California Bank & Trust v. Shilo Inn, Seaside East, LLC et al

Filing 119

OPINION & ORDER: Defendants' motion for leave to file supplemental counterclaims 103 is GRANTED. See 9-page opinion & order attached. Signed on 12/17/2014 by Judge Marco A. Hernandez. Associated Cases: 3:12-cv-00506-HZ, 3:12-cv-00508-HZ, 3:12-cv-00509-HZ (mr)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF OREGON

CALIFORNIA BANK & TRUST,
as assignee of the Federal Deposit Insurance
Corporation, as receiver for Vineyard Bank,
a California banking corporation,
Plaintiff,

No. 3:12-cv-506-HZ (lead case)
No. 3:12-cv-508-HZ (member case)
No. 3:12-cv-509-HZ (member case)
OPINION & ORDER

v.
SHILO INN, SEASIDE EAST, LLC, an
Oregon limited liability company, and
MARK S. HEMSTREET,
an Oregon resident,
Defendants.
Eric D. Lansverk
Joseph A.G. Sakay
HILLIS CLARK MARTIN & PETERSON
1221 Second Avenue, Suite 500
Seattle, WA 98101

1 – OPINION & ORDER

Hal Mark Mersel
Ren R. Hayhurst
BRYAN CAVE LLP
3161 Michelson Drive
Suite 1500
Irvine, CA 92612
Attorneys for Plaintiff
Sherrie D. Martinelli
Charles R. Markley
Greene & Markley, P.C.
1515 SW Fifth Avenue, Suite 600
Portland, OR 97201
Attorneys for Defendants
HERNÁNDEZ, District Judge:
Defendants Shiloh Inn, Seaside East, LLC, and Mark Hemstreet bring this motion
(“Defendants’ Motion”) under Federal Rule of Civil Procedure 15(d) for leave to file
supplemental counterclaims in response to Plaintiff California Bank & Trust’s supplemental
verified complaint. Also before the Court are requests for judicial notice pursuant to rule 201 of
the Federal Rules of Evidence. Plaintiff requests that the Court take judicial notice of two orders
issued by this Court and two orders and two docket listings from the United States District Court
for the District of Idaho and Eastern District of Washington. Defendants request that the Court
take judicial notice of an order and hearing transcript from the United States District Court for
the Eastern District of Washington.
For the reasons that follow, the Court grants Defendants’ Motion. The Court declines to
address the requests for judicial notice of orders and docket listings from other district courts,
because they are not determinative to the Court’s decision concerning Defendants’ Motion. As to

2 – OPINION & ORDER

the two orders issued by this Court, they are already properly before the Court (ECF Nos. 79,
84); therefore, judicial notice is not necessary.
BACKGROUND
On March 21, 2012, Plaintiff filed a complaint against Defendants related to alleged
defaults by Defendants under commercial loans secured by deeds of trust encumbering real
property and improvements. 1 Plaintiff commenced foreclosure actions against Shilo Inn. Plaintiff
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also named Mr. Hemstreet as a defendant in relation to a personal line of credit.
In the complaint, Plaintiff sought: (1) the appointment of a receiver to protect its interest
in the rents collected by Shilo Inn and an injunction to prevent Shilo Inn and Mr. Hemstreet from
interfering with the receiver’s duties; (2) an accounting of receipts, rents, income, and profits
collected by Shilo Inn; and (3) a judicial foreclosure of Plaintiff’s liens and security interests in
the Shilo Inn property. On May 11, 2012, this Court issued an order, stating that while Plaintiff
was entitled to the appointment of a receiver, equity required Plaintiff to provide Defendants
with a payoff amount within seven days and an opportunity for Defendants to render the payoff
amount within fourteen days thereafter. If Defendants timely paid the payoff amount, Plaintiff’s
motion for the appointment of a receiver and injunction would be moot; however, if Defendants
failed to timely pay the amount due, then the Court would appoint a receiver.
Between May 17 and June 14, 2012, Plaintiff forwarded the reinstatement figures for
each of the properties, including claimed attorney’s fees and punitive default interest. Defendants
disputed the claimed attorney’s fees; therefore, the Court ordered Defendants to pay all sums due
except the disputed fees, which would be addressed by the Court at a later date. Defendants
1

