JPMorgan Chase Bank, N.A. v. KB Home et al

Filing 344

ORDER Granting in part and denying in part 228 Plaintiff JP Morgan Chase Bank, N.A.'s Motion to Amend/Correct Complaint. The motion is denied as to proposed count one with respect to the Parent Defendants and granted in all other respects. Amended Complaint shall be filed on or before 10/12/2010. Signed by Judge Philip M. Pro on 9/27/10. (Copies have been distributed pursuant to the NEF - EDS)

JPMorgan Chase Bank, N.A. v. KB Home et al

Doc. 344

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 UNITED STATES DISTRICT COURT D IS T R IC T OF NEVADA *** ) J P M O R G A N CHASE BANK, N.A., ) ) P la in tif f , ) ) v. ) ) K B HOME et al., ) ) D e f e n d a n ts. ) ___________________________________ ) ) A N D ALL RELATED ACTIONS ) )

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ORDER

P re se n tly before the Court is Plaintiff JPMorgan Chase Bank, N.A.'s (" J P M o rg a n " ) Motion Seeking Leave to Amend the UCC Complaints Against the Home B u ild e r Defendants (Doc. #228), filed on February 12, 2010. Defendants filed an O p p o s itio n (Doc. #238) on March 17, 2010. Plaintiff filed a Reply (Doc. #245) on March 2 6 , 2010. The Court held a hearing on this motion on August 6, 2010. (Mins. of P ro c e e d in g s (Doc. #324).) T h e parties are familiar with the factual predicate for this case, and the Court will n o t repeat the facts here except where necessary. JPMorgan contends it has learned through d is c o v e ry of fraudulent acts by Defendants ("Builders") and their parent companies (" P a re n ts " ), and now seeks to amend to add claims for intentional interference with c o n tra c tu a l relations, fraud in the inducement, payment due under the limited guarantees, a n d declaratory relief. JPMorgan contends it learned through discovery that since April 2 0 0 8 the Builders repeatedly have purported to change the dates of their takedowns

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s c h e d u le d in the Acquisition Agreement by extending the deadlines starting in April 2008 a n d continuing to the present. JPMorgan contends Builders failed to inform JPMorgan of th e s e changes, even though all of the relevant agreements require JPMorgan's consent to a n y modification to the takedown schedule. JPMorgan contends the failure to inform it of th e s e changes fraudulently induced JPMorgan to enter into the Forbearance Agreement (" F A " ), triggered the limited guarantees executed by each Builder, and disrupted the c o n tra c tu a l relationship between JPMorgan and South Edge. JPMorgan also seeks a d e c la ra tio n that these acts are null and void. JPMorgan contends there is no prejudice as the a c tio n still is in its early stages in this Court. Builders respond that amendment should be d e n ie d because it is futile, untimely, and prejudicial. G e n e ra lly, a plaintiff may amend his or her complaint once "as a matter of c o u rs e " within twenty-one days after serving it, or twenty-one days after service of a re s p o n s iv e pleading or motion. Fed. R. Civ. P. 15(a)(1). In all other cases, a party may a m e n d its pleading only by leave of court or by written consent of the adverse party. Fed. R . Civ. P. 15(a)(2). "The Court should freely give leave when justice so requires." Id.; see a ls o Foman v. Davis, 371 U.S. 178, 182 (1962) ("Rule 15(a) declares that leave to amend `s h a ll be freely given when justice so requires'; this mandate is to be heeded."). The Court c o n s id e rs five factors in deciding whether to grant leave to amend: "(1) bad faith, (2) undue d e la y, (3) prejudice to the opposing party, (4) futility of amendment, and (5) whether p la in tif f has previously amended his complaint." Allen v. City of Beverly Hills, 911 F.2d 3 6 7 , 373 (9th Cir. 1990) (citing Ascon Props., Inc. v. Mobil Oil Co., 866 F.2d 1149, 1160 (9 th Cir. 1989)). The futility analysis determines whether the proposed amendment would s u rv iv e a challenge of legal insufficiency under Federal Rule of Civil Procedure 12(b)(6). Miller v. Rykoff-Sexton, Inc., 845 F.2d 209, 214 (9th Cir. 1988). /// //// 2

