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RESPONSE TO PLAINTIFF’S MOTION TO STRIKE 

DEFENDANTS’ AFFIRMATIVE DEFENSES

Page 1

Thomas L. Hutchinson, OSB #994896 

E-Mail: tom.hutchinson@bullivant.com 

Laura Caldera Taylor, OSB #993786 

E-Mail: laura.taylor@bullivant.com

BULLIVANT HOUSER BAILEY PC 

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Facsimile: 503.295.0915 

Attorneys for Defendants Heetan B. Patel 

and Heetal B. Patel

UNITED STATES DISTRICT COURT 

DISTRICT OF OREGON 

PORTLAND DIVISION 

MALBCO HOLDINGS, LLC, a 

Washington limited liability company, 

Plaintiff, 

v. 

BHUPENDRA R. PATEL and NILA B. 

PATEL, husband and wife; HEETAN B. 

PATEL; HEETAL B. PATEL-MANANI; 

and MUKESH PATEL, 

Defendants. 

Civil No.: 3:14-cv-947-PK

DEFENDANTS HEETAN PATEL AND 

HEETAL PATEL’S RESPONSE TO 

PLAINTIFF’S MOTION TO STRIKE 

DEFENDANTS’ AFFIRMATIVE 

DEFENSES 

Plaintiff Malbco Holdings, LLC moved to strike nine of defendants Heetan Patel and 

Heetal Patel’s defenses on the grounds that those defenses are “legally insufficient” and 

improperly pled. That motion should be denied because (1) the defenses are legally viable 

and (2) provide Malbco with fair notice of the nature of the defenses. 

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I. INTRODUCTION 

This case concerns a company, Malbco, which says that it was assigned Wells 

Fargo’s interest in a promissory note and related trust deed and personal guaranties. First 

Am. Compl., ¶ 14. The borrower was Om Namah Laxmi LLC, the deed concerned an Idaho 

hotel, and the guarantors were Heetan and Heetal Patel’s parents, Bhupendra (Bob) and Nila 

Patel. Id. at ¶¶ 9-11. By the time Wells Fargo assigned the note, it had started a receivership 

action against Om Namah Laxmi. Bob and Nila Patel were not parties to that action. 

As explained in the Response to Motion to Strike filed by Bob and Nila Patel (which 

Heetan and Heetal Patel join), Malbco then non-judicially foreclosed on the Idaho hotel for a 

$1,525,000 credit bid and obtained a deficiency judgment. Prior to foreclosing, Malbco filed 

a request for a substitute receiver in the receivership action and had Jeffrey Lyman appointed 

as the new receiver. Lyman was the Executive Vice President and Chief Operating Officer 

of Hospitality Associates. According to its website, Malbco owner James Malloy joined 

Hospitality Associates in 1996 and is currently its Senior Vice President. This information 

was not disclosed to the court in the receivership action—even though Idaho Code § 8-603 

states that a receiver cannot be interested in the action—and, in fact, Lyman filed an 

Affidavit in which he testified that he was not “an interested party in the action.” 

Furthermore, in the receivership action Wells Fargo represented that the amount due 

and owing on the note was $4,575,893.48. Wells Fargo also represented that the estimated 

value of the hotel was $2,100,000, and that the estimated value of the other collateral was 

$50,000. Based on that, any deficiency judgment should not have exceeded $2,500,000. 

Nevertheless, Malbco obtained a deficiency judgment in the amount of $3,903,294.12—and 

kept the Idaho hotel too. 

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Malbco then filed this case, asserting claims under the Oregon Uniform Fraudulent 

Transfer Act against Heetan and Heetal Patel. Heetan and Heetal Patel raised affirmative 

defenses (Third, Seventh, Ninth, and Tenth) that concern Malbco’s conduct in connection 

with the non-judicial foreclosure sale, which resulted in an artificially low sales price for the 

Idaho hotel. Those defenses are not a collateral attack on the deficiency judgment; instead, 

they set forth equitable and legal reasons that Malbco’s ability to recover assets that were 

transferred to them should be reduced in whole or in part based on Malbco’s conduct in 

connection with the non-judicial foreclosure sale. 

Furthermore, Oregon law permits transferees to challenge the validity of a judgment 

upon which a fraudulent transfer action is based. And even in jurisdictions where such a 

challenge is not permitted, Malbco’s non-judicial foreclosure sale conduct constituted 

collusion. As such, that conduct can be a basis for a reduction in the amount that Malbco 

may recover from Heetan and Heetal Patel even if these defenses constitute a collateral 

attack on the Idaho deficiency judgment. 

