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Cayne v. Washington Trust Bank

United States District Court, D. Idaho

September 1, 2015

ROBERT CAYNE and PHYLLIS CAYNE, husband and wife; RONNIE RIVERA, individually; SEAN RIVERA, individually; KEN McELROY and LAURA McELROY, husband and wife; and the same on behalf of themselves and on behalf of all others similarly situated, Plaintiffs,
v.
WASHINGTON TRUST BANK, a Washington corporation; and WEST SPRAGUE AVENUE HOLDINGS, LLC, a Washington limited liability company; and JOHN/JANE DOE I-V, Defendants

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[Copyrighted Material Omitted]

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          For Robert Cayne, Phyllis Cayne, David T Kuo, Bess Lee Chang, Ronnie Rivera, Sean Rivera, Ken McElroy, Laura McElroy, Plaintiffs: Douglas S Marfice, LEAD ATTORNEY, RAMSDEN & LYONS, Coeur d'Alene, ID; Adam H Springel, PRO HAC VICE, Springel & Fink, LLP, Las Vegas, NV.

         For Washington Trust Bank, Washington corporation, Defendant: William M Appleton, LEAD ATTORNEY, Coeur d'Alene, ID; Fred B Burnside, Rebecca J Francis, PRO HAC VICE, Davis Wright Tremaine, LLP, Seattle, WA; Thaddeus James O'Sullivan, Joseph Todd Reuter, K& L Gates, LLP, Spokane, WA; Thomas Timbridge Bassett, K AND L GATES LLP, Spokane, WA.

         For West Sprague Avenue Holdings, LLC, Washington limited liability company, Defendant: Thaddeus James O'Sullivan, Joseph Todd Reuter, K& L Gates, LLP, Spokane, WA; Thomas Timbridge Bassett, K AND L GATES LLP, Spokane, WA.

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         AMENDED MEMORANDUM DECISION AND ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT

         Honorable Ronald E. Bush, United States Magistrate Judge.

         SUMMARY OF THE CASE AND DECISION

         Plaintiffs are individuals who bought into an exclusive and expensive golf course development that began to take shape in 2004 on the western shores of Lake Coeur d'Alene, in northern Idaho. Most joining the golf course resort purchased a building lot in the real estate development surrounding the golf course, and a membership in the golf course club itself, known as " the Club at Black Rock." Those interested were required to make an up front payment of a socalled " membership deposit," which increased in amount over time but was always in the tens of thousands of dollars at a minimum and over $100,000 at its most expensive. On top of that, the members paid monthly dues to the golf club.

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          The Club at Black Rock closed in the late fall of 2010, after it fell into financial distress and several months after defendant Washington Trust, the bank whose loans were secured by the Club's real and personal property, took over ownership of nearly the entirety of the Club's assets, in a work-out agreement with the Club's developer, Marshall Chesrown. The Club continued to operate as it had before the change in ownership until the bank sold the golf course to a third-party, and after the members of the Club at Black Rock were informed that the memberships were terminated, and the Club was being closed.

         The former members of the Club at Black Rock want a return of their membership deposits. The membership agreement described when, and if, a member was entitled to a refund of the membership deposit. The former members contend that Washington Trust owes them a refund of those deposits, because Washington Trust assumed that liability when they took ownership of the golf course assets, which included an assignment of the Membership Agreement and related agreements. Washington Trust vigorously disputes that it has responsibility for the membership deposits, which -- depending upon which side answers the question -- total approximately $29 million. Someone in this case will ultimately be left holding that bag. Right now, it is the former members. They contend it should be the bank.

         Currently pending before the Court are Cross-Motions for Summary Judgment (Dkts. 89, 99) filed by Plaintiffs[1] and Defendants Washington Trust Bank and (its wholly owned subsidiary) West Sprague Avenue Holdings, LLC (sometimes collectively referred to as the " Bank" or " Washington Trust" ). For the reasons discussed herein, Plaintiffs' Motion for Summary Judgment is granted in part and denied in part, and Defendants' Motion for Summary Judgment also is granted in part, and denied in part. In the decision that follows: (1) the Court holds as a matter of law that the Bank took an assignment of the Membership Agreement and related Membership Plan which contain the details of when the members have a right to a refund of their membership deposits; (2) the Court holds as a matter of law that the right to a refund of the membership deposits was triggered when the memberships were terminated and the golf course facilities closed to the members; (3) the Court holds as a matter of law that the Bank did not make an express assumption of the liability for the membership deposits, having made express disclaimers of any such type of liability in the work-out agreement; and (4) the Court holds that there are genuine issues of material fact which preclude summary judgment for either side, and which will require resolution at trial, on the remaining ultimate issue of whether the Bank impliedly assumed liability for the membership deposit refunds because of its actions and conduct in the manner in which it took ownership of the Club and its facilities, and in the manner in which the Club continued to operate it until it was ultimately sold.