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A . Futility 1 . Intentional Interference With Contractual Relations B u ild e rs argue this claim is futile as against the Parents because they did not vote o r cause South Edge's Members to vote to extend the takedown schedule. Further, Builders a rg u e it is not intentional interference for limited liability company ("LLC") managers to c a s t votes affecting the LLC. JPMorgan responds that its claim is not alleged against either S o u th Edge as the LLC, or its members in their capacity as members. Rather, because the M e m b e rs are parties to the Acquisition Agreement, to extend the takedown schedules any a m e n d m e n t had to be signed by the Members both as members of the LLC and as counterp a rtie s to the Acquisition Agreements. As to the Parents, JPMorgan alleges the Parents e n g a g e d in the same acts through their control of the Members. Under Nevada law, to state a claim for intentional interference with contractual re la tio n s , a plaintiff must allege: (1) a valid and existing contract; (2) the defendant's knowledge of the c o n tra c t; (3) intentional acts intended or designed to disrupt the c o n tra c tu a l relationship; (4) actual disruption of the contract; and (5) re s u ltin g damage. J .J . Indus., LLC v. Bennett, 71 P.3d 1264, 1267 (Nev. 2003). The defendant's "mere k n o w le d g e of the contract is insufficient to establish that the defendant intended or d e s ig n e d to disrupt the plaintiff's contractual relationship; instead, the plaintiff must d e m o n s tra te that the defendant intended to induce the other party to breach the contract with th e plaintiff." Id. at 1268. T h e Acquisition Agreements, which contain the takedown schedules, are c o n tra c ts between South Edge and each Member Builder. The Builders thus signed the A c q u isitio n Agreements as counter-parties with South Edge. The Acquisition Agreements p ro v id e that "[n]o addition to or modification of any term or provision of this Agreement s h a ll be effective unless set forth in writing and signed by both Parties." As a result, 3

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J P M o rg a n plausibly alleges that each Member not only voted as Members of the LLC to e x te n d the takedown schedule, they also agreed to the extensions as counter-parties to the A c q u isitio n Agreement. The claim therefore is not futile as against the Builders. A s to the Parents, JPMorgan points to paragraphs 13, 36, 47, and 127 in support o f this claim. Paragraph 13 does not allege any facts, it states only that this action seeks to h o ld the Parents liable for, among other things, wrongful interference with the contracts b e tw e e n the Members and South Edge. Paragraph 36 states that the Parents have interfered w ith South Edge's and JPMorgan's rights with respect to the Acquisition and Operating A g re e m e n ts "by failing and refusing to permit and enable Defendant Member to honor its o b lig a tio n s to complete land purchases as set forth therein." This allegation does not allege th e Parents induced the Members to amend the takedown schedules. Paragraph 47 states o n ly that each Parent signed the Acquisition Agreement and sets forth language from the A c q u isitio n Agreement that no amendment shall occur absent JPMorgan's prior written a p p ro v a l. Paragraph 127 alleges that through the Parents' "comprehensive and continuous u s e of [their] management control and vetoes over [South Edge's] performance and e n f o rc e m e n t of its obligations," the Parents have "breached [their] fiduciary duties, as well a s [their] contractual and other duties, to Lenders under the Loan Documents, as well as to B o rro w e r under Defendants' Contract Collateral." This general allegation of parental c o n tro l over a subsidiary is insufficient to support the factual contention that the Parents d ire c te d or controlled the decisions regarding the takedown amendments. P a ra g ra p h 57 of JPMorgan's proposed amended complaint identifies those parties it alleges were involved in the amendments to the takedown schedule as the "Takedown F ra u d Defendants." The Parents are not included in the list of Takedown Fraud D e f e n d a n ts. There is no factual allegation that the Parents directed the Members to amend th e takedown schedule. JPMorgan therefore has not sufficiently alleged the Parents' in v o lv e m e n t in the amendments to the takedown schedule, and the Court will deny 4

