CapitalSource Finance LLC v. Pittsfield Weaving Co.

MEMORANDUM OPINION

This action involves a suit by Capital-Source Finance LLC (“CapitalSource” or “Plaintiff’) against Pittsfield Weaving Company (“Pittsfield” or “Borrower”) 1 and Gilbert and Susan Bleckmann (the “Bleekmanns” or “Guarantors”), (collectively “Defendants”) for breach of contract and related claims. Currently pending before the Court is Plaintiffs Motion to Dismiss the Counterclaims of Pittsfield (Paper No. 24), Plaintiffs Motion to Dismiss the Bleekmanns’ Counterclaims (Paper No. 27), and Plaintiffs Motion to Dismiss the Bleekmanns’ Affirmative Defenses (Paper No. 29). On December 8, 2006, the Court heard arguments on the motion via telephonic conference. The Court granted Plaintiffs motions to dismiss Defendants’ counterclaims, and granted Plaintiffs motion to strike Defendants’ affirmative defenses as plead. However, the Court also granted Defendants leave to amend their Answer and affirmative defenses in accordance with the Court’s comments to the parties. This Memorandum Opinion memorializes the Court’s findings of fact and conclusions of law.

FACTUAL AND PROCEDURAL BACKGROUND

This action for breach of contract arises out of Pittsfield’s breach of its obligations to CapitalSource under a Credit Agreement and the Guarantors’ failure to satisfy their obligations under a Guaranty Agreement covering Pittsfield’s obligations to CapitalSource. CapitalSource is a specialized commercial finance company offering financing to borrowers throughout the United States. In or about April 2004, Pittsfield, a company in the business of manufacturing woven and non-woven labels, sought a multi-million dollar loan from CapitalSource. (Counterclaim ¶¶ 46-47). On January 27, 2005, CapitalSource and Pittsfield entered into the Credit Agreement. (Counterclaim ¶ 46). Under the Credit Agreement, CapitalSource agreed to make loans and other financial accommodations to Pittsfield via revolving credit facilities of up to $3 million in the aggregate, and a term loan in the maximum principal amount of $1.6 million, for refinancing Pittsfield’s then-existing obligations and indebtedness. By executing the Credit Agreement, Pittsfield promised to repay the loans in accordance with the terms of the loan documents. {See Credit Agreement, Compl. Ex. 1A).

Pittsfield further agreed that in the event of default, CapitalSource would have a series of rights and remedies as set forth in the Credit Agreement. These included, without limitation: (1) the right to charge interest at a Default Rate; (2) the right to terminate its obligations under the Credit Agreement and accelerate Pittsfield’s Obligations, without notice or demand; and (3) the right to exercise “any and all rights, options and remedies provided for in the loan documents, under the UCC or at law or in equity.” (Credit Agreement at §§ 3.5, 8 and 9.1). In addition, in the Credit Agreement, Pittsfield waived any “setoff, counterclaim ... or defenses” and *671 “forever discharged [CapitalSource] ... from any and all causes of action ... of any kind whatsoever ...” that it could assert in connection with the Credit Agreement. (Credit Agreement at §§ 10.1 and 12.11).

In October 2005, CapitalSource discovered that Pittsfield had submitted Borrowing Base Certificates that were not true in violation of Sections 7.8 and 8(b) of the Credit Agreement. (Counterclaim ¶ 55). By the end of October 2005, Pittsfield was out of compliance with the terms of the Credit Agreement and required an overad-vance. (Counterclaim ¶ 54). Capital-Source, however, agreed to “work with” Pittsfield instead of accelerating its Obligations under the Credit Agreement. As of December 1, 2005, Pittsfield remained in default under the Credit Agreement. Accordingly, CapitalSource charged Pittsfield a 5% default interest rate for November.

