Claus et al v. Columbia State Bank

Filing 65

OPINION and ORDER - For the reasons stated, Columbias motion to strike 24 24, and motion to dismiss 14 are GRANTED. However, the dismissal is without prejudice and with leave to amend. Accordingly, the Clauses may file an amended complaint, re-pleading their claims, to cure the deficiencies stated above, within 30 days of this Opinion and Order (5/17/2018). DATED this 17th day of April, 2018, by United States Magistrate Judge John V. Acosta. (copy mailed to plaintiffs) (peg)

UNITED STATES DISTRICT COURT
DISTRICT OF OREGON
PORTLAND DIVISION

ROBERT JAMES CLAUS and
SUSAN CLAUS,

Case No.: 03:16-CV-01509-AC

Plaintiffs,

OPINION AND
ORDER

v.
COLUMBIA STATE BANK,

Defendant.
___________________________________
ACOSTA, Magistrate Judge:
Introduction
This suit arises from an ill-fated subdivision development project. Landowner Plaintiffs
Robert James Claus and Susan Claus (collectively, the “Clauses”) sue their former lender,
Defendant Columbia State Bank (“Columbia”), alleging Columbia misrepresented the capitalization
and creditworthiness of the project’s builder, Signature Homebuilders, LLC (“SHB”), and breached
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the parties’ construction loan contract. Currently before the court are Columbia’s motion to dismiss
all claims (“Motion”), ECF No. 14, and motion to strike portions of the Clauses’ response to the
motion to dismiss, ECF No. 24.1 First, because the Clauses’ response brief contains materials
outside the pleadings, Columbia’s motion to strike is granted. Second, because the Clauses’ current
complaint fails to state their claims under applicable pleading standards, Columbia’s motion to
dismiss is granted. However, the court also grants the Clauses leave to amend their complaint.2
Background
The following facts, as alleged in the complaint, are taken as true for purposes of the present
motion to dismiss. Since the mid-1980s, the Clauses engaged in a business relationship with
Columbia and its predecessor organizations, sharing a “long mutually beneficial business and
building project history . . . .” (Compl. (ECF No. 1), Ex. 1,¶ 5.) Four years ago, the Clauses decided
to develop land they owned in Sherwood, Oregon as a residential subdivision with eight houses.
(Compl. ¶ 6.) In July 2013, the Clauses approached Columbia to help finance the project, and the
bank issued the Clauses a conditional $900,000 revolving line of credit. (Compl. ¶ 6.)
In the months that followed, Columbia, as the Clauses allege, “controlled the [loan]
application process,” which included a credit analysis of the Clauses, property appraisal, and project
analysis. (Compl. ¶ 7.) As part of the project analysis, Columbia conducted “an extensive
confidential review of the proposed builder,” SHB, examining its “members, their projects, their

1

Columbia requested oral argument in their Motion. The court finds this motion appropriate
for disposition without oral argument pursuant to Local Rule of Civil Procedure 7-1(d)(1) and denies
the request.
2

The parties have consented to jurisdiction by magistrate judge pursuant to 28 U.S.C. §
636(c)(1).
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business, and credit.” (Compl. ¶ 8.) The information gleaned in the analysis was deemed “trade
secret,” and thus withheld from the Clauses. (Compl. ¶ 8.)
An employee of Columbia, Kelly White (“White”), “assured [the Clauses] that [Columbia’s]
commercial loan department had vetted SHB, finding that SHB had strong credit and adequate
capitalization.” (Compl. ¶ 10.) Columbia also “wanted to use SHB because they were a turnkey
builder3 who could get occupancy permits for specified prices with[in] 120 days of starting a house.”
(Compl. ¶ 10.) Columbia, therefore, “insisted upon” hiring SHB for the job. (Compl. ¶ 8.) Though
the Clauses allege they already “had a preferred general contractor,” and were approached by at least
three others for the project, they agreed to engage SHB as the general contractor for the project.
(Compl. ¶¶ 8, 29–30.)
The loan closed in October 2013, secured by a first trust deed on the property in Columbia’s
favor and executed through a Construction Loan Agreement (the “Loan Agreement” or
“Agreement”). (Compl. ¶ 6; See Declaration of Stanley M. Cruse in Support of Def.’s Mot. to
Dismiss (“Cruse Decl.”), Ex. 1.) The Agreement outlined several scenarios that would constitute
default events under the contract, including the Clauses’ failure to make loan payments or any
“creditor or forfeiture proceedings” against the loan’s collateral. (Agreement at 6.)
The parties agreed that Columbia would monitor both the credit line and SHB, to ensure the
property remained lien free during construction. (Compl. ¶ 9.) Funds from the loan were to be
dispersed to SHB through Columbia’s accounting program, and Columbia was responsible for
obtaining invoices and proof of payment from SHB as well as preparing on-going lien releases as
3

