Ionian Corp. v. Country Mutual Insurance Company

Filing 252

OPINION & ORDER: Ionian's Rule 12 Motions 237 are granted in part and denied in part. See 25-page opinion & order attached. Ordered by Judge Marco A. Hernandez. (mr)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF OREGON
IONIAN CORP., an Oregon corporation,

No. 03:10-cv-00199-HZ

Plaintiff,
v.
COUNTRY MUTUAL INSURANCE
CORPORATION, a foreign corporation,
Defendant/
Interpleader Plaintiff
v.
IONIAN CORP., an Oregon corporation,
PRECISION SEED CLEANERS, INC.,
an Oregon corporation,
Interpleader Defendants.
Gordon T. Carey
Attorney at Law
1020 S.W. Taylor Street, Suite 375
Portland, Oregon 97205
Attorney for Plaintiff
1 - OPINION & ORDER

OPINION & ORDER

Frederick M. Millard
Douglas M. Bragg
419 5th Street
Oregon City, Oregon 97045
Attorneys for Interpleader Defendant Precision Seed Cleaners, Inc.
HERNANDEZ, District Judge:
Following entry of Judgment in favor of Precision Seed Cleaners and against Ionian
Corporation, both parties appealed certain rulings to the Ninth Circuit. In an unpublished
Memorandum Disposition filed May 12, 2014, that Court affirmed in part, reversed in part, and
remanded the case back to this Court. Ionian Corp. v. Country Mut. Ins. Co., 572 F. App'x 513
(9th Cir. 2014). One of the issues on appeal was this Court's denial of Ionian's motion to amend
its crossclaims against Precision Seed to assert a new claim of unjust enrichment. The Ninth
Circuit reversed that ruling and remanded to this Court to grant Ionian leave to add the unjust
enrichment crossclaim. The mandate issued on June 9, 2014.
On July 11, 2014, Ionian filed its amended pleading asserting its unjust enrichment
crossclaim against Precision Seed.1 Precision Seed moved against the crossclaim. At an October
8, 2014 hearing, I granted Precision Seed's motion in part and denied it in part. See Oct. 8, 2014
Min. Ord. [ECF 229]. I ordered Ionian to file an amended crossclaim, which it did on October

1

Even before this case went up to the Ninth Circuit, I referred to its "somewhat tortured
procedural history." Mar. 5, 2012 Op. & Ord. at 2 [ECF 149] (stating the case, "which began as a
breach of contract case involving an insurance policy issued by defendant Country Mutual
Insurance Company, has a somewhat tortured procedural history" and explaining procedural
history up to that date). As a result of the procedural posture, the crossclaim Ionian filed on July
11, 2014 is contained within a pleading entitled "Ionian's Answer to Country Mutual Insurance
Company's Interpleader, Answer to Amended Cross-Claims of Precision Seed and Amended
Cross-Claims Against Precision Seed." ECF 219.
2 - OPINION & ORDER

16, 2014.2
Precision Seed filed a responsive pleading on October 27, 2014.3 ECF 232. Ionian now
moves to strike, for a more definite statement as to, or for judgment on the pleadings regarding,
some of the allegations and affirmative defenses asserted in Precision Seed's responsive pleading.
For the reasons explained below, I grant the motion in part and deny it in part.
I. New/Amended Unjust Enrichment Crossclaim
In its October 27, 2014 Answer, Precision Seed brings an unjust enrichment crossclaim
against Ionian. Oct. 27, 2014 Ans. at ¶¶ 25-49. Prior to the filing of the October 27, 2014
Answer, Precision Seed's operative pleading was its Answer filed on May 24, 2011, entitled
"Interpleader Defendant Precision Seed Cleaners, Inc.'s First Amended Answer to Interpleader,
and Cross-Claims." ECF 87. There, Precision Seed brought five crossclaims against Ionian. Id.
After summary judgment motions were resolved, only the unjust enrichment and conversion
crossclaims remained at issue. On July 17, 2012, I granted Precision Seed's Second Motion for
Partial Summary Judgment which effectively granted summary judgment to Precision Seed on its
unjust enrichment crossclaim against Ionian.4 Following that ruling, I granted Precision Seed's

2

This pleading bears the title "Answer to Amended Cross-Claims and Corrected
Amended Cross-Claim." ECF 231.
3

Precision Seed's pleading bears the title "Answer to Country Mutual Insurance
Company's Interpleader, Cross-Claims to Ionian and Answer to Corrected Amended Cross-Claim
from Ionian Corp." ECF 232.
4

At issue in the motion was whether Ionian was limited to liability coverage only, even
assuming it was an "additional insured." Because I agreed with Precision Seed, Ionian was no
longer entitled to the insurance proceeds which meant Precision Seed prevailed on its unjust
enrichment crossclaim. Precision Seed recognized this when it noted, in its subsequent motion to
dismiss the remaining conversion crossclaim, that due to the summary judgment ruling on the
"additional insured" issue and the dismissal of the conversion crossclaim, "there are no other
3 - OPINION & ORDER

