UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA

JOHN H. SUNUNU and

VICTOR H. FRANK, Jr.,

Plaintiffs, Civil Action 98-01192 (HHK)

v.

PHILIPPINE AIRLINES, INC.

Defendant.

MEMORANDUM OPINION AND ORDER

John H. Sununu and Victor H. Frank, Jr. (collectively, “plaintiffs”) bring this action

against Philippine Airlines, Inc. alleging breach of contract, unjust enrichment, and fraud. Before

the Court is Philippine Airlines’ motion to dismiss for failure to state a claim upon which relief

may be granted [#14]. Upon consideration of the motion, the opposition thereto, and the record

of this case, the Court concludes that the motion should be granted in part and denied in part.

I. BACKGROUND

In 1996, Philippine Airlines entered into an Aircraft Services Agreement with World

Airways in which it agreed to lease four aircraft from World Airways from June 15, 1996 until

November 15, 1997. The agreement committed Philippine Airlines to use the aircraft for a

minimum number of block hours each month and to pay $6,000 per block hour. In the spring of

1997, Philippine Airlines sought to negotiate a reduction in the payments remaining due under

this agreement, and engaged plaintiffs to help it do so. On or around June 27, 1997, Philippine

Airlines and plaintiffs entered into a contract that provided that Philippine Airlines would pay plaintiffs $50,000 to meet with World Airways’ Chairman. In addition, the contract specified

that plaintiffs would be paid a “Success Fee” of four percent of Philippine Airlines’ savings “if

[plaintiffs] are able to reach a Settlement to reduce the remaining obligation of PAL [Philippine

Airlines] to WA [World Airways] in accordance with either one of the following two offers [by

July 11, 2007].” Compl. Ex. 1. The two offers were as follows:

i. WA to accept return of four aircrafts by July 1997 and PAL to pay USD$1,000 for every hour remaining of the minimum guaranteed utilization of the aircraft up to November 15, 1997; or ii. WA to reduce the lease rate on the four aircraft to USD$4,000 per hour reckoned from June 01, 1997 to the end of the lease on November 15, 1997.

Id. The contract stated that the “Settlement should occur before . . . the 11th day of July, 1997,”

and that the “Settlement shall be deemed to occur on the signing by the President or CEO of WA

or a written notation reflecting acceptance of Offer One or Two.” The Success Fee was to be

paid “upon, and only if there is a Closing in accordance with the Settlement.” Id. The aforesaid

is, in essence, the entirety of the contract, which did not explicitly restrict Philippine Airlines’

ability to enter into a settlement with World Airlines based on other terms, nor guarantee

plaintiffs exclusive negotiating rights.

After meeting with World Airways’ Chairman, plaintiffs collected the $50,000 initial fee

and began negotiating with World Airways. Shortly before the July 11, 1997 deadline, according

to plaintiffs, World Airways showed plaintiffs documentation that World Airways had previously

opposed Philippine Airlines suggestion of a November 15, 1997 termination date and had

insisted on staggered lease termination dates. Plaintiffs continued to negotiate with World

Airways and encouraged Philippine Airlines to negotiate directly as well. On July 11, 1997,

2 “[a]cting in its sole discretion, and without advance notice to Sununu and Frank,” Philippine

Airlines entered into an Aircraft Services Agreement with World Airways. Compl. ¶ 13 & Ex. 2.

The agreement contained staggered dates for the return of each of the four aircraft: November

15, 1997, November 28, 1997, February 19, 1998 and February 28, 1998. PAL Mot. Dismiss Ex.

A.1 It also reduced the cost per block hour under the lease to $5,600 from September 1, 1997

through December 31, 1997, and to $5,300 from January 1, 1998 through the end of the

agreement. Id. The parties dispute whether the staggered termination dates were agreed to

before plaintiffs entered into their agreement with Philippine Airlines, thus rendering

performance of the specific contract terms more difficult, if not impossible.

Plaintiffs were never paid the four percent Success Fee because they did not persuade

World Airways to accept either of the offers contained in their contract with Philippine Airlines.

Plaintiffs allege, however, that the eventual agreement between Philippine Airlines and World

Airways achieved “approximately the same [savings] as those that would have been achieved had

November 15th been the termination date throughout the period and [had the eventual agreement

between Philippine Airlines and World Airways] been structured to match one of the two

alternatives set out in [the contract].” Compl. ¶ 14. Plaintiffs contend that the settlement saved

Philippine Airlines approximately $12,830,000 assuming the staggered termination dates.

