LREP Arizona LLC v. 597 Broadway Realty LP

          ORDER

          DOUGLAS L. RAYES UNITED STATES DISTRICT JUDGE

         At issue is Plaintiff's motion to dismiss Defendants' counterclaims, which is fully briefed. (Docs. 71, 74, 77.) Defendants' request for oral argument is denied because the issues are adequately briefed, and oral argument will not help the Court resolve the motion. See Fed. R. Civ. P. 78(b); LRCiv. 7.2(f); Lake at Las Vegas Investors Grp., Inc. v. Pac. Malibu Dev., 933 F.2d 724, 729 (9th Cir. 1991). For the following reasons, Plaintiff's motion is granted, and Defendants' counterclaims are dismissed.

         I. Background

         Defendants are the guarantors of a $4 million loan made by Plaintiff to non-party G Companies Management, LLC (“GCM”). The loan was secured by property owned by GCM (“the Property”) and by Defendants' guaranties. After GCM defaulted on the loan, Plaintiff acquired the Property at a trustee's sale for a credit bid of $315, 000. Plaintiff then notified Defendants that it intended to file a lawsuit against them to enforce the guaranties and recover the deficiency.

         Instead of proceeding with the lawsuit, however, the parties entered into a Forbearance Agreement, under which Plaintiff agreed, among other things, to delay suit and partially waive default interest. In exchange, Defendants agreed, among other things, (1) to waive any defenses to Plaintiff's collection of the deficiency under Arizona's anti-deficiency laws and, in the event they defaulted on the terms of the Forbearance Agreement, (2) to consent to the filing of a pre-prepared lawsuit and to the filing of a Stipulated Motion for Entry of Judgment and Order of Judgment, both of which were attached to the Forbearance Agreement. The waiver provision added: “For sake of clarity, Guarantors agree to admit all of the allegations of the Lawsuit, waive any defenses thereto, and consent to the entry of judgment against them upon Guarantor's breach [of] their obligations . . . as set forth in this Agreement.” (Doc. 9-2 at 28.)

         Defendants eventually defaulted, leading Plaintiff to file the stipulated lawsuit, Stipulated Motion for Entry of Judgment, and stipulated Order of Judgment referenced in the Forbearance Agreement. Magistrate Judge Fine issued a report and recommendation (“R&R”) recommending that the Court deny the stipulated motion without prejudice. Plaintiff objected to the R&R, but before the Court could rule on the objections Plaintiff moved to stay the case while the parties pursued an out-of-court resolution of their dispute. The Court obliged and stayed the matter for three months.

         Plaintiff moved to reactivate the case when the parties were unable to resolve the matter. The Court held a telephonic conference to discuss the motion in June 2017, during which only counsel for Plaintiff appeared. Counsel for Plaintiff confirmed that Defendants had not been formally served. The Court therefore granted the motion to reactivate the case but ordered that Plaintiff serve Defendants within 60 days. Before the expiration of this 60-day service deadline, however, the Court inadvertently issued an order sustaining Plaintiff's objections to the R&R and granting the Stipulated Motion for Entry of Judgment in a modified form. Defendants then moved to vacate the judgment pursuant to Federal Rule of Civil Procedure 60. The Court granted the motion after concluding that it lacked personal jurisdiction to enter a judgment against Defendants until they had been properly served.

         Plaintiff has since served Defendants. Instead of admitting all allegations, waiving all defenses, and consenting to the entry of judgment as contemplated by the Forbearance Agreement, Defendants filed an answer and brought counterclaims for restitution, unjust enrichment, and fraud in the inducement. The thrust of Defendants counterclaims is that Defendants are not liable to Plaintiff for any amounts (and are, in fact, entitled to recover amounts previously paid) because their guaranties were procured by fraud. Specifically, Defendants allege that Plaintiff did not actually expect GCM to repay the loan, that Plaintiff knew the Property was not worth much, and consequently Plaintiff lured Defendants into a false sense of security that they never would be called upon to fulfill their guaranties because, if GCM were to default, the sale of the Property would be more than adequate to satisfy the loan.

         Unsurprisingly, Plaintiff now moves to dismiss the counterclaims, principally because Defendants waived their rights to challenge their guaranties or the allegations against them in this lawsuit when they entered into the Forbearance Agreement. Plaintiff also argues, in the alternative, that Defendants have not adequately alleged fraud under Federal Rule of Civil Procedure 9(b). The Court does not address this alternative argument because it concludes that the Forbearance Agreement precludes Defendants from challenging their guaranties.

         II. Discussion

         The Court should dismiss counterclaims that are not based on a cognizable legal theory or that are not pled with enough factual detail to state a plausible entitlement to relief under an otherwise cognizable legal theory. See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009); Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1988). Here, Plaintiff's primary argument is that Defendants counterclaims are not cognizable because Defendants waived their right to challenge the enforceability of their guaranties or to otherwise dispute the allegations against them in this lawsuit when they entered into the Forbearance Agreement. The Court agrees.

         A forbearance agreement of the type entered into by the parties is essentially a pre-litigation settlement of an impending legal dispute, which the Court may enforce. See W. All. Bank v. Jefferson, 698 Fed. App'x 914, 914 (9th Cir. 2017). Indeed, the Court was prepared to enforce the Forbearance Agreement and enter the stipulated judgment once it obtained jurisdiction over Defendants through proper service of process. But for Defendants' disregard of their waivers, this litigation probably would have long since been over.

         Defendants argue that the Court should not enforce the waivers in the Forbearance Agreement and, instead, should permit them to challenge their guaranties and the allegations against them for four reasons (some of which at times blend together in the briefing): (1) the Forbearance Agreement itself was procured by fraud; (2) the waiver is insufficiently specific to waive a fraud in the inducement claim; (3) the guaranties are so substantively and procedurally unconscionable that the unconscionability permeates the entire transaction, including the Forbearance Agreement, rendering it unenforceable; and (4) the Forbearance Agreement has already been satisfied because the statute of repose for collecting a deficiency has expired. None of these arguments are persuasive.

         First, Defendants' contention that they were fraudulently induced into signing the Forbearance Agreement by misrepresentations about the Property's value is meritless. The allegations in the counterclaims make clear that Defendants entered into the Forbearance Agreement after they knew that the Property, allegedly represented to be worth between $10 million and $27 million, fetched a meager $315, 000 at auction. When they entered into the Forbearance Agreement, Defendants knew or should have known that Plaintiff, GCM, and/or their agents might have misrepresented the value of the Property. Perceived fraud in the inducement of the guaranties does not allow the Defendants to avoid their obligations and waivers under the separately ...