Wilchfort v. Knight

307 F.Supp.3d 64

Marsha WILCHFORT on behalf of herself and all others similarly situated, Plaintiff,

v.Glade M. KNIGHT, Apple REIT Eight, Inc., Apple Six Advisors, Inc., Apple REIT Seven, Inc., Apple Eight Advisors, Inc. and Apple Fund Management, LLC, Apple Seven Advisors, Inc., Apple Hospitality REIT, Inc., BRE Select Hotels Corp., Glenn W. Bunting, Kent W. Colton, Lisa B. Kern, Bruce Matson, Michael S. Waters and Robert M. Wiley, Defendants.

17–CV–01046 (MKB)

United States District Court, E.D. New York.

Signed March 30, 2018

Joseph Ralph Santoli, Ridgewood, NY, Lee Squitieri, Squitieri & Fearon, LLP, New York, NY, for Plaintiff.

Elizabeth F. Edwards, Pro Hac Vice, McGuireWoods LLP, Richmond, VA, Marshall Beil, McGuireWoods LLP, Jonathan K. Youngwood, Meredith Dawn Karp, Simpson Thacher & Bartlett, New York, NY, for Defendants.

MEMORANDUM & ORDER

MARGO K. BRODIE, United States District JudgePlaintiff Marsha Wilchfort commenced the above-captioned putative class action on behalf of herself and all others similarly situated against, inter alia , Defendants Apple Hospitality REIT, Inc., Apple REIT Seven, Inc., Apple REIT Eight, Inc. (collectively "AHR"), and BRE Select Hotels Corp., as successor-in-interest to Apple REIT Six, Inc. ("BRE"), asserting claims under Virginia law for breach of contract and the implied covenant of good faith and fair dealing, and tortious interference with contract. (Compl., Docket Entry No. 1.) Defendants AHR and BRE separately move to dismiss the Complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure for failure to state a claim upon which relief may be granted.¹ (AHR Mot. to Dismiss ("AHR Mot."), Docket Entry No. 26; AHR Mem. in Supp. of AHR Mot. ("AHR Mem."), Docket Entry No. 26–1); BRE Mot. to Dismiss ("BRE Mot."), Docket Entry No. 28; BRE Mem. in Supp. of BRE Mot. ("BRE Mem."), Docket Entry No. 28–1.) Defendants also move to dismiss the claims as time-barred.² (AHR Mem. 16; BRE Mem. 8) For the reasons explained below, the Court grants in part and denies in part Defendants' motions to dismiss.

I. Background

The facts alleged in the Complaint are assumed to be true for the purpose of deciding Defendants' motions. Wilchfort, a resident of Sarasota County, Florida, was a shareholder of three separate real estate investment trusts (entities that own and operate income-producing real estate or "REITs"): Apple REITs Six, Seven, and Eight ("A–6," "A–7," and "A–8"). (Compl. ¶ 13; Civil Cover Sheet, annexed to Compl., Docket Entry No. 1–1.)

Beginning in 2006, 2007, and 2008, respectively, A–6, A–7, and A–8 each instituted a Dividend Reinvestment Program ("DRIP"). (Compl. ¶¶ 15–17, 49.) Under DRIP, shareholders were "offered ...the choice of receiving additional units in lieu of [cash] dividends." (Id. ¶ 43.) The initial Forms S–3³ provide the manner in which the shares are to be 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.

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 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 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 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 for a unit was $11.00 on July 25, 2007.⁴ Accordingly, our board of directors has determined that the offering price for units purchased under the plan will initially be $11.00 per unit.

(Compl. ¶ 50; 2006 A–6 Form S–3, available at https://www.sec.gov/Archives/edgar/data/1277151/000119312506026519/ds3d.htm; 2007 A–7 Form S–3, available at https://www.sec.gov/Archives/edgar/data/1329011/000119312507156224/ds3d.htm; 2008 A–8 Form S–3, available at https://www.sec.gov/Archives/edgar/data/1387361/000119312508087581/ds3d.htm.)⁵ Therefore, in exchange for foregoing dividends, shareholders received shares at "fair market value," a rate determined by one of two methods: (a) "the most recent price at which an unrelated person had purchased [the] units" (b) or another measure determined in the good faith judgment of the boards of directors.⁶ (Compl. ¶ 50; AHR Mem. 4.) Thus, unless the boards chose otherwise, shares were to be priced at the rate purchased by the last non-shareholder. (Compl. ¶ 50.) Throughout the entire alleged "Class Period," ranging from July 17, 2007 through February 12, 2014,⁷ (id. ¶¶ 1, 13), all three Apple REITs assessed fair market value at eleven dollars per share, "[t]he most recent price at which an unrelated person ha[d] purchased [the Apple REIT] units" according to Defendants' various public filings, (id. ¶¶ 42, 50).