Plaintiffs filed their complaint in 1998. Soon afterwards Philippine Airlines sought

1 Ordinarily, when a defendant submits extrinsic evidence with a motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), the court must convert that motion into one for summary judgment. See Savage v. Scales,

(D.D.C. 2004). “[W]here a document is referred to in the complaint and is central to the plaintiff’s claim,” however, “such a document attached to the motion papers may be considered without converting the motion to one for summary judgment.” Vanover v. Hantman,

(D.D.C. 1999).

3 reorganization assistance (similar to bankruptcy proceedings) in the Philippines. As a result, all

then-pending U.S. litigation was stayed. The stay was recently lifted upon Philippine Airlines’

emergence from the reorganization proceedings.

II. ANALYSIS

This case comes before the Court on Philippine Airlines’ motion to dismiss plaintiffs’

complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) with regard to all three claims

and pursuant to Rule 9(b) with regard to plaintiffs’ fraud claim. Under Rule 12(b)(6), a court

may dismiss a complaint or any portion of it for failure to state a claim upon which relief may be

granted. Fed. R. Civ. P. 12(b)(6). A court considering such a motion to dismiss must assume

that all factual allegations are true, even if they are doubtful. Bell Atlantic Corp. v. Twombly,

(2007); Kowal v. MCI Commc’ns. Corp.,

(D.C. Cir. 1994)

(noting that a court must construe the complaint “liberally in the plaintiffs’ favor” and “grant

plaintiffs the benefit of all inferences that can be derived from the facts alleged”). “[A]

plaintiff’s obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief,’” however, “requires

more than labels and conclusions . . . . Factual allegations must be enough to raise a right of

relief above the speculative level.” Twombly,

(internal citations omitted). The

Court will address each of plaintiffs’ three claims in turn.

A. Breach of Contract

Plaintiffs allege that Philippine Airlines breached the contract because it failed to pay

plaintiffs a Success Fee of four percent of Philippine Airlines’ savings based on the negotiated

settlement with World Airways. A plaintiff states a claim for breach of contract by alleging “the

existence of a valid and enforceable contract between the plaintiff and defendant, the obligation

4 of the defendant thereunder, a violation by the defendant, and damages resulting to plaintiff from

the breach.” Qualls v. Rumsfeld,

(D.D.C. 2005).

Philippine Airlines argues that plaintiffs’ breach of contract claim must fail because

plaintiffs admit in their complaint that they did not meet the terms required to earn the contingent

Success Fee. Plaintiffs’ complaint and exhibits demonstrate that plaintiffs did not persuade

World Airways to accept either of the two offers laid out in the contract, according to Philippine

Airlines. Moreover, Philippine Airlines asserts that the complaint admits that Philippine

Airlines, not plaintiffs, was the driving force in negotiating the settlement with World Airways.

Philippine Airlines contends that it did not breach the contract because its performance never

came due. Plaintiffs respond that they substantially performed the contract, thus triggering

Philippine Airlines’ obligation to perform, i.e. to pay them the Success Fee. Plaintiffs contend

that there is no dispute that they entered into a contract with Philippine Airlines, that they met

with World Airways’ Chairman and other officials, and that Philippine Airlines achieved a

substantial reduction of costs as a result of changes made to the lease terms for the four aircraft.

“Substantial performance” is generally considered to exist when a contracting party has

failed to render full performance but any defects in performance are considered minor. Schneider

v. Dumbarton Developers, Inc.,

(D.C. Cir. 1985). In other words,

substantial performance occurs, triggering the other party’s obligation to perform, where any

failure in performance is not material. See Restatement (Second) of Contracts § 237. A classic

case in which the issue of substantial performance arises is when a contractor builds a home but

fails to complete certain tasks as specified in the contract (for example, the brand of pipes used is

different than that specified). The court will excuse such a condition specified in the contract

5 because otherwise a forfeiture would occur. See Jacob & Youngs v. Kent,

(N.Y. 1921) (Cardozo, J.) (“an omission, both trivial and innocent, will sometimes be atoned for

by allowance of the resulting damage, and will not always be the breach of a condition to be

followed by a forfeiture”). Substantial performance is inapplicable here because the contractual

condition that plaintiffs persuade World Airways to accept one of two offers was highly material

to the contract - it was, in fact, the entire point of the contract. See Pls.’ Ex. 1 (“[Plaintiffs] shall

be paid a Success Fee . . . if they are able to reach a Settlement . . in accordance with either one

of the following two offers . . . .”). The Court cannot excuse plaintiffs’ failure to persuade World

Airways to accept one of the two listed offers because such a failure is not minor at all.

