S and V LLC v. Lowe's Home Centers, LLC

Background

S and V LLC and Lowe’s Home Centers, LLC each owned real property in the Commercial Center in Dublin, California. S and V owned Lot E, which was undeveloped. The parties’ property was governed by November 17, 2006 Easements, Covenants, Conditions, and Restrictions (ECCRs). The ECCRs listed some uses that were automatically permitted, some that required written consent, and some that were prohibited.

S and V alleged that Lowe’s violated the ECCRs by failing to respond to, or automatically rejecting, proposed uses requiring Lowe’s consent. S and V alleged that Lowe’s rejected a proposed hotel in June 2017 and stated in 2019 that it would not approve a car dealership under any circumstances. S and V sent Lowe’s a notice of breach and later filed this lawsuit in state court. Lowe’s removed the case to federal court.

Claims and motions

S and V asserted four claims: declaratory relief concerning the approval process, cancellation and removal of a cloud on title based on the ECCRs, breach of the implied duty of good faith and fair dealing, and injunctive relief. The complaint sought relief based on Lowe’s alleged failure to evaluate proposed uses reasonably and in good faith.

Lowe’s moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal for failure to state a legally sufficient claim. Lowe’s also moved under Rule 12(f) to strike S and V’s request for attorney’s fees. Lowe’s argued that no statute or agreement authorized attorney’s fees and that the ECCRs did not provide for them. S and V did not oppose the motion to strike. The court’s standing order treated that failure as consent to granting the motion.

Court’s reasoning

The court ruled that the ECCRs did not require Lowe’s to act reasonably when deciding whether to consent to particular uses. The relevant provision stated that certain uses required written consent but did not say that consent could not be unreasonably withheld. Other ECCR provisions expressly imposed reasonableness limits on consent decisions, showing that the parties knew how to use that language but did not include it in the provision at issue.

The court rejected S and V’s argument that the implied duty of good faith and fair dealing supplied a reasonableness requirement. Under California law, the implied duty protects the express promises in a contract and cannot add substantive duties or limits beyond the contract’s terms. The court also rejected S and V’s reliance on a California case involving consent to a sublease. That rule concerned restraints on transferring or selling property, while the ECCRs here restricted land use. The court concluded that a land-use restriction does not become a restraint on alienation merely because it may affect the ability to sell or lease the property.

Because the court found no reasonableness requirement and no unlawful restraint on alienation, it concluded that S and V’s declaratory-relief, cancellation, and injunctive-relief claims failed for the same reasons as the good-faith-and-fair-dealing claim.

Disposition

The court dismissed the breach-of-good-faith-and-fair-dealing claim with prejudice. In its conclusion, the court stated that it granted Lowe’s motion to dismiss with prejudice. It also granted Lowe’s motion to strike S and V’s request for attorney’s fees. The opinion does not separately state that the motion to strike was granted with prejudice.