A builder that constructs projects for immediate use without securing a buyer in advance,
also known as a speculative, or “spec,” builder. Turnkey, AMERICAN HERITAGE DICTIONARY 1872
(5th ed. 2010).
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various aspects of the project were completed. (Compl. ¶ 12.)
The project commenced but, in April 2014, fell behind in its intended timeline after SHB
failed to deliver on time an occupancy certificate for one home and delayed construction on another.
(Compl. ¶ 14.) Additionally, though SHB was required to advance payments on all necessary
permits, the Clauses allege they were ultimately forced to make those payments. (Compl. ¶ 14.)
Still, the project continued.
The Clauses also claim that on or around April 2017, a construction contract for lot 4 on the
property was executed without either of the Clauses’ signature. (Compl. ¶ 15.) They allege that
SHB, and perhaps also Columbia, “used a forged signature” to execute the contract. (Compl. ¶ 15.)
In July 2014, Columbia informed the Clauses that one of SHB’s subcontractors had filed a
notice of lien against the property’s home lots, claiming it never was paid for supplies delivered.
(Compl. ¶ 16.) Three other subcontractors also recorded liens, claiming they, too, had not been paid.
(Compl. ¶ 16.) The Clauses later discovered that instead of paying the subcontractors, SHB had
“walked away” and kept the Clauses’ funds. (Compl. ¶ 21.)
On August 22, 2014, Columbia received a writ of garnishment against the Clauses’ Columbia
account. (Compl. ¶¶ 17–18.) The writ stemmed from a default judgment entered erroneously against
the Clauses in an unrelated legal action due to legal malpractice by the Clauses’ then attorney.
(Compl. ¶¶ 17–20.) With the help of the Oregon Professional Liability Fund, the default judgment
was corrected and set aside in December 2014, but the associated liens “were not removed in a
timely manner.” (Compl. ¶ 20.) The Clauses allege Columbia “then told [the Clauses] that their
construction loan would be frozen until the lien issues were resolved and that [they] would have to
make monthly interest payments until resolution,” but it is unclear whether the Clauses refer to the
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subcontractor liens or the liens associated with the erroneous writ of garnishment. (Compl. ¶ 17.)
In September 2014, the four unpaid subcontractors filed foreclosure actions on their liens.
(Compl.¶ 21.) Columbia, also a named party to that suit, filed its own claims against the Clauses,
for breach of the Agreement and, based on the liens associated with the writ of garnishment, to
foreclose on the Clauses’ property that served as collateral for their construction loan. (Compl. ¶
21.)
As alleged in the Complaint, as a result of SHB’s construction delays, the Clauses had to
make interest payments on their loan for five more months than they had anticipated, had SHB met
its obligations. (Compl. ¶ 14.) Based on either the subcontractor liens or the erroneous garnishment
writ liens, the Clauses’ construction loan with Columbia was frozen, which “forced them to borrow
$150,000 from another source” to finish houses that had been only partially completed. (Compl.
¶ 20.) When SHB walked away from the project, it took with it “more than $85,000 in construction
funds” and left the Clauses “as the responsible party” for over $65,600 in “outstanding balances
owed to” at least three subcontractors. (Compl. ¶ 21.) The Clauses also allege they incurred legal
costs to defend the foreclosure actions and the erroneous writ and “appraised monetary loss from
selling the houses in bulk at below-market value.” (Compl. ¶ 22.) Robert Claus also claims to have
suffered “severe physical and mental pain as a result of having to finish some of the work on the
Subdivision homes himself in order to mitigate damages[,]” and “further mental pain due to the
anxiety of not being able to provide” financially for his family. (Compl. ¶ 31.)
The Clauses filed suit in state court on June 22, 2016, asserting claims of fraud, negligence,
and breach of contract under state law, seeking economic and non-economic damages and equitable
relief. (Compl. ¶¶ 23–38.) Specifically, the Clauses allege Columbia fraudulently and negligently
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falsely represented the creditworthiness and extent of capitalization of SHB, and that they relied on
that representation to their detriment. (Compl. ¶¶ 24–36.) They also claim Columbia breached the
parties’ Loan Agreement by wrongly initiating foreclosure. (Compl. ¶ 38.)
Columbia timely removed to federal court, based on diversity jurisdiction. Columbia now
moves to dismiss the Clauses’ complaint for failure to state all three claims and, additionally,
challenges the fraud claim lacks the required particularity.
Legal Standards
Federal Rule of Civil Procedure (“Rule”) 8(a) governs pleadings and calls for “a short and
plain statement of the claim showing that the pleader is entitled to relief . . . .” FED. R. CIV. P. 8(a).
The Supreme Court in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), addressed the pleading
standard required to adequately state a claim under the Federal Rules of Civil Procedure. The Court
emphasized the need to include sufficient facts in the pleading to give proper notice of the claim and
its basis. “While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed
factual allegations, a plaintiff’s obligation to provide the ‘grounds’ of his ‘entitlement to relief
requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of
action will not do.” Id. at 555 (brackets omitted). Even so, the court noted that “a well-pleaded
complaint may proceed even if it strikes a savvy judge that actual proof of those facts is improbable,
and ‘that a recovery is very remote and unlikely.’” Id. at 556 (quoting Scheuer v. Rhodes, 416 U.S.
232, 236 (1974)). A court considering a motion to dismiss must draw all reasonable inferences in
favor of the plaintiff. Scheuer v. Rhodes, 416 U.S. 232, 236 (1974), overruled on other grounds by
Davis v. Scherer, 468 U.S. 183 (1984).
Since Twombly, the Supreme Court has made clear that the pleading standard announced
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therein is generally applicable to cases governed by the Federal Rules of Civil Procedure, not just
those cases involving antitrust allegations. As the Court held in Twombly, the pleading standard
Rule 8 announces does not require “detailed factual allegations,” but it demands more than an
unadorned, the-defendant-unlawfully-harmed-me accusation. A pleading that offers “labels and
conclusions” or “a formulaic recitation of the elements of a cause of action will not do.” Ashcroft
v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 555) (internal citations omitted);
see also Villegas v. J.P. Morgan Chase & Co., No. C 09–00261 SBA, 2009 WL 605833, at *3 (N.D.
Cal. Mar. 9, 2009) (“The Twombly standard, moreover, is of general application and is as easily
applied to wage and hour litigation as antitrust.”). “While legal conclusions can provide the
framework of a complaint, they must be supported by factual allegations. When there are
well-pleaded factual allegations, a court should assume their veracity and then determine whether
they plausibly give rise to an entitlement to relief.” Id. at 679.
Finally, courts generally have a duty to construe pro se pleadings liberally and “afford the
[pro se] plaintiff the benefit of any doubt.” Karim-Panahi v. Los Angeles Police Dep’t, 839 F.2d
621, 623 (9th Cir. 1988); accord. Erickson v. Pardus, 551 U.S. 89, 94 (2007) (“A document filed
pro se is to be liberally construed, and a pro se complaint, however inartfully pleaded, must be held
to less stringent standards than formal pleadings drafted by lawyers.” (internal citations and
quotations omitted)). This duty applies to both pro se complaints and pro se motions. Bernhardt
v. Los Angeles Cty., 339 F.3d 920, 925 (9th Cir. 2003).
Here, the Clauses were represented by counsel at the time their complaint was filed, and the
complaint was drafted by their then attorney. That attorney since has withdrawn, and the Clauses
have filed pro se their opposition brief to Columbia’s Motion. Therefore, although the Clauses’
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complaint, drafted by a lawyer, warrants no special leniency, their pro se opposition brief is liberally
construed and afforded the benefit of any doubt.
Preliminary Procedural Matter
In support of their opposition to Columbia’s Motion, the Clauses submitted to the court
numerous, voluminous evidentiary exhibits. (See ECF No. 22, Exs. 1–19.) Columbia moves to
strike these materials as redundant and immaterial. (Def.’s Motion to Strike Portions of Pls.’ Resp.
ECF No. 24, at 2.)
Generally, on a motion to dismiss for failure to state a claim, the court may consider only the
pleadings themselves, exhibits that are physically attached to the complaint, and matters of which
the court may take judicial notice. Swartz v. KPMG LLP, 476 F.3d 756, 763 (9th Cir. 2007) (per
curiam). Materials outside the pleadings may not be considered in ruling on a motion to dismiss
unless the motion is treated as one for summary judgment and the parties are “given reasonable
opportunity to present all materials made pertinent to such motion by Rule 56.” Jacobson v. AEG
Captial Corp., 50 F.3d 1493, 1496 (9th Cir.1995). A document is not considered “outside” the
complaint if the complaint specifically refers to the document, its authenticity is not questioned, and
the plaintiff’s complaint necessarily relies on it. Id. at 774.
Columbia’s Motion to Dismiss is properly brought against the pleadings alone. The Loan
Agreement is not considered outside of the pleadings because the Clauses’ complaint specifically
refers to and necessarily relies on it, and neither party challenges its authenticity. Thus, the court
finds no reason treat the Motion as one for summary judgment. Accordingly, because the court may
not look to materials outside the pleadings, Columbia’s motion to strike the Clauses’ outside
materials is granted. However, this grant in no way precludes the Clauses from referring to or
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resubmitting these exhibits at a later, appropriate juncture, such as at a summary judgment stage or
at trial, should the case so progress.
Discussion
I.

First Claim for Relief – Fraud.
A.

Particularity.

