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Claus v. Columbia State Bank

United States District Court, D. Oregon, Portland Division

October 30, 2019





         Plaintiffs Robert James Claus and Susan Claus (collectively, the "Clauses") seek money damages from their former lender, Defendant Columbia State Bank ("Columbia"), for allegedly misrepresenting the capitalization and creditworthiness of Signature Home Builders ("SHB") and for breaching parties' construction loan contract. Before the court are Columbia's Motion to Dismiss and the Clauses' Motion to Accept the Amended Complaint. (Def. Mot. to Dismiss Pl. First Am. Compl, ECF No. 73 ("Def. Mot."); Mot. to Accept the Am. Compl, ECF No. 77.)[1]

         Factual Background

         Since the mid-1980s, the Clauses have engaged with Columbia and its predecessor organizations in "a continuous and extensive banking relationship" as "private banking customers." (Am. Compl, ECF No. 73 ("Am. Compl") ¶ 4.) Due to concerns over costs related to their declining health, the Clauses undertook a development project as an investment that could pay for medical and other expenses. (Id. ¶¶ 7, 8.)

         In late 2011, the Clauses sought a loan from West Coast Bank ("West"), a predecessor to Columbia, to develop eight lots in their "McFall subdivision." (Id. ¶ 8.) As part of the loan process, West required the Clauses to sell their Oregon ranch property before issuing the loan, and the Clauses were subject to "an exhaustive review of [their] real estate portfolio and financial situation." (Id. ¶¶ 11, 12.) As alleged by the Clauses, West was aware of the Clauses' ongoing health issues and "voluntarily committed to administering the financial management of the building process." (Id., ¶ 9.) Specifically, West promised it "would monitor the progress of the construction and see that the contractor, subcontractors, and suppliers" were paid, and for doing so, the "Clauses paid $18, 000 to [West's successor, ] Columbia[, ] for administrating and processing the line of credit over the life of the project, with such administration to include builder oversight, disbursement of funds, and contract approval." (Am. Compl ¶¶ 9, 24.) Moreover, West went so far as to create the initial plan for the McFall subdivision. (Id., ¶ 10.) In April 2013, while the Clauses were still securing the loan from West, Columbia purchased West and continued the Clauses' appraisal process. (Id. ¶¶ 13, 15.)

         In October 2013, Columbia issued the loan, in the amount of $900, 000, secured by a deed of trust on the property. (Decl. of Stanley Cruse, ECF No. 15 ("Cruse Decl"), Ex. 3 at 1.) Among other restrictions, the Loan Agreement specified that only two lots could be built at a time. (Id. ¶ 23.) The Clauses allege Columbia orally promised to assume responsibility for "obtaining the invoices and proof of payment" to SHB and all subcontractors, and its disbursement system, AccuDraw, to oversee the project, disbursement of funds, and contract approval. (Am. Compl. ¶ 24.) But, the terms of the Construction Loan Agreement did not reflect Columbia's promised involvement. (Cruse Decl., Ex. 1.) Instead the Loan Agreement indicated that the Clauses were responsible for managing the project and submitting contractors, plans, builder contracts, and requests for the money disbursements. (Id. at 3.) The Loan Agreement, however, did provide that at its option Columbia could "directly pay the General Contractor . . . sums due . . . [and the Clauses] appoint [Columbia] as the attorney-in-fact to make such payments." (Cruse Decl., Ex 1 at 3.) Moreover, the Loan Agreement indicates it was fully integrated at the time of signing and amendments could be submitted only in writing with parties' consent. (Id. at 7.) The Loan Agreement required that Columbia would have "approved a list of all contractors employed," but no provision of the Loan Agreement provides a selection procedure for a general contractor. (Id. at 2.) Under the Loan Agreement, a creditor or forfeiture proceeding would constitute an event of default unless "there is a good faith dispute" as to the "validity or reasonableness of the claim which is the basis of the . . . proceeding." (Cruse Decl., Ex. 1 at 6.) Additionally, the Loan Agreement contained a maturity acceleration provision in the event the Clauses defaulted. (Id. at 6.)[2]

