Taylor et al v. Hawley Troxell Ennis & Hawley LLP et al

Filing 391

MEMORANDUM DECISION AND ORDER - THE COURT HEREBY ORDERS: 1. Crumb & Mundings Motion to Dismiss (Dkt. 303 ) is GRANTED. 2. Crumb & Mundings Motion for Sanctions (Dkt. 362 ) is DENIED. 3. Quarles & Bradys Motion to Dismiss (Dkt. 322 ) is GRANTED. 4. GemCaps Third Party Complaint (Dkt. 288) is DISMISSED WITHOUT PREJUDICE. 5. If GemCap wishes to file an Amended Complaint 288 , it shall seek leave to do so within 30 days of the date of this order and shall submit a copy of the Amended Third Party Complaint with such filing. Signed by Judge David C. Nye. (caused to be mailed to non Registered Participants at the addresses listed on the Notice of Electronic Filing (NEF) by (cjs)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF IDAHO

DALE L. MIESEN, an individual who is
a shareholder and who is also bringing
this action on behalf of and/or in the right
of AIA Services Corporation and its
wholly owned subsidiary AIA Insurance,
Inc.,
Plaintiff,
vs.
HAWLEY TROXELL ENNIS &
HAWLEY LLP, an Idaho limited
liability partnership; GARY D.
BABBITT, an individual; D. JOHN
ASHBY, an individual; RICHARD A.
RILEY, an individual; AIA SERVICES
CORPORATION, an Idaho corporation;
AIA INSURANCE, INC., an Idaho
corporation; CROP USA INSURANCE
SERVICES, LLC, an Idaho limited
liability company; CROP USA
INSURANCE AGENCY, INC., an Idaho
corporation; CONNIE TAYLOR
HENDERSON, an individual; JOLEE K.
DUCLOS, an individual; MICHAEL W.
CASHMAN SR., an individual; JAMES
BECK, an individual; R. JOHN
TAYLOR, an individual; and GEMCAP
LENDING I, LLC, a Delaware limited
liability company,
Defendants,
and
CROP USA INSURANCE SERVICES,
LLC, an Idaho limited liability company;
MEMORANDUM DECISION AND ORDER – PAGE 1

Case No. 1:10-cv-00404-DCN
MEMORANDUM DECISION AND
ORDER

CROP USA INSURANCE AGENCY,
INC., an Idaho corporation; CONNIE
TAYLOR HENDERSON, an individual;
JOLEE K. DUCLOS, an individual; R.
JOHN TAYLOR, an individual;
MICHAEL CASHMAN SR., an
individual; and JAMES BECK, an
individual,
Defendants/Third-Party
Plaintiffs,
vs.
REED TAYLOR, an individual,
Third-Party Defendant,
and
GEMCAP LENDING I, LLC, a
Delaware limited liability company,
Defendant/Third-Party
Plaintiff,
vs.
QUARLES & BRADY, LLP, a
Wisconsin limited legal partnership; and
CRUMB & MUNDING, P.S., a
Washington professional service
corporation,
Third-Party Defendants.

I. OVERVIEW
This matter comes before the Court on two Motions to Dismiss GemCap Lending
I LLC’s (“GemCap”) Third-Party Complaint (Dkts. 303, 322) and one Motion for

MEMORANDUM DECISION AND ORDER – PAGE 2

Sanctions (Dkt. 362). As explained below the Court finds good cause to GRANT the two
Motions to Dismiss and DENY the Motion for Sanctions.
II. FACTUAL BACKGROUND
A. The Original Parties and Dispute
This is a shareholder’s derivative action, the Court’s jurisdiction over which is
based upon diversity of citizenship. Plaintiff Dale Miesen is a minority shareholder of
Defendant AIA Services Corporation (“AIA”), the alleged wronged corporation. 1
There were originally two groups of defendants in this action. The first group
consists of AIA Services Corporation, AIA Insurance, Inc. (collectively “AIA Entities”),
CropUSA Insurance Agency, CropUSA Insurance Services (collectively “CropUSA”),
and several controlling shareholders and officers of those entities, namely: R. John
Taylor, James Beck, Michael Cashman, Connie Taylor Henderson, and JoLee Duclos 2
(individuals, collectively, “AIA Controlling Defendants”). The second group consists of
the law firm Hawley Troxell Ennis & Hawley, LLP, and several of its attorneys who
represented the AIA Entities and CropUSA during the events that gave rise to this action,
namely: Gary Babbitt, Richard Riles, and John Ashby (collectively “Hawley Troxell
Defendants”). GemCap intervened in this action as a defendant in July of 2016. Later,
Miesen asserted claims against GemCap in the Third Amended Complaint.

1

Donna Taylor was originally named as a plaintiff in this action. However, the Court dismissed
her, in both her personal and representative capacities, because her presence destroyed diversity.
See Dkt. 178.
2
JoLee Duclos passed away late last year. See Dkt. 316.
MEMORANDUM DECISION AND ORDER – PAGE 3

