Onset Financial v. Victor Valley Hospital Acquisition

Filing 32

MEMORANDUM DECISION AND ORDER granting Plaintiff's 21 Motion to Dismiss Counterclaim. Signed by Judge Dale A. Kimball on 4/4/2018. (eat)

_________________________________________________________________________
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF UTAH

ONSET FINANCIAL, INC., a Utah
corporation,

MEMORANDUM DECISION AND
ORDER

Plaintiff,
Case No. 2:17CV01133-DAK-BCW

vs.

Judge Dale A. Kimball

VICTOR VALLEY HOSPITAL
ACQUISITION, INC., a California
corporation,
Defendant.

This matter is before the court on Plaintiff’s Motion to Dismiss counterclaims for failure
to state a claim upon which relief can be granted pursuant to Rule 12(b)(6) of the Federal Rules
of Civil Procedure. The court held a hearing on the motion on March 21, 2018. At the hearing,
Plaintiff was represented by Stephen C. Tingey, and Defendant was represented by Sam Meziani.
The court took the matter under advisement. The court has considered carefully the memoranda
and other materials submitted by the parties, as well as the law and facts relating to the motion.
Now being fully advised, the court issues the following Memorandum Decision and Order.
BACKGROUND
Plaintiff Onset Financial, Inc. (“Onset”) is a Utah corporation with its principal place of
business in Utah. Defendant Victor Valley Hospital Acquisition, Inc. (“Victor Valley”) is a
California corporation with its principal place of business in California. Victor Valley owns and
operates medical facilities in California. Victor Valley borrowed money from Onset through

three lease schedule agreements in connection with a Master Lease Agreement (“Master Lease”).
These transactions were labelled as personal property leases.
In June 2014, Onset sent a proposal letter (“June Proposal”) to Victor Valley dated June
10, 2014, which Victor Valley signed on June 11, 2014. The proposal letter contained three
options at the end of the Base Period: (1) purchase the property for a price not less than 10% and
not greater than 30% of the original property cost; (2) renew the lease; or (3) terminate the lease
by returning all of the property to Onset. On or about August 4, 2014, Victor Valley, as lessee,
executed and delivered to Onset, as lessor, the Master Lease, dated August 4, 2014. In
connection with the Master Lease, Victor Valley executed and delivered to Onset Lease
Schedule No. 001 (“Schedule 1”), dated August 4, 2014, including Amendment No. 1 and
Amendment No. 2 to Schedule 1, dated December 9, 2014 and December 29, 2014, respectively;
and Lease Schedule No. 002 (“Schedule 2”), dated August 15, 2014, including Amendment No.
1 to Schedule 2, dated July 1, 2015.
In October 2014, Onset sent another proposal letter (“October Proposal”) to Victor
Valley dated October 7, 2014. The October Proposal contained three options: (1) renew the
property for a price to be determined by the parties; (2) renew the lease; or (3) terminate the lease
by returning all of the property to Onset. The two parties then executed and entered into a third
schedule in conjunction with the Master Lease: Lease Schedule No. 3 (“Schedule 3”), dated
October 29, 2014, including Amendment No. 1 and Amendment No. 2 to Schedule 3, dated
December 15, 2014 and January 6, 2015, respectively. In connection with each individual
schedule, Victor Valley executed and delivered an Acceptance and Delivery Certificate to Onset.
Paragraph 20(n) of the Master Lease provided that, at the end of the base period, the
schedule would automatically renew for twelve additional months. However, if Victor Valley

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gave written notice to Onset, which was received by Onset at least sixty days before the end of
the base period of any of the schedules, it would have two options: (1) purchase the property for
a price determined by the parties; or (2) terminate the schedule and return the property to Onset.
In order to choose the second option, Paragraph 20(n) required Victor Valley, inter alia, to enter
into a new schedule to lease property that replaced the property listed in the old schedule.
Options (1) and (2) would expire and the schedules would automatically renew if the parties did
not come to an agreement on either option prior to the maturity of the base period; if Victor
Valley failed to give written notice at least 150 days prior to the maturity of the base period; or if
Victor Valley was in default. Additionally, the parties amended the terms of Paragraph 20(n) in
relation to Schedules 1 and 2 but did not make any such amendments in relation to Schedule 3.
At the maturity of the initial twelve-month renewal period, the schedules would continue
in effect for successive periods of six months, with each subject to termination at the maturity of
any such successive six-month renewal period by either party giving thirty-day prior written
notice of termination to the other party. Paragraph 20(n) states that Victor Valley acknowledges
and agrees that it has read and understands the above provisions, and it concludes by stating
Paragraph 20(n) contains the entire agreement and supersedes all prior communications,
representations, and agreements, including proposal letters. Lastly, Paragraph 20(e) contained a
choice-of-law provision declaring that Utah law would govern the transaction.
Victor Valley used the money to finance the purchase of new medical software,
professional services, travel expenses, an electric generator, and construction improvements to its
urgent care facility. Victor Valley purchased these items and services from third party
contractors and vendors. After the initial terms of Schedules 1 and 3 had concluded, Victor
Valley continued to make monthly payments. In September 2017, when Victor Valley

