Meritage Homeowners' Association v. The Bank of New York Mellon, Etc.

Motion for Summary Judgment . Oral Argument requested.

D. Or.July 10, 2017

HART WAGNER LLP 1000 S.W. Broadway, Twentieth Floor Portland, Oregon 97205 Telephone: (503) 222-4499 Facsimile: (503) 222-2301 Troy S. Bundy, OSB No. 942574 E-mail: tsb@hartwagner.com Aaron J. Potter, OSB No. 992003 E-mail: ajp@hartwagner.com HART WAGNER, LLP 1000 SW Broadway, Twentieth Floor Portland, Oregon 97205 Telephone: (503) 222-4499 Facsimile: (503) 222-2301 Of Attorneys for Meritage Homeowners’ Association and Third-Party Defendant Kurt Freitag IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF OREGON EUGENE DIVISION MERITAGE HOMEOWNERS’ ASSOCIATION, an Oregon domestic nonprofit corporation, Plaintiff, v. THE BANK OF NEW YORK MELLON, fka The Bank of New York, as Trustee on Behalf of the Holders of the Alternative Loan Trust 2006- OA21, Mortgage Pass Through Certificates Series 2006-OA21, Defendants. No. 6:16-cv-00300-AA MERITAGE HOMEOWNERS’ ASSOCIATION AND THIRD-PARTY DEFENDANT KURT FREITAG'S MOTION FOR SUMMARY JUDGMENT Oral Argument Requested THE BANK OF NEW YORK MELLON, a Delaware corporation, Third-Party Plaintiff, MERITAGE HOMEOWNERS’ ASSOCIATION, an Oregon domestic nonprofit corporation, Nominal Third-Party Plaintiff, v. KURT FREITAG, Third-Party Defendant. Case 6:16-cv-00300-AA Document 46 Filed 07/10/17 Page 1 of 30 Page i – MERITAGE HOMEOWNERS’ ASSOCIATION AND THIRD-PARTY DEFENDANT KURT FREITAG'S MOTION FOR SUMMARY JUDGMENT HART WAGNER LLP 1000 S.W. Broadway, Twentieth Floor Portland, Oregon 97205 Telephone: (503) 222-4499 Facsimile: (503) 222-2301 TABLE OF CONTENTS I. INTRODUCTION ...................................................................................................................... 1 II. STATEMENT OF FACTS ...................................................................................................... 2 A. Underlying Litigation and Settlement Agreements .............................................................. 2 B. Bankruptcy ............................................................................................................................ 4 III. SUMMARY JUDGMENT STANDARD ................................................................................ 5 IV. MEMORANDUM OF LAW ................................................................................................... 6 A. The Agreements Bar BNYM’s Claims and Preclude BNYM from Changing .................... 6 1. BNYM is Bound by the Agreements ............................................................................... 6 2. The Agreements Released BNYM’s Counterclaims and Third-Party Claims ................. 9 3. The Agreements Establish Stipulated Facts that BNYM Cannot Now Change ............ 11 4. BNYM has Been Aware of these Documents but Proceeded Regardless ...................... 12 B. BNYM’S Claims Are Not Supported by Evidence ........................................................... 13 1. BNYM Has Not Produced Evidence In Support of its Claims ...................................... 13 2. The Evidence Contradicts BNYM’s Claims .................................................................. 14 3. BNYM’s Claims Are a Reprisal of the Unsupported Claims Brought by the Watts ..... 17 C. BNYM is Either Bound By the Agreements, or Does Not have Standing ........................ 18 D. BNYM May Not Bring A Derivative Action .................................................................... 19 1. There is no Statutory Authority for a Derivative Action Against an HOA.................... 19 2. BNYM has failed to properly plead a derivative action................................................. 20 E. The HOA and Freitag are Entitled to Attorneys’ Fees ...................................................... 22 V. CONCLUSION ...................................................................................................................... 23 Case 6:16-cv-00300-AA Document 46 Filed 07/10/17 Page 2 of 30 Page ii – MERITAGE HOMEOWNERS’ ASSOCIATION AND THIRD-PARTY DEFENDANT KURT FREITAG'S MOTION FOR SUMMARY JUDGMENT HART WAGNER LLP 1000 S.W. Broadway, Twentieth Floor Portland, Oregon 97205 Telephone: (503) 222-4499 Facsimile: (503) 222-2301 TABLE OF AUTHORITIES Cases Adrangi, et al. v. Kurt Freitag dba Big Fish Partners I v. Milgard Manufacturing, Inc., et al., Lincoln County Circuit Court Case No. 090515 ........................................................................ 2 Adrangi, et al. v. Kurt Freitag, et al., Lincoln County Circuit Court Case No. 110136 ................ 3 Anderson v. Liberty Lobby, Inc., 477 U.S. 242, (1986) .................................................................. 6 Bell v. Cameron Meadows Land Co., 669 F.2d 1278, (9th Cir.1982) ............................................ 6 Belova v. Sharp, 2008 WL 700961 (D. Or. Mar 13, 2008) .......................................................... 21 Botefur v. City of Eagle Point, Or., 7 F.3d 152, (9th Cir. 1993) .................................................... 6 Celotex, 477 U.S. 317, 106 S.Ct. 2548 (1986)................................................................................ 6 Commonwealth Ins. Co. v. Titan Tire Corp., 398 F.3d 879, 887 (7th Cir. 2004) ......................... 12 Devereaux v. Abbey, 263 F.3d 1070, (9 th Cir. 2001) (quoting Fed.R.Civ.P. 56(e) ......................... 6 Gouveia v. Tazbir, 37 F.3d 295 (7th Cir. 1994) .............................................................................. 8 Guenther v. Pac. Telecom, Inc., 123 F.R.D. 341, (D. Or. 1987) .................................................. 20 Guidroz-Brault v. Mo. Pac. R.R. Co. 254 F3d 825, (9th Cir 2001) .............................................. 13 Hernandez v. Spacelabs Medical, Inc., 343 F.3d 1107, (9th Cir. 2003) ....................................... 13 Huff v. Duncan, 263 Or. 408, 502 P.2d 584, (1972) ....................................................................... 8 In re 523 East Fifth Street Housing Preservation Development Fund Corp., 79 B.R. 568, (Bankr. S.D.N.Y. 1987) ........................................................................................................................... 9 In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 989-990 (9th Cir.1999) ........................... 19 In re WBQ Partnership, 189 B.R. 97 (Bankr. E.D.Va. 1995) ........................................................ 9 Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 111 S. Ct. 1711, 114 L. Ed. 2d 152 (1991) ..... 19 Lindgren v. Berg, 307 Or. 659, 772 P.2d 1336, (1989) .................................................................. 7 Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, (1986) ............................ 6 MCI Telecommunications Corp. v. Am. Tel. & Tel. Co., 512 U.S. 218, 114 S. Ct. 2223, 129 L. Ed. 2d 182 (1994) ....................................................................................................................... 7 Meritage Homeowners Association v. Nicholas Watt, et al., Lincoln County Circuit Court Case No. 112577 .................................................................................................................................. 4 Mikityuk v. Nw. Tr. Servs., Inc., 952 F. Supp. 2d 958, (D. Or. 2013) ........................................... 20 New Hampshire v. Maine, 532 U.S. 742, 121 S. Ct. 1808, 149 L. Ed. 2d 968 (2001) ................. 12 Noakes v. Schoenborn, 116 Or. App. 464, 841 P.2d 682, (1992) ................................................. 19 Nordbye v. BRCP/GM Ellington, 246 Or. App. 209, 266 P.3d 92, (2011) ..................................... 8 Portland Baseball Club, Inc. v. Kuhn, 368 F. Supp. 1004, (D. Or. 1971), aff'd, 491 F.2d 1101 (9th Cir. 1974) ........................................................................................................................... 18 Powell's Books, Inc. v. Kroger, 622 F.3d 1202, (9th Cir.2010) .................................................... 19 Salahub v. Montgomery Ward & Co., 41 Or. App. 775, 599 P.2d 1210, (1979).......................... 20 Siltronic Corp. v. Employers Ins. Co. of Wausau, 176 F. Supp. 3d 1033, (D. Or. 2016 .............. 19 Silverman v. Ankari (In re Oyster Bay Cove, Ltd), 196 B.R. 252, (E.D.N.Y. 1996) ...................... 9 State v. Vasquez-Rubio, 323 Or. 275, 917 P.2d 494, 497 (1996) ................................................. 20 Swett v. Bradbury, 335 Or. 378, 67 P.3d 391, (2003) ................................................................... 22 Texas Co. v. Butler, 198 Or. 368, 256 P.2d 259, (1953) ................................................................. 8 United States v. Various Slot Machine, 658 F2d 697, (9th Cir 1981) .......................................... 14 Case 6:16-cv-00300-AA Document 46 Filed 07/10/17 Page 3 of 30 Page iii – MERITAGE HOMEOWNERS’ ASSOCIATION AND THIRD-PARTY DEFENDANT KURT FREITAG'S MOTION FOR SUMMARY JUDGMENT HART WAGNER LLP 1000 S.W. Broadway, Twentieth Floor Portland, Oregon 97205 Telephone: (503) 222-4499 Facsimile: (503) 222-2301 Statutes 11 U.S.C. § 363 ....................................................................................................................... 5, 7, 8 11 U.S.C.A. § 363(f) ....................................................................................................................... 7 Chapter 94 of the Oregon Revised Statutes ............................................................................ 19, 22 Or. Rev. Stat. 174.010 Ann. § ....................................................................................................... 20 Or. Rev. Stat. Ann. § 65.369 ......................................................................................................... 19 Or. Rev. Stat. Ann. § 94.595 ......................................................................................................... 23 Or. Rev. Stat. Ann. § 94.640(1) .................................................................................................... 19 Or. Rev. Stat. Ann. § 94.670 ......................................................................................................... 23 Or. Rev. Stat. Ann. § 94.709 ......................................................................................................... 22 Or. Rev. Stat. Ann. § 94.719 ......................................................................................................... 23 Or. Rev. Stat. Ann. § 94.780 ......................................................................................................... 22 Or. Rev. Stat. Ann. §§ 60.261, 65.174 .......................................................................................... 20 Or. Rev. Stat. Ann. §§ 94.550-94.783 .......................................................................................... 22 ORS Chapter 94 ............................................................................................................................ 20 Other Authorities Assignee, Black’s Law Dictionary (9th ed. 2009)........................................................................... 7 Successor, Black’s Law Dictionary (9th ed. 2009) ......................................................................... 7 Rules Fed. R. Civ. P. 17(a)(1) ................................................................................................................. 18 Fed. R. Civ. P. 56(c) ....................................................................................................................... 6 Fed. R. Civ. P. 11(b)(3)................................................................................................................. 13 Fed. R. Civ. P. 23.1 ................................................................................................................. 20, 21 Fed. R. Civ. P. 23.1(b)(1).............................................................................................................. 21 Fed. R. Civ. P. 56 ............................................................................................................................ 1 Fed. R. Civ. P. 56(e) ................................................................................................................. 6, 13 Local Rule 56-1............................................................................................................................... 1 Local Rule 7-1(c) ............................................................................................................................ 