Miesen and Donna Taylor originally filed this case on August 11, 2010. However,
the operative complaint is the Third Amended Complaint, which Miesen filed on April
24, 2017. Dkt. 211. In it, Miesen alleges, among other things, that the AIA Controlling
Defendants engaged in fraud and breached their fiduciary duties to the AIA minority
shareholders. AIA was formed in 1983. It sold insurance products to members of
farmers’ and growers’ associations and worked with farmers and growers to form trusts
and/or related cooperatives. In the late 1990s, the AIA Board of Directors, controlled by
the AIA Controlling Defendants, decided to begin selling crop insurance through a
wholly-owned subsidiary called CropUSA. Miesen alleges that the AIA Controlling
Defendants unlawfully transferred CropUSA from AIA to their own possession. The AIA
Controlling Defendants then proceeded to unlawfully fund, subsidize, and operate
CropUSA using AIA’s assets. Through their operation of CropUSA, the AIA Controlling
Defendants defrauded AIA of millions of dollars. Miesen also alleges that the AIA
Controlling Defendants committed a “laundry list” of other unlawful acts including, selfdealing, malfeasance, and intentional torts. Miesen has highlighted specific acts
Defendant John Taylor allegedly committed. John Taylor was President of both AIA
Entities and CropUSA during all of these events. Miesen alleges that John Taylor
unlawfully transferred real property to AIA, required AIA to pay the liabilities on the
property, unlawfully amended AIA’s Bylaws, and issued himself Series A Preferred
Shares in AIA. Miesen claims that all of the above-described acts hurt AIA’s minority
shareholders.

MEMORANDUM DECISION AND ORDER – PAGE 4

Hawley Troxell represented both the AIA Entities and CropUSA during the
relevant timeframe. Accordingly, Miesen claims the Hawley Troxell Defendants aided
and abetted the fraud the AIA Controlling Defendants perpetuated against AIA and its
minority shareholders and committed legal malpractice.
B. Allegations Against GemCap
In 2011, after Miesen filed this lawsuit, the AIA Controlling Defendants sought
additional funding for CropUSA. They went to GemCap for this funding. On November
23, 2011, the AIA Controlling Defendants obtained a $5 million line of credit from
GemCap for CropUSA. The parties subsequently increased this line of credit to $10
million. Initially, the AIA Entities guaranteed only $1,113,930 of the loan. Later, in
October 2012, the AIA Controlling Defendants had the AIA Entities guarantee the entire
$10 million loan (collectively, “the Guarantees”). John Taylor, as the President of the
AIA Entities signed the Guarantees. On December 20, 2012, GemCap filed a UCC
financing statement with the Idaho Secretary of State regarding the Guarantees.
In his Third Amended Complaint, Miesen asserts that when GemCap executed the
loan documents, it knew, or should have known: (1) that this lawsuit was pending; (2)
that the Guarantees violated AIA Services’ amended articles of incorporation and bylaws,
and numerous Idaho Code sections; and (3) that AIA and its officers were not authorized
to execute the Guarantees.
CropUSA defaulted on the $10 million loan. On July 16, 2013, GemCap provided
CropUSA with a notice of default. Then, on July 29, 2013, GemCap provided a notice of
default and demand for payment to the AIA Entities for the $8,676,288.39 CropUSA
MEMORANDUM DECISION AND ORDER – PAGE 5

owed GemCap. Finally, on July 30, 2013, GemCap filed suit against CropUSA, the AIA
Entities, and the AIA Controlling Defendants in the U.S. District Court for the Central
District of California. GEMCAP Lending I, LLC vs. Crop USA, et al., No. 13-cv-55040SLO (C.D. Cal.).
In January 2015, GemCap entered into a Settlement Agreement with the AIA
Entities. John Taylor signed the Settlement Agreement on behalf of the AIA Entities.
Under the terms of the Settlement Agreement, the AIA Entities were required to transfer
certain real property to GemCap. Pursuant to the Settlement Agreement, the Court also
entered judgments against the AIA Entities in the amount of $12,126,584.61, which
included $3,986,368.78 in interest, penalties, and costs. In addition, the Settlement
Agreement provided that the AIA Entities would not file for bankruptcy protection and
that John Taylor and/or certain other AIA Controlling Defendants would continue to
operate the AIA Entities in the manner that they had been operated in the past. Judge S.
James Otero of the Central District of California entered a Stipulated Judgment in the
case on April 12, 2015. Dkt. 288-2.
Miesen asserts that the Settlement Agreement was illegal because it (1) violated
AIA Services’ amended articles of incorporation and bylaws; (2) violated numerous
Idaho Code sections; and (3) was the product of intentional breaches of John Taylor’s
fiduciary duties, which he owed to the AIA Entities. Miesen also maintains that the AIA
Controlling Defendants did not disclose the CropUSA loans, the Guarantees, or the
Settlement Agreement to AIA’s minority shareholders, as required, until 2015.

MEMORANDUM DECISION AND ORDER – PAGE 6

In his Third Amended Complaint, Miesen asserts that GemCap substantially
assisted and acquiesced in the AIA Controlling Defendants’ “breaches of their fiduciary
duties, fraud, and other malfeasance” by requiring the AIA Controlling Defendants to
improperly and unlawfully operate AIA, and by allowing John Taylor to “unlawfully
enter into the Settlement Agreements” and Guarantees. Accordingly, Miesen asserts
claims against GemCap for aiding and abetting breach of fiduciary duty, fraud, aiding
and abetting fraud, and for statutory liability under Idaho Code § 30-29-304 (ultra vires). 3
Miesen bases his claims against GemCap, at least in part, on the allegation that the
Guarantees and Settlement Agreement were made in violation of AIA Services’
Amended Articles of Incorporation. Specifically, the Articles barred the AIA Entities
from entering into these types of transactions without the approval of the Series A
Shareholders of AIA Services. At the time the AIA Entities entered into the Guarantees
and Settlement Agreement, Donna Taylor was the Series A Shareholder. Miesen alleges
that Donna Taylor did not know about these contracts and did not consent to the AIA
Entities entering into any of these contracts. GemCap asserts that it relied on, among
other things, John Taylor’s assurances that he had the authority to enter into these
contracts on behalf of the AIA Entities.

