555-56).
“Although for the purposes of this motion to dismiss we must take all the factual allegations
in the complaint as true, we are not bound to accept as true a legal conclusion couched as a factual
allegation.” Papasan v. Allain, 478 U.S. 265, 286 (1986). The court “should view the complaint
in the light most favorable to the plaintiff.” Mylan Labs, Inc. v. Matkar, 7 F.3d 1130, 1134 (4th
Cir. 1993).
III. DISCUSSION
By the pending motion, Defendants contend that Plaintiff has not plausibly alleged facts to
support any of its claims. (Document No. 7). Defendants describe this action as a “straightforward
contractual dispute about who is entitled to receive funds placed in escrow for a real estate
transaction that did not close.” (Document No. 8, p. 1). According to Defendants, “[t]he contract
contained detailed provisions for the deposit and disbursement of escrow funds, as well as the
processes by which disputes over those funds were to be resolved.” Id. Defendants contend that
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explicit language in the Contract, and Plaintiff’s failure to allege sufficient facts, require dismissal
of Plaintiff’s Complaint. (Document No. 8, p. 2).
A. Misrepresentation and UDTPA Claims
1. Liability Limitations in Contract
In their first argument, Defendants assert that the plain language of the Contract “prohibits
claims based on the representations made by Defendants related to the Contract.” (Document No.
8, p. 9). In support, Defendants include the following excerpt from the Contract:
Purchaser hereby covenants that it will bring no action of any kind
against such individual or any direct or indirect shareholder, partner,
or member of a Seller related to or arising out of the representations
and warranties set forth in this Agreement.
See Id. (quoting Ex. A, § 9.1, (Document No. 1-1, p. 13)).
Defendants note that “Plaintiff bases its entire Complaint on Defendants’ purported
representations related to the Contract.” (Document No. 8, p. 10). “Specifically, Plaintiff accuses
Defendants of ‘suppl[ying] Plaintiff with incorrect and inadequate information regarding the
presence of environmental contamination at the subject properties.’” Id. (quoting Document No.
1, ¶ 58); see also (Document No. 1, ¶¶ 43, 63, 71).
Defendants further note that Plaintiff’s claims arise out of representations and warranties
set forth in the Contract stating that Defendants had no knowledge of “Hazardous Materials” “on,
in, under or emanating from the Properties” or any “actual knowledge of any environmental
condition” that could give rise to liability. (Document No. 8, pp. 10-11) (citing Ex. A, § 9.1 (h),
(Document No. 1-1, pp. 12-13)). Defendants contend that in the last paragraph of the same section
of the Contract Plaintiff “covenanted that it would not sue the Defendants for those various
representations.” (Document No. 8, p. 11) (citing Ex. A, § 9.1, (Document No. 1-1, p. 13)).
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Defendants argue that Plaintiff is impermissibly “trying to renege on its covenant not to
sue,” but that “the Contract’s language unambiguously prohibits the very claims that Plaintiff seeks
to assert in this action.” Id. Defendants further argue that a covenant not to sue must be enforced.
(Document No. 8, p. 10) (citing McNair v. Goodwin, 136 S.E.2d 218, 223 (N.C. 1964); Harshaw’s
Ex’rs v. Woodfin, 64 N.C. 568, 569–70 (1870); VF Jeanswear Ltd. P’ship v. Molina, 320 F.Supp.
2d 412, 420 (M.D.N.C 2004)).
Next, Defendants argue that “even if the covenant not to sue did not exist, Plaintiff’s
UDTPA and Misrepresentation Claims against the Individual Defendants still fail as a matter of
law because the parties expressly disclaimed personal[] liability in the Contract.” Id. Defendants
argue that the following language “of the Contract forbids Plaintiff from bringing claims against
the Individual Defendants in their personal capacity”:
Each of Purchaser and Seller, for itself and on behalf of its agents,
members, partners, employees, representatives, related and
affiliated entities, successors and assigns, hereby agrees that in no
event shall any of the officers, directors, employees, agents,
consultants, representatives or attorneys of the other party or
any direct or indirect owner of any beneficial interest of the
other party have any personal liability under this Agreement or
under any of the Closing documents and each of Purchaser and each
Seller hereby expressly release and waive all such liability. In
addition, neither Seller nor Purchaser shall be entitled to recover
from the other party any punitive, consequential, special or
speculative damages. Purchaser and Seller acknowledge and agree
that the limitation on the liability of the parties set forth in this
Section 9.5 shall be applicable to any claim, liability or cause of
action under this Agreement, the Closing documents or any of the
other documents executed in connection with this Agreement . . .
(Document No. 8, pp. 11-12) (quoting Ex. A, § 9.5, (Document No. 1-1, p. 15)) (emphasis added).
Defendants contend that Plaintiff has ignored this provision by suing various Individual
Defendants related to the Contract. (Document No. 8, p. 12).
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In addition, Defendants contend that the provisions of the Contract limit potential liability
to only Lerner and Company Real Estate because each Seller is only responsible for their own
representations about their own property. Id. (citing Ex. A, § 9.1, (Document No. 1-1, pp. 11-12)
(“each Seller, individually, solely as to such Seller and the Property owned by it and not as to any
other Seller or any other Property, hereby makes the following representations and warranties to
Purchaser”). Defendants argue that Plaintiff ignored this provision and is accusing “every
Defendant of misrepresenting the environmental condition of the Lake Hill Apartments leasing
office property.” (Document No. 8, p. 13).
In response, Plaintiff first notes that “[e]xculpatory provisions are construed against the
party seeking their enforcement.” (Document No. 23, p. 9) (citing Schenkel & Schultz, Inc. v.