unopposed motion to dismiss its conversion crossclaim. Final Judgment in Precision Seed's
favor was entered on August 29, 2012.
Several of the allegations in the October 27, 2014 Answer's crossclaim are identical to the
crossclaim allegations in the May 24, 2011 Answer. Many of the allegations, however, are new.
Oct. 27, 2014 Ans. at ¶¶ 25-37, 38-49. Generally, they raise issues concerning the appropriate
distribution of the policy proceeds. Id.
Pursuant to Federal Rules of Civil Procedure 12(e) and (f), Ionian moves to strike, or for
a more definite statement, several of the allegations in support of the new/amended unjust
enrichment crossclaim brought by Precision Seed in its October 27, 2014 Answer. I grant the
motion. Additionally, I strike all the allegations asserted by Precision Seed that were not in its
May 24, 2011 Answer for the reason that Precision Seed did not have leave to amend its
crossclaims.
The crossclaims brought by Precision Seed which survived summary judgment were
either decided in Precision Seed's favor (the unjust enrichment crossclaim) or voluntarily
dismissed by Precision Seed (the conversion claim). Before Judgment was entered, Precision
Seed did not seek leave to amend its crossclaims before this Court. Other than contending that
this Court erred in concluding that Ionian owned the warehouse at the time of the fire, Precision
Seed pursued no issue related to its crossclaims before the Ninth Circuit. The remand from the
Ninth Circuit was limited to two issues: (1) granting Ionian leave to add a crossclaim for unjust
enrichment; and (2) determining each parties' insured financial interest in the proceeds and

issues currently pending between the parties[.]" ECF 192 (Precision Seed's Unopp. Mtn. to
Dismiss) at 2.
4 - OPINION & ORDER

awarding them accordingly. 572 F. App'x 513. Precision Seed has not requested leave to amend
its crossclaims since the Ninth Circuit remanded the case to this Court.
While the parties' pleadings are technically answers to the interpleader claim, no claims
remain in the case other than the only claim the Ninth Circuit ordered be allowed: Ionian's unjust
enrichment claim against Precision Seed. Thus, any amendment to the allegations answering the
interpleader claim or any amendment by Precision Seed to its previously-asserted crossclaims, is
inconsistent with the procedural posture of the case and the Ninth Circuit's limited remand issues.
Therefore, I strike all the allegations in support of the new/amended crossclaim Precision Seed
brings in its October 27, 2014 Answer to the extent the allegations vary from the previouslyadjudicated unjust enrichment crossclaim brought in the May 24, 2011 Answer. The only new
allegations that Precision Seed is able to bring in its Answer are affirmative defenses to the nowallowed unjust enrichment crossclaim brought by Ionian against Precision Seed upon remand by
the Ninth Circuit.
II. Affirmative Defenses
Precision Seed asserts eight affirmative defenses in response to Ionian's unjust enrichment
crossclaim. Ionian moves for judgment on the pleadings pursuant to Rule 12(c), or alternatively
to strike under Rule 12(f), all of the affirmative defenses except the First Affirmative Defense
(Failure to State a Claim) and the Eighth Affirmative Defense (Reservation of Rights). For the
reasons explained below, I grant the motion in part and deny it in part.
A motion for judgment on the pleadings may be brought after the pleadings are closed but

5 - OPINION & ORDER

within such time as not to delay the trial. Fed. R. Civ. P. 12(c).5 Rule 12(c) is "functionally
identical" to Rule 12(b)(6) and "the same standard of review" applies to motions brought under
either rule. United States ex rel. Cafasso v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1054
n.4 (9th Cir. 2011) (internal quotation marks omitted). If matters outside the pleadings are
presented to and not excluded by the court, the motion is to be treated as one for summary
judgment. Fed. R. Civ. P. 12(d). "A judgment on the pleadings is properly granted when, taking
all the allegations in the pleadings as true, the moving party is entitled to judgment as a matter of
law." Owens v. Kaiser Found. Health Plan, Inc., 244 F.3d 708, 713 (9th Cir. 2001) (internal
quotation marks omitted). To survive a Rule 12(c) motion, "the complaint's factual allegations,
together with all reasonable inferences, [must] state a plausible claim for relief." Cafasso, 637
F.3d at 1054 (citing Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). The complaint must contain
"well-pleaded facts" which "permit the court to infer more than the mere possibility of
misconduct[.]" Iqbal, 556 U.S. at 679 (citing Fed. R. Civ. P. 8(a)(2)).
Under Rule 12(f), "a court may strike affirmative defenses . . . if they present an
'insufficient defense, or any redundant, immaterial, impertinent, or scandalous matter.'" Gessele
v. Jack in the Box, Inc., No. 03:10-cv-00960-ST, 2011 WL 3881039, *1 (D. Or. Sept. 2, 2011)
(quoting Rule 12(f)).

5

Under Rule 12(c), a party may move for judgment on the pleadings after the pleadings
are closed. Ionian notes that it may still respond to Precision Seed's affirmative defenses by
filing a reply and therefore the pleadings are not technically closed. However, Ionian asserts,
Precision Seed's pleadings are "closed" in that Precision Seed can plead no further. Ionian Rule
12 Mtns. at 14-15 n.2. But, Federal Rule of Civil Procedure 7(a)(7) allows a reply to an
affirmative defense only by court order. Thus, as to the unjust enrichment crossclaim brought by
Ionian against Precision Seed, the pleadings are in fact closed. And, Ionian may not reply to the
affirmative defenses absent an order allowing it to do so.
6 - OPINION & ORDER

