Jennifer ANDLOVEC, an individual et al., Plaintiffs, and Jeffery CALLAHAN, Intervenor Plaintiff-Appellant, v. Christopher SPOTO, an individual et al., Defendants, and STORM 3, LLC, Defendant-Respondent.
Deschutes County Circuit Court 17CV11011; A175537
Deschutes County Circuit Court
June 22, 2023
326 Or App 525 | 532 P3d 531
Argued and submitted September 21, 2022
Reversed.
Raymond D. Crutchley, Judge.
Nicholas A. Kampars argued the cause and filed the briefs for appellant.
Shannon McCabe argued the cause for respondent. Gregory P. Lynch and Lynch Murphy McLane LLP filed the brief for respondent.
Before Shorr, Presiding Judge, and Mooney, Judge, and Pagán, Judge.
MOONEY, J.
Reversed.
This attorney fee case concerns a failed marijuana production operation started by two individuals, Callahan and Spoto, and run under the name of Farmington Industries, LLC (Farmington), for the purpose of producing marketable medical and recreational marijuana. The underlying lawsuit was filed by several Farmington investors against Spoto, Farmington‘s attorney (Smiley), and Storm 3, LLC (Storm 3), seeking damages for financial losses that the investors alleged that they suffered when the business failed. Callahan later intervened in that lawsuit as a plaintiff. Spoto filed for bankruptcy, and any personal liability that he might incur as a result of this lawsuit was discharged by the bankruptcy court. In the end, the claims of the investors who initially filed the lawsuit were voluntarily dismissed, followed by the trial court‘s dismissal of Callahan‘s remaining claims against Storm 3 on summary judgment. The only issue before us is whether the trial court erred when it awarded Storm 3 attorney fees.
Callahan appeals from the Supplemental Judgment and Money Awаrd entered against him and he assigns error to the trial court‘s granting of Storm 3‘s petition for attorney fees under
Callahan next argues that he had an objectively reasonable basis on which to pursue his claims against Storm 3 and, therefore, that the award of attorney fees to Storm 3 was improper. Storm 3 counters that Callahan‘s “claims became оbjectively unreasonable following factual determinations by the [bankruptcy court] in [the] adversary proceeding directly related to the claims asserted in” this case. We conclude that Callahan‘s claims were not without an objectively reasonable basis and, therefore, the trial court erred when it awarded attorney fees to Storm 3 under
Whether a claim lacks an objectively reasonable basis under
As mentioned, Callahan and Spoto operated as Farmington, a limited liability company, for the purpose of producing marketable marijuana. Both Callahan and Spoto
After the lease was signed, Callahan and Spoto employed Smiley for legal advice and assistance concerning Farmington‘s business structure and operations. Smiley proposed that Farmington adopt a structure in which two trusts would be created with each trust to serve as a member of the limited liability company. One trust would hold the combined ownership interests of Callahan and Spoto, and the other would hold the combined ownership interests of other investors. Spoto was to be named the trustee of both trusts and was also to serve as Farmington‘s manager. An operating agreement generally reflecting the proposed structure was drafted, and Spoto signed it in April 2016. Callahan did not sign that agreement, but he did agree conceptually with the proposed structure.4
Tension developed between Spoto and Callahan, primarily related to Farmington‘s finances. That tension grew and, in the fall of 2016, culminated in a disagreement about whether to accept a particular investment from
In January 2017, as Spoto and Callahan worked to resolve their dispute, most of Farmington‘s marijuana crop disappeared.5 As a result, Farmington was no longer able to meet its lease obligations and Spoto decided to terminate the lease as of February 1, 2017. Within days, Valerie Kahmann signed a new lease for the same property that then included the significant improvements that hаd already been made by Farmington. Valerie Kahmann signed the new lease as the authorized representative of the new tenant, Storm 3, and also personally, as guarantor. The effective date of the new lease was February 1, 2017. Spoto dissolved Farmington by the end of that same month.
In March 2017, the investors filed this lawsuit alleging various claims against Spoto, Storm 3, and Smiley. As relevant here, they asserted that Spoto had breached his fiduciary duty to them, and that Storm 3 had worked in conсert with Spoto to facilitate what amounted to a fraudulent transfer of the lease from Farmington to Storm 3. Callahan filed a motion to intervene as a plaintiff, arguing that he had a right to intervene under
The plaintiffs, including Callahan, filed an amended complaint in December of 2017, that, among other things,
Spoto filed for bankruptcy after the lawsuit was filed, and the investors initiated an adversarial bankruptcy proceeding, seeking to prevent the discharge of Spoto‘s potential liability to them. They asserted two claims against Spoto under
At a hearing in November 2018, the bankruptcy court found that Spoto did not owe a fiduciary duty to the investors; however, it excluded Callahan from that finding. It nevertheless denied the request of all investors, including Callahan, to except their claims against Spoto from discharge under
The parties engaged in extensivе discovery efforts and motions, and Callahan and the other investors filed
In August 2019, Storm 3 filed a motion seeking summary judgment in its favor on the IIER and the AABFD claims. The trial court heard that motion in December 2019, and granted it in part, as to the AABFD claim, at the conclusion of the hearing. In particular, the court explained that it considered itself to “be bound by the factual findings of [the bankruptcy court‘s] judicial officer with respect to the acts of Mr. Spoto.” Noting that the bankruptcy court had found that Spoto did not owe a fiduciary duty to the invеstors, the trial court reasoned that Storm 3 could not be held liable to those investors for aiding and abetting Spoto in breaching a duty that he did not owe them. The trial court reserved ruling on the motion as to the IIER claim and took that matter under advisement. By letter to counsel dated July 17, 2020, the trial court stated that it had reviewed its files and the record and concluded that “there is a genuine issue of material fact as to the IIER cause of action” and it denied Storm 3‘s motion for summary judgment on that claim.
