Summerfall Group, LLC v. Hatch

Filing 47

MEMORANDUM DECISION AND ORDER granting 20 Plaintiff's Motion for Summary Judgment. Plaintiff shall submit a proposed judgment to the Court within 10 days of this Order. Signed by Judge Ronald E. Bush. (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

SUMMERFALL GROUP, LLC,
Case No. 1:14-CV-00402-REB
Plaintiff,
MEMORANDUM DECISION AND
ORDER

v.
STEPHEN J. HATCH,
Defendant.

Currently pending before the Court is Plaintiff Summerfall Group LLC’s Motion
for Summary Judgment (Dkt. 20). Having heard oral argument and being otherwise fully
advised, the Court issues the following memorandum decision and order granting the
motion.
FACTUAL BACKGROUND
Plaintiff Summerfall Group, LLC (“Summerfall”) is an Idaho limited
liability company. On or about October 10, 2007, Defendant Stephen J. Hatch (“Hatch”)
executed a Pledge Note in favor of Summerfall in the amount of $500,000.00 Gee Decl.,
Dkt. 22, Ex. A. Under the terms and conditions of the Pledge Note, for value received,
Hatch agreed to pay Summerfall the principal sum of $500,000.00 at 0% interest per
MEMORANDUM DECISION AND ORDER - 1

annum no later than October 1, 2010. Id. On the same date, Hatch and Summerfall also
executed a Pledge Agreement. Id., Ex. B. Hatch personally guaranteed the Pledge Note’s
obligations with regard to the guaranteed payment to Summerfall of the $500,000.00 loan
principal. Id. Hatch also agreed to assign to Summerfall and grant a security interest in
3.5% of Hatch’s membership interest in PLNU-B-SCIENCE-B, LLC (“PLNU”), as
collateral on the loan. Id. Per the Pledge Agreement, Hatch executed an Assignment of
Proceeds of Certain Membership Interest in PLNU-B-SCIENCE-B, LLC (“PLNU
Assignment”) in favor of Summerfall, agreeing to distribute all proceeds from 3.5% of his
membership interest therein. Hatch Decl., Dkt. 27-2, Ex. C. Additionally, the Pledge
Agreement included a “Residual Financial Return” provision providing that:
In lieu of interest payments payable from the Pledgor to the
Lender during the term of the Pledge Note, Lender shall
receive a financial interest in the value of the Pledge PLNU
Membership Interests and any income or revenue stream
attributed to the Pledge PLNU Membership Interests. This
right shall exist both during the term of the Pledge Note and
shall continue as a residual right of Lendor even after the
repayment of the $500,000 loan principal by Pledgor.
Id.
In the fall of 2010, Summerfall agreed to an extension on the maturity date of the
Pledge Note on a month to month basis in exchange for Hatch’s agreement to pay
Summerfall interest at the rate of 12% to be paid at the rate of $5,000 per month on the
first day of each month beginning October 1, 2010. Gee Decl., ¶ 6. Emails were
exchanged between Summerfall and Brad Heinrichs, who was Hatch’s partner and
Director of Investor Relations. Hatch Decl., Ex. D. This “extension agreement,” as it is
MEMORANDUM DECISION AND ORDER - 2

called by Hatch, was to go through January 2011. Id.

It was agreed between

Summerfall and Hatch that payment of interest only on a month to month basis would
allow Hatch an opportunity to liquidate assets in order to pay the principal amount of
$500,000.00. Gee Decl., ¶ 6.
On or about February 11, 2011, Summerfall allegedly sent Hatch a letter
demanding payment of the loan in full but Hatch never received it. Hatch Decl., ¶ 12, Ex.
F. On March 2, 2011, Hatch said in an email to Summerfall that he understood the
$5,000.00 interest payment would be sufficient until Hatch could repay the loan in full.
Id., ¶ 13. Summerfall responded with a demand for immediate repayment of the loan, and
at the same time requesting “an outline for [Hatch’s] repayment strategy to be currently
commenced.” Hatch Decl., ¶ 14, Ex. F. Between March 3, 2011, and March 10, 2011,
Summerfall and Hatch engaged in email communications wherein Summerfall allowed
another extension of time up through June 15, 2011. Id. ¶ 15, Ex. F.
Hatch made one interest payment in 2013 in the amount of $30,000, which was
received on or about July 1, 2013. Hatch made no further interest payments. These
payments, which were made at irregular intervals through 2010, 2011, 2012, and 2013,
ultimately totaled $160,000.00. Gee Decl., ¶¶ 6-7, Ex. C, D. On or about July 22, 2013,
Summerfall made written demand that Defendant Hatch pay Summerfall the $500,000.00
principal amount of the Note, which Summerfall contended was due and owing. Gee
Decl., Ex. E; Hatch Decl., Ex G. Since that demand, Hatch has not paid, and refuses to
pay, the amount Summerfall contends is due and owing under the Pledge Note.
MEMORANDUM DECISION AND ORDER - 3

