Opinion
Case No. 3:13-cv-02045-SB
03-10-2017
ELIZABETH RETAIL PROPERTIES, LLC; JUDITH L. ANSTETH JEWELERS, INC.; and JUDITH ARNELL, an individual, Plaintiffs, v. KEYBANK NATIONAL ASSOCIATION, a national banking association, Defendant.
FINDINGS AND RECOMMENDATION
BECKERMAN, Magistrate Judge.
Plaintiffs Judith Arnell ("Mrs. Arnell"), Elizabeth Retail Properties, LLC ("Elizabeth Retail"), and Judith L. Ansteth Jewelers, Inc. ("Ansteth Jewelers") (collectively, "Plaintiffs") bring the present action against Defendant KeyBank National Association ("KeyBank"), alleging claims for defamation and breach of the implied covenant of good faith and fair dealing. KeyBank now moves for summary judgment on each of Plaintiffs' claims. KeyBank also moves to exclude testimony and strike the declaration and report proffered by Plaintiffs' banking expert, John Grogan ("Grogan"), in opposition to its summary judgment motion. The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1332(a). For the reasons explained below, the Court recommends that the district judge grant KeyBank's motion for summary judgment (ECF No. 77), and deny as moot KeyBank's motion to strike (ECF No. 97).
The latter-referenced claim is styled as a claim for bad faith breach of contract. (First Am. Compl. at 8.) The Court treats the claim as one for breach of the duty of good faith and fair dealing based on the supporting allegations. See Elizabeth Retail Props. LLC v. KeyBank Nat'l Ass'n, 83 F. Supp. 3d 972, 978 & 990 (D. Or. 2015). The Court dismissed Plaintiffs' claims for wrongful foreclosure and bad faith foreclosure at the motion to dismiss stage. Id. at 991-92.
BACKGROUND
The following facts are either undisputed or viewed in the light most favorable to Plaintiffs. Mrs. Arnell is the sole owner and stockholder of Ansteth Jewelers, an Oregon S-corporation that operates a jewelry business in Portland's Pearl District. Mrs. Arnell is also the current owner and sole member of Elizabeth Retail, an Oregon limited liability company whose single asset is a commercial property that it leased to Ansteth Jewelers (the "Property"). KeyBank is a national bank with its principal place of business and headquarters located in Cleveland, Ohio.
The Property consists of "two adjoining retail condominium units that were . . . finished as one retail store with no devising wall separating the two units and only one storefront entry serving the two adjoined units." (Street Decl. Ex. 14 at 1.)
In March 2007, Elizabeth Retail refinanced the Property through a loan from KeyBank. The loan was evidenced by a promissory note dated March 23, 2007, and secured by a deed of trust on the Property, an assignment of rents, and commercial guaranties executed by Ansteth Jewelers, Mrs. Arnell, and Charles Arnell ("Mr. Arnell"). Among the provisions of the promissory note was a list of the events of default, any one of which would allow KeyBank to declare the loan immediately due and payable. The list of the events of default included: (1) the borrower's failure to make a payment, (2) the borrower or a guarantor's "commencement of any proceeding under any bankruptcy or insolvency laws," (3) a "material adverse change" in the financial condition of the borrower or KeyBank's belief that "the prospect of payment or performance of" the note was "impaired," and (4) KeyBank's "good faith" belief that it was "insecure." (Thompson Decl. Ex. 11, at 1-2.)
The deed of trust listed three additional events of default, including a "Compliance Default," which is described as the "[f]ailure to comply with any other term, obligation, covenant or condition contained in this Deed of Trust, the Note or in any of the Related Documents," such as the guaranties. (Thompson Decl. Ex. 12, at 5, 8.) The deed of trust set forth a number of rights and remedies that would be available to KeyBank in the event of default, including:
Accelerate Indebtedness. Lender shall have the right at its option without notice to Grantor to declare the entire indebtedness immediately due and payable, including any prepayment penalty which Grantor would be required to pay.
Foreclosure. With respect to all or any part of the Real Property, the Trustee shall have the right to foreclose by notice and sale, and Lender shall have the right to foreclose by judicial foreclosure, in either case in accordance with and to the full extent provided by applicable law. . . .
. . . .
(Thompson Decl. Ex. 12, at 5-6.) The guaranties executed in connection with Elizabeth Retail's loan also provided that, upon KeyBank's request, Ansteth Jewelers, Mrs. Arnell, and Mr. Arnell would provide "financial and credit information in form acceptable to" KeyBank. (Thompson Decl. Exs. 14-16, at 2.)
Attorneys' Fees; Expenses. . . . Whether or not any court action is involved, and to the extent not prohibited by law, all reasonable expenses Lender incurs that in Lender's opinion are necessary at any time for the protection of its interest or the enforcement of its rights shall become part of the indebtedness payable on demand. . . . Expenses covered by this paragraph include . . . the cost of . . . appraisal fees[.]
Also in March 2007, Ansteth Jewelers obtained a $100,000 revolving line of credit from KeyBank. The promissory note, dated March 23, 2007, was secured by commercial guaranties executed by Elizabeth Retail, Mrs. Arnell, and Mr. Arnell. Among other things, the promissory note provided that KeyBank had the right to declare the line of credit immediately due and payable and was "authorized to make an annual (or more frequent) credit review based upon [Ansteth Jewelers'] current financial condition in determining whether to continue the line of credit." (Thompson Decl. Ex. 1, at 1-2; see also Ansteth Jewelers Dep. 103:3-4, stating that KeyBank could "call the line of credit [at] any time"; Elizabeth Retail Dep.134:15-135:1, stating that the line of credit could be called for any reason). The guaranties also provided that, upon KeyBank's request, the guarantors would provide "financial and credit information in form acceptable to" KeyBank. (Thompson Decl. Exs. 4, 6, at 2; Russillo Decl. Ex. 4, at 2.)
Between 2007 and 2010, Plaintiffs never missed a payment on their loans and KeyBank never asked for any "current financials or tax returns." (Judith Arnell Decl. ¶ 4.) During that same time period, Ansteth Jewelers' customers and sales were declining, and it was "subsidiz[ing]" Elizabeth Retail's property insurance, condominium owners' dues, and property taxes, because its $5,000 monthly lease payments were insufficient to service all of Elizabeth Retail's debt. (Elizabeth Retail Dep. 79:19-25, 80:6-13, 83:8-18, 87:18-22, 89:15-20, 90:2-23, 91:5-8, 249:21-250:4, 251:1-14.) At the end of 2010, the balance on Ansteth Jewelers' $100,000 revolving line of credit was $95,157.26.
On January 11, 2011, KeyBank sent a letter to Ansteth Jewelers and Elizabeth Retail, stating that, in accordance with credit documents executed in conjunction with the above-referenced loans, the following information was due for submission as part of an annual review: (1) Current Business Interim Statement; (2) Current Accounts Receivable Aging; (3) Current Accounts Payable Aging; (4) Debt Schedule; (5) 2010 Accountant Prepared Fiscal Year-End Statement and Business Tax Return for Ansteth Jewelers; (6) 2009 Accountant Prepared Fiscal Year-End Statement and Business Tax Return for Ansteth Jewelers; (7) 2010 Business Tax Return for Elizabeth Retail; (8) 2009 Business Tax Return for Elizabeth Retail; (9) Current Personal Financial Statements for each guarantor; (10) 2010 Personal Tax Returns, including all schedules, for each guarantor; and (11) 2009 Personal Tax Returns, including all schedules, for each guarantor. The letter indicated that the financial statements were due by March 11, 2011.
