Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_06-cv-02353/USCOURTS-caed-2_06-cv-02353-1/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1332 Diversity-(Citizenship)

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Because oral argument will not be of material assistance, 1

the Court orders this matter submitted on the briefs. E.D. Cal.

Local Rule 78-230(h). 

1

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

EUGENE N. GORDON, INC., 2:06-cv-2353-MCE-DAD

a California Corporation, 

JIM REEGO, and LIZ REEGO, 

as individuals,

Plaintiffs,

v. MEMORANDUM AND ORDER

LA-Z-BOY, INC., a Michigan 

Corporation, and Does 1-150,

Defendants.

----oo0oo----

Through the present action, Plaintiffs Eugene N. Gordon,

Inc., Jim Reego, and Liz Reego allege Defendant La-Z-Boy, Inc.

(“Defendant”) breached written contracts between them; breached

the implied covenant of good faith and fair dealing; and

committed intentional and negligent misrepresentation.1

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2

More specifically, Plaintiffs allege that Defendant

permitted another retailer to use, inter alia, color schemes,

marketing materials, display environments, and product lines

(“Gallery Motif”) in violation of the Parties’ retailer

agreements (“Retailer Agreements”). In addition, Plaintiffs aver

that Defendant orally misrepresented that it would protect

Plaintiffs’ right to exclusive use of the Gallery Motif in a

predetermined territory. 

Now before this Court is Defendant’s Motion to Dismiss

Plaintiffs’ Complaint for failure to state a claim upon which

relief can be granted. Fed. R. Civ. P. 12(b)(6). For the

reasons set forth below, Defendant’s Motion to Dismiss is granted

in part and denied in part.

BACKGROUND

Plaintiff Eugene N. Gordon, Inc. (“Gordon, Inc.”) is a

retail operator of several “La-Z-Boy Galleries” in the greater

Sacramento area. Plaintiffs Jim Reego and Liz Reego

(collectively, the “Reegos”) own and operate Gordon, Inc. 

Defendant La-Z-Boy, Inc. is a Michigan Corporation engaged in the

business of manufacturing and wholesaling home furnishings. 

Beginning in 1992, Gordon, Inc. and Defendant entered into a

series of Retail Agreements that authorized Gordon, Inc. to

retail La-Z-Boy products through outlets generally called

“La-Z-Boy Galleries.” 

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3

Pursuant to those Retail Agreements, Gordon, Inc. proceeded to

establish several outlets in the greater Sacramento area over the

next ten years. Each additional retail outlet was memorialized

by a substantially identical Retail Agreement regarding the

operation of those outlets. Gordon, Inc.’s multiple retail

locations operated without material incident over the next ten

years.

In 2004, Defendant authorized Plaintiffs to open another

retail outlet in Rocklin, California. By July 2005, Plaintiffs

learned that Defendant intended to permit a competing furniture

store, RC Willey, to retail La-Z-Boy products through an outlet

also located in Rocklin, California (“RC Willey Gallery”). In

addition, Plaintiffs learned that RC Willey intended to advertise

and sell its La-Z-Boy line through a “La-Z-Boy in store Gallery.” 

Plaintiffs immediately alerted Defendant that they believed the

use of the “in store” Gallery Motif would be a violation of the

exclusive territory provisions contained in the Retail

Agreements. Defendant responded that it would “ensure a fair

playing field.” Relying upon that assurance, the Reegos

proceeded to expend substantial sums in anticipation of their

planned Rocklin retail outlet (“Gordon Gallery”).

Between July 2005, and June 2006, the Parties were in

frequent communication regarding the anticipated opening of the

Gordon Gallery and the RC Willey Gallery. Plaintiffs allege that

during those communications, Defendant repeatedly stated that it

would “ensure a level playing field.” In June of 2006, however,

Defendant informed Plaintiffs it would not meaningfully restrict

the product lines and marketing materials available to RC Willey. 