A. Second Affirmative Defense - Financial Interest Calculation & Offset
Ionian moves against the allegations in Paragraphs 59 and 60 of the Second Affirmative
Defense in which Precision Seed contends that Ionian's interest in the insurance proceeds should
be limited to the $330,000 "purchase price" agreed to by the parties in the original Purchase
Agreement and reduced by payments Precision Seed made under that Purchase Agreement.6
Oct. 27, 2014 Ans. at ¶¶ 59, 60. Ionian argues that in prior rulings by both this Court and the
Ninth Circuit, Precision Seed has no claim under the Purchase Agreement and thus, any
affirmative defense asserting any rights under the Purchase Agreement must be stricken, or
Ionian is entitled to judgment on that defense. I agree with Ionian.
In her September 27, 2011 Findings & Recommendation (F&R) regarding summary
judgment motions, Judge Stewart ruled against Precision Seed on its crossclaim alleging that
Ionian breached the Purchase Agreement. One of the foundational issues before Judge Stewart
was whether the Purchase Agreement between Ionian and Paul Kloft, owner of Precision Seed, or
the Lease between Ionian and Precision Seed, controlled the parties' business relationship at the
time of the fire. Ionian's Vice-President John Skourtes drafted the "Purchase Agreement" in
December 2004. See Sept. 27, 2011 F&R at 5-7 (outlining history of parties' agreements and
conduct regarding the property). The Lease was entered into on May 26, 2009. Id. at 7.
Judge Stewart rejected Precision Seed's argument that the Purchase Agreement was valid
at the time of the fire. Id. at 15-18. She concluded that statutes regarding "Forfeiture Under

6

Ionian does not appear to dispute the allegation in Paragraph 58 that its financial
interest is limited to the structure, not the land. See Ionian's Reply in Sup. of Rule 12 Mtns. at 13
("Ionian and Precision agree that the value at issue is of the structure."). I understand the motion
to be limited to Paragraphs 59 and 60.
7 - OPINION & ORDER

Land Sale Contract," at Oregon Revised Statutes §§ (O.R.S.) 93.905 - 93.945, did not apply
because the "Purchase Agreement was not a land sale contract" subject to the Oregon statutes.
Id. at 15-16. Instead, it was only a "preliminary sales agreement." Id. at 16. She explained:
Although the Purchase Agreement names the parties and describes the property
and payment terms, it lacks many other provisions normally found in a land sale
contract, such as maintenance obligations, remedies in the event of default or
destruction, and insurance. More importantly, it specifically states that Ionian is
only "prepared to sell," not "sells" or "is selling" the property and [it] requires the
preparation of an "official real estate contract" on January 1, 2006, upon receipt of
the balloon payment, and the "figures on this agreement will be incorporated in
the real estate contract to reflect the outstanding balance as of 1 Jan 06." The
Purchase Agreement is nothing more than an earnest money agreement providing
for the later execution of a land sale installment contract. It contains sufficient
essential terms to entitle the purchaser to specific performance. However, it is not
a land sale contract subject to ORS 93.910.
Id. (citation omitted).
She then rejected Precision Seed's arguments that the Lease was invalid because of a lack
of consideration and that it should be rescinded because of a mutual mistake of fact. Id. at 16-17.
Addressing the second argument first, Judge Stewart made several observations and then stated
that
Ionian and Mr. Kloft did not enter into a land sale contract in January 2006 as
contemplated by the Purchase Agreement. As a result, the Purchase Agreement
expired and was replaced with or merged into the Lease. Precision Seed
challenges any termination of the Purchase Agreement due to the lack of any
writing signed by the parties as required by the Statute of Frauds, ORS 41.580(e).
However, as discussed above, the Purchase Agreement was merely an earnest
money agreement [which] may be rescinded or superseded by an oral agreement
without violating the Statute of Frauds. Regardless, a material term of the
Purchase Agreement was not performed, resulting in its abandonment. The
parties' relationship converted to a month-to-month tenancy until May 2009 when
Ionian and Precision Seed executed the Lease. Because the parties did not execute
the Lease based on any mutual mistake of fact as to the status of the Purchase
Agreement, no rescission remedy is available to invalidate the Lease.

8 - OPINION & ORDER

Id. at 17 (citations omitted).
Finally, Judge Stewart addressed the consideration argument. She noted that it was
undisputed that Precision Seed was in default under the Purchase Agreement as of May 2009 due
to late and missing payments. Id. at 17. The Lease reduced the monthly payment and allowed
Precision Seed to avoid eviction. Id. Judge Stewart concluded this was more than sufficient
consideration. Id. Based on her analysis, she concluded that the "Lease, not the Purchase
Agreement was valid and in effect at the time of the fire." Id. at 18. Thus, she granted Ionian's
motion as to the crossclaim brought against it by Precision Seed based on the Purchase
Agreement. Id. at 27.
This Court adopted the F&R in a December 2, 2011 Order. ECF 133. One of the issues I
specifically addressed in the Order was Judge Stewart's conclusion that the Lease, not the
Purchase Agreement, controlled the parties' relationship at the time of the fire. Dec. 2, 2011 Ord.
at pp. 5-11. In its objections to the F&R, Precision Seed argued that the Purchase Agreement
was not a preliminary agreement to transfer property in the future, but instead was the actual
agreement for the transfer of property. Id. at 7. Precision Seed contended it was an agreement
for future monthly payments with an immediate transfer of possession. Id. It also argued that the
fact that various "provisions normally found in a land sale contract" were missing in the Purchase
Agreement was not significant, as Judge Stewart suggested, because those terms are implied by
law. Id.
I rejected Precision Seed's arguments and explained:
Even if provisions regarding default or maintenance were in the Purchase
Agreement, the language of the Purchase Agreement itself creates only a
preliminary agreement to sell with the actual sale occurring after the balloon
9 - OPINION & ORDER