Ultimately, all plaintiffs except for Callahan agreed to dismiss their remaining claims, leaving Callahan‘s IIER claim against Storm 3 the only unresolved claim against Storm 3. In August 2020, Storm 3 filed another summary judgment motion against the IIER claim, this time asserting that the claim belonged to Farmington, and that Callahan lacked standing to pursue that claim as a nonmember. The trial court granted that motion by written order “for the reasons stated on the record.”
Storm 3 then filed its petition for attorney fees under
As a general rule, Oregon courts do not award attorney fees to opposing parties in litigation absent a statutory or contractual right. Swett v. Bradbury, 335 Or 378, 381, 67 P3d 391 (2003).
“In any civil action, suit or other proceeding in a circuit court ***, the court shall award reasonable attorney fees to a party against whom a claim *** is asserted, if that party is a prevailing party in the proceeding and to be paid by the party asserting the claim *** upon a finding by the court that *** there was no objectively reasonable basis for asserting the claim[.]”
Under
As already mentioned, Storm 3 argues that once the bankruptcy court found “that no fiduciary relationship existed” between Spoto and Callahan as “relating to Farmington,” Callahan had a “duty to evaluate his claims in light of [that] ruling,” and dismiss the case because he lacked the necessary standing to pursue it and, therefore, no longer had an objectively reasonable basis to continue pursuing his claims. The parties disagree about whether the trial court was bound by the bankruptcy court‘s factual findings. Storm 3 points to the trial court‘s conclusion “that [it] was factually estopped from arriving at a conclusion сontrary to” that of the bankruptcy court, but Storm 3 cites no authority and makes no legal argument to support the correctness of that conclusion. For his part, Callahan describes the findings made by the bankruptcy court under the bankruptcy code, and he argues that those findings do not establish the unreasonableness of his claims against Storm 3 in this case.
The bankruptcy court limited its findings about fiduciary duties and “fraud” to the context in which it made those findings—determining the dischargeability of debt under the federal bankruptcy code. As that court explained when it ruled from the bench,
“[I]t is important to remember this Court‘s role. *** Congress has defined nondischargeable debts narrowly with the goal of targeting debtors who take affirmative steps to inflict substantial injury. While Mr. Spoto may not have conducted himself perfectly, he did not commit any malfeasance significant enough to except [the investors‘] claims from discharge.”
The bankruptcy court carefully limited its findings to the record before it under the law that it was applying. Moreover, the bankruptcy court made clear findings, and it did not find that Spoto owed no fiduciary duty to Farmington. It did not find that no duty of loyalty existed between Spoto and Callahan as “relating to Farmington” as Storm 3 now argues. It concluded that Spoto owed no fiduciary duty to the investors, but it excluded Callahan from that finding. Regardless of whether the bankruptcy court findings were binding on the trial court, an issue we do not decide, those findings do not answer the question whether Callahan‘s сlaims lacked an objectively reasonable basis under
In determining whether to award Storm 3 attorney fees under
Whethеr a party has an objectively reasonable basis for asserting a claim is a function of the substantive law governing that claim. Dimeo v. Gesik, 195 Or App 362, 369, 98 P3d 397 (2004), adh‘d to as modified on recons, 197 Or App 560, 106 P3d 697 (2005). But, here, Storm 3‘s focus is not on the legal elements of Callahan‘s AABFD or IIER claims. It instead focuses on whether the record supports a conclusion that Callahan had standing to pursue those claims, in particular after the bankruptcy court made its ruling. As we have explained, the bankruptcy court‘s findings are not dispositive of standing in this case.
“‘[S]tanding’ means the right to obtain an adjudication. It is thus logically considered prior to consideration of the merits of a claim. To say that a plaintiff has ‘no standing’ is to say that the plaintiff has no right to have a tribunal decide a claim under the law defining the requested relief[.]”
Eckles v. State of Oregon, 306 Or 380, 383, 760 P2d 846 (1988). As explained by one constitutional scholar, standing “is an answer to the very first question that is sometimes rudely asked when one person complains of another‘s actions: ‘What‘s it to you?‘” Antonin Scalia, The Doctrine of Standing as an Essentiаl Element of the Separation of Powers, 17 Suffolk U L Rev 881, 882 (1983).
The basis of Callahan‘s standing was set forth in his motion to intervene and is set forth in the second amended complaint, where it is alleged that plaintiffs “bring this action derivatively, on behalf of [Farmington] and on their own behalf as members of [Farmington].” Callahan first joined this lawsuit as a plaintiff after filing his
After Callahan and the other plaintiffs added the IIER claim against Storm 3, the trial court denied Storm 3‘s
Whether Callahan was a member of Farmington or whether the trusts referred to in the operating agreement became the members in 2015 or 2016 is unclear. As noted above, no trust agreements were ever drafted or signed. However, the parties rely on the operating agreement for their arguments here, and the agreement states that the manager has a fiduciary duty to Farmington and to its members. Despite any confusion about whether the trusts exist,8 there is support in the record for Callahan‘s claim that Spoto owed him a duty of loyalty in relationship to the trust that held, or was supposed to hold, their joint interests in Farmington and was, according to the operating agreement, itself a member of Farmington to which Spoto owed a duty under
“[T]he overall persuasiveness of evidence is not the question before us” under
Reversed.
Notes
“(a) A discharge under [relevant sections] of this title does not discharge an individual debtor from any debt—
“*****
“(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny;
“*****
“(6) for willful and malicious injury by the debtor to another entity or to the property of another entity[.]”