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Cayne v. Washington Trust Bank

United States District Court, D. Idaho

January 20, 2017

ROBERT CAYNE, RONNIE RIVERA, SEAN RIVERA, KEN McELROY, and the same on behalf of themselves and on behalf of all others similarly situated, Plaintiffs,
WASHINGTON TRUST BANK, a Washington corporation; and WEST SPRAGUE AVENUE HOLDINGS, LLC, a Washington limited liability company, Defendants.


          Honorable Ronald E. Bush Chief U.S. Magistrate Judge.

         This decision and order addresses the issues raised in Plaintiffs' Renewed Motion for Judgment as a Matter of Law (Fed. R. Civ. P. 50(b)), or in the alternative, Motion for New Trial (Fed. R. Civ. P. 59) (Dkt. 415). The first motion renews Plaintiffs' Rule 50(a) motion for judgment as a matter of law, which was made at the close of evidence. The second motion seeks alternative relief, in the form of a new trial.


         Following several years of litigation, this case culminated in a multi-week jury trial. On March 21, 2016, the jury returned a unanimous verdict in favor of Defendants Washington Trust Bank (“the Bank”) and West Sprague Avenue Holdings, LLC (“West Sprague”). Subsequently, Plaintiffs filed the referenced motions, supported by a brief in support of their combined Rule 50(b) renewed motion for judgment as a matter of law and Rule 59 motion for new trial. See Dkt. 416. Defendants filed a response, which was followed by a reply brief from Plaintiffs. See Dkts. 448, 452. The record underlying the motions contains over 1600 pages of attachments to the briefing (including trial and other exhibits) and approximately 2300 pages of trial transcript. See Dkts. 418-446.

         First, the Court will address the renewed Rule 50 motion for judgment as a matter of law, and then the motion for a new trial. The particular issues, evidence details, witnesses, and related particulars are already well-known to the parties and largely have been discussed at length in prior orders of the Court. Therefore, the Court will not attempt an exhaustive background here.

         JUDGMENT AS A MATTER OF LAW / Fed.R.Civ.P. 50(a) and (b)

         A. Standard

         Fed. R. Civ. P. 50(a)(1) provides:

If a party has been fully heard on an issue during a jury trial and the court finds that a reasonable jury would not have a legally sufficient evidentiary basis to find for the party on that issue, the court may: (A) resolve the issue against the party; and (B) grant a motion for judgment as a matter of law against the party on a claim or defense that, under the controlling law, can be maintained or defeated only with a favorable finding on that issue.

         Relevant here, Rule 50(b) permits renewed motions for judgment as a matter of law made under Rule 50(a) and provides that the court may: “(1) allow judgment on the verdict, if the jury returned a verdict; (2) order a new trial; or (3) direct the entry of judgment as a matter of law.” Fed.R.Civ.P. 50(b). A Rule 50(b) motion for judgment as a matter of law is not treated as a separate motion; instead, it is a renewed 50(a) motion. EEOC v. Go Daddy Software, Inc., 581 F.3d 951, 961 (9th Cir. 2009). A Rule 50(a) motion is made before the case is submitted to the jury. If the court defers or denies the motion, and if the jury then returns a verdict against the movant, the movant may renew the motion under Rule 50(b).[1] Id. However, because the 50(b) motion is a renewed motion, the grounds for the motion are limited to the same as those asserted in the prior Rule 50(a) motion. “A party cannot properly raise arguments in its post-trial motion for judgment as a matter of law under Rule 50(b) that it did not raise in its preverdict Rule 50(a) motion.” Id. (internal quotation marks omitted). Accordingly, this decision addresses and resolves both the Rule 50(a) and Rule 50(b) motions as one Rule 50 motion.

         In considering a Rule 50 motion, the court must view the evidence in the light most favorable to the prevailing party and must draw all reasonable inferences in favor of the non-moving party. First Nat. Mortgage Co. v. Federal Realty Inv. Trust, 631 F.3d 1058, 1067 (9th Cir. 2011); Lakeside-Scott v. Multonomah County, 556 F.3d 797, 802 (9th Cir. 2009); Josephs v. Pac. Bell, 443 F.3d 1050, 1062 (9th Cir. 2006). Further, the court shall “give significant deference to the jury's verdict and to the nonmoving part[y] . . . .” A.D. v. Cal. Highway Patrol, 712 F.3d 446, 453 (9th Cir. 2013).