Hermon Fox & Assoc., 362 N.C. 269, 274 (2008) (“it is a universal rule that such [an] exculpatory
clause is strictly construed against the party asserting it.”)). Plaintiff then attempts to distinguish
the McNair, Harshaw’s, and VF Jeanswear Ltd. cases cited by Defendants. (Document No. 23,
pp. 10-11). In that discussion, Plaintiff asserts that Defendants had notice of the contamination
through acknowledgment of the Brownfields Agreement documents sent to them but
“affirmatively represented otherwise to Plaintiff.” (Document No. 23, p. 10) (citing Document
Nos. 1-1 and 1-2).
Plaintiff states that:
Defendants had notice of contamination of the adjacent property and
the release of drycleaning solvents and petroleum constituent
compounds through acknowledgment of a Brownfields Agreement
documents sent to them and affirmatively represented otherwise to
Plaintiff. (See Compl. Ex. A. and B.) They knew the plume of
contamination was moving onto the subject property. Then, after
Defendants’ trap had been sprung on Plaintiff, Defendants refused
to return the two million dollars of escrow funds that Plaintiff was
entitled to after finding the contamination on the property.
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(Document No. 23, p. 10).
Plaintiff concludes that because Defendants’ cited cases are distinguishable, and because
the exculpatory provisions should be strictly construed against Defendants, the claims here should
be allowed to proceed to discovery. (Document No. 23, p. 11).
In the reply brief, Defendants assert that Plaintiff has failed to respond to most of their
arguments and thereby abandoned or conceded those issues. (Document No. 27, p. 3) (citing
Moran v. Polk Cnty., 1:18-CV-300-MR-WCM, 2019 WL 5297027, at *4 (W.D.N.C. Sept. 3,
2019)). Defendants note that Plaintiff failed to address their argument that Section 9.5’s personal
liability waiver bars claims against Individual Defendants. Id. (citing Document No. 8, pp. 11-
12). Therefore, Defendants argue that “the Court must dismiss all claims against the Individual
Defendants because the parties explicitly agreed in the Contract to waive any personal liability for
“any direct or indirect owner of any beneficial interest of the other party.” Id. (citing Ex. A,
§ 9.5, Document No. 1-1, p. 15).
Defendants further note that Plaintiff “fails to contest (or even acknowledge) that the
Contract holds each Defendant responsible only for the property that it owns and the
representations made concerning only that property.” (Document No. 27, p. 4) (citing Document
No. 23, p. 16 and Ex. A, § 9.1, Document No. 1-1, pp. 11-13). As such, Defendants contend that
the Court must dismiss the UDTPA and misrepresentation claims against all Defendants other than
Lerner and Company Real Estate. Id.
2. Sufficiency of Plaintiff’s Allegations of Reliance
Defendants’ second argument for dismissal of Plaintiff’s misrepresentation claims argues
that Plaintiff failed to allege reasonable or justifiable reliance to its detriment. (Document No. 8,
pp. 13-20). Both misrepresentation claims “require either justifiable or reasonable reliance,” “[y]et
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Plaintiff’s Complaint lacks any factual allegation that would be necessary to support any reliance
on Defendants’ alleged misrepresentations.” (Document No. 8, p. 14).
Defendants provide the following legal authority in support of their motion.
To state a claim of negligent misrepresentation under North
Carolina law, a plaintiff must prove it (1) justifiably relied to its
detriment (2) on information prepared without reasonable care and
(3) by a person who owed the relying party a duty of care. SunTrust
Mortg., Inc. v. Busby, 651 F.Supp.2d 472, 485 (W.D.N.C. 2009)
(citing Hudson-Cole Dev. Corp. v. Beemer, 511 S.E.2d 309 (N.C.
Ct. App. 1999)). Further, to state a claim for fraudulent
misrepresentation under North Carolina law, a plaintiff must allege
that defendants made a “(1) false representation or concealment of
material fact, (2) that was reasonably calculated to deceive, (3)
which was made with the intent to deceive, (4) that did in fact
deceive, and (5) resulted in damage [to plaintiff].” Bonham v. Wolf
Creek Acad., 767 F. Supp. 2d 558, 568 (W.D.N.C. 2011) (citing
Jolly v. Acad. Collection Serv., 400 F. Supp. 2d 851 (M.D.N.C.
2005)). Similar to a negligent misrepresentation claim, a party must
reasonably rely on alleged misrepresentations to state a fraudulent
misrepresentation claim. Forbis v. Neal, 649 S.E.2d 382, 387 (N.C.
2007) (citing Johnson v. Owens, 140 S.E.2d 311, 313 (N.C. 1965)).
(Document No. 8, p. 14).1
According to Defendants, Plaintiff’s own allegations show that it “did not rely on
Defendants’ representations and warranties concerning the state of the property” because it
“commissioned two environmental studies, the Phase I and Phase II, to confirm the environmental
condition of the Lake Hill Apartments property.” (Document No. 8, pp. 14-15) (citing Document
No. 1, ¶¶ 31, 46). Defendants contend that without “allegations of actual, detrimental reliance on
any alleged misrepresentations, Plaintiff’s Misrepresentation Claims necessarily fail.” (Document
No. 8, p. 15). Defendants further contend that any reliance by Plaintiff on the alleged
misrepresentation was not to Plaintiff’s detriment. (Document No. 8, p. 16). Moreover,
1 The Forbis decision also notes that “[t]he reasonableness of a party’s reliance is a question for the jury,
unless the facts are so clear that they support only one conclusion.” Forbis, 649 S.E.2d at 387.
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Defendants assert that the Complaint does not allege that they denied Plaintiff the opportunity to
investigate the property or induced Plaintiff to forego additional investigation. (Document No. 8,
pp. 17-18).
Next, Defendants argue that even if Plaintiff alleged detrimental reliance on the alleged
misrepresentation(s), such reliance was neither justifiable nor reasonable based on the “defined
limitation of ‘Seller’s knowledge’ under the Contract.” (Document No. 8, pp. 16-17). Defendants
note that the Contract limits the representations made to “Seller’s knowledge,” defined as the
“actual, present, conscious knowledge of Mark Lerner . . . as to a fact at the time given without
any investigation or inquiry.” (Document No. 8, p. 18) (quoting Ex. A, § 9.1 (Document No. 1-
1, p. 13). Therefore, Defendants take the position that Plaintiff could not have reasonably relied
on any representations by Defendants because Defendants’ knowledge pursuant to the Contract
was whatever knowledge one Defendant, Mark Lerner, possessed “without any investigation or
inquiry.” (Document No. 8, pp. 18-19).
