Red Lion Hotels Franchising Inc v. First Capital Real Estate Investments LLC et al

Filing 28

ORDER STRIKING DEFENDANTS' FIRST, SECOND, FOURTH, AND FIFTH AFFIRMATIVE DEFENSES. Denying 20 Plaintiff's Motion to Partially Dismiss Defendants' Affirmative Defenses. Signed by Judge Rosanna Malouf Peterson. (SK, Case Administrator)

1
2
FILED IN THE
U.S. DISTRICT COURT
EASTERN DISTRICT OF WASHINGTON

3
UNITED STATES DISTRICT COURT

4

SEAN F. MCAVOY, CLERK

EASTERN DISTRICT OF WASHINGTON

5
6

May 22, 2018

RED LION HOTELS
FRANCHISING, INC.,

NO: 2:17-CV-145-RMP

7
Plaintiff,
8
v.

ORDER STRIKING DEFENDANTS’
FIRST, SECOND, FOURTH, AND
FIFTH AFFIRMATIVE DEFENSES

9
10
11
12
13

FIRST CAPITAL REAL ESTATE
INVESTMENTS, LLC, a California
limited liability company; MR.
SUNEET SINGAL and MRS.
MAJIQUE LADNIER, individually
and as the marital community
comprised thereof,
Defendants.

14
15

BEFORE THE COURT is Plaintiff’s Partial Motion to Dismiss Defendants’

16

Affirmative Defenses, ECF No. 20. Plaintiff moves to dismiss Defendants’ first,

17

second, fourth, and fifth affirmative defenses. See ECF No. 20. The Court has

18

reviewed the pleadings and the record, and is fully informed.

19
20
21

BACKGROUND
Plaintiff Red Lion Hotels Franchising, Inc., brings this breach of contract suit
against Defendants to recover amounts under three contracts of guaranty for
ORDER STRIKING DEFENDANTS’ FIRST, SECOND, FOURTH, AND FIFTH
AFFIRMATIVE DEFENSES ~ 1

1

payments allegedly owed by three entities under franchise license agreements

2

(“FLAs”) made with Plaintiff. ECF No. 1. Plaintiff alleges that the three franchise

3

entities in question are in default of amounts owed to Plaintiff under their FLAs. Id.

4

Plaintiff alleges that Defendant First Capital Real Estate Investments, LLC, is the

5

managing member of the three franchise entities. Id., ¶ 3.3. Plaintiff further alleges

6

that the named Defendants, as the principals behind the franchise entities, signed the

7

guaranty contracts that Plaintiff alleges have been breached. Id., ¶ 3.5.

8

The Court has subject matter jurisdiction over this matter pursuant 28 U.S.C.

9

§ 1332 based on the diversity of the parties and the amount in controversy. Plaintiff

10

is a corporation licensed in Washington. ECF No. 1, ¶ 1.1. Defendant First Capital

11

Real Estate Investments, LLC, is a foreign limited liability company. Id., ¶ 1.2.

12

Defendants Suneet Singal and Majique Ladnier reside in California. Id., ¶ 1.3. The

13

amount in controversy is $1,265,220.53, which exceeds the statutory requirement of

14

$75,000. Id., ¶¶ 4.6, 4.12, 4.18.

15
16

DISCUSSION
In its motion to dismiss several of Defendants’ affirmative defenses, Plaintiff

17

argues that four of the five asserted affirmatives defenses are not legally sustainable.

18

ECF No. 20 at 5. Plaintiff brings this motion pursuant to Federal Rule of Civil

19

Procedure 12(c), a motion for judgment on the pleadings. See id. at 9.

20
21

“The Court notes that a plaintiff's motion for judgment on the pleadings shall
not be granted unless all of the defenses raised in the answer are legally
ORDER STRIKING DEFENDANTS’ FIRST, SECOND, FOURTH, AND FIFTH
AFFIRMATIVE DEFENSES ~ 2

1

insufficient.” Burns v. Consol. Amusement Co., 182 F.R.D. 609, 611 (D. Haw.

2

1998) (emphasis in original) (citing Fed. R. Civ. P. 12(c)). Instead, “if one or more

3

of the defenses are viable, plaintiff's motion should be brought as a motion to strike

4

within [21] days after service of the answer.” Id. (citing Fed. R. Civ. P. 12(f)). The

5

court may also act on its own to strike from a pleading an insufficient defense. Fed.