3

Miesen asks the Court to declare that the Guarantees, Settlement Agreement, and related
instruments are ultra vires, set them aside, and award the AIA Entities damages for losses it
sustained from these agreements.
MEMORANDUM DECISION AND ORDER – PAGE 7

C. GemCap’s Third Party Complaint
GemCap filed its Third Party Complaint against the law firm of Crumb &
Munding and the law firm of Quarles & Brady on November 21, 2017, based on their
involvement with the loan, the Guarantees, and the Settlement Agreement.
According to the Third Party Complaint, GemCap required CropUSA, as a
condition precedent to the loan agreement, to provide a written legal opinion regarding
the legality of the loan and Guarantees. CropUSA’s attorneys, Quarles & Brady, provided
a legal opinion letter that stated the “execution, delivery and performance by . . . each
Guarantor . . . will not . . . violate any laws, statutes or regulations to which any Loan
Party is subject . . . or (c) to our best knowledge, violate, conflict with, or result in a
breach of or default under, any agreement or instrument to which any Loan Party
[including Guarantors] is a party or by which it is, or any of its properties or assets are, or
may be bound . . . .” Dkt. 288, at 5. GemCap relied on this opinion letter in executing the
loan documents and Guarantees. If GemCap is found liable to the minority shareholders,
it asserts Quarles & Brady should also be found liable as it advised GemCap that the
Guarantees were duly authorized, and/or failed to disclose to GemCap that the
Guarantees were not duly authorized.
GemCap also asserts Crumb & Munding should be held liable under such
circumstances. Crumb & Munding represented John Taylor when he signed the
Settlement Agreement on behalf of the AIA Entities. If it is determined that John Taylor
lacked authority to sign the Settlement Agreement, GemCap asserts Crumb & Munding
should be held liable because it failed to advise John Taylor that he lacked this authority
MEMORANDUM DECISION AND ORDER – PAGE 8

and it did not ensure that the Settlement Agreement was executed by someone with the
authority to bind the AIA Entities. Accordingly, GemCap asserts claims for
contribution/implied indemnity against Quarles & Brady and Crumb & Munding.
D. Pending Motions
On December 21, 2017, Crumb & Munding filed its Motion to Dismiss. Dkt. 303.
On January 29, 2018, Quarles & Brady filed its Motion to Dismiss. Dkt. 322. On April 4,
2018, Crumb & Munding also filed a Motion for Rule 11 Sanctions. Dkt. 362. After the
parties fully briefed the Motions, the Court held oral argument on May 4, 2018, and took
the Motions under advisement.
III. CRUMB & MUNDING’S MOTION TO DISMISS
Crumb & Munding argues that the claims GemCap asserts against it should be
dismissed for three reasons: (1) the Court lacks subject matter jurisdiction over the
claims; (2) the Court lacks personal jurisdiction over it; and (3) GemCap has failed to
state a claim upon which relief can be granted. The Court focuses on what it sees as the
heart of this Motion: whether GemCap has stated a claim upon which relief can be
granted.
A. Legal Standard
Federal Rule of Civil Procedure 12(b)(6) permits a court to dismiss a claim if the
plaintiff has “fail[ed] to state a claim upon which relief can be granted.” “A Rule 12(b)(6)
dismissal may be based on either a ‘lack of a cognizable legal theory’ or ‘the absence of
sufficient facts alleged under a cognizable legal theory.’” Johnson v. Riverside
Healthcare Sys., LP, 534 F.3d 1116, 1121 (9th Cir. 2008) (citation omitted). Federal Rule
MEMORANDUM DECISION AND ORDER – PAGE 9

of Civil Procedure 8(a)(2) requires a complaint to contain “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.” See Bell Atl.
Corp. v. Twombly, 550 U.S. 544, 554 (2007). “This is not an onerous burden.” Johnson,
534 F.3d at 1121. A complaint “does not need detailed factual allegations,” but it must set
forth “more than labels and conclusions, and a formulaic recitation of the elements.”
Twombly, 550 U.S. at 555. The complaint must also contain sufficient factual matter to
“state a claim to relief that is plausible on its face.” Id. at 570. In considering a Rule
12(b)(6) motion, the Court must view the “complaint in the light most favorable to” the
claimant and “accept[] all well-pleaded factual allegations as true, as well as any
reasonable inference drawn from them.” Johnson, 534 F.3d at 1122.
B. Analysis
GemCap’s only claim against Crumb & Munding is for contribution/implied
indemnity. GemCap first argues such a claim is actionable under Idaho Code section 6803, which provides, in relevant part:
(5) A party shall be jointly and severally liable for the fault of another person
or entity or for payment of the proportionate share of another party where
they were acting in concert or when a person was acting as an agent or servant
of another party. As used in this section, “acting in concert” means pursuing
a common plan or design which results in the commission of an intentional
or reckless tortious act.
GemCap asserts that it has alleged that it “acted in concert” with Crumb & Munding and,
accordingly, it seeks contribution from Crumb & Munding for its share of the liability.
The Court disagrees. Nowhere in the Third-Party Complaint does GemCap assert that it