Columbia argues the Clauses fail to state factual allegations to support their fraud claim with
the requisite particularity. Specifically, it contends the complaint lacks sufficient detail regarding
the alleged fraudulent representations made about SHB’s capitalization and creditworthiness.
Rule 9(b) supplements Rule 8 and imposes a heightened pleading standard for fraud claims,
requiring that such claims be pled “with particularity.” FED. R. CIV. P. 9(b). Courts have interpreted
that standard to require that the complaint specify the “who, what, when, where, and how of the
misconduct charged.” Cafasso v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1055 (9th Cir. 2011)
(internal quotation omitted). The particularity requirement furthers three policy interests: (1) to
provide defendants with adequate notice to allow them to defend the charge and deter plaintiffs from
the filing of complaints “as a pretext for the discovery of unknown wrongs”; (2) to protect those
whose reputation would be harmed as a result of being subject to fraud charges; and (3) to “prohibit
[ ] plaintiff[s] from unilaterally imposing upon the court, the parties and society enormous social and
economic costs absent some factual basis.” Kearns v. Ford Motor Co., 567 F.3d 1120, 1125 (9th
Cir. 2009) (quoting In re Stac Elecs. Sec. Litig., 89 F.3d 1399, 1405 (9th Cir. 1996)). In federal
court, the substantive elements of a state law fraud claim are determined by state law, but those
elements still must be pleaded with particularity as required by Rule 9(b). Vess v. Ciba-Geigy Corp.,
USA, 317 F.3d 1097, 1104–05 (9th Cir. 2003).
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The Clauses’ fraud claim alleges that, at some point in 2013, Columbia, through its agent,
White, “made a representation . . . that SHB and each of its members had strong credit and adequate
capitalization when [the Clauses] inquired about [Columbia]’s vetting of SHB as the general
contractor for the Subdivision homebuilding.” (Compl. ¶ 24.) That representation, according to the
Clauses, was false because “SHB was found to be an undercapitalized LLC” and some of its
members were in fact “in personal bankruptcy,” their company “valueless.” (Compl. ¶ 25.) Thus,
the complaint sufficiently pleads the “who” and, vaguely, the “what” elements required by Rule 9(b),
but fails to articulate when, where, or how, that is, by what means, the statement was made. The
complaint likewise fails to provide adequate particularity with respect to the details of what exactly
White represented about SHB’s capitalization and credit. Based on the current allegations in the
complaint, Columbia is not afforded adequate notice to allow it to defend against the accusation.
Without more, the fraud claim does not comport with Rule 9(b)’s heightened pleading requirement.
B.

Failure to State a Claim.

Columbia also challenges the Clauses’ fraud claim under Rule 12(b)(6) on the ground it fails
to state a claim upon which relief may be granted, that is, that the complaint fails to allege the
necessary elements of a fraud claim.
The elements of an Oregon common-law fraud claim are: (1) a representation; (2) its falsity;
(3) its materiality; (4) the speaker’s knowledge of its falsity or ignorance of its truth; (5) the
speaker’s intent that the representation should be acted upon by the listener in the manner reasonably
contemplated; (6) the listener’s ignorance of the representation’s falsity; (7) the listener’s reliance
on the truth of the representation; (8) the listener’s right to rely thereon; and (9) the listener’s
consequent and proximate injury. Webb v. Clark, 274 Or. 387, 391 (1976). Embedded in that list
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is the requirement that the defendant made the representation at issue “with knowledge of its falsity
and with the purpose of or knowledge that he was misleading the defendant.” McMullin v. Murphy,
89 Or. App. 230, 233 (1988) (citing U.S. National Bank v. Fought, 291 Or. 201, 220–25 (1981)).
Each of these elements must be established by “clear and convincing evidence.” Webb, 274 Or. at
391. Clear and convincing evidence means that the truth of the facts asserted is highly probable.
Coy v. Starling, 53 Or.App. 76, 80 (1981).
Accordingly, to state a claim for fraud, the Clauses must allege that Columbia made false
representation with the intent that they rely on that representation, that the Clauses were unaware of
the falsity of the representation, and that they justifiably relied on the representation to their actual
and proximate detriment. Columbia challenges specifically the latter two premises: that the
Clauses’ reliance on its representation was not justifiable and that the representation was not the
proximate cause of their damages.
1.

Proximate Cause.

Columbia argues the Clauses fail to allege sufficient proximate cause between the
representation made and the damages incurred. It contends that even if its representation about SHB
was false, the damages resulting from SHB’s failure to pay its subcontractors are too attenuated to
be attributed to Columbia.