payment was made and upon the preparation of the official real estate contract.
Although the parties refer to themselves as the buyer and the seller, these terms
and the fact that there were monthly payments and immediate possession are not
determinative of the nature of the relationship. Both the monthly payments and
immediate possession are consistent with a leasehold interest as well as a transfer
of beneficial interest in the property. Thus, those provisions do not control the
nature of the relationship created by the Purchase Agreement. The references to
being "prepared" to sell, the fact that a balloon payment was due one year later
and that this would trigger the preparation of the actual sales contract, and the fact
that the real estate contract would reflect the outstanding balance as of January 1,
2006, indicate that the actual sale of the property did not occur with this Purchase
Agreement but was instead an act to occur in the future.
Dec. 2, 2011 Ord. at 7-8.
I also rejected Precision Seed's argument about consideration, including an argument that
adopting Judge Stewart's conclusion would result in a forfeit of all the payments Kloft made
pursuant to the Purchase Agreement without due process of law or a clear agreement and
understanding of the risk of that loss. Id. at 9. I explained that the
payments tendered by Kloft during the time the Purchase Agreement was in effect
were not forfeited as a result of the expiration of the Purchase Agreement because
Kloft and Precision Seed[] were using the property that entire period of time and
the payments may be understood as either payments made toward a later purchase
(which did not occur), or as lease payments if the sale was not completed.
Id.
Not only did Judge Stewart's F&R and this Court's Order adopting her F&R address the
Purchase Agreement, the Ninth Circuit did as well. Precision Seed appealed the issue of who
owned the warehouse at the time of the fire. 572 F. App'x 513. The Ninth Circuit held:
The district court correctly found that Ionian, not Precision, owned the
warehouse at the time of the fire. The unambiguous language of the letter
agreement contemplated only a future intent to sell the warehouse, and the
absence of terms that are required, or would usually be included, in a land sale
contract further evidence that future intent[.] Precision was nothing more than a
lessee of the warehouse.
10 - OPINION & ORDER

Id. (citations omitted).
In response to the instant motion, Precision Seed argues that because Ionian's motion is
based on Rule 12(f), Precision Seed's allegations are taken as true. Thus, it contends that the
factual allegations it makes regarding the market value of the property at the time of the sale and
Ionian's expert's valuation of the land cannot be stricken. It also argues that in regard to
Paragraph 60, although the Purchase Agreement was replaced, payments on a land sale contract
or towards the purchase price can create equitable ownership. Precision Seed argues that it
would be unjust for Ionian to gain the benefit of over fifty-percent of the agreed purchase price
and retain the property without reducing its financial interest (as to Precision Seed) by the
amount paid.
As should be clear from the quoted portions of the previous decisions issued in this case
by Judge Stewart, myself, and the Ninth Circuit, the Purchase Agreement was never a purchase
agreement. It was never an actual land sale contract. It was initially an agreement to sell in the
future, but because that sale was never consummated, it is appropriate to consider, as discussed
in the prior decisions, that the payments Precision Seed made to Ionian were rent/lease payments.
Given that the contingency events for the contract to ripen into an actual land sale contract never
occurred, there was no land sale contract and thus, the payments Precision Seed made are not
"payments on a land sale contract or towards a purchase price" which Precision Seed asserts can
create an equitable ownership. Thus, there is no basis for Precision Seed to assert a "financial
interest" in the property by virtue of the payments it made to Ionian.
Based on the record of the case and the law of the case, I grant Ionian's motion directed to

11 - OPINION & ORDER

Paragraphs 59 and 60 of the Second Affirmative Defense.7
I also note that both parties address the issue of "excess" in discussing Ionian's motion
directed to the Second Affirmative Defense. Each party makes arguments concerning the effect
of a future finding by this Court that the parties' combined financial interests are less than the
amount paid into the Court by Country Mutual. I do not address the "excess" issue because it is
premature. If this Court later determines that the combined financial interest of both parties is
less than the interpleaded sum, this Court will ask the parties at that point to further brief the
issue.
B. Third Affirmative Defense - Marion County Action
The parties are presently litigating certain claims in Marion County Circuit Court. In the
currently operative "Corrected Third Amended Complaint," Ionian brings three claims against
Precision Seed: (1) breach of lease in which Ionian contends that Precision Seed failed to pay
rent under the Lease from June to September 2009 and owes Ionian $12,000; (2) breach of lease
in which Ionian alleges that Precision Seed breached its duty under the Lease to repair the
damage to the warehouse resulting in damage to Ionian in an amount no less than $350,000; and
(3) negligence in which Ionian alleges that Precision Seed and Kloft were negligent in several
aspects regarding the fire and as a result, caused damage to Ionian in an amount of at least
$350,000. Attchmt. 1 to Precision Seed's Mem. in Sup. of Mtn. to Dismiss. ECF 221-1.
In its Third Affirmative Defense asserted in response to Ionian's unjust enrichment
crossclaim, Precision Seed alleges that to the extent that Ionian receives any award in the Marion

7

Because I considered material outside of the pleadings I consider this a grant of
summary judgment to Ionian.
12 - OPINION & ORDER