The loan documents for the properties were amended in November 2010 (“First Amendment”)
and again in June 2011 (“Second Amendment”).
3 – OPINION & ORDER

tendered the amounts requested except the disputed attorney’s fees. 2 In July 2012, Plaintiff
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notified Defendants that their tender was insufficient to reinstate the loans and that, therefore,
Defendants were still in default.
On October 1, 2012, the Court entered an order granting Plaintiff leave to supplement its
complaint to reflect the following factual allegations:
(1) Plaintiff reminded Defendants in a letter on June 15, 2012, that further events of
default would exist under the loan documents if required actions were not completed
by the end of the “Forbearance Period” (as defined in the Second Amendment), which
was set to expire on June 30, 2012;
(2) Pursuant to Sections 2(d)(iv) and (v) of the Second Amendment, “Selling Borrowers”
were required to have sold the “Sale Properties” on or before June 30, 2012 to pay
down the outstanding balances (as all such terms are defined in the Second
Amendments) of the loans;
(3) “Post Closing Obligations” (as defined in the Hemstreet First Amendment) were to be
satisfied no later than August 17, 2011 pursuant to Section 2(c) of the Second
Amendment;
(4) Defendants failed to take the required actions by June 30, 2012 and August 17, 2011;
(5) Defendants failed to fully comply with each of the terms, conditions, and covenants
contained in Section 2 of the Second Amendment, thereby materially breaching their
loan obligations pursuant to Section 7 of the Second Amendment;
(6) Shilo Inn was not in full compliance with the obligations under the Second
Amendment; and,
(7) All obligations under Defendants’ loan documents had fully “matured” and
consequently the entire outstanding indebtedness were due and owing in full.
Pl.’s Mot. File Supp. Compl. Ex. 1, ¶¶ 48-55. Plaintiff’s Verified Supplemental Complaint was
filed with the Court on December 6, 2012.
On May 2, 2013, Defendants filed a Notice of Automatic Stay based on the corporate
Defendants’ filing of Chapter 11 petitions in the U.S. Bankruptcy Court. On May 24, 2013, the
Court dismissed this action in its entirety, without prejudice to the rights of the parties to reopen
proceedings if the Bankruptcy Court did not resolve the dispute.

2

Although Shilo Inn paid the default interest, it did so with a reservation of rights.

4 – OPINION & ORDER

On May 21, 2014, the U.S. Bankruptcy Court for the Central District of California issued
an Order Granting the Motion for Relief from the Automatic Stay, allowing Plaintiff to enforce
its remedies to foreclose upon and obtain possession of each property in accordance with
applicable bankruptcy law. On August 8, 2014, the Court granted the parties’ motion to reopen
the case in order for the parties to address the issues relating to foreclosure as permitted by the
Bankruptcy Court orders. On October 31, 2014, Defendants filed the present motion.
STANDARDS
Motions to amend an answer to assert counterclaims are governed by Federal Rule of
Civil Procedure 15’s liberal amendment standard. See Rule 13, Advisory Committee Notes, 2009
Amendments (“An amendment to add a counterclaim will be governed by Rule 15”); see also
Kelly Supply, LLC v. Econ. Polymers & Chemicals, No. CV-14-03-BLG-SPW-CSO, 2014 WL
2961083, at *1 (D. Mont. June 30, 2014).
Rule 15(d) provides that “the court may, on just terms, permit a party to serve a
supplemental pleading setting out any transaction, occurrence, or event that happened after the
date of the pleading to be supplemented.” “The purpose of Rule 15(d) is to promote as complete
an adjudication of the dispute between the parties as possible by allowing the addition of claims
which arise after the initial pleadings are filed.” William Inglis & Sons Baking Co. v. ITT Cont'l
Baking Co., Inc., 668 F.2d 1014, 1057 (9th Cir. 1982) (citations omitted).
The Ninth Circuit has stated that “Rule 15(d) is intended to give district courts broad
discretion in allowing supplemental pleadings. The rule is a tool of judicial economy and
convenience . . . [and] its use is therefore favored.” Keith v. Volpe, 858 F.2d 467, 473 (9th Cir.
1988). However, while leave to permit supplemental pleading is “favored,” it cannot be used to

5 – OPINION & ORDER

introduce a “separate, distinct and new cause of action[.]” Planned Parenthood of S. Arizona v.
Neely, 130 F.3d 400, 402 (9th Cir. 1997) (internal citation omitted).
The factors relevant to a Rule 15(a) motion to amend complaint are considered when
addressing a motion to amend under Rule 15(d). E.g., Al Haramain Islamic Found., Inc., 2012
WL 6203136, Civil No. 3:07–CV–01155–KI, at *8 (D. Or. 2012). “Those factors include: (1)
bad faith; (2) undue delay; (3) prejudice to the opponent; and (4) futility of the amendment.” Id.
DISCUSSION
Defendants seek to file supplemental counterclaims pursuant to Rule 15(d). Defendants
argue that “despite Shilo Inn’s tender of the full reinstatement amounts, [Plaintiff] not only failed
to reinstate the loans but, surreptitiously, and in bad faith, held Shilo Inn in default relative to a
few alleged immaterial pre-existing non-monetary defaults and relative to a pre-existing default
under a personal line of credit.” Defs.’ Mot. 2-3. Defendants seek to add the following
counterclaims: (1) violation of California Civil Code § 2924c for a wrongful rejection of tender;
(2) breach of contract; (3) promissory estoppel; (4) breach of the implied covenant of good faith
and fair dealing; (5) non-disclosure; (6) violation of California Business and Professions Code §§
17200 et. Seq. for unlawful, unfair, or fraudulent business acts and practices; and (7) attorney’s
fees. Proposed Defs.’ Ans. to Supp. Compl. ¶¶ 76-137.
Plaintiff contends that Defendants’ motion should be denied because Defendants unduly
delayed in seeking leave to file supplemental counterclaims, Plaintiff would be unduly
prejudiced if Defendants’ motion were granted, and Defendants’ proposed amendments would be
futile because they lack merit.
For the reasons that follow, the Court grants Defendants leave to file supplemental
counterclaims.
6 – OPINION & ORDER

