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LRY, LLC v. Lake County

United States District Court, D. Oregon, Medford Division

October 25, 2018

LRY, LLC; FR, LLC, Plaintiffs,

          OPINION & ORDER


         This matter comes before the Court on a Motion to Dismiss filed by Defendant Bruce Addington and Defendant Cornerstone Industrial Minerals Corporation (collectively, “Cornerstone Defendants”). ECF No. 80. Cornerstone Defendants also urge the Court to decline the exercise of supplemental jurisdiction over Plaintiffs' state law claims. Finally, Cornerstone Defendants move to strike certain factual allegations from the Third Amended Complaint. For the reasons discussed below, the motions are DENIED.


         The following factual summary is taken from the Third Amended Complaint (“TAC”). ECF No. 66.

         Plaintiff LRY, LLC (“LRY”) is an Oregon limited liability company with its principal place of business in Lakeview, Oregon. LRY operated a local railroad line connecting Lakeview, Oregon and Perez, California. As part of its operations, LRY leased approximately 55 miles of railway track from Defendant Lake County, Oregon (“the County”). A further section of track in Northern California was leased from Union Pacific Railroad Company. The leased section located in Oregon was known as the Lakeview Branch and the agreement between LRY and the County was memorialized in the Lake County Lease and Operating Agreement (the “Lease”), which was signed by LRY and the County on November 3, 2010. During the negotiation and drafting of the Lease, LRY was represented by attorney John D. Heffner (“Heffner”) and his associates.

         The Surface Transportation Board (“STB”) is a federal agency with regulatory authority over railroads. The STB granted LRY an exemption to operate the Lakeview Branch pursuant to the Lease. Heffner also represented LRY in seeking STB approval.

         The Lakeview Branch was generally in poor condition and there were a number of disputes between LRY and the County over the cost of necessary repairs. The State of Oregon offered grants through a program called ConnectOregon, which would help to defray the cost of those repairs. LRY, with the assistance of the County, applied for and received four ConnectOregon grants totaling more than $2 million for the improvement of the Lakeview Branch. In order to qualify for the ConnectOregon grants, LRY and the County agreed to extend the period of the Lease through December 31, 2035.

         The ConnectOregon grants were provided with a requirement that the recipient pay a percentage of matching funds for the project. The County has provided the matching funds for two of the four grants, but LRY was required to pay $140, 000 to match funds for one of the remaining grants. In addition to those funds, Plaintiff FR, LLC (“FR”) has loaned more than $500, 000 to LRY to finance additional repairs, with the expectation that it would recoup the loaned funds over the life of the Lease.

         LRY served a number of industrial clients in Lake County, including Defendant Cornerstone Industrial Minerals Corporation (“Cornerstone”), which operates a perlite mine. Defendant Bruce Addington (“Addington”) is the owner and president of Cornerstone. Cornerstone Defendants were unsatisfied with LRY's rates and other aspects of LRY's service.

         In 2016, LRY secured contractual rights to handle traffic for a new industrial client, Red Rock Biofuels. The Red Rock contract was expected to return annual profits of $400, 000 for LRY. In November 2016, the County sent a letter to LRY demanding a copy of LRY's contract with Red Rock Biofuels.

         In late 2016 through early 2017, Cornerstone Defendants and the County retained a consulting firm to carry out an inspection of the Lakeview Branch and LRY's operations, without LRY's involvement. Also in late 2016, Cornerstone Defendants retained Heffner as their attorney. As discussed above, Heffner had previously represented LRY and was responsible for the negotiation and drafting of the Lease between LRY and the County. In January 2017, Heffner, acting on behalf of Cornerstone Defendants, corresponded with the County's attorney concerning interpretation of the Lease and how an ambiguity in the Lease could be used to LRY's detriment. In April 2017, Heffner contacted the County's attorney several more times on behalf of Cornerstone Defendants. These emails communicated Cornerstone Defendants' dissatisfaction with LRY's operations and advised the County on how to most efficiently proceed with terminating the Lease.

         Heffner did not inform LRY that he was now representing a party adverse to LRY's interests, nor did Heffner seek informed written consent from LRY.

         On April 12, 2017, the County sent LRY a letter terminating the Lease without cause, effective April 30, 2017. At the time of the termination, LRY had invested a considerable sum in ballast and railroad ties for use in upgrading and repairing the Lakeview Branch. These materials, and all other LRY property, had to be relocated at a cost of more than $150, 000. Additionally, federal regulations require that interstate railroads operate continually. In order to prevent a stoppage of interstate commerce, LRY was forced to continue operating the Lakeview Branch at its expense until a new carrier was approved by the STB.

         Shortly after the termination of the Lease, Heffner, again acting on behalf of Cornerstone Defendants, advised the County's attorney that the County “has the ability to provide service in its own right so it could subcontract to Bruce [Addington] as of May 1, [2017]. That might simplify things.” On June 22, 2017, Goose Lake Railway (“Goose Lake”) submitted a proposal to take over operating the Lakeview Branch from LRY. Goose Lake is owned by Addington and non-party Toby Van Altvorst. Addington is also the president of Goose Lake. On July 27, 2017, Addington wrote to the County to urge the County to move more quickly in finding a replacement for LRY, saying “Please hurry! This is painful.” The County ultimately did select Goose Lake as LRY's successor in operating the Lakeview Branch. LRY alleges that the County and Cornerstone Defendants will benefit from FR and LRY's investments in the Lakeview Branch, as well as in taking over the Red Rock contract.


         A complaint must contain a “short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a). A court may grant a motion to dismiss for failure to state a claim only when there is no cognizable legal theory to support the stated claim, or when the complaint does not allege enough facts to support a facially plausible claim for relief. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). In considering whether the complaint is sufficient, the court will take as true all material factual allegations and construe them in the light most favorable to the plaintiff. NL Indus., Inc. v. Kaplan, 792 F.2d 896, 898 (9th Cir. 1986). The court must draw all reasonable inferences from the factual allegations in the plaintiff's favor. Newcal Indus. v. Ikon Office Solution, 513 F.3d 1038, 1043 n.2 (9th Cir. 2008). The court need not credit legal conclusions or “threadbare recitals of the elements of a cause of action.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Twombly, 550 U.S. at 555).


         With respect to Cornerstone Defendants, Plaintiffs assert Oregon state law claims for unjust enrichment; tortious interference with business relationships or expectations; tortious interference with contracts; tortious interference with economic relations; and intentional interference with prospective economic advantage.[1] Cornerstone Defendants move to dismiss for failure to state a claim. Cornerstone Defendants also urge the Court to decline the exercise of supplemental jurisdiction over the state law claims. Finally, Cornerstone Defendants move to strike Plaintiffs' allegations concerning the actions of Heffner, who served as attorney to both LRY and Cornerstone Defendants.

         I. Failure to State a Claim

         A. The “Interference” Claims

         Plaintiffs bring a battery of “interference” claims against Cornerstone Defendants for their role in the termination of the Lease. In terms of necessary ...

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