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4

On October 25, 2006, Plaintiffs filed the present action alleging

breach of contract, breach of the implied covenant of good faith

and fair dealing, intentional misrepresentation, negligent

misrepresentation and seeking specific performance as well as

declaratory relief. 

STANDARD

On a motion to dismiss for failure to state a claim under

Rule 12(b)(6), all allegations of material fact must be accepted

as true and construed in the light most favorable to the

nonmoving party. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336,

337-38 (9th Cir. 1996). A complaint will not be dismissed for

failure to state a claim “‘unless it appears beyond doubt that

plaintiff can prove no set of facts in support of [his or] her

claim that would entitle [him or] her to relief.’” Yamaguchi v.

Dep’t of the Air Force, 109 F.3d 1475, 1480 (9th Cir. 1997).

If the Court grants a motion to dismiss a complaint, it must

then decide whether to grant leave to amend. The Court should

“freely give[]” leave to amend when there is no “undue delay, bad

faith[,] dilatory motive on the part of the movant, ... undue

prejudice to the opposing party by virtue of ... the amendment,

[or] futility of the amendment....” Fed. R. Civ. P. 15(a); Foman

v. Davis, 371 U.S. 178, 182 (1962). Generally, leave to amend is

only denied when it is clear that the deficiencies of the

complaint cannot be cured by amendment. DeSoto v. Yellow Freight

Sys., Inc., 957 F.2d 655, 658 (9th Cir. 1992).

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5

ANALYSIS

1. Choice of Law

Defendant first argues that Michigan law, rather than

California law, applies to Plaintiffs’ contractually related

claims. In support of its contention, Defendant points to the

following choice of law provision contained within each of the

Retail Agreements: “Applicable Law. This Agreement, including

all matters relating to the validity, construction, and

enforcement thereof, shall be governed by the laws of the State

of Michigan.” Pl.’s Ex. 1 Part 5, 46 (Art. XI § 11.13). 

Plaintiffs do not dispute the existence or validity of the

foregoing choice of law provisions.

Because this Court sits in the State of California it must

analyze this choice of law issue in accord with California’s

choice of law rules. Klaxon v. Stentor Elec. Mfg. Co., 313 U.S.

487, 496 (1941); Patton v. Cox, 276 F.3d 493, 495 (9th Cir.

2002). California courts will enforce a choice of law clause in

a contract in favor of another jurisdiction’s law if there is: 1)

a substantial relationship between the contract and the chosen

state or some other reasonable basis for the selection of the

foreign states law; and 2) no conflict with fundamental policy of

California law. Nedlloyd Lines B.V. v. Super. Ct. of San Mateo,

3 Cal. 4th 459, 464-65 (1992).

In the instant case, Defendant’s state of incorporation,

principal place of business and headquarters are all in Michigan.

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6

In addition, the contract terms themselves provide that Michigan

law should govern the Retail Agreements. These connections

plainly provide a reasonable basis for applying Michigan law to

the present controversy. AFB Capital Corp. V. Grove Props. Co.,

126 Cal. App. 4th 204, 217 (2005). Further, neither Party has

asserted nor can the Court discern any obvious conflict between

Michigan law and fundamental policy of California law. Given the

foregoing, the Court finds it proper to enforce the choice of law

provisions contained in the Retail Agreements. Accordingly,

Michigan law shall govern the resolution of the contractual

issues herein.

2. Breach of Contract

The gravamen of Plaintiffs’ first claim is that Defendant is

in breach of the Retail Agreements because it granted a competing

company in Plaintiffs’ exclusive territory the right to open a

La-Z-Boy outlet when it permitted RC Willey to use the La-Z-Boy

Gallery Motif. Pl.’s Ex. 1 Part 5, 28 (Art. II, § 2.3). 

