Opinion
No. 218-2015-CV-01406
04-10-2018
DG Whitefield, LLC and Indeck Energy-Alexandria, LLC v. Cate Street Capital, Inc., et al
ORDER
DG Whitefield, LLC and Indeck Energy-Alexandria, LLC (collectively"Whitefield") have filed a Motion for Partial Summary Judgment on its breach of contract claim against the Defendant, Cate Street Capital ("Cate Street"). For the reasons stated in this Order, the Motion is GRANTED, as against Cate Street. Whitefield has also filed a Motion to Approve Interlocutory Appeal Statement. Cate Street objects. Whitefield seeks an order approving an interrogatory appeal of this Court's Order of January 25, 2018, concluding Whitefield may not recover attorney's fees on its claim against Cate Street for breach of a covenant not to sue. For the reasons stated in this Order, the Motion is DENIED.
Whitefield brought suit against Cate Street Capital, Inc., John Halle, Robert Desrosiers, and John Doe and Jane Doe. Since none of these individuals signed the release in their individual capacities, the Court construes the Motion for Summary Judgment as being directed only against Cate Street.
I
This litigation arises out of Cate Street's development of a 75 MW wood biomass fueled power plant known as Berlin Station, which is located in Berlin, New Hampshire. The lengthy history of this case is set out in this Court's prior orders — particularly in Cate Street Capital, Inc. v. DG Whitefield, LLC, Merrimack County Superior Ct., No. 218-2013-CV-00734, at 25 (Apr. 5, 2016) (Order, McNamara, J.), aff'd No. 2016-0355, 2017 WL 695387 (N.H. Jan. 17, 2017) — and is summarized here.
The Plaintiffs in this action are competitors of Berlin Station. In order to proceed with development of the 75 MW biomass plant, Cate Street needed certain approvals from the New Hampshire Public Utilities Commission. Whitefield intervened in the proceedings before the Public Utilities Commission and objected to the approvals. After lengthy litigation, including an appeal of a Public Utilities Commission order in favor of Cate Street to the New Hampshire Supreme Court, the parties entered into a settlement agreement that contained a release and a covenant not to sue running in favor of Whitefield from Cate Street ("the Settlement Agreement"). The Settlement Agreement resulted in Cate Street obtaining the necessary approvals from the Public Utilities Commission so that plans for the 75 MW wood biomass fueled power plant could go forward. To understand the claims in this case, it is necessary to understand the two actions brought by the parties against each other.
A. Cate Street's Suit against Whitefield
In 2013, Cate Street brought a declaratory judgment action against Whitefield (the "Underlying Litigation") in which it alleged that the price support and sales option agreements intertwined within the Settlement Agreement the parties had executed in 2011 were void. It alleged that both the release and covenant not to sue were invalid on the grounds of economic duress. In its Order on summary judgment dated April 5, 2016, the Court dismissed all of Cate Street's claims in the Underlying Litigation, based upon the release. Cate Street appealed that decision to the New Hampshire Supreme Court, which affirmed the dismissal of the Underlying Litigation.
B. Whitefield's suit against Cate Street
While the Underlying Litigation was pending in the Merrimack County Superior Court, on December 18, 2015, in the Rockingham County Superior Court Whitefield brought a complaint against the Defendants, alleging breach of contract against Cate Street (Count I), abuse of process against Cate Street (Count II), violation of the Consumer Protection Act against Cate Street (Count III), malicious prosecution against Cate Street (Count IV), and civil conspiracy against all the Defendants (Count V), and seeking enhanced compensatory damages (Count VI) and attorney's fees and costs (Count VII).
The action was transferred to the Merrimack County Superior Court on May 17, 2016. By that time, summary judgment had been granted to Whitefield in Cate Street's suit against it, but a Motion to Reconsider was pending. The Motion to Reconsider was denied in June 2016 and Cate Street filed a Notice of Appeal to the New Hampshire Supreme Court on July 7, 2016. In light of the appeal of the Underlying Litigation, this matter was stayed by Order dated October 12, 2016. The case was reactivated once the New Hampshire Supreme Court affirmed the Order in favor of Cate Street.