MEMORANDUM DECISION AND ORDER – PAGE 10

acted in concert with Crumb & Munding. Rather, GemCap makes the following
allegations about Crumb & Munding:
17. John Taylor signed the Settlement on behalf of the AIA Entities.
John Taylor was represented at that time by the law firm Crumb & Munding.
18. On information and belief, to the extent it is determined that John
Taylor lacked authority (which Miesen alleges but which GemCap denies),
Crumb & Munding did not advise John Taylor that he lacked authority to
enter that agreement (to the extent he did not have such authority), and did
not ensure that the settlement agreement was executed by someone with the
authority to bind the AIA Entities.
...
36. Crumb & Munding owed professional duties to the AIA Entities
at the time those entities entered the Settlement Agreement. If it is found that
the Settlement Agreement was not duly authorized, then Crumb & Munding
failed to exercise reasonable care and skill in representing the AIA Entities
and in doing so breached its professional duties to those entities.
37. Accordingly, if GemCap is found liable for monetary damages as
a result of a finding that Taylor did not have the authority to bind the AIA
Entities to the settlement agreement, such damages suffered by the Plaintiff
were caused primarily or wholly by the conduct of Crumb & Munding.
Accordingly, there is an implied/equitable relationship between GemCap and
Crumb & Munding under Idaho law.
Dkt. 288. As shown by the above paragraphs, GemCap has changed its theory of
recovery between its complaint and its brief. GemCap has not alleged that it acted in
concert with Crumb & Munding; rather, its claims rests on an “implied/equitable
relationship between GemCap and Crumb & Munding,” which under Idaho statutory law
does not support a claim for contribution/indemnity.
GemCap next points the Court to “[t]he common law right of indemnity,” which
“refers to those situations where a person who without fault on his part is compelled to

MEMORANDUM DECISION AND ORDER – PAGE 11

pay damages occasioned by the negligence of another.” May Trucking Co. v. Int’l
Harvester Co., 543 P.2d 1159, 1161 (Idaho 1975). It is true that the Idaho Legislature’s
adoption of section 6-803 did not affect the “common-law right to indemnification” Idaho
courts have recognized. Adams v. Krueger, 101–02, 856 P.2d 887, 891–92 & n.8 (Ct.
App. 1991), aff’d, 856 P.2d 864 (Idaho 1993). However, GemCap still must allege the
elements of a common law indemnity claim to survive this Motion to Dismiss. An
“indemnity claim has three elements: ‘(1) an indemnity relationship, (2) actual liability of
an indemnitee to the third party, and (3) a reasonable settlement amount.’” Pinnacle
Great Plains Operating Co., LLC v. Wynn Dewsnup Revocable Tr., No.
413CV00106EJLCWD, 2015 WL 5853139, at *3 (D. Idaho June 30, 2015) 4 (quoting
Chenery v. Agri–Lines Corp., 766 P.2d 751, 754 (Idaho 1988). Importantly, “unless
liability of the claimed indemnitee to the third party is established, the right to
indemnification does not arise.” Id. (quoting Beitzel v. Orton, 827 P.2d 1160, 1168 (Idaho
1992)). At this stage, the last two elements of this claim have not been satisfied. The
Court, nevertheless, looks at whether the first element is present in this case.
The Idaho Supreme Court has recognized equitable indemnity relationships in at
least three contexts:
(1) The indemnitee may claim that his liability was based on passive neglect,
while the indemnitor was guilty of recklessness.
(2) The indemnitee owed only a secondary duty to the injured party while the
indemnitor was primarily responsible, as in cases where a municipal
4

Report and recommendation adopted sub nom. Pinnacle Great Plains Operating Co., LLC. v.
Wynn Dewsnup Revocable Tr., No. 413CV00106EJLCWD, 2015 WL 5884861 (D. Idaho Oct. 7,
2015).
MEMORANDUM DECISION AND ORDER – PAGE 12

corporation has the primary duty to keep the streets in safe condition and the
landowner has a secondary duty.
(3) The indemnitee may be only vicariously liable for the actual negligence
of his employee and seek indemnity. These are the agency cases.
May Trucking, 543 P.2d at 1161. See also United Air Lines, Inc. v. Wiener, 335
F.2d 379, 399 (9th Cir. 1964) (discussing the many categories of cases in which
indemnity is permitted, none of which mirror the instant case). In addition, the
Idaho Supreme Court has clarified that, “where the fault of each party is equal in
grade and similar in character, the doctrine of implied indemnity is not available
since no one should be permitted to base a cause of action on that party’s own
wrong.” Beitzel, 827 P.2d at 1168 (quoting Borchard v. Wefco, Inc., 733 P.3d 776,
779 (Idaho 1987)) (internal alterations omitted).
GemCap vaguely asserts that it has alleged that Crumb & Munding was “primarily
responsible for the damages.” In doing so, GemCap appears to assert that it has an
indemnity relationship with Crumbing & Munding that mirrors the second relationship
listed above. In support of this assertion, GemCap argues “as the AIA Entities’ counsel
for the Settlement Agreement, [Crumb & Munding] owed the AIA Entities a duty of
competent representation, including to ensure that those entities were not bound to an
agreement by an unauthorized agent.” GemCap, however, has not alleged that it owed a
secondary duty to the AIA Entities. Such an indemnity relationship does not exist under
Idaho law where the indemnitor and indemnitee do not share a responsibility. Moreover,
GemCap has not cited any cases, binding or otherwise, that factually support finding such
an indemnity relationship between GemCap and Crumb & Munding in this instance.
MEMORANDUM DECISION AND ORDER – PAGE 13