On February 2, 2011, Mr. Arnell filed a voluntary Chapter 7 bankruptcy petition in the United States Bankruptcy Court for the District of Oregon. The schedules accompanying Mr. Arnell's bankruptcy petition disclosed assets of $1,647,109.98 and liabilities of $5,052,872.04. Mr. Arnell's liabilities included $1,936,843.33 in unsecured, nonpriority debts, and "roughly 1.7 [million] of that was related to personal guarantees[.]" (Russillo Decl. Ex. 32, at 1; Charles Arnell Dep. 146:17-21.)
Plaintiffs never provided the financial information requested in KeyBank's initial letter. (Thompson Decl. ¶ 4.2.) Mrs. Arnell did, however, meet with Katherine Holder ("Holder") and Brian Rice ("Rice"), a KeyBank relationship manager and regional president, respectively. During these meetings, Mrs. Arnell was told that KeyBank had concerns about Ansteth Jewelers' line of credit being "stagnant," that KeyBank wanted the line of credit to be paid off, and that KeyBank was concerned that Mr. Arnell had recently filed for bankruptcy protection. (Judith Arnell Decl. ¶¶ 7, 9.)
In April 2011, around the time Mrs. Arnell met with KeyBank's representatives, Plaintiffs' loans were downgraded from "acceptable" to "substandard," meaning KeyBank considered them "criticized assets" and ones that were not adequately "protected by current sound worth and paying capacity of the obligor or of the collateral pledged." (Thompson Decl. ¶ 1.3; Street Decl. ¶ 6.1; Am. Cochran Decl. ¶¶ 5.1-5.2; Judith Arnell Decl. ¶¶ 7, 9.) As a result, Plaintiffs' loans were transferred from KeyBank's Business Banking department to its workout department, Specialized Finance, formerly known as the Asset Recovery Group ("ARG"), which manages criticized assets. Contemporaneous records reveal that KeyBank transferred the loans due to the stagnant line of credit, lack of financial information, poor credit scores, questionable collateral value, and Mr. Arnell's bankruptcy filing. (Street Decl. Ex. 10-11, at 1.) Contemporaneous records also reveal that KeyBank believed that it "probably ha[d] a default" based on Mr. Arnell's commencement of bankruptcy proceedings and his status as a guarantor. (Street Decl. Ex. 11, at 1.)
In a letter dated August 17, 2011, KeyBank's lawyer, Craig Russillo ("Russillo"), formally demanded that Ansteth Jewelers pay off the total amount due under the line of credit within fifteen business days. After retaining an attorney who engaged in discussions with Russillo, Mrs. Arnell elected to pay off Ansteth Jewelers' line of credit in early September 2011. During the pre-payment discussions, Russillo indicated that KeyBank "was not currently declaring a default on any other accounts," but Russillo also "made no representation that [KeyBank] would not declare a default in the future on other accounts" and he never discussed Elizabeth Retail's loan or related documents. (Alterman Decl. ¶¶ 7, 9; Russillo Decl. ¶¶ 4.9-4.11.) Based on the representation that KeyBank was not currently declaring a default on any other accounts, Mrs. Arnell believed that, after paying off Ansteth Jewelers' line of credit, KeyBank would take no further action relating to Elizabeth Retail's loan, so long as she continued to make timely payments. (Judith Arnell Decl. ¶ 15.)
On September 1, 2011, the U.S. Bankruptcy Court entered an order of discharge for Mr. Arnell. (Street Decl. Ex. 17, at 1.)
In November 2011, Sheila Cochran ("Cochran"), a commercial loan workout officer in KeyBank's Specialized Finance Department, contacted Mrs. Arnell and requested an appraisal. Mrs. Arnell agreed to allow an appraiser to access the Property "after the busy Holiday season." (Judith Arnell Decl. ¶ 16.) The following month, December 2011, Cochran spoke with Mrs. Arnell by telephone and reiterated KeyBank's request for tax returns and financial statements. According to Cochran, Mrs. Arnell "was noncommittal," but Mrs. Arnell did state that Ansteth Jewelers "was profitable and that she expected good earnings results for 2011." (Am. Cochran Decl. ¶ 6.2.)
In January 2012, Cochran prepared an asset quality report recommending that Elizabeth Retail be retained as a borrower, even though Elizabeth Retail and the guarantors had not provided all of the requested financial documents. Cochran, however, cautioned that the strategy could change depending on financials KeyBank had not yet received:
By contrast, Brent Thompson ("Thompson"), the commercial loan workout officer who was assigned to Elizabeth Retail's loan between April and November 2011, recommended that KeyBank "[e]xit [the] [r]elationship." (Thompson Decl. ¶ 5.9, Ex. 24, at 4.) Thompson states that his reference to "exit" did not mean declare a default, accelerate the loan, or foreclose on the Property; rather, it meant he wanted "to have a workout strategy in place by the end of the first quarter in 2012." (Thompson Decl. ¶ 5.9.)
If financial statements report a loss for [year-end 2011] (which is expected) and the appraised value does not support the loan amount, the strategy for this loan will change to a focus on an exit plan. [Mrs. Arnell] has stated that it is not her preference to refinance at this time, due to the strain on their creditworthiness from [Mr. Arnell's] illness and resulting bankruptcy filing. Therefore, in the event that an exit strategy is required, the most likely scenario would be foreclosure, or as an alternate workout plan, this loan/note could possibly be sold.(Am. Cochran Decl. Ex. 14, at 4-5.)
In February 2012, an appraisal of the Property was conducted. The appraisal revealed that the Property had decreased in value from $750,000 at loan origination in March 2007, to $530,000 on February 10, 2012, a loss of approximately thirty percent. Accordingly, Elizabeth Retail's loan was under water by approximately $36,000. (Am. Cochran Decl. ¶ 6.6.)
Having failed to reach Mrs. Arnell "several times" in January and February 2012 to discuss Elizabeth Retail's loan and reiterate KeyBank's request for certain financial documents, on February 22, 2012, Cochran sent a letter to Elizabeth Retail and the guarantors of its loan. (Am. Cochran Decl. ¶¶ 6.7, 6.9.) In the February 2012 letter, Cochran indicated that she had made several unsuccessful attempts to reach Mrs. Arnell and that KeyBank required Ansteth Jewelers' 2011 year-end financial statements when completed and current personal financial statements for Mr. and Mrs. Arnell. Cochran also enclosed an invoice for the cost of the appraisal.
Mrs. Arnell responded by hiring an attorney because she did not believe she should be responsible for the appraisal cost. The attorney wrote a letter to KeyBank on March 6, 2012, questioning whether any contractual provision allowed KeyBank to charge Elizabeth Retail for the appraisal cost, referring to Elizabeth Retail's loan as "currently in good standing," and directing KeyBank not to communicate with Elizabeth Retail "or its members directly." (Russillo Decl. Ex. 16, at 1.) Based on this letter, KeyBank's loan workout officers ceased communicating with Plaintiffs and Russillo handled all further discussions and negotiations.