Between September 27, 2013, and December 3, 2013, Summerfall and Hatch
communicated in emails about setting up a meeting to discuss payment arrangements and
a draft repayment proposal. Hatch Decl., ¶ 20, Ex. H. On or about December 7, 2013,
Summerfall sent Hatch an email indicating that a draft agreement “would be great” and
requested payment of the June through December 2013 interest payments. Id. ¶ 21, Ex.
H.
On or about December 23, 2013, Summerfall again emailed Hatch requesting
payment of the June through December 2013 interest amounts and said that Summerfall
was “look[ing] forward to the receipt of the draft proposal as well . . .” Hatch Decl., ¶ 22,
Ex. I. Based on this communication, Hatch believed Summerfall was willing to enter into
a new repayment agreement. Id., ¶ 23. No signed agreement of a new repayment plan
ensued, however, and after July 2013, Hatch made no interest, or other, payments to
Summerfall. Summerfall filed suit on September 19, 2014. (Dkt. 1.)
SUMMARY JUDGMENT STANDARD
Summary judgment is appropriate where a party can show that, as to any claim or
defense, “there is no genuine dispute as to any material fact and the movant is entitled to
judgment as a matter of law.” Fed. R. Civ. P. 56(a). One of the principal purposes of
summary judgment “is to isolate and dispose of factually unsupported claims . . . .”
Celotex Corp. v. Catrett, 477 U.S. 317, 323-34 (1986). It is “not a disfavored procedural
shortcut,” but is instead the “principal tool[ ] by which factually insufficient claims or
defenses [can] be isolated and prevented from going to trial with the attendant
MEMORANDUM DECISION AND ORDER - 4

unwarranted consumption of public and private resources.” Id. at 327. “[T]he mere
existence of some alleged factual dispute between the parties will not defeat an otherwise
properly supported motion for summary judgment.” Anderson v. Liberty Lobby, Inc., 477
U.S. 242, 247-48 (1986). There must be a genuine dispute as to any material fact – a fact
“that may affect the outcome of the case.” Id. at 248.
The evidence must be viewed in the light most favorable to the non-moving party,
and the Court must not make credibility findings. Id. at 255. Direct testimony of the nonmovant must be believed, however implausible. Leslie v. Grupo ICA, 198 F.3d 1152,
1159 (9th Cir. 1999). On the other hand, the Court is not required to adopt unreasonable
inferences from circumstantial evidence. See McLaughlin v. Liu, 849 F.2d 1205, 1208
(9th Cir. 1988).
The moving party bears the initial burden of demonstrating the absence of a
genuine dispute as to a material fact. See Devereaux v. Abbey, 263 F.3d 1070, 1076 (9th
Cir. 2001) (en banc). To carry this burden, the moving party need not introduce any
affirmative evidence (such as affidavits or deposition excerpts) but may simply point out
the absence of evidence to support the nonmoving party’s case. See Fairbank v.
Wunderman Cato Johnson, 212 F.3d 528, 532 (9th Cir. 2000).
This shifts the burden to the non-moving party to produce evidence sufficient to
support a jury verdict in his favor. See Devereaux, 263 F.3d at 1076. The non-moving
party must go beyond the pleadings and show “by her [ ] affidavits, or by the depositions,
answers to interrogatories, or admissions on file” that a genuine dispute of material fact
MEMORANDUM DECISION AND ORDER - 5

exists. Celotex, 477 U.S. at 324.
DISCUSSION
The Court will address the various defenses raised by Defendant in his opposition
to Plaintiff’s motion for summary judgment before getting to the merits of Plaintiff’s
claims.
1.