In spite of numerous breaches under the Credit Agreement, CapitalSource continued to work with Pittsfield from December 2005 through the filing of the instant lawsuit. By August 2006, Pittsfield had been in default under the Credit Agreement for nine (9) months and was over $4 million in debt to CapitalSource. Accordingly, on August 7, 2006, CapitalSource initiated this action and sought the appointment of a receiver. Pittsfield concedes it has breached the Agreement (Counterclaim ¶ 80), but claims CapitalSource: (1) breached an implied duty of good faith and fair dealing by exercising its rights under the Credit Agreement (including bringing the instant action) (Counterclaim ¶¶ 82-97); and (2) negligently misrepresented that it would “work with” Pittsfield. (Counterclaim ¶¶ 98-103). The Bleckmanns’ counterclaims essentially duplicate those of Pittsfield. In addition, the Bleck-manns have asserted nine (9) affirmative defenses, all of which CapitalSource has moved to strike.

STANDARD OF REVIEW

A court must deny a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure “unless it appears beyond doubt that the plaintiff can prove no set of facts in support of its claim which would entitle it to relief.” See Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). In determining whether to dismiss a complaint pursuant to Rule 12(b)(6), this Court must view the well-pleaded material allegations in the light most favorable to the plaintiff and accept the factual allegations contained within the plaintiffs complaint as true. See Flood v. New Hanover County, 125 F.3d 249, 251 (4th Cir.1997) (citing Estate Constr. Co. v. Miller & Smith Holding Co., Inc., 14 F.3d 213, 217-18 (4th Cir.1994)); Chisolm v. TranSouth Finan. Corp., 95 F.3d 331, 334 (4th Cir.1996). The Court, however, is “not bound to accept as true a legal conclusion couched as a factual allegation.” See Papasan v. Allain, 478 U.S. 265, 286, 106 S.Ct. 2932, 92 L.Ed.2d 209 (1986) (citing Briscoe v. LaHue, 663 F.2d 713, 723 (7th Cir.1981)); Young v. City of Mount Ranier, 238 F.3d 567, 577 (4th Cir.2001) (the mere “presence ... of a few conclusory legal terms does not insulate a complaint from dismissal under Rule 12(b)(6)”). Nor is the Court “bound to accept [Plaintiffs’] conclusory allegations regarding the legal effect of the facts alleged.” United Mine Workers of Am. v. Wellmore Coal Corp., 609 F.2d 1083, 1085-86 (4th Cir.1979); Neitzke v. Williams, 490 U.S. 319, 326-27, 109 S.Ct. 1827, 104 L.Ed.2d 338 (1989).

Therefore, a complaint may be dismissed as a matter of law only if it lacks a cognizable legal theory or if it alleges insufficient facts to support a cognizable legal theory. See Robertson v. Dean Witter *672 Reynolds, Inc., 749 F.2d 530, 533-34 (9th Cir.1984) (citing 2A J. Moore, Moore’s Federal Practice ¶ 12.08 at 2271 (2d ed.1982)).

ANALYSIS

A. The Motions to Dismiss Defendants’ Counterclaims

Since the counterclaims of Pittsfield and the Bleckmanns are essentially the same, CapitalSource’s motions to dismiss equally apply to both sets of Defendants. Defendants assert two counterclaims: (1) breach of an implied duty of good faith and fair dealing; and (2) negligent misrepresentation.

1. Implied Duty of Good Faith and Fair Dealing

Defendants argue that under Maryland law, 2 it is well settled that “in every contract there exists an implied covenant that each parties thereto will act in good faith and deal fairly with the others.” Food Fair Stores, Inc. v. Blumberg, 234 Md. 521, 200 A.2d 166, 174 (1964). The Fourth Circuit has explained that the “implied duty of good faith and fair dealing as recognized in Maryland requires that one party to a contract not frustrate the other party’s performance.” Eastern Shore Markets, Inc. v. J.D. Associates, 213 F.3d 175, 184 (4th Cir.2000). Assuming that the Credit Agreement is a contract as alleged in the Complaint, the duty of good faith and fair dealing imposed by Maryland law obligates CapitalSource to exercise good faith in performing its contractual obligations. Defendants contend that while the duty of good faith does not change the terms of the contract, it does (a) define and limit the discretion which the parties have in the performance or enforcement of the contract and (b) permit a court to address issues arising from contractual silence regarding a specific issue. The duties of good faith and fair dealing prohibit one party to a contract from acting in such a manner as to prevent the other party from performing his obligations under the contract.