1 Case 6:16-cv-00300-AA Document 46 Filed 07/10/17 Page 4 of 30 Page 1 – MERITAGE HOMEOWNERS’ ASSOCIATION AND THIRD-PARTY DEFENDANT KURT FREITAG'S MOTION FOR SUMMARY JUDGMENT HART WAGNER LLP 1000 S.W. Broadway, Twentieth Floor Portland, Oregon 97205 Telephone: (503) 222-4499 Facsimile: (503) 222-2301 LR 7-1 CERTIFICATE The undersigned represent that the parties have made good faith efforts to resolve the subjects of this Motion and were unable to do so. MOTION FOR SUMMARY JUDGMENT Pursuant to Fed. R. Civ. P. 56 and Local Rule 56-1, Meritage Homeowners’ Association (“HOA”) and Third-Party Defendant Kurt Freitag move for summary judgment on all counterclaims against the HOA and third-party claims against Kurt Freitag. Pursuant to Local Rule 7-1(c), this Motion is supported by the following Memorandum, the Declarations of Troy Bundy, Kurt Freitag, and Brian Johnston, and all pleadings filed herein. I. INTRODUCTION Third-party plaintiff Bank of New York Mellon ("BNYM"), who owns a unit in the planned community Meritage at Little Creek, brings counterclaims for declaratory relief, injunctive relief, and nuisance against the HOA. In addition, in its third-party complaint, BNYM brings claims of gross negligence and breach of fiduciary duties against third-party defendant Kurt Freitag. The counterclaims and third-party claims brought by BNYM fail because its predecessor released those counterclaims and third-party claims and made the releases binding upon its successors and assigns. Alternatively, those releases stipulate to facts that estop BNYM from asserting contradicting facts. Apart from the releases, the counterclaims and third-party claims fail because the BNYM cites no evidence to support its claims. Should BNYM claim it is not bound by the releases, then it lacks standing to assert its counterclaims and third-party claims for the period of ownership by the Watts, because it would not be a successor or assign. Finally, the derivative action brought by BNYM in its third-party claim fails because there is no statutory authority for the action, and third-party plaintiff fails to plead or establish facts necessary to maintain the action. Further, BNYM asserts its derivative claims out of self Case 6:16-cv-00300-AA Document 46 Filed 07/10/17 Page 5 of 30 Page 2 – MERITAGE HOMEOWNERS’ ASSOCIATION AND THIRD-PARTY DEFENDANT KURT FREITAG'S MOTION FOR SUMMARY JUDGMENT HART WAGNER LLP 1000 S.W. Broadway, Twentieth Floor Portland, Oregon 97205 Telephone: (503) 222-4499 Facsimile: (503) 222-2301 interest in an effort to shift its responsibilities to other owners – conduct inconsistent with a derivative action. II. STATEMENT OF FACTS In 2006, Nicholas and Patricia Watt (collectively, the “Watts”) purchased a residence at 56 B Northwest 33rd Place, Newport, Oregon (“Property”). (Am. Compl. ¶ 4). The purchase of the Property was financed with a loan; the Bank of New York Mellon was assigned the interest in that loan on April 25, 2012. (Decl. of Troy Bundy, Ex. 1). The Property is one of eighteen townhouse units within a planned community, Meritage at Little Creek (“Planned Community”). (Am. Answer and 3rd Party Compl. ¶ 2). The Planned Community is subject to Covenants, Conditions, and Restrictions and Bylaws enforced by the HOA. (Decl. of Troy Bundy, Ex. 2). A. Underlying Litigation and Settlement Agreements In 2009, Kurt Freitag (“Freitag”) and other interested parties sued window manufacturers, window installers and contractors in Lincoln County Circuit Court, Oregon, for construction defects and defective installation of windows in all of the units located within the Planned Community (“Window Litigation”). Adrangi, et al. v. Kurt Freitag dba Big Fish Partners I v. Milgard Manufacturing, Inc., et al., Lincoln County Circuit Court Case No. 090515; (Decl. of Troy Bundy, Ex. 3). This lawsuit resulted in a settlement agreement between the parties which released past, present and future claims, signed by the homeowners, including the Watts, on December 11, 2013, (“Window Litigation Release”). (Decl. of Troy Bundy, Ex. 4 pg. 3 § III-A). The Window Litigation Release also required the owners, including the Watts, to use the settlement proceeds to replace the defective windows. (Id. at pg. 8 § IV-A). During the Window Litigation, and before the Window Litigation Release was signed, a four foot square view window located approximately 20 feet in the air facing the ocean in the Watt’s Unit blew out falling 20 feet to the ground and shattering. (Decl. of Troy Bundy, Ex. 5). No repairs were performed; new glass was merely placed back in the same frame under the same Case 6:16-cv-00300-AA Document 46 Filed 07/10/17 Page 6 of 30 Page 3 – MERITAGE HOMEOWNERS’ ASSOCIATION AND THIRD-PARTY DEFENDANT KURT FREITAG'S MOTION FOR SUMMARY JUDGMENT HART WAGNER LLP 1000 S.W. Broadway, Twentieth Floor Portland, Oregon 97205 Telephone: (503) 222-4499 Facsimile: (503) 222-2301 conditions that already caused the window to blow out before. (Decl. of Kurt Freitag, ¶ 2). As a result, as part of the settlement of the Window Litigation, the contractor that installed the windows in the phase of the Planned Community containing the BNYM Unit required the windows to be replaced and to be covered with plywood until replacement occurred. (Decl. of Troy Bundy, Ex. 6, ¶ 12) (Exhibit 6 is a handwritten agreement that followed the conclusion of mediation in the Window Litigation, signed by the Watts, Kurt Freitag on behalf of the HOA, and others). After initiation of the Window Litigation, owners of sixteen units in the Planned Community, including the Watts, sued Freitag in 2011 in an attempt to force a turnover of HOA management, along with claims of breach of fiduciary duty and negligence (“HOA Litigation”). Adrangi, et al. v. Kurt Freitag, et al., Lincoln County Circuit Court Case No. 110136; (Decl. of Troy Bundy, Ex. 7). This lawsuit ended with an apparent settlement agreement, also signed by the Watts, on September 2, 2012, which was intended to release past, present and future claims (“HOA Litigation Release”). (Decl. of Troy Bundy, Ex. 8, pg. 4 No. 7). As part of the resolution of the HOA Litigation, the Watts, and the other homeowners who joined them in the lawsuit, agreed to pay the HOA more than $400,000. (Id. at pg. 3, Nos. 2-3). The HOA Litigation Release authorized the HOA to require the Watts and other owners to replace the defective windows. (Id.). Despite the Window Litigation Release and the HOA Litigation Release, the Watts failed to replace and repair the defective windows. As a result, the HOA issued assessments and fines against the Watts and all other owners who did not proceed to replace the windows pursuant to the Bylaws and CCRs of the Planned Community and consistent with the obligations agreed to by the owners in the aforementioned settlement agreements. (Decl. of Kurt Freitag ¶ 3). These assessments and fines went unpaid by the Watts. (Id.). The HOA pursued recovery against the Watts for those unpaid sums and obtained a judgment of $175,504. Meritage Homeowners Case 6:16-cv-00300-AA Document 46 Filed 07/10/17 Page 7 of 30 Page 4 – MERITAGE HOMEOWNERS’ ASSOCIATION AND THIRD-PARTY DEFENDANT KURT FREITAG'S MOTION FOR SUMMARY JUDGMENT HART WAGNER LLP 1000 S.W. Broadway, Twentieth Floor Portland, Oregon 97205 Telephone: (503) 222-4499 Facsimile: (503) 222-2301 Association v. Nicholas Watt, et al., Lincoln County Circuit Court Case No. 112577; (Decl. of Kurt Freitag, Ex. 1). Following the Window Litigation, the Watts signed an agreement titled “Agreement for Pooling Litigation Repair Proceeds and Financing of Repair Work,” in February 2014 (“Repair Agreement”). (Decl. of Troy Bundy, Ex. 9). The Repair Agreement was created to apply the settlement proceeds payable to the Watts from the Window Litigation toward the replacement and repair of the defective windows. (Id. at pg. 2, Nos. 1, 3). In the Repair Agreement, the Watts also confessed to Judgment in favor of the HOA for all outstanding dues, assessments, fines, penalties and interest they had accrued and not paid. (Id. at pg. 3, No. 8). Additionally, the Watts signed a Covenant Running with the Land on December 16, 2013 (“Covenant”) (HOA Litigation Release, Window Litigation Release, Repair Agreement, and Covenant shall be referred to, collectively, as the “Agreements”). (Decl. of Troy Bundy, Ex. 10). The Covenant, which was recorded in the chain of the title for the Watt Unit prior to the BNYM taking title, expressly released claims by the Watts against Freitag which could have been alleged in the Window litigation. (Id. at pg. 2-3, No. 2). The Watts received compensation for the release of Freitag from Freitag’s insurer as a result of the claims asserted in the Window Litigation. (Decl. of Kurt Freitag, ¶ 5). The HOA Litigation Release, Window Litigation Release, and Repair Agreement were produced to BNYM on August 8, 2016. (Decl. of Troy Bundy, Ex. 11). The HOA Litigation Release and the Repair Agreement were also later included in BNYM’s production to Freitag. The Covenant was recorded in Lincoln County on February 24, 2014. (Decl. of Troy Bundy, Ex. 10). B. Bankruptcy The interest in the Watts’ original purchase loan for the property was assigned in the deed of trust to BNYM in April 2012. (Decl. of Troy Bundy, Ex. 1). Not long afterwards, the Watts Case 6:16-cv-00300-AA Document 46 Filed 07/10/17 Page 8 of 30 Page 5 – MERITAGE HOMEOWNERS’ ASSOCIATION AND THIRD-PARTY DEFENDANT KURT FREITAG'S MOTION FOR SUMMARY JUDGMENT HART WAGNER LLP 1000 S.W. Broadway, Twentieth Floor Portland, Oregon 97205 Telephone: (503) 222-4499 Facsimile: (503) 222-2301 agreed with the other owners who had joined the HOA Litigation to pay the HOA over $400,000. (Decl. of Troy Bundy, Ex. 8, pg. 3 No. 3). Later in 2012, the Watts stopped tendering the requisite loan repayments to BNYM and defaulted on the loan. (Decl. of Troy Bundy, Ex. 12). Despite this, BNYM never foreclosed on the property. (Decl. of Kurt Freitag, ¶ 6). Around this same time, the HOA issued assessments against the Watts for failing to repair the defective windows and pay fees, as required. (Decl. of Kurt Freitag, ¶ 7). The Watts filed for bankruptcy under Chapter 13 on March 12, 2014. (Decl. of Troy Bundy, Ex. 13). The Watts proposed a bankruptcy plan, to which the HOA objected. (Decl. of Kurt Freitag, ¶ 8). Eventually, the Watts proposed an amended plan, and then a second amended plan, which contained a nonstandard provision that would vest the property in BNYM. (Decl. of Troy Bundy, Ex. 14). The second amended plan was confirmed over BNYM’s objection on October 17, 2014, but later vacated on April 22, 2015. (Decl. of Troy Bundy, Ex. 15, 16,). BNYM, however, did not seek or receive a stay of the order approving the plan during the pendency of the appeal. (Decl. of Troy Bundy, Ex. 17). The Watts regained ownership from April 22, 2015 until August 12, 2015 when the title was transferred to BNYM pursuant to an order approving the sale of the unit to BNYM under 11 U.S.C. § 363. (Decl. of Troy Bundy, Ex. 18). From August 12, 2015 through the present, BNYM admits it holds title to the property. (Id. at ¶ 22). Based on the foregoing history, BNYM has been in title of the property for a period from October 17, 2014 to April 22, 2015, and again since August 12, 2015 to present. III. SUMMARY JUDGMENT STANDARD Summary judgment is appropriate “if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no Case 6:16-cv-00300-AA Document 46 Filed 07/10/17 Page 9 of 30 Page 6 – MERITAGE HOMEOWNERS’ ASSOCIATION AND THIRD-PARTY DEFENDANT KURT FREITAG'S MOTION FOR SUMMARY JUDGMENT HART WAGNER LLP 1000 S.W. Broadway, Twentieth Floor Portland, Oregon 97205 Telephone: (503) 222-4499 Facsimile: (503) 222-2301 genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c). To survive a motion for summary judgment, plaintiffs must present specific facts establishing a genuine issue on all essential elements of the case. Celotex, 477 U.S. 317, 322-24, 106 S.Ct. 2548 (1986). Once a defendant carries its initial burden, a plaintiff “may not rest upon the mere allegations or denials,” but must provide affidavits or other sources of admissible evidence that “set forth specific facts showing that there is a genuine issue for trial.” Devereaux v. Abbey, 263 F.3d 1070, 1076 (9 th Cir. 2001) (quoting Fed.R.Civ.P. 56(e)). The court must view the evidence in the light most favorable to the nonmoving party. Bell v. Cameron Meadows Land Co., 669 F.2d 1278, 1284 (9th Cir.1982). However, deference to the nonmoving party has limits. The nonmoving party must set forth “specific facts showing a genuine issue for trial.” Fed. R. Civ. P. 56(e). The “mere existence of a scintilla of evidence in support of plaintiff's positions [is] insufficient.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986). Therefore, 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., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (internal quotation marks omitted). IV. MEMORANDUM OF LAW A. The Agreements Bar BNYM’s Claims and Preclude BNYM from Changing the Facts The Agreements released the counterclaims and third-party claims that BNYM now asserts, and also preclude BNYM from changing the stipulated facts in the Agreements. BNYM has possession of, or access to these Agreements, and is bound by them. 1. BNYM is Bound by the Agreements “The interpretation of a settlement agreement is governed by principles of state contract law.” Botefur v. City of Eagle Point, Or., 7 F.3d 152, 156 (9th Cir. 1993). In Oregon, it is axiomatic that an unambiguous contract must be enforced according to its terms. Id. at 157 (applying Oregon law). Further, it is well-established that a release can serve as a bar to liability Case 6:16-cv-00300-AA Document 46 Filed 07/10/17 Page 10 of 30 Page 7 – MERITAGE HOMEOWNERS’ ASSOCIATION AND THIRD-PARTY DEFENDANT KURT FREITAG'S MOTION FOR SUMMARY JUDGMENT HART WAGNER LLP 1000 S.W. Broadway, Twentieth Floor Portland, Oregon 97205 Telephone: (503) 222-4499 Facsimile: (503) 222-2301 in future claims. Lindgren v. Berg, 307 Or. 659, 665, 772 P.2d 1336, 1339 (1989). In addition, the parties are entitled to rely upon executed settlement agreements and be assured as to the finality of the released claims. The Supreme Court of Oregon has stated, “Certainty and judicial economy are served when parties can negotiate settlement of their disputes with confidence that their settlement agreements will be upheld and enforced by the courts.” Id. The Agreements are expressly binding on the Watts’ successors and assigns. BNYM falls into both categories by virtue of being “the purchaser of the Subject Property.” (Decl. of Troy Bundy, Ex. 18, pg. 2, No. 2). BNYM is a successor as “[a] person who succeeds to the office, rights, responsibilities, or place of another; one who replaces or follows a predecessor.” Successor, Black’s Law Dictionary (9th ed. 2009). 