As described above, Plaintiff’s response to Defendants’ arguments for dismissal of the
misrepresentation claims initially focuses on a few cases cited by Defendants. (Document No. 23,
pp. 9-11). Defendants correctly note that the response provides little, if any, discussion related to
Defendants’ arguments regarding reliance as an element of the misrepresentation claims.
However, Plaintiff suggests that it has asserted sufficient “facts of affirmative misrepresentation
of the condition of the property and that the Defendants engaged in a scheme to withhold the
earnest money for which they have no right.” (Document No. 23, p. 11).
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Later in the response brief, Plaintiff adds additional arguments in support of its negligent
misrepresentation and fraudulent misrepresentation claims.2 See (Document No. 23, pp. 14-16).
Plaintiff contends that its allegations in support of the misrepresentation claims are adequate to
survive Rule 12(b)(6) scrutiny. Id.
In support of negligent misrepresentation, Plaintiff cites North Carolina caselaw that holds
that “a party to a contract owes the other contracting party a separate and distinct duty not to
provide false information to induce the execution of the contract.” (Document No. 23, p. 14)
(citing T.W.T. Distributing, Inc. v. Johnson Products Co., Inc., 3:13-CV-171-RJC-DSC, 966
F.Supp.2d 576, 582 (W.D.N.C. 2013) (quoting Schumacher Immobilien Und Beteiligungs AG v.
Prova, Inc., 2010 WL 3943754, *2 (M.D.N.C. Oct. 7, 2010)). Plaintiff argues that “[h]ere, that is
exactly what the Defendants did – supply Plaintiff with false information about environmental
contamination on the property such that when Plaintiff went through the due diligence period with
its lender, Plaintiff found out about the contamination late in the process a[n]d was caught off
guard by the contamination of the Lake Hills Apartments property….” Id. Plaintiff concludes that
it has “sufficiently and plausibly alleged its negligent misrepresentation claim,” but if “the Court
finds insufficient detail, then the Court should allow amendment to the Complaint.” (Document
No. 23, p. 15).
In support of its fraudulent misrepresentation claim, Plaintiff argues that it has adequately
alleged that “Defendants’ representations were false and were intentionally made and made with
the intent to deceive the Plaintiff and did deceive the Plaintiff,” and that “Plaintiff suffered
2 The undersigned notes that Plaintiff’s “Response Memorandum…” is organized very differently than the
“Memorandum In Support Of Defendants’ Motion To Dismiss.” Plaintiff’s counsel is respectfully advised
that the brief’s somewhat scattered organization – that does not “match” with the brief it is responding to –
is not helpful to the Court’s consideration.
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damages as a result of the Defendants actions.” (Document No. 23, p. 16) (citing Document No.
1, ¶¶ 62-68).
In reply, Defendants contend that Plaintiff failed to address their argument that “Plaintiff
could not actually, justifiably, or reasonably rely on Defendant’s alleged misrepresentations due
to the express limiting language contained in the Contract.” (Document No. 27, p. 4). Defendants
assert that because Section 9.1 severely limits the nature of misrepresentations set forth in the
Contract, Plaintiff could not have relied on those representations to its detriment. (Document No.
27, pp. 4-5) (citing Document No. 8, pp. 16-20).
Defendants argue that that there is no allegation supporting the first element of a negligent
misrepresentation claim – justifiable reliance; and similarly, there is no assertion that Plaintiff
reasonably relied on Defendant’s alleged misrepresentations to support a claim for fraudulent
misrepresentation. (Document No. 27, p. 5).
Based on the foregoing, Defendants conclude that Plaintiff’s “glaring omissions” require
the dismissal of both misrepresentation claims as to all Defendants. Id. (citing Suntrust Mortgage,
inc. v. Busby, 2:09-CV-003-LHT-DLH, 651 F.Supp.2d, 472, 485-86 (W.D.N.C. 2009) (dismissing
fraudulent misrepresentation and negligent misrepresentation claims for failing to plead reasonable
or justifiable reliance).
The undersigned finds that Plaintiff has pled sufficient “factual content that allows the court
to draw the reasonable inference that the defendant is liable for the misconduct alleged”; and
therefore, the misrepresentation claims should not be dismissed at this stage of the litigation. See
Iqbal, 556 U.S. at 678.
First, the undersigned is not persuaded by Defendants’ arguments that the purported
liability limitations in the Contract should be construed at this stage of the litigation to preclude
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Plaintiff’s misrepresentation claims. As Plaintiff notes, relevant caselaw holds that “[e]xculpatory
provisions are construed against the party seeking their enforcement.” Schenkel & Schultz, Inc.,
362 N.C. at 274.
The undersigned finds Ada Liss Group v. Sara Lee Corp., 2010 WL 3910433 (M.D.N.C.
2010), to be instructive on this issue. Apparently, the defendants’ argument in that case was similar
to the instant case. Defendants’ argument in Ada Liss Group was “in essence, that they have
converted tort liability into contract liability and eliminated that liability through the exercise of
the exculpatory provision.” Ada Liss Group, 2010 WL 3910433, at *9. The Ada Liss Group
decision stated that:
The case law in North Carolina supports only the more limited
proposition that exculpatory clauses eliminating liability for
ordinary negligence, though strictly construed and disfavored, are
enforceable under certain circumstances. . . .
There is absolutely no case law in North Carolina, on either
the state or federal level, supporting the enforcement of
exculpatory clauses for intentional wrongdoing. …the
Restatement of Contracts clearly states that “[a] term exempting a
party from tort liability for harm caused intentionally or recklessly
is unenforceable on grounds of public policy.”