6

R. Civ. P. 12(f).

7

Plaintiff does not argue that all of Defendants’ affirmative defenses are

8

insufficient as a matter of law. Therefore, the Court will construe Plaintiff’s motion

9

as a motion to strike Defendants’ first, second, fourth, and fifth affirmative defenses

10
11

pursuant to Fed. R. Civ. P. 12(f).
Defendants filed their answer on May 19, 2017. See ECF No. 9. Plaintiff

12

filed its motion for dismissal of Defendants’ affirmative defenses, which the Court

13

construes as a motion to strike, on February 20, 2018. See ECF No. 20. To comply

14

with Rule 12(f), Plaintiff needed to file its motion by June 9, 2017. See Fed. R. Civ.

15

P. 12(f). Plaintiff delayed eight months in filing its motion.

16

However, Defendants also did not respond timely to Plaintiff’s motion.

17

According to LR 7.1(b), counsel in a civil case has 21 days after the filing of a

18

dispositive motion to file a response. “The failure to comply with the requirements

19

of LR 7.1(a) or (b) may be deemed consent to the entry of an Order adverse to the

20

party who violates these rules.” LR 7.1(d).

21
ORDER STRIKING DEFENDANTS’ FIRST, SECOND, FOURTH, AND FIFTH
AFFIRMATIVE DEFENSES ~ 3

1

Although both parties have failed to follow the relevant procedural rules, Fed.

2

R. Civ. P. 12(f) authorizes the Court to act on its own to strike from a pleading an

3

insufficient defense.

4

Legal Standard for Striking Affirmative Defense

5

Federal Rule of Civil Procedure 12(f) provides that “[t]he court may strike

6

from a pleading an insufficient defense or any redundant, immaterial, impertinent, or

7

scandalous matter.” A defense may include both denials and affirmative defenses.

8

Defense, Black’s Law Dictionary (10th ed. 2014); see also Fed. R. Civ. P. 8. A

9

responding party must make general or specific denials to the substance of the

10

allegations asserted against it by an opposing party. Fed. R. Civ. P. 8(b). A

11

responding party also “must affirmatively state any avoidance or affirmative

12

defense.” Fed. R. Civ. P. 8(c).

13

Federal Rule of Civil Procedure 8(c) defines whether the procedural pleading

14

of an affirmative defense is “sufficient.” Wyshak v. City Nat’l Bank, 607 F.2d 824,

15

827 (9th Cir. 1979). Rule 8(b) requires a party responding to a pleading to “state in

16

short and plain terms its defenses to each claim asserted against it.” Fed. R. Civ. P.

17

8(b)(1)(A). Rule 8(c) states that “a party must affirmatively state any avoidance or

18

affirmative defense,” including such defenses as laches and violations of a statute of

19

limitations. Fed. R. Civ. P. 8(c). “Of course, affirmative defenses, like all

20

pleadings, must also satisfy Rule 11.” In re Washington Mut., Inc. Secs., Derivative

21

& ERISA Litig., 08-MD-1919 MJP, 2011 WL 1158387, at *1 (W.D. Wash. Mar. 25,
ORDER STRIKING DEFENDANTS’ FIRST, SECOND, FOURTH, AND FIFTH
AFFIRMATIVE DEFENSES ~ 4

1

2011) (striking certain affirmative defenses). Federal Rule of Civil Procedure 11

2

requires all pleadings to be presented for a proper purpose; warranted by existing

3

law or by a nonfrivolous argument for extending, modifying, or reversing existing

4

law or for establishing new law; and supported or likely to be supported by

5

evidence. Fed. R. Civ. P. 11(b).

6

Following the Supreme Court decisions in Bell Atlantic Corp. v. Twombly,

7

550 U.S. 544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662 (2009), courts were left

8

with a heightened pleading standard: “While a plaintiff need not provide detailed

9

factual allegations, he does need to allege the grounds for entitlement to relief

10

beyond mere labels and conclusions.” See Barnes v. AT & T Pension Ben. Plan-

11

Nonbargained Program, 718 F. Supp. 2d 1167, 1171 (N.D. Cal. 2010) (applying the

12

heightened pleading standard to affirmative defenses). Courts are in disagreement

13

about whether or not affirmative defenses are subject to the heightened standard.