Once the New Hampshire Supreme Court had resolved the Underlying Litigation, Cate Street moved to dismiss in this matter. On July 10, 2017, the Court granted the Motion, as it relates to Counts III and V regarding violations of the Consumer Protection Act and civil conspiracy, and denied the Motion, as it related to Counts I-II and IV. Whitefield has now moved for partial summary judgment on Count I. Whitefield argues Cate Street breached its covenant not to sue contained in the Settlement Agreement when it brought the Underlying Litigation and that Cate Street is collaterally estopped from denying that it brought suit against Whitefield and that the covenant not to sue is valid and enforceable.
II
A covenant not to sue does not relinquish a right or claim or extinguish a cause of action. State Line Steel Erectors v. Shields, 150 N.H. 332, 338 (2003). Rather, a covenant not to sue recognizes the continuation of the obligation or liability but the party making the covenant not to sue agrees not to assert any right or claim based upon the obligation or liability. Id. A covenant not to sue is a contract, and a breach occurs when a party who has executed such a covenant brings suit. See, e.g., Artvale, Inc. v. Rugby Fabrics Corporation, 363 F.3d 1002, 1004 (2d Cir. 1966).
Cate Street denies it brought suit in violation of the covenant not to sue that was determined to be valid in the Underlying Litigation. Cate Street argues that it did not breach the Settlement Agreement by seeking a declaratory judgment as to "the validity of the Release itself." (Opp'n at 6.) However, it provides no authority for the proposition that seeking a judicial declaration as to the validity of the covenant not to sue does not constitute a suit in violation of the covenant. The entire point of the covenant not to sue was to avoid litigation, not to determine whether or not Cate Street's position was meritorious. State Line Steel, 150 N.H. at 338.
More persuasively, Cate Street also argues that res judicata, and not collateral estoppel, applies to this case and bars Whitefield's claims. Res judicata applies to bar a claim if three elements are met: (1) the parties are the same or in privity with one another; (2) the same cause of action was before the court in both instances; and (3) the first action ended with a final judgment on the merits. Finn v. Ballantine Partners, LLC, 169 N.H. 128, 147 (2016). A cause of action "encompasses all theories upon which relief could be claimed on the basis of the factual transaction in question." Id. (quoting In re Estate of Bergquist, 166 N.H. 531, 535 (2014)). Cate Street argues that its effort to set aside the Settlement Agreement as the product of economic coercion and Whitefield's claim that Cate Street's effort to do so amounted to a breach of the covenant "are opposite sides of the exact same coin." (Def.'s Mem. at 5.) Therefore, Cate Street argues that Whitefield was required to bring its claims in the Underlying Litigation and, having failed to do so, is barred by res judicata. Finn, 169 N.H. at 148.
A similar claim was made by the Cate Street in its Motion to Dismiss. There, Cate Street asserted that Whitefield was required to file all its claims, except for the malicious prosecution claim (Count IV), as compulsory counterclaims in the Underlying Litigation. New Hampshire Superior Court Rule 10(a) governs compulsory counterclaims and states as follows:
A pleading shall state as a counterclaim any claim which at the time of serving the pleader has against any opposing party, if it arises out of the transaction or occurrence that is the subject matter of the opposing party's claim and does not require for its adjudication the presence of third parties over whom the court cannot acquire jurisdiction.