County case relating to the damages to the structure, Precision Seed is entitled to an offset in the
instant case. Oct. 27, 2014 Ans. at ¶ 61. Ionian moves for judgment on the pleadings under Rule
12(c), or alternatively to strike under Rule 12(f), the allegations in Paragraph 61, arguing that the
collateral source rule precludes Precision Seed from seeking an offset for any award to Ionian in
the Marion County case.
Generally, "[u]nder the collateral source rule," a "tortfeasor is not entitled to be relieved
of the consequences of its tort by some third party's compensation to the victim." SEC v. Capital
Consultants, LLC, 397 F.3d 733, 743 (9th Cir. 2005) (internal quotation marks omitted).
Benefits "received by the plaintiff from a source collateral to the defendant may not be used to
reduce that defendant's liability for damages." McLean v. Runyon, 222 F.3d 1150, 1155-56 (9th
Cir. 2000) (internal quotation marks omitted). In this case, Precision Seed is not a tortfeasor, this
is not a tort claim, and importantly, the insurance proceeds are not a "collateral" source when
they do not spring from a third party acting independently of Precision Seed but instead are
obtained as a result of a contract between Precision Seed and its insurer.
Seibel v. Liberty Homes, Inc., 305 Or. 362, 752 P.2d 291 (1988) is distinguishable and
does not stand for the proposition that the collateral source rule generally applies to breach of
contract claims. See Malbco Holdings, LLC v. Amco Ins. Co., No. 03:08-cv-00885-ST, 2010
WL 143778, at *6 (D. Or. Jan. 11, 2010) (concluding that Seibel did not apply the collateral
source rule to a breach of contract claim because the court viewed the claim as one for wrongful
discharge). In Seibel, the Oregon Supreme Court concluded that social security benefits should
not be deducted from a damage award in a breach of employment contract action. Id. at 369, 752
P.2d at 295. The court's holding was based on the unique nature of social security benefits, the
13 - OPINION & ORDER

recognition that allowing such a deduction could encourage employers to breach employment
contracts as the more profitable of its options, and the recognition that to the extent a failure to
offset social benefit payments in an employment contract action against an employer is viewed as
an "unjustified windfall" to the plaintiff, the issue of recapturing the costs is between the benefits
provider and its beneficiaries. Id. at 366-69, 752 P.2d at 293-95. Given the issues that
influenced the court's decision, it is clear that the case does not provide authority for a blanket
statement that the collateral source rule applies in contract cases. And, for the reasons noted
above, even if it applied to some contract claims, it does not apply here.
Ionian suggests that any damages for the cost of repair that it recovers as a result of
Precision Seed's breach of the Lease are independent of the insurance proceeds interpleaded by
Country Mutual and at issue in this case. While I agree that the Lease creates its own obligations
and duties between the parties, I reject Ionian's position that the terms of the Lease exist
completely independently of the insurance proceeds. At issue in the instant case is "each parties'
insured financial interest in the proceeds[.]" 572 F. App'x 513. The Lease provisions can impact
the parties' insured financial interests in the property by affecting the definition and/or ownership
of the covered property. While the starting point is the insurance policy language itself, to the
extent the Lease terms alter the ownership of the covered property under the policy, the Lease
impacts the parties' financial interest in the covered property.
Additionally, while I view the Third Affirmative Defense as premature because at this
point, there is no award in the Marion County case, I agree with Precision Seed that if Ionian
obtains a judgment in its favor on the breach of the lease/repair or negligence claims and the
amount of the judgment is determined by the value of the structure, then such payment would
14 - OPINION & ORDER

affect Ionian's financial interest in the insurance proceeds. If Ionian receives compensation for
the value of the structure/covered property in its Marion County case, Ionian no longer has a
financial interest in the insurance proceeds which represent the structure/covered property.
However, I reject Precision Seed's argument that its potential liability under the Lease for
the cost of repair creates a financial interest for Precision Seed in the insurance proceeds. I agree
with Ionian that the claim here is one under a property loss policy, not a liability policy.
Precision Seed's obligation to repair exists only by virtue of the Lease and is not related to the
insurance policy which protects against damage to the building only. Additionally, as between
Precision Seed and the insurer Country Mutual, Precision Seed has no obligation to spend the
insurance proceeds for the structure to actually repair it. Precision Seed will obtain insurance
proceeds because it is the named insured on a property policy and property was destroyed. As
between Precision Seed and the insurer, Precision Seed is not limited to using the insurance
proceeds to repair the covered property. The only policy limitation on the proceeds for covered
property is that the money Precision Seed receives cannot exceed its financial interest in the
property. Precision Seed's obligation to repair is a duty created by the Lease entirely independent
of the insurance proceeds and it has no affect on Precision Seed's financial interest in the
property.
In summary on the Third Affirmative Defense, the collateral source rule does not
preclude an offset. Should there be, at some point, a judgment in the Marion County case which
requires payment from Precision Seed to Ionian for the value of the structure, such a payment
would affect Ionian's financial interest in the covered property. Precision Seed's potential
liability under the Lease for the cost of repair is not, however, related to its financial interest in
15 - OPINION & ORDER

