The Richard And Sheila J. McKnight 2000 Family Tust, Richard McKnight Trustee
Filing
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ORDER Granting 318 Motion to Dismiss. Signed by Judge Robert C. Jones on 3/24/2014. (Copies have been distributed pursuant to the NEF - SLR)
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UNITED STATES DISTRICT COURT
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DISTRICT OF NEVADA
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THE RICHARD AND SHEILA J. MCKNIGHT
2000 FAMILY TRUST et al.,
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Plaintiffs,
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vs.
WILLIAM J. BARKETT et al.,
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Defendants.
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2:10-cv-01617-RCJ-GWF
ORDER
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This is a complex breach of guaranty case related to the USA Commercial bankruptcy.
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Pending before the Court is a Motion to Dismiss (ECF No. 318). For the reasons given herein,
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the Court grants the motion.
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I.
FACTS AND PROCEDURAL HISTORY
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Plaintiff Richard McKnight,1 as trustee for The Richard & Sheila J. McKnight 2000
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Family Trust (“the McKnight Trust”) provided $100,000 out of the total of $4.5 million that
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various direct lenders loaned to Defendant Castaic III Partners, LLC (“Castaic III”) through USA
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Commercial Mortgage Co. (“USA Commercial”). (Compl. ¶ 5, Sept. 21, 2010, ECF No. 1). The
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McKnight Trust has received no interest payments on the loan since August 2006. (Id. ¶ 9).
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Plaintiff sued Defendants Castaic III and William J. Barkett in this Court on two claims:
(1) Breach of Guaranty (Barkett only); and (2) Declaratory Judgment. The Court denied a
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Richard McKnight is a apparently both a beneficiary and the trustee of the McKnight
Trust and one of the McKnight Trust’s attorneys in this action.
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motion to reconsider transfer of the case from the Hon. Gloria M. Navarro to this Court,
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dismissed the second cause of action for declaratory judgment, granted offensive summary
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judgment on the first cause of action for breach of guaranty, and permitted 260 other direct
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lenders to intervene as Plaintiffs and to add claims against Castaic Partners, LLC (“Castaic” or
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“Tapia Ranch”) and Castaic II Partners, LLC (“Castaic II”). Defendants appealed the judgment
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against them as to breach of guaranty, but the Court of Appeals dismissed the appeal for lack of
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jurisdiction.
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Each group of intervenors has filed its own complaint in intervention. Intervenor
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Plaintiffs Thomas J. Kapp and Cynthia S. Roher, as trustees of the T&C Kapp Family Trust (the
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“Kapp Intervenors” or “Kapp”) filed a Complaint in Intervention (the “Kapp CI”) against Barkett
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and Castaic II for breach of contract, breach of guaranty, and declaratory judgment. (See Kapp
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CI, May 12, 2011, ECF No. 34). A second group of intervenors (the “Rasmussen Intervenors”)
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have filed a complaint in intervention (the “Rasmussen CI”) against Barkett, Castaic, Castaic II,
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and Castaic III for breach of contract, breach of guaranty, and declaratory judgment. (See
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Rasmussen CI, Aug. 8, 2011, ECF No. 61). The Rasmussen CI alleges the amount each
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Rasmussen Intervenor loaned the Castaic entities. (See id. ¶¶ 5, 67–69). A third group of
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intervenors, DACA-Castaic, LLC and Debt Acquisition Co. of America V, LLC (“DACA V,”
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collectively, the “DACA Intervenors” or “DACA”), withdrew its motion to intervene.
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The Court granted a motion to dismiss the Kapp CI in part, dismissing the declaratory
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judgment claim but refusing to dismiss the breach of contract and breach of guaranty claims for
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lack of standing. Defendants argued that Kapp Intervenors had transferred their interests in the
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relevant loans to DACA-Castaic, LLC and thus no longer had standing to sue for breach of
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contract or breach of guaranty. The Kapp Intervenors responded that they had only transferred
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the deeds of trust, not the beneficial interest. The Court invited summary judgment motions on
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the issue but refused to dismiss because the Kapp CI was sufficiently pled. The Court
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completely denied a motion to dismiss the Rasmussen CI, noting that the claim for declaratory
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relief thereunder was different from the declaratory relief claims in the Complaint and the Kapp
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CI that the Court had dismissed. The Court struck Defendants’ “crossclaim,” which was in
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reality a third-party complaint and/or a counterclaim, directing Defendants to refile the pleading
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properly, which they did. (See Countercl. and Third-Party Compl., ECF Nos. 156, 157). In that
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pleading, Defendants countersued several Compass entities, the two DACA entities, and direct
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lenders for: (1) breach of contract; (2) declaratory judgment; (3) interference with prospective
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economic advantage; (4) usury; (5) breach of fiduciary duty (two Compass entities only); (6)
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unjust enrichment; and (7) slander of title.
