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LLC v. Fidelity Real Estate Company, LLC

Supreme Judicial Court of Massachusetts, Suffolk

November 26, 2018

BUFFALO-WATER 1, LLC
v.
FIDELITY REAL ESTATE COMPANY, LLC.

          Heard: October 4, 2018.

          Civil action commenced in the Superior Court Department on May 23, 2017. A motion to dismiss was heard by Janet L. Sanders, J. The Supreme Judicial Court on its own initiative transferred the case from the Appeals Court.

          Richard E. Briansky for the plaintiff.

          David J. Apfel for the defendant.

          Timothy P. Burke & Nathaniel P. Bruhn, for Greater Boston Real Estate Board, amicus curiae, submitted a brief.

          Dawn Mertineit & Katherine E. Perrelli, for Appraisal Institute & another, amici curiae, submitted a brief.

          Present: Gants, C.J., Lenk, Gaziano, Lowy, Budd, Cypher, & Kafker, JJ.

          GANTS, C.J.

         In Eliot v. Coulter, 322 Mass. 86, 91 (1947), this court held that, where parties agree that the fair value of a property shall be determined by an appraiser, "the correctness of the principles and methods of valuation adopted by [an] appraiser[] cannot be inquired into by the courts, in the absence of fraud, corruption, dishonesty or bad faith." Under this common-law rule, a judge may not invalidate "the determination of appraisers selected by agreement to resolve a dispute" unless the appraisal process or decision was tainted on one of these four grounds. Nelson v. Maiorana, 395 Mass. 87, 89 (1985). The issue on appeal is whether we should modify this common-law rule and allow a judge to invalidate an appraisal intended by the parties to provide a final, binding valuation of a property where there is the appearance of bias, not on the part of the individual who conducted the appraisal, but on the part of the entity that employed the individual appraiser. We conclude that the common-law rule established in Eliot properly balances the need for fair valuations with the need for finality in the appraisal process, and that an appearance of bias alone is insufficient to invalidate an appraisal. Because the allegations in the complaint, if proved, do not warrant a finding of any violation of the agreements setting forth the terms of the appraisal, or a finding of fraud, corruption, dishonesty, or bad faith by the individual appraiser, or a finding of breach of the implied covenant of good faith and fair dealing by the defendant, we affirm the Superior Court judge's order allowing the defendant's motion to dismiss.[1]

         Background.

         When reviewing a motion to dismiss, we accept as true all facts alleged in the plaintiff's verified complaint and accompanying exhibits. See Revere v. Massachusetts Gaming Comm'n, 476 Mass. 591, 595 (2017). The following facts are drawn from that complaint and those documents.

         In October 2004, the defendant, Fidelity Real Estate Company, LLC (Fidelity), sold the Winthrop Building, a commercial property located in Boston (property), to the plaintiff, Buffalo-Water 1, LLC (Buffalo-Water), a subsidiary of a national real estate company. Buffalo-Water then leased the property back to Fidelity, and the parties entered into an option to purchase agreement (option agreement) granting Fidelity the option to buy the building back in the final year of its lease. The option agreement stated that, if Fidelity chose to exercise its option, the purchase price would be $16, 275, 000 or ninety-five percent of the property's fair market value, whichever is greater. The fair market value would be determined by agreement of the parties, or by the following appraisal process outlined in the option agreement: (1) each party appoints an appraiser who has at least ten years of experience appraising Greater Boston property and is an MAI-designated member of the Appraisal Institute[2] or a member of the American Society of Real Estate Counselors[3] (or their successor organizations); (2) if the two appointed appraisers cannot agree on the fair market value but their appraisals fall within five percent of one another, the fair market value shall be deemed to be the average of the two appraisals; (3) if the difference between the appraisals is greater than five percent, the two appraisers shall appoint a third appraiser to decide the fair market value. The option agreement provides that this final valuation may not be greater than the higher or less than the lower of the two previous appraisals.

