Buffalo-Water 1, LLC v. Fidelity Real Estate Company, LLCBuffalo-Water 1, LLC v. Fidelity Real Estate Company, LLC
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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.
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 a property shall be determined by an appraiser, “the correctness of the principles and methods of valuation adopted by [an] appraiser[] cannot be inquired into by the courts, in the absence of fraud, corruption, dishonesty or bad faith.” Under this common-law rule, a judge may not invalidate “the determination of appraisers selected by agreement to resolve a dispute” unless the appraisal process or decision was tainted on one of these four grounds. Nelson v. Maiorana, 395 Mass. 87, 89 (1985). The issue on appeal is whether we should modify this common-law rule and allow a judge to invalidate an appraisal intended by the parties to provide a finаl, binding valuation of a property where there is the appearance of bias, not on the part of the individual who conducted the appraisal, but on the part of the entity that employed the individual appraiser. We conclude that the common-law rule established in Eliot properly balances the need for fair valuations with the need for finality in the appraisal process, and that an appearance of bias alone is insufficient to invalidate an appraisal. Because the allegations in the complaint, if proved, do not warrant a finding of any violation of the agreements setting forth the terms of the appraisal, or a finding of fraud, corruption, dishonesty, or bad faith by the individual appraiser, or a finding of breach of the implied covenant of good faith and fair dealing by the defendant, we affirm the Superior Court judge‘s order allowing the defendant‘s motion to dismiss.1
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.
In August 2016, Fidelity exercised its right under the option agreement to purchase the property. Fidelity and Buffalo-Water were unable to agree upon the property‘s fair market value, and each retained an independent appraiser to determine the appropriate purchase price. Buffalo-Water‘s appraiser valued the property at $36 million; Fidelity‘s appraiser valued it at $17 million.4 Because the two appraisals differed by more than five percent, the parties agreed to retain Cushman & Wakefield (Cushman), a real
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 parties involved,” and “no bias with respect to the property that is the subject of this report or to the parties involved with this assignment.”
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 information to Fidelity, claiming that Fidelity‘s preexisting relationship with Cushman created an impermissible conflict of interest. Fidelity declined to retain a new appraiser or to extend the closing date in
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 declaratоry 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 be declared” [citation omitted]); Jewel Cos. v. Burlington, 365 Mass. 274, 277 (1974) (“a demurrer will not be sustained . . . merely because the court is convinced the plaintiff will fail on the merits but only where the bill on its face fails to state a controversy proper for determination under the declaratory procedure” [quotation and citation omitted]); Connery v. Commissioner of Correction, 33 Mass. App. Ct. 253, 254 n.4 (1992), S.C., 414 Mass. 1009 (1993) (“Irrespective of the merits of the case, dismissal of the case under
Our case law regarding whether courts may dismiss properly brought claims
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 declаration should simply be that the plaintiff is not entitled to the declaratory relief sought based on the ground that dismissal of a complaint under
on the allegations in the complaint. Such a declaration, however, is implicit in a judge‘s order to dismiss a declaratory judgment claim 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 to determine whether the appraisal is invalid due to “fraud, corruption, dishonesty or bad faith.” Eliot, 322 Mass. at 91.
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
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
relationships. Instead, it exists to protect Cushman should it choose to withdraw from an assignment to perform an appraisal because of a conflict of interest. The provision is therefore not applicable where, as here, the appraiser completed a valuation without exercising the right to withdraw.
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 seсtion 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 -- that Cushman is the relevant appraiser -- is belied not only by the text of the engagement agreement, which clearly refers to the “individual” and “undersigned” appraiser, but also by an Ethics Rule comment clarifying that the Ethics Rule “specifies the personal obligations and responsibilities of the individual appraiser.” Id. at 8. This is consistent with the “Assumptions and Limiting Conditions”
Buffalo-Water‘s complaint alleges no facts suggesting that Skinner had any interest in the Winthrop Building or that he had performed an appraisal of the Winthrop Building in the three years prior to his acceptance of the assignment (or at any other time). Nor does the complaint allege that Skinner even knew of Fidelity‘s national representation contract with Cushman. Without such knowledge, Skinner cannot be expected to have disclosed that information to Buffalo-Water. Nor, for that matter, could he have been influenced in his valuation of the property by a Cushman contract with Fidelity that he is not alleged to have known anything about. The “Prior Services Disclosure” section of the engagement agreement therefore did not require the disclosure of Cushman‘s contract with Fidelity.
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 the Cоde 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.”
