Straitshot Communications Inc et al v. Telekenex Inc et al

Filing 145

ORDER regarding SCR's 85 Motion to Dismiss by Judge Thomas S. Zilly.(RS) Modified on 11/19/2010/cc pro se parties (RS).

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22

UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON AT SEATTLE ) ) ) ) Plaintiff, ) ) v. ) ) TELEKENEX, INC., a Delaware ) corporation, et al., ) ) Defendants. ) _________________________________ ) ) TELEKENEX, INC., a Delaware ) Corporation, ) ) Third-Party Plaintiff, ) ) v. ) ) STRAIGHTSHOT RC, LLC, a Delaware ) limited liability company; et al., ) ) Third-Party Defendants. ) _________________________________ ) STRAIGHTSHOT COMMUNICATIONS INC., a Washington corporation, CASE NO. C10-268Z ORDER

ORDER PAGE -1

01

THIS MATTER comes before the Court on the Motion to Dismiss, docket

02 no. 85, filed by Plaintiff Straightshot RC, L.L.C.'s ("SRC"). Having reviewed 03 the parties' briefing, the Court enters the following Order. 04 05 06 07 08 09 10 I.

Discussion SRC moves to dismiss Defendant Mammoth Networks, L.L.C.'s

("Mammoth") counterclaim and third-party complaint for debt recharacterization (fourth cause of action), arguing that it is not a cognizable claim for relief outside of bankruptcy. SRC also moves to strike the following affirmative defenses in Mammoth's answer as unsupported by any facts: (1) estoppel/waiver (third

11 affirmative defense); (2) failure to mitigate damages (fourth affirmative defense); 12 and (3) failure to protect information (fifth affirmative defense). 13 14 15 16 17

A.

SRC's Motion to Dismiss Mammoth's Debt Recharacterization Claims

Dismissal under Fed. R. Civ. P. 12(b)(6) for failure to state a claim is proper where the complaint fails to state a cognizable legal theory or fails to allege sufficient facts to state a plausible claim for relief. Schroyer v. New Cingular Wireless Servs.,

18 Inc., 622 F.3d 1035, 1041 (9th Cir. 2009). SRC argues that Mammoth's cause of action 19 for "debt recharacterization" is not a cognizable claim for relief in a federal case. 20

Mammoth cites to a number of bankruptcy court opinions holding that, under

21 section 105 of the bankruptcy code (11 U.S.C. § 105(a)), a bankruptcy court has the 22 equitable authority to adjudicate a claim for debt recharacterization. See In re

ORDER PAGE -2

01 Autostyle Plastics, Inc., 269 F.3d 726, 748 (6th Cir. 2001); In re Official Comm. of 02 Unsecured Creditors for Dornier Aviation (North America), Inc., 453 F.3d 225, 233 (4th 03 Cir. 2006). In the Ninth Circuit, however, bankruptcy courts do not have the power to 04 05 06 07 08 09 10

adjudicate a claim for debt recharacterization. In re Pacific Express, Inc., 69 B.R. 112, 115 (B.A.P. 9th Cir. 1986). Mammoth argues that although In re Pacific Express precludes bankruptcy courts in the Ninth Circuit from adjudicating claims for debt recharacterization, it does not preclude this Court from hearing such a claim because this Court has broader equitable powers than a bankruptcy court. In support of this contention, Mammoth relies heavily

11 on a non-bankruptcy district court case from the Eastern District of New York, where 12 the court held that the plaintiff could pursue a claim for debt recharacterization. Gasser 13 v. Infanti Int'l, Inc., 2008 WL 2876531, *8 n.7 (E.D.N.Y 2008). The court in that case 14 adopted the cause of action from the bankruptcy context without discussion or analysis. 15 Id. The Court declines to follow the Gasser decision, and concludes that federal law 16 does not provide for a cause of action for debt recharacterization. Arena Dev. Grp., 17 18 19 20 21 22