Defendant rebuts that the Retail Agreements clearly reserve to it

the right to wholesale products to other retailers without

restriction. Pl.’s Ex. 1 Part 5, 28 (Art. II, § 2.3). In fact,

the Retail Agreements provide as follows:

“La-Z-Boy shall not, while this Agreement remains in

effect, own or operate, or grant the right to any third

party to establish, any other Outlet within the

Designated Area. Nothing in this Section 2.3 shall be

deemed or construed in any manner, however, as limiting

or restricting the right of La-Z-Boy to sell La-Z-Boy

Products at wholesale to any furniture retailer doing

business within the Designated Area so long as such

retailer is not operating an Outlet therein.”

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Id.

Defendant contends there is no breach of the Retail

Agreements as a matter of law because the foregoing provision has

not been breached as RC Willey is not operating an “Outlet.” In

reply, Plaintiff points the Court to the definition of the term

“Outlet” set forth in the Retail Agreements as follows:

“‘Outlet’ shall mean, ... when used with respect to LaZ-Boy and other retailers, the retail outlets

established by such persons which are La-Z-Boy

Furniture Galleries.”

Pl.’s Ex. 1 Part 5, 28 (Art. I, Definitions (I)). The Retail

Agreements do not define the term “La-Z-Boy Furniture Galleries.” 

Plaintiffs contend the RC Willey “in store La-Z-Boy Gallery” is,

in essence, a La-Z-Boy Furniture Gallery despite the fact that it

is within the walls of a larger establishment. Accordingly,

Plaintiffs reason, Defendant has breached the Retail Agreements

as it permitted RC Willey to operate an “Outlet” in its exclusive

territory in violation of Article II, § 2.3. 

Under Michigan law the primary goal in the construction or

interpretation of a contract is to honor the intent of the

parties. Rasheed v. Chrysler Corp., 445 Mich. 109, 127 n. 28

(1994). When the language of the contract is clear and

unambiguous the contract must be enforced as written. HomeWausau

Underwriters Inc. Co. v. Ajax Paving Indus. Inc., 256 Mich App.

646, 650 (2003). However, a contract is ambiguous if the

language is susceptible to two or more reasonable

interpretations. D'Avanzo v. Wise and Marsac, PC, 223 Mich. App.

314, 319 (1997).

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Plaintiffs’ Complaint and Opposition contain parol 2

evidence. However, when the parties include an integration

clause in their written contract, it is conclusive and parol

evidence is not admissible. See UAW GM Human Res. Ctr. v. KSL

Recreation Corp., 228 Mich. App. 486, 502 (1998).

The Retail Agreements at issue contain integration clauses

and Plaintiffs have made no attempt to attack them. Pl.’s Ex. 1

Part 5, 46 (Art. XI, § 11.11). Accordingly, pursuant to Michigan

law, the Court must confine its inquiry into the ambiguity of the

Retail Agreements to the four corners of the documents.

8

In an instance of contractual ambiguity, factual development is

necessary to determine the intent of the parties and summary

disposition is inappropriate. Id. Further, ambiguous terms are

to be strictly construed against the drafter of the written

contract. Sturgis Sav. & Loan Ass'n v. Italian Vill., Inc., 81 2

Mich. App. 577, 580 (1978).

Plaintiffs contend that they understood section 2.3’s grant

of exclusive territorial rights to include an exclusive right to

use the “La-Z-Boy Furniture Galleries Program.” Among the

exclusive rights Plaintiffs believed they acquired pursuant to

section 2.3, is the use of the Gallery Motif. In support of this

understanding, Plaintiffs point to section 6.3 of the Retail

Agreements, which provides that certain retail materials have

been developed for “sole use by the La-Z-Boy Furniture

Galleries.” Pl.’s Ex. 1 Part 5, 33 (Art. VI § 6.3).

Defendant contends that the only restriction section 2.3

imposes upon its ability to permit use of the Gallery Motif from

the La-Z-Boy Galleries Program by other retailers in the

territory is that those other retailers may not solely sell

La-Z-Boy products.