Ada Liss Group, 2010 WL 3910433, at *9 (emphasis added).
Here, Plaintiff has alleged intentional wrongdoing. The Sellers/Defendants “[i]n order to
induce Purchaser to enter into this Agreement” provided representations, warranties, and
covenants that included the following:
(a) Except as noted herein, there is no pending or, to Seller’s
knowledge, threatened condemnation, litigation, assessment, or
similar proceeding affecting any of the Properties or any part
thereof, . . .
(b) Seller has not received any written notice of any
violation of any restrictive covenant, ordinance, regulation, law or
statute of any governmental agency applicable to the Properties; . .
.
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(h) To Seller’s knowledge, there are no Hazardous Materials
(as hereinafter defined) on, in, under or emanating from the
Properties, . . . to Seller’s knowledge, no past or current releases of
Hazardous Materials on, over, at, from, into, or onto the Properties;
and Seller has no actual knowledge of any environmental condition,
situation or incident on, at or concerning any of the Properties that
possibly could give rise to an action to or liability under any law,
ordinance or common law theory.
(Ex. A., § 9.1, Document No. 1-1, pp. 11-13). See also (Ex. A, § 5.1 (g), Document No. 1-1, p. 7)
(Seller to provide Purchaser “. . . all notices received by any Seller concerning such Seller’s
Property compliance, or lack thereof . . . . ).
However, despite these and other representations and warranties, the Contract purports to
limit liability to only the “Seller of the Property owned by it,” and to limit the “Seller’s knowledge”
to only one individual, Mark Lerner, although no “conscious knowledge of any other individual
or entity, shall be imputed” to Mark Lerner, and he does not have any liability or duties to the
“Purchaser.” (Document No. 1-1, p. 13). Moreover, this section of the Contract concludes that:
“Purchaser hereby covenants that it will bring no action of any kind against such individual or any
direct or indirect shareholder, partner, or member of a Seller related to or arising out of the
representations and warranties set forth in this Agreement.” Id. See also (Ex. A, § 9.5, (Document
No. 1-1, p. 15) (“Further Limitations on Liability of the Parties”).
In essence, Defendants take the position that pursuant to the Contract, at most one, if any,
Defendants can be held responsible for the representations and warranties they made in inducing
the Purchaser/Plaintiff to enter into the Contract. If upheld, this interpretation will exclude any
liability for Harry Lerner who signed the acknowledgement of a “Notice of Brownfields”
(Document No. 1-2) in 2006, and the Contract on behalf of multiple Defendants (Document No.
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1-1, pp. 21, 25, 26) and the “First Amendment To Purchase And Sale Agreement” (Document No.
1-2) in 2022. See (Document No. 1, p. 8).
Second, viewing the Complaint in the light most favorable to Plaintiff, the undersigned is
satisfied Plaintiff has adequately alleged the elements of negligent and fraudulent
misrepresentation.3 Plaintiff effectively presents allegations that Defendants knew or should have
known about environmental contamination on at least one of the properties at issue, but withheld
that information to induce Plaintiff to enter into the underlying Contract and deposit its Earnest
Money.4 Moreover, Plaintiff has alleged that it justifiably relied on Defendants’ incorrect and
inadequate information to enter into the Contract.
The undersigned finds a decision by this Court, and cited by Plaintiff, T.W.T. Distributing,
Inc. v. Johnson Products, Co., Inc., 3:13-CV-171-RJC-DSC, 966 F.Supp.2d 576 (W.D.N.C. 2013),
to be instructive. In T.W.T Distributing, this Court declined to dismiss pending claims for breach
of contract and negligent misrepresentation, noting in part that “[w]here breach of contract and
negligent misrepresentation claims arise from the same conduct, the negligent misrepresentation
must include an aggravating element such as fraud, malice, reckless indifference, oppression,
insult, or willfulness. T.W.T. Distrib., Inc., 966 F.Supp.2d at 581. Here, as in T.W.T Distributing,
it appears that Plaintiff has adequately pled an aggravating element.
T.W.T Distributing also recognizes two other points applicable to this case. One,
“[o]rdinarily, the question of whether an actor is reasonable in relying on the representations of
3 Plaintiff suggests it has additional detail it could have provided, and is willing and able to amend the
Complaint. (Document No. 23, p. 15). It is unclear why, to date, Plaintiff has not sought to amend the
Complaint if it has additional factual content to support its claims.
4 Although Plaintiff’s arguments suggest that Defendants representations and warranties were “untrue,
inaccurate, or incorrect” it does not address whether relief would be available pursuant to the Contract
under § 9.3 “Breach of Warranties Prior to Closing.” (Document No. 1-1, pp. 14-15).
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another is a matter for the finder of fact.” T.W.T. Distrib., Inc., 966 F.Supp.2d at 582. And two,
“[u]nder North Carolina law, a party to a contract owes the other contracting party a separate and
distinct duty not to provide false information to induce the execution of the contract.” Id. (citing
Schumacher Immobilien Und Beteiligungs AG, 2010 WL 3943754, *2); see also City of Hight
Point v. Suez Treatment Solutions, Inc., 2020 WL 1307017, at *10-11 (M.D.N.C. Mar. 19, 2020)
and Jones v. BMW of North Am., LLC, 2020 WL 5752808, at *9 (M.D.N.C. Sept. 25, 2020).
Based on Plaintiff’s arguments, and the Schenkel & Shultz, Ada Liss Group and T.W.T
Distributing cases, the undersigned will respectfully recommend that it would be premature to
dismiss any of the misrepresentation claims against Defendants. Instead, it appears prudent for
the Court to allow Plaintiff to conduct discovery, and possibly amend its Complaint, and to then
reconsider Defendants’ arguments at a later date, if necessary. It will likely be helpful to the
ultimate resolution of this case for the parties to discover who knew what, and when, regarding
hazardous materials on the properties, and what, if any, of that information was shared with
Plaintiff before or during the Contract’s negotiation and execution.