14

Although the court in Barnes v. AT & T Pension Ben. Plan-Nonbargained Program

15

applied the heightened standard, see 718 F. Supp. 2d at 1171, numerous other courts

16

within the Ninth Circuit have held that the heightened standard should not apply to

17

affirmative defenses. See e.g., Rockwell Automation, Inc. v. Beckhoff Automation,

18

LLC, 23 F. Supp. 3d 1236, 1241-42 (D. Nev. 2014) (holding that an affirmative

19

defense must identify the legal theory upon which it rests but need not assert facts

20

making it plausible). The common thread throughout this line of cases is the Ninth

21

Circuit standard from Wyshak v. City Nat. Bank that “[t]he key to determining the
ORDER STRIKING DEFENDANTS’ FIRST, SECOND, FOURTH, AND FIFTH
AFFIRMATIVE DEFENSES ~ 5

1

sufficiency of pleading an affirmative defense is whether it gives plaintiff fair notice

2

of the defense.” Wyshak, 607 F.2d at 827 (citing Conley v. Gibson, 355 U.S. 41, 47-

3

48 (1957)).

4

Pursuant to Fed. R. Civ. P. 15(a), if a court finds that a defense is inadequately

5

pled, “[i]n the absence of prejudice to the opposing party, leave to amend should be

6

freely given.” Wyshak, 607 F.2d at 826-27 (citing Foman v. Davis, 371 U.S. 178,

7

182 (1962), and Howey v. United States, 481 F.2d 1187, 1190 (9th Cir. 1973)).

8

Plaintiff argues that the following four of Defendants’ five asserted

9

affirmative defenses should be stricken. See ECF No. 20. Defendants’ first

10

affirmative defense states that Defendants’ obligations under the relevant FLAs were

11

satisfied and/or discharged. ECF No. 9 at 6-7. Defendants’ second affirmative

12

defense states that “Plaintiff failed to mitigate its damages stemming from the

13

franchisees/licensees’ failure to perform their obligations under the relevant FLAs.”

14

ECF No. 9 at 7. Defendants’ fourth affirmative defense states that “Plaintiff’s

15

claims are barred in full or part by its violation of its duties under RCW 19.100 et

16

seq.” ECF No. 9 at 7. Defendants’ fifth affirmative defense states that the action

17

should be stayed pending the completion of arbitration of the disputes by Plaintiff

18

and the franchisees/licensees. ECF No. 9 at 7.

19

Principles Underlying Guaranty Agreements

20
21

The common law of guaranty contracts defines a “guaranty” as an
“undertaking or promise on the part of one person which is collateral to a primary or
ORDER STRIKING DEFENDANTS’ FIRST, SECOND, FOURTH, AND FIFTH
AFFIRMATIVE DEFENSES ~ 6

1

principal obligation on the part of another, and which binds the obligor to

2

performance in the event of nonperformance by such other, the latter being bound to

3

perform primarily.” In re Bond Issuance of Greater Wenatchee Reg’l Events Ctr.

4

Pub. Facilities Dist., 287 P.3d 567, 575 (Wash. 2012) (quoting Robey v. Walton

5

Lumber Co., 135 P.2d 95, 101 (Wash. 1943)). “A contract of guaranty, being a

6

collateral engagement for the performance of an undertaking of another, imports the

7

existence of two different obligations, one being that of the principal debtor and the

8

other that of the guarantor.” Wilson Court Ltd. P’ship v. Tony Maroni’S, 952 P.2d

9

590, 598 (Wash. 1998) (quoting Robey, 135 P.2d at 101-02). “The debtor is not a

10

party to the guaranty, and the guarantor is not a party to the principal obligation.”

11

Robey, 135 P.2d at 102. The undertaking of a primary obligation is independent of

12

the promise of the guaranty, “and the responsibilities which are imposed by the

13

contract of guaranty differ from those which are created by the contract to which the

14

guaranty is collateral.” Id.

15
16
17
18
19

A guaranty may be either absolute or conditional. In re Bond Issuance, 287
P.3d at 575.
An absolute guaranty is one by which the guarantor unconditionally
promises payment or performance of the principal contract on default
of the principal debtor or obligor, the most usual form of an absolute
guaranty being that of payment. . . . A guaranty is deemed to be absolute
unless its terms import some condition precedent to the liability of the
guarantor.

20
21
ORDER STRIKING DEFENDANTS’ FIRST, SECOND, FOURTH, AND FIFTH
AFFIRMATIVE DEFENSES ~ 7

1

Robey, 135 P.2d at 102 (emphasis added) (citing Sherman, Clay & co. v. Turner, 2

2

P.2d 688 (Wash. 1931) and quoting 28 Corpus Juris 895 (Am. Law Book Co.

3

1922)).1 An absolute guaranty is an “undertaking to pay a debt at maturity or

4

perform an agreement if the principal does not pay or perform.” Century 21 Prods.

