Sterling Savings Bank v. Citadel Development Co.

Citations: 656 F. Supp. 2d 1248; 80 Fed. R. Serv. 1048; 2009 U.S. Dist. LEXIS 83087; 2009 WL 2952041Docket: Civil 09-404-AC

Court: District Court, D. Oregon; September 10, 2009; Federal District Court

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The United States District Court for the District of Oregon, presided over by Judge Haggerty, addressed a case involving Sterling Savings Bank as the plaintiff against Citadel Development Company and the Eagon Defendants. The court reviewed Magistrate Judge Acosta's Findings and Recommendation, which advised granting the defendants' Motion to Strike and Motion to Dismiss the plaintiff's claim for the appointment of a receiver, while denying the plaintiff's Motion to Appoint a Receiver. No objections were raised to the recommendation, leading the court to confirm no clear errors were present in the record.

In the underlying matter, Sterling Savings Bank sought the appointment of a receiver due to Citadel's consent within the Deed of Trust, which secured a $2,070,000 loan. The bank argued that a receiver was necessary to protect and preserve the property known as Scott's Bluff or to facilitate its sale. However, the defendants contended that the appointment of a receiver was unwarranted and that consent alone did not negate the need for a thorough analysis of the receivership factors. The court concurred, stating that Sterling failed to present adequate evidence supporting the appointment of a receiver, leading to the denial of Sterling's motion. Citadel had defaulted on the loan, with an outstanding principal of $1,964,488.01, and additional charges amounting to $148,240.48. The Deed of Trust allowed Sterling to take possession or dispose of the property upon default. 

The court ultimately adopted the Magistrate Judge's recommendations, granting the defendants' motions and denying Sterling's request for a receiver without prejudice.

Citadel is obligated under the Deed of Trust to manage and protect the Property, which includes several specific covenants: insuring the Property, maintaining it in good condition, refraining from alterations or demolitions, promptly restoring any damage, complying with laws, preventing waste, maintaining its value, ensuring no actions invalidate insurance, and not constructing improvements. In case of default by Citadel, Sterling (the Beneficiary) and PNW Title (the Trustee) have the right to declare obligations due and seek a court-appointed receiver for the Property, with Grantor's consent to such actions.

Homes Worth Keeping, L.L.C. made a purchase offer of $1,050,000 for the Property, which the Defendants rejected. Evidence suggests the Defendants might have accepted the offer if Sterling forgave any remaining loan balance. Sterling argued it would be harmed by not being able to accept offers and indicated a receiver was necessary for the sale. However, Sterling later stated it no longer sought to sell the Property but still required a receiver to preserve it. Sterling's complaint involves foreclosure of the Deed of Trust, breach of a guaranty by the Eagon Defendants, and the appointment of a receiver. Additionally, Sterling is pursuing foreclosure in eight other cases against the Eagon Defendants and their business entities.

The excerpt also references Federal Rule of Evidence 408, which restricts the use of evidence related to compromise negotiations in proving liability, invalidity, or the amount of a disputed claim, with specific exceptions for criminal cases involving public offices.

Permitted uses under Rule 408 allow evidence to be introduced for purposes not prohibited by subdivision (a), such as demonstrating a witness's bias, countering claims of undue delay, or showing attempts to obstruct a criminal investigation. The overarching aim of Rule 408 is to promote public policy favoring the compromise and settlement of disputes. 

Rule 12(b)(6) of the Federal Rules of Civil Procedure permits dismissal for failure to state a claim upon which relief can be granted. A complaint must provide factual grounds for relief, though it does not need detailed allegations. Courts must interpret complaints favorably to the plaintiff, presuming truth in allegations and drawing reasonable inferences. However, the facts must plausibly suggest entitlement to relief; mere consistency with a theory of entitlement is inadequate. If the allegations do not support a plausible claim, the court should dismiss the case to maintain judicial efficiency.

In diversity actions, the federal standard applies for appointing a receiver, as established in Canada Life, which asserts that federal courts must adhere to Federal Rule of Civil Procedure 66, regardless of state law differences. Rule 66 requires that the management of a receiver or similar officer aligns with the historical practices of federal courts, ensuring uniformity in receiver appointments.