the covered property. With those limitations in mind, I deny the motion.
C. Fourth Affirmative Defense - Waiver
In its Fourth Affirmative Defense, Precision Seed asserts that in a September 22, 2009
letter to Precision Seed, Ionian waived any claims it had against Precision Seed "in relation to the
'repair' for which it asserts that the insurance proceeds were to cover." Oct. 27, 2014 Ans. at ¶
62. Precision Seed further asserts that Ionian waived any claims it had for any
"contents/inventory or business personal property" in a November 23, 2009 letter to Country
Mutual. Id. at ¶ 63. Ionian moves for judgment on the pleadings or alternatively to strike, the
Fourth Affirmative Defense.8
I agree with Ionian that the allegation in Paragraph 62 should be stricken because it is
immaterial. As Ionian notes, Ionian is not making a claim in this case to the insurance proceeds
"in relation" to Precision Seed's obligation under the Lease to repair the building. Alternatively,
the allegation is stricken because the letter does not evidence a waiver.
Waiver is the intentional relinquishment or abandonment of a known right. Gordon v.
Deloitte & Touche, LLP Grp. Long Term Disability Plan, 749 F.3d 746, 752 (9th Cir. 2014); see
also Moore v. Mut. of Enumclaw Ins. Co., 317 Or. 235, 240, 855 P.2d 626, 630 (1993) ("Waiver
is the intentional relinquishment or abandonment of a known right or privilege"). Waiver may be
implied by conduct, but there must be "clear, decisive and unequivocal conduct which indicates a
purpose to waive the legal rights involved[.]" adidas-America, Inc. v. Payless Shoesource, Inc.,
546 F. Supp. 2d 1029, 1074 (D. Or. 2008) (internal quotation marks omitted); see also Brown v.

8

Ionian's argument is directed to Paragraph 62 regarding the September 22, 2009 letter. I
understand the motion to be directed only to the allegations raised in that paragraph.
16 - OPINION & ORDER

Portland Sch. Dist. No. 1, 291 Or. 77, 84, 628 P.2d 1183, 1187 (1981) (intent must be expressed
by a "clear, unequivocal and decisive act").
The September 22, 2009 letter from Skourtes to Kloft states:
Structure was damaged by fire the last week in August 09. The structure was
destroyed one hundred percent. Therefore lease between the parties is terminated.
Only outstanding liability is cleanup of the site which should be the responsibility
of the insurance carrier. Country Mutual. Plus the recovery of insurance covering
the structure.
Until the insurance claim is paid we can not make a rational business decision
whether and when to rebuilt [sic].
Ex. A to Nov. 20, 2014 Carey Dec. at 7 [ECF 250]. Clearly, there is no express waiver by Ionian
of any rights it had under the Lease. And, as for an implied waiver, the termination of the Lease
is not "clear, unequivocal and decisive" conduct exhibiting Ionian's waiver of its right to have
Precision Seed repair the building. I grant Ionian's motion directed to Paragraph 62 of the Fourth
Affirmative Defense.
D. Fifth Affirmative Defense - Equitable Estoppel
Precision Seed alleges that Ionian should be equitably estopped from asserting a financial
interest in "business personal property lost in the fire" and in "the building in excess of
$72,000[.]" Oct. 27, 2014 Ans. at ¶ 65. Ionian moves to strike the Fifth Affirmative Defense
because it is insufficient.
In support of its Second Affirmative Defense, Precision Seed alleges that Ionian's
financial interest is limited to $72,000 because (1) the Purchase Agreement indicated that the
value of the property was $330,000; (2) the market value of the land was $84,000 which must be
subtracted from the $330,000, making Ionian's financial interest in the building no greater than

17 - OPINION & ORDER

$246,000; and (3) Precision Seed/Kloft paid $174,021.97 to Ionian for the purchase of the
building, reducing Ionian's financial interest in the property to $72,000. Oct. 27, 2014 Ans. at ¶¶
59, 60. Given my ruling granting summary judgment to Ionian on the Purchase Agreement
allegations in the Second Affirmative Defense, the same allegation appearing here in the Fifth
Affirmative Defense is similarly stricken.
As for the allegation regarding "business personal property," I note first that any issues
related to "business personal property" do not appear to belong in the case because the insurance
proceeds that are at issue are $350,000 for the structure and an additional $12,750 for the motor
control system. As Ionian notes, it makes no claims to any business "personal property." Thus,
the allegation appears to be immaterial. Accordingly, I grant Ionian's motion to strike the Fifth
Affirmative Defense. To the extent Precision Seed's reference to "business personal property"
somehow implicates the motor control system, Precision Seed has leave to amend this
affirmative defense but it must articulate more precisely the business personal property at issue
(namely, the motor control system), as well as the elements of its equitable estoppel theory.
E. Sixth Affirmative Defense - Mitigation
Precision Seed alleges that Ionian had a duty to mitigate its damages and failed to do so
by (1) failing to obtain its own insurance policy to cover its interests; (2) selling the land below
market value after the fire; and (3) "failing to seek repairs to the structure pursuant to the Lease,
while allowing Precision to seek recovery under the insurance policy to have funds to cover that
potential liability as contemplated by the Lease." Oct. 27, 2014 Ans. at ¶ 66. Ionian moves to
strike the Sixth Affirmative Defense as insufficient.
The concept of mitigation is misplaced here. The claim in this case is not a claim for
18 - OPINION & ORDER