         Under such constraints, a jury verdict can be set aside and judgment granted as a matter of law in favor of the moving party “only if, under governing law, there can be but one reasonable conclusion as to the verdict and only if there is no legally sufficient basis for a reasonable jury to find for [the non-moving] party on that issue.” Jules Jordan Video, Inc. v. 144942 Canada Inc., 617 F.3d 1146, 1155 (9th Cir. 2010) (internal quotation and citations omitted); see also A.D., 712 F.3d at 453 (“judgment is proper if the evidence construed in the light most favorable to the nonmoving party, permits only one reasonable conclusion [...] contrary to the jury's verdict.” (quoting Pavao v. Pagay, 307 F.3d 915, 918 (9th Cir. 2002))); First Nat. Mortgage, 631 F.3d at 1067-68 (verdict upheld if supported by substantial evidence, “even if it is also possible to draw a contrary conclusion[, ]” and court “must disregard evidence favorable to the moving party that the jury is not required to believe, and may not substitute its view of the evidence for that of the jury[ ]” (internal citation and quotation omitted)). Further, a jury's factual findings must be upheld if there is substantial evidence in support of the jury's verdict. Microsoft Corp. v. Motorola, Inc., 795 F.3d 1024, 1045 (9th Cir. 2015).

         Plaintiffs argue that the proof at trial permits only one reasonable conclusion - in their favor. Therefore, Plaintiffs contend the Court should have granted judgment in their favor at the close of evidence, and that the jury verdict in favor of the Defendants is untenable. More specifically, Plaintiffs seek judgment as a matter of law because: (1) in the period after the Deed in Lieu Agreement, the Club's staff became the Bank's employees or agents and the jury should have been instructed as such as a matter of law; (2) West Sprague was the alter ego of the Bank; and (3) the Court erroneously instructed the jury on the law of assumption of a contract liability by implication. The Court will consider such arguments in turn.

         B. The Court Properly Did Not Instruct the Jury that the Club Staff Were Employees/Agents of the Bank

         Plaintiffs contend that after execution of the Deed in Lieu agreement (“DIL”), the Club's staff became the employees or agents of Washington Trust Bank (“the Bank”). Plaintiffs argue that every asset was stripped out of the Club at Black Rock, LLC and became the Bank's assets, including the Club's checking account.[2] Plaintiffs contend the Club's staff were paid by checks drawn on the Club's checking account and the Bank had the right to control the employees' work, and therefore, it is indisputable that the staff members became the Bank's employees or agents. Pls.' Mem., Dkt. 416, p. 20.

         The Bank, on other hand, says that Plaintiffs failed to prove that the Bank or West Sprague exercised any control over the Club's management team or employees during the relevant post-DIL time frame and therefore, there was not a sufficient basis for an instruction as a matter of law that the Club's staff were the employees and/or agents of the Bank or West Sprague. Defs.' Mem., Dkt. 448, p. 22.

         Idaho law describes an agency relationship as one that arises from “the manifestation of consent by one to another that the other shall act on his behalf and subject to his control and consent by the other so to act.” Thornton v. Budge, 257 P.2d 238, 240 (Idaho 1953). The party alleging the existence of an agency relationship carries the burden of proof and where the existence of an agency relationship is disputed, it is a question for the trier of fact to resolve from the evidence. Gissel v. State of Idaho, 727 P.2d 1153, 1157 (Idaho 1986).[3]

         The trial evidence showed that after the DIL, the Club's existing general manager (Andy Gorton) continued to make hiring and work schedule decisions, the employees continued to have state and federal income taxes withheld, and the employees received all the same benefits as they had before the execution of the DIL. As part of the DIL, assets were transferred to the Bank (and later to West Sprague), including accounts such as the bank accounts.[4] Plaintiffs contend that the LLC was a “barren corporate shell” with nothing that it could operate, including the Club, and that it was the Bank's money paying the employees and such that they were inescapably employees/agents of the Bank.

         Such evidence is significant, and supports Plaintiffs' theory. However, there was other evidence that did not. Mr. Gorton testified that the Bank and West Sprague did not exercise any control over the Club's employees. Among other things, Gorton said that even after the DIL, if the Bank or West Sprague said one thing to him and Marshall Chesrown told him to do something else, he would do what Mr. Chesrown instructed. See, e.g., Gorton Testimony, Dkt. 418-3, 69:6-11. There was repeated, and consistent, testimony from the staff members of the Club and from Bank employees that after the execution of the DIL, the Club was to be and would be operated exactly as it had been operated previously (and therefore, by inference, in the same hands that had been running the show prior to the DIL) for various reasons, including the fact that the Bank “wasn't in the business of running a golf course” and didn't know how to run a golf course.[5]

         The sum of all of the evidence could be argued to support either side of the dispute. Further, there was conflicting evidence as to what role, if any, Chesrown may have played in the operation of the Club after the DIL, i.e., was he involved in some manner - whether directly or as a figurehead - or was he not? Further, even if he was involved, what was his motivation for any continuing involvement with the Club? Was he involved to keep the Club running as is, with an intact membership base, so as to help the Bank peddle the Club to some other entity as a going-concern (and make a windfall as a result, as Plaintiffs theorized)? Was he involved because of his purported loyalty to the Club members, wanting to keep the Club operating for their benefit? Or was he entirely self-serving, acting only to sweeten what Plaintiffs contended was an already sweet deal when it came to removing him from personal liability for any of the enormous unpaid liability owed to the Bank prior to the DIL?