Accordingly, the Court finds GemCap has failed to state a claim for
indemnity/contribution against Crumb & Munding either under Idaho statute or Idaho
common law.
Because the Court finds GemCap has failed to state a claim for
indemnity/contribution under either an Idaho statute or Idaho common law, the Court
finds good cause to dismiss this claim under Rule 12(b)(6).
IV. CRUMB & MUNDINGS’ MOTION FOR SANCTIONS
Crumb & Munding asks this Court to impose sanctions against GemCap under
Rule 11 of the Federal Rules of Civil Procedure for filing a frivolous third-party
complaint against it.
A. Legal Standard
“Rule 11 allows for sanctions against an attorney, law firm, or party who violates
Rule 11(b) by filing a pleading or motion that is, inter alia, frivolous, for an improper
purpose, or lacking in evidentiary support.” Meyer v. Bank of Am., N.A., No. 1:11-CV00528-BLW, 2012 WL 4470903, at *12 (D. Idaho Aug. 14, 2012), report and
recommendation adopted, 2012 WL 4458141 (D. Idaho Sept. 26, 2012) (citing Fed. R.
Civ. P. 11). An action is frivolous if it is “both baseless and made without reasonable and
competent inquiry,” or “groundless . . . with little prospect of success . . . .” Chevron
U.S.A., Inc. v. M & M Petroleum Servs., Inc., 658 F.3d 948, 952 (9th Cir. 2011) (internal
citations omitted). A district court has the discretion to impose sanctions under Rule 11
and under “its inherent authority to curb abusive litigation practices.” DeDios v. Int’l
Realty Invs., 641 F.3d 1071, 1076 (9th Cir. 2011) (citations omitted). “When, as here, a
MEMORANDUM DECISION AND ORDER – PAGE 14

complaint is the primary focus of Rule 11 proceedings, a district court must conduct a
two-prong inquiry to determine (1) whether the complaint is legally or factually baseless
from an objective perspective, and (2) if the attorney has conducted a reasonable and
competent inquiry before signing and filing it.” Holgate v. Baldwin, 425 F.3d 671, 676
(9th Cir. 2005) (internal quotation marks and citation omitted).
The Ninth Circuit has cautioned that “Rule 11 must not be construed so as to
conflict with the primary duty of an attorney to represent his or her client zealously.”
Operating Engineers Pension Tr. v. A-C Co., 859 F.2d 1336, 1344 (9th Cir. 1988)
“Forceful representation often requires that an attorney attempt to read a case or an
agreement in an innovative though sensible way. Our law is constantly evolving, and
effective representation sometimes compels attorneys to take the lead in that evolution.
Rule 11 must not be turned into a bar to legal progress.” Id. (citation omitted). Finally, in
reaching this decision, the Court keeps in mind that “Rule 11 is an extraordinary remedy,
one to be exercised with extreme caution.” Id. at 1345.
B. Analysis
Crumb & Munding primarily argues that the Court should impose Rule 11
sanctions because GemCap’s indemnity claim has no basis in law. As explained in the
previous section, the Court agrees that the claim against Crumb & Munding should be
dismissed. However, the Court declines to impose sanctions. First, there is no indication
that GemCap asserts the claim against Crumb & Munding for an improper purpose.
Second, while the claim is not legally cognizable, the Court declines to classify the claim

MEMORANDUM DECISION AND ORDER – PAGE 15

as entirely frivolous; rather it appears GemCap’s attorneys are attempting to zealously,
and creatively, advocate for their client.
GemCap’s two theories of liability—indemnity under state statute and under
common law—miss the mark, but only slightly. With regard to statutory liability,
GemCap could amend its Complaint to assert additional facts to support its claim that
GemCap “acted in concert” with Crumb & Munding in aiding and abetting the AIA
Controlling Defendants breaches of their fiduciary duties or in committing fraud.
However, it would be difficult for GemCap to do so without admitting any fault. If
GemCap made such allegations, it could have a claim for indemnity against Crumb &
Munding under Idaho law. Thus, the Court will give GemCap leave to assert additional
facts (if it reasonably believes it can do so in good faith) to support this theory.
As to the liability under common law theory, GemCap has attempted to creatively
frame the relationship between it and Crumb & Munding to fit into an indemnity
relationship. GemCap is unsuccessful in doing so, but there is not a case directly on point
which completely bars this theory. Absent case law barring such a theory, the Court
cannot find that GemCap’s claim is frivolous.
V. QUARLES & BRADY’S MOTION TO DISMISS
In its Motion to Dismiss (Dkt. 322), Quarles & Brady argues that the claim against
it should be dismissed for two reasons: (1) this Court lacks personal jurisdiction over it;

MEMORANDUM DECISION AND ORDER – PAGE 16

and (2) the Court lack subject matter jurisdiction over the claim. Alternatively, Quarles &
Brady asks this Court to transfer the case to the Central District of California. 5
Significantly, GemCap previously sued Quarles & Brady in the Central District of
California. Quarles & Brady describes this other suit as asserting the same “theory of
legal malpractice in connection with [its] Opinion Letter” on the legality of GemCap’s
loan to CropUSA. Dkt. 322-1, at 7. In other words, Quarles & Brady maintains the
California suit “is virtually indistinguishable from [GemCap’s] claim against [it] in this
case.” Id. On cross-motions for summary judgment, Judge Ronald S. W. Lew of the
Central District of California ruled in favor of Quarles & Brady on September 17, 2017. 6
GemCap appealed that ruling and filed its opening brief in the Ninth Circuit on February
5, 2018. The Court has serious concerns about whether it is the proper authority to hear
this claim in light of the California litigation. However, the Court need not fully address
these concerns as its finds that it lacks personal jurisdiction over Quarles & Brady for the
purpose of this case.
A. Legal Standard
“Federal courts apply state law to determine the bounds of their jurisdiction over a
party.” Williams v. Yamaha Motor Co., 851 F.3d 1015, 1020 (9th Cir. 2017) (citing Fed.
R. Civ. P. 4(k)(1)(A)). “In order for an Idaho court to exert jurisdiction over an out-ofstate defendant, two criteria must be met; the act giving rise to the cause of action must

5

Other parties in this case have opposed the Motion to Transfer.