Defendants claim that CapitalSource has been engaged in discussions with one or more potential buyers of Pittsfield’s business or assets. Further, by its actions, decisions, indecision, omissions, and refusal to cooperate with Pittsfield, CapitalSource has made it impossible for Pittsfield to satisfy its financial obligations under the Credit Agreement. 3 Defendants further claim that the duty of good faith and the “commercial reasonableness” doctrine imposed by the Uniform Commercial Code also prevent CapitalSource from rejecting legitimate business proposals intended to maximize the value of its inventory collateral simply because it “prefers to force Pittsfield to make the Hobson’s choice of defaulting under enforceable contracts with valued customers or generate new accounts for [CapitalSource].” See Pitts-field’s Verified Answer to Complaint ¶ 96; The Bleckmann’s Amended Answer to Complaint and Counterclaim ¶ 36.

Defendants rely principally on the Fourth Circuit opinion in Eastern Shore to support their contention that a cause of action exists for the breach of an implied *673 duty of good faith and fair dealing. See Eastern Shore Markets, Inc. v. J.D. Associates, 213 F.3d 175, 184 (4th Cir.2000). While Maryland law does impose upon contracting parties an implied duty of good faith and fair dealing, Defendants’ application of that law to the present facts is misplaced. The Eastern Shore court did not recognize a separate cause of action for the breach of an implied duty of good faith and fair dealing. Instead, the court simply recognized that the duty exists, as opposed to a cause of action for breach of that duty.

A decision by Judge Andre Davis of this Court is instructive and, frankly, dispositive of the issue here. See Eaglehead Corp., et al. v. Cambridge Capital Group, Inc., et al., 170 F.Supp.2d 552 (D.Md.2001). In Eaglehead, the plaintiff borrowers sued the defendant lenders for breach of contract and the implied duty of good faith and fair dealing, among other causes of action. The Court dismissed the breach of implied duty claim on the grounds that Maryland law did not recognize such a claim. Id. Judge Davis explained that

Maryland does not recognize a separate cause of action for the breach of implied duty of good faith and fair dealing. As I discussed in Wootton Enter., Inc. v. Subaru of America, Inc., 134 F.Supp.2d 698 (D.Md.2001), there is an implied duty of good faith and fair dealing in all contracts under Maryland law. This duty simply prohibits one party to a contract from acting in such a manner as to prevent the other party from performing his obligations under the contract, but does not require affirmative action not mandated by the contract. Furthermore, this implied duty cannot override or modify specific contractual terms. While this implied duty applies to performance of contractual obligations, Maryland courts have not explicitly recognized a separate cause of action relating to this duty. Accordingly, I shall dismiss [the breach of implied duty of good faith and fair dealing claim] for failure to state a claim.

Id. at 562 (internal citations omitted). In an unpublished opinion, the Fourth Circuit implicitly agreed with Judge Davis by affirming the dismissal of a breach of the covenant of good faith and fair dealing claim on the grounds that such an action is not recognized by Maryland courts. See Estrin v. Natural Answers, Inc., 103 Fed.Appx. 702, 705 (4th Cir.2004) (citing Eaglehead Corp., v. Cambridge Capital Group, Inc., 170 F.Supp.2d 552 (D.Md.2001)). This Court has previously described this type of claim as “precisely the kind of meritless dispute between lender and defaulting commercial borrower that the courts ... have been quick to put to rest.” Howard Oaks, Inc. v. Maryland Nat’l Bank, 810 F.Supp. 674, 678 (D.Md.1993). In like fashion, Defendants’ counterclaims for breach of the implied duty of good faith and fair dealing must be dismissed.

2. Negligent Misrepresentation

Defendants claim CapitalSource had a duty to exercise due care in making representations to Pittsfield, including the representation that it would “work with” Pittsfield and that it would find a “global solution” to the business and financial problems affecting the company, some of which were allegedly caused by Capital-Source and some of which were beyond the reasonable control of either party. Defendants further assert that CapitalSource knew and intended that Pittsfield would rely on these representations. According to Defendants, Pittsfield did in fact rely on the representations made by Capital-Source as shown by, among other things, (a) its retention of the consultants who were to be instrumental in the formulation *674 of the global solution, (b) the provision of detailed information to Price Waterhouse regarding foreign issues and enhancements and improvements made to the patents, (c) the negotiation of the Financial Services Agreement with Wall Street Venture Capital as required by CapitalSource which admittedly did not select Wall Street, and (d) the weeks of work devoted to finding a qualified investment banker.