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9

Defendant relies upon section 7.5 to contend the contract permits

Defendant to provide identical marketing materials, product

lines, and other components of the La-Z-Boy Galleries Program to

other retailers inside Plaintiffs’ exclusive territory. Section

7.5 provides that the stand alone nature of the Galleries Program

is essential to it and Plaintiffs must adhere thereto. Pl.’s Ex.

1 Part 5, 34 (Art. VII § 7.5).

Section 7.5 appears to be a limitation on Plaintiffs and not

a description of the rights Plaintiffs acquired through section

2.3. Moreover, as discussed above “Outlet” is defined

differently when referring to Plaintiffs as opposed to other

retailers in the territory. Accordingly, section 7.5 does not

definitively resolve the question of the extent and nature of the

exclusive territorial rights acquired by Plaintiffs under section

2.3.

Having exhaustively reviewed the Retail Agreements, the

Court finds that they are ambiguous as to the extent of the

exclusive territorial rights granted to Plaintiffs. It is not

clear from the face of the documents what materials were

developed for sole use by Plaintiffs within their exclusive

territory and what portions of the La-Z-Boy Galleries Program

Defendant was free to give to other retailers in the area. Thus,

factual development is necessary to determine the intent of the

Parties and dismissal is inappropriate at this early stage in the

litigation. 

For the reasons stated above, Defendant’s Motion to Dismiss

Plaintiffs’ breach of contract claim for failure to state a claim

is denied.

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3. Specific Performance

Defendant next moves to dismiss Plaintiffs’ separate claim

for “specific performance” on the ground that specific

performance is a remedy for breach of contract and not a

stand-alone claim. Defendant is correct that specific

performance is a remedy for the breach of contract where there is

no adequate remedy at law. Wilkison v. Wiederkehr, 101 Cal. App.

4th 822, 833 (2002); Petersen v. Hartell, 40 Cal. 3d 102, 110

(1985). Accordingly, Plaintiffs’ claim for specific performance

is dismissed without leave to amend. However, Plaintiffs may

seek the equitable remedy of specific performance for their

claims upon a proper showing.

4. Declaratory Relief

Defendant also moves to dismiss Plaintiffs’ claim for

“declaratory relief.” Like Plaintiffs’ claim for specific

performance, this claim is also properly a prayer for relief and

not a stand-alone claim. Plaintiffs cite no authority for the

proposition that declaratory relief is a stand-alone cause of

action as opposed to relief which the Court may give for breach

of contract. Moreover, the declaration Plaintiffs seek is that

their interpretation of the contract prevails. Thus, a separate

claim for declaratory relief is duplicative of Plaintiffs’ breach

of contract claim because the Court must interpret the contract

and resolve the underlying contractual dispute to determine if

declaratory relief is appropriate.

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Accordingly, Plaintiffs separate claim for declaratory relief is

dismissed without leave to amend. However, Plaintiffs may seek

declaratory relief for their claims upon a proper showing.

5. The Implied Covenant of Good Faith and Fair Dealing

Defendant next moves to dismiss Plaintiffs’ claim for breach

of the implied covenant of good faith and fair dealing for

failure to state a claim. Defendant contends that Michigan

courts do not recognize a claim for breach of the implied

covenant of good faith and fair dealing on the facts alleged by

Plaintiffs. Plaintiffs contend that Michigan courts do, in fact,

recognize an implied covenant of good faith and fair dealing and

seek punitive damages for Defendant’s allegedly willful breach of

the covenant.

Defendant correctly contends that Michigan law only

recognizes a claim for breach of the implied covenant where the

contract leaves the manner of one party’s performance to that

party’s own discretion. McLiechy v. Bristol West Ins. Co., 408

F. Supp. 2d 516, 522 (W.D. Mich. 2006); Ferrell v. Vic Tanny

Int’l Inc., 137 Mich. App. 238, 243 (1984).