6

The Court takes judicial notice of this California case and the filings from that case, which the
parties submitted for this Court’s review. See Fed. R. Evid. 201.

MEMORANDUM DECISION AND ORDER – PAGE 17

fall within the scope of [Idaho’s] long-arm statute and the constitutional standards of due
process must be met.” Saint Alphonsus Reg’l Med. Ctr. v. State of Wash., 852 P.2d 491,
494 (Idaho 1992). “Because Idaho’s long-arm statute, codified in Idaho Code § 5-514,
allows a broader application of personal jurisdiction than the Due Process Clause, the
Court need look only to the Due Process Clause to determine personal jurisdiction.”
Cornelius v. DeLuca, 709 F. Supp. 2d 1003, 1010 (D. Idaho 2010).
“The Due Process clause of the Fourteenth Amendment constrains a State’s
authority to bind a nonresident defendant to a judgment of its courts.” Walden v. Fiore,
__ U.S. __, 134 S.Ct. 1115, 1121 (2014). A nonresident defendant must have “certain
minimum contacts with [the forum] such that the maintenance of the suit does not offend
‘traditional notions of fair play and substantial justice.’” Int’l Shoe Co. v. Washington,
326 U.S. 310, 316 (1945) (quoting Milliken v. Meyer, 311 U.S. 457, 463 (1940)). Since
the Supreme Court’s “seminal decision in International Shoe, [its] decisions have
recognized two types of personal jurisdiction: ‘general’ (sometimes called ‘all-purpose’)
jurisdiction and ‘specific’ (sometimes called ‘case-linked’) jurisdiction.” Bristol-Myers
Squibb Co. v. Superior Court, __ U.S. __, 137 S. Ct. 1773, 1779–80 (2017). “For an
individual, the paradigm forum for the exercise of general jurisdiction is the individual’s
domicile; for a corporation, it is an equivalent place, one in which the corporation is
fairly regarded as at home.” Id. (quoting Goodyear Dunlop Tires Operations, S.A. v.
Brown, 564 U.S. 915, 924 (2011)). “A court with general jurisdiction may hear any claim
against that defendant, even if all the incidents underlying the claim occurred in a
different State.” Id. “Specific jurisdiction is very different. In order for a state court to
MEMORANDUM DECISION AND ORDER – PAGE 18

exercise specific jurisdiction, ‘the suit’ must ‘aris[e] out of or relat[e] to the defendant’s
contacts with the forum.” Id. (quoting Daimler AG v. Bauman, 134 S. Ct. 746, 760
(2014)). “In other words, there must be ‘an affiliation between the forum and the
underlying controversy, principally, [an] activity or an occurrence that takes place in the
forum State and is therefore subject to the State’s regulation.’” Id. (quoting Goodyear,
564 U.S. at 919). “For this reason, ‘specific jurisdiction is confined to adjudication of
issues deriving from, or connected with, the very controversy that establishes
jurisdiction.’” Id.
“There are three requirements for a court to exercise specific jurisdiction over a
nonresident defendant: (1) the defendant must either ‘purposefully direct his activities’
toward the forum or ‘purposefully avail[ ] himself of the privileges of conducting
activities in the forum’; (2) ‘the claim must be one which arises out of or relates to the
defendant’s forum-related activities’; and (3) ‘the exercise of jurisdiction must comport
with fair play and substantial justice, i.e. it must be reasonable.’” Axiom Foods, Inc. v.
Acerchem Int’l, Inc., 874 F.3d 1064, 1068 (9th Cir. 2017) (quoting Dole Food Co., Inc. v.
Watts, 303 F.3d 1104, 1111 (9th Cir. 2002)). “The plaintiff bears the burden of satisfying
the first two prongs of the test.” Schwarzenegger v. Fred Martin Motor Co., 374 F.3d
797, 802 (9th Cir. 2004). “[T]he burden then shifts to the defendant to ‘present a
compelling case’ that the exercise of jurisdiction would not be reasonable.’” Id. (quoting
Burger King Corp. v. Rudzewicz, 471 U.S. 462, 476–78 (1985)).
“Where a defendant moves to dismiss a complaint for lack of personal jurisdiction,
the plaintiff bears the burden of demonstrating that jurisdiction is appropriate.” Id. at 800
MEMORANDUM DECISION AND ORDER – PAGE 19

(citing Sher v. Johnson, 911 F.2d 1357, 1361 (9th Cir. 1990)). “Where, as here, the
motion is based on written materials rather than an evidentiary hearing, ‘the plaintiff need
only make a prima facie showing of jurisdictional facts.’” Id. Thus, the Court need only
determine whether the Plaintiff’s “pleadings and affidavits make a prima facie showing
of personal jurisdiction.” Id.
B. Analysis
Quarles & Brady is a Wisconsin law firm based in Milwaukee, Wisconsin. It also
has offices in Illinois, Indiana, Arizona, Florida, and the District of Columbia. It has no
property or offices in Idaho and employs no attorneys licensed in Idaho. GemCap has
made no allegation that Quarles & Brady’s attorneys ever visited Idaho or that Quarles &
Brady ever advertised in Idaho. Quarles & Brady sent the Opinion Letter (that forms the
basis of GemCap’s indemnity claim) from its Chicago, Illinois, office to GemCap’s office
in Santa Monica California. GemCap is a Delaware corporation with its headquarters in
California. In the Opinion Letter, Quarles & Brady opined on the validity and legality of
GemCap’s proposed $5 million loan to CropUSA and the Guarantees the AIA Entities
and John Taylor issued. Quarles & Brady also “specifically disclaim[ed] any opinions
with respect to Idaho law, including but not limited to any opinions related to (i) the
validity, effectiveness and/or foreclosure of any real property interest located in such
States and/or (ii) any provision(s) in the Loan Documents governed or affected by Idaho
law.” Dkt. 323-2, at 14.