         As the Clauses allege, Columbia made representations about the Clauses' prior relationship with Columbia's predecessor and about SHB. With respect to the relationship between the Clauses and Columbia, officials at Columbia, who were also former employees at West, assured the Clauses the same services previously provided by West still could be expected through Columbia. (Am. Compl. ¶ 14.) Specifically, Columbia officials told the Clauses it was the "same community bank with a different name," and "nothing had changed with respect to the relationship between the bank and the Clauses." (Id. ¶¶ 14, 15.) However, the Clauses do not allege any assurances were made relating to any specific prior promise. Notably, a predecessor to Columbia, Commercial Bank, performed services for the Clauses that were outside the scope of a normal banking relationship between the 1980s through 1995, such as "property inspections, loan budgeting, project management and investment advice." (Am. Compl. ¶ 5.)

         Columbia "mandated" SHB serve as the general contractor on the project, though it was not the Clauses' preferred general contractor, because SHB was a "turnkey builder."[3] (Id. ¶ 16.) Kelly White ("White"), a senior loan officer at Columbia, and Juan Mendoza ("Mendoza"), another loan officer at Columbia, allegedly made various misrepresentations about SHB's credit and capitalization. (Id. ¶ 17.)

         Specifically, White and Mendoza made five representations regarding SHB between June and October 2013. (Id. ¶ 17.) First, White assured the Clauses "Columbia's commercial loan department had conducted an extensive review of SHB and its three members, as well as its projects, business history, and creditworthiness." (Id. ¶ 17.) Second, White assured the Clauses there were no issues regarding SHB that "would constitute 'red flags.'" (Id. ¶ 17.) Third, both White and Mendoza represented that Columbia had "thoroughly checked out SHB with the Oregon Secretary of State's office," and confirmed SHB "was appropriately licensed and bonded with the State of Oregon" and with the Oregon Construction Contractors Board ("CCB"). (Id. ¶ 17.) Fourth, White asserted "SHB and its three principals had good credit" and had no outstanding judgments or liens against SHB. (Id. ¶ 17.) Lastly, both White and Mendoza represented that "SHB was a full-service builder, meaning that it was licensed and had the employees necessary to complete all the work on a home without having to hire subcontractors." (Id. ¶ 17.) SHB, however, was not a full-service builder, but rather a "broker-builder," which meant the principals borrowed money from the company "to hire out all the physical work to subcontractors." (Id. ¶ 19.)

         Because of the representations made by Mendoza and White, the Clauses relied on the evaluation of SHB's creditworthiness and capitalization. (Am. Compl. ¶ 18.) However, when such representations were made, SHB's members was either "in or had recently emerged from Chapter 7 bankruptcy proceedings," and the SHB member assigned to supervise the development project was not listed as a member on the contractor's license with CCB. (Id. ¶ 19.) Furthermore, White and Mendoza made the representations notwithstanding various negative financial documents from SHB, such as a December 31, 2012 balance sheet that reported a deficit equity of $62, 041 and that did not reconcile with an S corporation tax form filed with IRS. (Id. ¶ 20.) The Clauses allege they would not have chosen to proceed with SHB had they known of its precarious financial position, but Columbia claimed its evaluation of SHB was a trade secret or confidential when the Clauses requested it for review. (Id. ¶¶ 18, 21.)

         Although the sale of the Clauses' ranch had not yet closed and the loan was not yet ready, White nevertheless advised the Clauses to proceed with development of Lot 6. (Id. ¶ 25.) As a result of various delays on part of SHB and SHB's lack of payment for necessary building permits, the Clauses paid more in permit fees and interest payments than if SHB had met its contractual obligations. (Id. ¶¶25, 26.)

         Thereafter, the Clauses allege Columbia failed to diligently administer the project, as promised, in the following ways: (1) Columbia made disbursements without first ensuring SHB provided adequate supporting documentation, (2) failed to get lien releases from SHB, (3) allowed SHB to list and sell Lot 6 at less than fair market value and without an agreement made by the Clauses, and (4) did not intervene when SHB commenced the development process on Lot 3, despite the Loan Agreement requiring no more than two houses could be developed at a time. (Id. ¶¶ 27, 28, 29.)

