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Coldwell Banker Real Estate, LLC v. Plummer & Associates, Inc.

2009 WL 3230840 (U.S. Dist. Ct. D. N.J. 2009) (Unpublished)

FRANCHISES; GOOD FAITH AND FAIR DEALING — Where a franchise agreement expressly gives the franchisor the right to do exactly what a franchisee might complain of, and gives the franchisor the right to do so on such terms and conditions as the franchisor deems appropriate, its franchisee cannot transform such permissible conduct into impermissible conduct by operation of the implied covenant of good faith and fair dealing.

A national real estate brokerage firm entered into two separate franchise agreements with a third-party to operate two separate residential real estate brokerage offices. A principal of the franchisee executed a personal guaranty with respect to both agreements. A time came when both franchise agreements were terminated. The franchisor sued the former franchisee alleging a Lanham Act violation based on the franchisee continuing to use the franchisor’s trademarks after termination. The franchisee responded with two counterclaims: (a) breach of the franchise agreements; and (b) breach of the implied covenant of good faith and fair dealing based on franchisor’s alleged failure to pay performance premium awards, its placement of competitive franchises in the same market occupied by the franchisee, and its charging fees to the franchisee after it notified the franchisor it was closing its offices. The franchisor moved to dismiss both counterclaims.

The United States District Court granted the motion to dismiss in part and denied it in part. First, the Court rejected the franchisor’s claim that the guarantor lacked standing to assert a breach of contract claim because the individual gaurantor was not a party to either franchise agreement, but merely was a guarantor of the franchisee’s obligations under both franchise agreements. The Court noted that while it is the general rule that a guarantor may not assert a cause of action belonging to a principal against the principal’s creditor, two exceptions to the rule applied in this case: (a) the principal had consented to the making of the claim; and (b) both the principal and the surety had been joined as defendants. Thus, the Court denied the franchisor’s motion to dismiss the guarantor’s counterclaims for lack of standing.

The Court dismissed the counterclaim alleging a breach of the implied covenant of good faith and fair dealing, holding the implied covenant could not override a contract’s express terms. Here, the claimed breach of implied covenant of good faith and fair dealing claims pertained to conduct expressly governed by the franchise agreements. Thus, the Court believed that finding the conduct actionable would improperly override the franchise agreement’s express terms. It ruled that where the contracts expressly reserved to the franchisor the right to do exactly what the franchisee complained of, and gave the franchisor the right to do so on such terms and conditions as the franchisor deemed appropriate, the franchisee could not transform that permissible conduct into impermissible conduct, actionable conduct by operation of the implied covenant. Finally, the Court ruled that the allegations relating to a violation of the implied covenant were deficient for failure to assert that any of the conduct was fueled by bad faith or ill motive, an essential element of a claim for breach of the implied covenant of good faith and fair dealing.


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