Waiver
According to Hatch, Summerfall failed to properly provide notice of breach and

that by continuing to accept interest only payments from Hatch, Summerfall waived its
right to sue Hatch for breach of the Pledge Note and Pledge Agreement. (Dkt. 27, p. 3.)
Under the Pledge Note, the “failure of the Holder hereof to exercise any of the
foregoing options [in the Event of Default] shall not constitute a waiver of the right to
exercise the same upon the occurrence of a subsequent default.” Hatch Decl., Ex. A.
Similarly, the Pledge Agreement contains a “No Waiver of Rights or Remedies”
provision which provides that “no failure or delay by Lender [Summerfall] in exercising
any right, power or privilege under the Pledge Note or this Pledge Agreement shall
operate as a waiver thereof, and no single or partial exercise thereof shall preclude any
other or future exercise of any other right, power or privilege.” Id., Ex. B.
Non-waiver clauses are valid under Texas law.1 See In re GuideOne National Ins.
Co., 2015 WL 5766496, *3 (Tex. App.-Amarillo, Sept. 29, 2015) (citing a Texas case

1

The Pledge Agreement contains a choice of law provision for Texas law. Hatch
Decl., Ex. B.
MEMORANDUM DECISION AND ORDER - 6

from 1897 upholding a non-waiver clause); Breof BNK Tex., L.P. v. D.H. Hill Advisors,
Inc., 370 S.W.3d 58, 66 (Tex.App.-Houston, 2012). Even so, non-waiver clauses are
themselves waivable when the parties’ words and conduct demonstrate that it has been
“unequivocally manifested” that a party no longer intends to assert the right in question.
DPRS 15th Street, Inc. v. Texas Skyline, Ltd., 2014 WL 4058796, *8 (Tex.App.-Austin,
Aug. 13, 2104).
Hatch has not argued that Summerfall waived the non-waiver clause but even if he
had, there is no evidence that Summerfall “unequivocally manifested” an intent to no
longer assert a breach of the Pledge Note and Agreement. In Guzman v. Ugly Duckling
Car Sales of Texas, LLP, the court held that even though the car dealer had previously
accepted a car buyer’s late payments without pursuing a remedy under the contract, the
car dealer did not intend to waive the non-waiver clause. 63 S.W.3d 522, 528 (Tex.App.San Antonio, Nov. 7, 2001).
On this record, the non-waiver clause is enforceable. Accordingly, even if
Summerfall had not pursued its rights and remedies under the Pledge Note and
Agreement when Hatch first defaulted, that does not prevent Summerfall from seeking
recovery from Hatch now. Summerfall did not waive its rights under the Pledge Note and
Agreement. Hatch’s waiver defense fails.
2.

Novation
Hatch argues in the alternative that through oral agreement and conduct of

the parties, Summerfall and Hatch agreed upon interest only payments up through June
MEMORANDUM DECISION AND ORDER - 7

2011, a deviation from the contract terms. Hatch contends this agreement served as a
novation of the original Pledge Note, thereby extinguishing any further obligation under
the Pledge Note.
Novation occurs when parties substitute a new agreement in place of an existing
agreement between the same parties. Novation is an affirmative defense to a claim for
breach of contract, and Defendant bears the burden of proof in establishing such a
defense. In the Interest of B.N.L.-B, 375 S.W.3d 557, 562 (Tex.App.-Dallas, 2012). To
establish novation, the party must prove: (1) a previous valid obligation; (2) an agreement
of the parties to a new contract; (3) the extinguishment of an old contract; and (4) the
validity of the new contract. Id. “In the absence of inconsistent provisions, ‘a second
contract will operate as a novation of a first contract only when the parties to both
contracts intend and agree that the obligations of the second shall be substituted for and
operate as a discharge of the obligations of the first.’ ” Fulcrum Cent. v. AutoTester, Inc.,
102 S.W.3d 274, 277 (Tex.App.-Dallas, 2003) (quoting Chastain v. Cooper & Reed, 257
S.W.2d 422, 424 (Texas 1953)). Whether a subsequent agreement works a novation of an
earlier agreement is a question of intent. Id. The parties must have clearly intended a
novation and a novation is never presumed. White v. Harrison, 390 S.W.3d 666, 675
(Tex.App.-Dallas 2012, no pet.); Fulcrum Cent., 102 S.W.3d at 278. “In the absence of
express agreement, whether a new contract operates as a novation of an earlier contract is
‘usually a question of fact, and can only become a question of law when the state of the
evidence is such that reasonable minds cannot differ as to its effect.’ ” Fulcrum Cent., 102
MEMORANDUM DECISION AND ORDER - 8