Columbia specifically notes the Clauses allege only that the

representation caused them to hire SHB, not that the representation caused SHB’s failure to pay
subcontractors, which is what ultimately led to the liens being filed and, consequently, the Clauses’
foreclosure.
To state a claim for fraud under Oregon law, a plaintiff must show the allegedly fraudulent
conduct proximately caused his or her damages. Knepper v. Brown, 345 Or. 320, 330 (2008).
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Proximate cause in this context, like in negligence, means the injury in question is “reasonabl[y]
foreseeab[le]” from the conduct. Id. (“A fraudulent misrepresentation is a legal cause of a pecuniary
loss resulting from . . . reliance upon it if, but only if, the loss might reasonably be expected to result
from the reliance.”) (emphasis in original) (quoting Restatement (Second) of Torts § 548A (1977)).
This foreseeability inquiry “appropriately recognizes that the scope of liability for an intentional,
fraudulent misrepresentation depends on the nature of the misrepresentation, the audience to whom
the misrepresentation was directed, and the nature of the action or forbearance, intended or negligent,
that the misrepresentation justifiably induced.” Id. The Oregon Supreme Court also has noted that
“when an intentional tort is involved, the range of legal causation can be quite broad,” and can
encompass “even very remote causation.” Id. (internal quotation omitted).
For example, in Knepper, a doctor board-certified in dermatology, but not plastic surgery,
placed an ad in a phonebook. Id. at 323–24. At the urging of the phonebook’s sales representative,
the ad referred to the doctor’s board certification without specifying the area of certification. Id. The
ad was then listed under a “plastic and reconstruction surgery” heading in the phonebook, which led
Knepper, who was contemplating getting plastic surgery, to assume the doctor’s certification
pertained to that field. Id. Months later, Knepper attended a trade show and came upon a booth
offering information about plastic surgery, including the doctor’s brochure, which specifically and
erroneously, stated he was certified in plastic surgery. Id. at 325. Knepper was also later told by an
employee of the doctor and the doctor himself that he was indeed certified in plastic surgery. Id.
Knepper hired the doctor to perform liposuction, suffered complications from the procedure, and
sued the doctor and the phonebook, alleging both had fraudulently represented the doctor’s
credentials. Id.
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The phonebook defended that its representation was not the proximate cause of Knepper’s
injuries. Id. Applying its “foreseeability principle” to the case, the Oregon Supreme Court
concluded Knepper’s “damages reasonably might [have] be[en] expected to result from [] reliance
on [the phonebook]’s misrepresentation.” Id. at 331. The doctor’s and his employee’s similar
misrepresentations were not intervening causes that broke the chain of proximate cause. Id. Rather,
the ad, which “misrepresent[ed] a medical provider’s qualifications[,] self-evidently create[d] a risk
that a consumer who seeks treatment from the provider in reliance on that misrepresentation will
suffer an adverse result that would not have occurred if the provider’s qualifications had been as
represented.” Id. Despite that Knepper hired the doctor months after reading the phonebook ad and
only after directly receiving at least two other, more inaccurate representations regarding his
qualifications, Knepper’s injuries “fell precisely within the foreseeable risk of harm that
misrepresentation created . . . .” Id.
This court previously has applied Knepper to conclude that a plaintiff adequately pleaded
proximate cause to support a fraud claim under Oregon law. In Expedite, Inc. v. Plus, Bags, Cars
& Serv, LLC, No. CIV. 11-329-AC, 2013 WL 1700948, at *6 (D. Or. Apr. 18, 2013), a defendantsourcing agent facilitated a bidding process under which airport baggage delivery vendors would bid
on contracts to service various airlines. Id. at *1. The agent initially represented that all vendors
competed for the baggage delivery contracts under the same criteria. Id. The agent was later
purchased by a larger corporation with multiple subsidiaries, one of which was another baggage
delivery company. Id. Under new corporate ownership, the agent notified the baggage vendors that
under its “new program,” the bidding process would include new criteria, but did not disclose that
one of the vendors with which existing vendors would now be competing was its own subsidiary.
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Id. at *2. Thus, the agent now controlled “both ends of the bidding process” and could use the other
vendors’ business information to underbid and outcompete them. Id.
An existing vendor sued and the agent moved to dismiss, arguing it had not proximately
caused the vendor to lose any contracts and that the damages alleged were too speculative. Id. at *5.
The court disagreed, reasoning that “[l]ike the [phonebook’s] posting in Knepper that held out the
dermatologist as a board-certified plastic surgeon, [the agent] held out in its communications that
the bidding process would be fair.” Id. at *6. Thus, it was “reasonably foreseeable that [the baggage
company], had it known of the rigged bidding process, would have notified the airlines of the
irregularities it allege[d] and attempted to negotiate directly with the airlines.” Id.
Applying Oregon’s broad conception of proximate cause as articulated in Knepper to the
facts of this case, and drawing all reasonable inferences in favor of the non-moving plaintiffs, the
Clauses have adequately pleaded the element of proximate cause with respect to their fraud claim.
Columbia held out that SHB was creditworthy and sufficiently capitalized, and, according to the
complaint, “insisted” the Clauses use SHB if they wanted the loan. Notwithstanding whether
reliance on the representation was justifiable (discussed infra in part II.2), here, like the misleading
ad in Knepper, misrepresenting SHB’s financial status self-evidently created a risk that hiring SHB
would induce the adverse result that SHB would misuse the Clauses’ funds. And, under the
reasoning in Expedite, Inc., it is reasonably foreseeable that the Clauses, had they known of SHB’s
poor credit and capitalization, instead would have pursued another builder.
Columbia’s argument that its representation did not in fact cause SHB to take the Clauses’
money yet fail to pay its subcontractors misconstrues the requisite proximate cause analysis. The
question is not why SHB failed to pay the contractors; it is whether the damages caused by that
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failure fell within the foreseeable risk of harm its representation created. With respect to their fraud
claim, the Clauses allege money damages including those related to being forced to sell the land
below appraised value and to sell bare lots facing pending foreclosure by Columbia rather than fully
developed homes, out-of-pocket costs to complete and prepare some of the homes, and foreclosure
and lien expenses and accompanying attorney fees. (Compl. at 12.) These damages are all within
the scope of potential harm that hiring a financially untrustworthy builder might cause. In addition
to the direct economic losses the Clauses incurred as a result of SHB’s failings, Columbia’s
foreclosure action appears to be based at least in part on the subcontractors’ liens, liens that resulted
from SHB’s failure to pay the subcontractors. Therefore, the Clauses’ injuries fell precisely within
the foreseeable risk of harm that misrepresentation created.
Columbia also argues the Clauses’ “own failure to pay SHB or perform under [their]
contracts with SHB” is an “equally possible” intervening cause. (Motion at 10.) That argument runs
contrary to Oregon courts’ broad construct of proximate cause. The phonebook ad at issue in
Knepper was only one of three fraudulent representations that induced Knepper to hire the doctor.
The other two — the brochure and the doctor’s employee’s statements expressly and falsely touting
the doctor’s plastic surgery certification — were both closer temporally to the injuries and more
egregious than the ad. Yet neither of those causes were enough to constitute an intervening cause.
Here, there does not appear to be any analogous alternative or additional cause. Despite Columbia’s
general argument, nothing before the court suggests the Clauses failed to pay SHB or failed
otherwise to perform under their contracts with SHB. Moreover, Columbia’s intervening cause
argument ignores the pleaded damages induced by the foreclosure actions initiated by the
subcontractors, the reduced property values, the out-of-pocket costs and the legal fees. Again, in
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accordance with Oregon law, even remote causation is sufficient in the context of the intentional tort
of fraud. Thus, the Clauses’ fraud claim sufficiently states proximate cause.
2.

Justifiable Reliance.

With respect to justifiableness, the Clauses allege simply that their “rights to rely on
[Columbia]’s representation were not limited contractually, statutorily, or otherwise.” (Compl. ¶
29.) Columbia argues that this allegation merely states the absence of any limitation on the Clauses’
right of reliance; it does not affirmatively state that the Clauses had the actual right to rely on the
representation. Columbia is correct that the mere fact that the Clauses’ right to rely on its
representation was not limited does not establish a right to rely on the representation existed. But
neither does it establish that such a right did not exist.
The “right to rely,” or justifiableness, element of a fraud claim under Oregon law requires
that the plaintiff’s reliance be reasonable under the totality of the circumstances. Oregon Pub.
Employees’ et. Bd. ex rel. Oregon Pub. Employees’ Ret. Fund (“OPERB”) v. Simat, Helliesen &
Eichner, 191 Or. App. 408, 428 (2004). “The standard for assessing reasonable reliance varies
depending on the specific circumstances of the parties’ relationship.” Wieber v. FedEx Ground
Package Sys., Inc., 231 Or. App. 469, 483(2009). As the Oregon Court of Appeals explained,
reasonableness is measured in the totality of the parties’ circumstances and conduct.
For example, if there is a naive and unsophisticated plaintiff on one side of the
equation and an unscrupulous defendant who made active misrepresentations of fact
on the other, a court might well conclude that, although a more sophisticated party
would not have taken at face value the false representations of the defendant, that
particular plaintiff was justified in doing so.
OPERB, 191 Or. App. at 428.
Coy v. Starling, 53 Or. App. 76, rev. den., 291 Or. 662 (1981) is instructive. There, a