1 BNYM is likewise an assignee, as “One to whom property rights or powers are transferred by another.” Assignee, Black’s Law Dictionary (9th ed. 2009). Therefore, by the express terms of the Agreements, BNYM is bound by their terms. The enforceability of the Agreements is not affected by the purchase of the property by BNYM via 11 U.S.C. § 363. While section 363 authorizes the sale of property “free and clear of any interest in such property,” that phrase is undefined in the code. 11 U.S.C. § 363(f). There is no authority suggesting the term “interest” includes settlement agreements and contracts entered into by a predecessor that are specifically binding on successors and assigns. Such a broad application of § 363 is not stated or intimated in the Order authorizing the sale of the Property in this matter. (Decl. of Troy Bundy, Ex. 18). By its own terms, the § 363 Order applies only to “Liens,” or an “interest in the Subject Property.” (Id. at ¶¶ 6, 8). Specifically, paragraph 6 of the § 363 Order provides: “The Motion for Authority to Sell Free and Clear of Liens is Granted . . .”. Later, paragraph 8 provides: “The sale of the Subject Property shall be free and clear of any interest in the Subject Property of any entity.” No 1 The agreement should be interpreted by definitions that existed at the time of the agreements. MCI Telecommunications Corp. v. Am. Tel. & Tel. Co., 512 U.S. 218, 228, 114 S. Ct. 2223, 2230, 129 L. Ed. 2d 182 (1994). The 9th edition of Black’s Law Dictionary was published in 2009; the 10th edition was published May 2014. Case 6:16-cv-00300-AA Document 46 Filed 07/10/17 Page 11 of 30 Page 8 – MERITAGE HOMEOWNERS’ ASSOCIATION AND THIRD-PARTY DEFENDANT KURT FREITAG'S MOTION FOR SUMMARY JUDGMENT HART WAGNER LLP 1000 S.W. Broadway, Twentieth Floor Portland, Oregon 97205 Telephone: (503) 222-4499 Facsimile: (503) 222-2301 reference is made to any of the settlement agreements or the Covenant. BNYM seems to concede this point in their Amended Third-Party Complaint, asserting as an affirmative defense only that it “took title to the Property ‘free and clear of liens.’” (Am. Answer and 3rd Party Compl. ¶ 29). The Agreements also include the Covenant, which similarly binds BNYM. It is a long- standing principle that covenants running with the land are enforceable in Oregon. Texas Co. v. Butler, 198 Or. 368, 375, 256 P.2d 259, 263 (1953). For a covenant to run with the land, (1) there must be privity of the estate between the promisor and his successors; (2) the promisor and promisee must intend that the covenant run; (3) the covenant must touch and concern the land of the promisor; and (4) the promisee must benefit in the use of some land possessed by him as a result of the performance of the promise. Nordbye v. BRCP/GM Ellington, 246 Or. App. 209, 225, 266 P.3d 92, 101 (2011). The Covenant here meets those requirements. The Watts’ unit was transferred to BNYM, establishing privity. Huff v. Duncan, 263 Or. 408, 412, 502 P.2d 584, 586 (1972). The Covenant explicitly stated that the restrictions in it “shall operate as covenants running with the land in perpetuity,” and was recorded in the Lincoln County Book of Records, satisfying the requirement that the parties intended it to run. (Decl. of Troy Bundy, Ex. 10 pgs. 1, 3). The Covenant “touches and concerns the land,” in that it concerns the windows affixed to the Property. (Id. at pg. 2). Finally, the promisee benefited in the use of the land, in that the covenant was entered into “to offset costs of repairing defective windows and related damages.” (Id. at pg. 1). As with the other Agreements, the sale under 11 U.S.C. § 363 does not invalidate the Covenant. In Gouveia v. Tazbir, 37 F.3d 295 (7th Cir. 1994), the Seventh Circuit refused to allow a sale under Section 363(f) to eliminate a reciprocal land covenant prohibiting commercial development on a property. The Seventh Circuit held that the other landowners could not be compelled to accept money damages in lieu of enforcement of a restrictive covenant that affects property rights and, therefore, it is not barred by the 11 U.S.C. § 363 sale. Id. at 299. Another court has held that a sale “free and clear of liens and other interests has no impact on restrictions Case 6:16-cv-00300-AA Document 46 Filed 07/10/17 Page 12 of 30 Page 9 – MERITAGE HOMEOWNERS’ ASSOCIATION AND THIRD-PARTY DEFENDANT KURT FREITAG'S MOTION FOR SUMMARY JUDGMENT HART WAGNER LLP 1000 S.W. Broadway, Twentieth Floor Portland, Oregon 97205 Telephone: (503) 222-4499 Facsimile: (503) 222-2301 of record that run with the land,” and that such a sale “[is] not intended to sever easements and other non-monetary property interests that are created by substantive State law.” Silverman v. Ankari (In re Oyster Bay Cove, Ltd), 196 B.R. 252, 255 (E.D.N.Y. 1996). Other courts have echoed these holdings regarding covenants. See In re 523 East Fifth Street Housing Preservation Development Fund Corp., 79 B.R. 568, 576 (Bankr. S.D.N.Y. 1987) (refusing to approve sale under 11 U.S.C. § 363 free and clear of restrictive covenant limiting use of property for low- income housing); In re WBQ Partnership, 189 B.R. 97, 106 (Bankr. E.D.Va. 1995) (in dicta, a Section 363 sale cannot eliminate a covenant running with the land). 2. The Agreements Released BNYM’s Counterclaims and Third-Party Claims These Agreements preclude the counterclaims and third-party claims brought by BNYM. The Window Litigation Release was between the homeowners, including the Watts, their successors and assigns, the HOA, and Freitag, among other parties. (Decl. of Troy Bundy, Ex. 4, pg. 1 § I-B). It included a mutual release between the parties “not to sue and [to] release each other from any and all past, present and future claims . . . arising out of, related to, or in any way caused by the facts and circumstances alleged in the [Window Litigation].” (Id. at pg. 3 § III-A). The facts and circumstances alleged in the Window Litigation specifically related to defects in the windows installed at Meritage, and the resulting damage. (Decl. of Troy Bundy, Ex. 19 ¶¶ 18-24). BNYM’s claims directly arise from the same facts and circumstances alleged in the Window Litigation, and are therefore governed by the Window Litigation Release. As noted in the Statement of Facts, the Window Litigation resulted in an agreement by the Watts to repair the defective windows. (Decl. of Troy Bundy Ex. 4, pg. 8 § IV). The noncompliance with this term led to fines for the Watts. (Decl. of Kurt Freitag ¶ 3). BNYM’s allegations directly relate to the consequences of those events: plywood placed over the still-unrepaired windows to prevent the threat of the windows blowing out and falling to the ground; property damages resulting from a Case 6:16-cv-00300-AA Document 46 Filed 07/10/17 Page 13 of 30 Page 10 – MERITAGE HOMEOWNERS’ ASSOCIATION AND THIRD-PARTY DEFENDANT KURT FREITAG'S MOTION FOR SUMMARY JUDGMENT HART WAGNER LLP 1000 S.W. Broadway, Twentieth Floor Portland, Oregon 97205 Telephone: (503) 222-4499 Facsimile: (503) 222-2301 failure to repair; and assessments and fines incurred from a continuing refusal to repair the windows. Further, BNYM’s allegations relate to the selection and installation of the windows as that was a catalyst for the HOA’s financial difficulties, lawsuits, and large expenses that have been borne by the HOA, which in turn led to the Watts’ bankruptcy and BNYM’s ownership of the property. These are the very claims asserted against Freitag and Big Fish Partners I in the Window Litigation that are covered by the Window Litigation Release. The Watts were represented by independent counsel and accepted the consideration offered in exchange for the release contained in the Window Litigation Release. Therefore, BNYM’s claims arise from the same operative facts and circumstances that were resolved by the Window Litigation Release. As such, the Window Litigation Release expressly bars BNYM from raising these claims again against Freitag. Further, in the Window Litigation Release, the “Homeowners”—defined to include the Watts and their successors—agreed to indemnify Freitag and hold him harmless for claims relating to their complaint as intervening plaintiffs in the Window Litigation. (Id. at pg. 8 § V). Those allegations dealt with the selection and installation of the windows. (Decl. of Troy Bundy, Ex. 19 ¶¶ 18-24). As noted above, the allegations asserted by BNYM relate to the selection and installation of the windows. They, therefore, fall under the indemnity and hold harmless provisions within the Window Litigation Release. Moreover, the Watts entered into the Covenant, that specifically states that the restrictions therein “shall operate as covenants running with the land in perpetuity” and are binding upon the Watts’ “successors and assigns.” (Decl. of Troy Bundy, Ex. 10 pg. 3). The Covenant, which is supported by consideration paid to the Watts, expressly states that the Watts will not bring any claims against Freitag related “in any way” to “the facts and circumstances alleged in the Window Litigation.” (Id. at pg. 3 No.1). The current conflict arises directly from the effects of the windows litigation, and is subject to, and therefore precluded by, the Covenant. Case 6:16-cv-00300-AA Document 46 Filed 07/10/17 Page 14 of 30 Page 11 – MERITAGE HOMEOWNERS’ ASSOCIATION AND THIRD-PARTY DEFENDANT KURT FREITAG'S MOTION FOR SUMMARY JUDGMENT HART WAGNER LLP 1000 S.W. Broadway, Twentieth Floor Portland, Oregon 97205 Telephone: (503) 222-4499 Facsimile: (503) 222-2301 3. The Agreements Establish Stipulated Facts that BNYM Cannot Now Change The Agreements contain certain key stipulated facts that directly contradict BNYM’s allegations in this lawsuit. These stipulated facts estop BNYM from pleading contrary factual allegations here. BNYM alleges that Freitag wrongfully asserted the authority to replace windows, to assess fines related to the windows, to assess BNYM for “allegedly defective” windows, and to place plywood “over functioning windows.” (Am. Answer and 3rd Party Compl. ¶¶ 54, 69(vi)- (viii)). In addition, BNYM “denies that any windows in the Property are defective,” and asserts that the water intrusion and damage at the Property are not due to the windows. (Id. at ¶¶ 14-15, 54, 59). Contrary to those allegations, the Covenant establishes that the windows at the Property “were not performing” and were causing water intrusion and damage. (Decl. of Troy Bundy, Ex. 10 pg. 1). It reads: Whereas, the windows and related installation in the Property and the 17 other units in Phases 1 through 3 of Meritage were not performing and water intrusion was damaging or threatening to damage structural members of the Property for which Meritage Homeowners’ Association is responsible for the maintenance, repair and replacement. (Id.) Similarly, the Repair Agreement proclaims, “[W]indows installed in the Owners’ units were defective, and suffered from installation defects which were allowing water intrusion into the units.” (Decl. of Troy Bundy, Ex. 9, pg. 1). The Repair Agreement also sets out: Whereas owners of units in the Meritage are responsible for the maintenance and repair of the windows and the defects alleged by Owners in the Window Litigation were resulting in water intrusion which was damaging or threatening to damage portions of the structure the HOA is responsible to maintain and repair. (Id.) Case 6:16-cv-00300-AA Document 46 Filed 07/10/17 Page 15 of 30 Page 12 – MERITAGE HOMEOWNERS’ ASSOCIATION AND THIRD-PARTY DEFENDANT KURT FREITAG'S MOTION FOR SUMMARY JUDGMENT HART WAGNER LLP 1000 S.W. Broadway, Twentieth Floor Portland, Oregon 97205 Telephone: (503) 222-4499 Facsimile: (503) 222-2301 These facts were essential to the HOA in entering into the agreements with the Watts, and if the Watts did not, or do not, agree with those facts the HOA would not have entered into the agreements. (Decl. of Kurt Freitag, ¶¶ 9-10). Further, the Watts cite the very same agreements in an effort to avoid liability to the HOA in the HOA’s collection action against the Watts. (Decl. of Troy Bundy, Ex. 20, pgs. 9-13). Accordingly, the Watts seek to rely on an agreement BNYM contends should be ignored. Judicial estoppel prevents a party from asserting a claim in a legal proceeding that is inconsistent with a claim taken in a previous proceeding. New Hampshire v. Maine, 532 U.S. 742, 749–50, 121 S. Ct. 1808, 1814, 149 L. Ed. 2d 968 (2001). This doctrine applies to settlement agreements, as it has occurred in this matter. Commonwealth Ins. Co. v. Titan Tire Corp., 398 F.3d 879, 887 (7th Cir. 2004). BNYM, through its predecessor, has stipulated to facts that run counter to the allegations they bring now. They should not be able to undermine the prior settlement and assert claims that directly contradict the stipulated facts upon which those settlements were based. 