The Code of Ethics specifically defines a “valuer” as “[o]ne who is expected to provide Services in an unbiased and competent
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 “that wоuld in the future prevent a resort to the courts or to technical arbitration“). The common law also recognizes that
the need for finality does not override the need for the appraisal process to be untainted by “fraud, corruption, dishonesty or bad faith.” See Eliot, supra at 91. By allowing courts to invalidate appraisals only in these narrow circumstances, the common-law test established in Eliot balances the desire for finality with the need for integrity in the appraisal process.
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“);
Institute, Code of Professional Ethics and Explanatory Comments 6 (2015) (defining “valuer” as “[o]ne whо is expected to provide Services in an unbiased and competent manner” [emphasis added]).
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 served as an enginеering 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
were cited by Buffalo-Water in its discussion of appraiser bias focus on the bias of individual appraisers, not their employer. See, e.g., Gebers v. State Farm Gen. Ins. Co., 38 Cal. App. 4th 1648, 1652 (1995) (appraiser was separately retained by party as expert witness in two pending court cases); Central Life Ins. Co. v. Aetna Cas. & Sur. Co., 466 N.W.2d 257, 261 (Iowa 1991) (“appraiser was interested because he had a direct financial interest in the dispute“).
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.
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.).
Water alleges that Cushman committed fraud by omission because Buffalo-Water relied to its detriment upon a “material omission by Cushman (i.e. its failure to disclose its relationship with Fidelity),” this allegation also fails. To show fraud by omission, the plaintiff must allege “both concealment of material information and a duty requiring disclosure.” Sahin v. Sahin, 435 Mass. 396, 402 n.9 (2001). Here, Buffalo-Water has not shown that Skinner concealed (or even knew of) the national contract between Fidelity and Cushman, nor has it shown any duty to disclose that contract.13
“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 --
financial or otherwise -- in the outcome of his or her valuation. As earlier noted, rule 3-6 of the Code of Ethics provides that it is unethical to provide services without disclosure if the valuer has any “personal interest” in the subject or outcome of the service or “with respect to the parties involved.” But we decline to characterize as “corruption” the mere appearance of bias based on a business relationship of the appraisal company rather than of the individual appraiser, especially where there is no allegation that the individual appraiser knew of that rеlationship.
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
one party to an arbitration” (quotation and citation omitted). JCI Communications, Inc. v. Int‘l Bhd. of Elec. Workers, Local 103, 324 F.3d 42, 51 (1st Cir. 2003). We recognize that partiality, where it exists, is more likely to be evident in an arbitration than in an appraisal because an arbitrator generally conducts a hearing where evidence is offered, while an appraiser generally renders a valuation without a hearing or the presentation of evidence. See Palmer v. Clark, 106 Mass. 373, 389 (1871) (appraisal decision, unlike arbitration decision, “may be made without notice to or hearing of the parties“). But if evident partiality were proved in the context of an appraisal, it would be sufficient to establish bad faith and to invalidate an appraisal under our common law, much as it would invalidate an arbitration award under the MAA. Evident partiality, however, means “more than just the appearance of possible bias,” JCI Communications, Inc., supra, and therefore cannоt be established based on the allegations in Buffalo-Water‘s complaint.
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.,
of any party“). Buffalo-Water, however, has alleged no facts showing that Skinner‘s actions, if committed in an arbitral context, might have been impermissible under the MAA. We therefore need not address here to what extent “bad faith” under our common law might encompass the various grounds for invalidating an arbitration award under the MAA.
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
When parties negotiate a contract that provides for a binding appraisal, they are free to include provisions that establish more stringent impartiality requirements than those in our common law and specify that the appraisal will be invalid where those requirements are not met. Here, just as the parties required that the individual appraisers have at least ten years of experience valuing Greater Boston property, they could have required disclosure of any information concerning Cushman‘s business dealings with Buffalo-Water or Fidelity that might create an “appearance of bias,” and agreed to invalidate the appraisal if such a disclosure was not made. Where they did not, we decline to expand our common law to require invalidation on this ground alone.
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
knowing that the valuation was tainted by Cushman‘s potential conflict of intеrest with Fidelity.
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
Nothing in the contractual agreements entered into by Buffalo-Water and Fidelity prohibits Fidelity from demanding a sale based on thе 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
potential conflicts of interest that could create the appearance of bias. Buffalo-Water may not insert these conditions into its contract with Fidelity through the side door of the covenant of good faith and fair dealing. Because Buffalo-Water has alleged no facts tending to show that Fidelity injured its rights under the option agreement or the engagement agreement, we conclude that the judge properly dismissed the claim for breach of the implied covenant of good faith and fair dealing.14
Conclusion. For the reasons stated above, we affirm the order allowing the defendant‘s motion to dismiss the complaint.
So ordered.