United States District Court

For the Northern District of California

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UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

STONEBRAE, L.P.,

Plaintiff,

v.

TOLL BROS., INC., et al.,

Defendants.

___________________________________/

No. C-08-0221 EMC

ORDER DENYING COUNTERDEFENDANT STONEBRAE’S MOTION

TO DISMISS COUNTERCLAIM

(Docket No. 148)

Plaintiff Stonebrae, L.P. initiated this lawsuit against Defendant Toll Brothers, Inc. for

declaratory relief and breach of contract. Subsequently, Toll filed counterclaims against Stonebrae. 

Currently pending before the Court is Stonebrae’s motion to dismiss the counterclaim for breach of

the implied covenant of good faith and fair dealing. Having considered the parties’ briefs and

accompanying submissions, as well as the oral argument of counsel, the Court hereby DENIES the

motion to dismiss.

I. FACTUAL & PROCEDURAL BACKGROUND

In its counterclaims, Toll alleges as follows. Stonebrae is the owner and master developer of

the Stonebrae Development, a planned residential community in Hayward, California. See

Countercl. ¶ 5. The first phase of the Stonebrae Development was Village A; the second phase was

Village B. See id. ¶¶ 6-7. In July 2005, Stonebrae and Toll entered into an agreement pursuant to

which Toll purchased a certain number of lots in Village A. See id. ¶ 6. In May 2006, the parties

entered into an agreement pursuant to which Toll purchased a certain number of lots in Village B. 

See id. ¶ 7. At issue in this litigation is the parties’ agreement with respect to Village B.

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Paragraph A of the Village B agreement provides in relevant part that Stonebrae “intends to

construct . . . an 18-hole championship golf course, clubhouse and related facilities (the ‘Gold

Course), both adjacent to the Stonebrae Community [i.e., the residential lots].” Village B

Agreement ¶ A. According to Toll, based on Stonebrae’s promotional materials, Toll “entered into

the Village B Purchase agreement with the expectation that Stonebrae would build a high-end luxury

club house in the Stonebrae Development,” Countercl. ¶ 40, but instead of building such a

clubhouse, “Stonebrae installed a modular club house and temporary facilities” and thereby

breached its duty of good faith and fair dealing. Id. ¶ 41. Toll also alleges that Stonebrae breached

its duty of good faith and fair dealing by “eliminat[ing] numerous parks from the Stonebrae

Development and fail[ing] to construct other high quality amenities in conjunction with the

Stonebrae Development and Village B.” Id. 

II. DISCUSSION

In its motion to dismiss, Stonebrae argues that the claim for breach of the implied covenant is

not viable to the extent it is based on either the clubhouse or the parks. To the extent Stonebrae has

raised a challenge to the claim based on the parks, the Court defers ruling. Stonebrae has essentially

admitted that that issue is better left for resolution on summary judgment. See Mot. at 5 & n.5. 

Furthermore, Stonebrae has now filed a motion for summary judgment on that issue (as well as

others), which is currently set for hearing on May 12, 2010. This order therefore focuses on the

claim for breach of the implied covenant with respect to the clubhouse only.

As to this claim, Stonebrae argues that it must be dismissed because the express terms of the

parties’ contract preclude the claim. It is true that, when “acts and conduct [are] authorized by the

express provisions of the contract, no covenant of good faith and fair dealing can be implied which

forbids such acts and conduct.” Carma Developers (Cal.), Inc. v. Marathon Dev. Cal., Inc., 2 Cal.

4th 372, 374 (1992) (internal quotation marks omitted). But in the instant case Toll’s claim for

breach of the implied covenant is not contrary to any express term in the Village B Agreement. 

The Court notes that, in so concluding, it is proceeding on the assumption that the Village B

Agreement does in fact require Stonebrae to build a golf course, clubhouse, and related facilities. In

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 At the hearing, Stonebrae argued for the first time that it did not have such an obligation under

the Village B Agreement. While the Court is not, at this juncture, precluding Stonebrae from making

this assertion in the lawsuit, it is skeptical of the assertion. The Court notes that this lawsuit has been

ongoing for more than two years, but this is the first time that Stonebrae has articulated that position.

It made no such argument in support of its motion. It only argued that “Stonebrae was under no

obligation regarding when the clubhouse or the related facilities would be completed or what they would

look like.” (Opening Brief, pp. 4-5) (emphasis added). Indeed, at the hearing on the motion to dismiss,

Stonebrae actually conceded outright that it had that obligation; only later in the hearing did Stonebrae

backtrack. Finally, the Court notes that the Development Agreement for the Stonebrae Development

suggests that Stonebrae had an obligation to build. See Def.’s RJN, Ex. A (Development Agreement

¶ 3.10) (noting that the golf course and related facilities “are amenities which will significantly enhance

OWNER’s ability to market and sell at a premium the residential units to be developed on the

Property”). 

