Opinion
Case Number C 04-00446 JF, Docket No. 14.
August 2, 2004
ORDER GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS SECOND AMENDED COMPLAINT
On July 27, 2004, the Court heard argument on Defendant's motion to dismiss. The Court has considered the moving and responding papers as well as the arguments presented at the hearing. For the reasons discussed below, the motion will be granted in part and denied in part.
I. BACKGROUND
This action arises out of the relationship between Defendant General Electric Company ("Defendant") and Towantic Energy, L.L.C. ("Plaintiff"). Plaintiff, a "special purpose" company owned by Calpine Corporation, is the owner of a planned combined cycle electrical generation facility known as the Towantic Energy Center project ("the Energy Center Project"), to be developed in Oxford, Connecticut. Defendant is, among other things, a manufacturer and seller of gas and steam turbine generator equipment.
On or about November 13, 2000, Plaintiff entered into a written contract ("Purchase Contract") with Defendant for the purchase of two gas turbine generators and one steam turbine generator (collectively, the "Turbine Generators") for the Energy Center Project, at the price of $84,351,016. The purchase Contract included a choice of law provision selecting New York law and a forum selection clause providing for venue in this Court.
Defendant seeks judicial notice of the following: the November 13, 2000 Purchase Contract, Amendment No. 1, Change Orders Nos. 2-5, Plaintiff's termination letter, Plaintiff's 8-K filed with the Securities Exchange Commission ("SEC"), any other SEC filings made by Plaintiff, and facts set forth on Plaintiff's website. Pursuant to FED. R. EVID 201(b) the Court grants judicial notice with one exception. While the Court takes notice of the 8-K SEC filing, it does not notice any other SEC filings made by Plaintiff as such would comprise an undefined set of facts. Medimatch v. Lucent Tech., Inc., 120 F. Supp. 2d 842, 863 (N.D. Cal. 2000).
The Purchase Contract incorporated a payment schedule, under which payments were to be made consistently with the anticipated manufacturing of the turbine generators. The manufacturing schedule for the turbine generators, in turn, was based on the parties' estimate of when the Energy Center Project would be ready for installation of the turbine generators. These installation estimates took into account project development and the issuance of necessary government permits and approvals. Plaintiff alleges that because of Defendant's market power, its only option was to agree to these terms or fail to complete the Energy Center Project. Accordingly, the Purchase Contract set forth a schedule for the turbine generators to be delivered in March, 2002.
Plaintiff made a series of payments under the schedule, totaling $24,705,936. Beginning in late 2000, however, Plaintiff repeatedly notified Defendant of significant delays to the Energy Center Project. The primary cause of these delays was difficulty in the procurement of government permits required to build and operate the Energy Center Project. As a result, the parties agreed to a contract amendment and a series of four "Change Orders," postponing the delivery date for the turbine generators.
In or about September and October 2003, Plaintiff requested another change order. On or about October 22, 2003, Defendant denied the request. Accordingly, on October 22, 2003, Plaintiff notified Defendant that it was cancelling the Purchase Contract and requested return of the payments it had made under the Payment schedule. Defendant refused to return Plaintiff's payments, claiming that Plaintiff was entitled to only $862,049 of the total $24,705,936 already paid.
Under the revised Exhibit C "Payment and Termination Schedule" to the final Change Order #5, signed on October 1, 2003, Plaintiff agreed to total payments for the three turbines of $91,707,259. Plaintiff also agreed to an increasing termination fee — starting in October 2003 at $23,843,887 (26% of total payment) and going up to the full contract price of $91,707,259 (100%) when title to all equipment would have passed to Plaintiff in December 2004. Because Plaintiff terminated the contract on October 22, 2003, the terms of the purchase contract obligated it to pay the $23,843,887 termination fee, which Defendant set off against the progress payments already made by Plaintiff.
On February 3, 2004, Plaintiff filed its initial complaint against Defendant seeking the return of the money it had advanced to Defendant. On April 12, 2004, Plaintiff amended its complaint and added a cause of action against Defendant for unfair trade practices under the Connecticut Unfair Trade Practices Act (CUTPA). The crux of Plaintiff's present claim is that the termination fee it agreed to is a "penalty" or "forfeiture" that is unenforceable under New York law. Plaintiff also seeks a declaratory judgment that the termination fee is unenforceable under controlling law and "restitution" of the "illegal penalty."