         PROCEDURAL BACKGROUND AND SUMMARY OF THE CLAIMS AND DEFENSES

         Plaintiffs filed their lawsuit in Idaho state court, after which Defendants removed it to this Court. Plaintiffs brought three claims for relief: (1) breach of contract (as to the Membership Agreement and Membership Plan); (2) misrepresentation

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and/or constructive fraud; and (3) violation of the Idaho Consumer Protection Act (" ICPA" ). (Dkt. 1-1.) Defendants filed a Motion for Judgment on the Pleadings, which was denied as to the breach of contract claim. The constructive fraud/misrepresentation claim and the ICPA violation claim were dismissed, but with leave to amend. (Dkt. 13.) Plaintiffs did not seek to amend the dismissed claims.

         The parties stipulated to class certification (Dkt. 54), which was the subject of the Court's December 11, 2013 certification order (Dkt. 57). The pending cross-motions for summary judgment followed, and argument was heard upon the same in Coeur d'Alene on May 5, 2015.

         The now-defunct Club at Black Rock (the " Club" ) was marketed to be a world-class golf resort and residential community for the wealthy, located on the edge of Lake Coeur d'Alene in Northern Idaho. During its development, the legal entity that owned the Club assets and operated the Club was the " Club at Black Rock, LLC" (the " LLC" ).[2] The LLC borrowed more than $12 million in various loans from Washington Trust Bank, secured by various assets, including the real and personal property connected with the operation of the Club.[3] By late 2010, the LLC was in significant financial distress, and facing the threat of foreclosure. The Bank was concerned about its collateral, because of the length of time required to pursue such a foreclosure, and because there were other unpaid creditors. The possibility of an involuntary bankruptcy also loomed, and in either scenario the Bank was concerned that the golf club would be shut down, a result which the Bank feared would greatly diminish the value of its primary piece of collateral. To avoid such an end, the Bank sought and obtained a work-out agreement with the LLC by which the Bank accepted a deed in lieu of foreclosure in order to obtain immediate possession and ownership of the secured real estate and improvements, and by which the Bank also obtained immediate possession and ownership of the associated personal property, chattels and paper through a bill of sale. The Bank released the LLC from any possible deficiency and released Marshall Chesrown from his personal guarantee upon the largest of the unpaid loans. The deed in lieu of foreclosure, and its related bill of sale agreement, were entered into on August 11, 2010. From that date the Bank was the owner of all that used to be the Club at Black Rock, previously operated by the LLC.

         As the workout agreement was being negotiated and in the months that followed its completion, the Bank actively sought to sell the Club as a going-concern. The Club remained open through the remainder of the 2010 summer and fall golfing

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season, before being closed on October 31, 2010. Contemporaneously with its closure the Bank sold the Club to a third-party, which took the name " The Golf Club at Black Rock, LLC." Before the new owner re-opened the doors to the golf course under its ownership, the Plaintiffs received a letter informing them that the Club was " terminating all membership agreements effective at 5:00 p.m. on October 31, 2010." Springel Decl. Ex. ZZ.

         The Plaintiffs contend that the Bank had assumed the duties of the LLC in the operation of the Club -- including the LLC's duties under the Membership Agreement -- as a result of the assignment of that contract from the LLC to the Bank. The Plaintiffs further contend that closure of the Club and the termination of the memberships triggered the duty to refund the membership deposits under the Membership Agreement and its related Membership Plan, and that under the applicable agreements between the Plaintiffs and the LLC and the applicable agreements between the LLC and Washington Trust, Washington Trust became responsible to refund the membership deposits. Washington Trust disputes any such liability, arguing that the agreements it had between itself and the LLC expressly disclaimed the possibility of any such liability and that it did not take on such a liability, either expressly or impliedly.

         STATEMENT OF FACTS

         A. The Development and Financing of The Club at Black Rock, LLC

         1. Developer and managing member Marshall Chesrown created the Club at Black Rock, LLC (the " LLC" ) to develop, own, and operate a private golf club named the Club at Black Rock (the " Club" ) to promote his contemporaneous development of luxury home sites along the golf course and Lake Coeur d'Alene in Idaho.[4] He had a 99% interest in the LLC. Defs.' SOF ¶ 2; Burnside Decl. Ex. 12, Chesrown Dep. 11:24-12:1, 12:13-24, 101:24-102:1, 146:10-14.

