Cottage Capital, LLC v. Red Ledges Land Dev.

• Decision Date: 30 January 2015
• Docket Number: No. 20130320.,20130320.
• Citation: 779 Utah Adv. Rep. 62
• Parties: COTTAGE CAPITAL, LLC, Appellant, v. RED LEDGES LAND DEVELOPMENT, Appellee.
• Court: Utah Supreme Court

779 Utah Adv. Rep. 62

COTTAGE CAPITAL, LLC, Appellant,

v.RED LEDGES LAND DEVELOPMENT, Appellee.

No. 20130320.

Supreme Court of Utah.

Jan. 30, 2015.

Reversed and remanded.

[345 P.3d 643]

Karthik Nadesan, Salt Lake City, for appellant.

Brent O. Hatch, Mitchell A. Stephens, Salt Lake City, for appellee.

Justice LEE authored the opinion of the Court, in which Chief Justice DURRANT, Associate Chief Justice NEHRING, Justice DURHAM, and Justice PARRISH joined.Justice LEE, opinion of the Court:

¶ 1 This is an appeal from an order dismissing an action brought by Cottage Capital, LLC, to enforce a guaranty agreement against Red Ledges Land Development. The district court dismissed this action on grounds of preclusion, concluding that it should have been asserted as a compulsory counterclaim in an earlier suit between the parties. We reverse. We interpret rule 13(a) of our rules of civil procedure not to extend to a counter-claim that has not yet matured at the time of a civil proceeding. And because we cannot conclude that Cottage Capital's enforcement claim had matured at the time of the earlier proceedings between the parties, we hold that rule 13(a) was not implicated and thus that this claim was not precluded.

I

¶ 2 On May 5, 2008, Cottage Capital loaned GC Pacific just over one million dollars and memorialized the debt in a promissory note. On the same day, Cottage Capital also executed

[345 P.3d 644]

an agreement with Red Ledges, in which Red Ledges guaranteed GC Pacific's repayment obligations under the promissory note. The guaranty agreement provides that upon GC Pacific's default, Cottage Capital had the option of collecting the debt from Red Ledges instead. The relevant portion of the guaranty agreement is as follows:

Upon any default by BORROWER in the full and prompt payment and performance of any of the OBLIGATIONS, the liabilities and OBLIGATIONS of GUARANTOR hereunder shall at the option of the LENDER, become forthwith due and payable to the LENDER without demand or notice of any nature, such demand or notice being expressly waived by GUARANTOR.

¶ 3 GC Pacific and Cottage Capital negotiated several extensions on the debt, but GC Pacific became delinquent on its payments in or about May 2009. Instead of immediately turning to the guaranty agreement and asking Red Ledges to satisfy the debt, however, Cottage Capital continued to negotiate with GC Pacific directly for repayment.

¶ 4 During the course of these negotiations, on March 15, 2011, Red Ledges filed a declaratory judgment action in the district court. That action sought a declaration that the guaranty was unenforceable and that Red Ledges should be released from all of its obligations thereunder. Red Ledges' declaratory judgment claim was based on its assertions that the interest rate in the guaranty was unconscionable, that Cottage Capital had failed to provide Red Ledges with ongoing information about the status of GC Pacific's payments on the loan, that Cottage Capital and GC Pacific had conspired to modify the terms of the guaranty to increase Red Ledges' liability, and that Cottage Capital had breached the guaranty agreement. In its answer to the declaratory judgment action, Cottage Capital defended against Red Ledges' allegations, but did not assert any affirmative counterclaims.

¶ 5 On June 4, 2012, the district court granted summary judgment in favor of Cottage Capital on all counts. It held that the interest rate was not unconscionable, that Cottage Capital had no duty to provide Red Ledges with ongoing information about the loan, that Cottage Capital was authorized by the guaranty to modify the terms of the note, and that Red Ledges had failed to establish any breach of contract or conspiracy.¹ Red Ledges did not appeal that decision.

¶ 6 At the time of the declaratory judgment action, the parties appear to have understood that GC Pacific was still in a position to repay its debt, and thus that enforcement of the guaranty agreement might not be necessary. Red Ledges represented to the district court that at the time the declaratory judgment action was initially filed, “it was unclear whether [GC Pacific] would be able to fully satisfy its debt to Cottage Capital.” But during the course of the action, Red Ledges “learned of the increased likelihood that Cottage Capital will be paid in full by GC Pacific,” and accordingly filed a motion to toll the proceedings.

¶ 7 Negotiations with GC Pacific eventually broke down, however, and Cottage Capital sought repayment from Red Ledges instead. On June 12, 2012, it delivered notice to GC Pacific and Red Ledges that it was declaring all amounts due and payable from Red Ledges, and asserting that it would file an enforcement action if payment was not received within ten days. Red Ledges failed to pay, and Cottage Capital filed an enforcement action in the district court in September 2012.