4. BNYM has Been Aware of these Documents but Proceeded Regardless BNYM has been in possession of the Agreements for months; sufficient time to allow it to assess their effect on this litigation. The HOA Litigation Release, the Windows Release, and the Repair Agreement were all produced to plaintiff August 8, 2016. (Decl. of Troy Bundy, Ex. 11). In addition, BNYM (itself) included the HOA Litigation Release and the Repair Agreement in their document production to Freitag. The Covenant has been recorded in the Lincoln County records since February 24, 2014. (Decl. of Troy Bundy, Ex. 10). BNYM’s persistence in pursuing its claims is either a failure to perform due diligence when it purchased the property, a failure to review discovery, a willful disregard of these expressly binding documents, or some combination of the three. None of these reasons, however, provide authority for BNYM to pursue the released claims or contradict stipulated facts. / / / / / / Case 6:16-cv-00300-AA Document 46 Filed 07/10/17 Page 16 of 30 Page 13 – MERITAGE HOMEOWNERS’ ASSOCIATION AND THIRD-PARTY DEFENDANT KURT FREITAG'S MOTION FOR SUMMARY JUDGMENT HART WAGNER LLP 1000 S.W. Broadway, Twentieth Floor Portland, Oregon 97205 Telephone: (503) 222-4499 Facsimile: (503) 222-2301 B. BNYM’S Claims Are Not Supported by Evidence 1. BNYM Has Not Produced Evidence In Support of its Claims At the outset of this litigation in July 2016, BNYM was advised that it was required to have evidence in its possession at the time of filing its lawsuit to support its claims. (Decl. of Troy Bundy, Ex. 21). The basis for this warning is found in Fed. R. Civ. P. 11(b)(3), which requires that a party’s “factual contentions have evidentiary support” upon presenting the court with a pleading. The rule, however, allows for a plaintiff to plead that the factual contentions “will likely have evidentiary support after a reasonable opportunity for further investigation or discovery.” Id. Accordingly, BNYM was advised that if this was their aim, they should amend their pleading to reflect it. (Decl. of Troy Bundy, Ex. 21). No such amendment has been made. In fact, BNYM specifically represented that all of the allegations in its initial counter claims were supported by information in its file. (Decl. of Troy Bundy Ex. 22, pg. 2). Later, after BNYM produced its discovery, BNYM was cautioned that it had “not produced a single document that supports your third-party claims or counter-claims.” (Decl. of Troy Bundy, Ex. 23). In fact, as of the date of this filing, BNYM persists in litigating its claims without supporting evidence. The time is now past due for BNYM to bring evidence forward that they had at the time of filing, pursuant to Fed. R. Civ. P. 11(b)(3). It is important to identify what type of evidence could be sufficient for BNYM to meet their burden, and what is not. First, speculation is not sufficient to survive a motion for summary judgment. Hernandez v. Spacelabs Medical, Inc., 343 F.3d 1107, 1112 (9th Cir. 2003). A nonmoving party cannot defeat summary judgment by relying on the allegations in the complaint, or with unsupported conjecture or conclusory statements. Id. Next, an expert’s mere assertion of a conclusion or opinion in an affidavit submitted in opposition to a summary judgment motion does not satisfy the nonmoving party’s burden to come forward with specific facts under Fed. R. Civ. P. 56(e). Guidroz-Brault v. Mo. Pac. R.R. Co. 254 F3d 825, 831–832 (9th Cir 2001). Rather, the “factual basis for the expert’s opinion must be stated in the expert’s Case 6:16-cv-00300-AA Document 46 Filed 07/10/17 Page 17 of 30 Page 14 – MERITAGE HOMEOWNERS’ ASSOCIATION AND THIRD-PARTY DEFENDANT KURT FREITAG'S MOTION FOR SUMMARY JUDGMENT HART WAGNER LLP 1000 S.W. Broadway, Twentieth Floor Portland, Oregon 97205 Telephone: (503) 222-4499 Facsimile: (503) 222-2301 affidavit and although the underlying factual details need not be disclosed in the affidavit, the underlying facts must exist.” Id. To be more specific, the expert submitting an affidavit to satisfy the nonmoving party’s burden “must back up his opinion with specific facts.” United States v. Various Slot Machine, 658 F2d 697, 699–701 (9th Cir 1981). Affirmative evidence is required. 2. The Evidence Contradicts BNYM’s Claims Where BNYM has asserted allegations with specificity, as it has in relation to the plywood placed on the Property, the evidence does not support its claim. BNYM has alleged that Freitag wrongfully asserted the authority to require plywood boards to be placed over “functioning” windows, that Freitag actually placed those plywood boards over the windows, and, finally, that he then removed “fitted” plywood boards and replaced them with unfitted boards (“Plywood Allegations”). (Am. Answer and 3rd Party Compl. ¶¶ 54, 69(viii)-(x)). The time period contemplated for the Plywood Allegations is during the Watts’ ownership of the Property. The first set of plywood coverings was installed in February 2012, and removed in October 2012. (Decl. of Brian Johnston ¶¶ 3-4). The second set was installed February 2014. (Id. at ¶ 5). Both installations were intended to be a temporary emergency procedure until the windows were replaced. (Id. at ¶ 7). The first round of plywood installation was hotly contested by the owners, including the Watts. While the Window Litigation was pending, the HOA notified owners that conditions similar to those that existed when a four foot square window blew out and fell to the ground were observed in other windows throughout the complex. (Decl. of Kurt Freitag, Ex. 2). To avoid potential catastrophic injury that could result, and the damage to the units if windows blew out in a storm, the HOA informed owners they had to cover windows with evidence of failure. (Id.). The owners objected, contending the windows posed no threat and there was no reason to cover them. (Decl. of Troy Bundy, Ex. 24, pg. 4). The HOA provided the owners information as to why the windows needed to be covered and diagrams of the windows at issue. (Decl. of Troy Case 6:16-cv-00300-AA Document 46 Filed 07/10/17 Page 18 of 30 Page 15 – MERITAGE HOMEOWNERS’ ASSOCIATION AND THIRD-PARTY DEFENDANT KURT FREITAG'S MOTION FOR SUMMARY JUDGMENT HART WAGNER LLP 1000 S.W. Broadway, Twentieth Floor Portland, Oregon 97205 Telephone: (503) 222-4499 Facsimile: (503) 222-2301 Bundy, Ex. 25). The owners still refused and threatened to seek a TRO to stop the HOA from covering the windows. (Decl. of Troy Bundy, Ex. 26 pg. 3). While covering the windows was being contested, a coastal storm blew in. When it did, two of the four foot square windows located 20 feet in the air, including the window in the Watt/BNYM Unit, blew out. (Decl. of Troy Bundy, Ex. 27, pg. 1, No. 2). With the HOA’s concerns confirmed, the owners agreed the windows needed to be covered. (Decl. of Troy Bundy, Ex. 5). Further, the owners agreed to pay for the work. (Decl. of Brian Johnston, ¶ 6). As a result, the windows with evidence of failure were covered. Because of the pending Window Litigation the manufacturer was notified of the failure of the windows. The manufacture agreed to send a warranty repair crew and promised to address the defects that lead to the failure. (Decl. of Troy Bundy, Ex. 27, pg. 1, No. 2). The manufacturer sent a crew that made several repairs, but then left before making complete repairs. (Id.) Further, the manufacturer’s repairs were limited to re-glazing windows with failed seals. (Decl. of Kurt Freitag, ¶ 2). In essence, the manufacturer installed new glass, but did not address the conditions that lead to the failure. The liability associated with a large plate glass window flying from its frame and crashing to the ground two stories below cannot be understated. Many of the owners did not want to continue to have their windows covered in plywood while the Window Litigation dragged on. Accordingly, they asked the HOA to allow windows to be uncovered if the owners agreed to indemnify the HOA for any resulting injury of damage to the structures. An indemnification agreement was drafted, and approved by counsel for the owners. (Decl. of Troy Bundy, Ex. 27). The Watts signed the indemnification agreement in August of 2012, and the boards initially installed over the windows in their unit were removed, in October of 2012. (Id. at pg. 1, No. 2; Decl. of Brian Johnston, ¶ 4). In the fall of 2013, a mediation took place in the Window Litigation. The contractor who installed the windows in the phase of the Planned Community in which the Watt’s property is Case 6:16-cv-00300-AA Document 46 Filed 07/10/17 Page 19 of 30 Page 16 – MERITAGE HOMEOWNERS’ ASSOCIATION AND THIRD-PARTY DEFENDANT KURT FREITAG'S MOTION FOR SUMMARY JUDGMENT HART WAGNER LLP 1000 S.W. Broadway, Twentieth Floor Portland, Oregon 97205 Telephone: (503) 222-4499 Facsimile: (503) 222-2301 located wanted to settle the case, so a deal was struck for an appropriate payment and release. (Decl. of Troy Bundy, Ex. 6). At the time, the glass in the failed window was replaced and no other repairs were done to the failed window or others with the same defects. (Decl. of Kurt Freitag, ¶ 2). Therefore, to avoid the possibility of liability for resulting injuries, the contractor required the owners of units in the phase on which it worked to agree to replace the windows, and if repairs would not be made immediately, to re-cover the windows with plywood so they would not blow out. (Decl. of Troy Bundy, Ex. 6). The Watts were one of the owners who agreed, and they accepted the funds paid by the contractor. (Id.). Shortly after that agreement was reached, the Window Litigation settled. (Decl. of Troy Bundy, Ex. 4). With the window litigation settled, owners began making arrangements with the repair contractor to replace the windows. Because the Watts were not proceeding with repairs, and agreed to cover the windows until they did, the repair contractor replaced the plywood over windows at issue on the Watt Unit. (Decl. of Brain Johnston, ¶ 3). The second set of plywood coverings, those required by the settlement agreement with the contractor, were installed in February 2014. (Id. at ¶ 5). BNYM’s first period of ownership, October 17, 2014 through April 22, 2015, occurred well after the final installation of plywood. As such, BNYM must accept as controlling the Agreements entered into by the Watts. The Watts agreed that the windows were defective and allowing water intrusion into the Property. (Decl. of Troy Bundy, Ex. 9 pg. 1). The Watts also agreed that the water intrusion was damaging or threatening to damage elements for which the HOA had responsibility. (Id.). In addition, the Watts agreed that they were responsible for maintenance and repair of the windows. (Id.). The Watts agreed as part of the consideration they received from the contractor for the Window Litigation Release that they would replace the windows, and cover them with plywood until they did. (Decl. of Troy Bundy, Ex. 6 ¶ 12). Based on these stipulated facts, the HOA was acting within its rights when it required the Watts to board up their windows to help prevent Case 6:16-cv-00300-AA Document 46 Filed 07/10/17 Page 20 of 30 Page 17 – MERITAGE HOMEOWNERS’ ASSOCIATION AND THIRD-PARTY DEFENDANT KURT FREITAG'S MOTION FOR SUMMARY JUDGMENT HART WAGNER LLP 1000 S.W. Broadway, Twentieth Floor Portland, Oregon 97205 Telephone: (503) 222-4499 Facsimile: (503) 222-2301 further damage. Further, the HOA is authorized to require such work under the Bylaws and CCRs. (Decl. of Troy Bundy, Ex. 2, pg. 16 § 4.18). The HOA observed conditions that preceded a previous catastrophic windows failure. Accordingly, the HOA was well within its authority when it acted to require owners to cover windows showing the defective conditions. The failure of two windows during a coastal storm a short time later proved the point. These same facts also defeat BNYM’s allegation that Freitag was responsible for the substitution of one plywood with “unattractive” plywood. (Am. Answer and 3rd Party Compl. ¶¶ 51-52, 69(x)). The Watts agreed to have their windows boarded up until they were replaced, with no specification as to the aesthetic quality of the plywood installed. (Decl. of Troy Bundy, Ex. 6 ¶ 12). Further belying an interest in the attractiveness of plywood boards, the Watts never paid for the work that was performed. (Decl. of Brian Johnston ¶ 6). When it became apparent that there was no intent on the part of the Watts or BNYM to replace the windows, and that the plywood would be a long-term fixture, the HOA requested access to replace the existing plywood with more aesthetic plywood, such as staining it to match the siding, but these requests were denied. (Decl. of Kurt Freitag ¶ 12). 3. BNYM’s Claims Are a Reprisal of the Unsupported Claims Brought by the Watts Apart from the Plywood allegations, most of BNYM’s remaining allegations were asserted by the Watts and other homeowners in the HOA Litigation. There, the homeowners brought virtually identical allegations to those that BNYM brings now. Specifically, the Watts and their co-plaintiffs alleged against Freitag and the HOA the following: breach of fiduciary duty and negligence regarding overcharges; conflict of interest transactions; expenses made which were not in the homeowners’ best interests; insufficient informational disclosures, inadequate maintenance of common property; and un-maintained common property causing damage to exteriors and interiors of units, misappropriation of funds and failure to maintain an Case 6:16-cv-00300-AA Document 46 Filed 07/10/17 Page 21 of 30 Page 18 – MERITAGE HOMEOWNERS’ ASSOCIATION AND THIRD-PARTY DEFENDANT KURT FREITAG'S MOTION FOR SUMMARY JUDGMENT HART WAGNER LLP 1000 S.W. Broadway, Twentieth Floor Portland, Oregon 97205 Telephone: (503) 222-4499 Facsimile: (503) 222-2301 adequate reserve account. (Decl. of Troy Bundy, Ex. 7 ¶¶ 32, 34). Those claims lacked evidence just as BNYM’s claims do now. C. BNYM is Either Bound By the Agreements, or Does Not have Standing The chronology of facts in this matter raises a question: how does BNYM establish standing to bring its claims? Every action filed in federal court must be prosecuted in the name of the real party in interest. Fed. R. Civ. P. 17(a)(1). By its own admission, BNYM claims it was not the owner of the property prior to August 12, 2015, and it disputes whether it owned the property from October 17, 2014 through April 22, 2015. (Am. Answer and 3rd Party Compl. ¶ 22). The events giving rise to the plywood allegations occurred before the disputed period of ownership, and the first installation occurred even before BNYM was assigned the interest in the Watts’ loan. (Decl. of Brian Johnston ¶¶ 3-5; Decl. of Troy Bundy, Ex. 1). Presumably, many of the other allegations brought by BNYM relate to events prior to August 12, 2015 as well. (Am. Answer and 3rd Party Compl. ¶ 69). Of course, a successor or assignee may become the real party in interest when all the rights, title, and interests are assigned to it. See Portland Baseball Club, Inc. v. Kuhn, 368 F. Supp. 1004, 1008 (D. Or. 1971), aff'd, 491 F.2d 1101 (9th Cir. 1974). BNYM, however, has provided no explanation for the basis of its standing to assert these allegations, since they claim they are “in title,” but not “owners.” (Am. Answer and 3rd Party Compl. ¶ 6). BNYM’s claims must inhabit one of two roles: either they are the successor and assignee of the Watts, thereby having standing to bring claims relating to the period of the Watts ownership—but which were nevertheless released by the Agreements—or they do not have standing to bring claims that occurred prior to ownership. In sum, BNYM may not stand in the shoes of the Watts when it is convenient for them, and slip them off to avoid responsibilities that accompany that position. BNYM must show that they have the rights to bring claims belonging to the Watts, or that all of their claims occurred after it assumed ownership. / / / / / / Case 6:16-cv-00300-AA Document 46 Filed 07/10/17 Page 22 of 30 Page 19 – MERITAGE HOMEOWNERS’ ASSOCIATION AND THIRD-PARTY DEFENDANT KURT FREITAG'S MOTION FOR SUMMARY JUDGMENT HART WAGNER LLP 1000 S.W. Broadway, Twentieth Floor Portland, Oregon 97205 Telephone: (503) 222-4499 Facsimile: (503) 222-2301 D. BNYM May Not Bring A Derivative Action 1. There is no Statutory Authority for a Derivative Action Against an HOA BNYM alleges a derivative claim despite no legal basis to do so. A derivative action is a suit brought by an individual shareholder to enforce a “corporate cause of action against officers, directors, and third parties.” Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 95, 111 S. Ct. 1711, 1716, 114 L. Ed. 2d 152 (1991). It must be brought in the name of the corporation. Noakes v. Schoenborn, 116 Or. App. 464, 471, 841 P.2d 682, 686 (1992). The majority of BNYM’s allegations against Freitag are apparently for damages suffered by the HOA or the homeowners as a group. (Am. Answer and 3rd Party Compl. ¶ 69(i)-(vi), (xi)-(xv)). BNYM has alleged that Freitag “breached his fiduciary duties to the Meritage HOA,” and that as a consequence, “Meritage HOA has been and continues to be damaged.” (Id. at ¶¶ 69-70). The court looks at the laws of the state where the company is incorporated in determining whether a complaint meets pleading requirements for a derivative action. In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 989-990 (9th Cir.1999), abrogated on other grounds by S. Ferry LP, No. 2 v. Killinger, 542 F.3d 776, 784 (9th Cir. 2008). Further, a federal court interpreting Oregon law should “interpret the law as would the [Oregon] Supreme Court.” Siltronic Corp. v. Employers Ins. Co. of Wausau, 176 F. Supp. 3d 1033, 1049 (D. Or. 2016) quoting Powell's Books, Inc. v. Kroger, 622 F.3d 1202, 1209 (9th Cir.2010). In Oregon, there is no authority for this action in the context of an HOA. Chapter 94 of the Oregon Revised Statutes governs a Homeowners Association, and also provides for the liability of directors and board members. Chapter 94 does not authorize a derivative action. This cannot simply be adduced to an oversight, as Chapter 94 is otherwise careful to include other aspects of liability and legal remedies in the HOA context. For example, Or. Rev. Stat. Ann. § 94.640(1) identifies Or. Rev. Stat. Ann. § 65.369—which limits liability to gross negligence or intentional misconduct—as grounds for liability of directors of a Homeowners Association. / / / Case 6:16-cv-00300-AA Document 46 Filed 07/10/17 Page 23 of 30 Page 20 – MERITAGE HOMEOWNERS’ ASSOCIATION AND THIRD-PARTY DEFENDANT KURT FREITAG'S MOTION FOR SUMMARY JUDGMENT HART WAGNER LLP 1000 S.W. Broadway, Twentieth Floor Portland, Oregon 97205 Telephone: (503) 222-4499 Facsimile: (503) 222-2301 Regardless, even if the omission of authority for a derivative action was a mistake, it is not the role of the court to supply “an essential element omitted, by mistake or design, by the legislature.” Salahub v. Montgomery Ward & Co., 41 Or. App. 775, 785, 599 P.2d 1210, 1216 (1979). Rather, it is the role of the court only “to ascertain and declare what is, in terms or in substance, contained therein, not to insert what has been omitted, or to omit what has been inserted.” Or. Rev. Stat. 174.010 Ann. § (emphasis added); Mikityuk v. Nw. Tr. Servs., Inc., 952 F. Supp. 2d 958, 963 (D. Or. 2013). In sum, it is the court’s role to interpret the law, and not to write it. State v. Vasquez-Rubio, 323 Or. 275, 282–83, 917 P.2d 494, 497 (1996). As further evidence that the legislature purposefully omitted authorization for a derivative action from ORS Chapter 94, the legislature has authorized derivative actions in other sections of the Oregon Revised Statutes when it intends to create such an action. The chapters governing private corporations and non-profit corporations both have statutes that authorize a derivative action. Or. Rev. Stat. Ann. §§ 60.261, 65.174. However, there is no similar statute in Chapter 94, nor any reference in Chapter 94 to the derivative claim statutes in Chapters 60 or 65. Moreover, Chapter 94 does not adopt a wholesale application of all the provisions in Chapters 60 or 65. As such, Freitag and HOA are entitled to a judgment in their favor against BNYM’s derivative claims since they have no statutory basis. 2. BNYM has failed to properly plead a derivative action Alternatively, BNYM’s derivative action fails because it does not adhere to the pleading requirements found in Fed. R. Civ. P. 23.1. There are two areas in which BNYM is deficient. First, BNYM does not “fairly and adequately” represent the interests of the other homeowners. Fed. R. Civ. P. 23.1(a). In determining whether BNYM meets this standard, the court “can and should consider outside entanglements making it likely that the interests of the other stockholders will be disregarded.” Guenther v. Pac. Telecom, Inc., 123 F.R.D. 341, 345 (D. Or. 1987). / / / Case 6:16-cv-00300-AA Document 46 Filed 07/10/17 Page 24 of 30 Page 21 – MERITAGE HOMEOWNERS’ ASSOCIATION AND THIRD-PARTY DEFENDANT KURT FREITAG'S MOTION FOR SUMMARY JUDGMENT HART WAGNER LLP 1000 S.W. Broadway, Twentieth Floor Portland, Oregon 97205 Telephone: (503) 222-4499 Facsimile: (503) 222-2301 An example of an “outside entanglement” specifically cited by the Court in Guenther is “ongoing litigation between a plaintiff and the defendant corporation.” Id. Such is the case here, as the HOA has been forced to bring suit to force BNYM to adhere to agreements and obligations to repair the Property’s windows, and to recover dues, fines and assessments that BNYM has refused to pay, and BNYM has responded recalcitrantly with their own counterclaims and derivative action. The Court in Guenther viewed this exact set of circumstances as dangerous, because the interests of a party with ongoing litigation “would be able to use [a] derivative suit as leverage in negotiating a settlement” of the claims brought against them. Id. BNYM’s lawsuit, or outside entanglement, is especially egregious because it seeks to avoid the obligation to replace the defective windows, which has already been met by 17 of the 18 properties at Meritage. (Decl. of Kurt Freitag, ¶ 13). As such, BNYM is essentially bringing a derivative suit in an attempt to be treated differently than the other homeowners. Predictably, various homeowners have expressed their opposition to such a tactic, explicitly stating that each individual homeowner should pay for their own window replacement. 2 BNYM cannot said to be a representative, then, when its litigation goals are directly opposed to the homeowners it purports to represent. As a result, BNYM should be disqualified as an “adequate representative” under Fed. R. Civ. P. 23.1. Second, a plaintiff in a derivative action is required to have been a shareholder at the time of the transactions alleged. Fed. R. Civ. P. 23.1(b)(1). BNYM does not address this issue at all, apart from noting that they acquired title August 12, 2015. (Am. Answer and 3rd Party Compl. ¶ 6). This is not sufficient for a derivative action, as a complaint must allege that the plaintiff was a shareholder when the challenged transactions took place. Fed. R. Civ. P. 23.1(b)(1). BNYM 2 In response to an email asking whether BNYM should pay for replacement windows or whether it should fall to the HOA, four homeowners responded that BNYM should bear the burden. None expressed the opposite view. “I am emphatically in support of the owners individually paying for there [sic] own windows.” (Decl. of Troy Bundy, Ex 28, pg. 1). “We agree that the owners of the property should pay for the replacement of their windows. We had to replaced [sic] our windows at a cost of $111,000 and do not want to be responsible for the cost of replacing another homeowners windows.” (Id. at 3). “I concur that BONY-M, owner of unit 56B, is obligated to replace the Milgard windows in this unit.” (Id. at 4). Case 6:16-cv-00300-AA Document 46 Filed 07/10/17 Page 25 of 30 Page 22 – MERITAGE HOMEOWNERS’ ASSOCIATION AND THIRD-PARTY DEFENDANT KURT FREITAG'S MOTION FOR SUMMARY JUDGMENT HART WAGNER LLP 1000 S.W. Broadway, Twentieth Floor Portland, Oregon 97205 Telephone: (503) 222-4499 Facsimile: (503) 222-2301 does not meet this requirement but it should be highlighted that, in an unpublished opinion, the District of Oregon held that a conclusory pleading that a plaintiff was a member “at times relevant” is insufficient. Belova v. Sharp, 2008 WL 700961 *3 (D. Or. Mar 13, 2008) (decision attached). Considering the allegations, it is unlikely that BNYM’s claims pertain only to the time period following August 12, 2015. This further illustrates the untenable role BNYM seeks— apparently inheriting the rights and benefits of litigation by virtue of acquiring the property from the Watts, while disavowing any of the responsibilities or obligations that came with that same transaction. BNYM must plead with particularity that they have standing to bring these allegations. Either they explain how they were a shareholder during the time of the Watts ownership (bolstering the argument—albeit superfluously—that they are bound to the Agreements), or they do not have standing for derivative claims. E. The HOA and Freitag are Entitled to Attorneys’ Fees The general rule in Oregon is that attorney fees are only awarded “if a statute or contract authorizes such an award.” Swett v. Bradbury, 335 Or. 378, 381, 67 P.3d 391, 392 (2003). Pursuant to Or. Rev. Stat. Ann. § 94.780, the prevailing party of an action brought to remedy or recover damages for the violation of the provisions of Or. Rev. Stat. Ann. §§ 94.550- 94.783 is entitled to attorney fees. Further, the Bylaws and CCRs of the Planned Community provide for recovery of attorney fees in actions involving disputes over their terms or enforcement. 3 (Decl. of Troy Bundy, Ex. 2 pg. 29 § 11.3; pg. 54 Article 13). By definition, all of the claims asserted by BNYM against Freitag are in his role as the declarant for the HOA. By example, among other allegations, BNYM seeks to recover damages for Freitag’s failure to 3 Where a homeowner, such as BNYM, leaves dues unpaid, these immediately become a lien pursuant to the CCRs and under Or. Rev. Stat. Ann. § 94.709(1). (Decl. of Troy Bundy, Ex. 7 pg. 29 § 10.7.2). While the HOA may formalize the lien if it decides to do so, it is not required. Or. Rev. Stat. Ann. § 94.709(1). Collection costs, including attorney fees, are automatically added to the lien that is created. Id.; (Decl. of Troy Bundy, Ex. 7 pg. 29 § 11.3; pg. 54 Article 13). The lawsuit brought against BNYM by the HOA is a collection action. (Am. Compl. ¶¶ 29-33). Attorney fees expended by the HOA in defending counterclaims and the third-party complaint brought by BNYM in response to the collection action would therefore also qualify as recoverable under Or. Rev. Stat. Ann. § 94.709 and the CCRs and Bylaws. (Decl. of Troy Bundy, Ex. 7 pg. 29 § 11.3; pg. 54 Article 13). Case 6:16-cv-00300-AA Document 46 Filed 07/10/17 Page 26 of 30 Page 23 – MERITAGE HOMEOWNERS’ ASSOCIATION AND THIRD-PARTY DEFENDANT KURT FREITAG'S MOTION FOR SUMMARY JUDGMENT HART WAGNER LLP 1000 S.W. Broadway, Twentieth Floor Portland, Oregon 97205 Telephone: (503) 222-4499 Facsimile: (503) 222-2301 provide “financial and informational disclosures required by Oregon Revised Code Chapter 94,” or more specifically, in Or. Rev. Stat. Ann. § 94.670. (Am. Answer and 3rd Party Compl. ¶ 69(iv)). Additionally, BNYM alleges that the HOA reserve account was not “fully fund[ed].” Presumably, this allegation is in reference to Or. Rev. Stat. Ann. § 94.595. Applicability of the attorney’s fee statute, Bylaws and CCRs under these circumstances cannot be denied. Similarly, the prevailing party in an action to enforce compliance with the provisions of the HOA bylaws is also entitled to attorneys’ fees under Or. Rev. Stat. Ann. § 94.719. BNYM, in its third-party complaint, has alleged that the HOA has failed to maintain common property and seeks injunctive relief that they perform those activities. (Am. Answer and 3rd Party Compl. ¶¶ 44, 47). As noted by BNYM, this responsibility comes pursuant to the governing documents, specifically the bylaws. (Id. at ¶ 44; Decl. of Troy Bundy, Ex. 2 pg. 49, § 6.6.2). As a result, the prevailing party in this matter is entitled to attorneys’ fees under Or. Rev. Stat. Ann. § 94.719, the Bylaws and CCRs. Finally, the Window Litigation Release, Repair Agreement, and Covenant all bind the Watts’ successors to provide for fees and other costs to the prevailing party. There is language in each one of these legal documents confirming that if a party to the Agreements, or their successors, commences a legal proceeding to enforce or interpret the terms of the agreement, the prevailing party is entitled to attorneys’ fees and costs. (Decl. of Troy Bundy, Ex. 4 pg. 11 § VI- J; Ex. 9 pg. 4 No. 15; Ex. 10 pg. 3 No. 4). Both the counterclaims and the third-party complaint in this current litigation require the interpretation and enforcement of the terms of the Window Litigation Release, Repair Agreement, and Covenant. If the HOA or Freitag prevails with respect to the issues raised in this motion, an award for fees should be entered. V. CONCLUSION For the foregoing reasons, Meritage Homeowners' Association and Third-Party Defendant Kurt Freitag request the Court grant summary judgment in their favor and for an award of