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discovered it was still making payments beyond the initial term, it stopped making such
payments.
DISCUSSION
Onset moves to dismiss Victor Valley’s counterclaims for failure to state a claim upon
which relief can be granted according to Rule 12(b)(6) of the Federal Rules of Civil Procedure.
“To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as
true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678
(2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “[A]ll well-pleaded
factual allegations in the . . . complaint are accepted as true and viewed in the light most
favorable to the nonmoving party.” Moore v. Guthrie, 438 F.3d 1036, 1039 (10th Cir. 2006).
A. Equitable Rescission or Reformation
Victor Valley’s Counterclaim argues in favor of equitably rescinding or reforming the
agreement made between the two parties based on the doctrine of mistake. More specifically,
Victor Valley argues for equitable relief based on unilateral mistake. “When one party’s mistake
of fact is coupled with knowledge of the mistake by the other party or a mistake is produced by .
. . inequitable conduct by the nonerring party, the mistake provides a basis for reformation or
rescission.” Guardian State Bank v. Stangl, 778 P.2d 1, 5 (Utah 1989). In order to “prevail on a
theory of unilateral mistake, ‘the mistake must have occurred notwithstanding the exercise of
ordinary diligence by the party making the mistake.’” Oliphant v. Estate of Brunetti, 64 P.3d
587, 592 (UT App 2002) (quoting John Call Eng’g, Inc. v. Manti City Corp., 743 P.2d 1205,
1209 (Utah 1987). However, “one party to an agreement does not have a duty to ensure that the
other party has a complete and accurate understanding of all terms embodied in a written

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contract. Rather, each party has the burden to read and understand the terms of a contract before .
. . affix[ing] his or her signature to it.” Id.
Victor Valley argues that Onset was aware of its mistake and engaged in inequitable
conduct by (1) sending proposal letters that contained different end-of-term provisions than the
Master Lease and (2) failing to negotiate or explain the automatic renewal provisions in the
Master Lease to Victor Valley after obtaining Victor Valley’s signature on the proposals. On
their face, these pleaded facts fall short of the plausibility standard.
First, Onset alleges that it was not aware of Victor Valley’s mistake due to Victor
Valley’s affirmative actions, and it was under no obligation to explain or ensure Victor Valley’s
understanding of the provisions of the contract. Even though Paragraph 20(n) of the Master
Lease contained more complete end-of-term provisions than the proposals, Victor Valley
affirmatively took steps to have such provisions amended in Schedules 1 and 2. If Victor Valley
wanted to object to the automatic renewal terms, it had the opportunity to negotiate for further
amendments just as it did with Schedules 1 and 2. Additionally, Victor Valley signed each
individual proposal and the Master Lease and even specifically initialed Paragraph 20(n). While
Victor Valley appears to argue it was bound after signing the proposals, the proposals expressly
stated that they were not binding commitments.
Second, the end-of-term provisions in the proposal letters are not entirely inconsistent
with the end-of-term provisions in the Master Lease. Even if they were, proposals generally
serve just as their name suggests—as proposals. It would seem farfetched to categorize having
more complete terms in the final documentation as inequitable conduct. Victor Valley had the
burden to read and understand the terms of the contract. Without some other inequitable conduct,
Victor Valley’s claim of mistake is not legally cognizable. Similarly, as stated above, Victor