II. LEGAL STANDARD
For purposes of this motion to dismiss, the plaintiff's allegations are taken as true, and the Court must construe the complaint in the light most favorable to the plaintiff as it is the non-moving party. Jenkins v. McKeithen, 395 U.S. 411, 421 (1969); Argabright v. United States, 35 F.3d 472, 474 (9th Cir. 1994). In Conley v. Gibson, 355 U.S. 41 (1957), the Supreme Court held that a complaint should not be dismissed for failure to state an adequate claim "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of the claim which would entitle him to relief." Leave to amend must be granted unless it is clear that the deficiencies of the complaint cannot be cured by amendment. Lucas v. Department of Corrections, 66 F.3d 245, 248 (9th Cir. 1995). When amendment would be futile, however, dismissal may be ordered with prejudice. Dumas v. Kipp, 90 F.3d 386, 393 (9th Cir. 1996); Albrecht v. Lund, 845 F.2d 193, 195-96 (9th Cir. 1988); Beezley v. Fremont Indem. Co., 804 F.2d 530, 531 (9th Cir. 1986).
III. DISCUSSION
A. Plaintiff Has Properly Alleged the Elements of a Penalty Under New York Law
While federal law provides the standard for deciding a motion to dismiss in this diversity action, the question as to whether the termination fee provided for under the Purchase Contract is enforceable is governed by New York law. Under New York law, when a liquidated damages clause amounts to a penalty, it is not enforceable. Truck Rent-A-Center v. Puritan Farms 2d, Inc., 41 N.Y.2d 420, 425 (1977). Plaintiff claims that Defendant's termination fee is so unreasonable in light of the anticipated or actual harm caused by Plaintiff's termination of the Purchase Contract that it amounts to a penalty. Defendant argues that it is entitled to dismissal because Plaintiff's allegations are insufficient to support such a conclusion. Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530, 533-34 (9th Cir. 1984) (citing 2A J. MOORE, MOORE'S FED. PRACTICE ¶ 12.08 at 2271 (2d ed. 1982).
As part of the Purchase Contract, the parties agreed that "This Contract of Sale shall be construed and interpreted in accordance with the Laws of the State of New York." Amended Complaint, Ex. A § 17.12.
New York law as to what constitutes a penalty is ambiguous. Plaintiff cites authority holding that a stipulated sum constitutes a penalty if (1) at the time the contract is executed, the amount of probable loss that would result from breach is not difficult or impossible to ascertain, and (2) the stipulated sum is not reasonably proportionate to the probable loss from breach. Time Assoc. v. Blake Realty, 212 A.D.2d 879, 881-882 (1995); National Telecanvass Assocs., Ltd. v. Smith, 98 A.D.2d 796, 798 (1983); Morgan Servs. v. Lavan Corp., 59 N.Y.2d 796, 797 (1983); Truck Rent-A-Center, 41 N.Y.2d at 425. Defendant suggests that a third element is required, which is that the stipulated sum is not reasonably proportionate to theactual loss from breach. Equitable Lumber Corp. v. IPA Land Dev. Corp., 38 N.Y.2d 516, 520-21 (1976); U.C.C. § 2-718 (1981). At the pleading stage, any reasonable doubt as to whether a provision constitutes an unenforceable penalty or a legitimate liquidated damages clause should be resolved in favor of a construction which holds the provision to be a penalty. National Telecanvass, 98 A.D.2d at 796; Pyramid Ctrs. Co. v. Kinney Show Corp., 663 N.Y.S.2d 711, 713 (App.Div. 1997); Vernitron, 104 A.D.2d at 410. The Court is satisfied that Plaintiff's complaint adequately alleges the first two elements discussed above. Because New York law is unclear as to whether the third element is required and in light of the liberal standard applicable to a motion to dismiss, the Court concludes that Plaintiff has stated a cause of action.