Both parties analogize to cases regarding contingency fee arrangements between an

attorney and a client, but the cases they cite do not answer the question presented here.

Philippine Airlines points principally to King & King Chtd. v. Harbert Int’l,

(D.D.C. 2006), in which the court held that an attorney could not recover a contingent fee

even though the attorney alleged that his client was responsible for the attorney’s failure to meet

the contingency, as plaintiffs do here. The holding in that case, however, stresses that the

attorney could not recover the contingency fee because the client had not recovered anything as a

result of the attorney’s substantial performance.

(“Such a limitation on contractual

damages is unavoidable, of course, because substantial performance is merely a substitute for full

performance, not a substitute for the occurrence of the condition.”). Here, by contrast, Philippine

Airlines did allegedly reap savings as a result of plaintiffs’ efforts. Plaintiffs point principally to

Kaushiva v. Hutter,

(D.C. 1983), in which the D.C. Court of Appeals held

that “an attorney who enters into a contingency fee arrangement with his client, substantially

6 performs, and then is prevented by his client from completing performance is entitled to the full

amount specified in the fee arrangement.” In Kaushiva, however, the agreement between

attorney and client was that the attorney would represent the client in arbitration proceedings,

which the attorney did. Here, by contrast, the agreement specified two offers, one of which must

be accepted by World Airways in order to obtain the Success Fee; the agreement did not broadly

require plaintiffs to negotiate on Philippine Airlines behalf to achieve savings. Thus, neither of

these cases decides the issue at hand.

The Court concludes that the contract between plaintiffs and Philippine Airlines clearly

set out two alternative terms required to earn the four percent Success Fee and that performance

of one of these terms was highly material to the agreement. It is undisputed that plaintiffs did not

persuade World Airways to accept either of those terms. Therefore, Philippine Airlines’

obligation to pay did not come due and plaintiffs’ breach of contract claim must fail.

B. Unjust Enrichment

Plaintiffs bring a claim for unjust enrichment alleging that Philippine Airlines knew when

it entered into their contract that the November 15, 1997 termination date was incorrect and that

plaintiffs could not possibly secure World Airways’ agreement to either of the alternatives.

Plaintiffs further allege that Philippine Airlines misrepresented the termination date to them, and

that without plaintiffs’ intensive efforts, Philippine Airlines would not have been able to recoup

the savings from the reduced rates eventually achieved. The elements of a claim for unjust

enrichment are: “(1) the plaintiff conferred a benefit upon the defendant; (2) the defendant

accepted and retained the benefit; and (3) it would be unjust for the defendant not to pay the

plaintiff the value of the benefit.” Rapaport v. U.S. Dep’t of Treasury,

(D.C.

7 Cir. 1995).

Philippine Airlines argues that plaintiffs’ unjust enrichment claim must be dismissed

because a plaintiff may not plead a cause of action for unjust enrichment where there is a written

contract between the parties. See Schiff v. Am. Ass’n of Retired Persons,

, 1194 n.

2 (D.C. 1997) (“in order to claim a remedy for unjust enrichment, there must be no contract,

either express or implied”) (citing Bloomgarden v. Coyer,

(D.C. Cir. 1973)).

This is true; however, to preclude a claim for unjust enrichment, a contract must be valid. See,

e.g., Shaw v. Marriott Int’l, Inc.,

(D.D.C. 2008) (“a party to a valid

contract cannot bring a claim for unjust enrichment related to the subject matter of an express

contract between the parties”) (emphasis added). Here, plaintiffs state sufficient facts to support

an allegation that the contract between plaintiffs and Philippine Airlines was invalid due to fraud.

See Compl. ¶¶ 7, 28-32. At the motion to dismiss stage, this is enough. “Pleading in the

alternative is permissible under the Federal Rules of Civil Procedure, and a court must look

beyond how a ‘complaint is styled’ to determine if facts support any claim for relief under a

theory of breach of contract or unjust enrichment.” Nevius v. Africa Inland Mission Int’l,

, 122 n. 6 (D.D.C. 2007); see also Fed. R. Civ. P. 8(e)(2) (permitting pleading in the

alternative). Therefore, the Court will not dismiss plaintiffs’ claims for unjust enrichment at this

stage of the litigation.