"damages." "Damages" are "[m]oney claimed by, or ordered to be paid to, a person as
compensation for loss or injury[.]" Black's Law Dictionary 416 (8th ed. 2004). While Ionian's
claim for breach of contract against Country Mutual was a claim for damages, its current claim of
unjust enrichment as to Precision Seed is a claim for the insurance proceeds to the extent of
Ionian's financial interest in the property. That is, Ionian's claim against Country Mutual sought
damages, but its crossclaim against Precision Seed seeks only its own financial interest in the
property and contends that to the extent Precision Seed is awarded more than its financial interest
in the property, Precision Seed is unjustly enriched. It is an equitable claim seeking the equitable
distribution of the insurance proceeds according to each parties' respective financial interest in
the covered property. Accordingly, at the outset, I reject the assertion that the duty to mitigate is
material at all.
Even if it is relevant, I grant Ionian's motion. First, I agree with Ionian that Ionian's
"failure" to purchase its own insurance is something it could not have done to "mitigate" its
damages. "The duty to mitigate damages does not arise until the party upon whom the duty is
impressed is aware of facts making the duty to mitigate necessary." Home Indem. Co. v. Lane
Powell Moss & Miller, 43 F.3d 1322, 1329 (9th Cir. 1995) (further stating that "[the plaintiff]
had no duty to mitigate until it actually discovered the damage done to it"). Here, Ionian could
not have obtained fire insurance after the fire. This is simply not a "mitigation" situation.
Second, any allegations regarding the land are immaterial because the value of the land is
not at issue. The covered property at issue is the structure and the motor control system. It
makes no difference what Ionian sold the land for as the interpleaded sums relate only to the
covered property, not to the land. Ionian's financial interest in the covered property is unrelated
19 - OPINION & ORDER

to the land. Thus, the issue of the sale price of the land for the insurance proceeds is completely
irrelevant and any concept of "mitigation" as related to the price of the land is immaterial.
Finally, the last alleged failure to mitigate theory Precision Seed asserts is unclear.
Precision Seed alleges that Ionian failed "to seek repairs to the structure pursuant to the Lease,"
while failing to allow Precision Seed to seek recovery under the insurance policy to cover the
cost of the repairs to the structure. I do not know what this means. To the extent Precision Seed
contends that Ionian failed to pursue its rights under the Lease, I reject that as basis for a
mitigation argument in regard to any insurance proceeds. To the extent Precision Seed's
allegation is understood as contending that Ionian should have somehow forced Precision Seed to
make the repairs and then "allowed" Precision Seed to seek recovery under the insurance policy
and that by failing to so "force" and "allow," Ionian failed to mitigate its damages, I reject this
allegation as immaterial. Suing Precision Seed for breach of the Lease for failing to make the
repairs is the only way Ionian could "pursue its rights under the Lease." In the end, the fact that
the distribution of the insurance proceeds and the use of those proceeds to repair the building
could have occurred under a scenario other than this litigation does not mean that there is a
failure to mitigate. I grant Ionian's motion as to the Sixth Affirmative Defense.
F. Seventh Affirmative Defense - Unclean Hands
Precision Seed raises six separate "unclean hands" allegations in support of its Seventh
Affirmative Defense. Ionian moves against each of them. In a recent decision, Judge Aiken
explained that
[t]o establish whether a party has unclean hands, the party asserting the
defense must demonstrate that "'the plaintiff's conduct is inequitable and that the
conduct relates to the subject matter of its claims.'" Ayers v. Life Ins. Co., 869 F.
20 - OPINION & ORDER

Supp.2d 1248, 1267 (D. Or. 2012) (citing Providence Health Plan v. Charriere,
666 F. Supp. 2d 1169, 1182 (D. Or. 2009) (quoting Brother Records, Inc. v.
Jardine, 318 F.3d 900, 909 (9th Cir. 2003))). "'Equity requires that those seeking
its protection shall have acted fairly and without fraud and deceit as to the
controversy in issue.'" Id. (quoting Providence, 666 F. Supp. 2d at 1182 (quoting
Ellenburg v. Brockway, Inc., 763 F.2d 1091, 1097 (9th Cir. 1985))). "The
doctrine, however, is not without limitations." North Pac. Lumber Co. v. Oliver,
286 Or. 639, 651, 596 P.2d 931 (1979). "In quantitative terms, the misconduct
must be serious enough to justify a court's denying relief on an otherwise valid
claim. Even equity does not require saintliness." Id.
Unum Life Ins. Co. of Am. v. Martin, No. 6:13-cv-00158-AA, 2014 WL 1154065, at *3 (D. Or.
Mar. 19, 2014).
1. Motor Control System
Precision Seed alleges that Ionian has unclean hands because Ionian has allegedly made a
false claim in this lawsuit for recovery of a motor control system it did not own and was not lost
in the fire. Oct. 27, 2014 Ans. at ¶ 67a. Judge Stewart addressed the motor control system in her
September 27, 2011 F&R. There, she noted that the funds interpleaded by Country Mutual
included a separate $12,750 for a Siemens motor control system. Sept. 27, 2011 F&R at 22-23.
She concluded that on the record before her, she could not determine who owned the motor
control system that was destroyed in the fire or whether it was a fixture and thus included in the
building coverage as opposed to being separately insured. Id. at 23. Precision Seed never
argued, until now, that Ionian's claim to the motor control system was false.
I agree with Ionian that the allegation should be stricken either because it is immaterial or
insufficient. First, even if Precision Seed successfully establishes that Ionian intentionally
deceived this Court by claiming proceeds for the motor control system it did not own, Ionian
would have "unclean hands" only as to the $12,750 for the motor control system. But, if

