BUFFALO-WATER 1, LLC vs. FIDELITY REAL ESTATE COMPANY, LLC.
SJC-12487
Supreme Judicial Court of Massachusetts
November 26, 2018
GANTS, C.J.
Suffоlk. October 4, 2018. Present: Gants, C.J., Lenk, Gaziano, Lowy, Budd, Cypher, & Kafker, JJ.
Appraisal. Declaratory Relief. Practice, Civil, Declaratory proceeding, Motion to dismiss. Contract, Implied covenant of good faith and fair dealing.
Civil action commenced in the Superior Court Department on May 23, 2017.
A motion to dismiss was heard by Janet L. Sanders, J.
The Supreme Judicial Court on its own initiative transferred the case from the Appeals Court.
Richard E. Briansky for the plaintiff.
David J. Apfel for the defendant.
Timothy P. Burke & Nathaniel P. Bruhn, for Greater Boston Real Estate Board, amicus curiae, submitted a brief.
Dawn Mertineit & Katherine E. Perrelli, for Appraisal Institute & another, amici curiae, submitted a brief.
GANTS, C.J. In Eliot v. Coulter, 322 Mass. 86, 91 (1947), this court held that, where parties agree that the fair value of
Background. When reviewing a motion to dismiss, we accept as true all facts alleged in the plaintiff‘s verified complaint and accompanying exhibits. See Revere v. Massachusetts Gaming Comm‘n, 476 Mass. 591, 595 (2017). The following facts are drawn from that complaint and those documents.
In October 2004, the defendant, Fidelity Real Estate Company, LLC (Fidelity), sold the Winthrop Building, a commercial property located in Boston (property), to the plaintiff, Buffalo-Water 1, LLC (Buffalo-Water), a subsidiary of a national real estate company. Buffalo-Water then leased the property back to Fidelity, and the parties entered into an option to purchase agreement (option agreemеnt) granting Fidelity the option to buy the building back in the final year of its lease. The option agreement stated that, if Fidelity chose to exercise its option, the purchase price would be $16,275,000 or ninety-five percent of the property‘s fair market value, whichever is greater. The fair market value would be determined by agreement of the parties, or by the following appraisal process outlined in the option agreement: (1) each
In August 2016, Fidelity exercised its right under the option agreement to purchase the property. Fidelity and
Cushman outlined the terms of its appraisal services in a letter of engagement (engagement agreement) signed by the parties and by Robert Skinner, the Cushman professional selected to perform the independent appraisal.5 On April 18, 2017, Skinner submitted an appraisal valuing the property at $22.9 million. The valuation was accompanied by a “Certification of Appraisal” signed by Skinner, which stated, “We have no present or prospective interest in the property that is the subject of this report, . . . no personal interest with respect to the
Soon after receiving the valuation, Buffalo-Water asked Skinner to reconsider the appraisal in light of certain “factual errors.”6 In response, Cushman offered to meet with Buffalo-Water and Fidelity to discuss the appraisal. Fidelity declined this offer to meet in a letter that noted that neither the option agreement nor the engagement agreement “contemplates reconsideration of the appraisal at any time.” Fidelity also stated that Buffalo-Water was obliged under the option agreement to honor the third appraiser‘s valuation and deed the property to Fidelity.
After receiving Fidelity‘s letter, Buffalo-Water learned that in December 2016, before Cushman was engaged to conduct the appraisal, Fidelity had retained Cushman for a national representation contract.7 Buffalo-Water communicated this
The following week, Buffalo-Water filed a two-count verified complaint against Fidelity in the Superior Court. The first count seeks a judgment declaring that the appraisal is invalid and nonbinding; the second count alleges a breach of the covenant of good faith and fair dealing. Fidelity moved to dismiss the complaint for failure to state a claim upon which relief can be granted.