3. UDTPA
Defendants also contend that Plaintiff’s UDTPA claim must be dismissed. (Document No.
8, pp. 20-22). Defendants note that the UDTPA claim is based on the misrepresentations discussed
above and a dispute over the term(s) of the Contract related to the release of funds in escrow.
(Document No. 8, p. 20). As such, Defendants assert that the parties’ dispute “is neither an ‘unfair
and or deceptive act’ nor is it ‘in or affecting commerce,’ as required to state a UDTPA claim in
North Carolina.” Id. According to Defendants, this case is, “at most a contractual dispute.” Id.
Defendants’ memorandum provides a helpful summary of the requirements for a UDTPA
claim:
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“The elements of an Unfair and Deceptive Trade Practices Act
claim are: ‘(1) an unfair or deceptive act or practice, or an unfair
method of competition, (2) in or affecting commerce, (3) which
proximately caused actual injury to the plaintiff or to his business.’”
Brinkman v. Barrett Kays & Assocs., P.A., 575 S.E.2d 40, 44 (N.C.
Ct. App. 2003) (internal citation omitted). The North Carolina
Supreme Court has held that, along with the above cited elements,
“some type of egregious or aggravating circumstances must be
alleged and proved before the [Act’s] provisions may [take effect].”
Carcano v. JBSS, LLC, 684 S.E.2d 41, 50 (N.C. Ct. App. 2009)
(quoting Bus. Cabling, Inc. v. Yokeley, 643 S.E.2d 63, 68 (N.C. Ct.
App. 2007) (further quotations omitted)).
Here, Plaintiff has failed to allege facts sufficient to support the
first element of its UDTPA claim. “A mere breach of contract, even
if intentional, is not an unfair or deceptive act under Chapter 75.”
Bob Timberlake Collection, Inc. v. Edwards, 626 S.E.2d 315, 323
(N.C. Ct. App. 2006) (citing Bartolomeo v. S.B. Thomas, Inc., 889
F.2d 530, 535 (4th Cir. 1989)). Under North Carolina law, it is well
recognized that “actions for unfair or deceptive trade practices are
distinct from actions for breach of contract . . .
(Document No. 8, pp. 20-21).
Defendants argue that “Plaintiff has failed to allege any facts to support the existence of an
unfair or deceptive act.” (Document No. 8 p. 21). Their view is that this claim is based on the
alleged failure to release escrow funds in breach of the contract, which is a dispute about the
Contract’s terms – not an unfair or deceptive act. Id.
Next, Defendants argue that their alleged conduct is not “in or affecting commerce.”
(Document No. 8, pp. 21-22). Rather, Defendants contend this is a one-off, business-to-business
dispute that is “wholly divorced from the context of consumer transactions.” (Document No. 8, p.
22) (quoting PCS Phosphate Co., Inc. v. Norfolk Southern Corp., 559 F.3d 212, 225 (4th Cir.
2009)). “The UDTPA ‘was intended to benefit consumers,’ . . . but this dispute is between two
sophisticated business entities.” Id. (quoting PCS Phosphate, 559 F.3d at 225 (quoting Dalton v.
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Camp, 548 S.E.2d 704, 710 (2001)). Based on the foregoing legal authority, Defendants conclude
that the UDTPA claim must be dismissed. (Document No. 8, p. 22).
In response, Plaintiff contends it has set forth a valid claim under the North Carolina unfair
and deceptive trade practices act. (Document No. 23, pp. 11-14). Plaintiff notes that in this case
Defendants had actual notice of contamination on the property in question through a letter
regarding a Notice of Brownfields Agreement, but Defendants withheld such evidence from
Plaintiff. (Document No. 23, p. 13). Moreover, Plaintiff accuses Defendants of being “engaged
in a scheme to deprive Plaintiff of its funds after proper termination after discovery of a Material
Adverse Condition.” Id. (citing Document No. 1, ¶¶ 47-51).
Plaintiff relies on two cases from the North Carolina Court of Appeals that found there may
be violations of N.C.Gen.Stat. § 75-1.1, along with breach of contract, where there were
sufficiently aggravating circumstances. Id. (citing Garlock v. Henson, 112 N.C. App. 243, 246
(1993) and Foley v. L & L Int’l, 88 N.C. App. 710, 714 (1988)).
Plaintiff concludes that its allegations, taken together, adequately state a claim of actions
by Defendants, in or affecting commerce, which deceived Plaintiff to its detriment. Id.
Defendants present two main arguments in their reply brief. (Document No. 27, pp. 5-10).
First, they argue that Plaintiff has failed to refute that their claim is precluded by the provision in
the Contract that “it would ‘bring no action of any kind . . . related to or arising out of the
representations and warranties set forth in this Agreement.’” (Document No. 27, p. 6) (citing Ex.
A, § 9.1, (Document No 1-1, pp. 11-13)). Defendants suggest that the language in the Contract is
so clearly and explicitly exculpatory it is binding on Plaintiff and must be enforced. (Document
No. 27, pp. 6-7).
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Second, Defendants argue that the UDTPA claim is indistinguishable from the breach of
contract claim and must fail for that reason as well. (Document No. 27, pp. 7-10). Defendants re-
assert that Plaintiff has failed to allege any facts to support two of the three elements of a UDTPA
claim – an unfair or deceptive act, in or affecting commerce. (Document No. 27, p. 8) (citing
Document No. 8, pp. 20-22).
Defendants further argue that the cases relied upon by Plaintiff are inapposite because the
dispute here is one of contract interpretation and because it does not involve a consumer
transaction. (Document No. 27, p. 9). Defendants conclude that because “Plaintiff has alleged
neither an unfair or deceptive act with some sort of aggravating circumstance nor an act that affects
commerce, the Court must dismiss the UDTPA claim.” (Document No. 27, p. 10).
Like the misrepresentation claims, the undersigned is not persuaded that Plaintiff’s
UDTPA claim should be dismissed at this time. Plaintiff has alleged sufficient factual content to
state a plausible claim.