It is noteworthy that the letter from Elizabeth Retail's attorney refers to the Elizabeth Retail's "members." (Russillo Decl. Ex. 16, at 1.) Mr. Arnell signed Elizabeth Retail's promissory note as a "member," the underwriting refers to Mr. Arnell as "co-owner" of Elizabeth Retail, and Mrs. Arnell admitted in a request for admission that Mr. Arnell was a member "from the formation of Elizabeth Retail until shortly before" he filed for bankruptcy. (Thompson Decl. Ex. 12, at 3; Street Decl. Ex. 6, at 3; Parker Decl. Ex. 1, at 2.) Nevertheless, Plaintiffs now claim that Mr. Arnell "never had any ownership interest" in Elizabeth Retail, and that KeyBank's "misimpression" led to Mr. Arnell executing a guaranty that KeyBank "had no legal right to obtain" based on his status as a spouse with no ownership interest in the LLC. (Pls.' Resp. Mot. Summ. J. at 4; Charles Arnell Decl. ¶ 2.) Plaintiffs' counsel claims he discovered that Mr. Arnell was not a member of Elizabeth Retail in August 2015, and informed opposing counsel that Plaintiffs needed to amend their responses to KeyBank's Requests for Admission. (Pls.' Resp. Mot. Summ. J. at 22 n.4.)
On March 20, 2012, Russillo sent a letter to Elizabeth Retail's attorney with the subject line "Notice of Default." (Russillo Decl. Ex. 17, at 1.) The letter explained that: (1) Mr. Arnell's bankruptcy filing constituted a default under the promissory note and deed trust, (2) KeyBank believed in good faith that it was insecure in light of the fact that the loan balance exceeded the value of the Property, (3) the insecurity default could only be cured by paying down the balance or pledging other security, (4) the promissory note states that Elizabeth Retail was responsible for post-default appraisal fees, (5) the bankruptcy filing default was not curable or a default KeyBank was willing to waive, (6) the best course of action was to seek financing and pay KeyBank in full, and (7) KeyBank was willing to provide Elizabeth Retail three to six months in order to secure such financing. (Id.)
In a response letter dated April 16, 2012, Elizabeth Retail's attorney stated that calling in the loan made "no sense economically" since his client made timely payments and was paying well above the going rate of interest. (Street Decl. Ex. 15, at 1.) After questioning the validity of the appraisal obtained by KeyBank, Elizabeth Retail's attorney stated that he advised his client to keep current on its loan obligations, that his client was willing to attempt to re-margin the loan by making a $25,000 payment "in exchange for a waiver of the default of Charles Arnell on terms set forth in writing," that initial attempts to secure alternative financing were unsuccessful, and that there was "no additional property to pledge as security." (Street Decl. Ex. 15, at 1-2.) In fact, Elizabeth Retail never attempted to secure alternative financing, and Mrs. Arnell had "a lot of equity" in a condominium in the same building, as well as a $500,000 to $600,000 property in Chicago that was nearly paid off and could have been pledged as security. (Elizabeth Retail Dep. 152:18-153:23, 164:3-19.)
In a letter dated April 26, 2012, Russillo rejected Elizabeth Retail's offer to re-margin the loan in exchange for a waiver of Mr. Arnell's default. (Russillo Decl. Ex. 20, at 1-2.) Russillo added that a $140,000 payment would be necessary to reduce the loan-to-value ratio to an acceptable rate of eighty percent (the loan was underwritten at eighty-two percent), that KeyBank still needed comprehensive financial information from Plaintiffs (2011 tax returns if completed, year-to-date profit and loss statements and balance sheets, and a personal financial statement signed by Mrs. Arnell) before any settlement could be consummated, and that KeyBank would declare a default in the event Plaintiffs failed to provide the financial information within fifteen days. (Id.)
On May 10, 2012, Elizabeth Retail's attorney provided KeyBank with a 2011 balance sheet for Elizabeth Retail and a document titled "2011 Taxable Income Recap" for Ansteth Jewelers, but noted that 2011 tax returns were not available. (Russillo Decl. Ex. 21, at 1-3.) Elizabeth Retail's attorney did not include, among other things, a financial statement signed by Mrs. Arnell. (See Am. Cochran Decl. ¶ 8.7; Russillo Decl. ¶ 6.15, stating that KeyBank was not provided with all of the financial documentation it had requested). In addition, the statements Elizabeth Retail produced were "not prepared in accordance with generally accepted accounting principles, they contained material inaccuracies, and revealed significant financial weakness." (Am. Cochran Decl. ¶ 8.8.) Notably, Elizabeth Retail's 2011 balance sheet listed a Pearl District condominium as one of its assets, even though Mrs. Arnell owned the condominium before transferring it into a trust in October 2010. (Am. Cochran Decl. ¶ 8.8.) The Taxable Income Recap for Ansteth Jewelers also showed a taxable income of only $28,417 in 2011, and revealed that Ansteth Jewelers' lease payments were insufficient to service Elizabeth Retail's debts. (Am. Cochran Decl. ¶ 8.8.)
Russillo sent another letter to Elizabeth Retail's attorney on June 13, 2012, titled "Notice of Default/Demand for Financial Information." (Russillo Decl. Ex. 22, at 1.) This letter served as notice to Elizabeth Retail that it was in breach of the promissory note, based on KeyBank's belief that the prospect of repayment was impaired and that KeyBank's position was insecure. (Id.) The letter gave Elizabeth Retail fifteen days to cure the insecurity default by paying down the balance on the note. (Id.) The letter added that Mr. Arnell's bankruptcy filing constituted a default, and that KeyBank required Mrs. Arnell's personal financial statement and 2011 income tax returns, and Ansteth Jewelers' 2011 income tax returns, profit and loss statement, and balance sheet. (Id.) The letter also stated that failing to provide the requested financial information within seven days would constitute a default under the guaranties and promissory note. (Id.)
In the months that followed, Elizabeth Retail's attorney gave KeyBank a copy of Ansteth Jewelers' 2011 tax return, but never responded to KeyBank's demand to cure the insecurity default by re-margining the loan. (Russillo Decl. ¶ 6.17, 6.20, Ex. 23.) Instead, the parties unsuccessfully attempted to enter a forbearance agreement, while Elizabeth Retail attempted to sell the Property. (Russillo Decl. ¶ 6.17; Exs. 23, 25; Street Decl. Exs. 19-20.) Elizabeth Retail never received any offers on the Property, which was listed at $735,000 and later reduced to $675,000. (Russillo Decl. ¶ 6.22, Ex. 24; Judith Arnell Dep. 12:10-13:8, 15:21-16:3; Parker Decl. Ex. 2, at 2.)
On August 27, 2012, shortly after Elizabeth Retail rejected KeyBank's proposed forbearance agreement, KeyBank recorded a Notice of Default and Election to Sell in the Multnomah County Recorder's Office, setting a nonjudicial foreclosure sale date of January 7, 2013. (Street Decl. Ex. 21, at 1-2.) The Notice of Default and Election to Sell stated that foreclosure was being pursued based on: (1) the failure to provide requested financial documentation "despite repeated requests," (2) a guarantor's bankruptcy filing, and (3) devaluation of the Property, which resulted in KeyBank deeming itself insecure and believing that the prospect of payment or performance was impaired, "together with [the] failure to re-margin the Note by either paying down the Note balance or providing additional collateral." (Street Decl. Ex. 21, at 1-2; Russillo Decl. ¶ 7.9, 7.12; Am. Cochran Decl. ¶ 9.5.)