Of course, if Stonebrae now chooses to assert it had no contractual obligation to build the golf

course and clubhouse, this could lead to the Court permitting additional pleadings or motions by Toll.

2

 In its papers, Stonebrae also argues that Toll’s claim for breach of the implied covenant is also

contrary to ¶ 15.1(a) of the parties’ contract. Paragraph 15.1(a) basically provides that, with limited

exceptions not applicable here, Toll is not relying on any representations furnished by Stonebrae.

According to Stonebrae, given this provision in the contract, Toll was not entitled to rely on any

promotional materials in which Stonebrae described what the intended clubhouse would look like. See

Countercl. ¶ 40 (“In promotional materials, Stonebrae described the intended club house as a 32,000

square foot clubhouse designed in a Scottish style by an award winning architect. Toll entered into the

Village B Purchase agreement with the expectation that Stonebrae would build a high-end luxury club

house in the Stonebrae Development.”).

This argument is not persuasive. Even if Toll was not entitled to rely on any promotional

materials, that does not mean that Stonebrae was therefore free to construct any kind of clubhouse that

it wanted (e.g., a shack) or whenever it wanted (e.g., in a million years). The bigger issue is what impact

¶ 15.1(g)(iii) of the Village B Agreement has on Toll’s claim for breach of the implied covenant. 

3

its papers, Stonebrae never argued that it did not have this obligation under the contract.1

Proceeding with this assumption for purposes of the instant motion, the critical provision in the

Village B Agreement is ¶ 15.1(g)(iii),2

 which provides as follows:

(iii). Golf Course. An eighteen (18) hole golf course is

currently planned for a portion of the Stonebrae Development,

although Stonebrae makes no commitment regarding the Golf Course

generally, including without limitation, when it may be completed or

where it will be located. . . .

Village B Agreement ¶ 15.1(g)(iii) (emphasis added). Stonebrae argues that, in light of this

provision, Stonebrae did not have any obligation to make the clubhouse look in any particular way

or to complete the clubhouse by any particular time. Toll argues that, nevertheless, where a party to

a contract is given discretion to act and that discretionary power affects the right of the other

contracting party, “a duty is imposed [on the former] to exercise that discretion in good faith and fair

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 Conversely, if the contract imposed objective terms of performance, there would be no need

to imply a covenant of good faith because the express contract would govern. Storek & Storek, Inc. v.

Citicorp Real Estate, Inc., 100 Cal. App. 4th 44 (2002).

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dealing.” Locke v. Warner Bros., Inc., 57 Cal. App. 4th 354, 363 (1997) (internal quotation marks

omitted); see also California Lettuce Growers, Inc. v. Union Sugar Co., 45 Cal. 2d 474, 484 (1955)

(noting the same).

While the parties’ contract does not expressly provide that Stonebrae has discretion with

respect to the timing and quality of the clubhouse, it is clear that the contract implicitly gives

Stonebrae discretion in that regard. The parties do not dispute this. The contract contains no

specific or objective standards regarding the construction of the clubhouse. The question is whether

or not Stonebrae was given unfettered discretion under the terms of the Village B Agreement. If so,

Toll cannot assert a claim for breach of the implied covenant. The conferral of unfettered discretion

would defeat any claim of an implied covenant of good faith. See generally Vectren

Communications Services. v. City of Alameda, No. C 08-3137 SI, 2009 U.S. Dist. LEXIS 72811

(N.D. Cal. Aug. 18, 2009); Wolf v. Walt Disney Pictures & Television, 162 Cal. App. 4th 1107

(2008); Third Story Music, Inc. v. Waits, 41 Cal. App. 4th 798 (1995).3

In Vectren, Judge Illston discussed the concept of unfettered discretion. There, a private

company and the City of Alameda had an agreement pursuant to which the City’s

telecommunications system was engineered, constructed, and operated by the company. In 2002,

the company and the City agreed to terminate the relationship. The parties also agreed that the City

would buy out the company’s right to manage the telecom system – but the company was to be paid

only if the telecom system made money. See Vectren, 2009 U.S. Dist. LEXIS 72811, at *2-4. 

Ultimately, the telecom system experienced serious financial problems and the City ended up selling

the system to a third party. See id. at *5. Thereafter, the private company filed suit against the City,

asserting, inter alia, claims for breach of contract and breach of the implied covenant of good faith

and fair dealing. See id. at *5-6. With respect to the claim for breach of the implied covenant, the

private company argued that the City was in breach because it had failed to add voice service to the

telecom system. According to the company, because the City had agreed to pay the company only if

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the telecom system made money, it became obligated to take acts to make the system competitive

such as adding voice service. See id. at *12-13. 