To maintain a claim for negligence, Defendants must establish that CapitalSource had a duty to “protect [them] from injury.” Jones v. Hyatt Ins. Agency, Inc., 356 Md. 639, 741 A.2d 1099, 1106 (1999). “A contractual obligation, by itself, does not create a tort duty. Instead, the duty giving rise to a tort action must have some independent basis.” Id. at 1107. Under Maryland law, “a claim for negligent misrepresentation is improper when ... the only relationship between the parties is contractual, both parties are sophisticated, and the contract does not create an express duty of due care in making representations.” Martin Marietta Corp. v. Int’l Telecomm. Satellite Org., 991 F.2d 94, 98 (4th Cir.1992). The reasoning in Martin Marietta is directly applicable to the present case, and flatly disposes of Defendants’ negligent misrepresentation counterclaim. “Courts have been exceedingly reluctant to find special circumstances sufficient to transform an ordinary contractual relationship between a bank and its customer into a fiduciary relationship or to impose any duties on the bank not found in the loan agreement.” Parker v. Columbia Bank, 91 Md.App. 346, 604 A.2d 521, 532 (1992). The Court finds the present circumstances insufficient to create a tort duty outside of the parties’ contractual obligations. As a result, the Court will not impose such a duty here. Accordingly, Defendants’ counterclaim for negligent misrepresentation must be dismissed.

B. Motion to Dismiss Affirmative Defenses and Strike Portions of Amended Answer

1. Affirmative Defenses

The Bieckmanns have asserted nine (9) affirmative defenses in their Answer. CapitalSource has moved to dismiss (or strike) all nine of the defenses. The Court will grant the motion for the reasons articulated in pages 5-11 of CapitalSource’s Memorandum in Support of its Motion. In particular, the Bleckmann’s breach of contract and misrepresentation affirmative defenses are stricken for the reasons set forth in the Court’s analysis of Plaintiffs Motion to Dismiss Defendants’ Counterclaims. Further, the forum non conve-niens defense is stricken as an improper affirmative defense. The Court agrees with CapitalSource that the remaining affirmative defenses are not sufficiently plead, but disagrees that they should therefore be dismissed with prejudice. The Court will grant the Bieckmanns leave to amend their Pleading to comply with the Rules 8 and 9 of the Federal Rules of Civil Procedure. Further, the Court cautions Defendants that any amendment to their Pleading should comply with the provisions of Rule 11 of the Federal Rules of Civil Procedure.

2. Responses to Allegations in Complaint

In paragraphs 8, 11, 15, and 17 of their Answer, the Bieckmanns refuse to answer certain allegations on the grounds that the allegations are “legal conclusions.” Rule 8 requires a party responding to a pleading to admit or deny its allegations. The failure to deny is an admission. Here, the Bieckmanns have neither admitted nor denied the allegations referenced in para *675 graphs 8, 11, 15, and 17 of their Answer. This failure to deny can properly be deemed an admission of those particular allegations. However, the Court will not impose upon Defendants such a technical application of Rule 8. Since the Bieckmanns have leave to amend their Answer to properly plead their affirmative defenses, the Court will also grant the Bieckmanns leave to amend their Answer to properly respond to the allegations referenced in paragraphs 8, 11, 15, and 17 of the Bieckmanns’ Answer.

3. Waiver

CapitalSource claims that even if Defendants could have asserted their counterclaims, they would be precluded from doing so because they expressly waived and released such claims and any defenses by virtue of the terms of the Credit Agreement and Guaranty Agreement. The Court declines to reach the merits of Plaintiffs waiver argument. Instead, the Court instructs Defendant to consider the legal effect of the waiver terms when submitting their amended Answer, if any.

CONCLUSION

For the reasons stated above, the Court should GRANT Plaintiffs Motion to Dismiss the Counterclaims of Pittsfield and the Bieckmanns (Paper Nos. 24 and 27). Further, the Court will GRANT Plaintiffs Motion to Strike the Bieckmanns’ Affirmative Defenses and Portions of their Answer (Paper No. 29), with leave to amend consistent with this Opinion.