Shortly thereafter, KeyBank served a Trustee's Notice of Sale on the occupants of the Property, Elizabeth Retail and its agent, and the condominium owners' association. (Am. Cochran Decl. ¶¶ 9.7-9.8.) KeyBank also caused the notice to be published on four occasions in the Daily Journal of Commerce. (Am. Cochran Decl. ¶ 9.9.)
Between early September 2012 and early January 2013, a new attorney retained by Plaintiffs attempted to negotiate a forbearance agreement with KeyBank. (See Russillo Decl. ¶¶ 8.1-8.20.) Ultimately, the attorney provided the financial documentation KeyBank requested, but failed to respond to KeyBank's counterproposal regarding the terms of a forbearance agreement. (See Russillo Decl. ¶¶ 8.7-8.12, 8.20.) During this same time period, Plaintiffs' then-attorney represented that they were "working on a sale that would result in full payment of the loan," and consequently KeyBank notified the attorney that it was postponing the foreclosure for three weeks. (Russillo Decl. ¶¶ 8.18-8.19.) In fact, however, Plaintiffs were never "working on a sale." (Judith Arnell Dep. 16:4-15.)
The foreclosure sale eventually took place on February 6, 2013, and a company affiliated with KeyBank was the highest and successful bidder with a credit bid in the amount of $412,780. (Am. Cochran Decl. ¶ 13.1; Russillo Decl. ¶ 10.1.)
ANALYSIS
I. STANDARD OF REVIEW
Summary judgment is appropriate where there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. FED. R. CIV. P. 56(a). On a motion for summary judgment, the court must view the facts in the light most favorable to the non-moving party, and all reasonable inferences must be drawn in favor of that party. Porter v. Cal. Dep't of Corr., 419 F.3d 885, 891 (9th Cir. 2005) (citations omitted). The court does not assess the credibility of witnesses, weigh evidence, or determine the truth of matters in dispute. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986). "Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no 'genuine issue for trial.'" Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (citation omitted).
II. DISCUSSION
KeyBank moves for summary judgment on Plaintiffs' claims for breach of the implied duty of good faith and fair dealing and defamation, arguing, inter alia, that: (1) KeyBank was entitled to demand that Ansteth Jewelers pay off the line of credit balance, (2) KeyBank had the right to foreclose on the Property based on the breach of certain financial covenants under Elizabeth Retail's loan, (3) the duty of good faith and fair dealing does not apply to workout negotiations, and even if it did, KeyBank's conduct did not rise to the level of a breach of its duty, (4) Plaintiffs' defamation claim fails because the foreclosure notice was true, and (5) Ansteth Jewelers and Mrs. Arnell should not now be permitted to amend their previously dismissed defamation claims. The Court recommends that the district judge enter judgment for KeyBank on both of Plaintiffs' remaining claims.
A. Breach of the Duty of Good Faith and Fair Dealing
1. Applicable Law
Under Oregon law, every contract includes an implied duty of good faith and fair dealing. Klamath Off-Project Water Users, Inc. v. Pacificorp, 237 Or. App. 434, 445 (Or. Ct. App. 2010). This duty "may be implied as to a disputed issue only if the parties have not agreed to an express term that governs that issue." Oregon Univ. Sys. v. Oregon Pub. Emps. Union, Local 503, 185 Or. App. 506, 511 (Or. Ct. App. 2002) (quotation marks omitted). "Thus, the implied duty cannot provide a remedy for an 'unpleasantly motivated act that is permitted expressly by the contract.'" Gregory Funding LLC v. Saksoft, Inc., No. 16-480-SI, 2016 WL 4480693, at *3 (D. Or. Aug. 24, 2016) (citation omitted).
The Oregon Supreme Court has held that "it is only the objectively reasonable expectations of parties that will be examined in determining whether the obligation of good faith has been met." Id. (quoting Tolbert v. First Nat'l Bank of Oregon, 312 Or. 485, 494 (Or. 1991)). "[T]he reasonable expectations of the parties to a contract may include evidence from outside the terms of the contract and generally present a question of fact." Id. For example, in Iron Horse Eng'g Co. v. Nw. Rubber Extruders, Inc., 193 Or. App. 402 (Or. Ct. App. 2009), the Oregon Court of Appeals recognized that "holding the parties to industry standards and practices effectuates the reasonable contractual expectations of the parties." Id. at 421. Similarly, in Brown v. Am. Prop. Mgmt. Corp., 167 Or. App. 53 (Or. Ct. App. 2000), the Oregon Court of Appeals concluded that the plaintiff presented sufficient evidence from which a jury could have found that the bank exercised its contractually-granted discretion in bad faith. Id. at 62-63.
2. Application of Law to Fact
KeyBank argues that it is entitled to summary judgment on Plaintiffs' claim for breach of the implied duty of good faith and fair dealing because KeyBank acted consistently with the terms of its contracts. KeyBank argues that, under the terms of the relevant contracts, it was allowed to seek financial and credit information from Plaintiffs, conduct credit reviews, demand that Ansteth Jewelers pay off its line of credit, assess when and whether to declare a default, and foreclose on Elizabeth Retail's loan based on nonmonetary defaults.
KeyBank compares Plaintiffs' case to the one before the district court in Lakeside Inn, Inc. v. Bank of the West, No. 3:14-cv-00473-RCJ, 2015 WL 1331383 (D. Nev. Mar. 25, 2015). Lakeside presented the question of whether a lender could exercise its rights to foreclosure based on a breach of a non-monetary covenant, when the borrower had never missed a payment and the loan was fully secured. Id. at *1-4. Lakeside answered that question in the affirmative, recognizing that financial covenant defaults (e.g., to maintain a certain loan-to-value ratio, etc.) "serve as warnings to a lender that the borrower's ability to repay may be in jeopardy, even if no payment has yet been late." Id. at *5 n.5. The Lakeside court added that "[i]t is not unreasonable for a security instrument to provide for acceleration and foreclosure under such circumstances, so that a lender may recover its investment before the chance of recovery becomes further jeopardized." Id.
Plaintiffs argue that there is a genuine issue of material fact as to whether KeyBank believed in "good faith" that it was "insecure," as expressly required by Elizabeth Retail's promissory note. (See Pls.' Resp. Mot. Summ. J. at 11, arguing there is a jury question as to the "Insecurity" default referenced in Elizabeth Retail's promissory note, which counsel refers to as "the basic default in this case"). As support for their argument that KeyBank lacked a good faith basis for deeming itself insecure, Plaintiffs note that Elizabeth Retail never missed a payment, and was no different than many of KeyBank's borrowers who saw the value of their collateral decrease following the collapse of the housing market in 2008-09 and the ensuing economic crisis. Plaintiffs also note that KeyBank "rarely" transferred loans to the ARG based on a decrease in collateral value in the wake of the housing market collapse, and that their banking expert, Grogan, "cannot understand why or how" KeyBank transferred Elizabeth Retail's loan to the ARG and elected to foreclose on the Property. (Pls.' Resp. Mot. Summ. J. at 12-13.)