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plaintiff-buyer of a motel sued the seller, the motel’s former owner, for fraud based on a
misrepresentation about the motel’s annual gross income and expenses. Coy v. Starling, 53 Or. App.
at 81. The court held the buyer’s reliance on the seller’s representation was not justified, noting that
the case involved an arm’s-length transaction and that the buyer was familiar with accounting and
bookkeeping, yet declined to examine the records that had been offered and provided by the seller.
Id. Moreover, the buyer knew the seller had owned the motel for less than a year and thus knew that
the representation of annual gross income could have been only an estimate. Id. Therefore, the
seller’s representations were mere expressions of opinion on which a buyer should not have relied,
particularly when the buyer “‘ha[d] or c[ould] obtain equal means of information and [was] equally
qualified to judge certain factors claimed to contribute to the value of the property . . . .’” Id. at
81–82 (some citations omitted) (citing Gregory v. Novak, 121 Or. App. 651, 655 (1993) (“Justifiable
reliance requires a ‘right to rely,’ which is acquired by taking reasonable precautions to safeguard
one’s own interests.”)).
Nor was reliance justified in Vasquez-Lopez v. Beneficial Oregon, Inc., 210 Or. App. 553,
580 (2007). The Vasquez-Lopezes, who spoke only Spanish, sought to refinance their home and
applied for a loan, providing supporting documentation. Id. at 557–58. They later sued their
mortgage company after it disclosed unfavorable terms of the loan only in English. Id. at 558. The
company asserted fraud as an affirmative defense, alleging that the couple had provided it with
inaccurate tax returns and thus fraudulently induced the loan. Id. at 559. The court evaluated
whether the company had a right to rely on the returns by weighing the parties’ relative
sophistication. Id. at 580. The company was “a sophisticated organization that employ[ed]
underwriters whose job includes reviewing loan applications for misrepresentation,” with a policy
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in place for dealing with suspect returns. Id. The company also “had sufficient resources at its
disposal to detect any existing liabilities plaintiffs had not disclosed either in their loan application
or in their conversations with defendant’s representative.” Id. at 581 (alterations omitted).
Therefore, the company’s reliance on the returns was unreasonable. Id.
Conversely, reliance was reasonable and thus justifiable in Wieber v. FedEx Ground Package
Sys., Inc., 231 Or. App. 469, 473 (2009). FedEx hired Wieber as a subcontractor to deliver packages
within a certain service area for a period of three years. Id. at 472. Under their subcontractor
agreement, Wieber was responsible for furnishing and maintaining its own fleet of delivery vehicles,
overseeing its own staff, and managing its own operations in accordance with FedEx’s guidelines,
and in return, Wieber was granted certain proprietary interests in Fedex’s customer accounts. Id.
Weiber’s customer service deteriorated and, anticipating its subcontract soon would be terminated,
Wieber asked a FedEx manager whether and how much advance notice it would receive prior to
termination. Id. at 473. Despite Fedex’s policy not to provide any advance notice of subcontractor
termination, the manager replied, “usually 30 to 45 days.” Id. Weiber was terminated, without
notice, two months later. Id. Wieber sued for fraud, and FedEx argued the subcontractor had no
right to rely on the manager’s statement. Id. at 481. The court, viewing the facts in the light most
favorable to Wieber, held that a jury “reasonably could have found that, even if a more sophisticated
party would not have relied on [the manager]’s statement, [Wieber] — who appeared to rely solely
on FedEx’s guidance to understand FedEx’s policies regarding [Wieber]’s rights to sell their
proprietary interests and FedEx’s termination procedures — were justified in so relying on [the
manager]’s statement.” Id. at 484.
The relative sophistication of the parties, and accordingly, the justifiableness of Clauses’
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reliance on Columbia’s representation falls in between Coy, Vasquez-Lopez, and Weiber. The
Clauses are less sophisticated as relates to their reliance than was the mortgage company in
Vasquez-Lopez, which not only had significant commercial resources but also was in the specific
business of evaluating the creditworthiness of its loan applicants. But they likely had less
justification to rely on the representation than did Weiber in his case, who relied on a representation
that was contrary to existing policy and regarded an active contract, through the direct word of his
general contractor.
Coy is most apt, as the Clauses’ Loan Agreement represented an arm’s-length transaction,
and the Clauses were at least familiar, if not experienced, with real estate, lending, development, and
construction processes. By the Clauses’ own description, the parties shared a long project history.
However, unlike the seller in Coy, which, due to the short time it owned the motel, had only a limited
ability to ensure the accuracy of its representation, Columbia had no such limitation on its ability to
gauge SHB’s creditworthiness or capitalization, indeed, the Clauses allege Columbia withheld such
information from them under cover of trade secret. Thus, the Clauses, unlike the buyer in Coy,
would have less reason to believe the representation in question was a statement of mere opinion.
Additionally, the Clauses, much like the buyer in Coy, failed to heed publically available records
highly relevant to their own ability to pay back their loan. The Clauses reference that very
information in their complaint. (Compl. ¶ 25) (stating “one look at U.S. Bankruptcy Court records
. . . would have revealed that all three SHB principals filed for and were granted Chapter 7
bankruptcy protection . . . ” and pointing to “Oregon Secretary of State business records” and
“Oregon Construction Contractors Board” records).
The Clauses acknowledge they retain “core knowledge” about the construction field but note
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they have been in a “semi-retired” state for the past eight years, and therefore relied on Columbia as
their “expert” in construction loan matters. (Pls.’ Resp. Br. (ECF No. 22), at 31.) They also argue
that despite the relevant publically available records about SHB, only Columbia had access to several
“critical” confidential documents including SHB’s business references, bids, and other subcontractor
information. (Compl. ¶ 8.)
These allegations, however, are inadequate to support the justifiable reliance element of the
Clauses’ fraud claim. At most, the allegations explain why the Clauses subjectively felt entitled to
rely on Columbia’s representation alone. The allegations do not, however, show that the Clauses’
reliance was reasonable based on the specific circumstances of the parties’ relationship, as required
under Oregon law.

Still, the court cannot conclude that amendment could not cure these

deficiencies. Based on other allegations in the complaint, surrounding the Clauses’ longstanding
business relationship with Columbia, it is possible the Clauses’ reliance was justified on some other
ground, for example if the parties’ relationship reached beyond that of a typical lender-borrower
arrangement. It may be unusual for a lender to suggest a general contract for a project it merely
finances or to “volunteer to monitor both the credit line and SHB . . . .” Or if, as OPERB and Wieber
suggest, Columbia gave the Clauses reason to rely solely on its financial due diligence, for example,
if it had affirmatively assured them the bank alone was responsible for the credit check or if the
parties had a similar arrangement in the past, then the situation might be different. But Twombly and
Iqbal require plausible, not just possible, claims and, without more, the Clauses fail to allege their
reliance on Columbia’s representation was reasonable based on the facts currently alleged.
3.

Knowledge or Purpose.