         2. Between 2004 and 2010, Washington Trust made four loans to the LLC amounting to over $12 million. These loans were secured by a deed of trust on the golf course and club house, and security interests in its equipment, vehicles, boats, trailers, inventory, equipment, furniture, fixtures and accounts receivable. Mr. Chesrown personally guaranteed the first loan, made in June 2004, of $10 million.[5] Defs.' SOF ¶ 10; Oberst Decl. ¶ ¶ 3-4, Ex. 21, Ex. 23, Ex. 24, Ex. 25, Ex. 26, Ex. 27, Ex. 28, Ex. 29, Ex. 30, Ex. 31; Perko Dep. 195:5-13, 207:18-20; 253:16-18; Chesrown Dep. 114:18-116:1; 153:19-154:1, 155:3-156:8 ; Heath Dep. 80:18-22, 175:15-21, 192:19-193:2, 193:7-10; Burnside Decl. Ex. 16, Oberst Dep. 297:24-298:6; Springel Decl. Exs. H-M, Ex. D, Perko Dep. 17:16-18:4.

         B. Membership in the Club at Black Rock

         3. The Membership Agreement was a contract between each member and the LLC, whose rights and obligations were also governed by the incorporated Membership Plan. See Membership Agreement (Dkt. 92-1).

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          4. The Membership Plan described the membership amenities at the Club, including the Club facilities, Club operations, membership rights, and dues and charges. Membership Plan (Dkt. 92-1).

         5. The Agreement required each member to pay a membership deposit (this ranged from $40,000 to $125,000, increasing in amount as the number of members grew) and monthly dues and charges in exchange for use of the Club's facilities.[6] Defs.' SOF ¶ 3; Pls.' SOF ¶ 3.

         6. Members were entitled to a refund of the Membership Deposit within thirty days of the following: (1) termination of the Membership Plan; (2) termination of any category of membership; or (3) the discontinuance of operation of all or substantially all of the Club facilities. Membership Agreement, p. 4. See also Membership Plan, p. 14.

         7. The Membership Agreement provided that: " In the event that the Club facilities are sold and the buyer assumes liability for the repayment of the Membership Deposit, the [member] shall look solely to the new for owner for repayment of the Membership Deposit and the seller shall be released from all liability for the repayment thereof. In the event of a sale of the Club facilities, the buyer shall take title subject to the terms and provisions of the then existing Membership Plan." Membership Agreement, p. 4. See also Membership Plan, p. 14.

         8. The members of the Plaintiff class are all former members of the Club. Defs.' SOF ¶ 1; Pls.' SOF ¶ 1.

         9. Dean Oberst, Commercial Special Assets Manager at Washington Trust, was aware of the Membership Agreement and Membership Plan. Dean Emmanuels, Washington Trust Vice President and Chief Appraisal Officer, knew the deposits were refundable. Pls.' SOF ¶ 16, ¶ 38; Springel Decl. Ex. E, Emmanuels Dep. 132:2-17; 156:6-157:8; 164:3-165:6; Ex. F, Oberst Dep. 27:8-15; 31:13-32:12; 85:11-25.

         C. Financial Difficulties Surrounding the LLC and Related Chesrown Entities

         10. Between 2004-2009, the LLC operated at multi-million dollar annual operating losses. Defs.' SOF ¶ 7; Pls.' SOF ¶ 26; Perko Dep. 30:4-23; 90:1-7; Springel Decl. Ex. G, Von Buchwaldt Dep. 65:21-24; Ex. O; Ex. X.

         11. From 2003 to 2010, the LLC listed " Club Member Deposits" as a long-term liability on its balance sheet. By March 31, 2010, the liability was calculated at $29,505,182.00. Defs.' SOF ¶ 6; Oberst Decl. ¶ 8, Ex. 39; Burnside Decl. Ex. 14, Rountree 1st Dep. 39:2-13.

         12. In 2009, Washington Trust purchased the Black Rock marina and beach/sales office properties used by Club members. These properties previously were owned by other Chesrown-owned entities, and not the LLC. Washington Trust President Jack Heath testified that these properties were purchased because aggregating the real estate would make it more valuable. Pls.' SOF ¶ 29; Springel Decl. Ex. N, Chesrown Dep. 146:23-148:1; Ex C., Heath Dep. 85:4-86:24, 216:5-16.