In the discussion regarding the motion to strike, Sterling submitted the Luby Declaration supporting its motion to appoint a receiver. This included an email from Matt Burton, an agent for Homes Worth Keeping, indicating the Defendants' willingness to sell the property and expressing concerns about the financial arrangements related to the sale.

Mr. Luby's declaration indicates that guarantor Mr. Eagon has requested that Sterling waive any deficiency as a condition for his signature. Attached to the declaration is a letter from the Eagons' attorney, dated April 24, 2009, which states that the Eagons are blocking the sale solely to secure a release from any deficiency claims, without opposing the sale's price or terms. The Eagons refuse to consent to a short sale unless Sterling agrees to waive claims against them related to the loan on the Scott's Bluff property.

Defendants contend that the evidence presented is inadmissible under Rule 408, which restricts the use of statements made during compromise negotiations. However, Sterling argues that this evidence is admissible to demonstrate the Eagons' obstructive behavior, unrelated to the sale's price or terms, but focused on their desire for personal liability release. The court must determine if Sterling's intended use of the evidence aligns with permissible purposes under Rule 408(b), which allows such evidence to prove obstruction of criminal investigations.

The analysis notes that while Rule 408(a) promotes settlement discussions without fear of repercussions, Rule 408(b) permits the use of compromise evidence to demonstrate obstruction of criminal justice, which is not applicable in this case. Sterling's claim pertains to obstructing its sale efforts rather than any criminal obstruction. The court retains discretion in deciding whether the evidence should be admitted for this non-criminal obstruction claim.

Rule 408(a) does not establish a public policy that permits creditors to sell property securing a promissory note before the foreclosure process is completed, rendering Sterling's negotiation evidence inadmissible under this rule. The court then evaluates whether the evidence can be admitted under Rule 408(b), noting that its list of permissible uses is illustrative, not exhaustive. The court has the authority to assess the evidence's purpose, balancing its probative value against Rule 408’s goal of promoting dispute settlements. Previous cases have allowed negotiation evidence when its probative value is high and its admission would not deter future settlements. Specific examples include using such evidence to demonstrate a party's knowledge of wrongful conduct, establish procedural facts like the amount in controversy, clarify settlement agreement terms, or prove breaches of those agreements. Additionally, Rule 408 does not apply when claims arise from wrongs occurring during settlement discussions, such as libel or breach of contract. Courts also retain discretion to admit evidence to avoid jury confusion regarding defendants' absence in court.

The court finds that the examples presented by Sterling do not support the admissibility of evidence intended to demonstrate the Defendants' 'obstructionist stance.' The Defendants failed to provide specific legal authority to argue against this evidence's admissibility. The court will evaluate the evidence under Rule 408(b) and determines it has minimal probative value, as Sterling has already provided adequate evidence regarding the Property's value, loan default status, and the Defendants' refusal to sell. The Defendants' motives are irrelevant to the court’s assessment of whether a receiver is necessary, as established in Canada Life, which indicates that factors beyond those specified can be considered but do not include negotiation positions.

Additionally, allowing evidence of the Defendants' settlement conduct would contradict the policy of fostering open negotiations, as it may deter candid discussions if such conduct could later be used against them. Sterling appears to be using the evidence as an indirect admission of the Defendants' liability, which violates Rule 408(a). The court notes that Sterling has changed its position, no longer seeking to compel a sale but rather to appoint a receiver, rendering the evidence of obstruction irrelevant to the current issue. Consequently, due to the low probative value of the evidence, the conflict with Rule 408 policies, and its use as indirect liability proof, the court grants the Defendants' motion to strike and will not consider specific exhibits when deciding on the receiver's appointment.

Regarding the motion to dismiss Sterling's fourth claim for the appointment of a receiver, the Defendants assert that Sterling has not sufficiently alleged facts to support its claim. To avoid dismissal, Sterling must present factual allegations that establish its right to relief, as defined in legal precedent and guidelines, emphasizing that claims must contain a clear statement demonstrating entitlement to relief.