As discussed above, KeyBank did not transfer Plaintiffs' loans to ARG based solely on a decrease in collateral value. (Street Decl. Ex. 10-11, at 1.)
As further support for their contention that KeyBank acted in bad faith, Plaintiffs note that KeyBank withheld important information from Plaintiffs and failed to disclose that KeyBank planned to terminate their relationship:
• KeyBank failed to disclose that it intended to "exit the relationship" with Elizabeth Retail when it demanded that Ansteth Jewelers pay off the line of credit balance,
• Russillo failed to explain to Mrs. Arnell and Ansteth Jewelers' former attorney, Susan Alterman ("Alterman"), "why the line of credit was being called, and . . . was silent as to [KeyBank]'s concerns with the Elizabeth Retail loan,"
• Russillo informed Alterman that KeyBank "was not declaring a default on any other accounts," which caused Mrs. Arnell to believe that KeyBank would not foreclose on Elizabeth Retail,
• KeyBank declared a default under Elizabeth Retail's loan "in direct response" to Mrs. Arnell hiring a lawyer to question whether she was obligated to bear the cost of the appraisal on the Property,
• KeyBank's relationship manager, Holder, had a "personal vendetta" against Mrs. Arnell, and Holder stated that she "took away" Mrs. Arnell's "office condo," and(Pls.' Resp. Mot. Summ. J. at 1-3.)
• Russillo represented that Mr. Arnell's bankruptcy default was not curable or a default KeyBank was willing to waive, and advised Elizabeth Retail to seek refinancing to pay off its loan.
On the basis of the foregoing, Plaintiffs argue that withholding information from a borrower can amount to bad faith, citing the Oregon Supreme Court's decision in U.S. Nat'l Bank of Oregon v. Boge, 311 Or. 550 (Or. 1991). Plaintiffs also cite three decisions from the District of Oregon—Henin v. Bank of America, No. 10-1500-HA, 2011 WL 1667472 (D. Or. May 3, 2011), Hinshaw v. BAC Home Loans Serv. LP, No. 10-1468-JO, 2012 WL 407026 (D. Or. Feb. 7, 2012), and Rapacki v. Chase Home Fin. LLC, No. 3:11-cv-185-HZ, 2012 WL 1340119 (D. Or. Apr. 17, 2012)—in support of the proposition that courts have allowed bad faith claims to proceed to trial, even where banks had the contractual right to foreclose.
The Court must begin by addressing the factual support for certain arguments Plaintiffs advance. As explained below, the Court finds that several arguments lack factual support, and, therefore, necessarily fail to support the reasonable inference that KeyBank acted in bad faith. See generally KDC Foods, Inc. v. Gray, Plant, Mooty, Mooty & Bennett, 763 F.3d 743, 753 (7th Cir. 2014) (stating that "a motion for summary judgment requires the court to consider only reasonable inferences, not every conceivable inference") (brackets and citation omitted); see also Deherrera v. Decker Truck Line, Inc., 820 F.3d 1147, 1159 (10th Cir. 2016) ("On summary judgment, '[a]lthough we must draw all factual inferences in favor of the nonmovant, those inferences must be reasonable.") (citation omitted); Johnson v. MP Quail Chase LLC, No. 11- 1275, 2013 WL 85373, at *5 (E.D. Cal. Jan. 8, 2013) ("Although the court must draw all inferences in favor of the non-moving party on a motion for summary judgment, such inferences must be reasonable.").
First, Plaintiffs fault KeyBank for demanding that Ansteth Jewelers pay off the line of credit balance when it intended to "exit the relationship" with Elizabeth Retail. Counsel suggests "exit" must mean that KeyBank intended to declare a default and foreclose. (See Pls.' Resp. Mot. Summ. J. at 8, indicating that "the exit from the relationship . . . had officially begun" after KeyBank declared a default). Thompson, the workout officer who was initially assigned to Elizabeth Retail's loan, did recommend that KeyBank "exit the relationship" before Ansteth Jewelers paid off the line of credit. (See Thompson Decl. ¶ 5.9, Ex. 24, at 4.) However, Thompson states that his reference to "exit" meant that he wanted to have a workout strategy in place, not declare a default, accelerate Elizabeth Retail's loan, or foreclose on the Property. (Thompson Decl. ¶ 5.9.) Thompson's supervisor, Chong Street ("Street"), similarly testified that "exit" is not synonymous with foreclosure, nor does it mean that KeyBank planned on terminating the relationship with the borrower. (Street Decl. ¶¶ 1.1, 8.5, Street Dep. 76:17-25.) Further, the summary judgment record reveals that approximately four months after Ansteth Jewelers paid off the line of credit balance, KeyBank planned to retain Elizabeth Retail as a borrower. (Am. Cochran Decl. Ex. 14, at 4.) Plaintiffs fail to proffer any credible evidence suggesting that KeyBank had undertaken a clandestine plan to declare a default and foreclose on the Property.
Second, Plaintiffs take issue with the fact that Russillo failed to explain to Alterman "why the line of credit was being called," was "silent" about KeyBank's "concerns with the Elizabeth Retail loan," and represented that KeyBank "was not declaring a default on any other accounts." Alterman represented Mrs. Arnell and Ansteth Jewelers in August 2011, in connection with the line of credit issues. (Alterman Decl. ¶ 2.) Alterman did not represent Elizabeth Retail, which is why she never received or reviewed Elizabeth Retail's loan documents or discussed the loan with Russillo. (Alterman Decl. ¶¶ 2-3, 7.) During their conversations, Russillo informed Alterman that KeyBank had "the right to call the line at any time" and "was not currently declaring a default on any other accounts," but he "made no representation that [KeyBank] would not declare a default in the future on other accounts." (Alterman Decl. ¶ 9; Thompson Decl. Ex. 27, at 1.) Russillo's communications with Alterman fail to reflect any bad faith on KeyBank's part. In addition, KeyBank told Mrs. Arnell that it was concerned about Mr. Arnell's bankruptcy filing (an issue that concerned Elizabeth Retail's loan) in May 2011, several months before KeyBank formally required Ansteth Jewelers to pay off the line of credit balance. (Judith Arnell Decl. ¶ 9.)
Third, Plaintiffs suggest that KeyBank declared a default under Elizabeth Retail's loan "in direct response" to Mrs. Arnell hiring an attorney to question whether she was obligated to bear the cost of the appraisal. KeyBank argues that "[t]his is a frivolous assertion without a scintilla of evidence to support it." (Def.'s Reply at 19 n.11.) The Court agrees. The record indicates that Cochran—who had already made several unsuccessful attempts at contacting Mrs. Arnell to discuss the loan and obtain financial information KeyBank was entitled to request—was "pleased" Mrs. Arnell hired an attorney because it "improve[d] the prospects of a successful workout[.]" (Am. Cochran Decl. ¶¶ 6.7, 6.12, 7.9.) Given Cochran's testimony and the steps KeyBank undertook to assess the credit risk before declaring a default under Elizabeth Retail's loan, the Court finds that temporal proximity alone is insufficient to support a reasonable inference of retaliation.