         In June 2014, SHB left Lots 3, 4, and 5 unfinished in the McFall subdivision. (Am. Compl. ¶ 30.) Though White attempted to find a new general contractor, Columbia could not secure a replacement because it refused to supply a list of subcontractors and suppliers used by SHB to the replacing contractor. (Id. ¶¶ 30, 31.)

         In July 2014, Columbia notified the Clauses that Parr Lumber, a supplier for SHB, issued a notice of lien against Lots 1, 2, 3, 4, 5, 8, and 9 for supplies delivered and not paid for. (Id. ¶ 32.) Over the following months, other suppliers and subcontractors filed liens against the properties. (Id. ¶ 32.) Because of oversights and errors, a default judgment and a writ of garnishment entered against the Clauses on August 22, 2014, in the Circuit Court of the State of Oregon for the County of Gilliam. (Id. ¶¶ 33, 34.) Columbia ultimately filed its own liens on Lots 4 and 5, but Columbia was still named as a defendant in the foreclosure proceedings brought by other subcontractors in September of 2014. (Id. ¶ 36.) Although the Clauses allege they timely informed Columbia of the proceedings, the Clauses do not allege that Columbia received written notice of the proceedings. (Id.)

         In October 2014, the CCB provided the Clauses with copies of paid and unpaid invoices from SHB's suppliers and subcontractors, which showed "Columbia incorrectly allocated funds" when disbursing payments to SHB, and that "SHB had kept more than $85, 000 by failing to pay its suppliers and subcontractors." (Am. Compl. ¶ 37.) That same month, White informed the Clauses there was a "strong possibility" the liens and default judgments could be resolved if the remaining liens could be paid or dismissed. (Am. Compl. ¶ 38.) However, the Clauses' loan file was transferred to a different Columbia official in November 2014, and Columbia rejected the Clauses' offer to pay $150, 000 to satisfy the valid liens. (Id. ¶ 39.)

         Though the liens and forfeiture proceedings were allegedly disputed in good faith, Columbia froze the Clauses' line of credit and did not request the Clauses provide a surety bond. (Id., ¶ 39; Cruse Decl, Ex. 3 at 2.) Consequently, the Clauses used the remaining funds, combined with a private loan, to complete the unfinished homes on Lots 4 and 5. (Am. Compl. ¶ 41.)

         In March 2015, the Clauses, Columbia, and various lienholders agreed to use the proceeds from the sale of Lot Four to pay off the remaining liens. (Am. Compl., ¶ 43.) The proceeds of selling Lot 4 allowed the Clauses to pay off the participating lienholders, and they were able to post a "bond in the amount of $203, 558 to remove SHB's liens on Lots 4 and 5." (Id. ¶ 43.) The Clauses allege they suffered significant economic harm as a result of Columbia's pursuit of the foreclosure proceedings. (Id. ¶48.)

         The Clauses filed suit against Columbia in the Circuit Court of the State of Oregon for the County of Washington on June 22, 2016. (Notice of Removal, ECF No. 1.) On July 26, 2016, Columbia removed the case to federal court on the basis of diversity jurisdiction, 28 U.S.C. § 1332. (Id.) On April 17, 2018, the court granted Columbia's first motion to dismiss with leave to amend the claim. (Op. and Order, ECF No. 65 ("Op. and Order") at 33.) The Clauses filed their amended complaint on September 17, 2018, which included three new claims: negligent misrepresentation, breach of the obligation of good faith and fair dealing, and promissory estoppel, in addition to the original claims of breach of contract and fraud. (Am. Compl. at 12-14, 17.)[4] Subsequently, the Clauses moved the court to accept the amended complaint. (Mot. to Accept First Am. Compl., ECF No. 77.)