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The Court refused to stay the judgment against Defendants in favor of Plaintiff but noted
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that it would await summary judgment motions as to whether certain Intervenor Plaintiffs still
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owned the beneficial interest in the loans or had transferred them to DACA-Castaic, LLC or
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other parties. DACA asked the Court to grant it summary judgment on thirteen issues under its
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Counterclaim (as to Defendants’ Third-Party Complaint) for declaratory relief. The Court
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granted the motion in part, ruling that any direct lender who had transferred his or her beneficial
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interest in a Castaic loan to DACA had also transferred his or her interest in the respective deed
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of trust or guaranty and could no longer sue on the note or Barkett’s guaranty thereof, because the
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interest in the guaranty followed the interest in the note automatically under California law. The
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Court noted that it remained a question of fact which direct lenders had effected such transfers.
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The evidence adduced at the time showed only a transfer of Castaic Partners, LLC’s beneficial
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interest in the Castaic loans to DACA-Castaic, LLC, but did not indicate any previous transfer
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from any direct lenders to Castaic Partners, LLC. The Court also noted that no party disputed
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that the Castaic loans were in default but that it would not attempt to calculate the total amount
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due on each loan at the pre-trial stage. The Court also ruled that the notes were neither usurious
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nor subject to offset. The Court ruled that the Castaic deeds of trust were enforceable under their
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terms and that the pending foreclosures in California under the 2007 notices of default were
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proper. The Court also noted that an action against Barkett for breach of guaranty would not
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violate the one-action rule even after foreclosure, because Barkett was not the target of any
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foreclosure, though Plaintiffs could only collect on a guaranty to the extent of any deficiency
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remaining after a foreclosure sale. The Court also ruled that the Purchase Agreement, under
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which DACA-Castaic, LLC purported to obtain the beneficial interests in the loans from Castaic
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Partners, LLC, was in compliance with the 51% rule under Chapter 645B, and that DACA-
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Castaic, LLC’s decision to foreclose was valid. The Court declined to rule on the priority of a
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lien against the properties held by DACA V, because DACA V and DACA-Castaic were not
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adversaries in the present case.
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Kapp Intervenors also moved for summary judgment on four points. The Court refused
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to rule that Barkett was liable to Kapp Intervenors on the guaranty because it was not clear that
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the Kapp Intervenors retained the beneficial interest in the loans. The Court again noted that no
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party denied the Castaic loans were in default. The Court then ruled that Barkett was liable to the
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Kapp Intervenors on the Castaic II Guaranty, but the Court added that Barkett could obtain relief
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under Rule 60(b) if he could later show that the Kapp Intervenors had transferred their interest in
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the Castaic II note. The Court ruled that it would not attempt to calculate the total amount due on
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the Castaic II loan at the pre-trial stage. Next, the Court ruled that the Castaic notes were to be
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interpreted by their terms under Nevada law, that Nevada had no usury law, and that the
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borrower under the notes had waived any right of offset. Finally, the Court declined to rule
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whether any direct lenders were liable for the wrongdoing of loan servicers.
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Defendants then filed three similar motions, asking the Court to dismiss the Kapp CI, the
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Rasmussen CI, and DACA’s Counterclaim for lack of subject matter jurisdiction. The Court
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ruled that it had diversity jurisdiction to adjudicate the Kapp CI and bankruptcy jurisdiction (but
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not diversity jurisdiction) to adjudicate the Rasmussen CI and DACA’s Third-Party
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Counterclaim, and that neither mandatory nor equitable abstention under the Bankruptcy Code
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were appropriate.
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In March 2013, the Court granted in part DACA’s motion for leave to file a Supplemental
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Third-Party Counterclaim against Defendants and a Supplemental Fourth Party-Complaint
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(against Pond Avenue Partners, LLC (“Pond”), Merjan Financial Corp. (“Merjan”), and Palisades
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Capital (NV), LLC), based upon events occurring after DACA filed its Third-Party Counterclaim
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in February 2012. DACA soon thereafter filed that consolidated pleading, i.e., the Answer,
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Counterclaim, Supplemental Counterclaim, and Fourth-Party Complaint (the “DACA Pleading”).
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(See DACA Pldg., Mar. 25, 2012, ECF No. 231). The Court adopted the magistrate judge’s
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recommendation to strike the answers of Barkett and the Castaic Defendants and to instruct the
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Clerk to enter default as a sanction for failing to comply with a court order to retain new counsel.
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The Clerk entered default as to the February 2012 Counterclaim, accordingly.
