Welsh v. Case

Citation43 P.3d 445,180 Or. App. 370
PartiesGent WELSH, William F. Schroeder, and John T. Schroeder, Respondents, v. Stanley W. CASE, Wren Case, Lovene Case, Wren Case and Lovene H. Case, Trustees of the Wren W. and Lovene H. Case Living Trust dated November 2, 1992, Appellants.
Decision Date27 March 2002
CourtCourt of Appeals of Oregon

George W. Kelly, Eugene, argued the cause and filed the briefs for appellants.

Martin Leuenberger, Baker City, argued the cause for respondents. With him on the brief was Carol DeHaven Skerjanec, Vale.

Before LANDAU, Presiding Judge, and BREWER and SCHUMAN, Judges.


To pay for professional services rendered in a bankruptcy matter, defendants gave promissory notes secured by a mortgage to plaintiffs, who were their attorneys and a consultant. When defendants defaulted, plaintiffs brought this foreclosure action. Defendants assign error to the trial court's denial of their request for a jury trial and to the court's rejection of their defenses challenging the enforceability of the mortgage. We affirm.

On de novo review, we find the following facts. Defendants1 own farm property in Union County. In the fall of 1989, after four years of losing money, they found themselves nearly $600,000 in arrears on a loan from the federal government administered through the Farm Credit Service (the federal creditor). They retained the firm of William Schroeder, P.C.,2 and plaintiff Gent Welsh, a consultant, to help work out a debt restructure and avoid losing the farm. Negotiations did not succeed, and, in January 1990, the federal creditor sued to foreclose. Schroeder asked defendants for a fee deposit of $1,500 "to apply against cash advances by us and past and future time expended at our usual hourly rate." Defendants sent two checks, one for $500 to Welsh and one for $1,000 to Schroeder. When Schroeder tried to cash his check, the bank returned it due to insufficient funds.

Two months later, in March 1990, the federal creditor filed a motion for summary judgment in the foreclosure case. Schroeder informed defendants of this development, reminded them of the returned check, and asked for a payment of $3,500 to cover already-incurred expenses. He wrote, "Wheel[s] have now stopped turning to protect you further and will not turn again until you have made a deposit of an additional $3,500." He also told defendants that they should "arrange a substantial fund" if they intended for him to apply for protection under the bankruptcy laws. Later that month, Schroeder again wrote defendants, informing them that they were delinquent in their payments and that he would formally withdraw as their lawyer if he did not receive payment by March 28. On that date, he received a check from them for $20,000, which he deposited in a trust account.

On May 7, 1990, the federal creditor won a judgment of foreclosure against defendants. As planned, Schroeder and his associated Idaho firm, Schroeder & Lezamiz, filed a petition in the United States Bankruptcy Court for the District of Idaho, seeking protection under Chapter 12 of the Bankruptcy Code, a since-repealed chapter entitled "Adjustment of Debts of a Family Farmer with Regular Annual Income." 11 USC § 1201 et seq. (2000) (terminated July 1, 2000). Along with the petition, plaintiffs filed a disclosure of compensation reporting the amounts already received by the attorneys ($8,120.53), as well as an attorney-client fee agreement setting out the hourly rates and specifying,

"Client acknowledges that it has been informed by the Attorney that the reasonableness of the amount of the Attorney's compensation in any bankruptcy is subject to final review and approval by the United States Bankruptcy Court in accordance with 11 USC 330."

After extensive negotiation and litigation, including a change of venue to Portland and an initial rejection by the federal creditor, the bankruptcy court, on January 15, 1991, confirmed a debt restructuring plan. At the same time, the court approved fees for plaintiffs and entered orders to that effect.

Defendants had trouble meeting the terms of their Chapter 12 plan, and in addition they were unable to pay the court-ordered fees. Once again, they consulted plaintiffs. In late January of 1993, three relevant events occurred. First, plaintiffs negotiated on behalf of defendants a modified extension plan allowing them to avoid foreclosure by the federal creditor, a task that was complicated by the creditor's allegations that defendants had previously acted in bad faith by misappropriating loan funds and selling assets out of the trust estate. Second, plaintiffs agreed to take promissory notes under which their fee payments were delayed until January 1, 1994 (Welsh), and January 1, 1995 (Schroeder, John Schroeder), by which time the bankruptcy plan would be completed, other creditors paid, and an order of discharge issued. Third, defendants mortgaged their farm to plaintiffs as security for the promissory notes. As a result of substituting the notes and mortgage for the court-ordered payments, plaintiffs' claim—approximately $22,000 plus interest at nine percent per year—was subordinated to the claims of other creditors, which amounted to approximately $700,000.