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a m e n d m e n t on this claim as to the Parents. 2 . Fraud in the Inducement B u ild e rs contend that South Edge, not the Builders, made the representations in th e FA that JPMorgan now claims to be false because the FA was between JPMorgan and S o u th Edge. Builders further argue the FA contained no misrepresentations, as it listed the d e f a u lt associated with failing to follow the takedown schedule. Builders contend that p u rp o rtin g to alter the takedown schedule is not a default, it is only the actual failure to take d o w n the property at the scheduled time that constitutes default. Additionally, Builders c o n te n d the FA contained a catchall phrase which covered other defaults, which would in c lu d e the amendments to the takedown schedule. Builders also claim they made no m isre p re s e n ta tio n because they never have claimed that the purported amendments to the ta k e d o w n schedule alter the terms of the Credit Agreement or otherwise modify any of the L o a n Documents. Builders argue JPMorgan cannot plead reliance because it agreed to e x te n d the takedown schedule in the FA. Finally, Builders argue JPMorgan has not and c a n n o t plead damages. JPMorgan argues Builders signed the FA, and thus had a duty to disclose the a m e n d m e n ts to the takedown schedule. JPMorgan also argues the FA does not identify the a m e n d m e n ts as among the specified defaults in the FA. JPMorgan contends the amendment w ith o u t JPMorgan's consent is a default under the relevant agreements. JPMorgan also c o n te n d s the Builders have argued the amendments alter the takedown schedule under the A c q u isitio n Agreements, which affects JPMorgan's collateral and ability to collect on the lo a n . JPMorgan contends it pled reliance because it only agreed in the FA to a certain ta k e d o w n extension for which it received consideration, it did not agree Builders u n ila te ra lly could alter the takedown schedule indefinitely. Finally, JPMorgan argues it has p le d damages because it forewent its rights to collect during the forbearance period. /// 5

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T h e elements of a claim for fraud in the inducement are: (1) the defendant made a f a ls e representation, (2) with knowledge or belief that the representation was false (or k n o w le d g e that it had an insufficient basis for making the representation), (3) with the in te n t to induce the plaintiff to consent to the contract's formation, (4) the plaintiff ju s tif ia b ly relied on the misrepresentation, and (5) the plaintiff suffered damages as a result. J.A. Jones Constr. Co. v. Lehrer McGovern Bovis, Inc., 89 P.3d 1009, 1018 (Nev. 2004). In the context of an intentional misrepresentation claim, Nevada has equated a false re p re se n ta tio n with "the suppression or omission of a material fact which a party is bound in g o o d faith to disclose." Nelson v. Heer, 163 P.3d 420, 426 (Nev. 2007) (quotation omitted). Fraud in the inducement must be proven by clear and convincing evidence. J.A. Jones C o n tr. Co., 89 P.3d at 1018. a . Who Made the Alleged Misrepresentations? The FA is "by and among" South Edge, the various Builders and their Parents, a n d JPMorgan. JPMorgan identifies three alleged misrepresentations: (1) JPMorgan argues S e c tio n 3(d) of the FA was false because it stated that takedowns were "currently scheduled f o r April 15, 2008," when in fact three times prior to signing the FA, Builders had agreed to e x te n d the schedule; (2) JPMorgan argues Section 15(a) was false because it represented th a t as of the date of the FA, there were "no defaults or Events of Default . . . under the L o a n Documents other than the Specified Defaults," when in fact there was another default in the form of the undisclosed modification of the takedown schedule; and (3) JPMorgan c o n te n d s Section 15(b) of the FA represents that "the Loan Documents and the provision th e re o f . . . have not been modified, supplemented or waived" was a misrepresentation b e c a u s e Builders knew they had modified the takedown schedule. In addition to asserting th e s e alleged misrepresentations, JPMorgan contends Builders induced JPMorgan to enter in to the FA through a fraudulent omission by failing to inform JPMorgan of the m o d if ic a tio n s to the takedown schedule. 6