         There was evidence put forward on this issue from which Plaintiffs could, and did, strongly argue that such agency existed. However, that conclusion was not the only reasonable conclusion that could be drawn. Against that standard, Plaintiffs' contention that the jury should have been instructed as a matter of law that the Club's staff were employees or agents of the Bank and/or West Sprague cannot prevail. The Court concluded that the evidence presented could result in more than one reasonable conclusion and instructed the jury in that manner, leaving the issue to be resolved by the jury. The Court is not persuaded of a different result on the renewed motion and denies Plaintiffs' Rule 50 motion on this issue.

         C. The Court Properly Did Not Instruct that West Sprague was the Alter Ego of the Bank

         Plaintiffs contend that, as a matter of law, West Sprague was the alter ego of Washington Trust Bank. Plaintiffs emphasize several pieces of evidence - the Bank owned all of West Sprague; that there were officers of West Sprague who were common to the officers of the Bank; that West Sprague's only assets were those conveyed to it by the Bank; that the Bank owned the building where West Sprague's business was conducted; that all decision-making for West Sprague was made by the Bank's officers; that the Bank paid all of the Club's operating expenses and funded the Club's checking account, and that the Bank paid expenses and salaries (if any) related to West Sprague. See Pls.' Mem., Dkt. 416, pp. 22-23.

         Defendants disagree that such evidence establishes alter ego status as a matter of law, contending that such facts simply describe West Sprague's “mere subsidiary status.” Such “mere control and even total ownership, ” according to Defendants, do not warrant the disregard of a separate corporate entity, must less a determination as a matter of law that West Sprague was the alter ego of the Bank. See Defs.' Mem., Dkt. 448, p. 23.

         Under Idaho law, two elements must combine to justify disregarding the legal status of distinct business entity existence. First, there must be such a “unity of interest” between the two entities that there are not separate personalities between the two. Second, it must appear from the facts that the observance of the fiction or separate existence of two separate entities would, under the circumstances, sanction a fraud or promote injustice. Bailey v. Price Manufacturing Co., LLC, 2015 WL 12681370, *6 (D. Idaho Jan. 23, 2015); Hayhurst v. Boyd, 300 P. 895, 898-99 (Idaho 1931); see also Tolman v. American Red Cross, 874 F.Supp.2d 928, 936 (D. Idaho 2012) (discussing that proof of alter ego status is required to pierce corporate veil of even parent and subsidiary companies); Hutchison v. Anderson, 950 P.2d 1275, 1279 (Idaho Ct. App. 1997) (party asserting alter ego must put forward “sufficient evidence such that there is no distinction” between the two entities).

         Various factors guide the assessment of whether an alter ego relationship exists, including the level of control that the shareholder exercises over the corporation, whether separate business formalities are observed, whether the entities are operated separately and keep separate books, and the decision-making process of the entities. E.g., Wandering Trails, LLC v. Big Bite Excavation, Inc., 329 P.3d 368, 376 (Idaho 2014). In Wandering Trails, a land development limited liability company and its managing member brought breach of contract and related claims against a paving company known as Piper Ranch, LLC (“Piper Ranch”), and its only members, husband and wife Tim and Julie Schelhorn (“the Schelhorns”).[6] The claims arose in part from an assignment agreement between the plaintiff developer and Piper Ranch. Id. at 371.[7] The plaintiff sought to impose liability against the Schelhorns on the theory that Piper Ranch was their alter ego, arguing that Piper Ranch was undercapitalized, was controlled exclusively by the Schelhorns, and acted only as a financial conduit for the Schelhorns. Id. at 375-76.

         The Idaho Supreme Court ruled that such facts were insufficient to establish “a unity of interest” to support a finding of an alter ego status. Id. Instead, the court held that such evidence demonstrated “a distinction between the personalities of the Schelhorns and Piper Ranch [LLC].” Id. at 377. (Emphasis supplied.) Among other things, the Piper Ranch bank account had checks in only Piper Ranch's name, there was no evidence that the Schelhorns deposited their own money into that account other than to meet capital obligations, and there was no evidence that either of the Schelhorns used Piper Ranch money to pay their own obligations.[8] Id. Further, the Schelhorns had insisted that the assignment agreement run between the developer and Piper Ranch - not between the developer and the Schelhorns individually. Id.