Fourth, Plaintiffs maintain that Holder's "personal vendetta" against Mrs. Arnell demonstrates that KeyBank acted in bad faith in declaring a default and foreclosing on the Property. In her capacity as a relationship manager, Holder met with Mrs. Arnell on one occasion in April 2011, to express concern about the line of credit being stagnant and to indicate that KeyBank wanted the line paid off. (Judith Arnell Decl. ¶ 7.) The record, however, fails to indicate that Holder played any part in the workout negotiations or the decisions to transfer the loans to ARG, declare a default, or foreclose. On the contrary, the record reveals that: (1) Denise Stewart served as Plaintiffs' relationship manager until January 11, 2011 (Rask Dep. 35:8-14); (2) workout negotiations were handled by Thompson and Cochran (Thompson Decl. ¶ 1.3; Am. Cochran Decl. ¶ 1.2); (3) Thompson requested that Plaintiffs' loans be transferred to ARG in April 2011, and his manager, Richard Johanson, approved the request for transfer, (Thompson Decl. ¶ 1.3; Street Decl. Ex. 10, at 2); (4) Cochran directed Russillo to declare a default (Am. Cochran Decl. ¶ 7.1); (5) Cochran and Street decided that it was necessary to pursue foreclosure (Am. Cochran Decl. ¶¶ 1.2, 8.25); and (6) Street made the decision to foreclose (Street Decl. ¶ 1.5). Thus, it is not reasonable to infer that KeyBank acted in bad faith based on Holder's "personal vendetta."
Fifth and finally, Plaintiffs claim that KeyBank's bad faith is evidenced by Russillo's representations that Mr. Arnell's bankruptcy default was not curable or a default KeyBank was willing to waive, and his recommendation that Elizabeth Retail seek refinancing in order to pay off its loan. As an initial matter, no reasonable juror could conclude that Russillo's recommendation to obtain refinancing amounted to bad faith. To be sure, in light of the following facts, no reasonable juror could conclude that Russillo's recommendation to seek refinancing amounted to bad faith: (1) a prepayment penalty provision was set to expire three days after Russillo first made the recommendation (Am. Cochran Decl. ¶ 3.14, Russillo Decl. ¶ 6.7); (2) Mrs. Arnell and/or her counsel believed that more favorable interest rates were available and that KeyBank's appraisal did not reflect the Property's true "market value," which is why she elected to list the Property for $735,000 (Street Decl. Ex. 15, at 1; Russillo Decl. Ex. 24); and (3) Plaintiffs represented to KeyBank that they had, in fact, attempted to secure "alternative financing" around the time Russillo made his recommendation (Street Decl. Ex. 15, at 1). Given Plaintiffs' representation, the impending expiration of the prepayment penalty provision, the availability of more favorable interest rates, and the diverging views on the Property's value, no reasonable juror could find that Russillo acted in bad faith in recommending that Elizabeth Retail seek refinancing.
The next issue to address concerns Russillo's representations that Mr. Arnell's bankruptcy-related default was not curable or a default KeyBank was willing to waive. With respect to the latter representation, the absence of bad faith is demonstrated by the fact that the promissory note allowed KeyBank to "delay or forego enforcing any of its rights or remedies[.]" (Russillo Decl. ¶ 5.14.) Additionally, at the time Russillo stated that the bankruptcy default was not curable, Mr. Arnell had already received a discharge from the bankruptcy court. (Russillo Decl. ¶¶ 6.7, 7.13.) In Russillo's view, the discharge meant that a cure "seemed virtually impossible[.]" (Russillo Decl. ¶ 6.7.) Elizabeth Retail's prior attorney seemed to believe the same was true. Indeed, after Russillo made this statement, Gary Shepherd ("Shepherd") offered to make a $25,000 payment "in exchange for a waiver of the default of Charles Arnell[.]" (Street Decl. Ex. 15, at 1; Russillo Decl. ¶ 6.10.) Elizabeth Retail's replacement attorney, Scott Jensen ("Jensen"), "never made any proposal" about curing Mr. Arnell's bankruptcy discharge either. (See Russillo Decl. ¶ 8.2.) Instead, Jensen offered to provide KeyBank with a new personal guaranty from Mr. Arnell as part of a proposed forbearance agreement. (Russillo Decl. ¶ 8.11, Ex. 45, at 1-2.) The law firm currently representing Plaintiffs presented KeyBank with a "reaffirmation" of Mr. Arnell's guaranty without negotiating with Russillo about potential cures, speaking with Russillo about his concern that a valid reaffirmation agreement must be executed prior to a discharge, or addressing the fact that Mr. Arnell remained insolvent. (See Russillo Decl. ¶¶ 9.3-9.5.)
Plaintiffs' counsel now argues that the bankruptcy discharge was in fact curable, and suggests that "a substitute guarantor could have been found" or Mr. Arnell could have dismissed the bankruptcy proceeding before the discharge order was issued, "reaffirmed his guarantee," or "signed a new guarantee." (Pls.' Resp. Mot. Summ. J. at 23-24.) Plaintiffs' counsel also argues that, in the event the bankruptcy was not curable, KeyBank was not entitled to foreclose nonjudicially.
From this Court's perspective, the pertinent inquiry is not whether KeyBank was correct in asserting that Mr. Arnell's bankruptcy-related default was curable. Rather, the appropriate inquiry is whether one reasonably could infer that Russillo made the assertion in bad faith. Considering the workout negotiations described above and the tacit agreement that the bankruptcy was not curable, no reasonable juror could conclude that Russillo acted in bad faith. Plaintiffs emphasize that Russillo made no mention of Mr. Arnell's bankruptcy filing constituting an event of default when he contacted Ansteth Jewelers in August 2011. (Id. at 24 n.5.) Setting aside the fact the August 2011 communication concerned the line of credit, KeyBank communicated its concerns regarding Mr. Arnell's bankruptcy filing in May 2011. (Judith Arnell Decl. ¶ 9.) In addition, as voluntary signatories to Elizabeth Retail's promissory note (Thompson Decl. Ex. 11, at 3), the Arnells are presumed to be familiar with its contents, including its default provisions and their status as co-members of the LLC. See Noorzai v. Dabella Exteriors, LLC, No. 15-00045-PK, 2015 WL 5037669, at *6 (D. Or. Aug. 25, 2015) ("A person who has voluntarily signed a document is presumed to be familiar with its contents.").
KeyBank's "credit policies require all owners of a borrower entity to guaranty the loan." (Street Decl. ¶ 5.5.)
For all of these reasons, the actions described above fail to support a reasonable inference that KeyBank acted in bad faith.
The remaining inquiry centers on whether a reasonable juror could conclude that KeyBank lacked a good faith belief for deeming itself insecure. (See Pls.' Resp. Mot. Summ. J. at 11, referring to the "Insecurity" default as "the basic default in this case"). Taken as a whole, the record could not lead a rational trier of fact to find for Plaintiffs on this issue, because Plaintiffs have failed to adduce sufficient evidence from which a reasonable juror could conclude that KeyBank did not possess a good faith belief for deeming itself insecure.