First, Plaintiff has alleged Defendants engaged in an unfair or deceptive act by knowingly
withholding information about hazardous materials on the property in question to induce Plaintiff
to enter into the Contract. See (Document No. 1, pp. 6-7). Moreover, “during the Phase I
Assessment of the Lake Hill Apartment property, Defendants stated that they had no records or
recollection of any releases . . . were unaware of any environmental issues with the property . . .
[and] failed to produce any documentation.” (Document No. 1, p. 9).
Despite Defendants’ representations in the Contract, Plaintiff alleges that “Defendants
were aware of and acknowledged receipt of the Notice of Brownfields Agreement concerning the
Lake Hill property . . . signed by Harry Lerner as President of Lake Hills Corporation” on or about
December 7, 2006, and “a ‘Notice of Brownfields’ [was] filed with the Mecklenburg County
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Register of Deeds on March 19, 2007, related to the subject properties and property adjacent the
subject properties.” (Document No. 1, p. 8); see also (Document No. 1-2). A brownfields property
or site is a property “at which expansion or redevelopment is hindered by actual environmental
contamination or the possibility of environmental contamination and that is or may be subject to
remediation under any State remedial program or that is or may be subject to remediation under
the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended (42 U.S.C. § 9601, et seq.).” 5 N.C.Gen.Stat. § 130A-310.31.
Strikingly, Defendants do not seem to deny that they were aware of the contamination at
the property in question, or that they knowingly withheld that information from Plaintiff.
(Document Nos. 7, 8, 27). Rather, they take the position that the exculpatory provisions in the
Contract and/or Plaintiff’s option to conduct inspections of the property, waive any liability
Defendants might have had for misrepresenting the status of the property.
Second, the undersigned is satisfied that Plaintiff has adequately alleged that the action in
question was in or affecting commerce. “An act is ‘in or affecting commerce’ if the parties were
‘engaged in an activity involving an exchange of some type in which a participant could be
characterized as a seller.’ Cent. Nat’l Gottesman Inc. v. Nakos Paper Products Inc., No. 3:18-CV-
640-DSC, 2021 WL 3562898, at *3 (W.D.N.C. Aug. 11, 2021) (quoting Durling v. King, 554
S.E.2d 1, 4 (N.C.App. 2001)).
5 See N.C.Gen.Stat. § 130A-310.35 (b) & (d) (“a prospective developer who enters into a brownfields
agreement with the Department shall file a certified copy of the Notice of Brownfields Property in the
register of deeds’ office in the county or counties in which the land is located.” “When a brownfields
property is sold, leased, conveyed, or transferred, the deed or other instrument of transfer shall contain in
the description section, in no smaller type than that used in the body of the deed or instrument, a statement
that the brownfields property has been classified and, if appropriate, cleaned up as a brownfields property
under this
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This case involves parties who own, develop, and/or manage, multi-family residential
properties and were engaged in a transaction whereby Plaintiff would acquire ten (10) multi-family
properties from Defendants for $198,500,000.00. (Document No. 1, pp. 2-5). A relevant North
Carolina Supreme Court case that addressed the sale of just two lots found that “the transaction at
issue was indisputably a commercial land transaction that affected commerce in the broad sense”
and that Plaintiff should prevail on its UDTPA claim. Bhatti v. Buckland, 328 N.C. 240, 246
(1991). More specifically, the Bhatti decision stated the following:
to the limited extent that the transaction is depicted by the sparse
facts in this record, it involved a buyer and seller in a commercial
context to which the protections afforded by section 75–1.1, whether
viewed literally or purposively, apply. The defendant did not prove
that the transaction was anything other than a business activity well
within the banks of the stream of commerce as broadly defined by
the General Assembly in N.C.G.S. § 75–1.1. As such, plaintiff is
entitled to the protection of the statute.
We thus conclude that the sale fell within the ambit of the inclusive
phrase “business activities, however denominated,” N.C.G.S. § 75–
1.1(b), and was therefore “in or affecting commerce” within the
meaning and intent of that phrase as used in N.C.G.S. § 75–1.1(a).
Because the jury found that the sale was procured by defendant’s
“fraudulent representation,” plaintiff was entitled to treble damages.
Hardy v. Toler, 288 N.C. at 309, 218 S.E.2d at 346.
Bhatti, 328 N.C. at 246–47 (1991).
Third, Plaintiff has adequately alleged that Defendants’ actions have proximately caused
injury. In short, Defendants allegedly fraudulently induced Plaintiff into the Contract and have
since improperly withheld the return of $2,000,000.00 in Earnest Money. Id. At this stage,
Plaintiff has adequately alleged injury.
To the extent Defendants contend this is, at most, a contractual dispute and that the UDTPA
does not apply, the undersigned notes recent caselaw from this Court holding that under certain
circumstances a UDTPA claim is not duplicative of a breach of contract claim. See Aseltine v.
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Bank of America, 3:23-CV-235-MOC-WCM, 2023 WL 6305809 (W.D.N.C. Sept. 27, 2023). In
Aseltine, this Court stated:
While the UDTPA does not apply “to an individual who merely
breaches a contract.” Bumpers v. Cmty. Bank of N. Virginia, 367
N.C. 81, 87–88 (2013), “[a] plaintiff may bring a UDTPA claim
where a defendant’s breach of contract involved deception and
egregious and aggravating circumstances.” Viza Elecs., LLC v.
Paradigm Clinical Rsch. Inst., Inc., No. 3:22-CV-49-MOC-DCK,
2022 WL 4459836, at *6 (W.D.N.C. Sept. 23, 2022) (citing S. Atl.
Ltd. P'ship of Tenn., L.P. v. Riese, 284 F.3d 518, 535 (4th Cir.
2002)) (additional citations omitted). A breaching party commits an
egregious or aggravated breach when it acts deceptively “in the
circumstances of [the contract’s] breach” such as the formation of
the contract ….
