Wardley v. McLachlan

• Decision Date: 23 September 2021
• Docket Number: 2:21-CV-00128-DAK-DAO
• Citation: Wardley v. McLachlan, 2:21-CV-00128-DAK-DAO (D. Utah Sep 23, 2021)
• Parties: LYNN WARDLEY, Plaintiff, v. SCOTT MCLACHLAN and GARY KEARL, Defendants.
• Court: U.S. District Court — District of Utah

LYNN WARDLEY, Plaintiff, v. SCOTT MCLACHLAN and GARY KEARL, Defendants.

No. 2:21-CV-00128-DAK-DAO

United States District Court, D. Utah

September 23, 2021

MEMORANDUM DECISION AND GRANTING IN PART MOTION TO DISMISS COUNTERCLAIMS

DALE A KIMBALL, United States District Judge

This matter is before the court on Plaintiff Lynn Wardley's (“Wardley”) Motion to Dismiss Counterclaims. Wardley moves to dismiss counterclaims Three, Four, and Five of Defendants' Counterclaim, as well as any arguments regarding the court adjudicating tax issues within the First and Second counterclaims, pursuant to Fed.R.Civ.P. 12(b)(1) and (6). The court held a hearing on the motion on September 21, 2021. At the hearing, Wardley was represented by Matthew L. Lalli and Jeremy J. Stewart. Defendants were represented by Scott O. Mercer. The court has carefully considered the memoranda submitted by the parties, the arguments made by counsel at the hearing, and the law and facts relating to this matter. Now being fully advised, the court now renders the following Memorandum Decision and Order.

BACKGROUND

For over 25 years, Wardley and Defendant Scott McLachlan (“McLachlan”) were in business together developing real estate and related infrastructure in and around Saratoga Springs, Utah. Lake Mountain Mutual Water Company (“LMM”) is one entity that was utilized by Wardley and McLachlan to conduct some of their joint business. Wardley and McLachlan were 50/50 shareholders of LMM. In the mid-1990s, McLachlan contributed land to LMM for the purpose of drilling water wells to form a culinary water system for the development of the Saratoga Springs community.

Wardley and McLachlan began winding up their business affairs in 2004. Since then, they have been engaged in various disputes and litigation regarding their business interests and entities. In February 2006, Wardley, McLachlan, and other related parties entered into a Restructuring and Distribution Agreement (the “Agreement”) whereby, among other things, Wardley and McLachlan agreed to divide up many jointly held assets. One particular section of the Agreement paragraph 5(a), has since become an area of dispute in two court cases. Paragraph 5(a) of the Agreement states:

Within 60 days of the execution of this Agreement, McLachlan shall pay to Wardley the sum of $256, 000. This includes a credit from Wardley to McLachlan for all lands and easements related to the culinary system water transferred to the City of Saratoga Springs under the LMM settlement agreement, as well as the Easements described in paragraph 4, above. This also includes a credit from Wardley to McLachlan for the transfer of McLachlan's 19 shares of Utah Lake Distributing stock. (ECF No. 22; Exh. A)

The Wells Case

By 2012, Wardley and McLachlan still held some assets jointly - including two property lots and wells. For years, the parties were unable to divide up these assets. In order to deal with the property lots and wells, Wardley filed a complaint on May 5, 2012 against McLachlan and others in the lawsuit Wardley v. McLachlan et al., Case No. 120400700 (4th Dist. Utah) (the “Wells Case”).

Wardley filed a notice of lis pendens (“Lis Pendens”) in the Wells Case on June 22, 2017. McLachlan filed a motion on December 7, 2018 for the release of the Lis Pendens. At a February 11, 2019 hearing, the state court allowed the Lis Pendens to remain because there was pending litigation regarding ownership. The state court stated: “it's appropriate to give notice as it relates to anyone that may be purchasing the subject property or has an interest as it relates to that, that in fact a title is under dispute That's going to be the order of the Court.” (ECF No. 22; Exh. E at 21:2-17). The state court did not hear oral arguments regarding the merits of the Lis Pendens during that February hearing, but instead bumped the issue to be considered later.

At that same February hearing, McLachlan's counsel raised an argument that the property descriptions in the Lis Pendens were overbroad because they describe the entire property parcels instead of the specific portion of the properties affected by the wells and easements at issue in the Wells Case. In response, the state court instructed the parties to brief the issue before a subsequent telephonic hearing “so that we can address this further issue in connection with the narrowness issue.” (ECF No. 22; Exh. E at 23:15-22, 24:20-23, 26:13-16). After the additional briefing, the state court concluded the following at a hearing on February 19, 2019:

The lis pendens may remain. There was some reasonable anticipation that the parties could look towards, you know, a narrowing of it as it relates to an easement in connection with the two wells. But the more that I read is that the lis pendens as it relates to that goes to the entire property involved. I don't want to hear any arguments relative to that, but it may remain. (ECF No. 22; Exh. F at 4:12-19)

The state court held a bench trial in the Wells Case on June 4 7, 10, and 11, 2019. At the end of the trial, Judge Davis released the Lis Pendens because “[i]t is unnecessary for a Lis Pendens to continue to encumber the real properties upon which the North and South Well sit in light of the valid, recorded easements held by LMM.” (ECF No. 22; Exh. G).