The record indicates that KeyBank deemed itself insecure based on the following objective, undisputed facts: (1) the Property declined in value; (2) the most recent appraisal produced a loan-to-value ("LTV") ratio far greater than the LTV produced at loan origination and that which is generally permitted under KeyBank's underwriting policy, thereby increasing the credit risk; (3) the bankruptcy of a guarantor; (4) Elizabeth Retail's status as a single-asset real estate company; and (5) the failure (at least initially) to provide financial information. (Russillo Decl. ¶ 7.15; Am. Cochran Decl. ¶¶ 3.6, 7.1, 8.9; Street Decl. ¶¶ 5.3, 6.5.) Testimony from Plaintiffs' own banking expert, Grogan, further demonstrates the absence of bad faith on KeyBank's part. During his deposition, Grogan testified that Elizabeth Retail was financially dependent on Ansteth Jewelers, that Ansteth Jewelers' financials indicated that it was an "insolvent" entity "with the exception of inventory," and that Mrs. Arnell's financial condition "wasn't in real good shape" in 2011. (Grogan Dep. 186:10-25.) Grogan also testified that, based on the materials reviewed, nothing suggests KeyBank foreclosed "for any reason other than . . . it was in the best interest for the bank[.]" (Grogan Dep. 198:10-18.) Additionally, the record demonstrates that Plaintiffs were not willing to take the steps necessary to reduce the LTV to a rate acceptable to KeyBank, despite having the means do so. (Elizabeth Retail Dep. 152:18-153:23, 164:3-19.)
When confronted with similar facts, courts have found that banks had a good faith belief to believe they were insecure. For example, in Capitol Radiology, LLC v. Sandy Spring Bank, 439 F. App'x 222 (4th Cir. 2011), the bank issued an equipment loan and line of credit to a borrower. Id. at 223. The loans were secured by, inter alia, the borrower's accounts, a personal guaranty from its principal, and a junior lien on the principal's residence. Id. The parties executed a business agreement upon extending the line of credit. Id. The agreement contained an "[i]nsecurity" default provision that required the bank to believe "in good faith" that it was "insecure." Id. at 224. The borrower made timely payments on the loans, but "either wholly failed to provide or was delayed in providing" financial information that the bank was entitled to request under the terms of the agreement. Id. This resulted in the borrower being added to a "watch list of risky borrowers." Id. The bank later discovered that a tax lien was filed against the principal's residence and a judgment had been entered against the borrower and principal. Id. at 225. The bank declared a default under the agreement in spite of the protests of the borrower, who maintained that the judgment would be overturned and that there were sufficient funds to cover it. Id. After declaring default, the bank discovered that the borrower's corporate account had previously been overdrawn on several occasions and that the principal was using the account to cover other expenses. Id. The bank reiterated to the borrower that it believed the prospect of payment or performance was impaired. Id. The bank proceeded to exercise its right to set-off, and paid the loans in full with funds from corporate accounts. Id. The borrower sued the bank for breach of contract and the district court granted summary judgment in favor of the bank. Id. at 225-26.
On appeal, the borrower argued that the bank breached the agreement by declaring default and accelerating payment of the loans. Id. at 226. In affirming the district court's grant of summary judgment, the Fourth Circuit emphasized that the borrower either "ignored" or "neglected to respond promptly" to requests for financial information, failed to notify the bank about the judgment, allowed a writ of garnishment to issue, failed to report that a guarantor was subject to a lien, and allowed its principal to use accounts securing the loans for other expenses. Id. at 226-27. On these facts, the Fourth Circuit held that, as a matter of law, the bank had a good faith belief that it was insecure and, therefore, was entitled to take steps to protect its interests. Id. at 227.
Capital Radiology is not on all fours with the present case, but it is sufficiently analogous for the Court to conclude that the undisputed facts demonstrate that KeyBank believed in good faith that it was insecure. Indeed, this case and Capital Radiology both involve borrowers that satisfied their payment obligations. Like the borrower in Capital Radiology, it is undisputed that Plaintiffs were far from diligent in providing financial information to KeyBank. Capital Radiology demonstrates that such conduct is relevant when assessing whether a bank believed in good faith that it was insecure. Like the borrower in Capital Radiology, KeyBank learned of events that negatively impacted the financial status of a guarantor. KeyBank also learned that Elizabeth Retail was financially dependent on an entity in poor financial condition. These facts and those discussed above demonstrate that KeyBank had a good faith belief that it was insecure and, therefore, was entitled to take steps to protect its own interests.
In sum, the undisputed facts support a conclusion that KeyBank believed in good faith that it was insecure. Accordingly, the Court recommends that the district judge grant summary judgment in favor of KeyBank on Plaintiffs' claim for breach of the duty of good faith and fair dealing, and deny as moot KeyBank's motion to strike Grogan's declaration and report. See Perez-Denison v. Kaiser Found. Health Plan of the Nw., 868 F.Supp.2d 1065, 1088-89 (D. Or. 2012) (denying motion to strike as moot where the challenged material would not change the recommended disposition).
B. Ansteth Jewelers and Mrs. Arnell's Defamation Claims
This Court previously dismissed Ansteth Jewelers and Mrs. Arnell's defamation claims with leave to amend. Elizabeth Retail, 83 F. Supp. 3d at 978. Plaintiffs acknowledge this fact in their response to the pending motion for summary judgment. (Pls.' Resp. Mot. Summ. J. at 30 n.6.) Despite never filing an amended pleading curing the deficiencies described in the Court's order, Mrs. Arnell and Ansteth Jewelers attempt to revive their claims at the summary judgment stage. (See Pls.' Resp. Mot. Summ. J. at 30, stating that a defamation claim is being pursued by each plaintiff).
The Court finds that Ansteth Jewelers and Mrs. Arnell waived their defamation claims by failing to reallege them in an amended pleading that cured the previously described deficiencies. See Armentero v. Lotersztain, 517 F. App'x 549, 550 (9th Cir. 2013) (noting that the pro se prisoner waived claims that were dismissed with leave to amend and not realleged in an amended pleading); Mayshack v. Gonzales, 437 F. App'x 615, 618 (9th Cir. 2011) ("A plaintiff waives all claims dismissed with leave to amend by failing to reallege those claims in [an] amended complaint."); Kelley v. Rambus, Inc., 384 F. App'x 570, 572 (9th Cir. 2010) ("Kelley waived all claims dismissed with leave to amend by failing to reallege those claims in his amended complaint.") (citation, quotation marks, and brackets omitted); Granite Rock Co. v. Teamsters Local 287, No. 04-2767, 2011 WL 6328842, at *6 (N.D. Cal. Dec. 14, 2011) ("Plaintiff's breach of contract claim was waived as a matter of law when Plaintiff failed to replead the claim after being given leave to do so.").
Furthermore, the Court finds that KeyBank is entitled to summary judgment on Mrs. Arnell and Ansteth Jewelers' defamation claims because "summary judgment is not a procedural second chance to flesh out inadequate pleadings." Wasco Prods., Inc. v. Southwall Tech., Inc., 435 F.3d 989, 992 (9th Cir. 2006); see also Mitchell v. Homesales, Inc., No. 3:13-cv-00665-SI, 2014 WL 1744991, at *4 n.5 (D. Or. Apr. 30, 2014) (declining to consider alleged violation of different subsection of statute, and noting that the plaintiff could not allege a new cause of action in response to a motion for summary judgment and that "summary judgment is not a procedural second chance to flesh out inadequate pleadings") (citations omitted).