costs, disbursements and attorney fees. It is clear the Agreements unambiguously / / / Case 6:16-cv-00300-AA Document 46 Filed 07/10/17 Page 27 of 30 Page 24 – MERITAGE HOMEOWNERS’ ASSOCIATION AND THIRD-PARTY DEFENDANT KURT FREITAG'S MOTION FOR SUMMARY JUDGMENT HART WAGNER LLP 1000 S.W. Broadway, Twentieth Floor Portland, Oregon 97205 Telephone: (503) 222-4499 Facsimile: (503) 222-2301 released BNYM’s claims. Moreover, BNYM has failed to produce evidence in support of its claims. Alternatively, BNYM does not have standing to bring these claims in the first place. DATED this 10 th day of July, 2017. HART WAGNER LLP By: /s/ Troy S. Bundy Troy S. Bundy, OSB No. 942574 Aaron Potter, OSB No. 992003 Of Attorneys for Third-Party Defendant Kurt Freitag Case 6:16-cv-00300-AA Document 46 Filed 07/10/17 Page 28 of 30 Page 1 – CERTIFICATE OF SERVICE HART WAGNER LLP 1000 S.W. Broadway, Twentieth Floor Portland, Oregon 97205 Telephone: (503) 222-4499 Facsimile: (503) 222-2301 CERTIFICATE OF SERVICE I hereby certify that on the 10 th day of July, 2017, I served the foregoing MERITAGE HOMEOWNERS' ASSOCIATION AND THIRD-PARTY DEFENDANT KURT FREITAG'S MOTION FOR SUMMARY JUDGMENT on the following parties at the following addresses: Mark C. Hoyt Sherman, Sherman, Johnnie & Hoyt P.O, Box 2247 Salem, OR 97308 Email: mark@shermlaw.com Attorney for Plaintiff Meritage Homeowners’ Association Thomas A. Larkin Tyler J. Storti Stewart, Sokol & Larkin, LLC 2300 SW First Avenue, Suite 200 Portland, OR 97201-5047 Email: tlarkin@lawssl.com; tstorti@lawssl.com; and bhamilton@lawssl.com Attorneys for Defendant and Third-Party Plaintiff The Bank of New York Mellon Thomas Yoxall Daron Janis Locke Lord, LLP 2200 Ross Ave., Suite 2800 Dallas, TX 75201 FAX: 214-740-8800 Email: djanis@lockelord.com; tyoxall@lockelord.com Pro Hac Attorneys for Defendant and Third-Party Plaintiff The Bank of New York Mellon [ ] by mailing a true and correct copy thereof, certified by me as such, placed in a sealed envelope addressed as set forth above, and deposited in the U.S. Post Office at Portland, Oregon on said day with postage prepaid; [ ] by causing a true and correct copy thereof to be hand-delivered in sealed envelopes to said addresses on the date set forth above. [ ] by faxing a true and correct copy thereof to the fax numbers shown for said addresses on the date set forth above. / / / Case 6:16-cv-00300-AA Document 46 Filed 07/10/17 Page 29 of 30 Page 2 – CERTIFICATE OF SERVICE HART WAGNER LLP 1000 S.W. Broadway, Twentieth Floor Portland, Oregon 97205 Telephone: (503) 222-4499 Facsimile: (503) 222-2301 [ ] by sending a full, true and correct copy thereof via overnight mail in a sealed, prepaid envelope, addressed to the attorneys as shown above on the date set forth above. [X] by submitting said document via electronic mail and CM/ECF e-service, a copy thereof was served on the parties above. /s/ Troy S. Bundy Troy S. Bundy, OSB No. 942574 Case 6:16-cv-00300-AA Document 46 Filed 07/10/17 Page 30 of 30 Belova v. Sharp, Not Reported in F.Supp.2d (2008) 2008 WL 700961, Fed. Sec. L. Rep. P 94,605 © 2017 Thomson Reuters. No claim to original U.S. Government Works. 1 2008 WL 700961 United States District Court, D. Oregon. Svetlana BELOVA, Derivatively on Behalf of Triquint Semiconductor, Inc., Plaintiff, v. Steven J. SHARP et al., Defendants, and Triquint Semiconductor, Inc., a Delaware corporation, Nominal Defendant. No. CV 07–299–MO. | March 13, 2008. Attorneys and Law Firms Gary I. Grenley, Paul H. Trinchero, Grenley Rotenberg Evans Bragg & Bodie PC, Portland, OR, James I. Jaconette, Coughlin Stoia Geller Rudman & Robbins LLP, San Diego, CA, for Plaintiff. Claire Loebs Davis, Douglas W. Greene, Wilson Sonsini Goodrich & Rosati, P.C., Seattle, WA, Douglas J. Clark, Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto, CA, Kelley Moohr Kinney, Frohnmayer, Deatherage, Pratt, et al., Medford, OR, James M. Barrett, Ater Wynne, LLP, Portland, OR, for Defendants. OPINION & ORDER MOSMAN, District Judge. *1 TriQuint Semiconductor, Inc., and the individual defendants (collectively “defendants”) each move to dismiss this consolidated shareholder derivative suit brought by Svetlana Belova and Bradley Bullard (the “shareholders”) for failure to state a claim and failure to make a pre-suit demand. Because the shareholders do not adequately allege contemporaneous ownership, I GRANT the Motions to Dismiss (# 20 & # 22) without prejudice and with leave to amend. I also address the other arguments for dismissal, making future motions to dismiss unnecessary once the Complaint is properly amended. BACKGROUND The defendants allegedly engaged in a scheme of stock options backdating, diverting hundreds of millions of dollars to TriQuint insiders. They also allegedly participated in concealing the backdating and/or refusing to assert TriQuint's legal rights. Based on this, the shareholders allege violations of federal and state law, including breaches of fiduciary duties, abuse of control, fraud, corporate waste, unjust enrichment, and gross mismanagement. 1 Backdating is a form of fraud under federal and state law. See, e.g., In re Zoran Corp. Derivative Litig., 511 F.Supp.2d 986, 996–97 (N.D.Cal.2007) (discussing backdating). Former Securities and Exchange Commission (“SEC”) Chairman Harvey Pitt said: What's so terrible about backdating options grants? For one thing, it likely renders a company's proxy materials false and misleading. Proxies typically indicate that options are granted at fair market value. But if the grant is backdated, the options value isn't fair —at least not from the vantage point of the company and its shareholders. For another, backdating means a corporate document used to permit access to corporate assets has been falsified.... Moreover, ... illegal insider trading may also have occurred. ... On the state level, backdating could involve a breach of fiduciary duty, a waste of corporate assets and even a usurpation of a corporate opportunity. .... Those who backdate options grants violate federal and state law. And those on whose watch this conduct occurs are also potentially liable: If they knew about the backdating, they're participants in fraudulent and unlawful conduct. If they didn't know about the backdating, the question will be: Should they have done more to discover it? Compl. (# 15) ¶ 7 (quoting Harvey Pitt, The Next Big Scandal, Forbes, May 26, 2006, http://www.forbes.com/). “A fundamental requirement of ... [TriQuint's] Stock Option Programs always has been that the exercise price for incentive stock options be not less than 100% of the fair market value per share on the date of the grant.” Id. ¶ 50. Case 6:16-cv-00300-AA Document 46-1 Filed 07/10/17 Page 1 of 9 Belova v. Sharp, Not Reported in F.Supp.2d (2008) 2008 WL 700961, Fed. Sec. L. Rep. P 94,605 © 2017 Thomson Reuters. No claim to original U.S. Government Works. 2 Thus, based on the theories discussed by former Chairman Pitt, the shareholders allege: [D]efendants caused TriQuint to file false and misleading statements with the SEC, including proxy statements filed with the SEC which stated that the options granted by TriQuint carried with them an exercise price that was not less than the fair market value of TriQuint stock on the date of grant and issuance. 2 *2 Id. ¶ 8 (emphasis omitted). Based on a statistical analysis, the shareholders allege the following option grants 3 to various defendants were backdated: The shareholders allege their analysis of these grants “reveals that stock option grants were dated: (i) near or on the very day that TriQuint's stock price hit its low price for the month, quarter and/or year; and/or (ii) in advance of significant stock price increases.” Id. ¶ 54. Furthermore, “[t]he odds of defendants ‘fortuitously’ choosing option grant dates year after year at historic low closing prices absent intentional manipulation are so extremely remote that backdating must have taken place.” Id. Based on their statistical analysis of the option grants, the shareholders allege various violations of state and federal law. See id. ¶¶ 145–96. The defendants filed a Motion to Dismiss the Verified Consolidated Shareholder Derivative Complaint for Failure to State a Claim (# 20), and nominal defendant TriQuint filed a Motion to Dismiss the Verified Consolidated Shareholder Derivative Complaint for Failure to Make a Pre–Suit Demand (# 22). DISCUSSION I. Standard of Review A. 12(b)(6) Motions to Dismiss A court should dismiss a complaint for failure to state a claim under Federal Rule of Civil Procedure 12(b) (6) if the complaint does not “raise a right to relief above the speculative level on the assumption that all the allegations in the complaint are true.” Bell Atl. Corp. v. Twombly, 127 S.Ct. 1955, 1965 (2007) (citation omitted) (footnote omitted). “[C]onclusory allegations of law and unwarranted inferences are not sufficient to defeat a motion to dismiss.” Associated Gen. Contractors of Am. v. Metro. Water Dist. of So. Cal., 159 F.3d 1178, 1181 (9th Cir.1998). Furthermore, certain claims, such as those for fraud, must meet the heightened pleading standards of Federal Rule of Civil Procedure 9. 4 If a complaint is dismissed for failure to state a claim, “a district court should grant leave to amend even if no request to amend the pleadings was made, unless it determines that the pleading could not possibly be cured by the allegation of other facts.” Doe v. United States, 58 F.3d 494, 497 (9th Cir.1995) (internal quotation marks omitted). B. Shareholder Derivative Suits *3 Derivative actions are brought by a shareholder to enforce a corporation's rights when the corporation itself fails to enforce its rights. See Daily Income Fund, Inc. v. Fox, 464 U.S. 523, 528–34 (1984). Derivative suits are subject to the procedural requirements of Federal Rule of Civil Procedure 23.1. See Greenspun v. Del E. Webb Corp., 634 F.2d 1204, 1208–10 (9th Cir.1980) (affirming dismissal of a derivative action for failure to comply with Rule 23.1). Rule 23.1 requires the complaint: (1) “allege that the plaintiff was a shareholder or member at the time of the transaction complained of”; and (2) “state with particularity ... any effort by the plaintiff to obtain the desired action from the directors or comparable authority and, if necessary, from the shareholders or members; and ... the reasons for not obtaining the action or not making the effort.” Fed.R.Civ.P. 23.1(b). Rule 23.1 does not establish the circumstances under which demand would be futile. Instead, demand futility is determined under the law of the company's incorporating state—in this case, Delaware. See In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 989–90 (9th Cir.1999) (citing Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 96 (1991)). Under Delaware law, a court limits its consideration to the particularized facts alleged in the complaint; the burden is thus more onerous than that required to withstand an ordinary motion to dismiss. See Aronson v. Lewis, 473 A.2d 805, 813–15 (Del.1984), overruled on other grounds by Brehm v. Eisner, 796 A.2d 244 (Del.2000). “Conclusory ‘allegations of fact or law [which are] not supported by allegations of specific fact may not be taken as true.’ “ Levine v. Smith, 591 A.2d 194, 207 (Del.1991) (quoting Grobow v. Perot, 539 A.2d 180, 187 (Del.1988)). Case 6:16-cv-00300-AA Document 46-1 Filed 07/10/17 Page 2 of 9 Belova v. Sharp, Not Reported in F.Supp.2d (2008) 2008 WL 700961, Fed. Sec. L. Rep. P 94,605 © 2017 Thomson Reuters. No claim to original U.S. Government Works. 3 II. The Shareholders' Standing Under Rule 23. 1, plaintiffs bringing derivative actions must have owned shares of the corporation at the time the challenged transaction took place. Fed.R.Civ.P. 23.1; see also Kona Enters ., Inc. v. Estate of Bishop, 179 F.3d 767, 769–79 (9th Cir.1999); Lewis v. Chiles, 719 F.2d 1044, 1047 (9th Cir.1983). A plaintiff's allegation of ownership must be sufficiently particularized. See, e.g., In re Computer Sci. Corp. Derivative Litig., No. CV 06–05288 MRP, 2007 WL 1321715, at * 15 (C.D.Cal. Mar. 26, 2007) (holding that a complaint stating the plaintiffs owned stock “during the relevant period,” was insufficient to allege contemporaneous ownership during the time period in which the questioned transactions occurred). In this case, the shareholders do not allege with sufficient particularity that they owned TriQuint shares during the relevant time periods. The Complaint states they owned TriQuint stock at “times relevant.” Compl. (# 15) ¶¶ 17–18, 106. This general allegation is not sufficiently particular and is, in fact, inaccurate by the shareholders' own admissions. In their response to the Motions to Dismiss, the shareholders state: “Ms. Belova has held her stock continuously since April 2000 and Mr. Bullard has held his stock ... continuously since January 1999.” Consolidated Opp'n to Mots. to Dismiss (# 30) 36. These facts are not contained in the Complaint, and they are an admission that the shareholders did not own TriQuint stock when at least some of the grants were allegedly made. The shareholders argue this shortcoming does not merit dismissal. However, such varying allegations are “the precise reason why Plaintiffs must [particularly] allege contemporaneous ownership of ... stock during all periods relevant to the ... transactions.” In re Computer Sci., 2007 WL 1321715, at * 15; see also, Zoran, 511 F.Supp.2d at 1009–10 (discussing the contemporaneous ownership requirement); Ryan v. Gifford, 918 A.2d 341, 359 (Del. Ch.2007) (same). *4 Based on the foregoing, I GRANT the Motions to Dismiss (# 20 & # 22) without prejudice and with leave to amend. An Amended Complaint is due by March 28, 2008. Because I assume the shareholders will file an Amended Complaint, I now address the defendants' other arguments for dismissal. III. The Motions to Dismiss The defendants rely on the argument that the shareholders have not sufficiently