I.

Undue Delay and Prejudice
Plaintiff argues that Defendants unduly delayed in adding counterclaims. Plaintiff

contends that the events alleged by Defendants occurred in 2012. Therefore, Plaintiff argues,
Defendants have had almost two years in which they could have brought these claims. Plaintiff
argues that granting this motion could unduly delay the entry of a final judgment and cause
Plaintiff to incur additional expenses. 3
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However, Plaintiff fails to place Defendants’ motion in the overall procedural context of
this case. Plaintiff filed a supplemental complaint on December 6, 2012. Defendants filed for
bankruptcy in May of 2013 and the case was reopened in this Court in August of 2014.
Defendants filed this motion three months later. Defendants’ proposed counterclaims involve the
same parties as the original action and are responsive to the claims Plaintiff added in its
supplemental complaint. Therefore, Defendants’ Motion does not run afoul of Neely by alleging
a “separate, distinct and new cause of action.” Rather, the entire controversy between the parties,
including the newly alleged facts in the supplemental counterclaims, can be settled in this action.
See Neely, 130 F.3d at 402 (“To determine if efficiency might be achieved, courts assess
whether the entire controversy between the parties could be settled in one action . . . .”)
(Citations omitted); see also Volpe, 858 F.2d at 473 (“While some relationship must exist
between the newly alleged matters and the subject of the original action, they need not all arise
out of the same transaction.”). The Court finds that Defendants’ motion will not cause undue
delay, nor will Plaintiff suffer undue prejudice.
///
3

Plaintiff also argues it would suffer significant prejudice because it has already filed its motion
for summary judgment [105]. The Court gives this argument little weight because Plaintiff filed
its summary judgment motion after Defendants submitted the motion at issue here.

7 – OPINION & ORDER

II.

Futility
The goal of the rule governing supplemental pleadings is to promote judicial efficiency.

Neely, 130 F.3d at 402. A proposed amendment is futile “only if no set of facts can be proved
under the amendment to the pleadings that would constitute a valid and sufficient claim or
defense.” Miller v. Rykoff–Sexton, Inc., 845 F.2d 209, 214 (9th Cir. 1988) (citation omitted).
Plaintiff argues that Defendants’ counterclaims are meritless because “they have already
been raised and rejected in this case and in related proceedings.” Pl.’s Opp. Defs.’ Mot. 2. In
addition, Plaintiff contends that the parties entered into a Settlement and Release Agreement
(Settlement Agreement) which included “an express release provision by which Defendants
waived and released the proposed counterclaims.” Id. Finally, Plaintiff advances several
arguments attacking Defendants’ counterclaims on their merits.
Defendants’ counterclaims stem from Plaintiff’s actions in connection with the parties’
attempt to reinstate the loans in May and June of 2012. This Court’s October 1, 2012 order
explained that the Court had not yet ruled on whether “Shiloh Inn’s payment to Plaintiff would
reinstate Defendants’ loans or otherwise cure all of Defendants’ past and future monetary and
non-monetary defaults.” Order, Oct. 2, 2012 [79]. To date, the Court has still not ruled on this
issue. Therefore, Plaintiff’s contention that the counterclaims have already been rejected by this
Court is incorrect.
As to Plaintiff’s arguments about the terms of the Settlement Agreement or the merits of
Defendants’ claims, the Court will more appropriately evaluate those issues at the summary
judgment stage of the proceeding. Defendants raise sufficient issues of fact in response to
Plaintiff’s arguments to make a ruling on the merits of Defendants’ claims inappropriate. For the

8 – OPINION & ORDER

purposes of ruling on this motion, Rule 15 is clear that the Court “should freely give leave” to
amend.
CONCLUSION
In light of the interest in judicial economy and the liberal interpretation of Rule 15(d),
Defendants’ motion for leave to file supplemental counterclaims [103] is GRANTED.

IT IS SO ORDERED.

Dated this

day of _______________, 2014.

MARCO A. HERNÁNDEZ
United States District Judge

9 – OPINION & ORDER