Discussion. We review the allowance of a motion to dismiss de novo. Galiastro v. Mortgage Elec. Registration Sys., Inc., 467 Mass. 160, 164 (2014). In considering whether a count in a complaint survives a motion to dismiss under
Buffalo-Water raises three arguments on appeal. First, it claims that the judge improperly dismissed its claim for declaratory judgment under
1. Declaratory relief. Buffalo-Water contends that the judge erred in dismissing its claim for declaratory relief under
When evaluating a motion to dismiss a claim for declaratory relief under
Where the claim is “properly brought,” as it is here, the judge must proceed to the second step: determining whether the facts alleged by the plaintiff in the complaint, if true, state a claim for declaratory relief that can survive a defendant‘s motion to dismiss.
Buffalo-Water contends that, even if the facts alleged in its complaint fail to state a claim for declaratory relief, the judge may not dismiss its properly brought claim but must instead declare the rights of the parties. Buffalo-Water‘s contention has considerable support in our case law. See Lynn v. Lynn Police Ass‘n, 455 Mass. 590, 599 (2010) (“In a properly brought action for declаratory relief, there must be a declaration of the rights of the parties even though relief is denied to a plaintiff“); Cherkes v. Westport, 393 Mass. 9, 12 (1984) (same); Attorney Gen. v. Kenco Optics, Inc., 369 Mass. 412, 418 (1976) (“When an action for declaratory relief is properly brought and relief is denied on the merits, the action should not be dismissed. . . . The rights of the parties should
Where a defendant has filed a motion to dismiss and the judge concludes that the plaintiff has failed to state a claim upon which relief can be granted, the claim is ripe for disposition. If the plaintiff is not entitled to the declaratory judgment sought even if all of the factual allegations in the complaint are true, there can be no justification for allowing the claim to proceed or for permitting further discovery. If the judge were to declare the rights of the parties, the deсlaration should simply be that the plaintiff is not entitled to the declaratory relief sought based on the ground that dismissal of a complaint under
2. Validity of appraisal. Parties that agree to be bound by an appraisal are free to set forth contractual terms regarding the appraiser‘s obligations and the grounds for invalidating the appraisal. Therefore, in deciding whether to invalidate an appraisal, we look first to determine whether there are allegations that would support a finding of a material breach of the contract terms governing the appraisal. Where there is no such material breach, we then look to the common law
a. Contract terms. Because the engagement agreement retaining Cushman to perform an appraisal for Buffalo-Water and Fidelity sets forth the terms of the appraisal at issue here, we look to its contents to determine whether the appraiser was contractually obligated to disclose Cushman‘s contract with Fidelity. Three provisions of the engagement agreement are relevant: the discussion of conflicts of interest, the requirement that the appraiser‘s prior services be disclosed, and the commitment to “develop an appraisal in accordance with [the Uniform Standards of Professional Appraisal Practice (USPAP)10] and the Code of Ethics and Certification Standards of the Appraisal Institute.”
i. Conflicts of interest. The “Conflicts of Interest” section of the engagement agreement states that “[Cushman] adheres to a strict internal conflict of interest policy. If we discover in the preparation of our appraisal a conflict with this assignment we reserve the right to withdraw from the assignment without penalty.” This provision does not obligate Cushman or its appraisers to disclose any conflicts or
ii. Disclosure requirement. In a section entitled “Prior Services Disclosure,” the engagement agreement states that the “USPAP requires disclosure of prior services performed by the individual appraiser within the three years prior to this assignment.” The section goes on to affirm that the “undersigned appraiser has not provided prior services within the designated time frame.” The relevant USPAP sеction is an “Ethics Rule” explaining that “[i]f known prior to accepting an assignment, and/or if discovered at any time during the assignment, an appraiser must disclose to the client . . . any current or prospective interest in the subject property or parties involved; and any services regarding the subject property performed by the appraiser within the three year period immediately preceding acceptance of the assignment, as an appraiser or in any other capacity.” Appraisal Foundation, USPAP 9 (2016-2017) (USPAP).