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In the face of these facts, GemCap has not argued that this Court has general
jurisdiction over Quarles & Brady. Therefore, the Court only addresses the specific
personal jurisdiction analysis.
GemCap argues that this Court has specific personal jurisdiction over Quarles &
Brady because it represented CropUSA Insurance Agency, Inc. and CropUSA Insurance
Service LLC, which are both Idaho entities, in drafting the loan documents and Opinion
Letter that are at issue in this case. In addition, GemCap points out that the Opinion
Letter opined about the legality of Guarantees issued by two Idaho corporations (the AIA
Entities) and an Idaho resident (John Taylor), which pledged real property in Idaho.
Multiple courts have held that a law firm’s representation of a forum client alone
is not enough to establish the “purposeful availment” necessary for specific personal
jurisdiction. The Court finds Sher v. Johnson particularly instructive on this front, even
though the Ninth Circuit ultimately found a California court did have personal
jurisdiction over an out-of-state law firm. The Sher court first found the California court
did not have specific personal jurisdiction over the Florida law firm that had represented
a California resident in a criminal action in Florida based on that representation alone.
911 F.2d 1357, 1362 (9th Cir. 1990). The California resident brought a legal malpractice
claim against the Florida firm and the firm moved to dismiss for lack of personal
jurisdiction. Id. The Sher court first explained, the “mere existence of a contract with a
party in the forum state does not constitute sufficient minimum contacts for jurisdiction.”
Id. (citing Burger King, 471 U.S. at 478). The court then looked to “prior negotiations
and contemplated future consequences, along with the terms of the contract and the
MEMORANDUM DECISION AND ORDER – PAGE 21

parties’ actual course of dealing” to determine if the defendant’s contacts were
“substantial ” and not merely “random, fortuitous, or attenuated.” Id. The Court then
found the “normal incidents of . . . representation,” such as accepting payment from a
California bank, making phone calls and sending letters to California, and even visiting
California on three occasions, did not, by themselves, establish purposeful availment. Id.
These acts did not deliberately create a “substantial connection” to California nor did
they promote business within California. Id. In sum, the Court concluded, “[o]ut-of-state
legal representation does not establish purposeful availment of the privilege of
conducting activities in the forum state, where the law firm is solicited in its home state
and takes no affirmative action to promote business within the forum state.” Id. at 1363.
As noted previously, however, the Court found it had specific personal jurisdiction
over the Florida firm when it was revealed that to secure the plaintiff’s payment for the
legal representation, the plaintiff had “executed a deed of trust in favor of the [law firm],
encumbering the [plaintiff’s] California home.” Id. The Court explained, the law firm
“look[ed] to the laws of California to secure its right to payment” and “[t]he execution of
the deed ‘contemplated [significant] future consequences in California,’” including filing
the deed in the California recorder’s office, judgment in a California court applying
California law, and enforcement of that judgment in California. Id.
Other circuits and district courts have similarly concluded that mere representation
of a forum resident does not establish personal jurisdiction over an out of state law firm.
See, e.g., Austad Co. v. Pennie & Edmonds, 823 F.2d 223, 226–27 (8th Cir. 1987)
(finding South Dakota did not have personal jurisdiction in malpractice action over New
MEMORANDUM DECISION AND ORDER – PAGE 22

York law firm that represented South Dakota corporation in Maryland patent suit);
Kaempe v. Myers, No. IP 01-0424-CHK, 2001 WL 1397291, at *8 (S.D. Ind. Nov. 6,
2001) (“[A]n attorney does not submit to the jurisdiction of another state solely by
agreeing to represent one of its residents.”); We’re Talkin’ Mardi Gras, LLC v. Davis,
192 F. Supp. 2d 635, 639 (E.D. La. 2002) (“[T]he mere exchange of communications in
the course of developing and carrying out a contract, such as an attorney-client
relationship, is insufficient to constitute purposeful availment.”). Including this Court.
See Wheaton Equip. Co. v. Franmar, Inc., No. CV08-276-S-EJL, 2009 WL 464337, at
*20 (D. Idaho Feb. 24, 2009).
Significantly, the conclusions of these courts comports with the Supreme Court’s
recent decision in Walden v. Fiore. In Walden, the Supreme Court clarified that “the
plaintiff cannot be the only link between the defendant and the forum. Rather, it is the
defendant’s conduct that must form the necessary connection with the forum State that is
the basis for its jurisdiction over him.” 134 S. Ct. 1115, 1122 (2014). In other words, “a
defendant’s relationship with a plaintiff or third party, standing alone, is an insufficient
basis for jurisdiction.” Id. Thus, when a law firm’s only contact with a forum state is the
representation of a forum resident outside of the forum state, personal jurisdiction is
lacking.
This case closely mirrors the cases cited above. GemCap does not allege that
Quarles & Brady solicited business in Idaho or has any other contacts to Idaho beyond its
representation of CropUSA. Even though Quarles & Brady did not appear in any court on
behalf of CropUSA, the Opinion Letter is clearly an “out-of-state legal representation.”
MEMORANDUM DECISION AND ORDER – PAGE 23

