Summary
explaining that Kentucky courts have not extended the tort for breach of the covenant of good faith and fair dealing to non-insurance contracts and thus declining to recognize an independent cause of action
Summary of this case from Equiventure, LLC v. WheatOpinion
Civil Action No. 3:01CV-447-H.
January 11, 2002
MEMORANDUM OPINION
Plaintiffs, the owners and operators of multiple HR Block tax preparation stores located within the Western District of Kentucky, are franchisees of Defendant, a Missouri corporation. After contracting with one another for over thirty years, the relationship between the parties has soured, and Plaintiffs have asserted claims against Defendant for: breach of contract (Count I); and tortious breach of the implied covenant of good faith and fair dealing (Count II). Defendant has counterclaimed for a declaratory judgment that the franchise agreements may properly expire in September 2002, at the end of their current term. Defendant has presently moved to dismiss Count II on the ground that breach of the implied covenant of good faith and fair dealing is not a viable cause of action in tort.
I.
In considering a Rule 12(b)(6) motion to dismiss, this Court must accept all of the allegations in the complaint as true. See Rippy ex rel. Rippy v. Hattaway, 270 F.3d 416, 419 (6th Cir. 2001). To dismiss any part of the claim, "it must appear beyond doubt that the plaintiff[s] would not be able to recover under any set of facts that could be presented consistent with the allegations of the complaint." Varljen v. Cleveland Gear Co., Inc., 250 F.3d 426, 429 (6th Cir. 2001) (quoting Glassner v. R.J. Reynolds Tobacco Co., 223 F.3d 343, 346 (6th Cir. 2000)). The Court's inquiry, however, is not limited to the factual bases of Plaintiff's proffered allegations. Equally important, "[t]o survive a motion to dismiss under Rule 12(b)(6), `a . . . complaint must contain either direct or inferential allegations respecting all the material elements to sustain a recovery under some viable legal theory.'" Rippy, 270 F.3d at 419 (quoting Scheid v. Fanny Farmer Candy Shops, Inc., 859 F.2d 434, 436 (6th Cir. 1988) (emphasis added)). See also Long v. Illinois Cent. Gulf R.R. Co., 660 F. Supp. 469, 471 (W.D.Ky. 1986) (noting that a complaint must "charge every essential element necessary to recover on some legally cognizable claim" (emphasis in original)). The Court must therefore determine whether tortious breach of the implied duty of good faith and fair dealing is a legitimate cause of action under which Plaintiffs in this case may seek relief.
II.
A federal court adjudicating a diversity action must apply the choice of law rules of the forum state. See Wallace Hardware Co., Inc. v. Abrams, 223 F.3d 382, 391 (6th Cir. 2000); Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487 (1941). The Sixth Circuit has recently "conclude[d] that, in a standard breach-of-contract case . . . the Kentucky courts would choose to adopt § 187 of the Restatement [( Second) of Conflict of Laws (1971)] as their analytical framework for addressing a contractual choice-of-law clause." Wallace Hardware, 223 F.3d at 397. Section 187(2) of the Restatement provides that a choice of law clause will be enforced unless either:
(a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties' choice; or
(b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of § 188, would be the state of the applicable law in the absence of an effective choice of law by the parties.
The contract allegedly breached in the present dispute indicates that the parties elected Kentucky law as controlling. The Court must therefore determine if this choice of law provision is enforceable under the terms of § 187. The first prong of this inquiry is readily met, as Kentucky has a substantial relationship to the parties and transactions between them. The HR Block franchises owned and operated by Plaintiffs (who are Kentucky residents) are located in Kentucky, and the terms of the contract were to be performed there. This evinces an amply reasonable basis for the parties' choice of Kentucky law. See Wallace Hardware, 223 F.3d at 398; Johnson v. Ventra Group, Inc., 191 F.3d 732, 739-40 (6th Cir. 1999). As to the second prong, the Court is not aware of, nor did the parties present, any reason why applying Kentucky law would be contrary to a fundamental policy of Missouri, the only other state which plausibly could have a materially greater interest in the determination of this particular issue.