         13. In the summer of 2010, the LLC solicited Club members to serve on a long-range planning committee, to advise it and Club members on options for restructuring. Defs.' SOF ¶ 12; Francis Decl. Ex. 7

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          14. In letters to Club members in 2010, the long-range planning committee recommended that the best solution would be to convert the Club to a member-owned club. However, the LLC and Club members could not agree on how this should occur. Chesrown testified that his priority was for the Club to remain open and that was a prerequisite to any deal he would agree to. Defs.' SOF ¶ ¶ 13-14; Francis Decl. Exs. 8-9; Oberst Decl. ¶ 7; Oberst Dep. 86:14-24, 87:22-88:23; Heath Dep. 153:23-154:2 ; Burnside Decl. Ex. 6, Gorton Dep. 43:3-22; Chesrown Dep. 134:23-136:15.

         15. At this time in 2010, the LLC had a number of unpaid creditors. Also in 2010, Washington Trust became concerned about the possibility of an involuntary bankruptcy originating with other creditors that the Bank believed could cause " significant delay to preserving the asset" (that is, Washington Trust's security for its unpaid loans). Pls.' SOF ¶ 37; Perko Dep. 55:7-10, 57:18-25; Oberst Dep. 55:19-56:4, 61:18-62:5; Oberst Decl. ¶ 7 (" the Bank did not want to proceed with bankruptcy or foreclosure because both can take months or years to complete . . . [t]o achieve a faster resolution than bankruptcy or foreclosure would allow, and to best protect the value of the collateral, the Bank agreed to executed a deed in lieu of foreclosure." ); Heath Dep. 178:17-20 (" the decision to take the deed in lieu of foreclosure" was because " we [didn't] have to go through an extended foreclosure process." )

         16. Washington Trust, as reflected in internal memoranda, believed that " preservation of the membership base" was critical to the Club's value and that there would be more value if there were active members interested in buying the Club. Pls.' SOF ¶ 34; Defs.' SOF ¶ ¶ 15-16; Heath Dep. 156:6-12; Springel Decl. Ex Y.

         17. Washington Trust knew it could " let the golf course go to seed," but believed that doing so would make the asset worth much less. On the other hand, the Bank believed that keeping the golf course open and maintained would preserve its value. Pls.' SOF ¶ 33; Defs.' SOF ¶ 16; Heath Dep. 43:21-45-7; Oberst Dep. 86:18-24.

         D. Deed in Lieu of Foreclosure

         18. To avoid the prospect of either a voluntary or involuntary bankruptcy, and to protect against foreclosure and a possible deficiency, Washington Trust and the LLC agreed to a work out of the unpaid loans which included an Agreement for Deed in Lieu of Foreclosure (" DIL Agreement" ), an accompanying Non-Merger Warranty Deed in Lieu of Foreclosure (" Warranty Deed" ), and a Bill of Sale and Assignment (" Bill of Sale" ). These agreements were executed effective August 11, 2010. Defs.' SOF ¶ 17; Oberst Decl. ¶ 7; DIL Agreement, Non Merger Warranty, Bill of Sale (Dkt. 92-2--3).

         19. The DIL Agreement released the LLC from its indebtedness on the four outstanding loans secured by the golf club's real and personal property. The Bank also agreed to release Chesrown from the individual guaranty he made on the $10 million loan in 2004. The Warranty Deed transferred the real property to the Bank and the Bill of Sale transferred the associated personal property to the Bank, as detailed more specifically below. Id.

         20. The LLC's 2010 Tax Return reported nearly $28 million in " Cancellation of Debt" income related to the membership deposits as a result of the DIL Agreement. Pls.' SOF ¶ 56; Springel Decl. Ex. AAA.

         21. In the DIL Agreement, Washington Trust and the LLC agreed that " transfer

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of the Property[7] to [Washington Trust] in lieu of foreclosure is necessary to allow for continued operation of the Club as set forth in Section 6.3." DIL Agreement Recital G.

         22. Section 6.3 of the DIL Agreement, titled " Post-Closing Obligations," provided that after the Closing, the Bank was required to: " reasonably endeavor to continue stabilized operations of the Club, at least through the 2010 season, at a level of service and amenities that is consistent with the prior operation of the Club, provided that the membership is maintained with a sufficient number of dues paying members to sustain operation of the Club as reasonably determined by [Washington Trust]." DIL Agreement § 6.3.

