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Claus v. Columbia State Bank

United States District Court, D. Oregon, Portland Division

April 17, 2018





         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 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]


         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 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 builder[3] 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 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 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 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 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' 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 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).

         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 ...

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