         Preliminary Procedural Matters

         As part of Columbia's Motion to Dismiss, Columbia moves the court to consider materials outside of the pleadings in support of their motion. In general, material 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 Capital Corp., 50 F.3d 1493, 1496 (9th Cir. 1995). There are two exceptions to this rule. First, a court may consider "material which is properly submitted to the court as part of the complaint," and second, under Federal Rule of Evidence ("FRE") 201, the court may take judicial notice of "matters of public record." Lee v. Cty of Los Angeles, 240 F.3d 754, 774 (9th Cir. 2001, overruled on other grounds by Galbraith v. Cty of Santa Clara, 307 F.3d 1119, 1125-26 (9th Cir. 2002). A document is not considered "outside" the complaint if the complaint specifically refers to the document, its authenticity is not questioned, and the plaintiffs complaint necessarily relies on it. Swartz v. KPMG LLP, 476 F.3d 756, 763 (9th Cir. 2007) (per curiam).

         The materials Columbia has submitted in support of its motion are properly before the court. The Loan Agreement and the accompanying documents are not outside of the pleadings because the Clauses' complaint specifically refers to and necessarily relies on them, and neither party challenges their authenticity. Accordingly, the court finds that the Loan Agreement and accompanying documents are not outside the complaint, Columbia's motion should be treated as a motion to dismiss rather than for summary judgment.

         Legal Standard

         I. Motion to Dismiss for Failure to State a Claim

         Federal Rule of Civil Procedure ("Rule") 8 requires that complaints in federal court consist of "a short and plain statement of the claim showing that the pleader is entitled to relief[.]" FED. R. CIV. P. 8(a)(2). Pleadings need not contain detailed factual allegations, but "labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do[.]" Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). However, a claim "may proceed even if it strikes a savvy judge that actual proof of [necessary] facts is improbable," and the plaintiff is unlikely to succeed on the merits. Id. at 556.

         Although a plaintiff need not allege detailed facts, a motion to dismiss under Rule 12(b)(6) will be granted if the pleading fails to provide "enough facts to state a claim to relief that is plausible on its face." Twombly, 550 U.S. 554, 570 (2007). A claim rises above the speculative level "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662 (2009). The court is required to "assume the veracity" of all well-pleaded factual allegations and draw all "reasonable inferences in favor of the nonmoving party." Holden v. Hagopian, 978 F.2d 1115, 1118 (9th Cir. 1992). Thus, "for a complaint to survive a motion to dismiss, the non-conclusory 'factual content,' and reasonable inferences from that content, must be plausibly suggestive of a claim entitling the plaintiff to relief." Moss v. United States Secret Serv., 572 F.3d 962, 969 (9th Cir. 2009) (citation omitted).

         Moreover, pro se pleadings must be "liberally construed." Allen v. Gold Country Casino, 464 F.3d 1044, 1048 (9th Cir. 2006). Before dismissing a pro se litigant's complaint, the court must give the pro se litigant leave to amend his complaint unless it is "absolutely clear that the deficiencies of the complaint cannot be cured by amendment." Weilburg v. Shapiro, 488 F.3d 1202, 1205 (9th Cir. 2007).

         Here, the Clauses' original complaint was drafted by an attorney who has since withdrawn from the case. Thereafter, they filed their motion to accept first amended complaint pro se, However, the "amended complaint was prepared mostly by attorneys that Plaintiffs had hired for the limited purpose." (Mem. in Supp. of Pl. Mot. to Accept First Am. Compl., ECF No. 78 ("Mem. in Supp.") at 1.) Nonetheless, the court will construe the Clauses' motions liberally.

         II. Leave to Amend - Fed.R.Civ.P. 15(a)(2)

         FRCP 15(a) provides that leave to amend "shall be freely given when justice so requires." Segal v. Rogue Pictures, 544 Fed.Appx. 769, 770 (9th Cir. 2013) (citation omitted); Fed.R.Civ.P. 15. The court may, however, deny leave to amend upon consideration of several factors "such as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, [or] futility of amendment." Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir. 2003) (citing Foman v. Davis, 371 U.S. 178 (1962)).