         23. In a provision addressing representations and warranties made by the LLC to the Bank, Section 7.4 reads: " [The LLC] acknowledges and agrees that acceptance by [Washington Trust] of title to and [the LLC's] interest in the Property pursuant to the terms of this Agreement shall not create any obligations on the part of [Washington Trust] to third parties that have claims of any kind whatsoever against [the LLC] with respect to the Property and that [Washington Trust] does not assume or agree to discharge any liabilities pertaining to the Property that occurred prior to the date of Closing, except as specifically assumed by [Washington Trust.] The [LLC] agrees to indemnify and hold [Washington Trust] free and harmless from and against any losses, damages, costs, or expenses, including attorneys' fees, pertaining to claims and liabilities relating to the Property, resulting from events that occurred prior to the date of Closing. No person not a party to this Agreement shall have any 'third-party beneficiary' or other right hereunder." DIL Agreement § 7.4.

         24. Section 9.10 of the DIL Agreement, titled " No Partnership," described the " relationship between [Washington Trust] and [the LLC] is that of debtor and creditor. Nothing contained in this Agreement will be deemed to create a partnership or joint venture between [Washington Trust] and [the LLC], or between [Washington Trust] and any other party, or to cause [Washington Trust] to be liable or responsible in any way for the actions, liabilities, debts, or obligations of [the LLC]." DIL Agreement § 9.10.

         25. Section 9.12 was titled " No Third-Party Beneficiaries" and reiterated the language of the last sentence of Section 7.4: " The provisions of this Agreement are solely for the benefit of [Washington Trust] and [the LLC], and do not inure to the benefit of, or confer rights upon, any third party." DIL Agreement § 9.12.

         26. The Bill of Sale and Assignment, executed contemporaneously with the DIL Agreement, served to " grant, bargain, sell, convey, assign, and transfer unto [Washington Trust]" the following: " All Equipment; " " All inventory, chattel paper, accounts, furniture, and all fixtures, excluding Alcoholic Liquor as defined in Idaho Code 23-105; " . . . " All deposits and bonds of the Club; " . . . " All assignable permits, licenses, contracts, approvals, applications

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and agreements, of every kind and nature, relating to the Club, including, without limitation, all building permits and environmental and subdivision approval; but excluding any permits and licenses relating to Alcoholic Liquor as defined in Idaho Code 23-105. . ." Bill of Sale (emphasis added). There is no reference in any of the conveyance agreements that address by specific name the membership deposits that are referenced in the Membership Agreement; however, neither is there any reference in the conveyance agreements that specifically indicates by name that the Membership Agreement is not one of the agreements otherwise included in the above described paragraph from the Bill of Sale.

         27. Washington Trust President Heath testified that the Bank " took the things that were required to operate the Club. . ." Pls.' SOF ¶ 50; Heath Dep. 111:1-5.

         28. Section 5.2 required that the LLC deliver, at closing, all insurances policies, all keys to access the Property, and all Certificates of Title to Property. DIL Agreement § 5.2.

         29. Section 2.1(c) confirmed that, upon a default, the various security agreements gave Washington Trust the power to deal with " the Personal Property" in Washington Trust's own name or that of the LLC. DIL Agreement § 2.1(c).

         30. Section 2.2 stated, in part: " The [LLC] should have no further interest or claim in or to the Personal Property conveyed by the Bill or Sale and Assignment, or the proceeds or profits of any kind whatsoever which may be derived from the Personal Property." DIL Agreement § 2.2.

         31. The Deed in Lieu Agreement, and related documents (including the Warranty Deed and Bill of Sale), were executed on August 11, 2010. Pls.' SOF ¶ 48; Defs.' SOF ¶ 17.

         32. On August 23, 2010, Washington Trust assigned the assets transferred by the LLC to its wholly owned subsidiary, West Sprague Avenue Holdings, LLC. Pls.' SOF ¶ 49; Defs.' SOF ¶ 19; Springel Decl. Ex. YY.

         E. The Operation of the Club After Execution of the DIL Agreement

         33. At Washington Trust's request, Black Rock Development[8] assigned Washington Trust its declarant's rights to the Black Rock Homeowners' Association (" HOA" ). Pls.' SOF ¶ 52; Oberst Dep. 39:16-40:17; 42:21-43:12.

         34. Dean Oberst, Special Assets Manager and Washington Trust, said the assignment of the HOA's declarant rights was important to the Bank for two reasons: (1) if the Bank was the declarant, it would not be charged HOA dues and (2) a potential buyer would interested in " getting all of the rights that are available" . Pls.' SOF ¶ 52; Oberst Dep. 39:16-43:20.

         35. Following this, the former HOA board members,[9] who had been appointed by Chesrown, resigned. In their place, Washington Trust appointed persons ...


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