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S e c tio n 3(d) of the FA does not attribute the statement "currently scheduled for A p ril 15, 2008" to any particular party. Sections 15(a) and (b) are prefaced with the s ta te m e n t that "Borrower," which is South Edge, represents the following statements. JPMorgan thus does not allege facts supporting a plausible entitlement to relief that B u ild e rs made any affirmative misrepresentations. However, JPMorgan has alleged facts s u p p o rtin g a plausible entitlement to relief based on an omission. Builders signed the FA k n o w in g that they had amended the takedown schedule, but did not inform JPMorgan of th a t fact despite statements in the FA which suggested the original takedown schedule still w a s in effect. b . Is Amendment of the Schedule a Default? S e c tio n 9.01 of the Credit Agreement sets forth Events of Default. Section 9 .0 1 (d ) provides that it is an Event of Default if South Edge "shall fail to observe or p e rf o rm any covenant, condition or agreement contained . . . in Article VII." In Article VII, S e c tio n 7.03(a) states that South Edge "shall not amend, modify or terminate any A c q u isitio n Agreement without the prior written approval of" JPMorgan. The purported a m e n d m e n ts therefore are Events of Default. c . Did the FA Disclose All Defaults? S e c tio n 15(a) of the FA provides that South Edge warrants that as of the date of s ig n in g the FA, "there are no defaults or Events of Default . . . under the Loan Documents o th e r than the Specified Defaults." The FA defines Specified Defaults as "any Default or E v e n t of Default arising solely with respect to the failure by a Member to complete its s c h e d u le d Takedown on April 15, 2008." The FA also defines Specified Defaults as "any o th e r Defaults or Events of Default existing as of the date hereof or which may arise during th e Forbearance Period (as defined below), other than any New Material Default." The FA d e f in e s New Material Default as, among other things, "any other Defaults or Events of 7

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D e f a u lt . . . involving the failure to pay money or that, individually or in the aggregate, w o u ld materially and adversely affect (1) the value of the Collateral, (2) the ability of the A g e n t or the Lenders to exercise remedies with respect to any Collateral or Guaranties, or (3 ) the timing of such remedies; provided, however, that a New Material Default shall not in c lu d e any event with respect to a Member or Parent Guarantor which does not give rise to te rm in a tio n of this Forbearance Agreement under Section 5(e)." Section 5(e) refers to the v o lu n ta ry or involuntary bankruptcy or appointment of a receiver for any Member or Parent G u a ra n to r. Amendment of the takedown schedule is a New Material Default because it w o u ld affect the collateral and would affect JPMorgan's remedies. If South Edge and the M e m b e rs amend the Acquisition Agreement by extending the takedown schedule, it affects J P M o rg a n 's ability to enforce the takedown schedule under the Acquisition Agreement, an a g re e m e n t in which JPMorgan has a security interest. d. Reliance J P M o rg a n contends it has pled reliance because when it agreed to the extension in the FA, it did so with knowledge and for consideration, for a determinate period of time. But what it did not know was that Builders were extending the takedown schedule without its knowledge, for no consideration, and in a manner that suggested the takedowns could be m o d if ie d indefinitely in the future so that takedowns would never come due unless Builders w a n te d that result. JPMorgan has alleged reliance sufficient to support amendment, as it has alleged it would not have agreed to forbear and negotiate further if it had known the Builders were ta k in g the position they could change the takedown schedule at will and indefinitely put off th e takedowns. That it agreed to a limited extension of the takedown schedule in exchange f o r some consideration does not mean it did not rely on the representations in the FA, and B u ild e rs ' silence in the face of those representations, that the original takedown schedule 8

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w a s in effect. e . Damages J P M o rg a n has alleged damages because it forbore under the FA, and thus e x te n d e d the time frame for recovering its money. Whether JPMorgan will be able to e s ta b lis h its entitlement to such damages is not a proper inquiry at the amendment stage. J P M o rg a n has alleged facts supporting a plausible entitlement to relief for its in te n tio n a l interference with contractual relations claim. This claim is not futile as against th e Builders. However, the claim is futile as against the Parents for the reasons set forth above. 3. Payment Due Under the Limited Guaranty B u ild e rs argue this claim is futile because the Limited Guaranty is not triggered u n le s s there is a fraudulent misrepresentation in the Loan Documents, and the FA is not a lo a n document as that term is defined in the Limited Guaranty. JPMorgan responds the L im ite d Guaranty is triggered by misrepresentations not only "in" the Loan Documents, but " u n d e r" the loan documents. JPMorgan contends that because the misrepresentations re f e re n c e the Loan Documents, the misrepresentations were "under" the Loan Documents. JPMorgan also argues the FA is itself a Loan Document because it was delivered by B u ild e rs to JPMorgan pursuant to the Credit Agreement. JPMorgan further argues the L im ite d Guaranty is triggered by a fraudulent omission "in respect of the Loans or the O b lig a tio n s ," and the failure of Builders to advise JPMorgan of the amended takedown s c h e d u le is a fraudulent omission "in respect of" the loans or obligations. The contractual parties to the Limited Guarantees are the Members, the Parent G u a ra n to rs , and JPMorgan. The Members and Parents agreed to guarantee "any and all a c tu a l losses, costs, damages and expenses incurred" by JPMorgan "as a direct or indirect re s u lt of (i) any willful or fraudulent misrepresentation by the Parent Guarantor or the M e m b e r Guarantor under any Loan Documents; [or] (ii) any fraudulent or unlawful act or 9