Additionally, though Columbia does not argue as much, the Clauses also fail to state that
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Columbia had the requisite knowledge or purpose to commit the intentional tort of fraud. Under
McMullin and U.S. National Bank, the Clauses must allege that Columbia both knew its
representation was false and made the representation with the purpose to, or at least the knowledge
the representation would, mislead the Clauses.
The Complaint alleges only that Columbia, through its agent, White, “knew or should have
known that representation” was false, and “knew that by telling the Clauses . . . about SHB’s credit,
they would rely on [the] representations . . . .” (Compl. ¶¶ 27–28.) Those conclusory allegations are
insufficient to state the requisite intent for fraud for two reasons.
First, the formulaic recitation misstates the elements of fraud. It is not enough that Columbia
“should have known” its representation was false; it actually must have known the representation
was false.
Second, the Clauses provide no factual allegations to support that Columbia in fact knew its
representation about SHB was false. And logically, absent evidence of some ulterior motivation, it
makes little sense for a bank to approve a financially untrustworthy general contractor for a project
when the success of that project, and ipso facto, the likelihood of loan repayment, hinges in large part
on that contractor’s financial stability. Were Columbia to have known that SHB might be financially
unsound, it would have little incentive even to suggest the contractor, let alone to extend funds for
the project. The Clauses provide no allegations that plausibly suggest why Columbia would act so
contrary to its own business interests. Moreover, Columbia could not have known, much less
intended, that its representation would misled the Clauses if the bank itself did not know the
statement was false.
As such, the fraud claim, as stated, falls short of the Twombly and Iqbal standard and fails
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plausibly to give rise to an entitlement to relief above a speculative level.
II.

Second Claim for Relief – Negligence.
The Clauses allege Columbia acted negligently and breached its duty of reasonable care by

“insisting upon using a bankrupt general contractor for a valuable construction and home sale project
or by failing to recognize that all three members of SHB were recently bankrupt,” which caused the
Clauses to suffer “economic injuries-in-fact of $5,000,000.” (Compl. ¶ 36.) That harm, the Clauses
allege, “was a reasonably foreseeable consequence of selecting an uncreditworthy general contractor
like SHB or failing to discover” that SHB or its members were uncreditworthy.” (Compl. ¶ 36.)
To survive a motion to dismiss in Oregon, a plaintiff seeking to recover for negligence must
“allege facts from which a factfinder could determine (1) that defendant’s conduct caused a
foreseeable risk of harm, (2) that the risk is to an interest of a kind that the law protects against
negligent invasion, (3) that defendant’s conduct was unreasonable in light of the risk, (4) that the
conduct was the cause of plaintiff’s harm, and (5) that plaintiff was within the class of persons and
plaintiff’s injury was within the general type of potential incidents and injuries that made defendant’s
conduct negligent.” Graham v. Multnomah Cty., 158 Or. App. 106, 109–110 (1999) (citing Solberg
v. Johnson, 306 Or. 484, 490–91 (1988)).
When the damages alleged in connection with negligence are economic in nature, a plaintiff
must also establish “some duty of the negligent actor to the injured party beyond the common law
duty to exercise reasonable care to prevent foreseeable harm.” Onita Pac. Corp. v. Trustees of
Bronson, 315 Or. 149, 159 (1992) (en banc). This limitation on recovery, termed the “economic loss
doctrine,” rescinds a defendant’s liability for “negligently causing a [plaintiff]’s purely economic loss
without injuring his person or property,” unless that plaintiff “can show some source of duty outside
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the common law of negligence, such as a special relationship or status that imposed a duty on the
defendant beyond the common-law negligence standard.” Harris v. Suniga, 344 Or. 301, 308 (2008)
(internal alteration and citation omitted). For purposes of the economic loss doctrine, “economic
losses” are characterized as “financial losses such as indebtedness incurred and return of monies
paid, as distinguished from damages for injury to person or property.” Onita Pac. Corp., 315 Or.
at 159 n.6; see e.g., Harris, 344 Or. at 310 (holding economic loss doctrine did not apply because
defendant’s negligence caused building dry rot damage, which was not solely economic damage).
If the economic loss doctrine applies, to recover, a plaintiff must “show the existence of a
special relationship in which the defendant had some obligation to pursue the plaintiff’s economic
interests.” Roberts v. Fearey, 162 Or. App. 546, 550 (1999) (citing Conway v. Pacific University,
324 Or. 231, 237 (1996). Whether such a relationship exists depends on “the nature of the parties’
relationship and compare[s] that relationship to other relationships in which the law imposes a duty
on parties to conduct themselves reasonably, so as to protect the other parties to the relationship.”
Onita Pac. Corp., 315 Or. at 160. Supporting factors include: “(1) One party relinquishes control
over matters, usually financial, and entrusts them to the other party; (2) The party with control is
authorized to exercise independent judgment; (3) in order to further the other party’s interests; and
(4) The relationship either is, or resembles, other relationships in which the law imposes a duty on
parties to conduct themselves reasonably, so as to protect the other parties to the relationship.”
Hettle v. Constr. Contractors Bd., 260 Or. App. 135, 147 (2013) (internal alterations omitted)
(quoting Bell v. PERB, 239 Or. App. 239, 249–50 (2010), rev. den., 350 Or. 230 (2011)).
Illustrative is Onita, in which a defendant-seller, one party of many to a complex property
sale transaction, represented to the plaintiff- buyer, that certain deeds would be released to the buyer
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as soon as payment was made. Id. at 154. The subsequent contract documenting the transaction,
however, contained no such representation, and instead provided that the deeds would be released
only upon resale. Id. The buyer later sued for negligent misrepresentation and sought only economic
damages. Id. at 155. The Oregon Court of Appeals rejected the claim, noting that although
professional or contractual relationships in which one party is “acting to further the economic
interests of a “client,” may “give rise to a tort duty to exercise reasonable care on behalf of another’s
interests[,]” “adversarial parties negotiating at arm’s length to further their own economic interests”
owe one another no such duty. Id. at 160–61. “[A]llowing recovery for negligent misrepresentations
made in the bargaining process would undermine the law of contracts, especially rules of law
concerning written contracts.”

Id. at 162.