II. LEGAL ANALYSIS 

A. Standard of review. 

Federal Rule of Civil Procedure 8 provides the “general rules of pleading.” Rule 8(a) 

governs pleadings that state a claim for relief (e.g., complaints), Rule 8(b) governs 

responsive pleadings (e.g., answers), and Rule 8(c) governs “affirmative defenses.” 

According to Rule 8(c), a defendant must “affirmatively state any avoidance or affirmative 

defense.” But unlike Rules 8(a) and 8(b), Rule 8(c) does not require a defendant to state its 

affirmative defenses in “short and plain” terms. 

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Rule 12(f) states that “[t]he court may strike from a pleading an insufficient defense.” 

Traditionally, a defense was considered sufficient under Rule 12(f) if it provided the plaintiff 

with “fair notice” of the defense. See Wyshak v. City Nat’l Bank, 607 F.2d 824, 827 (9th Cir. 

1979) (citing Conley v. Gibson, 355 U.S. 41, 45-46 (1957)). The “fair notice” standard, 

however, was abrogated by the U.S. Supreme Court in Bell Atlantic Corp. v. Twombly, 550 

U.S. 544 (2007) and Ashcroft v. Iqbal, 556 U.S. 662 (2009)—and replaced with a 

heightened-pleading standard that requires a pleader to allege “plausible” grounds for the 

court’s jurisdiction and a “plausible” claim for relief. Some courts—including courts in this 

district—have concluded that the Twombly and Iqbal heightened-pleading standard governs a 

Rule 12(f) motion to strike an affirmative defense.

Other courts, however, have concluded that the heightened-pleading standard does not 

govern a Rule 12(f) motion to strike an affirmative defense. See, e.g., Trustmark Ins. Co. v. 

C & K Market, Inc., 2011 WL 587574 (D. Or. (Mosman, J.) 2011) (declining to extend 

Twombly to affirmative defenses until the Ninth Circuit overrules Wyshak); Doe ex rel. 

Christina H. v. Medford School Dist. 549C, 2011 WL 1002166 (D. Or. (Clarke, J.) 2011) 

(same); Kohler v. Islands Rests., LP, 280 F.R.D. 560, 566 (S.D. Cal. 2012) (declining to 

extend Twombly to affirmative defenses) Lane v. Page, 272 F.R.D. 581, 589 n. 5 (D. N.M. 

2011) (same). This Court should decline to apply the Twombly and Iqbal heightenedpleading standard to the challenged affirmative defenses because (1) Wyshak has not been 

overruled by the Ninth Circuit and (2) Rule 8(c), which governs affirmative defenses, is 

subject to a different standard than that for complaints under Rule 8(a) or answers under Rule 

8(b). Simply put, Rule 8(c) does not require a “short and plain” statement and, therefore, is 

not subject to Twombly and Iqbal. 

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Furthermore, if the Court is in doubt as to whether the challenged defense may raise 

an issue of fact or law, the motion to strike should be denied, leaving the assessment of the 

sufficiency of the allegations for adjudication on the merits after proper development of the 

factual nature of the defense through discovery. See generally Whittlestone, Inc. v. Handi–

Craft Co., 618 F.3d 970, 974-75 (9th Cir. 2010). Finally, even if one or more affirmative 

defenses are vulnerable to Malbco’s motion to strike, courts freely grant leave to amend 

stricken pleadings unless it would prejudice the opposing party. Wyshak, 607 F.2d at 826; 

see also Fed. R. Civ. P. 15(a)(2). 

B. The challenged defenses are legally sufficient. 

1. Oregon law permits a transferee to “look behind a judgment” to 

determine if the amount of a debt is correct. 

ORS 95.290 states that “principles of law and equity, including ... estoppel, laches, 

fraud, misrepresentation, duress, coercion, mistake, insolvency or other validating or 

invalidating cause, supplement” the Oregon Uniform Fraudulent Transfer Act. Several of 

Heetan and Heetal Patel’s affirmative defenses (Third, Seventh, Ninth, and Tenth) implicate 

Malbco’s misconduct in connection with the non-judicial foreclosure sale, which resulted in 

the Idaho hotel being sold for an amount less than its fair market value. 