S.W.3d at 278 (quoting Chastain, 257 S.W.2d at 424).
Hatch has not proven that there was a novation. For a period of time Summerfall
accepted interest only payments in the amount of $5,000 a month, which were paid at
irregular intervals by Hatch. These payments ultimately totaled $160,000.00. In an email
dated September 13, 2010, Summerfall member David Gee wrote that “Summerfall
members have agreed to [Hatch’s] offer of 12% annual interest paid on a monthly basis at
the beginning of the month for a limited time through January 2011 . . .” Hatch Decl, Ex.
D. In March 2011, there is an email exchange between David Gee and Hatch in which
Gee requests immediate return of the principal and that Summerfall will extend an
additional three months “under the same conditions,” through June 2011, but with an
immediate return of the $500,000.00 principal by June 15, 2011. Id., Ex. F. Hatch made
his last interest-only payment in 2013. In an email dated September 27, 2013,
Summerfall wrote to Hatch: “Regardless of previous conversations or communication,
our business relationship with you remains ambiguous at the present time. There is no
contract in place and merely a verbal agreement to pay interest that comes at variable
intervals.” Id., Ex. H. Hatch contends that Summerfall’s acceptance of the interest only
payments for three years implies an intention by the parties to abandon the original
repayment obligation.
Such evidence does not establish as a matter of law that Summerfall agreed to
accept interest only payments and relinquish its right to collect the principal amount of
$500,000.00. Summerfall made no agreement to accept interest-only payments
MEMORANDUM DECISION AND ORDER - 9

indefinitely, in lieu of the payment of the principal. Rather, the communications show
that Summerfall agreed to interest-only payments through June 2011, to be followed by a
then immediate repayment of the principal amount. Such details neither fit the theory of
Hatch’s purported novation, nor is there evidence in the record that there was to be a
substitution and discharge of the obligations in the Pledge Note. Instead, Summerfall
makes repeated requests for return of the principal, negating Hatch’s contention that there
was an agreement that the obligation in the Pledge Note be extinguished and replaced by
interest-only payments.
In summary, there is no evidence that Summerfall ever intended to replace the
obligation in the Pledge Note with a new obligation. While Texas courts recognize that
novation is typically a question of fact, the Court concludes the absolute dearth of
evidence in support of Hatch’s novation defense is such that reasonable minds could not
differ.2 There was no new, valid contract formed that replaced the previous, valid
contract (the Pledge Note). Plaintiff’s novation defense fails.
3.

Accord and Satisfaction
Lastly, Hatch contends that Summerfall agreed to accept the PLNU shares in full

2

Additionally, assuming arguendo that there was a novation, the Texas statute of
frauds requires that a “an agreement which is not to be performed within one year from
the date of making the agreement” must be in writing and signed “by the person to be
charged with the promise.” Tex. Bus. & Comm. Code § 26.01. Interest payments in the
amount of $5,000 a month (even in an undefined amortization) could not possibly satisfy
repayment of a principal amount of $500,000.00 within one year and therefore any such
agreement would be subject to the Texas statute of frauds. Because such an agreement is
not in writing and signed, such an agreement would be unenforceable.
MEMORANDUM DECISION AND ORDER - 10