Therefore, the court held that “in arms-length

negotiations, economic losses arising from a negligent misrepresentation are not actionable.” Id. at
161–62.
Under Oregon law, absent special circumstances, loan contracts represent arm’s-length
transactions, and creditor-debtor relationships do not impose a fiduciary or higher standard of care.
Uptown Heights Assocs. Ltd. P’ship v. Seafirst Corp., 320 Or. 638, 650 (1995); see also Hogan v.
NW Tr. Servs., Inc., No. 10-6027-HO, 2010 WL 1872990, at *9 (D. Or. May 7, 2010), aff’d, 441 F.
App’x 490 (9th Cir. 2011) (explaining “long-held Oregon legal principles that, arms-length banking
and loan transactions do not constitute a special or fiduciary relationship”). “To establish a fiduciary
relationship there must be some standard of care [additional and] apart from th[at] imposed by a loan
agreement.” Hogan, 2010 WL 1872990, at *9 (citing Uptown Heights Assocs. Ltd. P’ship, 320 Or.
at 650.)
The Oregon Supreme Court examined the relationship between borrower and lender in
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Uptown Heights Assocs. Ltd. P’ship, and concluded even a “special relationship of trust and
confidence” between a borrower and a bank, including a bank’s “aggressive sales tactics” or
“assurances to [a borrower] that [the bank] want[s] [the borrower] to succeed]” and that the bank
“would work with [the borrower] to make [a] project a success,” are insufficient to trigger a
heightened standard of care independent of contractual duties imposed by a loan agreement. Uptown
Heights Assocs. Ltd. P’ship, 320 Or. at 648–50. The court did, however, suggest that “parties’ . .
. past course of dealing [if it is] itself of a fiduciary nature,” in theory could suggest a higher,
fiduciary standard of care on the part of a lending bank. Id. at 650.
The Oregon Court of Appeals, too, has considered the borrower-lender relationship,
addressing a lender’s common law duty of reasonable care to disburse funds in conjunction with a
construction loan. Thormahlen v. Citizens Sav. & Loan, 73 Or. App. 230, 233 (1985). The court
discussed the “majority rule” that
no duty is imposed upon a lender of a construction loan to exercise reasonable care
in its inspection of the borrower’s premises, even where the borrower pays the
lender’s inspection fee, unless the lender voluntarily undertakes to perform such
inspection on behalf of and for the benefit of the borrower. . . . Because the lender
may exercise its independent right of inspection for its exclusive benefit, and thus
incur no liability to the borrower for its negligent inspection, the burden is on the
borrower, seeking to impose liability, to prove the lender’s voluntary assumption of
activities beyond those traditionally associated with the normal role of a money
lender.
Id. The court therefore held that a construction lender had no duty to inspect the construction work
before disbursing funds, primarily because “inspections by construction lenders to determine the
percentage of completion of the work before disbursing funds are undertaken to ensure that the
lender’s security is protected adequately, not to provide technical assistance to the borrower . . . .”
Id. at 240. “[I]n the absence of the lender[] agreeing to go beyond its ordinary function in making
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inspections, the borrower must look elsewhere for the protection it desires.” Id. at 240–41.
The economic loss doctrine applies here. With respect to their negligent misrepresentation
claim, the Clauses seek only “economic injuries-in-fact of $5,000,000,” which comprises legal costs,
costs to finish the partially-constructed homes to prepare for sale, appraised monetary loss from
being forced to sell the homes at bulk and below market value. (Compl. ¶¶ 22, 36, 38.) Unlike the
physical property damage in Harris, the damages the Clauses’ allege, like the indebtedness,
additional monies owed, and loss of appraised market value contemplated in Onita, are economic
in nature. Though the Clauses seek “noneconomic damages for pain and suffering” in conjunction
with their fraud claim, they do not include such damages in their prayer for relief on their negligence
claim. (Compl. ¶ 38.)
Even if the Clauses had included those non-economic damages, which allegedly stem from
Robert Claus having to perform some of the construction himself and anxiety from the financial loss,
in conjunction with their negligence claim, those damages are too attenuated to bring their claim
outside of the economic loss doctrine. The Oregon Court of Appeals has held “mental distress”
damages are not recoverable in a negligence action alleging no physical injury, reasoning,
it is difficult to imagine a circumstance in which damage to any property does not
directly, naturally and predictably result in some emotional upset. Unless some other
line is drawn, as we believe there must be as a policy matter, neither the quality of
a defendant’s conduct nor the predictability of distress as a result of property damage
alone or together form a basis for an award of compensatory damages for emotional
distress.
Meyer v. 4-D Insulation Co., 60 Or. App. 70, 74 (1982). Though this case arises in a slightly
different context, the Meyer court’s reasoning applies here as well. Moreover, here, unlike in Meyer,
there is no alleged property damage, only economic damage. Therefore, here, there are even less

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grounds to render the claim outside of the economic loss doctrine sphere.
Because the doctrine applies, to recover on their negligent representation claim, the Clauses
must show the existence of a special relationship in which Columbia had some obligation to pursue
the Clauses’ economic interests, independent of the Loan Agreement. They fail to do so.
Under the requisite Hettle factors, first, it does not appear the Clauses relinquished control
over their financial matters. To the contrary, second, the Clauses at all relevant times maintained
the authority to exercise their independent judgment in negotiating and entering into the Loan
Agreement. Though they apparently gave up control of the builder vetting process, that decision was
made of their own accord, and they retained the authority either to conduct their own evaluation of
SHB or pull out of the loan if they disagreed with the recommendation to choose SHB. Third, the
allegations do not support that Columbia assumed any particular duty to further the Clauses’ interests
beyond that of a typical financial lender. Rather, like the defendant-lender in Onita, Uptown
Heights, and Thormahlen, Columbia acted as an adversarial party negotiating at arm’s length to
further the bank’s own economic interests. Fourth, this relationship imposes only the typical duty
to act reasonably, nothing more.
In their Response to the Motion, the Clauses provide extensive information related to their
past relationship with Columbia, (see Defs.’ Resp. Br. at 3–7, 32–34, 39–40), but none supports the
type of special relationship required to allow economic recovery for a negligent representation. The
Clauses note their “long and productive” general “banking history,” their personal friendship with
Columbia’s predecessor organization’s commercial loan officer, and that Columbia and its
predecessors have “participated in [] many of [the Clauses’] community efforts” and “loaned several
millions of dollars” to the Clauses “over the years for a variety of projects including . . . construction
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financing, lines of credit, business loans, short term financing, long term property financing,
oversight, review and monitoring.” (Defs.’ Resp. Br. at 3–4.) They also argue that because
Columbia was in charge of the “change work orders,” that is, because Columbia had control over
whether to allow “change[s] in the original set of [development] plans,” it could “modify liabilities”
or approve cost increases. (Defs.’ Resp. Br. at 13.)
These allegations do not appear in the Clauses’ complaint, however, and therefore cannot be
relied upon to support a negligent representation claim in their complaint. But even if they were
included in the complaint, these facts suggest only that the longstanding relationship between the
Clauses and Columbia was one of a typical borrower and lender. Regardless of whether the
longevity of the relationship or the Clauses’ personal ties to bank employees led the Clauses to
believe their connection to Columbia was in some way different than their connection to other
lenders, under Uptown Heights, even that “special relationship of trust and confidence” did not
impose a heightened duty on Columbia.
As to the Clauses’ change work order argument, even assuming the Clauses are correct that
such an arrangement is uncommon between lender and borrower, and thus indicative of a special
relationship, the Clauses do not provide any information as to why or how Columbia came to have
such control over the work orders. Moreover, under Thomahlen, in which the lender in a
construction loan agreement undertook financial disbursements and work inspections, even a
lender’s substantive participation in construction or development activities is not enough to impose
a heightened duty of care.
The Clauses cite Reynolds v. Schrock, 197 Or. App. 564 (2005), rev’d, 341 Or. 338 (2006),
to argue Columbia was “participating and directing, becoming part of the process.” (Defs.’ Resp.
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Br. at 14.) However, reliance on Reynolds is misplaced. First, the case is factually inapposite.
Reynolds centered on whether the attorney had an independent fiduciary duty to his client’s business
partner. Reynolds, 197 Or. App. at 568. Here, Columbia’s attorney’s duty is not at issue. Second,
the Oregon Supreme Court later reversed the case on related grounds. See Reynolds v. Schrock, 341
Or. 338, 353–54 (2006).
Finally, the Clauses argue that even if their connection to Columbia does not constitute a
special relationship under Oregon law, it may under federal law. However, under the Supreme
Court’s Erie doctrine, when hearing state law claims, “federal courts sitting in diversity apply state
substantive law . . . .” Gasperini v. Ctr. for Humanities, Inc., 518 U.S. 415, 427 (1996). Therefore,
it is Oregon state substantive law that governs the Clauses’ claims.
Still, as Uptown Heights and Thormahlen suggest, if the Clauses can allege facts sufficient
to support that their past course of dealings with Columbia or its predecessors somehow established
that the bank voluntarily assumed activities or duties above those traditionally associated with the
normal role of a financial lender, they may be able to remedy the aforementioned deficiencies.
However, even granting the Clauses’ response the requisite liberal construction and benefit of any
doubt, they currently fail to state that Columbia went beyond its ordinary function as a financial
lender. Accordingly, their negligent representation claim fails under the economic loss doctrine and
is dismissed.
III.