The parties do not agree regarding who first suggested the mortgage, nor do they agree whether it was actually signed before the modification was officially accepted. Defendants contend that plaintiffs coerced them into signing the mortgage by threatening to end the modification negotiations unless they did so. Plaintiffs argue that, by the time defendants signed the mortgage, they knew that the modification had been approved, so no coercion could have occurred. In support of their contention, plaintiffs note that the mortgage papers were re-signed, in the presence of a notary, several days after defendants knew the modification had been approved and that the notary testified that defendants signed willingly and with full knowledge of the papers' import. On de novo review, we find plaintiffs' version more credible: Regardless of who first suggested the idea of a mortgage to secure the promissory notes, defendants were not coerced into signing the mortgage papers. This conclusion comports with the trial court's rejection of defendants' counterclaims for duress and undue influence, to which defendants do not assign error.

On May 18, 1993, the bankruptcy trustee reported that defendants had made all of their payments under the modified plan. Three days later the bankruptcy court issued an order of discharge closing the case.

In August 1994, defendants filed a second Chapter 12 bankruptcy petition in which they included their debts to plaintiffs on the list of their existing obligations. That action was dismissed without an adjudication.

By late 1998, defendants had not paid their long-overdue promissory notes, and, on December 30, plaintiffs brought this action for foreclosure. Defendants responded with counterclaims and affirmative defenses. They also requested a jury trial. The trial court denied the jury trial request, rejected the affirmative defenses, and entered judgment of foreclosure. On appeal, defendants assign error to the denial of their jury trial request; the rejection of their argument that the mortgage is unenforceable because the debt it secures was discharged in bankruptcy; the rejection of their breach of fiduciary duty argument; and the rejection of their argument that plaintiffs should be denied relief because they have "unclean hands."


Defendants maintain that they had a right to a jury trial because their affirmative defenses were legal in nature. The trial court concluded that they were equitable and denied the request. That denial was not error.

Jackson County Federal Savings v. Urban Planning, 95 Or.App. 598, 605, 771 P.2d 629, rev. den. 308 Or 197 (1989), sets out the principles governing this issue:

"Although Oregon has abolished procedural distinctions between law and equity, ORCP 2, the distinction remains with respect to the right to a jury trial. Or Const, Art VII, § 3. Actions that, historically, were equitable in nature, including foreclosure suits, continue to be tried to the court. The complaint fixes the nature of the action, and the court, sitting in equity, has jurisdiction to resolve all issues in the case, both equitable and legal, including legal defenses and counterclaims. However, a party who desires a jury trial on a legal defense or counterclaim brought in an equitable proceeding is entitled to one, unless the right is waived by the party's failure to assert it." (Citations omitted.)

Defendants' amended answer raised affirmative defenses and counterclaims alleging duress and breach of fiduciary duties and seeking damages. Before trial, the court ordered those defenses stricken insofar as they would allow recovery of damages, but allowed them to remain in the answer by interlineation as "affirmative defenses by way of recoupment." Defendants do not assign error to that decision. Under Jackson County Federal Savings, then, defendants had a right to a jury trial only if recoupment is a legal defense. It is not.

Recoupment "means the `cutting back' of the plaintiff's claim by the defendant. Recoupment is confined to matters arising out of and connected with the transaction upon which the action is brought. 1 Bancroft, Code Pleading § 352." Rogue River Management Co. v. Shaw, 243 Or. 54, 58-59, 411 P.2d 440 (1966). The defense is more fully described at 20 Am. Jur. 2d 231, Counterclaim, Recoupment and Setoff § 5 (1995):

"Recoupment * * * refers to the defendant's right, in the same action, to cut down the plaintiff's demand, either because the plaintiff has not complied with some cross obligation of the contract on which he or she sues or because the plaintiff has violated some legal duty in the making or performance of that contract. * * * The practice

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