L.L.C. v. Naegele Commc'ns, Inc., 2007 WL 2506431, *7 (D. Minn. 2007) ("Declaratory relief for recharacterization of debt to equity and equitable subordination are not cognizable causes of action in federal district court."); Englewood Lending, Inc. v. G&G Coachella Invs., L.L.C., 651 F. Supp. 2d 1141, 1146 (C.D. Cal. 2009) ("Borrowers' authorities show recharacterization is a tool bankruptcy courts use when

ORDER PAGE -3

01 deciding the priority to give certain claims. They do not show it is a claim parties can 02 assert against each other under . . . federal law independent of bankruptcy 03 proceedings."); see also Rubbermaid Inc. v. Robert Bosch Tool Corp., 2010 WL 04 05 06 07 08 09 10

3834410 (C.D. Ill. 2010). In the alternative, Mammoth argues that debt recharacterization is a cognizable claim for relief under Washington state law. There appear to be some states that provide a common law cause of action for debt recharacterization. See James M. Wilton & Stephen Moeller-Sally, Debt Recharacterization under State Law, 62 Bus. Law. 1257, 1268 (2007) (citing Massachusetts and Wisconsin cases recognizing debt

11 recharacterization as a defense to the enforceability of insider loans). Although the 12 Court directed Mammoth to submit supplemental briefing on the viability of a debt 13 recharacterization claim under Washington law, see Minutes, docket no. 129, Mammoth 14 failed to provide any authority in support of such a claim. Instead, Mammoth urges the 15 Court to adopt the standard for debt recharacterization claims applied in Massachusetts 16 and Wisconsin. The Court declines to create a new cause of action that is unsupported 17 18 19 20 21 22

by Washington law. Mammoth's debt recharacterization cause of action is not cognizable under federal law or Washington state law. B. SRC's Motion to Strike Mammoth's Affirmative Defenses

A court may strike from a pleading an "insufficient defense or any redundant, immaterial, impertinent, or scandalous matter." Fed. R. Civ. P. 12(f). A defense is

ORDER PAGE -4

01 insufficient if it is unsupported by any facts that would entitle the defendant to relief. 02 Qarbon.com, Inc. v. eHelp Corp., 315 F. Supp. 2d 1046, 1049 (N.D. Cal. 2004). A 03 reference to a legal doctrine, standing alone, is insufficient notice. Id. If the Court 04 05 06 07 08 09 10

chooses to strike a defense, leave to amend should be freely given so long as there is no prejudice to the opposing party. Wyshak v. City Nat'l Bank, 607 F.2d at 824, 826 (9th Cir. 1979). SRC argues that the Court must strike Mammoth's affirmative defenses of waiver/estoppel, failure to mitigate damages, and failure to protect information because Mammoth has not pled any facts to support these defenses. The Court agrees that

11 Mammoth's answer only raises these defenses in conclusory fashion, without 12 referencing any particular facts. See Answer, docket no. 78 at 10. Mammoth's 13 answer fails to plead sufficient facts to give SRC fair notice of the defenses. 14 II. 15

Conclusion The Court GRANTS SRC's motion to dismiss, docket no. 85. Mammoth's

16 fourth cause of action for debt recharacterization is DISMISSED with prejudice. The 17 18 19 20 21 22

Court further GRANTS SRC's motion to strike, docket no. 85, and STRIKES Mammoth's third, fourth, and fifth affirmative defenses without prejudice. Mammoth has requested leave to amend as to these affirmative defenses, and the Court concludes that SRC will not be prejudiced by an amendment. The Court GRANTS Mammoth's

ORDER PAGE -5

01 request for leave to file an amended answer as to these defenses. Mammoth shall file 02 any amended answer no later than December 13, 2010. 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22

IT IS SO ORDERED. Filed and entered this 19th day of November, 2010.

Thomas S. Zilly United States District Judge

A

ORDER PAGE -6