21 - OPINION & ORDER

Precision Seed establishes that Ionian did not own the motor control system, Precision Seed will
prevail as to the proceeds for the motor control system because it will have established that
Ionian did not have a financial interest in that property. Thus, the defense is immaterial to the
distribution of the proceeds for the motor control system.
Second, an allegation that Ionian made a "false claim" is insufficient for an unclean hands
affirmative defense. Absent an allegation of fraud or intent to deceive, a "false" claim does not
establish that Ionian acted with unclean hands. Third, even if Precision Seed included an
allegation of fraud or intent to deceive, I reject the application of "unclean hands" because I view
the conduct here as nothing more than competing claims to a piece of equipment.
2. Payments on Lease & Purchase Agreement
The next two allegations in support of Precision Seed's unclean hands affirmative defense
concern the Purchase Agreement. Precision Seed alleges that Ionian mislead Precision Seed
regarding the status of payments on the Purchase Agreement to induce Precision Seed into
entering the Lease. Oct. 27, 2014 Ans. at ¶ 67b. Precision Seed also alleges that Ionian breached
the Purchase Agreement so that it would not be forced to recognize its sale to Precision Seed and
allow it to retain all purchase payments made by Precision Seed. Id. at ¶ 67c.
For the reasons previously explained, Precision Seed's allegations about the Purchase
Agreement are immaterial and are contrary to the issues already decided in the case. Although
Precision Seed's affirmative defense allegations do not expressly seek to reinstate the Purchase
Agreement, the allegations of unclean hands based on payments Precision Seed considered to be
towards a purchase and based on an alleged breach of the Purchase Agreement would effectively
overrule the prior rulings in the case by essentially contending that the Purchase Agreement was
22 - OPINION & ORDER

valid. Because the law of the case is otherwise, I strike the allegations as immaterial.
3. Starting the Fire
Precision Seed alleges that Ionian has unclean hands because Ionian intentionally started
the fire that destroyed the structure. Oct. 27, 2014 Ans. at ¶ 67d. Ionian moves to strike the
allegation because it is "scandalous," completely unsupported factually (either in the case record
or in the October 27, 2014 Answer), and because Precision Seed has made a contrary
representation in the Marion County case. See Ionian Rule 12 Mtns. at 23 (representing that
Precision Seed's summary judgment motion in the Marion County case was partly based on its
representation that the cause of the fire is unknown and that in support, Precision Seed cited to
the inability of both the Marion County Fire Department and Country Mutual to determine a
cause of the fire).
I agree with Ionian that the allegation "improperly casts a derogatory light" on Ionian and
thus is scandalous. Germaine Music v. Universal Songs of Polygram, 275 F. Supp. 2d 1288,
1300 (D. Nev. 2003). The allegation is without any support and despite the presence of facts in
record that Precision Seed argues support a finding that Ionian caused the fire, Precision Seed's
allegation is completely speculative. It is also contradicted by the fact that the insurer, which
completed its own investigation, was unable to determine a cause of the fire and thus,
interpleaded the funds with this Court. In the end, however, the allegation is immaterial because
the limited remand from the Ninth Circuit confines the issue before this Court to a determination
of each party's financial interest in the covered property.
4. Land Value
Precision Seed alleges that Ionian has unclean hands because Ionian demands to be
23 - OPINION & ORDER

compensated for the land value which it sold during the pendency of this case. Oct. 17, 2014
Ans. at ¶ 67e. Ionian moves to strike the allegation as immaterial because it makes no claim
against the land. I agree with Ionian. The unjust enrichment crossclaim, as previously explained,
concerns insurance proceeds for the structure and the motor control system. It does not concern
the value of the land. Moreover, even if Ionian were making a claim for the value of the land,
that does not support an unclean hands affirmative defense. Rather, Ionian would be asserting a
"financial interest" that is not awardable by the insurance proceeds.9
5. Benefit of the Bargain
Precision Seed alleges that Ionian has unclean hands because when Ionian terminated the
Lease in September 2009, Ionian precluded Precision Seed from returning to the property or
repairing the building and thus, unilaterally acted to deprive Precision Seed of the benefit of the
bargain of the Lease, namely, the right to repair the building for less than the amount paid by the
insurance company and to retain any savings. Oct. 27, 2014 Ans. at ¶ 67f. As I understand this
allegation, Precision Seed contends that the termination of the Lease deprived Precision Seed of
the opportunity to pocket the difference between the insurance proceeds paid by Country Mutual
to Precision Seed and the actual cost of repair. Thus, Precision Seed contends, Ionian acted
unfairly and with unclean hands by denying Precision Seed the benefit of the bargain it made in
the Lease. Ionian moves against the allegation. I grant the motion.
The allegation is immaterial because such conduct is not unclean hands related to the
insurance proceeds. The insurance policy limits Precision Seed to its financial interest in the
9

The appropriate response by Precision Seed to Ionian's allegation that Ionian's financial
interest is $450,00 is to deny that allegation which Precision Seed did in Paragraph 56 of its
October 27, 2014 Answer.
24 - OPINION & ORDER

property. This allegation regarding the contractual relationship of the parties under the Lease is
unrelated to Precision Seed's financial interest in the covered property. Thus, the allegation is
stricken as immaterial or insufficient.
CONCLUSION
Ionian's Rule 12 Motions [237] are granted in part and denied in part.
IT IS SO ORDERED.

Dated this

13

day of

February

Marco A. Hernandez
United States District Judge

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, 2015