accord and satisfaction of the $500,000.00 due under the Pledge Note. Additionally
(despite the terms of the Pledge Agreement, which provided that the dividends and
proceeds from the company would be accepted in lieu of interest payments), Hatch made
interest payments in addition thereto, in excess of $160,000, which according to Hatch
demonstrates a mutual agreement between the parties to accept a lesser payment in full
satisfaction of the Pledge Note.
An accord and satisfaction exists when parties agree to discharge “an existing
obligation in a manner other than in accordance with the terms of their original contract.”
Avary v. Bank of Am., N.A., 72 S.W.3d 779, 788 (Tex.App.-Dallas, 2002). The
affirmative defense involves a new contract, either express or implied, in which the
existing obligation is released by agreement of the parties through “means of [a] lesser
payment tendered and accepted.” Jenkins v. Henry C. Beck Co., 449 S.W.2d 454, 455
(Tex. 1969). Evidence must demonstrate “both parties agreed the amount paid by the
debtor to the creditor fully satisfied the entire claim.” Avary, 72 S.W.3d at 788. Because
a valid accord and satisfaction depends upon an agreement, it “only occurs when the
parties mutually [assent] to it.” Their intention is the controlling element. McCarty v.
Humphrey, 261 S.W. 1015, 1016 (Tex. Comm’n App. 1924).
As with novation, Hatch cannot prove there was any new agreement, express or
implied, to accept a lesser payment of $160,000.00, whether with or without the
assignment of Hatch’s membership interest and the value of the proceeds and dividends,
in full satisfaction of the loan.
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The Court agrees with Summerfall that the Pledge/Assignment of an interest in
PLNU cannot operate as an accord and satisfaction. The Assignment of the proceeds and
dividends of Hatch’s membership interest was made at the same time as the Pledge Note
and Pledge Agreement to secure the Pledge Note. There is no evidence, nor any sense, to
support the proposition that this was to operate as an accord and satisfaction of the Note
Nor was there a meeting of the minds indicating mutual asset that the
$160,000.00 paid in interest by Hatch was to operate as a satisfaction of the entire
$500,000.00 owed under the Pledge Note, an amount more than three times the total
interest paid. The record contains repeated instances of Summerfall making reference to
and demanding payment of the entire $500,000.00. There are numerous references in the
email exchanges to Summerfall’s expectation that the $500,000.00 was still to be paid in
full. For example, on March 10, 2011, Summerfall member David Gee wrote that
Summerfall was willing to extend an additional 3 months “but with return of our 500K
principal by June 15, 2011.” Hatch Decl., Ex. F. Accordingly, as a matter of law, there
was no accord and satisfaction, and Hatch’s affirmative defense of the same fails.
4.

Breach of Contract
A breach of contract is found with: (1) the existence of a valid contract, (2) the

performance or tendered performance by the plaintiff, (3) breach of the contract by the
defendant, and (4) resulting damages to the plaintiff. Rice v. Metro Life. Ins. Co., 324
S.W.3d 660, 666 (Tex.App.-Fort Worth, 2010).
Summerfall has proven each of the elements of breach of contract beyond any
MEMORANDUM DECISION AND ORDER - 12

genuine issue of material fact. There was a valid contract in the Pledge Note and Pledge
Agreement between Summerfall and Defendant Hatch. Hatch does not dispute that this
was a valid agreement. Summerfall performed by making the loan to Hatch of
$500,000.00. Hatch “promise[d]s to pay to the order of the Summer Fall Group, LLC
(“Payee”), the principal sum of Five Hundred Thousand Dollars ($500,000.00) with
interest thereon at zero percent (0%) per annum no later than October 1, 2010.” Gee
Decl., Ex. A.
Hatch did not pay the $500,000.00 by October 1, 2010. When 30 days passed
without Hatch making payment of the principal amount, the Pledge Note was breached.
Hatch has not proven any of his affirmative defenses to breach of contract. When Hatch
did not pay Summerfall, Summerfall was damaged as a result of Hatch’s breach. Hatch
personally guaranteed the Pledge Note. Accordingly, summary judgment will be granted
on Summerfall’s breach of contract and personal guaranty claims.
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ORDER
IT IS THEREFORE ORDERED that Plaintiff Summerfall’s Motion for
Summary Judgment (Dkt. 20) is GRANTED.
Plaintiff shall submit a proposed judgment to the Court within 10 days of this
Order.
DATED: June 15, 2016

Honorable Ronald E. Bush
Chief U. S. Magistrate Judge

MEMORANDUM DECISION AND ORDER - 14