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Charlton v. Gallo

February 18, 2010


The opinion of the court was delivered by: Norma L. Shapiro, S.J.


Plaintiffs moved to dismiss the amended counterclaim of defendants Ryan E. Gallo and Ryan Gallo Tree Service, Inc. (collectively, the "Gallo Defendants"), under Rule 12(b)(6). The Gallo Defendants asserted seven claims against plaintiffs regarding an agreement of sale for property in Chester County, Pennsylvania. After oral argument at which counsel for all parties were heard, this court dismissed all counts of the amended counterclaim by Order dated January 25, 2010, for the reasons that follow. This court has jurisdiction under 28 U.S.C. § 1332.


When reviewing a Rule 12(b)(6) motion to dismiss, the court must accept as true all allegations in the counterclaim and must provide the counterclaim-plaintiff with the benefit of all inferences that may be fairly drawn from the contents of the pleading. See Phillips v. County of Allegheny, 515 F.3d 224, 228 (3d Cir. 2008).Accepting as true the allegations of the counterclaims, the pertinent facts were as follows:

Vaughn and Deborah Charlton (the "Charltons"), are citizens of Pennsylvania and owned three pieces of real property located in Chester County, Pennsylvania. Ryan Gallo Tree Service, Inc. ("Tree Service"), is a Delaware corporation that conducts landscaping business in Delaware and Pennsylvania. Ryan E. Gallo ("Mr. Gallo"), is a citizen of Delaware, and owns 100% of the stock of Tree Service.

In August 2006, Tree Service entered into an agreement of sale (the "Agreement") with the Charltons to purchase the three Pennsylvania properties. The total purchase price was $1.25 million. Tree Service and Mr. Gallo financed the entire purchase price through two loans:a loan in the amount of $1 million from Wilmington Savings Fund Society, secured by a first mortgage on the purchased property; and an interest-only balloon note ("Balloon Note") in the amount of $250,000, to the Charltons, secured by a second mortgage on the purchased property and a mortgage on Mr. Gallo's personal residence in Delaware. Even though Tree Service was the only purchaser, both Tree Service and Mr. Gallo were obligors on the Balloon Note.

Closing on the sale of the Pennsylvania property took place November 9, 2006, at the Pennsylvania offices of Global Title, Inc. ("Global"). Global prepared and filed a mortgage to secure the Balloon Note; the mortgage purported to cover the purchased property and Mr. Gallo's personal residence in Delaware. Mr. Gallo denied agreeing to a mortgage on his personal residence. The mortgage securing the Balloon Note was prepared only in the name of Tree Service, and signed by Mr. Gallo on behalf of Tree Service. Tree Service does not hold title to Mr. Gallo's residence.

Under the terms of the Balloon Note, Mr. Gallo and Tree Service were to make monthly interest payments to the Charltons in the amount of $1,875.00 until December 9, 2008, at which time the entire principal balance of $250,000.00 was due to the Charltons. The Gallo Defendants paid interest on the Balloon Note for approximately two years; none of the $250,000 principal has been paid.In 2008, the Charltons filed a mortgage foreclosure action on Mr. Gallo's residence in the Superior Court of Delaware (No. 08-L-01-127(CLS)). The parties stipulated to dismissal of that action on September 29, 2009.

The Charltons commenced this diversity action by filing a complaint for breach of contract against the Gallo Defendants to enforce the Balloon Note. The Gallo Defendants filed an answer and counterclaim against the Charltons and, after a motion to dismiss, an amended counterclaim. The Charltons moved to dismiss the amended counterclaim under Federal Rule of Civil Procedure 12(b)(6).

While the Charltons' second motion to dismiss was pending, Mr. Gallo filed a voluntary Chapter 7 petition in bankruptcy. Counsel for the Gallo Defendants, asserting that they lacked the authority to do so under the automatic stay, declined to file a response to the Charltons' motion on behalf of Mr. Gallo; counsel also waived Tree Service's right to file a responsive pleading, and asked that the court rely on Tree Service's response to the prior motion to dismiss. Under 11 U.S.C. § 362(a), the filing of a Suggestion of Bankruptcy operates as a stay only of proceedings against the debtor. "[W]ithin one case, actions against a debtor are suspended even though closely related claims by the debtor may continue. Judicial proceedings resting on counterclaims and third-party claims asserted by a defendant-debtor are not stayed, while same-case proceedings asserted by the plaintiff are stayed." Maritime Electric Co. v. United Jersey Bank, 959 F.2d 1194, 1205 (3d Cir. 1991). By Order dated January 25, 2009, the Charltons' claim against Ryan E. Gallo, individually, was severed and stayed. This court has the authority to determine the amended counterclaim brought by the Gallo Defendants.


A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) tests the legal sufficiency of a claim and whether the facts as alleged would support relief under the proffered legal theory. See, e.g., Kost v. Kozakiewicz, 1 F.3d 176, 183 (3d Cir. 1993). Except as provided in Federal Rule of Civil Procedure 9, a complaint is sufficient if it complies with Rule 8(a)(2). That rule requires only "a short and plain statement of the claim showing that the pleader is entitled to relief" in order to give the defendant fair notice of what the claim is and the grounds upon which it rests. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007).

A counterclaim must be dismissed for failure to state a claim if it does not allege "enough facts to state a claim to relief that is plausible on its face." Twombly, 550 U.S. at 570; Ashcroft v. Iqbal, 129 S.Ct.1937, 1949, 173 L.Ed. 2d 868 (2009). "A claim has facial plausibility when the [claimant] pleads factual content that allows the court to draw the reasonable inference that the [counterclaim-defendant] is liable for the misconduct alleged." Iqbal, 129 S.Ct. at 1949; see also Fowler v. UPMC Shadyside, 578 F.3d 203, 210 (3d Cir. 2009).


A federal district court sitting in diversity must apply the substantive law of the state whose law governs the action. Orson, Inc. v. Miramax Film Corp., 79 F.3d 1358, 1373 n.15 (3d Cir. 1996). The parties agree that Pennsylvania law governs this dispute.

A. Fraud in the Inducement

The Gallo Defendants alleged that the Charltons fraudulently induced them to enter into the Agreement with misrepresentations regarding: (1) the "buildability" of the property based on undisclosed wetlands and a protected flood zone; (2) the ease with which the Gallo Defendants could obtain zoning approval for development; (3) Mr. Charlton's relationship with the Township allowing faster zoning approval; and (4) the fair market value of the property. The Charltons asserted these allegations of fraud were vague, contrary to the express terms of the Agreement, barred by the parole evidence rule, and barred by Pennsylvania's two year statute of limitations.

Fraud in the inducement occurs where "the party proffering evidence of additional prior representations does not contend that the representations were omitted from the written agreement, but, rather, claims that the representations were fraudulently made and that 'but for them' he would never have entered into the agreement." Blumenstock v. Gibson, 811 A.2d 1029, 1036 (Pa. Super. Ct. 2002).In Pennsylvania, the parol evidence rule bars evidence of prior representations in a fully integrated written agreement. Toy v. Metropolitan Life Ins. Co., 928 A.2d 186, 206-07 (Pa. 2007). Where a written contract contains an integration clause, "the law declares the writing to be not only the best, but the only evidence of [the parties'] agreement." Yocca v. Pittsburgh Steelers Sports, Inc., 854 A.2d 425, 436 (Pa. 2004). The purpose of an integration clause is to give effect to the parol evidence rule: "Thus the written contract, if unambiguous, must be held to express all of the negotiations, ...

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