The Court also declines to consider Mrs. Arnell and Ansteth Jewelers' new theory of liability—namely, that KeyBank's relationship manager, Holder, allegedly made defamatory statements about Mrs. Arnell and her businesses to a fellow member of the University Club of Portland. Plaintiffs filed their First Amended Complaint on March 12, 2014. Plaintiffs claim that they did not discover the basis for their new defamation theory until early 2016. (Pls.' Resp. Mot. Summ. J. at 30.) Thus, there is no way this new theory could have been contemplated by, or alleged in, a pleading that was drafted roughly two years earlier. Accordingly, the Court declines to consider this new theory of liability because KeyBank would be prejudiced by the fact that it was not included in Plaintiffs' First Amended Complaint. See Patel v. City of Long Beach, 564 F. App'x 881, 882 (9th Cir. 2014) ("As the district court held, a plaintiff cannot raise a new theory for the first time in opposition to summary judgment. Allowing a plaintiff to proceed on a new theory would prejudice defendants because '[a] complaint guides the parties' discovery putting the defendant on notice of the evidence it needs to adduce in order to defend against the plaintiff's allegations."") (internal citations omitted); see also Stations W., LLC v. Pinnacle Bank, 338 F. App'x 658, 660 (9th Cir. 2009) (holding that district court did not abuse its discretion by declining to consider theory first advanced by the plaintiff in response to motion for summary judgment, and stating that "[c]hanging the basis of liability at that point would have effectively amended the complaint after the close of discovery and initiation of summary judgment proceedings").
Plaintiffs imply that KeyBank received adequate notice because it learned of Holder's statements before the close of discovery. (See Pls.' Resp. Mot. Summ. J. at 29, noting Holder's statements were discussed during Mrs. Arnell's deposition.) Patel makes clear that the complaint, not discovery, must provide notice to a defendant as to what evidence it needs to adduce. --------
For these reasons, the Court recommends that the district judge grant summary judgment in favor of KeyBank on Mrs. Arnell and Ansteth Jewelers' defamation claims.
C. Elizabeth Retail's Defamation Claim
1. The New Theory
Elizabeth Retail also attempts to bring a defamation claim premised on Holder's allegedly defamatory statements. (See Pls.' Resp. Mot. Summ. J. at 30, stating that Elizabeth Retail is pursuing such a claim). For the reasons stated, the Court declines to consider Elizabeth Retail's new theory of liability.
2. The Pled Theory
Elizabeth Retail's defamation claim is based on KeyBank falsely representing that Elizabeth Retail defaulted on its loan and that KeyBank was legally entitled to foreclose on the Property. (First Am. Compl. ¶ 48.) In its prior opinion and order, this Court declined to dismiss Elizabeth Retail's defamation claim because fact-dependent issues precluded a ruling in KeyBank's favor at the motion to dismiss stage, and because Elizabeth Retail was entitled to an opportunity to overcome the qualified privilege that attached to the statements made in the foreclosure notice by presenting evidence of an improper motive. Elizabeth Retail, 83 F. Supp. 3d at 995-96.
Unlike the motion to dismiss stage where it was "premature" to evaluate whether KeyBank truthfully represented that it was entitled to foreclosure as a result of a default, id. at 996, Elizabeth Retail's defamation claim is now ripe for disposition. It is well settled that "[t]ruth is an affirmative defense to a defamation claim." Lansford v. Georgetown Manor, Inc., 192 Or. App. 261, 270 (Or. Ct. App. 2004) (citation omitted); see also Bahr v. Ettinger, 88 Or. App. 419, 422 (Or. Ct. App. 1987) (stating that "truth is a complete defense in a defamation case") (citation omitted).
KeyBank argues that it is entitled to summary judgment on Elizabeth Retail's defamation claim because Elizabeth Retail's FED. R. CIV. P. 30(b)(6) designee, Mrs. Arnell, conceded that the contents of the foreclosure notice were true. (See Def.'s Mot. Summ. J. at 34, citing Elizabeth Retail Dep. 233:14-20, "[T]he next statement is 'devaluation of the property such that KeyBank deems itself 'insecure.' . . . Is it your position that those statements are false? A. No."). Plaintiffs respond by arguing that there are genuine issues of fact as to whether KeyBank abused its qualified privilege in disseminating the foreclosure notice. Specifically, Plaintiffs contend that it is disputed whether KeyBank believed in good faith that it was insecure, and whether the publication of the foreclosure notice was made to people "not reasonably believed to be necessary for the accomplishment of the purpose of the particular privilege." (See Pls. Resp. Mot. Summ. J. at 31-32.)
The burden of proving KeyBank abused the qualified privilege rests upon Plaintiffs. Gordon v. Kleinbelder West, Inc., No. 03:11-CV-00245-HU, 2012 WL 844200, at *7 (D. Or. Mar. 12, 2012). To satisfy this burden, Plaintiffs must prove that KeyBank acted with malice in publishing the foreclosure notice. See id. The Court concludes that Plaintiffs have failed to meet that burden.
To the extent Plaintiffs argue KeyBank did not believe in good faith that it was insecure, the Court's analysis of the implied duty claim demonstrates that Plaintiffs have failed to meet their burden. Plaintiffs also argue that Russillo failed to comply with provisions of the Oregon Trust Deed Act ("OTDA"), because the foreclosure notices were posted on the outside of the Property on two occasions when they should have been served on the occupant via personal, office, or mail service. (See Pls. Resp. Mot. Summ. J. at 32-33.) Russillo's testimony confirms that such a posting took place on one occasion. (See Russillo Decl. ¶¶ 7.18, 7.20.) However, Plaintiffs have failed to demonstrate that Russillo acted with malice in allegedly failing to comply with the OTDA. Indeed, another company was tasked with the responsibility of effecting service. (See id.)
Additionally, the Court concludes that KeyBank is entitled to avail itself of the complete defense of truth. There is no genuine issue of fact as to whether Elizabeth Retail defaulted on its loan or whether KeyBank was entitled to protect its interests under the terms of the loan agreement. Mrs. Arnell admitted as much while testifying as Elizabeth Retail's FED. R. CIV. P. 30(b)(6) designee. Accordingly, KeyBank is entitled to summary judgment on this ground as well. See Patterson v. Sivley, No. 04-1223-HA, 2005 WL 2372034, at *5 (D. Or. Sept. 27, 2005) (holding that defamation claim "necessarily" failed where the plaintiff acknowledged the publication was accurate); see also Irion v. U.S. W. Inc., No. 98-35320, 1999 WL 362860, at *3 (9th Cir. June 1, 1999) (finding Oregon state law defamation claim failed because the allegedly defamatory statements "were substantially true"); Hickey v. Capital Cities/ABC, Inc., 792 F. Supp. 1195, 1197 (D. Or. 1992) ("A factual statement need not be literally true in every detail in order to be protected from a defamation action; rather, it is sufficient if the statement is substantially true.").
CONCLUSION
For the foregoing reasons, the Court recommends that the district judge GRANT KeyBank's motion for summary judgment (ECF No. 77), and deny its motion to strike as moot (ECF No. 97).
SCHEDULING ORDER
The Findings and Recommendation will be referred to a district judge. Objections, if any, are due fourteen (14) days from service of the Findings and Recommendation. If no objections are filed, the Findings and Recommendation will go under advisement on that date. If objections are filed, a response is due fourteen (14) days after being served with a copy of the objections. When the response is due or filed, whichever date is earlier, the Findings and Recommendation will go under advisement.
DATED this 10th day of March, 2017.
/s/_________
STACIE F. BECKERMAN
United States Magistrate Judge