         The court has taken Columbia's Motion to Dismiss and the Clauses' Motion to Accept First Amended Complaint under advisement together, and thus will discuss each in turn. With Columbia's Motion to Dismiss, the court will discuss the amended claims of fraud and breach of contract. Next, the court will discuss the newly asserted claims of negligent misrepresentation, breach of the obligation of good faith and fair dealing, and promissory estoppel.

         I. Fraud

         To establish a claim for fraud under Oregon law, a plaintiff must show: (1) the defendant made a material representation that was false; (2) the defendant knew that the representation was false; (3) the defendant intended the plaintiff to rely on the misrepresentation; (4) the plaintiff justifiably relied on the misrepresentation; and (5) the plaintiff was damaged as a result of that reliance. Horton v. Nelson, 252 Or.App. 611, 616 (2012) (citing Strawn v. Farmers Ins. Co., 350 Or. 336, 352, adh'd to on recons., 350 Or. 521, 256 (2011), cert, den., 565 U.S. 1177 (2012)); see also Knepper v. Brown, 345 Or. 320, 329 (2008) (noting that more recent Oregon cases use the abbreviated five-element list as opposed to the older nine-element list, and that historical references to proximate cause are subsumed in the last element of the abbreviated list). A plaintiff must establish each element of fraud by clear and convincing evidence. Riley Hill Gen. Contractor, Inc. v. Tandy Corp., 303 Or. 390, 392 (1987) (en banc).

         The following elements are in dispute: (1) that the Clauses' reliance was justified; (2) that Columbia knew its representation - that "SHB was a reputable builder that had strong credit and adequate capitalization" - was false; and (3) that Columbia intended to induce the Clauses with the alleged misrepresentation.

         A. Justifiable Reliance

         The Clauses argue their reliance on Columbia's representation regarding SHB's credit and capitalization was justified because of their "longstanding relationship" with Columbia and its predecessors, because Columbia went beyond the typical lender-borrower relationship by overseeing certain financial aspects of the project, and because Columbia's evaluation of their own credit was extensive. (Pl. Resp. at 15.) The Clauses also allege reliance was justified, in part, because Columbia was aware of the Clauses' health status and promised to financially administer the project. (Id. at 14.) In response, Columbia argues the fiduciary duties the Clauses reference have long since ceased, and the conclusory statements made by the Clauses do not support any justifiable reliance on behalf of the Clauses. (Def. Reply 14.)

         "Whether reliance is justified requires consideration of the totality of the parties' circumstances and conduct, which includes whether the party claiming reliance took reasonable precautions to safeguard his or her own interests." Masood v. Safeco Ins. Co. of Oregon, 275 Or.App. 315, 332, 365 P.3d 540 (2015) (citation omitted) (internal quotations omitted). Finding justifiable reliance therefore "hinges on the extent to which the plaintiff had a duty to investigate the truth of the statement." Murphy v. Allstate Ins. Co., 251 Or.App. 316, 324 (2012). Oregon law has focused on two criteria to make this determination: first, the ability of a party to obtain information, i. e. the "difficulty that a plaintiff would encounter in conducting an independent investigation of the truthfulness of the statement;" and second, the relative sophistication of the parties - that is, "whether the parties are equally capable of evaluating certain facts about the statements." Id. at 325. Furthermore, parties can be equally sophisticated when the parties have prior experience with the particular subject matter, even if the respective experiences vary. See Id. at 317-19, 326 (finding that a jury could conclude that the parties were equally sophisticated when plaintiff, a long-time construction worker, relied on statements by defendant-claims adjuster that permits were not needed to complete restoration work).

         Here, though Columbia refused to disclose documentation related its evaluation of SHB, the Clauses do not allege they would have encountered difficulty in obtaining the public information regarding SHB or that they tried to obtain such information at all. Moreover, the longstanding history of the parties, and their multiple successful dealings in the past, suggest the relative sophistication of the parties is near equal with respect to development projects and selecting contractors. In other words, both parties could equally evaluate certain facts and make informed decisions based on those facts. For example, the Clauses assert that had they known about the financial status of the general contractor, they would have opted to partner with their preferred dealer. This assertion suggests the Clauses are equally capable of evaluating certain facts about Columbia's statements regarding SHB. Conversely, the terms of the Loan Agreement - that Columbia would need to approve the general contractor - suggests Columbia is familiar with development projects enough to evaluate a general contractor.

