Hall CA-NV, LLC v. Ladera Development LLC

Filing 41

ORDER that the Motion to Dismiss (ECF No. 29 ) is DENIED. Signed by Judge Robert C. Jones on 8/27/2018. (Copies have been distributed pursuant to the NEF - LH)

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UNITED STATES DISTRICT COURT

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DISTRICT OF NEVADA

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______________________________________
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HALL CA-NV, LLC,
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Plaintiff,
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vs.
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LADERA DEVELOPMENT LLC,
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Defendant.
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3:18-cv-00124-RCJ-VPC
ORDER

This case arises out of an alleged breach of contract. Pending before the Court is a

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motion to dismiss the Counterclaim.

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I.

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FACTS AND PRCEDURAL HISTORY
On September 30, 2014, Plaintiff Hall CA-NV, LLC and Defendant Ladera

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Development, LLC made $29,000,000 and $6,000,000 loans (respectively, “the Senior Loan”

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and “the Junior Loan”) to Debtor New Cal-Neva Lodge, LLC. (Third Am. Compl. ¶¶ 9–11, ECF

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No. 23). In connection with the Junior Loan, Defendant obtained a policy of insurance (“the

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Policy”) from Old Republic National Title Insurance Co. (“Old Republic”) insuring the priority

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of Defendant’s lien. (Id. 14). To induce Plaintiff to make the Senior Loan, Defendant agreed to

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subordinate the Junior Loan via separate agreement (“the Intercreditor Agreement”). (Id. ¶ 15).

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The Intercreditor Agreement subordinated the Junior Loan to the Senior Loan and contained

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additional promises by Defendant, e.g., that it would not contest any aspect of the Senior Loan or

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its priority or take any action to interfere with the enforceability of the Senior Loan, including

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actions in potential bankruptcy proceedings. (Id. ¶ 16).

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On July 28, 2016, Debtor filed for Chapter 11 bankruptcy in California, and the case, No.

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16-bk-51282-GWZ (“the Bankruptcy Case”), was later transferred to this District. (Id. ¶ 18). On

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August 7, 2017, Defendant filed its Second Amended Plan of Liquidation (“the Ladera Plan”) in

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the Bankruptcy Case, which violated the Intercreditor Agreement, e.g., by proposing that

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Plaintiff not be paid in full and limiting Defendant’s liability to Plaintiff under the Intercreditor

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Agreement. (Id. ¶ 19). Accordingly, Plaintiff sued Defendant in state court, and although

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Plaintiff won an injunction forcing Defendant to withdraw the Ladera Plan in the Bankruptcy

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Case, it incurred damages from Defendant’s breach of the Intercreditor Agreement in the form of

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fees and costs expended in the state court case. (Id. ¶ 20). Undeterred, Defendant then supported

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a third party’s plan in the Bankruptcy Case that the Bankruptcy Court confirmed over Plaintiff’s

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objection. (Id. ¶ 21).

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In the meantime, the Penta Building Group, LLC (“Penta”) had sued Debtor and all of its

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lenders, known and unknown, in state court to foreclose its mechanic’s lien against the Property

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(“the Penta Action”). Plaintiff removed the Penta Action to the Bankruptcy Court as an

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adversary proceeding, No. 16-ap-5036-GWZ, under 28 U.S.C. § 1334(b) “related to”

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jurisdiction, asserting that the action was non-core and reserving its right to final determination

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by an Article III judge. All parties in the Penta Action settled except Defendant. (Id. ¶ 22). The

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Bankruptcy Court overruled Defendant’s objections to the settlement made in the Bankruptcy

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Case. (Id. ¶ 23). Under the settlement, the Property sold on January 10, 2018, but Defendant’s

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refusal to confirm its intentions as to a possible appeal delayed the sale thirteen days and cost

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Plaintiff additional fees, costs, and interest. (Id. ¶¶ 24–25).

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Finally, Defendant has informed Plaintiff that Defendant intends to keep any payments it

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receives from Old Republic under the Policy, which Plaintiff alleges would also violate the

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Intercreditor Agreement because it would result in Defendant receiving payment prior to Plaintiff

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being paid in full. (Id. 26).
In the TAC, Plaintiff has sued Defendant for breach of the Intercreditor Agreement due to

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Defendant’s promotion of the Ladera Plan and its objections to the settlement in the Bankruptcy

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Case, as well as for failing to timely disclaim any intent to appeal the rulings in the Bankruptcy

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Case. Plaintiff also seeks a declaration that it would violate the Intercreditor Agreement for

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Defendant to keep any proceeds of the Policy from Old Republic before the Senior Loan has

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been paid in full.
Defendant has filed a Counterclaim, listing claims for intentional and negligent

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misrepresentation and seeking a declaration that the Intercreditor Agreement is void or voidable.

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Defendant essentially alleges that Plaintiff intentionally or negligently concealed from Defendant

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that fact that Penta had begun construction on Debtor’s Property prior to the Senior Loan and the

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Junior Loan being given on September 30, 2014, which Plaintiff knew or should have known

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would give Penta a senior lien (once perfected) under Nevada law. Defendant argues it would

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not have agreed to the Intercreditor Agreement had it known, as Plaintiff did when representing

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to Defendant that no work had begun on the Property at the time of the loans, that Defendant’s

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interest in the Property would be in third position behind both Penta’s and Plaintiff’s interests.