         As to the instant case, Plaintiffs rely on facts very similar to those which fell short in Wandering Trails. Here, Plaintiffs rely upon the fact that the Bank was the only member of West Sprague, LLC, and they contend that the Bank exercised full control over West Sprague. But, under Idaho law, the fact that a separate entity is the only member of an LLC entity and exercises full control of the LLC is “not a relevant inquiry” for determining alter ego. Id. at 377.[9] Indeed, the court went on to say the plaintiffs' “argument, if accepted, would effectively eviscerate the legislative intent that member-managed and individual LLCs are separate legal entities.” Id. Significantly, in the trial of this case, Defendants put on evidence that West Sprague had separate financial statements, separate income statements, its own general ledger accounts, and a separate federal tax ID number. See Oberst Testimony, Dkt. 420, 81:1-82:4. Such factual indicia of economic separateness are identical in all relevant manner to the facts relied upon by the court in Wandering Trails. Id. at 375.

         Moreover, in order to establish an alter ego there must be an inequitable result that would follow if the entities were not treated as the same. In general terms, this means that observing the separate entities would “sanction a fraud or promote injustice.” See Maroun v. Wyreless Sys., Inc., 114 P.3d 974, 986-87 (Idaho 2005). The fact a creditor may be unsatisfied is not proof alone of an injustice warranting piercing the corporate veil. United States v. Standard Beauty Supply Stores, Inc., 561 F.2d 774, 777 (9th Cir. 1977). Relatedly, “[i]t is a general principle of corporate law deeply ingrained in our economic and legal systems that a parent corporation (so-called because of control through ownership of another corporation's stock) is not liable for the acts of its subsidiaries.” United States v. Bestfoods, 524 U.S. 51, 61 (1998) (internal quotation and citation omitted). Only in exceptional cases do such bright lines give way, such as if fraud or injustice would result if the corporate form was not disregarded. Seymour v. Hull & Moreland Engineering, 605 F.2d 1105, 1111 (9th Cir. 1979). “To warrant casting aside the legal fiction of distinct corporate existence . . . it must [ ] be shown that there is such a unity of interest and ownership that the individuality of such corporation and such person had ceased; and it must further appear from the facts that the observance of the fiction of separate existence would, under the circumstances, sanction a fraud or promote injustice.” Hayhurst v. Boyd, 300 P. 895, 897 (Idaho 1931).

         Accordingly, in keeping with these general principles measured against the facts presented in this case, and construing the facts most favorable to the non-moving party under Rule 50, Plaintiffs' motion for judgment as a matter of law on the issue of alter ego is denied.

         D. Jury Instruction No. 37 Is a Correct Statement of Applicable Law on Assumption by Implication of a Contract Liability.

         Plaintiffs contend that Jury Instruction No. 37 erroneously instructed on the law applicable to Plaintiffs' claim of assumption by implication. In particular, Plaintiffs complain of the language which reads “assumption by implication occurs when the assignee's conduct manifests an intent to be bound to such duty or obligation.” Jury Instruction No. 37, Dkt. 382, p. 18. Plaintiffs argue the language should be: “the assignee of an executory contract is not liable on the contract in the absence of an express assumption of the obligations of the contract.” Pls.' Mem., Dkt. 416, p. 13 (emphasis in original).

         Plaintiffs argue that without the words “of the contract, ” the instruction was ambiguous because the jury would have been required to decide whether “Defendants intended to assume the membership deposit refund liability, rather than requiring the jury to determine if the Defendants' conduct showed an intent to assume the assigned Membership Agreement.” Id. at 13-14.

         Plaintiffs draw upon Hardinger v. Fullerton, 5 P.2d 987, 989 (Wash. 1931), which held that “the assignee of an executory contract is not liable on the contract in the absence of an express assumption of the obligations of the contract . . .” Pls.' Mem., Dkt. 416, p. 13; see also Summary Judgment Decision, Dkt. 177, p. 28. Hardinger draws upon a treatise for the proposition that a “purchaser is not liable for the payment of an encumbrance unless he has expressly or impliedly agreed to pay the same, and a mere recital that the property is sold subject to an encumbrance is not sufficient to create a personal liability.” Hardinger, 5 P.2d at 990 (internal quotation omitted). The focus of Hardinger, however, was upon a particular liability (as would sensibly be so), and the Washington Supreme Court specifically affirmed the trial court's ruling that the evidence of an “assumption of the indebtedness” was not sufficiently strong and convincing and that there was no implied ...

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