As the Sher court held, such “[o]ut-of-state legal representation does not establish
purposeful availment of the privilege of conducting activities in [Idaho].” 911 F.2d at
1362. Thus, Quarles & Brady’s “relationship with [CropUSA] a third party, standing
alone, is an insufficient basis for jurisdiction.” Walden, 134 S. Ct. at 1122.
GemCap does argue that Quarles & Brady may have represented CropUSA in
other cases in Idaho. An out-of-state law firm’s choice to represent a client inside the
forum state can establish purposeful availment. See Wheaton, 2009 WL 464337, at *22.
However, significantly, that representation must form the basis of the current suit in order
to establish the second prong of the specific jurisdiction test: that the claim arises out of
or relates to the defendant’s forum-related activities. Id. at 23.
Wheaton is instructive. In Wheaton, the Colorado law firm of Hamilton and Faatz
represented the two defendants in Wheaton Equip. Co. v. Franmar, Inc. & Franklin
Tolbert, CV03–220–S–BLW (D. Idaho). Ultimately, Chief Judge B. Lynn Winmill
awarded the plaintiff attorneys’ fees and damages in the total amount of $424,835.02.
2009 WL 464337, at *2. The defendants made no payment toward satisfying the
judgment, but disposed of all of their assets through a series of allegedly fraudulent
transfers, including the conveyance of “a rock crusher valued at $175,000 to Hamilton &
Faatz to satisfy the legal fees owed.” Id. at 2–3. “Those transfers and the failure to pay
anything” lead the plaintiff to sue the defendants again, along with several others,
including the law firm of Hamilton & Faatz. Id. The law firm moved to dismiss for lack
of personal jurisdiction. Id. In granting that motion, the Court explained, “even if the law
firm purposefully availed itself of Idaho’s benefits”—by representing the defendants in
MEMORANDUM DECISION AND ORDER – PAGE 24

the first law suit—the plaintiff’s claims in the second law suit “do not ‘arise out’ of the[se
prior] forum-related activities.” Id. at 23. Similarly here, even if Quarles & Brady
represented CropUSA in Idaho previously, GemCap has not explained how this case
arises out of those previous Idaho contacts. Thus, even if the Court granted GemCap
leave to conduct discovery on the extent of Quarles & Brady’s prior representation of
CropUSA, the outcome of the pending Motion to Dismiss would not change.
In sum, this Court does not have personal jurisdiction over Quarles & Brady for
purposes of this suit and, therefore, it must grant Quarles & Brady’s Motion to Dismiss.
VI. LEAVE TO AMEND
Under Federal Rule of Civil Procedure 15(a), a party may amend its pleading once
“as a matter of course within . . . 21 days after serving [the pleading]” or “if the pleading
is one to which a responsive pleading is required, 21 days after service of a responsive
pleading or 21 days after service of a motion under Rule 12(b), (e), or (f), whichever is
earlier.” Fed. R. Civ. P. 15(a)(1). After that, a party may amend the pleading only with
the written consent of the opposing party or with leave of the court. Fed. R. Civ. P.
15(a)(2); see also DCD Programs, Ltd. v. Leighton, 833 F.2d 183, 185 (9th Cir. 1987).
Rule 15(a) instructs the court to grant leave to amend “when justice so requires.” Fed. R.
Civ. P. 15(a)(2). Nevertheless, “[a] district court . . . may . . . deny leave to amend due to
undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to
cure deficiencies by amendments previously allowed, undue prejudice to the opposing
party by virtue of allowance of the amendment, and futility of amendment.” Zucco
Partners, LLC v. Digimarc Corp., 552 F.3d 981, 1007 (9th Cir. 2009) (internal quotation
MEMORANDUM DECISION AND ORDER – PAGE 25

marks and alteration omitted). “An amendment is futile when ‘no set of facts can be
proved under the amendment to the pleadings that would constitute a valid and sufficient
claim or defense.’” Missouri ex rel. Koster v. Harris, 847 F.3d 646, 656 (9th Cir. 2017)
(quoting Miller v. Rykoff–Sexton, Inc., 845 F.2d 209, 214 (9th Cir. 1988)).
Because it is conceivable that GemCap could allege additional facts to cure the
deficiencies identified above, the Court dismisses the Third-Party Complaint without
prejudice. However, if GemCap wishes to file an Amended Complaint, it shall seek leave
to do so within 30 days of the date of this order and shall submit a copy of the Amended
Third Party Complaint with such filing. See Arbon Valley Solar, LLC. v. Thomas & Betts
Corp., No. 1:16-CV-0070-EJL-REB, 2017 WL 277402, at *10 (D. Idaho Jan. 19, 2017).
VII. ORDER
THE COURT HEREBY ORDERS:
1. Crumb & Munding’s Motion to Dismiss (Dkt. 303) is GRANTED.
2. Crumb & Munding’s Motion for Sanctions (Dkt. 362) is DENIED.
3. Quarles & Brady’s Motion to Dismiss (Dkt. 322) is GRANTED.
4. GemCap’s Third Party Complaint (Dkt. 288) is DISMISSED WITHOUT
PREJUDICE.
5. If GemCap wishes to file an Amended Complaint, it shall seek leave to do so
within 30 days of the date of this order and shall submit a copy of the Amended
Third Party Complaint with such filing.

MEMORANDUM DECISION AND ORDER – PAGE 26

DATED: May 31, 2018

_________________________
David C. Nye
U.S. District Court Judge

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