As a starting point, Judge Illston acknowledged that “covenants to use ‘good faith’ or ‘best

efforts’ to generate profits for a licensor are ‘routinely implied where the licensor grants exclusive

promotional or licensing rights in exchange for a percentage of profits or royalties,’ even though the

licensee does not expressly promise to do anything.” Id. at *13. But, she added, 

an implied covenant will not be read into a contract to prohibit a party

from doing something that is expressly permitted by the agreement. 

“Thus, although it has been said the implied covenant finds ‘particular

application in situations where one party is invested with a

discretionary power affecting the rights of another’ if the express

purpose of the contract is to grant unfettered discretion, and the

contract is otherwise supported by adequate consideration, then the

conduct is, by definition, within the reasonable expectation of the

parties and ‘can never violate an implied covenant of good faith and

fair dealing.’”

Id. at *13-14 (emphasis added).

Judge Illston then concluded in Vectren that there was no breach of the implied covenant

based on the City’s failure to add voice services to the telecom system. She explained that the

agreement between the private company and the City 

conferred complete discretion on the City to decide whether to make

any additions or modifications to the system: “Alameda P&T may at

any time and from time to time, in its sole discretion and at its own

expense, install or permit to be installed other items of equipment or

other personal property in or upon the Telecom System.” [This]

section[] permit[s] the City to decide whether and how to modify the

telecom system, and whether to install other equipment in the system. 

In light of the complete absence of any language in the [parties’

agreement] requiring the addition of voice service, and the

discretionary language in Sections 6.2 and 6.3, there is no breach. 

“[Implied] terms cannot vary the express terms of a contract; if the

defendant did what it was expressly given the right to do, there can be

no breach.” 

Id. at *17-18 (emphasis added).

In Wolf, a state appellate court also addressed the issue of unfettered discretion. There,

an author entered into a written purchase agreement granting Disney

the right to exploit the “Roger Rabbit” characters in a wide variety of

contexts. [The agreement specified that] “Purchaser [Disney] shall

not be under any obligation to exercise any of the rights granted to

Purchaser hereunder; and any and all said rights may be assigned by

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Purchaser, and/or licenses may be granted by Purchaser with respect

thereto, as Purchaser may see fit.” In exchange, Disney agreed to

give the author 2.5% of any motion picture net profits, and 5% of the

“gross receipts” derived from the exploitation of the Roger Rabbit

characters. The author claimed that Disney breached the implied

covenant of good faith and fair dealing by negotiating promotional

agreements for which it received no monetary consideration, thus

reducing the percentage of “gross receipts” to which the author was

entitled. The Court of Appeal rejected that claim:

[T]he 1983 Agreement afforded Disney the unlimited

discretion to grant (or not grant) to third parties licenses

to exploit the Roger Rabbit characters.

Id. at *14-15 (emphasis added). The court emphasized:

Had Disney . . . simply elected not to exploit the rights granted to it

under the 1983 Agreement, Cry Wolf agrees it would have no recourse

against Disney. However, once Disney elected to enter into licensing

agreements with third parties in connection with the exploitation of the

Roger Rabbit characters, Cry Wolf argues, it had a duty to do so fairly

and in good faith so as not to deliberately thwart Cry Wolf’s

opportunity to obtain a royalty. That argument rests on a distortion of

the language in the 1983 Agreement, which did not merely grant

Disney the ability to refrain from exercising the rights conveyed, but

also conferred the express authority to “grant licenses” to third parties

in connection with the exploitation of the Roger Rabbit characters in

any manner it “saw fit.” As explained, recognizing an implied term

that would limit the unfettered discretion given to Disney to license

the characters as it saw fit would be at odds with the express terms of

the agreement. 

Wolf, 162 Cal. App. 4th at 1122-23.

Thus, in the instant case, the question is whether the parties’ Village B Agreement conferred

unfettered discretion on Stonebrae with respect to the clubhouse, similar to the agreements in

Vectren and Wolf. As noted above, ¶ 15.1(g)(iii) of the Village B Agreement states as follows:

(iii). Golf Course. An eighteen (18) hole golf course is

currently planned for a portion of the Stonebrae Development,

although Stonebrae makes no commitment regarding the Golf Course

generally, including without limitation, when it may be completed or

where it will be located. . . .

Village B Agreement ¶ 15.1(g)(iii) (emphasis added). Stonebrae’s argument that this provision

gives it unfettered discretion is unavailing.