Plaintiffs assert that Michigan law recognizes a claim for

breach of the implied covenant where the contract is ambiguous. 

However, Plaintiffs were unable to locate any Michigan law to

support this proposition. Instead, Plaintiffs rely upon a Fifth

Circuit case applying Michigan law which extended the implied

covenant to cases of ambiguity. Hubbard Chevrolet Co. v. Gen.

Motors Corp., 873 F.2d 873, 876-77 (5th Cir. 1989).

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However, the Court is not persuaded by Hubbard Chevrolet because

Michigan courts have consistently and narrowly construed the

implied covenant in an effort to preclude plaintiffs from

pleading breach of contract in tort which would give rise to

punitive damages. See Kewin v. Massachusetts Mut. Life Ins. Co.,

409 Mich. 401, 423 (1980). Under Michigan law a breach of

contract cannot give rise to punitive damages even where the

breach is intentional. Ass’n Research & Dev. Corp. v. CNA Fin.

Corp., 123 Mich. App. 162, 172 (1983). Accordingly, the Court

finds that Michigan law only recognizes the implied covenant of

good faith and fair dealing where the contract leaves the manner

of one party’s performance to that party’s own discretion.

Plaintiffs’ claim for breach of the implied covenant rests

upon an assertion that Defendant “consciously, deliberately and

unfairly” breached the contract by allowing RC Willey to use the

Gallery Motif, a right held exclusively by Plaintiffs. Pl.’s

Compl. ¶ 66. Defendant correctly contends that Plaintiffs’

Complaint fails to allege any abuse of discretion by Defendant. 

As drafted, the Complaint fails to state a claim for breach of

the implied covenant of good faith and fair dealing under

Michigan law. 

For the reasons set forth above, Defendant’s Motion to

Dismiss Plaintiffs’ claim for breach of the implied covenant of

good faith and fair dealing is granted with leave to amend. 

Further, Plaintiffs’ request for punitive damages is dismissed

without leave to amend.

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6. Intentional and Negligent Misrepresentation

Defendant next moves to dismiss Plaintiffs’ claims for

intentional and negligent misrepresentation for failure to plead

with sufficient particularity. Fed. R. Civ. P. 9(b). Defendant

argues Plaintiffs’ Complaint fails to meet the requirements of

Rule 9 because it does not set out the time, place, or to whom

the statements were made. Plaintiffs respond that the Complaint

sets forth both a date range as well as the parties which is

sufficient to meet the pleading standards of Rule 9(b).

Rule 9(b) requires that all averments of fraud be plead with

particularity, a standard which requires “a high degree of

meticulousness.” Desaigoudar v. Meyercord, 223 F.3d 1020, 1022

(9th Cir. 2000). To meet this standard the allegations must

identify the time, place, and content of the alleged

misrepresentation. Miscellaneous Serv. Workers, Drivers, &

Helpers, Teamsters Local #427 v. Philco-Ford Corp., 661 F.2d 776,

782 (9th Cir. 1981). Additionally, Plaintiffs must plead facts

explaining why the statement was false when it was made. Smith

v. Allstate Ins. Co, 160 F. Supp. 2d 1150, 1152 (S.D. Cal. 2001).

Defendant correctly points out that the Complaint does not

state the specific content, recipient, times, or places of the

allegedly fraudulent statements nor does it plead facts

explaining why the statements were false at the time they were

made. The Complaint merely notes that the statements allegedly

conflict with the current state of affairs. Pl.’s Compl. ¶¶ 85-

88. There are no facts alleged to support Plaintiffs’ conclusion

that the statements were false at the time they were made.

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The Court finds that Plaintiffs’ Complaint fails to meet the

pleading standard of Rule 9(b) because it does not state with

sufficient particularity the elements of a fraud claim. 

Accordingly, Defendant’s Motion to Dismiss is granted with leave

to amend.