The relevant appraiser for the purposes of the contract is Skinner, who signed the engagement agreement and went on to perform the valuation at issue. Buffalo-Water‘s argument --
iii. Incorporation of USPAP and Code of Ethics. In an engagement agreement section entitled “USPAP Compliance,” Skinner agreed to “develop an appraisal in accordance with USPAP and the Code of Ethics and Certification Standards of the Appraisal Institute.” Here, the relevant incorporated standard is rule 3-6 of thе Code of Ethics, which provides that in the absence of disclosure, “[i]t is unethical to provide a Service if a valuer has any direct or indirect, current, or prospective personal interest in the subject or outcome of the Service or with respect to the parties involved in the Service.”
b. Common law. Finding no contractual breach, we move on to consider whether the appraisal was invalid under Massachusetts common law. Our common law has recognized that, when parties enter into a contract providing that the valuation established by an independent appraiser shall determine the value of a property or business, they express their “shared desire for finality” through a means other than adjudication by a court or an arbitrator. State Room, Inc., 84 Mass. App. Ct. at 249. See Eliot, 322 Mass. at 89 (parties agreed to valuation “thаt would in the future prevent a resort to the courts or to technical arbitration“). The common law also recognizes that
Buffalo-Water claims that the appearance of bias arising from Cushman‘s national representation contract with Fidelity suffices to invalidate Skinner‘s appraisal. In evaluating this claim, we first consider whether the appearance of bias falls within the existing rubric of “fraud, corruption, dishonesty or bad faith.” Because we find that it does not, we then consider whether we should revise our common law to include it.
We begin by noting that, in determining whether to invalidate an appraisal, we look to the conduct of the individual appraiser or appraisers responsible for the valuation, not to the conduct of their employer. This rule is in keeping with the USPAP and the Code of Ethics. See USPAP, supra at 1 (defining “appraiser” as “one who is expected to perform valuation services competently and in a manner that is independent, impartial, and objective” [emphasis added]); id. at 8 (“This [Ethics] Rule specifies the personal obligations and responsibilities of the individual appraiser“); Appraisal
In arguing for the adoption of an “appearance of bias” standard, Buffalo-Water relies in large part on the statement in the United States Supreme Court‘s opinion in Commonwealth Coatings Corp. v. Continental Cas. Co., 393 U.S. 145, 150 (1968) that, under the Federal Arbitration Act, “any tribunal permitted by law to try cases and controversies not only must be unbiased but also must avoid even the appearance of bias.” Putting aside that this decision involved an arbitration rather than an appraisal and that it interpreted a Federal arbitration statute, the appearance of bias in Commonwealth Coatings Corp. arose from the fact that the “third arbitrator, the supposedly neutral member of the panel, conducted a large business . . . in which he sеrved as an engineering consultant” and one of the “regular customers” of that business was a litigant in the arbitration. Id. at 146. Thus, “the appearance of bias” arose from his personal, “repeated and significant” business relationship with the defendant, not simply the business relationship of his employer.12 Id. Even the cases from other jurisdictions that
Buffalo-Water alleges that there is an appearance of bias in Skinner‘s appraisal because of a business relationship that his employer, Cushman, has with Fidelity. Skinner is not alleged to have known about this business relationship when he made the valuation. The alleged appearance of bias does not qualify as “fraud, corruption, dishonesty or bad faith.” Eliot, 322 Mass. at 91.
At a minimum, a claim of fraud sufficient to invalidate an appraisal must allege a misrepresentation, and there are no allegations in the complaint tending to show that Skinner made, or was even aware of, a false representation to Buffalo-Water. See Balles v. Babcock Power Inc., 476 Mass. 565, 573 (2017) (describing elements of fraud). To the extent that Buffalo-
more than trivial business with a party, that fact must be disclosed.” Commonwealth Coatings Corp. v. Continental Cas. Co., 393 U.S. 145, 151-152 (1968) (White, J., concurring, joined by Marshall, J.).