In its Motion to Strike, Malbco identifies a number of out-of-jurisdiction cases that 

have concluded that a transferee may only look behind a judgment if the judgment is tainted 

by fraud or collusion. Mot. to Strike, Dkt. # 31, at 6-8. But according to a pre-UFTA 

Oregon Supreme Court decision (discussed in Bob and Nila Patel’s Response), a transferee 

against whom a fraudulent transfer claim is brought may also look behind a judgment to 

determine the validity of the debt that a creditor bases its claim upon. Davis v. Davis, 20 Or. 

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78, 83-84, 25 P. 140 (1890). Here, Heetan and Heetal Patel raise defenses that challenge 

Malbco’s conduct in connection with the non-judicial foreclosure sale, which resulted in a 

low sales price for the Idaho hotel, which increased the amount that Malbco seeks to recover 

from Heetan and Heetal Patel in this action. Those defenses, therefore, challenge the validity 

of the debt on which Malbco bases its claim—and are proper under Oregon law. 

Under these circumstances, the challenged defenses should not be stricken as legally 

insufficient on the basis that they are invalid as a matter of law. 

2. The defenses raise collusion issues. 

In the cases cited by Malbco for the proposition that a transferee in a fraudulent 

transfer case is bound to the underlying judgment and may not collaterally attack it, an 

exception is noted for judgments obtained by fraud or collusion. See Mansfield v. Pierce, 

1998 WL 433304, at *5 (4th Cir. 1998) (so noting); Commerce Bank of Lebanon v. 

Halladale A Corp., 618 S.W.2d 288, 291 (Mo. Ct. App. 1981) (same); Nelson v. Boe, 226 

Ala. 582, 587 (1933) (same). Here, certain of Heetan and Heetal Patel’s affirmative defenses 

(Third, Seventh, Ninth, and Tenth) concern the apparent collusion between Malbco and the 

receiver for the Idaho hotel (discussed in Bob and Nila Patel’s Response). As a result of that 

collusion, Malbco was the only bidder in the foreclosure sale and obtained the hotel at a 

below-market price. 

These defenses should therefore be permitted to proceed, Heetan and Heetal Patel 

should be permitted to obtain discovery on them, and they should be permitted to present 

evidence during trial proving collusion. See Bolton v. Logan, 46 Cal. App.2d 739, 740, 116 

P.2d 801 (1941) (in a case involving a challenge to a judgment of foreclosure, the court held 

that evidence of collusion involved in a foreclosure proceeding was properly admitted). 

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3. Heetan and Heetal Patel are not issue precluded from challenging the 

foreclosure proceeding or the deficiency judgment. 

Although Malbco argues that Heetan and Heetal Patel are issue precluded from 

challenging the Idaho proceedings, they misinterpret the law regarding issue preclusion. 

First, they offer no authority supporting the notion that issue preclusion bars challenges to 

judgments obtained through fraud or collusion; indeed, if it did, then issue preclusion would 

take away the recognized bases for a collateral attack on a judgment. Second, even if issue 

preclusion could apply, it couldn’t bar challenges based on fraud or collusion unless those 

issues were actually litigated in the prior proceedings (which they weren’t). Third, there was 

no judicial determination regarding the Idaho hotel’s fair market value in the Idaho 

proceeding. Fourth, Heetan and Heetal Patel are not in “privity” with their parents with 

respect to the foreclosure proceeding or the Idaho judgment. They have an independent 

interest in those proceedings because the impact of Malbco’s collusion with the receiver is 

the possibility of a greater judgment against them in this proceeding. And again, allowing 

them to address the collusion and fair market value issues in this proceeding will not entail 

the “relitigating” of any issue decided in the Idaho case.1

 

1

 Finally, even if the Court concludes that the challenged defenses are impermissible 

collateral attacks on the deficiency judgment, the defendants should be permitted to look 

behind the judgments to determine when Malbco became a “creditor”—and whether it 

attained the status as a creditor prior to entry of the deficiency judgment. The timing of 

Malbco’s acquisition of any debt relative to the dates of various challenged transfers is 

relevant (a) to the question of which statutes will be applied to which transactions and (b) 

which limitations period will apply. Thus, as part of defending Malbco’s claims, defendants 

should be able to inquire whether Malbco was a creditor (or even an anticipated future 

creditor) prior to judgment. That inquiry would include any failure to demand payment by 

Bob and Nila Patel and failure of an effective assignment of the guaranties to Malbco. 