         In August 2016, Fidelity exercised its right under the option agreement to purchase the property. Fidelity and Buffalo-Water were unable to agree upon the property's fair market value, and each retained an independent appraiser to determine the appropriate purchase price. Buffalo-Water's appraiser valued the property at $36 million; Fidelity's appraiser valued it at $17 million.[4] Because the two appraisals differed by more than five percent, the parties agreed to retain Cushman & Wakefield (Cushman), a real estate services company, as a third appraiser.

         Cushman outlined the terms of its appraisal services in a letter of engagement (engagement agreement) signed by the parties and by Robert Skinner, the Cushman professional selected to perform the independent appraisal.[5] On April 18, 2017, Skinner submitted an appraisal valuing the property at $22.9 million. The valuation was accompanied by a "Certification of Appraisal" signed by Skinner, which stated, "We have no present or prospective interest in the property that is the subject of this report, ... no personal interest with respect to the parties involved," and "no bias with respect to the property that is the subject of this report or to the parties involved with this assignment."

         Soon after receiving the valuation, Buffalo-Water asked Skinner to reconsider the appraisal in light of certain "factual errors."[6] In response, Cushman offered to meet with Buffalo-Water and Fidelity to discuss the appraisal. Fidelity declined this offer to meet in a letter that noted that neither the option agreement nor the engagement agreement "contemplates reconsideration of the appraisal at any time." Fidelity also stated that Buffalo-Water was obliged under the option agreement to honor the third appraiser's valuation and deed the property to Fidelity.

         After receiving Fidelity's letter, Buffalo-Water learned that in December 2016, before Cushman was engaged to conduct the appraisal, Fidelity had retained Cushman for a national representation contract.[7] Buffalo-Water communicated this information to Fidelity, claiming that Fidelity's preexisting relationship with Cushman created an impermissible conflict of interest. Fidelity declined to retain a new appraiser or to extend the closing date in light of this alleged conflict.

         The following week, Buffalo-Water filed a two-count verified complaint against Fidelity in the Superior Court. The first count seeks a judgment declaring that the appraisal is invalid and nonbinding; the second count alleges a breach of the covenant of good faith and fair dealing. Fidelity moved to dismiss the complaint for failure to state a claim upon which relief can be granted. Mass. R. Civ. P. 12 (b) (6), 365 Mass. 754 (1974). The judge allowed Fidelity's motion and dismissed the complaint, concluding that the facts alleged by Buffalo-Water did "not amount to the kind of bad faith, fraud or corruption required for a court to invalidate an independent appraisal agreed to by the parties." Buffalo-Water appealed, and we transferred the case to this court on our own motion.

         Discussion.

         We review the allowance of a motion to dismiss de novo. Galiastro v. Mortgage Elec. Registration Sys., Inc., 467 Mass. 160, 164 (2014). In considering whether a count in a complaint survives a motion to dismiss under Mass. R. Civ. P. 12 (b) (6), we accept as true the factual allegations in the complaint and the attached exhibits, draw all reasonable inferences in the plaintiff's favor, and determine whether the allegations "plausibly suggest" that the plaintiff is entitled to relief on that legal claim (citation omitted) . Id. The allegations must be more than "mere labels and conclusions," and must "raise a right to relief above the speculative level" (quotations and citations omitted) . Id. at 165.

         Buffalo-Water raises three arguments on appeal. First, it claims that the judge improperly dismissed its claim for declaratory judgment under rule 12 (b) (6) because courts are obligated to declare the rights of the parties in every properly brought action for declaratory relief. Second, it claims that the appraisal should be invalidated due to Cushman's failure to disclose its preexisting contractual relationship with Fidelity. Third, Buffalo-Water claims that Fidelity committed a breach of the covenant of good faith and fair dealing by taking advantage of an appraisal process it knew to be biased. We address each of these arguments in turn.

         1. Declaratory relief.

         Buffalo-Water contends that the judge erred in dismissing its claim for declaratory relief under G. L. c. 231A, § 1, because, where the claim was properly brought, Buffalo-Water is entitled to a declaration of the rights of the parties. We hold that, where a party moves to dismiss a properly brought declaratory judgment claim under rule 12 (b) (6) and where the judge concludes that the facts alleged in the complaint fail to state a claim upon which relief can be granted, the judge has the option of ...


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