“Dishonesty” is a broader term than fraud, encompassing all “behavior that deceives or cheats people,” “untruthfulness,” and “untrustworthiness.” Black‘s Law Dictionary 568 (10th ed. 2014). We need not decide here whether a dishonest act that falls short of fraud will suffice under our common law to invalidate an appraisal, because an appearance of bias alone cannot reasonably be deemed an act of dishonesty where, as here, the appearance of bias arises from a business relationship of Cushman that Skinner is not alleged to have known existed.
A finding of “corruption” might be warranted where the individual appraiser had an undisclosed personal interest --
Bad faith is a “general and somewhat indefinite term” that goes beyond “bad judgment” or “negligence,” suggesting “a dishonest purpose or some moral obliquity,” a “conscious doing of wrong,” or a “breach of a known duty through some motive of interest or ill will.” Spiegel v. Beacon Participations, Inc., 297 Mass. 398, 416 (1937). See Commonwealth v. Frith, 458 Mass. 434, 441 (2010). Bad faith is not a statutory ground for invalidating arbitrations under the Massachusetts Uniform Arbitration Act for Commercial Disputes,
Arguably, an appraiser may also act in “bad faith” where he or she acts in any other way that would justify vacating an arbitration award under the MAA. See, e.g.,
Having determined that the appearance of bias alone does not support a finding of “fraud, corruption, dishonesty or bad faith,” Eliot, 322 Mass. at 91, we consider whether to add “appearance of bias” as a separate common-law ground for invalidating an appraisal. We decline to do so. For more than seventy years, the common-law standard established in Eliot has provided an appropriate balance between parties’ desire for finality and the need for integrity in the appraisal process. Allowing appraisals to be invalidated based on the appearance of bias alone would considerably diminish the finality of appraisals without significantly improving their over-all integrity. Cf. Katz, Nannis & Solomon, P.C. v. Levine, 473 Mass. 784, 794 (2016) (“[a]llowing parties to expand the grounds for judicial review would undermine the predictability, certainty, and effectiveness of the arbitral forum that has been voluntarily chosen by the parties” [quotation and citation omitted]).
Because the allegations in Buffalo-Water‘s verified complaint, taken as true, do not “plausibly suggest” that the appraisal was tainted by fraud, corruption, dishonesty, or bad faith, and because the appearance of bias alone is not sufficient to invalidate an appraisal, the motion to dismiss the count of the complaint seeking invalidation of the appraisal was properly allowed under
3. Covenant of good faith and fair dealing. In a separate count of the complaint, Buffalo-Water alleges that the defendant violated the covenant of good faith and fair dealing by insisting that Buffalo-Water sell the Winthrop Building despite
The covenant of good faith and fair dealing “requires that neither party shall do anything that will have the effect of destroying or injuring the right of the other party to the fruits of the contract” (quotation and citation omitted). T.W. Nickerson, Inc. v. Fleet Nat‘l Bank, 456 Mass. 562, 570 (2010). Although “[e]very contract implies good faith and fair dealing between the parties to it,” the “scope of the covenant is only as broad as the contract that governs the particular relationship” (quotations and citations omitted). Id. at 569-570. In other words, the covenant of good faith and fair dealing “cannot create rights and duties not otherwise provided for in the existing contractual relationship” (quotation and citation omitted). Id. at 570.
Nothing in the contractual agreements entered into by Buffalo-Water and Fidelity prohibits Fidelity from dеmanding a sale based on the price established in Skinner‘s appraisal. The option agreement clearly states that the property‘s value would be determined through an appraisal process, every step of which was followed here. It does not require the parties to refrain from selecting an appraiser whose company had previously contracted with one of the parties. Nor does the option agreement or the engagement agreement require disclosure of
Conclusion. For the reasons stated above, we affirm the order allowing the defendant‘s motion to dismiss the complaint.
So ordered.