The court will assume all facts alleged by Sterling to be true, but if those facts do not warrant relief, the claim will be dismissed. The focus is on whether Sterling is entitled, as a matter of right, to the appointment of a receiver. Sterling claims such a right; however, the court disagrees, referencing Canada Life, which states that the appointment of a receiver is procedural rather than substantive and does not determine the outcome of the case. The Ninth Circuit has indicated that a party does not have a substantive right to a receiver, and this principle informs the court's decision regarding Sterling's claim. Additionally, the court has broad discretion in deciding on the appointment of a receiver, which is an equitable remedy and not a matter of right. Various legal precedents emphasize that the appointment and discharge of a receiver are typically left to the discretion of the district court, with limited interference from appellate courts. Given the lack of entitlement demonstrated by Sterling, the court grants the Defendants' motion to dismiss Sterling's claim for appointment of a receiver, but allows Sterling the opportunity to amend its pleading to clarify its request for this remedy.

Appointment of a receiver is an extraordinary legal remedy requiring careful consideration of federal receivership factors, as established in *Canada Life*, 563 F.3d at 844. Courts must exercise caution and make specific findings related to these factors, which include: the validity of the claimant's case, evidence of fraudulent conduct by the defendant, the imminent risk of property loss or damage, inadequacy of legal remedies, the balance of harm to both parties, the likelihood of the plaintiff's success, and whether the plaintiff’s interests will be adequately protected by receivership.

Additionally, the Ninth Circuit has identified further considerations such as the defendant's financial stability and the property’s value. While evidence of these factors may suffice to appoint a receiver for collecting rents, additional evidence of potential economic waste or other urgent circumstances is necessary for granting managerial powers to the receiver. Ultimately, the court retains broad discretion in the decision to appoint a receiver.

Regarding the necessity of an evidentiary hearing, neither the Supreme Court nor the Ninth Circuit has definitively ruled on this requirement. However, the Eleventh Circuit has indicated that such a hearing is not mandatory, provided that the case files and records justify the appointment. Similarly, the Fifth Circuit has stated that the lack of a full evidentiary hearing should not hinder a proper appointment of a receiver.

The court's decision to appoint a receiver must be based on the moving papers, any opposition affidavits, and witness testimony if deemed necessary. Notice must be given to allow the defendant the opportunity to present evidence. A receivership can only be ordered after a presentation of evidence and findings demonstrating its necessity. The court must also record its findings regarding the relevant factors influencing the decision to appoint a receiver. In Solis, the Ninth Circuit vacated a receivership due to the lack of recorded findings on these factors.

In this case, although a formal evidentiary hearing is not mandated, both parties have been notified and have submitted evidence regarding the receivership. The court can utilize this evidence to evaluate the factors necessary for appointing a receiver, as well as the issue of the defendants' consent. The Deed of Trust indicates that Citadel consented to a receiver's appointment in the event of default, granting the parties the right to seek this appointment. This consent is recognized as significant but not conclusive. Consent does not eliminate the requirement for the court to assess whether the property is insufficiently valued to secure the loan.

Furthermore, the court must consider the nature of the consent; mere consent to seek a receiver differs from consent to the actual appointment. In this instance, the defendants have consented to the appointment of a receiver, which Sterling argues justifies the appointment. The distinction between consent to apply for a receiver and consent to the appointment itself is critical, as established in prior cases.

Sterling cites *Investors Syndicate v. Smith*, 105 F.2d 611 (9th Cir.1939), to argue that a court can appoint a receiver to collect rents and profits from mortgaged property based solely on the mortgagor's pledge. However, the case's facts differ significantly from the current situation in three key areas. First, the *Investors Syndicate* court applied Oregon receivership law due to the Erie doctrine, while modern federal courts with diversity jurisdiction apply Rule 66 of the Federal Rules of Civil Procedure, which may involve different considerations than state law. Sterling has not provided any federal case law indicating that consent alone is sufficient for receiver appointment.

Second, in *Investors Syndicate*, the parties consented to a receiver specifically for rent collection, whereas the contracts in the current case do not include such a limiting phrase. The distinction between a receiver with rent-collection powers and one with broader managerial authority is significant, as granting managerial powers can strip property owners of their traditional rights.

Third, *Investors Syndicate* dealt with income-producing properties facing potential waste, evidenced by the need for repairs and mismanagement of rent income. In contrast, the current property does not generate income, lacks structures, and there is no evidence of economic waste.

