Capitalsource Finance v. Pittsfield Weaving Co., Civil Action No. AW-06-2028.

• Decision Date: 11 December 2006
• Docket Number: Civil Action No. AW-06-2028.
• Citation: 571 F.Supp.2d 668
• Parties: CAPITALSOURCE FINANCE LLC, Plaintiff, v. PITTSFIELD WEAVING COMPANY, INC., et al., Defendants.
• Court: U.S. District Court — District of Maryland

571 F.Supp.2d 668

CAPITALSOURCE FINANCE LLC, Plaintiff, v. PITTSFIELD WEAVING COMPANY, INC., et al., Defendants.

Civil Action No. AW-06-2028.

United States District Court, D. Maryland, Southern Division.

December 11, 2006.

Brian H. Corcoran, Justin Leonard Krieger, Katten Muchin Rosenman LLP,

Washington, DC, Kenneth Joseph Ottaviano, Katten Muchin Rosenman LLP, John E. Zummo, Reed Smith LLP, Chicago, IL, for Plaintiff/Counter Defendant.

Christopher L. Hamlin, McNamee Hosea Jernigan Kim, Greenan and Walker PA, Greenbelt, MD, William S. Gannon, William S. Gannon PLLC, Manchester, NH, for Defendant/Counter Claimant.

MEMORANDUM OPINION

ALEXANDER WILLIAMS, JR., District Judge.

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 "Bleckmanns" or "Guarantors"), (collectively "Defendants") for breach of contract and related claims. Currently pending before the Court is Plaintiff's Motion to Dismiss the Counterclaims of Pittsfield (Paper No. 24), Plaintiff's Motion to Dismiss the Bleckmanns' Counterclaims (Paper No. 27), and Plaintiff's Motion to Dismiss the Bleckmanns' 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 "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 overadvance. (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 Bleckmanns 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 wellpleaded material allegations in the light most favorable to the plaintiff and accept the factual allegations contained within the plaintiff's 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 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 Pittsfield's Verified Answer to Complaint ¶ 96; The Bleckmann's Amended Answer to Complaint and Counterclaim ¶ 36.

Defendan...