A liquidated damages clause also can equate to a penalty on the alternate ground that the agreement is "unconscionable or contrary to public policy." Mosler Safe Co. v. Maiden Lane Safe Deposit Co., 199 N.Y. 479, 485 (1910). Plaintiff alleges that the termination fee is unconscionable and contrary to public policy. Amended Complaint, ¶ 13. Because in this case unconscionability may turn on factual issues such as the nature of the parties' relationship and the particular commercial context in which the parties' agreement is set, it is inappropriate for the Court to address these issues on a motion to dismiss.
B. Plaintiff's Claim is Not Barred by the Terms of the Purchase Agreement
As a matter of law, a claim should be dismissed for failure to state a claim if "the documents upon which appellants based their claim show on their face absence of any grounds for relief." Feick v. Fleener, 653 F.2d 69, 75 (2nd Cir. 1981); McWane, Inc. v. Crow Chicago Indus., Inc., 224 F.3d 582 (7th Cir. 2000). In addition to attacking the sufficiency of Plaintiff's factual allegations, Defendant also argues that the Purchase Contract expressly bars Plaintiff from asserting a penalty claim. First, Defendant cites Article 13.4 of the contract, which gives Plaintiff the right to terminate the contract "at any time for [Plaintiff's] convenience," in which case, Plaintiff is required to pay Defendant "the termination payment determined in accordance with the schedule set forth." Motion to Dismiss, 14:3-6. However, whether this provision is enforceable depends upon whether the termination payment amounts to a penalty.
Second, Defendant asserts that the termination fee is not a "liquidated damages provision" because it is not labeled as such in the Purchase Contract, while other contractual provisions relating to damages are identified with particularity. Motion to Dismiss, 13-16. However, "regardless of the label assigned to a disputed clause," a court may "determine whether it is in the nature of a liquidated damages clause." Scudder v. Baker, 576 N.Y.S.2d 855, 857 (Civ. Cit. 1991); Vanguard Commercial Leasing Corp. v. Dayanzadeh, 538 N.Y.S.2d 492, 493 (App.Div. 1989) (termination provision not labeled "liquidated damages" held to be an unenforceable penalty.); City of Rochester v. E L Piping, Inc., 764 N.Y.S.2d 514, 517 (Sup.Ct. 2003); Chien v. Tova Realty, 573 N.Y.S.2d 855, 857.
Third, Defendant characterizes the termination fee as an "option," citing California law for the proposition that "consideration paid for a freely negotiated option does not constitute liquidated damages or a penalty because the payment obligation does not arise on a breach of contract by the optionee, but as an alternative to performance." Allen v. Smith, 94 Cal.App.4th 1270, 1279 (2002). Defendant contends, that in reality, Plaintiff merely chose the option of not accepting the turbines and paying the agreed-upon price. This argument, however, requires the Court to determine whether the termination fee was in fact "freely negotiated," which again is an issue of fact.
Finally, Defendant contends that Plaintiff expressly waived any right it may otherwise have had to claim that the termination fee is unenforceable. Article 17.12 of the Purchase Contract provides that "any provisions of [New York] law invalidating any provision of this Contract of Sale or modifying the intent of the Parties as expressed herein shall not apply." Defendant argues that the parties thus explicitly agreed that they expected to abide by all of the terms of their Purchase Contract as written, including the termination fee. Defendant notes that virtually the same provision was found enforceable by the Virginia Supreme Court in Gondonsville Energy, L.P. v. Virginia Elec. Power Co., 257 Va. 344, 355-56 (1999). However, the plaintiff in that case had specifically waived its right to object to liquidated damages. Moreover, under New York law, even explicit waivers will not be enforced if enforcement would be contrary to public policy. Public Serv. Mut. Ins. Co. v. Goldfarb, 425 N.E.2d 810, 814 (N.Y. 1981). This rule has been specifically applied to liquidated damages provisions. LeRoy v. Sayers, 635 N.Y.S.2d 217, 222 (App.Div. 1995). Even if there were a specific waiver in this case, New York law would not necessarily require dismissal. See, e.g., BNI New York, Ltd. v. DeSanto, 675 N.Y.S.2d 752, 755 (City Ct. 1998); Clubb v. ANC Heating Air Conditioning, Inc., 675 N.Y.S.2d 176, 178 (App.Div. 1998); Irving Tire Co. v. Stage II Apparel Corp., 646 N.Y.S.2d 528 (App. Dov. 1996).