5

v. Glacier Sales, 918 P.2d 168, 171 (Wash. 1996) (quoting Joe Heaston Tractor &

6

Implement v. Secs. Acceptance Corp., 243 F.2d 196, 200 (10th Cir. 1957)).

7

Plaintiff provides copies of the guarantee of franchise license agreements

8

signed by Defendants on behalf of each franchise entity. ECF Nos. 1-1, 1-2, and 1-

9

3. Defendants admit that they signed the guaranties. ECF No. 9, ¶ 3.5. Each

10

guarantee agreement states that “the undersigned hereby unconditionally and

11

irrevocably guarantees the following: (i) the full and prompt payment of all sums

12

owed under the [FLA] at the time and according to the terms expressed therein,

13

including, but not limited to, all fees and charges, interest, default interest, and other

14

costs and fees.” ECF Nos. 1-1, 1-2, and 1-3. The agreements also state: “This

15

Guarantee is absolute and unconditional.” Id.

16
17
1

A current reference for guaranty law is 38A C.J.S. Guaranty § 10, which states

18
that “[a] guaranty is absolute if the guarantor promises that the guarantor will
19
20

perform some act to (or for the benefit of) the creditor when the debtor fails to
perform the obligation.”

21
ORDER STRIKING DEFENDANTS’ FIRST, SECOND, FOURTH, AND FIFTH
AFFIRMATIVE DEFENSES ~ 8

1

The Court finds that Defendants expressly entered into an absolute guaranty

2

under the language of the agreements, and that the express language of each

3

guaranty requires Defendants to make full and prompt payments owed under the

4

FLAs upon the failure of the franchise entities to perform under the FLAs.

5

Defendants’ First Affirmative Defense

6

Defendants’ first affirmative defense states that Defendants’ obligations were

7

discharged because the obligations of the franchise entities under the relevant FLAs

8

were satisfied and/or discharged. ECF No. 9 at 6-7. Plaintiff argues that the Court

9

should dismiss this affirmative defense because it relies on the FLAs, which are

10
11

separate contracts. ECF No. 20 at 10.
Under the common law of guaranty contracts, a guarantor becomes liable for

12

the obligations of the principal when the principal fails to pay or perform under an

13

agreement. See Century 21 Prods., 918 P.2d at 171. Defendants have alleged that

14

no default exists. See ECF No. 9.

15

The Court finds that Defendants’ first affirmative defense alleging that

16

Defendants are not liable because the franchise entities have satisfied their

17

obligations is a general denial regarding the substance of Plaintiff’s allegations,

18

rather than an affirmative defense. See Fed. R. Civ. P. 8. Therefore, the Court

19

strikes Defendants’ first affirmative defense without prejudice. If Defendants seek

20

to assert as an affirmative defense that Defendants are not liable because the

21

franchise entities have satisfied their obligations, Defendants may amend their
ORDER STRIKING DEFENDANTS’ FIRST, SECOND, FOURTH, AND FIFTH
AFFIRMATIVE DEFENSES ~ 9

1

pleading with specific facts to support their assertions. See Wyshak, 607 F.2d at

2

826-27. Any amendment must comply with the Federal Rules of Civil Procedure.

3

See id.

4

Second Affirmative Defense

5

Defendants’ second affirmative defense states that “Plaintiff failed to mitigate

6

its damages stemming from the franchisees/licensees’ failure to perform their

7

obligations under the relevant FLAs.” Id. at 7. Plaintiff argues that Defendants may

8

not escape liability by relying upon the FLAs, which Plaintiff asserts are separate

9

contracts between Red Lion and franchise entities that are not parties to this lawsuit.

10

ECF No. 20 at 10.

11

Because Defendants expressly entered into an absolute guaranty under the

12

language of the guaranty agreements, their obligation is not conditioned upon the

13

performance of Plaintiff under the FLAs. See Robey, 135 P.2d at 102 (“An absolute

14

guaranty is one by which the guarantor unconditionally promises payment or

15

performance of the principal contract on default of the principal debtor or obligor . .

16

. .” (emphasis in original)). Therefore, the Court strikes Defendants’ second

17

affirmative defense, and grants Defendants leave to amend in the absence of

18

prejudice to Plaintiff.