C. Fraud

Plaintiffs allege that Philippine Airlines intentionally falsely represented to them, prior to

their agreement and until July 11, 1997, that the lease of all four aircraft would end on November

15, 1997, and concealed from them the staggered termination deadlines. Thus, according to

8 plaintiffs, Philippine Airlines knew that World Airways would not accept either of the two offers

outlined in their contract. At common law, the requisite elements of fraud are: (1) “a false

representation (2) made in reference to a material fact, (3) with knowledge of its falsity, (4) with

intent to deceive, and (5) an action that is taken in reliance upon the representation.” Daisley v.

Riggs Banks, N.A.,

(D.D.C. 2005).

Philippine Airlines argues that plaintiffs’ fraud claim must be dismissed for three reasons.

First, Philippine Airlines argues that its statements that the leases terminated on November 15,

2007 were true and therefore do not support a claim for fraud. Philippine Airlines contends that

the record is clear that the initial agreement between Philippine Airlines and World Airways

contained an expiration date of November 15, 2007 and that any alleged verbal agreement would

be legally ineffective because their initial agreement with World Airways required that all

amendments be in writing and executed by both parties. Second, Philippine Airlines asserts that

plaintiffs have alleged fraud by omission (i.e., that Philippine Airlines failed to tell them that the

termination dates had changed) and that Philippine Airlines was under no legal duty to disclose

any alleged agreement to stagger the lease termination dates. Third, Philippine Airlines argues

that plaintiffs have failed to state a claim for fraud with sufficient particularity under Federal

Rule of Civil Procedure 9(b).

The first two arguments may be easily dispatched. Plaintiffs’ complaint alleges that

Philippine Airlines “represented to them that the November 15, 1997, date therein, was the lease

termination date” even though “this termination date had been changed to reflect the different

dates on which each aircraft had been delivered . . . .” Compl. ¶ 7. At the motion to dismiss

stage, the court must accept the plaintiffs’ allegations as true. See Twombly,

.

9 Philippine Airlines does not show that plaintiffs’ allegation cannot be true. Moreover, plaintiffs

do not allege fraud by omission, but allege that Philippine Airlines made an affirmative

misrepresentation when it stated that the lease termination deadline was November 15, 1997 for

all four aircraft.

The Court next turns to Philippine Airlines’ argument that plaintiffs did not state their

fraud claim with sufficient particularity. Federal Rule of Civil Procedure 9(b) states: “In all

averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated

with particularity. Malice, intent, knowledge, and other condition of mind of a person may be

averred generally.” Under Rule 9(b), the court requires “the pleader . . . [to] state the time, place

and content of the false misrepresentations, the fact misrepresented and what was retained or

given up as a consequence of the fraud.” Kowal,

. Rule 9(b)’s particularity

requirement serves several purposes, including discouraging nuisance suits, safeguarding

potential defendants from frivolous accusations of moral turpitude, and guaranteeing all

defendants sufficient information to allow for preparation of a response. U.S. ex rel. Williams v.

Martin-Baker Aircraft Co., Ltd.,

(D.C. Cir. 2004).

Here, plaintiffs allege that “at the time [Philippine Airlines] sent the Agreement to

Sununu and Frank for their signatures,” Philippine Airlines “represented to them that the

November 15, 1997, date therein [] was the lease termination date.” Compl. ¶ 7; see also Compl.

¶ 28 (“Defendant [Philippine Airlines] intentionally falsely represented to Sununu and Frank,

prior to June 27, 1997 and thereafter until July 11, 1997, that the lease of all four aircraft would

end on November 15, 1997”). Plaintiffs further allege that as a consequence of the fraud,

Philippine Airlines “obtain[ed] Sununu and Frank’s valuable services, without actually having to

10 pay [the] Success Fee.” Id. ¶ 30. The Court concludes that plaintiffs have pled their fraud claim

with sufficient particularity by stating what was misrepresented, when, in what context, and the

effect of the misrepresentation, see Kowal,

, and have given defendants sufficient

information to allow for preparation of a response, see U.S. ex rel. Williams,

.

Therefore, the Court will not dismiss plaintiffs’ fraud claim.

III. CONCLUSION

For the foregoing reasons, it is this 31st day of July 2009, hereby

ORDERED that defendant’s motion to dismiss [#14] is GRANTED with respect to

plaintiffs’ breach of contract claim; and it is further

ORDERED that defendant’s motion to dismiss [#14] is otherwise DENIED.

Henry H. Kennedy, Jr. United States District Judge

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