D. Claim for relief under Connecticut Unfair Trade Practices Act
Plaintiff's amended complaint alleges unfair trade practices in violation of the Connecticut Unfair Trade Practices Act. CONN. GEN. STAT. §§ 42-110a — 42-110q (2003) ("CUTPA"). Defendant asserts that this claim is barred by the choice of law provision in the Purchase Contract. In suits based on diversity, the Court applies choice of law principles of the forum state. Day Zimmerman, Inc. v. Chaloner, 423 U.S. 3, 4 (1975). California's choice of law principles govern whether Plaintiff may maintain a CUTPA claim. Under California law, a choice of law made in an arm's length negotiation by sophisticated commercial parties is enforced unless it is contrary to California's fundamental policy. Medimatch, Inc. v. Lucent Technologies, Inc., 120 F. Supp. 2d 842, 861-62 (N.D. Cal. 2000) (citing Nedlloyd Lines, B.V. v. Superior Court, 3 Cal. 4th 459, 465-66 (1992). However, the choice of law provision at issue here merely states that the " Contract of Sale shall be construed and interpreted in accordance with the Laws of the State of New York" (emphasis added). While this narrowly worded choice of law clause is sufficient to govern interpretation and construction of the contract, it does not explicitly bar tort claims related to the contract. Travel Servs. Network, Inc. v. Presidential Fin. Corp. of Mass., 959 F. Supp. 135, 146-47 (D. Conn. 1997) (citing Turtur v. Rothschild Registry Int'l, Inc., 26 F.3d 304, 309-10 (2nd Cir. 1994)). Many courts have similarly held that narrow choice of law provisions do not bar non-contractual causes of action under the laws of another state. Thompson Wallace of Memphis, Inc. v. Falconwood Corp., 100 F.3d 429, 432-33 (5th Cir. 1996) (tort claims were not governed by choice of law clause that stated chosen law applied to the "agreement and its enforcement"); Krock v. Lipsay, 97 F.3d 640, 645 (2nd Cir. 1996) (provision stating contract would be "governed by and construed in accordance with" was too narrow to encompass claim for fraudulent misrepresentation). In addition, the Ninth Circuit has held that "[c]laims arising in tort are not ordinarily controlled by a contractual choice of law provision." Sutter Home Winery, Inc. v. Vintage Selections, Ltd., 971 F.2d 401, 407 (9th Cir. 1992) (citing Consolidated Data Terminals v. Applied Digital Data Sys., 708 F.2d 385, 390 n. 3 (9th Cir. 1983)). Thus, this Court concludes that the CUTPA claim is not barred by the choice of law provision found in the Purchase Contract.
The Court nonetheless concludes that the CUTPA claim is subject to dismissal for failure to state a claim upon which relief can be granted because none of the alleged violations has a sufficient nexus with the state of Connecticut. CUTPA prohibits "unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce." CONN. GEN. STAT. § 42-110b. By its own terms, CUTPA defines "trade or commerce" as "the advertising, the sale or rent or lease, the offering for sale or rent or lease, or the distribution of any services and any property, tangible or intangible, real, personal, or mixed, and any other article, commodity or thing of value in this state." CONN. GEN. STAT. § 42-110a (emphasis added). While a CUTPA violation need not necessarily occur in Connecticut, it must be tied to a form of trade or commerce intimately associated with the state. Titan Sports, Inc. v. Turner Broad. Sys., Inc., 981 F. Supp. 132, 140 (D. Conn. 1997) (emphasis in original); see also Uniroyal Chem. Co. v. Drexel Chem. Co., 931 F. Supp. 132, 140 (D. Conn. 1996). In the present action, the only alleged connection with Connecticut is that the state was the ultimate destination of the turbine generators. The Court concludes that this solitary tie is insufficient to invoke CUTPA, thus warranting dismissal of the claim. Plaintiff shall have leave to amend if it can allege in good faith additional facts sufficient to state a CUTPA claim.
IV. ORDER
Good cause therefore appearing, IT IS HEREBY ORDERED that the motion to dismiss is GRANTED IN PART with leave to amend and DENIED IN PART. Any amended pleading shall be filed within twenty (20) days of the date this order is filed.