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RIVEREDGE ASSOC. v. METRO. LIFE INS. CO.

October 2, 1991

RIVEREDGE ASSOCIATES, PLAINTIFF,
v.
METROPOLITAN LIFE INSURANCE COMPANY, DEFENDANT.



The opinion of the court was delivered by: Wolin, District Judge.

OPINION

Before the Court is Riveredge Associates' ("Riveredge's") motion to dismiss Metropolitan Life Insurance Co.'s ("Metropolitan's") counterclaim pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim on which relief can be granted, or in the alternative, for summary judgment pursuant to Federal Rule of Civil Procedure 56(c). For the following reasons, the Court will deny plaintiff's motion. Also before the Court is Metropolitan's motion to compel discovery and for sanctions. That motion will be granted as to compelling discovery, but denied as to sanctions.

DISCUSSION

Both parties moved for summary judgment on the issue of Metropolitan's duty to allow prepayment of the loan. In an Opinion dated January 16, 1991, this Court denied Riveredge's motion and granted Metropolitan's motion. 774 F. Supp. 892. The Court found that as a matter of law, Metropolitan was under no obligation, fiduciary or contractual, to allow Plaza to prepay the $11.5 million loan. Riveredge's motion for reconsideration was denied in a letter opinion dated April 2, 1991.

In its answer to Riveredge's complaint, Metropolitan asserted the counterclaim that is the subject of this motion. The counterclaim alleges that Riveredge, by commencing and maintaining a lawsuit based on its bad faith interpretation of the partnership agreement, mortgage and note, breached the implied covenants of good faith and fair dealing contained in those agreements. Riveredge now moves to dismiss this action.

DISCUSSION

1. Failure to State a Claim

On motion to dismiss under Rule 12(b)(6), the Court must accept as true all allegations in the complaint, and provide the plaintiff with the benefit of all inferences that fairly may be drawn from the complaint. Wilson v. Rackmill, 878 F.2d 772, 775 (3d Cir. 1989). The complaint cannot be dismissed unless the court is certain that no set of facts can be proved that would entitle plaintiff to relief. Id.; Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957).

a. The Cause of Action

Metropolitan's theory of its counterclaim is straightforward. It alleges that Riveredge instituted an action against Metropolitan in bad faith, based on interpretations of the Mortgage, Note, and Partnership Agreement that it knew were clearly contradicted by the express language of those agreements. Metropolitan further alleges that this conduct constituted a breach by Riveredge of the implied-in-law covenant of good faith and fair dealing contained in those agreements. Last, Metropolitan alleges that its damages consist of the costs, including legal fees, of defending against this bad faith legal action. Riveredge contends that no such cause of action exists, and that Metropolitan's counterclaim must therefore be dismissed.

In support of its counterclaim, Metropolitan relies primarily on the comments to § 205 of the Restatement (Second) of Contracts, and Association Group Life, Inc. v. Catholic War Veterans of the United States of America, 61 N.J. 150, 293 A.2d 382 (1972). Section 205 provides that "Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement." Restatement (Second) of Contracts § 205 (1981) ("Restatement"). New Jersey has recognized this implied covenant since at least 1965. Palisades Properties, Inc. v. Brunetti, 44 N.J. 117, 130, 207 A.2d 522 (1965). This covenant requires that "neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract." Id. at 130, 207 A.2d 522 (quotation omitted); see Restatement § 205 comment a (good faith requires adherence to the agreed purpose of the contract and "consistency with the justified expectations of the other party").

Most relevant to this cause of action is comment e to Restatement § 205, entitled "Good faith in enforcement." Comment e states that the covenant of good faith extends to the "assertion, settlement and litigation of contract claims and defenses." Restatement § 205 comment e. According to comment e, the covenant is breached by "conduct such as conjuring up a pretended dispute, [or] asserting an interpretation [of the contract] contrary to one's own understanding." Id.

Consistent with comment e is the New Jersey Supreme Court's decision in Catholic War Veterans. In that decision the court found that the covenant could be breached even when the defendant's acts "did not literally violate" the agreement in issue. 61 N.J. at 153, 293 A.2d 382. It held that a cause of action could be maintained if a jury could rationally find that a party to the contract engaged in behavior "not ...


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