At the time, Whitefield argued that its claims were not compulsory counterclaims because "they do not arise out of the same 'transactions or occurrences' as those that gave rise to the Underlying Litigation." In its Order of July 17, 2017, the Court focused on the abuse of process and malicious prosecution claims and agreed that Whitefield's claims concerned the Settlement Agreement and actions that occurred prior to the execution of the Settlement Agreement and held that Whitefield's claims in this action do not arise out of the same transactions or occurrences that formed the basis of the Underlying Litigation, and were not compulsory counterclaims. See 412 S. Broadway Realty, LLC v. Wolters, 169 N.H. 304, 314 (2016) (agreeing with those jurisdictions that have held that "generally an abuse of process claim does not arise out of the same transaction or occurrence as the underlying claim"); Parker v. Sadler, No. 1:08-CV-57, 2008 WL 2697376, at *2 (E.D. Tenn. July 1, 2008) ("When a plaintiff files a lawsuit and a defendant files a counterclaim alleging the plaintiff's behavior regarding the filing of the lawsuit was improper, courts have repeatedly held the counterclaim is not compulsory."); but see Pochiro v. Prudential Ins. Co. of Am., 827 F.2d 1246, 1252 (9th Cir. 1987) ("Because we believe that the liberal reading of the 'transaction or occurrence' standard is more in keeping with the pronouncements of the Supreme Court, we now reject the line of cases that has refused to find an abuse of process claim a compulsory counterclaim."). The Court also rejected the claim that New Hampshire Superior Court Rule 10 (a) would have required the claims been brought as compulsory counterclaims, considering the Rule was not in effect at the time Whitefield filed its Answer to Cate Street's claim.
In its opposition to the current motion, however, Cate Street focuses on the distinction between the covenant not to sue and cases involving malicious prosecution or other similar counts and argues that breach of the covenant not to sue is part of the same transaction as the lawsuit brought by Cate Street against Whitefield. There is force to Cate Street's argument. Illustrative is Paramount Pictures Corp. v. Allianz Risk Transfer AG, No. 16, 2018 WL 942329 *8 (N.Y. Feb. 20, 2018), in which Allianz Risk Transfer AG brought suit in federal court, alleging Paramount had induced it to invest through material misrepresentations and omissions and a subscription agreement. Paramount successfully moved to dismiss, asserting that the subscription agreement — by which the investment was made — contained a release and covenant not to sue in favor of Paramount. Following a judgment in its favor in federal court, Paramount brought suit in New York state court, claiming Allianz Risk Transfer AG had breached the covenant not to sue by filing the federal action. Although New York is not a compulsory counterclaim state, the Court held that Paramount's action based upon the covenant not to sue was barred:
At bottom, Paramount's covenant not to sue claim is based on the "same transaction" as the federal action (the Melrose investment); it involves much of the "same evidence" (the Subscription Agreement and surrounding negotiations); and its essential facts (the scope and validity of the Subscription Agreement's provisions) were present in the first action. Unlike in cases involving malicious prosecution or other similar claims, Paramount did not depend upon the judgment in the federal action in order to allege a breach of the covenant not to sue. Nor did its claim depend on events subsequent to the filing of the investor's complaint. Rather, the covenant not to sue claim accrued immediately when the investors filed suit in the federal action and could be resolved upon consideration of nearly identical factual and legal issues. Accordingly, because it should have been asserted in the parties' federal action, Paramount's claim is barred by res judicata.Id. (citations omitted).
Nonetheless, the rationale of Paramount Pictures Corporation is not applicable to this case because Whitefield brought its claims against Cate Street while Cate Street's claims against it were pending. Whitefield brought suit against Cate Street in the Rockingham County Superior Court on December 18, 2015. At the time Whitefield brought suit in Rockingham County, the action against it in this Court was pending, but not final; summary judgment was granted in favor of Whitefield on April 5, 2016. Therefore, assuming that the mandatory counterclaim provisions of Rule 10 (a) are not applicable, res judicata could not bar Whitefield's claim because an action was brought before the action against it was final.
No different result would be reached even if Rule 10 (a) was applicable. Neither claim preclusion nor waiver or estoppel are appropriate theories for barring a second suit because preclusion becomes operative only upon the termination of an action and, thus, they have no bearing on the second action where the first suit is still pending. See, e.g., Fullerton Aircraft Sales and Rentals, Inc. v. Beech Aircraft Corporation, 842 F.2d 717, 722 (4th Cir. 1988). In such circumstances, federal courts applying Federal Rule of Civil Procedure 13 (a) — which is comparable to our Rule 10(a) — will generally stay the second case or dismiss the claim brought in it with leave to plead it in the case before. That is, of course, precisely what the Court did here. See generally Wright & Miller 6 Federal Practice & Procedure § 1418 (3rd Ed. 2018).