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Plaintiff has moved to dismiss the Counterclaim.

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II.

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LEGAL STANDARDS
Federal Rule of Civil Procedure 8(a)(2) requires “a short and plain statement of the

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claim showing that the pleader is entitled to relief” in order to “give the defendant fair notice of

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what the . . . claim is and the grounds upon which it rests.” Conley v. Gibson, 355 U.S. 41, 47

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(1957). A motion to dismiss under Rule 12(b)(6) tests the complaint’s sufficiency, see N. Star

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Int’l v. Ariz. Corp. Comm’n, 720 F.2d 578, 581 (9th Cir. 1983), and dismissal is appropriate only

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when the complaint does not give the defendant fair notice of a legally cognizable claim and the

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grounds on which it rests. See Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).

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A court treats factual allegations as true and construes them in the light most favorable to

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the plaintiff, NL Indus., Inc. v. Kaplan, 792 F.2d 896, 898 (9th Cir. 1986), but does not accept as

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true “legal conclusions . . . cast in the form of factual allegations.” Paulsen v. CNF Inc., 559 F.3d

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1061, 1071 (9th Cir. 2009). A plaintiff must plead facts pertaining to his case making a violation

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“plausible,” not just “possible.” Ashcroft v. Iqbal, 556 U.S. 662, 677–79 (2009) (citing Twombly,

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550 U.S. at 556) (“A claim has facial plausibility when the plaintiff pleads factual content that

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allows the court to draw the reasonable inference that the defendant is liable for the misconduct

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alleged.”). That is, a plaintiff must not only specify or imply a cognizable legal theory (Conley

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review), he must also allege the facts of his case so that the court can determine whether he has

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any basis for relief under the legal theory he has specified or implied, assuming the facts are as

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he alleges (Twombly-Iqbal review).

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“Generally, a district court may not consider any material beyond the pleadings in ruling

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on a Rule 12(b)(6) motion. However, material which is properly submitted as part of the

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complaint may be considered on a motion to dismiss.” Hal Roach Studios, Inc. v. Richard Feiner

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& Co., 896 F.2d 1542, 1555 n.19 (9th Cir. 1990) (citation omitted). Similarly, “documents

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whose contents are alleged in a complaint and whose authenticity no party questions, but which

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are not physically attached to the pleading, may be considered in ruling on a Rule 12(b)(6)

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motion to dismiss” without converting the motion to dismiss into a motion for summary

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judgment. Branch v. Tunnell, 14 F.3d 449, 454 (9th Cir. 1994). Also, under Federal Rule

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of Evidence 201, a court may take judicial notice of “matters of public record” if not “subject to

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reasonable dispute.” United States v. Corinthian Colls., 655 F.3d 984, 999 (9th Cir. 2011).

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Otherwise, if the district court considers materials outside of the pleadings, the motion to dismiss

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is converted into a motion for summary judgment. See Arpin v. Santa Clara Valley Transp.

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Agency, 261 F.3d 912, 925 (9th Cir. 2001).
Furthermore, the circumstances of fraud or mistake (but not states of mind such as

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knowledge or intent) must be stated with particularity. Fed. R. Civ. P. 9(b). A Plaintiff must

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plead facts such as “he bought a house from defendant, that the defendant assured him that it was

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in perfect shape, and that in fact the house turned out to be built on a landfill . . . .” Warshaw v.

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Xoma Corp., 74 F.3d 955, 960 (9th Cir. 1996) (quoting In re GlenFed, Inc. Sec. Litig., 42 F.3d

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1541, 1548 (9th Cir. 1995) (en banc)).

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III.

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ANALYSIS
The elements of intentional misrepresentation (fraud) in Nevada are: (1) a false

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representation by the defendant; (2) the defendant’s knowledge or belief that the representation is

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false (or insufficient basis for making the representation); (3) the defendant’s intention to induce

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the plaintiff to act or to refrain from acting in reliance upon the misrepresentation; (4) the

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plaintiff’s justifiable reliance upon the misrepresentation; and (5) resulting damage. Bulbman,

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Inc. v. Nev. Bell, 825 P.2d 588, 592 (Nev. 1992) (citing Lubbe v. Barba, 540 P.2d 115, 117 (Nev.

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1975)). The elements of negligent misrepresentation in Nevada are: (1) a false representation by

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the defendant; (2) made in the course of the defendant’s business or in any action in which he has

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a pecuniary interest; (3) for the guidance of others in their business transactions; (4) the

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plaintiff’s justifiable reliance upon the misrepresentation; (5) resulting damage; and (6) failure to

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exercise reasonable care or competence in obtaining or communicating the information. G.K. Las

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Vegas Ltd. P’ship v. Simon Prop. Grp., Inc., 460 F. Supp. 2d 1246, 1262 (D. Nev. 2006).

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A.