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DACA asked the Court to strike Barkett’s and the Castaic Defendants’ Answer and
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Counterclaims (ECF No. 247) to the DACA Pleading and also requested a default judgment or
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offensive summary judgment as to its third-party counterclaims in the DACA Pleading, offensive
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summary judgment on its fourth-party claims, and defensive summary judgment against
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Defendants’ third-party claims. The Court struck the answer as against the first counterclaim in
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the DACA Pleading, but not as against the answers to the second counterclaim and the
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supplemental counterclaim therein. The Court granted default judgment in favor of DACA and
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against Defendants as to DACA’s first third-party counterclaim, but not as to its supplemental
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counterclaim, and the Court solicited a proposed form of judgment from DACA. The Court
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dismissed DACA’s second third-party counterclaim for appointment of a receiver. The Court
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granted offensive summary judgment to DACA’s on its Fourth-Party Complaint as against
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Palisades Capital (NV) LLC, but denied it as against Pond or Merjan. The Court denied
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offensive summary judgment to DACA’s on its supplemental third-party counterclaim against
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Defendants. The Court granted in part and denied in part defensive summary judgment to DACA
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as against Defendants’ second third-party claim for declaratory judgment. The Court granted
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defensive summary judgment to DACA as against Defendants’ seventh third-party claim for
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slander of title.
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Plaintiffs have asked the Court to dismiss Defendants’ counterclaims as against Plaintiffs.
II.
DISCUSSION
Plaintiffs attach proof that Richard McKnight has purchased all claims by Barkett in this
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case against Plaintiffs for a $1000 credit bid at a public constable’s auction in Las Vegas after
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appropriate notice. (See Cert. of Sale, Oct. 24, 2013, ECF No. 318, at 7). That Constable’s sale
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was executed against Barkett’s (counter)claims in this case in order to satisfy the default
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judgment entered against him in the present case. (See J., July 9, 2012, ECF No. 194). Barkett no
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longer has standing to pursue the claims, and Plaintiff wishes to dismiss them. Barkett responds
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that it is still an open question whether McKnight still owns interests in the Castaic loans or has
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transferred his interests to DACA. But the issue of whether Barkett still owns his own
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counterclaims is simply not affected by the answer to that question. It is clear that Barkett has no
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more counterclaims in this case against Plaintiffs. Plaintiffs therefore ask the Court to dismiss
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the Counterclaim (ECF No. 90). The Court has already stricken that document and ordered
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Defendants to file a proper counterclaim and third-party complaint. Defendants did so. (See ECF
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Nos. 156, 157). The Court dismisses the Counterclaim (ECF No. 156) as by Barkett against
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Plaintiffs.
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Plaintiffs next ask the Court to dismiss the Counterclaim (ECF No. 156) as against
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Castaic III under Rule 13(a) (the mandatory counterclaim rule). Plaintiffs reason that because the
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Court had already dismissed Plaintiffs’ claim against Castaic III when Castaic III filed the
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Counterclaim, the Counterclaim is barred by the mandatory counterclaim rule. Castaic III moved
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with Barkett to dismiss the only claim against Castaic III (for declaratory judgment), and the
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Court granted that motion and entered judgment on July 26, 2011. Castaic III never attempted to
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file any counterclaim against Plaintiffs before that time. Castaic III responds that Rule 13(e)
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permits supplemental counterclaims that mature or are acquired after a party serves its answer,
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and that Castaic III had no reason to know when it moved to dismiss that DACA may have
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owned the direct lenders’ (including Plaintiffs’) interests in the loans. But once the Court
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adjudged Plaintiff’s claims against Castaic III, Castaic III was no longer a Defendant as to
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Plaintiffs, and the counterclaim rule no longer governed their relationship. Castaic III became a
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Defendant when it was served on October 1, 2010. (See ECF No. 6). It joined a motion to
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dismiss on October 22, 1010. (See ECF No. 7). The Court entered judgment in favor of Castaic
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III on July 26, 2011. (See ECF No. 49). Hours earlier, the Court had granted intervention by the
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Kapp and Rasmussen Intervenors. (See ECF No. 48). So Castaic III remained a Defendant as to
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Intervenors. But judgment had already been entered as to Plaintiffs, and Castaic III’s compulsory
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counterclaims against them were lost.
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Next, Plaintiffs note that they invested only in the Castaic III loan (which Barkett
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guarantied), not in the Castaic and Castaic II loans (which Barkett also guarantied), and that
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Castaic and Castaic II therefore have no counterclaims against Plaintiffs. The Court agrees.
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Because Mr. McKnight has purchased Barkett’s counterclaims, because Castaic III’s
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counterclaims are barred under Rule 13(a), and because Castaic and Castaic II have no claims
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against Plaintiffs, any counterclaims by Defendants in this case are dismissed in their entirety as
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against Plaintiffs.
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Finally, Plaintiffs in their reply ask the Court to impose sanctions against Attorney
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Gilmore for vexatiously multiplying the proceedings under 28 U.S.C. § 1927. The Court denies
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the request. Plaintiffs filed the present motion, and if Plaintiffs wish to seek sanctions based
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upon Defendants’ allegedly frivolous arguments in response, Rule 11 is the proper vehicle.
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CONCLUSION
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IT IS HEREBY ORDERED that the Motion to Dismiss (ECF No. 318) is GRANTED.
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IT IS SO ORDERED.
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Dated this 28th day of January, 2014.
Dated this 24th day of March, 2014.
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ROBERT C. JONES
United States District Judge
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