Third Claim for Relief – Breach of Contract.
Finally, the Clauses allege Columbia breached the parties’ Loan Agreement by wrongly

exercising the foreclosure rights provided therein. They interpret the Agreement as “provid[ing]
relief from breach due to liens or encumbrances on the Subdivision lots if a genuine dispute existed
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regarding the validity of the lien or encumbrance.” (Compl ¶ 38.) The Clauses accept that they
“were in breach due to a combination of [the] erroneous [writ] and SHB[’s] failure to pay their
subcontractors,” but contend that these encumbrances constituted “genuine dispute[s]” sufficient to
preclude Columbia from foreclosing under the Agreement. (Id.)
Columbia argues the Clauses fail to state such a claim for two reasons. First, it agrees that
the Loan Agreement provides the Clauses with relief from foreclosure stemming from genuine, good
faith disputes, but asserts that the Clauses failed to substantially perform the requirements to trigger
that provision. Second, Columbia contends the loan’s maturation on October 8, 2014, independently
justified its subsequent foreclosure.
To state a claim for breach of contract under Oregon law, a plaintiff must establish not only
the opposing party’s nonperformance of a duty under the contract, but also substantial “performance
of the contract on his [or her] own part . . . .” Huszar v. Certified Realty Co., 266 Or. 614, 620
(1973).
Under the Loan Agreement, any “creditor or forfeiture proceeding[]” against the loan’s
collateral constitutes a default event. (Agreement at 6.) Specifically, “[c]ommencement of
foreclosure or forfeiture proceedings . . . against any collateral securing the loan” or “garnishment
of any of Borrower’s accounts, including deposit accounts, with Lender” triggers default. (Id.) In
the event of default, the Agreement affords Columbia the right, among other remedies, to
“[a]ccelerate maturity on the . . . indebtedness and demand payment of all sums due. . . ; [b]ring an
action on the . . . indebtedness; [or f]oreclose Lender’s . . . Deed of Trust . . . on the Property in any
manner available under law . . . .” (Id.) However, default does
not apply if there is a good faith dispute by Borrower as to the validity or
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reasonableness of the claim which is the basis of the . . . proceeding and if Borrower
gives Lender written notice of the creditor or forfeiture proceeding and deposits with
Lender monies or a surety bond for the creditor or forfeiture proceeding, in an
amount determined by Lender, in its sole discretion, as being an adequate reserve
bond for the dispute.
(Id.)
Based on the information currently before the court, it is unclear when exactly Columbia
initiated foreclosure. According to the Complaint, Columbia foreclosed on the loan through the state
court action initiated by the unpaid subcontractors. The subcontractors filed suit in mid-September
2014, but it is unclear when Columbia asserted its foreclosure claims against the Clauses. It is
therefore possible that Columbia foreclosed before the October 8, 2014 maturation date. That the
maturation date has since passed cannot retroactively ratify premature foreclosure. Moreover, the
Clauses also allege that Columbia “froze[]” the loan and refused to make disbursements sometime
after the writ was filed on August 22, 2014, more than a month before the loan matured. If Columbia
did so before the maturation date, that too would constitute material breach on its part. Thus, the
October 8, 2014 maturation of the loan alone does not support dismissing the breach of contract
claim.
Columbia’s other proffered basis for dismissal fares better. The Clauses fail to state a legally
cognizable claim because under the terms of the Agreement, Columbia was within its express,
contractual right to foreclose from the time the first subcontractor filed its lien in July 2014.
Columbia’s foreclosure right was then independently triggered again in August 2014 when the writ
of garnishment was filed, albeit erroneously. Both of those events constituted default under the
contract and, therefore, justified Columbia’s initiation of foreclosure proceedings.
Even if, as the Clauses argue, the erroneous writ or the subcontractor liens constituted good
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faith disputes, the Clauses were required under the Agreement both to give Columbia written notice
of the disputes and to deposit funds or bonds with Columbia, deemed adequate in the bank’s sole
discretion, to cover the disputes. That Columbia actually knew about the disputes did not excuse the
Agreement’s written notice requirement. Nothing in the complaint demonstrates the Clauses either
provided written notice of the disputes or deposited reserve funds with Columbia. Absent
allegations that the Clauses did so, Columbia was under no duty to forbear foreclosure.
Unless the Clauses can demonstrate they provided the notice and deposited with Columbia
sufficient funds as required by the Agreement or can provide a legally sufficient justification for their
breach, both the subcontractor liens and the writ, regardless of whether either qualified as a good
faith dispute under the meaning of the contract, constituted default events that justified Columbia’s
accelerated foreclosure. Accordingly, the breach of contract claim as currently pleaded is dismissed.
IV.

Leave to Amend.
If the court dismisses a complaint, it must then decide whether to grant leave to amend.

Leave to amend should be granted with “extreme liberality.” Eminence Capital, LLC. v. Aspeon,
Inc., 316 F.3d 1048, 1051 (9th Cir.2003). Ninth Circuit repeatedly has held that dismissal without
leave to amend is improper, even if no request to amend the pleading was made, unless it is clear that
the defective pleading cannot possibly be cured by the allegation of additional facts. Snell v.
Cleveland, Inc., 316 F.3d 822, 828 n.6 (9th Cir. 2002) (citing Lee v. City of Los Angeles, 250 F.3d
668, 692 (9th Cir. 2001)); Lopez v. Smith, 203 F.3d 1122, 1130–31 (9th Cir. 2000).
Here, the court finds leave to amend is appropriate on all of the Clauses’ claims because it
is possible the Clauses may be able to cure the aforementioned deficiencies in their pleading by
alleging certain additional facts. Those facts must add detail regarding what, when, where, and how
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Columbia represented SHB was creditworthy and adequately capitalized, under the requirements of
Rule 9. The Clauses also must plead factual allegations to support that Columbia knew that
representation was false and that the Clauses’ reliance on that representation was reasonable. With
respect to their negligence claim, the Clauses must plead facts showing that they shared a special
relationship with Columbia, independent of the parties’ relationship as borrower and lender and of
their past course of dealings. Finally, as to the breach of contract claim, because it appears the
Clauses were in default of the Agreement, the Clauses either must allege they complied with the
contract’s notice and deposit provisions or they must provide some other basis for contractual
recovery.
Conclusion
For the reasons stated above, Columbia’s motion to strike, ECF No. 24, and motion to
dismiss, ECF No. 14, are GRANTED. However, the dismissal is without prejudice and with leave
to amend. Accordingly, the Clauses may file an amended complaint repleading their claims, to cure
the deficiencies stated above, within 30 days of this Opinion and Order.
DATED this 17th day of April, 2018.

/s/ John V. Acosta
JOHN V. ACOSTA
United States Magistrate Judge

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