Aseltine, 2023 WL 6305809, at *4 (W.D.N.C. Sept. 27, 2023) (emphasis added) (citing Software
Pricing Partners, LLC v. Geisman, No. 3:19-CV-195-RJC-DCK, 2020 WL 3249984, at *10
(W.D.N.C. June 16, 2020)).
Regarding Defendants’ argument that exculpatory provisions in the Contract preclude a
UDTPA claim, the undersigned notes that this issue was addressed above in discussing the
misrepresentation claims and the undersigned is persuaded that dismissal on those grounds would
be premature.
Based on the foregoing, the undersigned will respectfully recommend that the motion to
dismiss Plaintiff’s UDTPA claim also be denied.
B. Breach of Contract Claim
Defendants also argue that Plaintiff’s breach of contract claim should be dismissed.
(Document No. 8, pp. 22-25). Defendants contend that Plaintiff has failed to plead facts to
plausibly allege the existence of a material adverse condition. Id. Defendants note that pursuant
to the plain language of the Contract:
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a Material Adverse Condition exists on the property under only one
circumstance: the presence of “environmental matters or conditions
which would require more than $50,000 to cure or remediate, in
the reasonable estimate of the QEP.” Ex. A, § 3.1 (emphasis
added). Indeed, Plaintiff’s Complaint lacks any allegation that the
QEP ever estimated the cost to remediate the alleged environmental
issues at all, much less that it would cost more than $50,000.
Without such an allegation, Plaintiff’s breach of contract claim must
be dismissed because Plaintiff cannot allege the existence of a
Material Adverse Condition—the lynchpin to its entire case.
(Document No. 8, p. 23).
Defendants note that the Phase II Report attached to the Complaint does not include “an
estimate that the remediation would cost more than $50,000,” nor “a statement that remediation is
required at all under North Carolina law.” (Document No. 8, pp. 24-25). Defendants conclude
that Plaintiff’s failure to “plausibly allege the existence of a Material Adverse Condition” is fatal
to its claim. (Document No. 8, p. 25).
In response, Plaintiff contends it has asserted a valid breach of contract claim. (Document
No. 23, pp. 5-6). Specifically, Plaintiff states that it:
has alleged that Defendants have breached the contract by failing to
return its escrow funds despite the fact that environmental
contamination was revealed at the Lake Hills property which
objectively will cost over $50,000.00 to remediate constituting a
Material Adverse Condition. (See Compl. ¶ 48.) The contract
required the return of escrow funds if there is a Material Adverse
Condition and Defendants refused to return Plaintiff’s funds
constituting a breach. Defendants scheming to unjustly enrich
themselves in the amount of $2 million dollars also breached the
contract since it violated the implied duty of good faith and fair
dealing which is part and parcel of every contract. See Maaco
Franchisor SPV, LLC v. Sadwick, 3:20-cv-147, 2020 WL 4468727
(W.D.N.C. 2020).
(Document No. 23, pp. 5-6).
In addition, Plaintiff contends that Defendants are improperly seeking “a determination of
their own interpretation of the contract.” (Document No. 23, p. 6). Plaintiff argues that Defendants
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are attempting “to read additional requirements into the contract with regard to the definition of
Material Adverse Condition to add in an additional submission of an estimate of costs as opposed
to a typical Phase II environmental assessment.” Id. “Defendants’ interpretation manufactures
language relating to the actual condition of property to one that only means that there is a written
estimate to remediate the condition costing more than $50,000 provided to Defendants.” Id.
Plaintiff notes that Defendants do not contest that “should remediation occur to clean up
the plume of drycleaning and petroleum constituent compounds,” it would cost more than $50,000,
“especially since the plume of contamination is flowing down gradient to the subject residential
property.” Id. Plaintiff suggests that, at the very least, the “Material Adverse Condition can be
construed as ambiguous since there are multiple interpretations of the contractual language that
make sense.” (Document No. 23, p. 8). Plaintiff further suggests that Defendants’ position ignores
reality because it “denies the objective conditions o[n] the property of hazardous chemical
contamination and is unreasonable.” Id.
Plaintiff then notes that, contrary to Defendants’ interpretation of the Contract, “there is no
specific contractual provision regarding the procedure for any third-party to submit any estimate
to Defendants and indeed the Phase II Report was to assess the objective environmental condition
of the property.” Id.
In reply, Defendants first argue that the Contract “unambiguously defines Material Adverse
Condition as requiring a reasonable estimate by the QEP, yet Plaintiff’s Complaint cannot point to
a single allegation of such an estimate existing at all.” (Document No. 27, p. 11). Defendants
assert that they “directly quoted the Contract’s definition of a Material Adverse Condition to show
that a Material Adverse Condition exists only if the QEP provides a ‘reasonable estimate’ (written
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or otherwise) of the remediation cost that exceeds the Contract’s $50,000 materiality threshold,
which never occurred according to the facts alleged in the Complaint.” Id.
According to Defendants, a “contract is only ambiguous when ‘either the meaning of words
or the effect of provisions is uncertain or capable of several reasonable interpretations.’” Id.
(quoting Variety Wholesalers, Inc. v. Salem Logistics Traffic Servs., LLC, 723 S.E.2d 744, 748
(N.C. 2012) (quoting Schenkel, 658 S.E.2d at 921)). “[A] contract must be ‘fairly and reasonably
susceptible to either one of the constructions asserted by the parties’ to be ambiguous.” (Document
No. 27, p. 12) (quoting St. Paul Fire & Marines Ins. Co. v. Freeman-White Assocs., Inc., 366
S.E.2d 480, 484 (N.C. 1988)).
Here, the Contract could not be clearer: a Material Adverse
Condition only exists when there are “environmental matters or
conditions which would require more than $50,000 to cure or
remediate, in the reasonable estimate of the QEP.” Compl. Ex.