Attached to Plaintiffs' complaint are three document that evidence the relationship between the parties. The first "Agreement," signed on September 25, 1967, states that it "shall be construed according to the laws of the State of Missouri." Pl.s' Ex. A at ¶ 3.f. The second "Satellite Franchise Agreement" of September 14, 1978, is silent as to choice of law. See Pl.s' Ex. B. The third "Satellite Franchise Agreement," of November 10, 1988, provides that it "shall be subject to and construed by the laws of the State of Kentucky." Pl.s' Ex. C at ¶ 25.
Furthermore, neither party challenges the validity of the Kentucky choice of law provision in the contract. Even were one side to do so, the Court would apply the "most significant relationship" test set forth in § 188 of the Restatement and adopted by Kentucky courts to determine which state's law governs in the absence of a contractual choice by the parties. Breeding v. Massachusetts Indem. and Life Ins. Co., 633 S.W.2d 717, 719 (Ky. 1982). For the reasons already cited, Kentucky has the most significant relationship to this transaction and these parties. Thus, under either standard, Kentucky law governs this dispute.
Despite Plaintiffs' assertion to the contrary, it appears that Kentucky courts have not addressed the tort of breach of the implied covenant of good faith and fair dealing in the franchisor-franchisee context. "It is this Court's duty, therefore, to decide unsettled issues of state law as a Kentucky court would decide them." CMI, Inc. v. Intoximeters, Inc., 918 F. Supp. 1068, 1078 (W.D.Ky. 1995) (citing Overstreet v. Norden Laboratories, Inc., 669 F.2d 1286, 1289 (6th Cir. 1986)). "To do so, the Court must predict how our state courts would rule." Id.
III.
The Court notes at the outset that Plaintiffs' stated cause of action does present, under certain circumstances, a viable legal claim. "Bad faith is an intentional tort which results from a breach of the implied contractual duty of good faith and fair dealing." 86 C.J.S. Torts § 5 at 630 (1997). The parties dispute the scope of the tort, however, and both sides draw support from selected passages of Corpus Juris Secundum's discussion of what constitutes an actionable breach. A brief summary of the entire relevant portion of this authority is instructive. Within every contract there is an implied covenant of good faith and fair dealing. Id. But, the tort itself arises from a violation of a duty to act in good faith that is imposed by the common law, not by the terms of the contract. Id. at 631. Thus, not all contracts impose a duty that, if breached in bad faith, may be remedied in tort. Id. Only in contracts involving "special relationships" not found in ordinary commercial settings do courts find a tort duty of good faith. Id. The most notable, but not exclusive, example are contracts between insurers and insureds, where distinct elements are present, such as: unequal bargaining power, vulnerability, and trust among the parties; nonprofit motivations for contracting (e.g., peace of mind, security); and inadequacy of standard contract damages. Id. at 631-32.
Plaintiffs argue that Kentucky courts have recognized commercial agreements generally, and franchise contracts specifically, to be of this type. True, the state legislature has codified the principle that within every contract exists "an obligation of good faith in its performance or enforcement." K.R.S. 355.1-203. This does not also mean, however, that bad faith or unfair dealing necessarily gives rise to a separate tort claim. For example, Plaintiffs cite two Kentucky decisions as purportedly recognizing the tort of bad faith. Both Hunt Enter., Inc. v. John Deere Indus. Equip. Co., 18 F. Supp.2d 697, 699-700 (W.D.Ky. 1997) and LaGrew v. Hooks-SupeRx, Inc., 905 F. Supp. 401, 407 (E.D.Ky. 1995) recognize the implied covenant of good faith and fair dealing, but each does so in the context of a breach of contract claim, and neither even discusses — much less holds — that bad faith constitutes a viable tortious cause of action. Rather, the only Kentucky decisions that have recognized bad faith tort claims have involved suits between insurers and insureds. See, e.g., Davidson v. American Freightways, Inc., 25 S.W.3d 94 (Ky. 2000); Motorists Mut. Ins. Co. v. Glass, 996 S.W.2d 437 (Ky. 1997); Guaranty Nat. Ins. Co. v. George, 953 S.W.2d 946 (Ky. 1997).