alleged backdating. If the shareholders have not alleged backdating, then it is impossible for them to sufficiently allege the other purported violations of federal and state law. A. Backdating The shareholders employed two analytical models to identify the eight options grants as backdated: (1) the Center for Financial Research and Analysis (“CFRA”) methodology, and (2) the Merrill Lynch methodology. See Consolidated Opp'n to Mots. to Dismiss (# 30) 7– 8; Compl. (# 15) ¶¶ 54–62. The CFRA methodology “individually analyzed ... stock options grants, looking for any options where the price on the grant date was within 105% of the ten-day or forty-day periodic low point in stock price and where the price range within that period was more than ten percent of the lowest stock price.” In re CNET Networks, Inc. S'holder Derivative Litig., 483 F.Supp.2d 947, 957 (N.D.Cal.2007) (discussing and accepting the CFRA methodology). The Merrill Lynch methodology “compared annualized 20–day stock returns following option pricing events to the stock's calendar year annual return” to identify suspicious options pricing activities. Conrad v. Blank, ––– A.2d ––––, No. 2611– VCL, 2007 WL 4788447, at *8 n. 30 (Del. Ch. Sept. 7, 2007) (discussing and accepting the Merrill Lynch methodology); see also Ryan, 918 A.2d at 355 n. 34 (same). Also, the shareholders point out that at least one court has accepted an ad hoc methodology, “not entirely revealed,” to support a claim for backdating. E.g., Zoran, 511 F.Supp.2d at 1004–06 (discussing and accepting an unidentified methodology that identified grants at low points and calling the pattern “hugely suspicious”). The defendants argue the shareholders' analysis has many shortcomings. They argue: (1) The shareholders have selectively chosen eight of at least twenty-two grants made to officers and directors between 1998–2002. (2) The shareholders use their methodology inconsistently—they review TriQuint's stock price at 10– or 20–day intervals depending on when the facts suit them. (3) Return analysis refutes backdating. (4) The options were not granted at the year's low. Case 6:16-cv-00300-AA Document 46-1 Filed 07/10/17 Page 3 of 9 Belova v. Sharp, Not Reported in F.Supp.2d (2008) 2008 WL 700961, Fed. Sec. L. Rep. P 94,605 © 2017 Thomson Reuters. No claim to original U.S. Government Works. 4 (5) The grants do not have the typical indicia of backdating, such as restated financial statements. (6) The grants are not dated after a sharp drop or before a substantial rise. See TriQuint's Memo. in Supp. of Mot. to Dismiss (# 23) 12–18. Additionally, the SEC has informally investigated TriQuint's stock options granting practices and decided not to take any enforcement action against TriQuint. See Supp. Decl. of Kelley M. Kinney (# 40), Ex. A. *5 Despite the shortcomings of the shareholders' analysis, I draw reasonable inferences in their favor. See, e.g., Associated Gen. Contractors, 159 F.3d at 1181. The many shortcomings listed above are subject to competing inferences, explained as follows: (1) The shareholders do not need to allege that every grant has been backdated; they may select eight grants and allege that only those eight have been backdated. (2) The shareholders' inconsistent use of their own methodology is the most troubling. It is unclear which use I should accept and which use I should reject. Despite this concern, for purposes of the Motions to Dismiss, I can reasonably infer backdating from the shareholders' Complaint. (3) For purposes of the Motions to Dismiss, I need not consider how return analysis may or may not refute backdating—that is, I will not weigh the evidence or lack thereof. (4) Lower stock prices on dates other than the grant dates do not necessarily indicate backdating did not occur. It may simply mean the backdating scheme is more sophisticated and more difficult to identify through statistical analyses. (5) The lack of typical indicia of backdating may also indicate the defendants' scheme is more sophisticated than the average backdating scheme. (6) The grants not being dated after a sharp drop or before a sharp rise may indicate the backdating scheme was more sophisticated than the average scheme. (7) Finally, the SEC may have decided not to take any enforcement action against TriQuint for any number of reasons. Those reasons could include resources, internal policies, or the strength of the case. The SEC's inaction does not necessarily indicate backdating did not occur. Based on the shareholders' analysis, I may reasonably infer backdating occurred for purposes of the Motions to Dismiss. “Given the choice between improbable good fortune and knowing manipulation of option grants, ... [I] may reasonably infer the latter....” See Ryan, 918 A.2d at 355 n. 34. The shareholders have alleged a striking pattern in stock option grants at TriQuint, which may indicate backdating. The above-mentioned shortcomings and the SEC's recent decision not to take any enforcement action against TriQuint presumably will play a persuasive role in upcoming dispositive motions but have less of a role in the Motions to Dismiss. B. The § 10(b) Claim Section 10(b) of the Securities Exchange Act of 1934 forbids (1) the “use or employ[ment] ... of any ... deceptive device,” (2) “in connection with the purchase or sale of any security,” and (3) “in contravention of” SEC “rules and regulations.” 15 U.S.C. § 78j(b). Rule 10b–5 forbids, among other things, the making of any “untrue statement of a material fact” or the omission of any material fact “necessary in order to make the statements made ... not misleading.” 17 C.F.R. § 240. 10b–5(b). From this statute and Rule, courts have implied a private damages action, similar to common-law tort actions for deceit and misrepresentation. See, e.g., Ernst & Ernst v. Hochfelder, 425 U.S. 185, 196 (1976); Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 730, 744 (1975). The private action also has statutory requirements. E.g., 15 U.S.C. § 78u–4(b) (4) (discussing loss causation). *6 A private action under § 10(b) and Rule 10b–5 has six basic elements. They are: (1) material misrepresentation or omission; (2) scienter—i.e., a wrongful state of mind; (3) connection with the purchase or sale of a security; (4) reliance—i.e., “transaction causation”; (5) economic loss; and (6) “loss causation”—i.e., a connection between the misrepresentation and the loss. Dura Pharm ., Inc. v. Broudo, 544 U.S. 336, 341–42 (2005). Case 6:16-cv-00300-AA Document 46-1 Filed 07/10/17 Page 4 of 9 Belova v. Sharp, Not Reported in F.Supp.2d (2008) 2008 WL 700961, Fed. Sec. L. Rep. P 94,605 © 2017 Thomson Reuters. No claim to original U.S. Government Works. 5 First, the Complaint alleges TriQuint's filings misrepresented that options were granted with an exercise price at fair market value as of the date of the grant. See Compl. (# 15) ¶¶ 70, 73, 76, 82, 85, 88, 91, 94, 97, 113, 116, 119, 125, 128, 131, 134. Because these stock options were allegedly backdated, TriQuint's filings allegedly misrepresented material facts. For the same reason, the Complaint also alleges TriQuint's financial statements were materially false and misleading. See id. ¶¶ 111, 112, 115, 118, 121, 124, 127, 130, 133. Second, the Complaint alleges facts that give a strong inference of scienter. It alleges the defendants prepared or approved false and misleading public statements relating to the stock options in question. See id. ¶¶ 20– 32. “[S]cienter is properly alleged when the complaint alleges both false statements and the defendants' close involvement in the preparation of those statements .” Zoran, 511 F.Supp.2d at 1013 (citing In re Daou Sys., Inc ., Sec. Litig., 411 F.3d 1006, 1022–24 (9th Cir.2005)). Furthermore, scienter is typically present in backdating schemes. See, e.g., Ryan, 918 A.2d at 355 n. 35 (“[I]t is difficult to understand how a plaintiff can allege that directors backdated options without simultaneously alleging that such directors knew that the options were being backdated.”). Third, the Complaint alleges the material misrepresentations or omissions occurred in connection with stock options. A stock option is a “sale under the securities laws because it is a contract to sell a security when the option is exercised.” Falkowski v. Imation Corp., 309 F.3d 1123, 1130–31 (9th Cir.2002) (finding that fraud with respect to employee stock option plans was “ ‘in connection with’ the ‘sale or purchase of a covered security’ ”); see also 15 U.S.C. § 78c(a)(10) (defining “security” to include any “option”). The shareholders allege misrepresentations of the value and date of stock option grants, which necessarily are misrepresentations “in connection with” the purchase or sale of a security. See Falkowski, 309 F.3d at 1131. Fourth, the Complaint alleges TriQuint relied on its financial and related statements when issuing stock. It allegedly increased authorized stock and granted options based on the allegedly false or misleading statements. See Compl. (# 15) ¶¶ 5, 9–10, 111–12, 115, 118, 121, 124, 127, 130, 133, 139, 141, 156. Fifth, the Complaint alleges TriQuint suffered substantial economic harm because of the alleged backdating. See id. ¶¶ 8–12, 39–40, 139, 156. It also alleges the backdating wasted valuable corporate assets. Id. *7 Sixth, the Complaint alleges loss causation because the alleged backdating scheme is necessarily connected to the alleged economic losses. Id. The economic losses discussed in the complaint flow from the alleged backdating scheme. In sum, the shareholders sufficiently allege a § 10(b) claim because the Complaint, as a whole, alleges each of the six elements as to each defendant. C. The § 14(a) Claim Section 14(a) prohibits the use of “any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.” 15 U.S.C. § 78j(b). “To state a claim under Section 14(a), a plaintiff must establish that ‘(1) a proxy statement contained a material misrepresentation or omission which (2) caused the plaintiff injury and (3) that the proxy solicitation, [rather than the particular defect in the solicitation materials], was an essential link in the accomplishment of the transaction.’ “ Knollenberg v. Harmonic, Inc., 152 F. App'x. 674, 682 (9th Cir.2005) (alteration in original) (quoting Atl. Coast Airlines Holdings, Inc. v. Mesa Air Group, Inc., 295 F.Supp.2d 75, 81–82 (D.D.C.2003)); see also 15 U.S.C. § 78j(b); 17 C.F.R. § 240.14a–9. Furthermore, “[s]ection 14(a) ‘lacks any reference to ... indicate a requirement of scienter.’ Accordingly, negligence is sufficient to support a claim for a violation of Section 14(a).” Knollenberg, 152 F. App'x. at 682–83 (quoting In re McKesson HBOC, Inc. Sec. Litig., 126 F.Supp.2d 1248, 1263 (N.D.Cal.2000)). In this case, the shareholders have adequately alleged proxy statements contained misrepresentations relating to the allegedly backdated stock options. See Compl. (# 15) ¶¶ 66–98. Furthermore, the Complaint alleges TriQuint suffered economic harm because of the alleged backdating. See id. ¶¶ 8–12, 39–40, 139, 156. The shareholders' allegations also support an inference that the defendants were negligent because they did not discover or stop the alleged backdating scheme. See Zoran, 511 F.Supp.2d at 1016 (discussing similar allegations and concluding they “lead to the inference that the Case 6:16-cv-00300-AA Document 46-1 Filed 07/10/17 Page 5 of 9 Belova v. Sharp, Not Reported in F.Supp.2d (2008) 2008 WL 700961, Fed. Sec. L. Rep. P 94,605 © 2017 Thomson Reuters. No claim to original U.S. Government Works. 6 compensation committee neglected its duty and was thus negligent”). The key question thus becomes whether or not the shareholders allege the proxy statements are an essential link. The Complaint alleges TriQuint shareholders voted in directors, authorized stock option plans, and authorized increasing the number of shares of stock because of the allegedly false proxy statements. See Compl. (# 15) ¶¶ 66–98. “If defendants had not falsely stated in ... proxy statements that stock options were being granted properly under the plans, and that directors were complying with the terms of the plans that the shareholders approved, shareholders would have voted those board members out, and the board members would no longer have had the means to grant more backdated stock options.” Zoran 511 F.Supp.2d at 1016. The proxy statements are therefore an essential link, and the shareholders state a claim under § 14(a). D. The State Law Claims 1. Duties of Loyalty and Care *8 Under Delaware law, there are two fiduciary duties: loyalty and care. See Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 367 (Del.2006). A claim for a breach of these fiduciary duties sounds in fraud and must be pleaded with particularity as required by Federal Rule of Civil Procedure 9(b). See Sachs v. Sprague, 401 F.Supp.2d 159, 170 n. 15 (D.Mass.2005); York Linings v. Roach, No. 16622–NC, 1999 WL 608850, at *2 (Del. Ch. July 28, 1999) (holding breaches of the duties of loyalty and care must be pleaded with particularity). To meet the heightened standard, a plaintiff must identify what is false or misleading, and why. See Vess v. Ciba–Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir.2003). Furthermore, a plaintiff must rebut the presumption of the business judgment rule. See, e.g., Aronson, 473 A.2d at 812 (“The business judgment rule ... is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.”); McKesson, 126 F.Supp.2d at 1278 (“[T]he complaint must contain well- pleaded allegations to overcome the presumption that the directors' decisions were informed and reached in good faith.”). The Complaint alleges with particularity a breach of the duties of loyalty and care. The Complaint lists each defendant and discusses what he or she allegedly did to facilitate the backdating scheme and disseminate false information through SEC filings. See Compl. (# 15) ¶¶ 20–31. The Complaint, taken as a whole, also alleges each defendant acted in bad faith. “[An][i]ntentional violation of a shareholder approved stock option plan, coupled with fraudulent disclosures regarding the directors' purported compliance with that plan, constitute conduct that is ... an act in bad faith.” Ryan, 918 A.2d at 358. It is difficult to fathom a situation where the deliberate violation of a shareholder approved stock option plan and false disclosures is anything but an act of bad faith in violation of the duties of loyalty and care. See Zoran, 511 F.Supp.2d at 1017. The defendants argue they cannot be liable for a breach of the duty of care because TriQuint's charter has an exculpatory provision. If a company has adopted such a provision, its directors cannot be held liable for money damages for unintentional breaches of their fiduciary duties. See, e.g., Aronson, 473 A.2d at 813 n. 6 (discussing the authorities). However, the defendants' argument constitutes an affirmative defense that will not dispose of a matter at the pleading stage. See Emerald Partners v. Berlin, 726 A.2d 1215, 1223–24 (Del.1999) (holding the use of exculpatory provisions to shield directors from personal liabilities presents an affirmative defense, and the party asserting the defense bears the burden of establishing it). The shareholders thus state a claim for breach of the duty of care, but the defendants may establish their affirmative defense in the future. 