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Valley had the opportunity to amend the provisions of Paragraph 20(n), and Onset was under no
duty to ensure Victor Valley understood every provision. Therefore, the alleged facts of
inequitable conduct do not rise to facial plausibility. Accordingly, Victor Valley’s counterclaim
for equitable rescission or reformation, as pleaded, fails as a matter of law.
B. Judgment Declaring the Lease is a Loan
Victor Valley’s Counterclaim seeks a declaratory judgment that the agreement between
the two parties is actually a loan instead of a lease. This, Victor Valley asserts, is pivotal in
defining its obligations under the agreement.
According to the Declaratory Judgment Act, “[i]n a case of actual controversy within its
jurisdiction, . . . any court of the United States . . . may declare the rights and other legal relations
of any interested party seeking such declaration.” 28 U.S.C. § 2201(a). Courts have “the power,
but not the duty, to hear claims for declaratory judgment.” Acuity, A Mut. Ins. Co. v. McGinnis
Homes, LLC, 194 F. Supp. 3d 1204, 1209 (D. Utah 2016) (citation omitted). When considering
such claims or counterclaims, if the court finds that they “merely restate[] an issue already before
the court, ‘[i]t is well settled that such repetitious and unnecessary pleadings should be stricken’”
or dismissed. Maui Jim, Inc. v. SmartBuy Guru Enterprises, No. 1:16 CV 9788, 2018 WL
509960, at *8 (N.D. Ill. Jan. 23, 2018) (citation omitted). And “when a party has mistakenly
designated a defense as a counterclaim,” courts are permitted “to treat [the] counterclaim as an
affirmative defense.” MRSI Int'l, Inc. v. Bluespan, Inc., No. 2:05CV00896 DAK, 2006 WL
2711791, at *2 (D. Utah Sept. 21, 2006) (citing Rayman v. Peoples Savings Corp., 735 F. Supp.
842, 851-53 (N.D. Ill. 1990)).
Victor Valley’s claim for declaratory relief defining the lease as a loan is repetitious and
constitutes an issue already before the court. As its Third Affirmative Defense, Victor Valley

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argues that the lease should be construed as a loan. Thus, the court will treat the counterclaim in
its appropriate form as an affirmative defense. The court will address this affirmative defense as
the case progresses through the various stages of litigation. Accordingly, Victor Valley’s
Counterclaim for a declaratory judgment is dismissed, but this decision does not hinder Victor
Valley’s ability to raise the defense nor give any assessment as to the merits of the defense.
C. California Usury Claim
Victor Valley alleges in its Counterclaim that the automatic-renewal provisions result in
interest rates that violate California usury law. Onset, however, argues that California usury law
is irrelevant because Utah law governs as established in the agreement’s choice-of-law provision.
“To decide the effect of a contractual choice-of-law clause, courts look to the choice-of
law [sic] rules in the forum state.” GRB Enterprises LLC v. JPMorgan Chase Bank, N.A., No.
2:11CV833DAK, 2012 WL 845418, at *3 (D. Utah Mar. 12, 2012) (citing Been v. O.K. Indus.,
495 F.3d 1217, 1236 (10th Cir. 2007)). “Utah courts generally uphold choice-of-law provisions
based on the intent of the contracting parties and a respect of the parties’ right to choose the
governing law for a contract.” GRB Enterprises at *3 (citing Innerlight, Inc. v. Matrix Group,
LLC, 214 P.3d 854, 857-58 (Utah 2009). Under Utah law:
[T]he law of the state chosen by the parties to govern their contractual rights and
duties will be applied unless either (a) the chosen state has no substantial
relationship to the parties or the transaction and there is no other reasonable basis
for the parties' choice or (b) application of the law of the chosen state would be
contrary to a fundamental policy of a state which has a materially greater interest
than the chosen state in the determination of the particular issue which . . . would
be the state of the applicable law in the absence of an effective choice of law by
the parties.
GRB Enterprises at *3 (citing Electrical Distributors, Inc. v. SFR, Inc., 166 F.3d 1074,
1084 (10th Cir.1999)).

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In this case, Onset argues that Utah has a substantial relationship to the case
because Onset is a Utah corporation with its principal place of business in Utah; the
contracts were delivered to Onset in Utah; Onset signed and accepted the contracts in
Utah; all payments were made to Onset or its assignees in Utah; and Onset negotiated the
terms of the contracts on the phone and via email from its office in Utah. Victor Valley
makes essentially the same arguments in favor of California law applying and also claims
all of the goods and services it purchased were in California thereby establishing
California has a greater relationship to the case. However, the court need only find that
Utah has a substantial—not a greater—relationship to the transaction and the parties,
which, in this case, it does.
Victor Valley argues that applying Utah law would be contrary to a fundamental
California public policy. “California courts have discussed the issue whether the state's
prohibition on usury is a fundamental public policy overriding parties' negotiated contractual
choice of law provision.” Palm Ridge, LLC v. Ahlers, No. EDCV0800652SGLOPX, 2008 WL
11339594, at *2 (C.D. Cal. June 23, 2008). The courts “have uniformly enforced contracts
allowing interest rates above the limit under California law where there is shown a substantial
relationship between the contract and the state which is referenced in the choice-of-law
provision.” Id. Because Utah has a substantial relationship to one of the parties and the
transaction, Utah law governs.
CONCLUSION
Based on the above reasoning, Plaintiff’s Motion to Dismiss is GRANTED, and
Defendant’s counterclaims are dismissed pursuant to Federal Rule of Civil Procedure 12(b)(6).

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DATED this 4th day of April, 2018.
BY THE COURT:

__________________________________
Dale A. Kimball,
United States District Judge

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