Vergara v. Apple REIT Nine, Inc.

• Decision Date: 31 March 2020
• Docket Number: 19-cv-02027 (DLI) (RML)
• Parties: STEVE VERGARA, on behalf of himself and all others similarly situated, Plaintiff, v. APPLE REIT NINE, INC., now known as APPLE HOSPITALITY REIT, INC., Defendant.
• Court: U.S. District Court — Eastern District of New York

STEVE VERGARA, on behalf of himself and all others similarly situated, Plaintiff, v. APPLE REIT NINE, INC., now known as APPLE HOSPITALITY REIT, INC., Defendant.

19-cv-02027 (DLI) (RML)

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF NEW YORK

March 31, 2020

MEMORANDUM & ORDER

DORA L. IRIZARRY, United States District Judge:

Plaintiff Steve Vergara ("Plaintiff"), a resident of Suffolk County, New York, brings this putative class action against Defendant Apple REIT Nine, Inc., now known as Apple Hospitality REIT, Inc. ("Defendant" or "A-9"), a real estate investment trust, or REIT, organized under the laws of Virginia, asserting claims under Virginia law for breach of contract and implied covenant of good faith and fair dealing. See, Amended Complaint ("Am. Compl."), Dkt. Entry No. 6. Defendant moved to dismiss for failure to state a claim upon which relief can be granted. See, Def.'s Mem. in Supp. of Mot. to Dismiss ("Def.'s Mem."), Dkt. Entry No. 9. Plaintiff opposed the motion. See, Pl.'s Opp'n to Mot. to Dismiss ("Pl.'s Opp'n"), Dkt. Entry No. 13. Defendant replied. Reply in Supp. of Mot. to Dismiss ("Reply"), Dkt. Entry No. 18. For the reasons set forth below, Defendant's motion to dismiss is granted in part and denied in part.

BACKGROUND

The following facts are taken from the Amended Complaint, and are accepted as true for purposes of this decision. Plaintiff and the putative class consist of the pre-merger public common shareholders of A-9 who participated in the A-9 Dividend Reinvestment Plan ("DRIP") from April 8, 2013 through the termination and/or suspension of the DRIP (the "Class Period"). Am. Compl. ¶ 1. During the Class Period, A-9 contracted with its unitholders to allow A-9 to provide consenting DRIP participants with "units" in lieu of the cash dividends declared. Id. ¶¶ 2, 13. A-9 instituted a DRIP by filing a Form S-3 registration statement on or about December 10, 2010, which it amended and restated on February 19, 2013 (the "A-9 Form S-3"). Id. ¶ 13. The A-9 Form S-3 explains how the DRIP units are priced:

"The price of units purchased under the plan directly from us by dividend reinvestments will be based on the fair market value of our units as of the reinvestment date as determined in good faith by our board of directors from time-to-time. Thus, unless our board of directors adopts a different method of determining market value and price for our units for purposes of this plan, the market value of our units and the unit price of units purchased from us under the plan will not be based on an appraisal or other valuation of us, our net assets, or the units, and will not necessarily reflect our value, earnings, net worth or other measures of value, but rather will be deemed equal to the most recent price at which an unrelated person has purchased our units from us.

Our units are not publicly traded; consequently, there is no established public trading market for our units on which we could readily rely in determining fair market value. Nevertheless, the board has determined that, for purposes of this plan, at any given time the most recent price at which an unrelated person has purchased from us our units represents the fair market value of our units. Consequently, unless and until the board decides to use a different method for determining the fair market value of our units, the per unit price for the plan will be determined at all times based on the most recent price at which an unrelated person has purchased from us our units. Notwithstanding the foregoing, the board of directors may determine a different fair market value and price for our units for purposes of this plan if (1) in the good faith judgment of the board an amount of time has elapsed since our units have been purchased from us by unrelated persons such that the price paid by such persons would not be indicative of the fair market value of our units or (2) our board determines that there are other factors relevant to such fair market value.

The most recent price paid by an unrelated person to us for a unit was $10.25 on January 15, 2013 which was the most recent date a dividend was paid by the Company."

Def.'s Mem. Ex. 2 at 7.¹ The DRIP units were priced at $10.25 per unit throughout the Class Period. Am. Compl. ¶ 5.

Plaintiff alleges that A-9 breached the terms of the A-9 Form S-3 by failing to change the price of units to be received in the DRIP when the $10.25 per unit price was no longer indicative of the actual fair market value of the units, as the A-9 Form S-3 allegedly required. Id. ¶ 56. Plaintiff further alleges that A-9 breached the implied covenant of good faith and fair dealing by exercising its discretion unfairly, arbitrarily, and in bad faith by maintaining the $10.25 per unit price when the actual fair market value of the DRIP units was considerably less, and by exercising its discretion unfairly by failing to establish any procedures to re-evaluate the DRIP unit price. Id. ¶¶ 5, 68-69.