Relying in part on a SEC Administrative Order imposing penalties on the Apple REITS for various violations of federal securities law,⁸ Wilchfort alleges that Defendants were aware that the actual fair market value of their shares was well below eleven dollars. (Id. ¶¶ 10, 57, 59, 61, 71, 72.) Wilchfort further alleges that shares of A–7 and A–8 had been purchased by "unrelated persons ... for much less than [eleven dollars] per share" in various tender offers. (Id. ¶¶ 66, 68.) In light of these circumstances, Wilchfort asserts that "Defendants failed to live up to their agreement to, in good faith, revalue units from time to time and to price units at ‘the most recent price at which an unrelated person has purchased [the] units.’ " (Pl. Opp'n to AHR Mot. and BRE Mot. ("Pl. Opp'n") 5, Docket Entry No. 32; Compl. ¶¶ 81–83, 105–07.)

II. Discussion

a. Standard of review

In reviewing a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure, a court must construe the complaint liberally, "accepting all factual allegations in the complaint as true and drawing all reasonable inferences in the plaintiff's favor." Kim v. Kimm , 884 F.3d 98, 103 (2d Cir. 2018) (quoting Chambers v. Time Warner Inc. , 282 F.3d 147, 152 (2d Cir. 2002) ); see also Tsirelman v. Daines , 794 F.3d 310, 313 (2d Cir. 2015) (quoting Jaghory v. N.Y. State Dep't of Educ. , 131 F.3d 326, 329 (2d Cir. 1997) ). A complaint must plead "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). A claim is plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Matson v. Bd. of Educ. , 631 F.3d 57, 63 (2d Cir. 2011) (quoting Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) ); see also Pension Ben. Guar. Corp. ex rel. St. Vincent Catholic Med. Ctrs. Ret. Plan v. Morgan Stanley Inv. Mgmt. Inc. , 712 F.3d 705, 717–18 (2d Cir. 2013). Although all allegations contained in the complaint are assumed true, this principle is "inapplicable to legal conclusions" or "[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements." Iqbal , 556 U.S. at 678, 129 S.Ct. 1937.

b. Breach of contract

Under Virginia law, "[t]he elements of a breach of contract action are (1) a legally enforceable obligation of a defendant to a plaintiff; (2) the defendant's violation or breach of that obligation; and (3) injury or damage to the plaintiff caused by the breach of obligation."⁹ Ramos v. Wells Fargo Bank, NA , 289 Va. 321, 323, 770 S.E.2d 491 (2015) (citation omitted); CoreTel Virginia, LLC v. Verizon Virginia, LLC , 808 F.3d 978, 982–83 (4th Cir. 2015). The Court discusses each element below.¹⁰

i. Enforceable obligation

Plaintiff argues that the Forms S–3 provide enforceable obligations on which their contract claims are based. (See generally Compl.) Defendants do not argue that the Forms S–3 cannot form the basis of an enforceable obligation or contract.¹¹ Indeed, Defendants do not dispute the holding in Moses v. Apple Hospitality REIT Inc. , No. 14-CV-3131, 2016 WL 8711089, at *6 (E.D.N.Y. Sept. 30, 2016), finding certain enforceable obligations in the Forms S–3. Both Defendants acknowledge that at the very least, there was an enforceable obligation to price units at "the most recent price at which an unrelated person purchased [the] units." Id. ; (AHR Mem. 10; BRE Mem. 6–7.) Defendants instead argue that Plaintiff is relying on theories or arguments not recognized by the Moses court. Thus, the Court understands the dispute to be not whether the Forms S–3 give rise to any enforceable obligations but the scope and substance of those obligations.

ii. Breach of enforceable obligation

Plaintiff asserts that Defendants breached the obligations provided in the Forms S–3 and other public filings in two ways: (1) "fail[ure] to reprice DRIP units following purchases by unrelated persons for prices far lower than $11.00," and (2) "fail[ure] to determine the fair market value and price of DRIP units from time-to-time in good faith." (Pl. Opp'n 6.)

"A material breach is a failure to do something that is so fundamental to the contract that the...