On October 1, 2019, the state court issued its Findings of Fact Conclusions of Law, and Decision in the Wells Case. In this decision, the state court tolled Wardley's prejudgment interest for the time period during which the Lis Pendens was in place. (ECF No. 22; Exh. H at Findings of Fact). On December 4, 2019, McLachlan filed a Motion for Attorney Fees Related to Lis Pendens - arguing that, pursuant to Utah Code Ann. § 78B-6-1304.5, McLachlan was entitled to an award of attorney fees and costs he incurred to get the Lis Pendens removed because the Lis Pendens was overbroad.

On May 21, 2021, the state court issued a Ruling re: Well Valuation and Damages, which stated that the court previously decided the issue with respect to the Lis Pendens, and also entered judgment against McLachlan in favor of Wardley. In this ruling, the state court stated that, as per its earlier determination, “Wardley [had] caused an improper lis pendens to be placed on McLachlan's property.” (ECF 22; Exh. K at 9). Wardley filed a motion for clarification on this statement because he believes it to be in opposite to two previous determinations by the prior judge on the case. The clarification motion was decided on July 20, 2021. The decision clarified that the Lis Pendens issue had been determined - that it was improper - and that this was the reason for the tolling of the prejudgment interest for the time that the Lis Pendens was in place. Wardley v. McLachlan et al., Case No. 120400700 (Ruling Re: Wardley's Motion to Clarify), at 2-3.

The Present Action

On March 3, 2021, Wardley properly filed the present case against McLachlan and Gary Kearl in federal district court. McLachlan and Kearl filed Answer to Complaint, Counterclaim on April 29, 2021. The present motion is Wardley's Motion to Dismiss Counterclaims, brought by McLachlan on April 29th.

DISCUSSION

Wardley moves to dismiss with prejudice each of McLachlan's (1) Third Cause of Action for declaratory judgment regarding tax treatment of LMM; (2) Fourth Cause of Action for declaratory judgment regarding McLachlan's loan to LMM; and (3) Fifth Cause of Action for wrongful lien. Wardley also requests that the court dismiss with prejudice any tax issues the court would have to decide in McLachlan's First and Second Causes of Action. Wardley brings this motion pursuant to Fed.R.Civ.P. 12(b)(1) for the court's lack of subject matter jurisdiction over the tax issues, and Fed.R.Civ.P 12(b)(6) for McLachlan's failure to state a claim in his Fourth and Fifth Causes of Action. To resolve Wardley's motion, the court addresses the issues as follows.

I. 12(b)(1) Motion to Dismiss Tax Counterclaims Standard of Review

Rule 12(b)(1) “allows a court to dismiss a complaint for lack of subject matter jurisdiction.” Pueblo of Jemez v. United States, 790 F.3d 1143, 1151 (10th Cir. 2015) (citation omitted). “Federal courts are courts of limited jurisdiction, possessing only that power authorized by Constitution and statute.” Id. at 1151 (quoting Gunn v. Minton, 133 S.Ct. 1059, 1064 (2013)). “[F]ederal subject matter jurisdiction is elemental, ” and “must be established in every cause under review in federal courts.” Id. (quoting Firstenberg v. City of Santa Fe, 696 F.3d 1018, 1022 (10th Cir. 2012)). The “burden of establishing” a federal court's subject matter jurisdiction “rests upon the party asserting jurisdiction.” Id. (citation omitted). “A court lacking jurisdiction cannot render judgment but must dismiss the cause at any stage of the proceedings in which it becomes apparent that jurisdiction is lacking.” Id. (quoting Full Life Hospice, LLC v. Sebelius, 709 F.3d 1012, 1016 (10th Cir. 2013)).

Declaratory Judgment Act

As per his Counterclaim, McLachlan asks the court to resolve a tax dispute regarding the “tax treatment” by LMM of certain funds as well as the “tax treatment” of various payments allegedly made by LMM. (ECF No. 17, at ¶ 26-29). McLachlan also seeks a “declaratory judgment regarding tax treatment of LMM” and a declaratory judgment order that LMM prepare and file tax returns for a period of 25 years. (ECF No. 17, at ¶ 27-29, 52). McLachlan cites to 28 U.S.C. § 2201 as the basis for the court's authority to provide this relief. (ECF No. 17, at p. 29). However, this court does not have subject matter jurisdiction to do so.

The Declaratory Judgment Act expressly excludes tax cases or controversies from federal district court jurisdiction. 28 U.S.C. § 2201(a)...