Turning now to the merits of Whitefield's motion, the doctrine of collateral estoppel bars a party to a prior action, or a party in privity with such a party, from relitigating any issue or fact actually litigated and determined in the prior action. Gray v. Kelly, 161 N.H. 160, 164 (2010). Collateral estoppel precludes the relitigation of findings where: (1) the issue subject to estoppel is identical in each action; (2) the first action resolved the issue finally on the merits; (3) the party to be estopped appeared in the first action or was in privity with someone who did; (4) the party to be estopped had a full and fair opportunity to litigate the issue; and (5) the finding at issue was essential to the first judgment. Tyler v. Hannaford Bros., 161 N.H. 242, 246 (2010). There can be no dispute that Cate Street sued Whitefield despite a valid covenant not to sue. Cate Street is, therefore, collaterally estopped from arguing otherwise, and Whitefield's Motion for Partial Summary Judgment pertaining to the issue of liability on its breach of contract claim is GRANTED. Whitefield's damages, of course, must be proved at trial.
III
Whitefield also seeks interlocutory review by the New Hampshire Supreme Court of this Court's decision reducing its prejudgment attachment from $1 million to $250,000. Whitefield claims that it is entitled to attorney's fees as a result of Cate Street's violation of the covenant not to sue. Although Whitefield has obtained partial summary judgment based upon Cate Street's breach of the covenant not to sue, the covenant contained no provision for attorney's fees, and, as explained in this Court's Order of January 25, 2018, Whitefield is not likely to recover attorney's fees.
The Settlement Agreement between the parties provided in relevant part:
Article Parties' Mutual Releases . In consideration of the foregoing agreement, each Party, for itself and for its Related Persons, hereby releases, remises, discharges, holds harmless and covenants not to sue each of the other Parties and its respective Related Persons, from or with respect to any and all claims, demands, damages, losses, suits, proceedings, actions, causes of action, injunctive relief or other equitable or legal remedies, of any kind or nature, whether at law or in equity, whether asserted or unasserted, whether known or unknown, and whether now or hereafter existing . . . .(Pls.' Suppl. Br. at 34 (emphasis in original)).
Whitefield claims that the foreseeable damages for breach of the covenant not to sue includes attorney's fees. (Id. at 34.) Although the New Hampshire Supreme Court has never directly addressed whether attorney's fees and costs are recoverable for violation of a release and covenant not to sue, the majority of courts that have applied state contract law to the issue have held that attorney's fees and expenses are not recoverable, as a matter of course, merely for violation of a release and covenant not to sue. W.R. Grace & Co. - Conn. v. Goodyear Tire & Rubber Co., No. 1:99-CV-305, 1999 U.S. Dist. LEXIS 22553 at *8-10 (W.D. Mich. Nov. 30, 1999) (collecting cases); see generally Recovery of Attorney's Fees and Costs of Litigation Incurred as a Result of Breach of Agreement Not to Sue, 9 A.L.R. 5th 933 (1993, updated 2017). A defendant normally may not recover litigation expenses for breach of a covenant not to sue unless the parties specifically intended such recovery. Kamfar v. New World Rest. Group, Inc., 347 F. Supp. 2d 38, 50 (S.D.N.Y. 2004). The primary function of the usual covenant not to sue:
See generally Restatement (Second) of Contracts § 285, explaining that a release extinguishes a claim while a covenant not to sue merely requires forbearance. To avoid circuity of actions, common law courts allowed covenants not to sue to be pled as a bar. 13 Corbin on Contracts § 67.14 at 145 (2003).
is to serve as a shield rather than as a sword. . . . In the absence of contrary evidence, sufficient effect is given the usual covenant not to sue if, in addition to its service as a defense, it is read as imposing liability only for suits brought in obvious breach or otherwise in bad faith . . . .Artvale, Inc. v. Rugby Fabrics Corp., 363 F.2d 1002, 1008 (2d Cir. 1966).