DISCUSSION

I. Legal Standard

A. Federal Rule of Civil Procedure 12(b)(6)

To survive a Rule 12(b)(6) motion to dismiss, a complaint must "state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 561 (2007) (citations and internal quotation marks omitted). The plausibility standard "does not require 'detailed factual allegations,' but it demands more than [] unadorned, the-defendant-unlawfully-harmed-me accusation[s]." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 555). Iqbal requires more than "'a formulaic recitation of the elements of a cause of action.'" Id. at 681 (quoting Twombly, 550 U.S. at 555). Where a complaint pleads facts that are "merely consistent with a defendant's liability, it stops short of the line between possibility andplausibility of entitlement to relief." Id. at 678 (quoting Twombly, 550 U.S. at 557) (internal quotation marks omitted). On a motion to dismiss, a court accepts as true all well pled factual allegations and draws all reasonable inferences in the plaintiff's favor. See Dangler v. N.Y.C. Off Track Betting Corp., 193 F.3d 130, 138 (2d Cir. 1999). Courts may only consider the complaint itself, documents attached to or referenced in the complaint, documents that the plaintiff relied on in bringing suit and that are either in the plaintiff's possession, or that the plaintiff knew of when bringing suit, and matters of which judicial notice may be taken. See, e.g., Roth v. Jennings, 489 F.3d 499, 509 (2d Cir. 2007).

II. Breach of Contract

Under Virginia law, the elements of a claim for breach of contract are: (1) the existence of a legally enforceable obligation of a defendant to a plaintiff, (2) the defendant's violation or breach of the obligation, and (3) an injury or harm to the plaintiff caused by the defendant's breach. Wood v. Symantec Corp., 872 F. Supp.2d 476, 481 (E.D. Va. 2012) (applying Virginia law). The parties do not dispute that the A-9 Form S-3 is a legally enforceable agreement. See, Def.'s Mem. at 5; Pl.'s Opp'n at 1 n.2; Cf., Moses v. Apple Hospitality REIT Inc., 2015 WL 1014327, at *6 (E.D.N.Y. Mar. 9, 2015) ("Regarding the DRIP at issue in this case, the Forms S-3 constituted a valid contract as the Forms S-3 set forth the terms of the purchase agreement and contained a signature page.").

Plaintiff alleges he was injured because "A-9 issued fewer shares to DRIP participants than it would have issued had the number of shares been based on a value calculated in the manner represented in the [A-9 Form] S-3." Am. Compl. ¶ 58. Accepting this allegation as true, which the Court must do at this stage, Plaintiff adequately has pled the first and third requirements of a breach of contract claim under Virginia law. Accordingly, the issue before the Court is whetherPlaintiff plausibly has alleged that Defendant's pricing of the DRIP units at $10.25 per unit throughout the Class Period constituted a breach of Defendant's obligations under the A-9 Form S-3.

A. Failure to Determine Fair Market Value from Time to Time

Plaintiff argues that the A-9 Form S-3 required Defendant to revisit the DRIP unit price from time to time, and Defendant breached its obligations under the contract by failing to change the price of the DRIP units when the $10.25 per unit price no longer was indicative of the fair market value of the units. Am. Compl. ¶ 56; Pl.'s Opp'n at 11. In so arguing, Plaintiff repeats a breach of contract theory that twice has been rejected in prior, substantially similar, litigations involving the Apple REIT family. See, Wenzel v. Knight, 2015 WL 3466863 (E.D. Va. June 1, 2015) (putative class action against Apple REIT Eight alleging, inter alia, defendants' pricing of DRIP units breached its obligations under operative Form S-3); Wilchfort v. Knight, 307 F. Supp.3d 64 (E.D.N.Y. 2018) (putative class action against Apple REITs Six, Seven and Eight alleging, inter alia, defendants' pricing of DRIP units breached their obligations under operative Forms S-3).

In Wenzel, the court "read the entire contractual language [of the Form S-3] together," and found that "[a]ny shareholder agreeing to participate in the DRIP did so knowing the price ($11.00 per share) and the basis for that amount (it was the last price paid by an outsider)." 2015 WL 3466863, at *4. The court found that the Form S-3 "imposed no duty on the board to monitor, evaluate, or appraise the share values. Instead, it gave the board discretionary power to change the valuation method for DRIP shares." Id., at *7 (emphasis in original).

In Wilchfort, a judge of this Court concurred with the reasoning in Wenzel, similarly finding that the operative Forms S-3 contained no enforceable obligations to revalue the DRIP shares fromtime to time. 307 F. Supp.3d at 74-75. The Wilchfort court determined that "the contracts conferred discretionary power to the boards to reconsider the fair market value of the shares through valuation methods different from the 'most recent...