First, the plain language of the provision does not clearly confer unfettered discretion upon

Stonebrae. The provision vaguely states that “Stonebrae makes no commitment regarding the Golf

Course generally.” (Emphasis added.) This contrasts with the language used in the contracts in

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Vectren and Wolf. In Vectren, the agreement between the private company and the City specified

that the City “‘may at any time and from time to time, in its sole discretion and at its own expense,

install or permit to be installed other items of equipment or other personal property in or upon the

Telecom System.’” Vectren, 2009 U.S. Dist. LEXIS 72811, at *18 (emphasis added). In Wolf, the

agreement between the author and Disney provided: “‘Purchaser [Disney] shall not be under any

obligation to exercise any of the rights granted to Purchaser hereunder; and any and all said rights

may be assigned by Purchaser, and/or licenses may be granted by Purchaser with respect thereto, as

Purchaser may see fit.’” Wolf, 162 Cal. App. 4th at 1121 n.7 (emphasis added). In Third Story, 41

Cal. App. 4th at 801, the agreement referenced defendant’s manufacture, sell, distribute, and

advertise the works of Tom Waits, but provided that defendant “‘may at our election refrain from

any or all of the foregoing.’” (Emphasis added.) The language of § 15.1(g)(iii) is less conclusive

than that in these cases.

Second, even if the language used in ¶ 15.1(g)(iii) is sufficiently comparable to that used in

the agreements in Vectren and Wolf, that does not mean that ¶ 15.1(g)(iii) necessarily conferred

unfettered discretion. In Vectren and Wolf – as well as Third Story – the defendants were given the

discretion to take an action or decline to take an action. They were not, as here, given discretion

only as to how or when to take the action (assuming as noted above there was an obligation to take

action (i.e. build a clubhouse)). That difference is material. It is possible to give unfettered

discretion with respect to a decision whether or not to take an action. But if the contract requires an

action, there cannot be unfettered discretion as to how or when to take such action lest the obligation

to take the action be entirely defeated. For example, if ¶ 15.1(g)(iii) of the Village B Agreement did

give Stonebrae unfettered discretion as to when to build a clubhouse (Stonebrae’s position), then this

would effectively give Stonebrae the right to delay construction ad infinitum. Stonebrae would, in

effect, never have to build the clubhouse at all – contrary to the express terms of the contract (as

assumed herein). In short, Stonebrae’s interpretation of the contract is not reasonable given its

assumed obligation to build the golf course and clubhouse. Such a grant of unfettered discretion

would be contrary to the express contractual obligation (assumed herein) to build a clubhouse. 

Storek & Storek, Inc. v. Citicorp Real Estate, Inc., 100 Cal. App. 4th 44 (2002).

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Accordingly, as a matter of contract interpretation, the Court concludes that ¶ 15.1(g)(iii) of

the Village B Agreement did not confer unfettered discretion on Stonebrae with respect to the

construction of the golf course and clubhouse. Since the contract conferred discretion without either

imposing objective terms or conferring unfettered discretion, the covenant of good faith and fair

dealing is implied.

As a final point, the Court addresses Stonebrae’s contention that, even if its discretion had

limits, thereby giving rise to an implied duty of good faith and fair dealing, no breach of the implied

covenant could have taken place in the instant case because no breach could have happened by

November 1, 2007, the day that Toll argues was the close of escrow. In other words, according to

Stonebrae, even if it could not, under the Village B Agreement, wait one million years to complete

the clubhouse, nothing required it to complete the clubhouse by the day escrow was to close. That

argument, however, deals with the merits of Toll’s claim for breach of the implied covenant. At this

juncture, the Court cannot say as a matter of law that there was no breach. Even if Stonebrae did not

have to complete the clubhouse by the close of escrow, that does not preclude the possibility of a

breach. For example, if it were clear by the close that escrow that Stonebrae had decided to build no

clubhouse or only a clubhouse of sub-par caliber (e.g., a shack), then arguably Toll could possibly

claim an anticipatory breach. Whether there was an actual breach is not before the Court. 

Moreover, as stated above, in concluding that a covenant of good faith may be implied with respect

to construction timing and quality of the clubhouse, the Court does not address nor has it resolved

the foundation question whether the express contract obligated Stonebrae to build a golf course and

clubhouse at all.

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III. CONCLUSION

For the foregoing reasons, the Court denies Stonebrae’s motion to dismiss the counterclaim

to the extent it is based on the clubhouse. The denial is without prejudice to the issue whether

Stonebrae was generally obligated to build a clubhouse at all.

This order disposes of Docket No. 148.

IT IS SO ORDERED.

Dated: April 8, 2010

_________________________ EDWARD M. CHEN

United States Magistrate Judge

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