Plaintiffs also cite of number of cases from foreign jurisdictions for this same purpose. None of these decisions stand for the proposition claimed by Plaintiffs.
Kentucky's limited adoption of bad faith tort actions in solely insurance claims mirrors the approach taken by other states. "The courts do not generally recognize the existence of a special relationship giving rise to an independent duty of good faith and fair dealing in contracts outside of the insurance context or the public sector. . . ." C.J.S., supra, at 631. See also, e.g., Gov't St. Lumber Co., Inc. v. AmSouth Bank, N.A., 553 So.2d 68, 72 (Ala. 1989) ("[w]e are not prepared to extend to the area of general contract law the tort of bad faith that we have recognized in the context of insurance policy cases." (quoting Harrell v. Reynolds Metals Co., 495 So.2d 1381, 1388 (Ala. 1986))); Ritchie Enter. v. Honeywell Bull, Inc., 730 F. Supp. 1041, 1052 (D.Kan. 1990) ("Kansas courts have not recognized th[e] tort [of breach of the implied covenant of good faith and fair dealing] in a commercial contract setting."); Radloff v. First Am. Nat'l Bank of St. Cloud, N.A., 470 N.W.2d 154, 158 (Minn.Ct.App. 1991) ("There is no tort cause of action in Minnesota on th[e] theory [of breach of duty of good faith or fair dealing]").
In addition, although Kentucky has not specifically addressed the viability of a bad faith tort cause of action in the context of franchisor-franchisee contracts, the Court does not perceive any reason to extend the tort in this fashion. Plaintiffs argue that, as a franchisee, they have not entered into an ordinary commercial contract because the franchisor controls the sole means of their livelihood. But, "[t]o a certain extent, all franchisees are dependent on their franchisors for the success of their businesses." Norwood v. Atlantic Richfield Co., 814 F. Supp. 1459, 1468 (D.Or. 1991). "Not every contract carries with it the duty which would give rise to the tort of bad faith; it is only in rare and exceptional cases that the duty of good faith and fair dealing is of such a nature as to give rise to tort liability." C.J.S., supra, at 631. The mere possibility that a franchisor could take unfair advantage of a franchisee is not enough to deem this common class of contracts qualified for this uncommon type of tort remedy. Cf. Ajir v. Exxon Corp., 185 F.3d 865, 1999 WL 393666, at *8 (9th Cir. May 26, 1999) ("under current California law, `there is only one category of business transaction which definitely is amenable to tort actions for contract breaches and that is insurance.' Judging from the limitations that the California Supreme Court placed on this doctrine in [other cases] and from the trend in the case law, it is unlikely that the California Supreme Court would expand the doctrine to cover franchisor/franchisee contracts." (internal citations omitted)).
In sum, despite obvious opportunity to do so, Kentucky courts have not extended the tort action for breach of the covenant of good faith and fair dealing to non-insurance contracts. The Court finds no trend in the law towards this direction, nor any compelling policy reason to initiate one. Plaintiffs' dispute with Defendant is grounded in a contract relationship. Accordingly, contract damages are available to make Plaintiffs whole, and Plaintiffs may still properly seek redress on a breach a contract claim. They may not, however, pursue the same claim in tort as well.
The Court will enter an order consistent with this Memorandum Opinion.
ORDER
Defendant has moved for a partial dismissal of Plaintiffs' claim. The Court has reviewed the memoranda of the parties as well as the exhibits of record. Being otherwise sufficiently advised,
IT IS HEREBY ORDERED that Defendant's motion to dismiss is SUSTAINED and Count II of Plaintiffs' Complaint is dismissed with prejudice.
Plaintiffs may proceed with their claims in Count I.