7. Dismissal of Plaintiffs Jim Reego and Liz Reego

Lastly, Defendant moves to dismiss the Reegos’, each in

their individual capacity, from this case as the Complaint fails

to allege a proper ground for relief as to them. Plaintiffs

respond that the Reegos were personally injured as a result of

the misrepresentations and breach of contract.

Defendant correctly points out that although the Reegos did

sign the various Retail Agreements at issue, each of these

Agreements was entered into by Gordon, Inc., not by the Reegos

individually. Accordingly, they were not parties to the Retail

Agreements and are, therefore, not proper Plaintiffs to assert

claims for breach of contract or breach of the implied covenant

of good faith and fair dealing. Plaintiffs concede that they are

the sole shareholders of Gordon, Inc. and that the Corporation,

rather than they themselves, are the real parties in interest as

to these claims.

A shareholder cannot bring an individual cause of action

unless it appears that the injury resulted from the violation of

some special duty owed the stockholder by the wrongdoer and

having its origin in circumstances independent of the plaintiff’s

status as a shareholder.

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See Nelson v. Anderson, 72 Cal. App. 4th 111, 124, 84 Cal. Rptr.

2d 753 (1999)(citations omitted). There is no argument that the

Reegos acted on their own behalf when they invested in the

property for the Gordon Gallery site. Rather, it is clear their

investment was specifically in anticipation of Gordon, Inc.

utilizing the property for the purpose of establishing a new

retail outlet. To be sure, any injury resulting from the alleged

breach of contract or breach of the implied covenant of good

faith and fair dealing was an injury incidental to that of the

Corporation. Because their injury does not stand independently

of the Corporation as to the contractually related claims, the

Reegos do not have standing to bring these claims individually. 

Accordingly, the Court grants Defendant’s Motion to Dismiss the

Reegos’ contractually related claims without leave to amend. 

As discussed above, Plaintiffs’ claims for specific

performance and declaratory relief have been dismissed because

they are remedies as opposed to stand-alone claims. Given that

these claims have been dismissed without leave to amend,

Defendant’s Motion to Dismiss the Reegos claims in their

individual capacities as to these claims is proper and hereby

granted without leave to amend.

The Parties dispute whether the misrepresentation claims are

injuries personal to the Reegos or whether those injuries are

those of the Corporation. The Court needn’t resolve this dispute

as the claims for misrepresentation have been dismissed for

failure to plead with sufficient particularity. Consequently,

the Court grants Defendant’s Motion to Dismiss the Reegos in

their individual capacities with leave to amend.

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CONCLUSION

For the reasons set forth above, La-Z-Boy Inc.’s Motion to

Dismiss Gordon, Inc.’s Complaint is granted in part and denied in

part. Defendant’s Motion to Dismiss Plaintiffs’ claim for breach

of contract is denied. Defendant’s Motion to Dismiss Plaintiffs’

claims for “specific performance” and “declaratory relief” is

granted without leave to amend. Defendant’s Motion to Dismiss 

Plaintiffs’ claim for breach of the implied covenant of good

faith and fair dealing is granted with leave to amend. 

Defendant’s Motion to Dismiss Plaintiffs’ claims for intentional

and negligent misrepresentation is granted with leave to amend. 

Lastly, Defendant’s Motion to Dismiss Plaintiffs Jim Reego and

Liz Reego from the Complaint is granted without leave to amend as

to Plaintiffs’ breach of contract claim and breach of the implied

covenant of good faith and fair dealing. 

Defendant’s Motion to Dismiss Plaintiffs Jim Reego and Liz

Reego individually is granted with leave to amend as to

Plaintiffs’ misrepresentation claims. Plaintiffs have twenty

(20) days from the issuance of this Order to amend their

Complaint.

IT IS SO ORDERED.

Dated: April 12, 2007

_____________________________

MORRISON C. ENGLAND, JR.

UNITED STATES DISTRICT JUDGE

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