The Second Circuit did not state whether it relied on state or federal law but stated that "nothing in New York law would lead us to a different approach". Id. at 1007. Therefore, the Court believes that Artvale is based upon common law principles of contract. --------
Thus, it is generally held that "absent contractual language to the contrary, a party who brings an action which is ultimately held to be in breach of the covenant not to sue but which was based upon a reasonable and good faith belief that the covenant did not bar the suit or that the covenant was obtained by unfair means, is not liable for his opponent's litigation expenses." Bellefonte Reinsurance Co. v. Argonaut Insurance Co., et al., 586 F. Supp. 1286, 1288 (S.D.N.Y. 1984); Le Cordon Bleu, S.A. v. BPC Publishing Ltd., 451 F.Supp. 63, 71 (S.D.N.Y. 1978). This principle is based upon the so-called American Rule, which provides that "attorney's fees and disbursements are incidents of litigation and the prevailing party may not collect them from the loser unless an award is authorized by agreement between the parties or by statute or court rule." Versatile Housewares & Gardening Sys. Inc. v. Thill Logistics, Inc., 819 F. Supp. 2d 230, 241 (S.D.N.Y. 2011) (quotation & citation omitted). The American Rule is said to provide "freer and more equal access to the courts . . . [and] promotes democratic and libertarian principles." Oscar Gruss & Son, Inc. v. Hollander, 337 F.3d 186, 199 (2d Cir. 2003). The American Rule is based upon "the high priority accorded free access to the courts and a desire to avoid placing barriers in the way of those desiring judicial redress of wrongs." Versatile Housewares & Gardening Sys. Inc., 819 F. Supp. 2d at 241 n.6.
New Hampshire generally follows the American Rule; "absent statutory or judicially created exceptions, parties pay their own attorney's fees." Jesurum v. WBTSCC Ltd. P'ship, 169 N.H. 469, 482 (2016). The First Circuit has noted that under the American Rule, attorney's fees and costs are generally not recoverable by the prevailing litigant in the absence of an explicit contractual provision or other applicable rule or statute, and has held that since the American Rule is followed in Massachusetts attorney's fees cannot be recovered for breach of a release and covenant not to sue under Massachusetts law. Bukuras v. Mueller Group, LLC, 592 F.3d 255, 267 n.7 (1st Cir. 2010). The Court believes that the New Hampshire Supreme Court would, like other American jurisdictions, hold that absent explicit language authorizing recovery, attorney's fees are not recoverable for breach of a covenant not to sue.
New Hampshire Supreme Court Rule 8 (1) (d) provides that in order for an interrogatory appeal to be granted a party must: (1) present a controlling question of law; (2) demonstrate why a substantial basis exists for a difference of opinion on the question of law; and (3) demonstrate why an interrogatory appeal may materially advance the termination or clarify further proceedings of the litigation, protect a party from substantial and irreparable injury, or present the opportunity to decide, modify or clarify an issue of general importance in the administration of Justice. Interrogatory appeals are limited to exceptional cases. Guyette v. C & K Development Co., 122 N.H. 913 (1982). In effect, the rule provides that "only novel or significant issues will be reviewed on an interrogatory basis". G. MacDonald, Weibusch on New Hampshire Civil Practice and Procedure, § 60.16 (3rd Ed. 2010).
None of the requirements of the Rule are met here. A petition to attach is not a controlling issue of law and the award of an attachment will not expedite litigation of this case. There is no substantial basis for a difference of opinion on the question of law presented; the vast majority of American courts follow the American rule with respect to attorney's fees, and the New Hampshire Supreme Court has never indicated any inclination to change its view and abandon it. Finally, the issue of whether or not attorney's fees should be allowed for breach of a covenant not to sue that does not provide that such fees will be awarded if there is a breach of the covenant does not present an important issue in the administration of justice. As the court noted in Artvale, Inc. v. Rugby Fabrics Corp., 363 F.2d 1002, 1008 (2d Cir. 1966) "certainly it is not beyond the powers of a lawyer to draw a covenant not to sue in such terms as to make clear that any breach will entail liability for damages, including the most certain of all- defendant's litigation expense."
It follows that the Motion to Approve Interlocutory Appeal Statement must be DENIED.
SO ORDERED
4/10/18
DATE
s/Richard B . McNamara
Richard B. McNamara,
Presiding Justice RBM/