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o m is s io n of the Parent Guarantor or the Member Guarantor in respect of the Loans or the O b lig a tio n s or any of the Loan Documents to which such Parent Guarantor or Member G u a ra n to r is a party[.]" The Limited Guarantees also provide that the Members and Parents g u a ra n ty the same for any such acts by South Edge. The Limited Guarantees provide that the capitalized terms have their meaning as s e t forth in the Credit Agreement. The Credit Agreement defines Loan Documents as "(a) [ th e Credit Agreement], any Notes delivered pursuant hereto or the Original Credit A g re e m e n t, the Guaranties, the Environmental Indemnity Agreement and the Collateral D o c u m e n ts and (b) any and all other instruments or documents delivered or to be delivered b y the Credit Parties pursuant hereto or pursuant to any of the other documents described in c la u s e (a) above." Loans are defined as "the loans made by the Lenders to the Borrowers p u rs u a n t to this Agreement." Obligations means "all Loans, LC Disbursements, advances, d e b ts , liabilities, obligations, covenants and duties owing by any Credit Party" to JPMorgan o r the other Lenders. The FA is not a Loan Document because it was not delivered pursuant to the C re d it Agreement. The FA requires South Edge and the Members to deliver the FA to the o th e r parties to the agreement, but it is the FA that requires delivery, not the Credit A g re e m e n t. Consequently, a misrepresentation made in the FA would not qualify as a m isre p re s e n ta tio n "under the Loan Documents." However, the Limited Guarantees also are triggered by misrepresentations "in re s p e c t of the Loans or the Obligations." JPMorgan adequately has alleged a m isre p re s e n ta tio n "in respect of" the Loans or the Obligations by alleging Defendants, by o m is s io n , misrepresented the takedown schedule or amendments thereto. Additionally, D e f e n d a n ts agreed the Limited Guaranty would be triggered by South Edge's m isre p re s e n ta tio n s , and JPMorgan has alleged South Edge made affirmative m isre p re s e n ta tio n s in the FA regarding the takedown schedule. The takedown schedule is 10

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re la te d to the structuring of the loan and the Obligations thereunder. As discussed above, a m e n d in g the takedown schedule without JPMorgan's consent was a default under the C re d it Agreement. This claim therefore is not futile. 4 . Declaratory Relief B u ild e rs argue this claim is not ripe because there presently is no dispute as to w h e th e r the internal vote to change the takedown schedules affected JPMorgan's rights u n d e r the Loan Documents, and in any event this issue will be addressed in JPMorgan's b re a c h of contract claim. JPMorgan responds that JPMorgan's rights are affected by any a m e n d m e n t to the schedules in the Acquisition Agreement because that agreement has been a s s ig n e d to JPMorgan. JPMorgan contends that any modification that would make p a ym e n ts due under the Acquisition Agreement perpetually changeable at the whim of the B u ild e rs affects JPMorgan's ability to collect on the loan. JPMorgan thus claims it is e n title d to know whether the purported amended takedowns are the actual schedule or w h e th e r the original takedown schedule controls. To determine whether to hear a declaratory judgment claim, the Court first must d e te rm in e whether there is an actual case or controversy within its jurisdiction. Principal L if e Ins. Co. v. Robinson, 394 F.3d 665, 669 (9th Cir. 2005). To determine whether there is an actual case or controversy, the Court uses the same test for Article III cases or c o n tro v e rs ie s . Id. "A claim is usually ripe if the issues raised are primarily legal, do not re q u ire further factual development, and the challenged action is final." Center For B io lo g ic a l Diversity v. Kempthorne, 588 F.3d 701, 708 (9th Cir. 2009) (quotation omitted). Additionally, the Court should consider "the fitness of the issues for judicial decision and . . . the hardship to the parties of withholding court consideration." Id. (quotation omitted). If the Court determines it has jurisdiction, the Court then must decide whether to e x e rc ise its jurisdiction. Principal Life Ins. Co., 394 F.3d at 669. To make this d e te rm in a tio n , the Court considers the following factors: (1) avoiding needless 11