A, § 3.1 (emphasis added). Thus, unless the QEP offered a
“reasonable estimate” that the alleged contamination would cost
more than $50,000 to remediate, a Material Adverse Condition
cannot exist. Id.
Notably, despite arguing that the Contract’s language was
ambiguous, Plaintiff failed to allege that the QEP provided a
reasonable estimate. In fact, Plaintiff failed to even offer a viable
competing interpretation of the clause at issue.
(Document No. 27, p. 12).
As such, Defendants are not persuaded there are “multiple interpretations of the contractual
language that make sense.” Id.; see also (Document No. 23, p. 8).
Finally, Defendants argue that they did not violate the implied covenant of good faith and
fair dealing because Plaintiff can point to no duty in the Contract they violated. (Document No.
27, p. 13).
Here, the Contract unambiguously requires Defendants to return
the funds in escrow only after the finding of an environmental
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condition that the QEP reasonably estimates will cost more than
$50,000 to remediate. Compl. Ex. A, § 3.1. Because no such
estimate has ever been made, Plaintiff has no basis to demand the
escrowed funds returned. Thus, Plaintiff attempts to use the implied
covenant to “write into the Agreement obligations that do not exist.”
Drummond, 3 F.4th at 611. Indeed, Defendants could not, as a
matter of law, have violated the implied covenant of good faith and
fair dealing by refusing Plaintiff’s unfounded demand to return the
funds in escrow.
(Document No. 27, p. 14).
Defendants conclude that the Court should not allow this case to proceed to discovery
“because the plain language of the contract dooms every claim.”
The undersigned finds that this issue presents a close call.
In pertinent part the Contract states:
As used herein, “Material Adverse Condition” means either (x) a
recommendation in a Phase I environmental site assessment (by a
qualified environmental professional (the “QEP”)) to conduct a
Phase II environmental site assessment or other further testing,
which further testing reveals the existence of environmental matters
or conditions that require more than $50,000 to cure or remediate,
in the reasonable estimate of the QEP
. . .
or (y) other findings which reveal the existence of environmental
matters or conditions which would require more than $50,000.00 to
cure or remediate, in the reasonable estimate of the QEP.
(Ex. A., § 3.1, Document No. 1-1, p. 4) (emphasis added).
The undersigned finds that both sides raise important points. The crux of Defendants’
argument is that Plaintiff has yet to allege that there is a “reasonable estimate of the QEP” in any
form. (Document Nos. 8, 27). However, Defendants’ description of the Contract language is
misleading – the Contract does not state that the “QEP provides” an estimate, or that it would be
“(written or otherwise).” See (Document No. 27, p. 11). As Plaintiff observes, “there is no specific
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contractual provision regarding the procedure for any third-party to submit any estimate to
Defendants.” (Document No. 23, p. 8).
In the Complaint, Plaintiff acknowledges, and quotes from the Contract, that the definition
of “Material Adverse Condition” – a prerequisite for the return of its Earnest Money – requires
environmental conditions that require more than $50,000 to cure or remediate, in the reasonable
estimate of the QEP. (Document No. 1, ¶ 28). Nevertheless, without citing any estimate of the
QEP, Plaintiff concludes that the “related environmental matters or impacts on the property, would
cost well over $50,000.00, and thus, Plaintiff is entitled to the return of its Earnest Money.”
(Document No. 1, ¶ 38).
The undersigned finds that Plaintiff presents a plausible argument that it would cost in
excess of $50,000 to cure or remediate the environmental conditions at the subject property. Since
the Contract does not provide a required form of an estimate, or any method of submission of an
estimate by the QEP, it is unclear at this stage whether or not there was “a reasonable estimate of
the QEP” that there were “matters or conditions that would require more than $50,000 to cure or
remediate.” However, Plaintiff’s pleading does not include the precise language that the Contract
requires to establish a “Material Adverse Condition,” and its briefing does not adequately explain
the failure to identify the existence of a “reasonable estimate of the QEP.”
Despite the apparent deficiencies in Plaintiff’s pleading, after considering all the
circumstances of this case, the undersigned recommends that dismissal of the breach of contract
claim be denied without prejudice. The undersigned further recommends that the parties be
directed to conduct at least some initial discovery, and that Plaintiff then be allowed to file an
Amended Complaint. Plaintiff is respectfully advised that if it cannot allege the presence of a
“Material Adverse Condition”– as defined by the Contract – at the time it demanded the return of
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its Earnest Money, its breach of contract claim, at least on that basis, may be vulnerable to a future
dispositive motion.
IV. RECOMMENDATION
FOR THE FOREGOING REASONS, the undersigned respectfully recommends that
“Defendants’ Motion To Dismiss” (Document No. 7) be DENIED WITHOUT PREJUDICE.
V. TIME FOR OBJECTIONS
The parties are hereby advised that pursuant to 28 U.S.C. § 636(b)(1)(C), and Rule 72 of
the Federal Rules of Civil Procedure, written objections to the proposed findings of fact,
conclusions of law, and recommendation contained herein may be filed within fourteen (14) days
of service of same. Responses to objections may be filed within fourteen (14) days after service
of the objections. Fed.R.Civ.P. 72(b)(2). Failure to file objections to this Memorandum and
Recommendation with the District Court constitutes a waiver of the right to de novo review by the
District Court. Diamond v. Colonial Life, 416 F.3d 310, 315-16 (4th Cir. 2005); United States v.
Benton, 523 F.3d 424, 428 (4th Cir. 2008). Moreover, failure to file timely objections will preclude
the parties from raising such objections on appeal. Id. “In order ‘to preserve for appeal an issue
in a magistrate judge’s report, a party must object to the finding or recommendation on that issue
with sufficient specificity so as reasonably to alert the district court of the true ground for the
objection.’” Martin v. Duffy, 858 F.3d 239, 245 (4th Cir. 2017) (quoting United States v. Midgette,
478 F.3d 616, 622 (4th Cir. 2007)).
IT IS SO RECOMMENDED.
Signed: November 1, 2023
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