19

Defendants’ Fourth Affirmative Defense

20
21

Defendants’ fourth affirmative defense states that “Plaintiff’s claims are
barred in full or part by its violation of its duties under RCW 19.100 et seq.” ECF
ORDER STRIKING DEFENDANTS’ FIRST, SECOND, FOURTH, AND FIFTH
AFFIRMATIVE DEFENSES ~ 10

1

No. 9 at 7. RCW 19.100 et seq is Washington’s Franchise Investment Protection

2

Act (“FIPA”). FIPA expressly defines “franchisor” and “franchisee,” but does not

3

address the rights of guarantors. See RCW 19.100 et seq. FIPA’s aim is to protect

4

franchisees through a comprehensive scheme for regulating franchising in

5

Washington. See Dep’t of Labor & Indus. v. Lyons Enters., Inc., 374 P.3d 1097,

6

1102 (Wash. 2016).

7

Plaintiff argues that Defendants do not have standing to allege this affirmative

8

defense under FIPA because FIPA provides the right to recover only for franchisors

9

and franchisees. ECF No. 20 at 14-16. Plaintiff argues that Defendants, for the

10

purpose of this lawsuit, are independent guarantors not covered by FIPA. Id.

11

Because this lawsuit relates specifically to the guaranty contracts entered into

12

by Plaintiff and Defendants, the Court finds that Defendants are guarantors without

13

standing under FIPA in the context of this lawsuit. Therefore, the Court strikes

14

Defendants’ fourth affirmative defense, and grants Defendants leave to amend in the

15

absence of prejudice to Plaintiff.

16

Defendants’ Fifth Affirmative Defense

17

Defendants’ fifth affirmative defense states that the action should be stayed

18

pending the completion of arbitration of the disputes by Plaintiff and the

19

franchisees/licensees. ECF No. 9 at 7. Plaintiff argues that Defendants again rely

20

on the franchise entities’ FLAs, which Plaintiff asserts are contracts independent of

21

the guarantee agreements at issue in this lawsuit. ECF No. 20 at 16.
ORDER STRIKING DEFENDANTS’ FIRST, SECOND, FOURTH, AND FIFTH
AFFIRMATIVE DEFENSES ~ 11

1

Plaintiff argues that the parties in this matter are not bound by any arbitration

2

clauses in the FLAs. Id. at 16-17. Plaintiff further argues that a stay, if granted,

3

would frustrate the purpose of the guaranty contracts. Id. at 17.

4

Defendants are not asserting arbitration between the parties to this action as an

5

affirmative defense. However, Defendants allege that it would be premature for the

6

Court to hear this matter pending the completion of arbitration between Plaintiff and

7

the franchise entities involved in the dispute. ECF No. 9 at 7.

8

The dispute between Plaintiff and the relevant franchise entities is not before

9

the Court, and the Court finds that any arbitration that may take place between non-

10

parties to this lawsuit is not a viable affirmative defense in this lawsuit. If

11

Defendants seek a stay, Defendants may move for a stay, pursuant to the relevant

12

procedural rules. Therefore, the Court strikes Defendants’ fifth alleged affirmative

13

defense, and grants Defendants leave to amend in the absence of prejudice to

14

Plaintiff.

15

In conclusion, the Court denies Plaintiff’s Motion to Dismiss Defendants’

16

Affirmative Defenses, which the Court construes as a motion to strike pursuant to

17

Fed. R. Civ. P. 12(f), because the motion was untimely. However, the Court finds

18

that Defendants have not sufficiently pled their first, second, fourth, and fifth

19

affirmative defenses. See ECF No. 9 at 6-7. Therefore, the Court strikes

20

Defendants’ first, second, fourth, and fifth affirmative defenses.

21
ORDER STRIKING DEFENDANTS’ FIRST, SECOND, FOURTH, AND FIFTH
AFFIRMATIVE DEFENSES ~ 12

1

Accordingly, IT IS HEREBY ORDERED:

2

1. Plaintiff’s Motion to Partially Dismiss Defendants’ Affirmative Defenses,

3
4

ECF No. 20, is DENIED.
2. Defendants’ first, second, fourth, and fifth affirmative defenses are

5

STRICKEN.

6

3. Defendants’ deadline to amend their answer is June 12, 2018.

7

The District Court Clerk is directed to enter this Order and provide copies to

8
9

counsel.
DATED May 22, 2018.

10
11

s/ Rosanna Malouf Peterson
ROSANNA MALOUF PETERSON
United States District Judge

12
13
14
15
16
17
18
19
20
21
ORDER STRIKING DEFENDANTS’ FIRST, SECOND, FOURTH, AND FIFTH
AFFIRMATIVE DEFENSES ~ 13