Failure to Allege a False Statement

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Plaintiff argues that Defendant has not alleged falsity because it has only alleged that

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Plaintiff knew Penta had performed work prior to the loans being given, not that Penta actually

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had a perfected lien at the time Defendant represented it was the first lienholder. The Court

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rejects this argument. Defendant has alleged that Plaintiff twice represented explicitly to

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Defendant in writing that no construction work of any kind had been begun prior to the loans

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when it presented to Defendant copies of two agreements between Plaintiff and Debtor so

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stating: (1) the Senior Loan agreement; and (2) a separate agreement (“the Contractor’s

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Agreement”). (Countercl. ¶¶ 17–20). 1 That was a materially false statement (if it was false),

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because under Nevada law, the loans would be junior to a mechanic’s lien based on Penta having

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begun work prior to the loans, and the Intercreditor Agreement could not have overridden the

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statutory rule. See Nev. Rev. Stat. §§ 108.225, 108.2453. Had the only misrepresentation been to

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the effect that no mechanic’s lien had yet been perfected related to work begun before the loans,

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the analysis might be different. Such a statement might have been technically true and may or

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may not have been misleading as to whether work had begun, depending on the circumstances of

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the statement. But Defendant has alleged a false statement as to work having begun, which is the

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core material issue. A mechanic’s lien attaches (obtains priority) as of the beginning of work,

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regardless of when the lien is ultimately perfected. Unless circumstances exist preventing the

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perfection of any mechanic’s liens in the future, it is critical for a lender to know whether any

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still-perfectible mechanic’s liens have attached, i.e., whether any work has begun on any still-

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perfectible mechanic’s liens. A false statement as to work having begun is therefore material.

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1 Defendant also alleges that it relied on the implications of a third agreement presented to
Defendant by Plaintiff, a subordination agreement between Plaintiff and Penta (“the Penta
Subordination Agreement”) purporting (illegally) to subordinate any mechanic’s liens to the
Senior Loan. (Id. ¶¶ 20–22).
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B.

Failure to Plead with Particularity and Reliance

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Defendant has particularly stated the circumstances of the false representation. The exact

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alleged misrepresentations and how they were made have been specified in the Counterclaim.

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(Id. ¶¶ 17, 18, 21). Defendant has stated when and to whom the statements were made, alleging

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in relevant part, “Along with the [Senior Loan Agreement] and Contractor’s Agreement,

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[Plaintiff] entered into and provided [Defendant] access to review the Penta Subordination

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Agreement [Plaintiff] executed with Penta.” (Id. ¶ 20). This implies the documents were

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provided to Defendant before Defendant signed the Intercreditor Agreement.

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C.

Failure to Allege Reliance

Defendant has sufficiently alleged justifiable reliance. It has alleged that it would not

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have made a $6,000,000 loan junior to Plaintiff’s $29,000,000 loan had it not been falsely

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assured of facts indicating that there could not be any mechanic’s liens against the property

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senior to both loans, i.e., that no mechanic’s work had been performed on the property, when in

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fact there had been such work.

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D.

The Declaratory Judgment Claim

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Plaintiff also argues that Defendant’s claim for a declaration that the Intercreditor

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Agreement is void or voidable is duplicative of Defendant’s claim for breach of contract. But

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Defendant has brought no breach of contract claim, only claims for misrepresentation and

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declaratory relief. A party’s claim for a declaration can in some cases be duplicative of that

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same party’s claim for breach of contract, see, e.g., Crown Beverages, Inc. v. Sierra Nevada

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Brewing Co., No. 3:16-cv-695, 2017 WL 1508486, at *5 (D. Nev. Apr. 26, 2017) (Du, J.), but

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that is not the case here. Only Plaintiff has brought a breach of contract claim, not Defendant.

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Even assuming Defendant’s declaratory relief claim concerns the same issue(s) as Plaintiff’s

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breach of contract claim, counterparties can, and very often do, bring parallel claims against one

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another in the same action, each seeking an opposite ruling on the same issue(s). The Court has

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seen this repeatedly in Chapter 116 foreclosure cases, for instance, where holders of deeds of

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trust and foreclosure deeds sue and countersue one another for parallel declarations that the

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Chapter 116 foreclosure did nor did not extinguish the deed of trust. It is also typical in patent

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infringement cases for defendants to plead counterclaims for declarations of non-infringement

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(or for a patent holder to plead a counterclaim for infringement where a putative infringer has

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begun the action by suing for a declaration of non-infringement). Parallel claims by and against

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counterparties are not duplicative even when they seek a determination of the same issue,

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because counterparties to parallel claims have opposite pleading and evidentiary burdens in the

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contexts of dismissal, summary judgment, and trial. Nor is Defendant’s counterclaim for a

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declaration duplicative of its misrepresentation claims. Defendant could obtain a declaration as

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to the voidability of the Intercreditor Agreement without succeeding on its misrepresentation

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claims, because the latter claims require additional proof of reliance and damages.

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CONCLUSION

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IT IS HEREBY ORDERED that the Motion to Dismiss (ECF No. 29) is DENIED.

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IT IS SO ORDERED.

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Dated this 27th day of August, 2018.

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_____________________________________
ROBERT C. JONES
United States District Judge

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