         However, the poor health of one party, which could adversely affect both the difficulty of conducting an independent investigation of a statement's veracity and the evaluation of material facts, must be taken into account. See Soursby v. Hawkins, 307 Or. 79, 87 (1988) (stating that a real estate purchaser may rely on representations if "discovering the truth would be unreasonably difficult"). The facts alleged in the Amended Complaint do not indicate the Clauses' health or mental state was affected such that their duty to investigate was somehow diminished. On the contrary, the fact the Clauses were able to contract with another contractor and finish the development without Columbia's assessment of a general contractor demonstrates the Clauses were able to act on their duty to protect their own interests without Columbia's evaluation. This undercuts their argument that their reliance on Columbia's representations was justified. Moreover, if true, the promise to provide financial oversight of the project did not alter the Clauses' duty to investigate, as the promise of financial oversight does not explain how the reliance on the selection of SHB was justified. Additionally, merely concluding reliance was justified because a longstanding relationship exists does not address whether a party's duty to investigate was satisfied.

         Finally, the extensiveness of their own credit check has no bearing on the reasonableness of their reliance on Columbia's representations. That the Clauses' credit check was extensive in no way relieves them of their own duty to investigate Columbia's assertions regarding the credit of a third party whom they ultimately hired. Additionally, and as discussed infra, assuming responsibility of the financial oversight of the project does not change the nature of the typical lender-borrower or lender-developer relationship. See Bennett v. Farmers Ins. Co. of Oregon, 332 Or. 138, 161 (2001) (reasoning that a heightened duty is imposed when the relationship, "by its nature, allows one party to exercise judgment on the other party's behalf). Accordingly, because factual support of the Clauses' duty to investigate is lacking, the allegations with respect to the Clauses' justified reliance are not plausible.

         B. Knowledge of Falsity

         Defendant argues that the Clauses have failed to allege facts showing Columbia knew its representation was false, and though the Clauses allege facts that support the falsity of Columbia's representation, the Clauses fail to allege facts showing Columbia knew of this information. (Def. Mot. at 20.) The Clauses argue Columbia's representations - that Columbia conducted an "extensive review" of SHB and that Columbia went through SHB's information with a "fine-tooth comb" similar to the review of the Clauses' finances - support Columbia's knowledge of the falsity of their representation that SHB had strong credit and was adequately capitalized. (Pl. Resp. at 14-15; Am. Compl. ¶¶ 17, 18.) Furthermore, the Clauses argue that "[d]eficit equity, indebtedness, negative gross profit, and negative expenses are not consistent with strong credit and adequate capitalization," and that it is reasonable to infer that Columbia knew that SHB was "a mere shell and not a full-service contractor." (PL Resp. at 16.)

         Specifically, the Amended Complaint alleges that Columbia would have known the falsity of their assertions based on a 2012 balance sheet reporting notes receivable and loans receivable by the owners in the amount of $120, 478 and $141, 533, respectively, and a deficit equity of $62, 041; a negative gross profit and negative expenses report; and that SHB's members were "in or had recently emerged from Chapter [seven] bankruptcy proceedings." (Am. Compl. ¶¶ 19, 20.) Further, the Clauses allege Columbia's agents represented to the Clauses that SHB was a "full-service builder," meaning that it was "licensed and had the employees necessary to complete all the work on a home without having to hire subcontractors;" that "Columbia's commercial loan department had conducted an extensive review of SHB and its three members, as well as projects, business history, and creditworthiness;" and that SHB had strong credit and adequate capitalization. (Am. Compl. ¶¶ 17, 18, 19.)

         Although the substantive elements of a state law fraud claim are determined by state law, those elements still must be pleaded "with particularity." Fed.R.Civ.P. 9(b); Vess v. Ciba-Geigy Corp., USA, 317 F.3d 1097, 1103 (9th Cir. 2003). Knowledge of falsity can be proven by alleging facts that establish the speaker's knowledge of falsity of the representation or the ignorance of its truth. Burgdorf v. Weston, 259 Or.App. 755, 771 (2013).