¶ 8 Red Ledges filed a motion to dismiss, alleging that Cottage Capital's claim was precluded under rule 13 of the Utah Rules of Civil Procedure. Red Ledges asserted

[345 P.3d 645]

that Cottage Capital's enforcement claim was a compulsory counterclaim that should have been filed in the declaratory judgment proceeding the prior year. Cottage Capital opposed the motion to dismiss on four grounds: (1) that the enforcement claim had not accrued at the time of the declaratory judgment action; (2) that a provision of the guaranty agreement waiving Red Ledges' contract defenses foreclosed the compulsory counterclaim defense; (3) that there is a declaratory judgment exception to the compulsory counterclaim rule; and (4) that the claim was not compulsory because it was not logically related to Red Ledges' claims in the declaratory judgment action.

¶ 9 The district court granted the motion, dismissing Cottage Capital's enforcement action with prejudice. In so doing, the court rejected all of Cottage Capital's defenses. Of particular importance to this appeal, it held that the enforcement claim “accrued without demand when GC Pacific went into default in May 2009,” two years before the declaratory judgment action was filed. And from that premise the district court proceeded to conclude that the enforcement action was precluded as a compulsory counterclaim, holding that it arose out of the “same transaction or occurrence” as the declaratory judgment action, that there could be no waiver of the preclusive effect of rule 13(a), and that any declaratory judgment exception did not apply.

¶ 10 Cottage Capital filed this appeal, which we retained under Utah Code section 78A–3–102(3)(j). Cottage Capital's arguments for reversal are the same grounds it pressed in opposition to the motion to dismiss in the district court. Our review of the order of dismissal is de novo; we afford no deference to the district court's judgment. Maxfield v. Herbert, 2012 UT 44, ¶ 11, 284 P.3d 647 (“We review [a] district court's decision to grant [a] 12(b)(6) motion for correctness.”).

II

¶ 11 The principal question presented concerns the applicability of civil rule 13(a) to the enforcement claim asserted by Cottage Capital against Red Ledges. Cottage Capital challenges the applicability of rule 13(a) on various grounds. We reach only one of them—the first—because we find it sufficient to sustain the viability of its claim and thus to require reversal of the district court's judgment of dismissal.

¶ 12 Under civil rule 13(a), a pleading must “state as a counterclaim any claim which at the time of serving the pleading the pleader has against any opposing party, if it arises out of the transaction or occurrence that is the subject-matter of the opposing party's claim.” Utah R. Civ. P. 13(a) (emphasis added). As the highlighted terms indicate, a counterclaim cannot be compulsory unless it is extant—i.e., matured or accrued—“at the time” of the relevant pleading. That point is emphasized by the parallel terms of rule 13(d), which designates as permissive counterclaims those “maturing or acquired after pleading.” Id. 13(d).²

¶ 13 The key question is accordingly whether Cottage Capital's claim had accrued at the time of the pleading in the declaratory judgment proceeding between the parties. In resolving that question on a motion to dismiss, we accept the facts as alleged by Cottage Capital, together with all reasonable inferences to be drawn therefrom. See Krouse v. Bower, 2001 UT 28, ¶ 2, 20 P.3d 895. And under that standard, we reverse the decision granting the motion to dismiss, holding that there is at least a reasonable basis for concluding that Cottage Capital's claim had not accrued at the time of the pleading in the underlying declaratory judgment proceeding.

¶ 14 Under the express terms of the guaranty, Red Ledges' obligation did not become enforceable until Cottage Capital's option to exercise the guaranty had been exercised. Specifically, payment was due and payable from Red Ledges only “at the option of the lender.” And that option, bargained

[345 P.3d 646]

for by the parties, gave Cottage Capital the discretion to decide when to give up on recovering the debt from GC Pacific and declare Red Ledges' obligation due and payable. Until that happened, Cottage Capital's enforcement action was not mature and could not be asserted. See O'Hair v. Kounalis, 23 Utah 2d 355, 463 P.2d 799, 800 (1970) (“Ordinarily, a cause of action for a debt begins to run when the debt is due and payable because at that time an action can be maintained to enforce it.”).

¶ 15 Under the facts as alleged by Cottage Capital, and giving it the benefit of reasonable inferences in its favor, we cannot conclude that Cottage Capital's enforcement claim had accrued at the time of the pleadings in the declaratory judgment suit. It is at least reasonable to infer that Cottage Capital had not exercised its option until after that suit had been dismissed and Cottage Capital had given up on collecting directly from GC Pacific. And in light of that inference, ...