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d e te rm in a tio n of state law issues; (2) discouraging forum shopping; and (3) avoiding d u p lic a tiv e litigation. Id. at 672. The Court "must balance concerns of judicial a d m in is tra tio n , comity, and fairness to the litigants." Id. (quotation omitted). In addition to th e above factors, the Court may consider: whether the declaratory action will settle all aspects of the controversy; w h e th e r the declaratory action will serve a useful purpose in clarifying th e legal relations at issue; whether the declaratory action is being s o u g h t merely for the purposes of procedural fencing or to obtain a `res ju d ic a ta ' advantage; or whether the use of a declaratory action will re s u lt in entanglement between the federal and state court systems. In a d d itio n , the district court might also consider the convenience of the p a rtie s , and the availability and relative convenience of other remedies. Id . A ripe controversy exists between the parties as to whether the amendments to th e takedown schedule have any legal effect under any applicable agreement. Although B u ild e rs contend that they do not dispute the amendment did not affect the Credit A g re e m e n t, Builders do not disclaim that the amendments affect the Acquisition A g re e m e n t. Whether the amendments have any legal effect is primarily a legal question w h ic h will not require further factual development, and the challenged action is final. There are no concerns here about avoiding needless determination of state law issues, d is c o u ra g in g forum shopping, or avoiding duplicative litigation. Declaratory relief as to the a m e n d m e n ts' legal effect will serve a useful purpose in clarifying the legal relations at is su e . The claim therefore is not futile or unnecessary. 5 . Punitive Damages B u ild e rs contend there is no basis to add punitive damages relief to this action. Because JPMorgan's fraudulent inducement claim is not futile, punitive damages likewise a re not futile at this stage of the proceedings. B . Undue Delay and Prejudice B u ild e rs argue JPMorgan unduly delayed amending because the extensions to the ta k e d o w n schedule were discussed in a hearing many months ago, and were referenced in 12

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d o c u m e n ts produced in October 2009. JPMorgan responds that it moved to amend within th e time allotted in the Scheduling Order for amendment. JPMorgan also contends it did n o t learn of all the facts supporting amendment until January 2010. JPMorgan argues that p a s s in g references to amendments to the takedown schedule and unsigned votes to extend th e schedule were insufficient to support amendment earlier. JPMorgan moved to amend prior to the expiration of the deadline to move to a m e n d . JPMorgan's motion therefore is timely under the Scheduling Order. The passing re f e re n c e s to amendments which the Builders cite would not have sufficed for JPMorgan to a s s e rt its claims with the factual allegations necessary to support a plausible entitlement to re lie f . Builders will not be prejudiced because the Court already has indicated it will solicit f ro m the parties a new proposed discovery plan and scheduling order following the Court's ru lin g on certain motions submitted at the August 6, 2010 hearing. (Mins. of Proceedings (D o c . #324).) Thus, to the extent Builders need further discovery to address these new c la im s , they may propose extending the discovery deadline. JPMorgan's motion to amend is not futile, unduly delayed, or prejudicial. The C o u rt therefore will grant the motion to amend. JPMorgan must detach and file the a m e n d e d complaint within ten (10) days of the date of this Order. C . CONCLUSION IT IS THEREFORE ORDERED that Plaintiff JPMorgan Chase Bank, N.A.'s (" J P M o rg a n " ) Motion Seeking Leave to Amend the UCC Complaints Against the Home B u ild e r Defendants (Doc. #228) is hereby GRANTED in part and DENIED in part. The m o tio n is denied as to proposed count one with respect to the Parent Defendants. The m o tio n is granted in all other respects. /// /// /// 13

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IT IS FURTHER ORDERED that Plaintiff JPMorgan Chase Bank, N.A. shall file a n amended complaint in compliance with this Order on or before October 12, 2010.

DATED: September 27, 2010 _______________________________ PHILIP M. PRO United States District Judge

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