         A member filing for bankruptcy does not mean the LLC is equally affected. See ORS 63.265(1)-(2)(a)[5]; see also Smith v. Cent. Point Pawn, LLC, 296 Or.App. 341, 347, 438 P.3d 436, 440 (2019) (holding that the summary judgment record contained sufficient evidence to create a triable issue whether the debt incurred by an LLC member also bound the LLC to the same debt); see also In re Woodfleld, 602 B.R. 747, 753 (Bankr. D. Or. 2019) (stating that "Oregon law creates a process of dissociation when a LLC member files a bankruptcy petition ... [and] if a member of a multi-member LLC files a bankruptcy petition, that member ceases to be an LLC member, but retains the right to receive and retain ... the distributions ... and allocations of profits and losses to which the [member] would be entitled") (citation omitted) (internal quotations omitted). Further, a member filing for bankruptcy does not mean that the LLC has dissolved. ORS 63.249(2).[6] But, an LLC can be dissolved when the LLC has no members. ORS 63.621(4). Additionally, the assignment of a membership interest can be in whole or in part, and the assignor of the interest "ceases to be a member with respect to the interest assigned." ORS 63.249 (1), (2), (5).

         The Clauses have not alleged facts to support that SHB, rather than one of its members, was in or recently emerged from bankruptcy proceedings, which could plausibly and negatively affect SHB's credit. At most, the fact that SHB's members filed bankruptcy would inform Columbia only that there was an assignee to part of an interest of the bankrupt member, not that the LLC's financial condition was affected. Moreover, there is no factual support to plausibly infer that the bankruptcy proceedings of the three members had a negative effect on SHB's credit or that the proceedings dissolved the LLC. Though possible that all three members were in bankruptcy proceedings at the same time, effectively leaving the LLC without members and causing its dissolution, the facts alleged do not support the plausibility that the LLC was dissolved at the time Columbia made the representations of SHB's creditworthiness and capitalization. Absent such factual allegations, SHB's members filing for bankruptcy does not support that Columbia knew or was ignorant of any bankruptcy proceedings affecting SHB. It is equally possible that SHB's creditworthiness was still in good standing despite the members' bankruptcy proceedings, or that the LLC had at least one member when Columbia made its representations about SHB's financial condition. Consequently, the Clauses have failed to allege facts supporting the falsity of Columbia's representation of SHB's creditworthiness at the time of the representation or Columbia's knowledge of such falsity.

         Additionally, taking the allegation that Columbia reviewed 2012 financial forms and that SHB was not a "full-service builder" as true, there is not enough factual support that Columbia knew SHB was not adequately capitalized. The capital contributions by the members of an LLC can be either cash, property, services rendered or a promissory note or other obligation to contribute cash, property, or render services. ORS 63.175. When analyzing whether a coiporation was adequately capitalized, Oregon courts have emphasized that "a corporation must have sufficient capital to cover its reasonably anticipated liabilities, measured by the nature and magnitude of its undertaking, the risks attendant to the particular enterprise and normal operating costs associated with its business." Klokke Corp. v. Classic Exposition, Inc., 139 Or.App. 399, 405, 912 P.2d 929, 932-33 (1996).[7] Also, "[b]ecause loans to the corporation do not increase the worth of the corporation or the assets available to conduct its business, they are not part of its capitalization." Id. Lastly, "[t]he sufficiency of capital is determined at the time a corporation is formed and in the beginning of its operation." Stirling-Wanner v. Pocket Novels, Inc., 129 Or.App. 337, 341 (1994).

         Regarding the 2012 financial statements, the Clauses do not allege that Columbia reviewed only the 2012 financial statements, but they allege that in light of the 2012 financial statements, Columbia knew that SHB's credit and capitalization was not in good standing. A single year's balance sheet would not be able to show what contributions an LLC member made at the formation of the LLC, and the reference to loans receivable does not "increase the worth" of SHB or affect the assets available to conduct SHB's business. Thus, the member ...

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