Thus, *Investors Syndicate* does not govern the present case. The *Canada Life* decision acknowledges that courts may consider various circumstances when deciding on receiver appointment, and while the consent in the Deed of Trust is one such factor, it does not negate the need to evaluate other federal receivership factors.

Ultimately, the court must assess whether Sterling has met its burden of proof to demonstrate the necessity for a receiver, as appointing one is an extraordinary remedy requiring substantial justification.

My Fruit's request for the appointment of a receiver is denied due to its failure to meet the burden of proof required. The court has discretion in appointing a receiver, and the applicant must demonstrate a genuine need. Relevant case law indicates that mere consent to a receiver does not lessen the applicant's burden to provide evidence supporting the necessity of such an action.

The court evaluates the Canada Life factors to determine the appropriateness of appointing a receiver. The first factor considers the financial standing of the Defendants, with evidence showing that they are involved in multiple foreclosure suits totaling over $16 million, suggesting they are financially dubious. Thus, this factor favors the appointment of a receiver.

The second factor examines whether the property value is inadequate to cover the secured debt. Evidence indicates that the Defendants owe approximately $2 million, while a purchase offer of $1.05 million has been made for the property, fulfilling the evidentiary requirement and favoring the appointment of a receiver.

The third factor assesses if Sterling has a valid claim. Sterling has demonstrated a valid claim, evidenced by the Defendants' loan default exceeding $2 million, which the Defendants have not contested. This factor also supports appointing a receiver.

Conversely, the fourth factor regarding fraudulent conduct weighs against the appointment since Sterling has not alleged any fraudulent actions by the Defendants.

Finally, the fifth factor evaluates the risk of property loss or damage. Sterling argued that it would suffer irreparable harm without the ability to sell the property independently, emphasizing the need for a receiver to facilitate the sale.

Sterling, in its reply brief and accompanying declaration, shifted its focus from selling the Property to the need for its preservation and protection. The court found that the potential loss of sale opportunities does not equate to imminent danger regarding the Property's condition or value. Sterling has not provided sufficient evidence of imminent danger, noting that the Property consists of vacant lots generating no income, and lacks structures requiring maintenance or rent collection. While Sterling asserts the need for protection from trespass, vandalism, and the necessity of insurance, it has not demonstrated that the Property is uninsured, unmaintained, or unsecured, nor that it has encountered issues like trespassing or vandalism. The Defendants are contractually obligated to maintain insurance and protect the Property's value, yet there is no evidence of their breach of these duties. Speculative claims regarding the Defendants' lack of incentive or resources do not establish imminent danger. Regarding the adequacy of legal remedies, Sterling has not argued that foreclosure, the standard remedy for creditors, is inadequate, which weighs against the need for a receiver. Lastly, while the court recognizes that Sterling may experience harm if a receiver is not appointed, insufficient evidence supports the claim that such harm would occur. Mr. Luby's declaration indicates that Sterling currently lacks the authority to inspect the Property, emphasizing the necessity of verifying its insurance and maintenance status. Overall, the court concludes that Sterling has not met the burden of proving imminent danger or inadequacy of legal remedies, leading to a decision against appointing a receiver at this time.

Defendants expressed concerns about their ability to fulfill certain duties, leading to a request for the appointment of a receiver. However, the court determined that the evidence presented was insufficient to demonstrate that Sterling would suffer harm without a receiver, and the potential harm to Defendants if a receiver were appointed outweighed any harm to Sterling. The court examined several factors from the Canada Life case, specifically focusing on the likelihood of Sterling's success and the risk of irreparable injury to its property interests. The court found that Sterling had not provided adequate evidence of current or potential irreparable harm, nor did it show that a receiver would better manage the property than the Defendants, who are required to preserve it under the Deed of Trust. Consequently, the court concluded that Sterling did not meet the burden of proving that a receivership was necessary. In summary, Sterling's motion for a receiver was denied, and Defendants' motions to strike certain evidence and dismiss Sterling's claim for a receiver were granted. The Findings and Recommendation will be forwarded to a district judge, with a deadline for objections set for September 2, 2009. If no objections are filed, the matter will be taken under advisement on that date.