2. Insider Trading *9 The defendants also argue the shareholders do not state a claim for insider trading. To state a claim for insider trading under Delaware law a plaintiff must allege (1) “the corporate fiduciary possessed material, nonpublic company information”; and (2) “the corporate fiduciary used that information improperly by making trades because she was motivated, in whole or in part, by the substance of that information.” In re Oracle Corp. Derivative Litig., 867 A.2d 904, 934 (Del. Ch.2004), aff'd, 872 A.2d 960 (Del.2005). The shareholders allege certain defendants participated in the backdating scheme and sold their stock based on this material, non-public information. See Compl. (# Case 6:16-cv-00300-AA Document 46-1 Filed 07/10/17 Page 6 of 9 Belova v. Sharp, Not Reported in F.Supp.2d (2008) 2008 WL 700961, Fed. Sec. L. Rep. P 94,605 © 2017 Thomson Reuters. No claim to original U.S. Government Works. 7 15) ¶¶ 99–101. The shareholders therefore state a claim for insider trading under Delaware law. See Zoran, 511 F.Supp.2d at 1018 (holding that plaintiffs stated a claim for insider trading when they alleged participation in a backdating scheme and subsequent sale of stocks). 3. Corporate Waste To plead a claim for waste of corporate assets, a “plaintiff must overcome the general presumption of good faith by showing that the board's decision was so egregious or irrational that it could not have been based on a valid assessment of the corporation's best interests.” White v. Panic, 783 A.2d 543, 554 n. 36 (Del.2001). “Directors are guilty of corporate waste, only when they authorize an exchange that is so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration.” Glazer v. Zapata Corp., 658 A.2d 176, 183 (Del. Ch.1993). Because the shareholders adequately plead backdating, they state a claim for corporate waste. “Backdating is a form of fraud. In the face of such allegations, defendants simply cannot be said to have acted in the company's best interest. Accordingly, plaintiff has pled a claim for corporate waste under Delaware law.” Zoran, 511 F.Supp.2d at 1019. The crux of the backdating allegation is that the decision to backdate “was so egregious or irrational that it could not have been based on a valid assessment of the corporation's best interests.” See White, 783 A.2d at 554 n. 36. 4. Gross Mismanagement and Abuse of Control To state a cause of action for gross mismanagement, a plaintiff must plead facts showing that defendants were “recklessly uninformed” or acted “outside the bounds of reason.” Cincinnati Bell Cingular Sys. Co. v. Ameritech Mobile Phone Serv. of Cincinnati, Inc., No. 13389, 1996 WL 506906, at *14 (Del. Ch. Sept. 3, 1996), aff'd, 692 A.2d 411 (Del.1997). The shareholders allege the defendants participated in a backdating scheme and produced false proxy statements. Such conduct is either “recklessly uninformed” or “outside the bounds of reason.” Therefore, the Complaint, taken as a whole, sufficiently alleges a claim for gross mismanagement and abuse of control. 5. Claims for Accounting, Waste, Unjust Enrichment, and Recision *10 The defendants' brief states: Accounting, unjust enrichment and rescission are all equitable remedies. As discussed above, plaintiffs fail to adequately plead any of the claims that trigger these remedies. Thus, the Court should also dismiss these claims. See Allegheny Gen. Hosp. v. Phillip Morris, Inc., 228 F.3d 429, 446–67 (3d Cir.2000) (dismissing unjust enrichment claim necessary when traditional tort claims were also dismissed); McCormick v. Fund Am. Cos., Inc., 26 F.3d 869 (9th Cir.1994) (dismissing rescission claim where underlying claims dismissed). Individual Defs.' Memo. in Supp. of Mot. to Dismiss (# 21) 22–23. Because this argument relies on me dismissing the other claims, it fails. E. The Statutes of Limitations The defendants argue all of the shareholders' federal and state law claims are time barred. See id. at 11–13, 15– 16, 23. The shareholders argue the applicable statutes of limitations have not run or were equitably tolled. See Consolidated Opp'n to Mots. to Dismiss (# 30) 54–59. The statute of limitations for a § 10(b) claim is “two years from the discovery of facts constituting the violation but no more than five years from the date of the violation.” Zoran, 511 F.Supp.2d at 1013 (citing 28 U.S.C. § 1658(b) (1)(2)). The five year limitations period “serves as a statute of repose in lieu of equitable tolling.” Id. at 1013–14 (citing Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 363 (1991)). Because outsiders like the shareholders do not have “superpowers to detect secret backdating inside the company,” the five year statute of limitations applies. See id. at 1014; see also Ryan, A.2d at 359. The shareholders argue the statute of limitations begins to run from the last alleged misrepresentation, but they are incorrect. See Durning v. Citibank, Int'l, 990 F.2d 1133, 1136 (9th Cir.1993) (rejecting a plaintiff's argument that the statue of limitations for an allegedly Case 6:16-cv-00300-AA Document 46-1 Filed 07/10/17 Page 7 of 9 Belova v. Sharp, Not Reported in F.Supp.2d (2008) 2008 WL 700961, Fed. Sec. L. Rep. P 94,605 © 2017 Thomson Reuters. No claim to original U.S. Government Works. 8 fraudulent offering of bonds was extended by continued fraud through the redemption of the bonds). The initial Complaint (# 1) in this case was filed on February 28, 2007, so the shareholders cannot base a § 10(b) claim on alleged backdating that occurred before February 28, 2002, regardless of when they first learned of the alleged backdating scheme. The statute of limitations for § 14(a) “is one year from the discovery of the occurrences giving rise to the claim, but no later than three years from the date of the violation.” Zoran, 511 F.Supp.2d at 1017. The analysis in the previous paragraph also applies here. Therefore, the three year statute of limitations applies, and the shareholders cannot base a § 14(a) claim on proxy statements filed before February 28, 2004, regardless of when they first learned of the alleged backdating scheme. For the state law claims, the statute of limitations is three years. Del.Code Ann. tit. 10, § 8106; see also Zoran, 511 F.Supp.2d at 1019. Delaware courts often find that the statute of limitations is tolled when defendants engage in “fraud or concealment of the facts which would have disclosed” the wrongdoing. Kahn v. Seaboard Corp., 625 A.2d 269, 276 (Del. Ch.1993); see also Ryan, 918 A.2d at 359–60 (“Inaccurate public representations as to whether directors are in compliance with shareholder-approved stock option plans constitute fraudulent concealment of wrongdoing sufficient to toll the statute of limitations.”) At this stage, therefore, the statute of limitations for the state law claims was tolled because of the alleged fraud or concealment. IV. The Shareholders' Demand Futility Allegations are Sufficient *11 “A shareholder seeking to vindicate the interests of a corporation through a derivative suit must first demand action from the corporation's directors or plead with particularity the reasons why such demand would have been futile.” In re Silicon Graphics Inc. Sec. Litig., 183 F.3d at 989. “A trial court need not blindly accept as true all allegations, nor must it draw all inferences from them in plaintiffs' favor unless they are reasonable inferences.” Grobow, 539 A.2d at 187. Here, the shareholders do not allege they made a demand on the board. They instead plead demand was excused because it would have been futile. “[A] court that is entertaining a derivative action ... must apply the demand futility exception as it is defined by the law of the State of incorporation.” Kamen, 500 U.S. at 108–09. TriQuint is incorporated in Delaware, so Delaware law applies. Delaware courts apply two tests for determining when demand is futile. If a derivative action challenges a board's affirmative decisions, then demand is excused if “under the particularized facts alleged, a reasonable doubt is created that: (1) the directors are disinterested and independent and (2) the challenged transaction was otherwise the product of a valid exercise of business judgment.” Aronson, 473 A.2d at 814. A different test applies if the current directors failed to act. “[A] court must determine whether or not the particularized factual allegations of a derivative stockholder complaint create a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand.” Rales v. Blasband, 634 A.2d 927, 934 (Del.1993). Furthermore, the plaintiff must show that a majority of directors were interested or not independent. See Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1046 (Del.2004). The parties agree that the test outlined in Aronson applies. The shareholders allege: “Based upon the facts set forth throughout [the] ... Complaint ... a pre-filing demand upon the TriQuint Board ... is excused as futile.” Compl. (# 15) ¶ 107. “Five of seven of TriQuint's directors engaged in backdating stock options and all approved false and misleading SEC filings.” Id. ¶ 108 (providing a table). They also allege four of the seven board members engaged in some form of insider trading (based on the backdating scheme). See id. ¶¶ 101–09. As discussed above, the backdating scheme is not likely a valid exercise of business judgment. This leads to “a reasonable doubt ... that: (1) the directors are disinterested and independent and (2) the challenged transaction was otherwise the product of a valid exercise of business judgment.” See Aronson, 473 A.2d at 814. The shareholders have therefore sufficiently alleged demand futility. 5 See Zoran, 511 F.Supp.2d at 1002–03 (“[D]emand is excused based on plaintiff's first theory—[all current board members received backdated stock options].”). CONCLUSION *12 Because the shareholders do not properly allege standing, I GRANT the defendants' Motions to Dismiss Case 6:16-cv-00300-AA Document 46-1 Filed 07/10/17 Page 8 of 9 Belova v. Sharp, Not Reported in F.Supp.2d (2008) 2008 WL 700961, Fed. Sec. L. Rep. P 94,605 © 2017 Thomson Reuters. No claim to original U.S. Government Works. 9 (# 20 and # 22) without prejudice and with leave to amend. Once an appropriately Amended Complaint is filed, the shareholders will have standing to pursue claims related to the transactions that occurred when they owned TriQuint stock. The Amended Complaint should also otherwise conform with the foregoing discussion to survive future Motions to Dismiss. The Amended Complaint is due March 28, 2008. 6 IT IS SO ORDERED. All Citations Not Reported in F.Supp.2d, 2008 WL 700961, Fed. Sec. L. Rep. P 94,605 Footnotes 1 The shareholders allege a total of eleven claims for relief. See Compl. (# 15) ¶¶ 145–96. 2 The shareholders identify specific proxy statements they believe were false and misleading. Id. ¶¶ 66–103. 3 See id. ¶ 50. Grant Date Recipient(s) Approved By 04/16/1998 Fournier Sharp, Gibson, Rhines 12/02/1998 Sharp, Fournier, Winn, Pye Sharp, Gibson, Rhines 10/18/1999 Whitehurst Sharp, Gibson, Rhines, Gary 12/01/1999 Kauser, Sharp, Cordner, Pye, Fournier, Welty Sharp, Gibson, Rhines, Gary 12/21/2000 Sharp, Pye, Cordner, Fournier, Welty Sharp, Gibson, Rhines, Gary 04/04/2001 Fournier, Cordner, Welty, Pye Sharp, Gibson, Rhines, Gary 12/21/2001 Sharp, Pye, Cordner, Fournier, Welty, Link Sharp, Gibson, Rhines, Gary 04/29/2002 Sharp Sharp, Gibson, Rhines, Gary 4 “In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.” Fed.R.Civ.P. 9(b). 5 As the Zoran court stated: [D]irectors receiving backdated stock options receive a benefit not shared by stockholders.... [S]hareholders do not have the benefit of reaching back in time to buy their shares at low-price point. Furthermore, if a corporate decision will have a materially detrimental impact on the director, but not the corporation or its stockholders, a director can be considered interested. Thus, a decision now to correct the grant dates would have a detrimental impact on the directors by removing the financial benefit of the backdating. The director may be required to pay back the difference in price between the true grant date and the purported grant date. The directors may even face legal exposure. Accordingly, if ... the directors received backdated grants, those directors will be considered interested. Zoran, 511 F.Supp.2d at 1002–03. 6 I also DISMISS the Motion for Leave to File a Supplemental Exhibit (# 39) as moot. End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works. Case 6:16-cv-00300-AA Document 46-1 Filed 07/10/17 Page 9 of 9