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4. The “transaction at issue” with respect to the unclean hands doctrine 

includes Malbco’s conduct in obtaining the “claim” on which it brings its 

UFTA action. 

“[A party] who comes into equity must come with clean hands.” McKee v. Fields, 

187 Or. 323, 326, 210 P.2d 115 (1949). The unclean hands doctrine applies to a broad range 

of misconduct. See Martin v. Allbritton, 124 Or. App. 345, 351-52, 862 P.2d 569 (1993) 

(quoting Baxter v. Redevco, Inc., 279 Or. 117, 121, 566 P.2d 501 (1977) (“[A] litigant may 

be denied relief by a court of equity on the ground that his conduct has been inequitable, 

unfair and dishonest, or fraudulent and deceitful as to the controversy in issue.”)); see also N. 

Pac. Lumber Co. v. Oliver, 286 Or. 639, 651, 596 P.2d 931 (1979) (noting that courts have 

applied doctrine of unclean hands when plaintiff’s conduct constituted a crime, fraud, or bad 

faith). The purpose of the doctrine “is to deny equitable relief to a party that, by its actions, 

has disqualified itself from the assistance of a court of conscience.” Thompson v. Coughlin, 

144 Or. App. 348, 352, 927 P.2d 146 (1996), rev’d on other grounds, 329 Or. 630, 997 P.2d 

191 (2000). The doctrine “is applied for the protection of the court and not for the benefit of 

the defendant, who may in fact be equally affected with the improper transaction,” Oliver, 

286 Or. at 650; thus, the trial court “may invoke the doctrine on its own motion,” Merimac 

Co. v. Portland Timber, 259 Or. 573, 580, 488 P.2d 465 (1971). 

Under the Oregon Uniform Fraudulent Transfer Act, a “creditor” is defined as “a 

person who has a claim against a debtor.” ORS 95.200(4). A “claim,” in turn, is defined as 

“a right to payment.” ORS 95.200(3). Only “creditors” with a “claim” can pursue a UFTA 

action against a transferee. See ORS 95.230; 95.240. Thus, in order to prove its UFTA 

claim, Malbco will need to prove that it is a “creditor” with a “claim”—and it will need to 

prove that the amount of its claim is valid. 

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GE Capital Commercial, Inc., v. Worthington National Bank, No. 3:09-CV-0572-L, 

2011 WL 5025153, at *1 (N.D. Tex. Oct. 20, 2011) (Lindsay, J.) is instructive. There, GE 

Capital sought the equitable remedy of avoiding the transfer of approximately $2.5 million 

Worthington National Bank received in repayment of a line of credit it extended to a 

company called Wright & Wright. Worthington National Bank argued that GE Capital came 

to the court with unclean hands because it made three transfers to Wright and Wright’s 

deposit account at Worthington, all of which were applied to repay the credit line, because 

each wire provided instructions from GE Capital that the funds were to be applied by 

Worthington as a “payoff on loan.” 

GE Capital moved to strike Worthington’s unclean hands defense arguing, as Malbco 

does here, that the court should take a restrictive view of the doctrine. GE Capital argued 

that it was not a party to the transfers it sought to avoid, which occurred after the three 

transfers identified above, and as such the three transfers it made should not be considered as 

part of Worthington’s unclean hands defense. The court disagreed finding that there was “a 

sufficient nexus between the three wire transfers from GECC to Wright & Wright and the 

payoff of the line [of] credit to establish that they are connected. The court therefore 

determines that the doctrine of unclean hands applies and requires consideration of GECC’s 

conduct in relation to the three original transfers from GECC to Wright & Wright’s account 

at Worthington.” Id. at * 7. 

Accordingly, the “transaction at issue” in this case is not just the asset transfers 

between Bob and Nila Patel and their children, but also includes Malbco’s collusion with the 

receiver which resulted in an inflated “claim.” And because the unclean hands doctrine 

embraces all inequitable, unfair, and dishonest conduct that relates to the parties, the 

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“transaction at issue” should also be broad enough to include Malbco’s racial targeting of 

Bob and Nila Patel and their effort to take other hotels owned by the Patel family. 

Under these circumstances, the unclean hands defense should not be stricken. 

C. The challenged defenses provide Malbco fair notice of the nature of the defenses. 

An affirmative defense is insufficiently pleaded only if it fails to give the plaintiff fair 

notice of the nature of the defense. See Simmons v. Navajo Cnty., Ariz., 609 F.3d 1011, 1023 

(9th Cir. 2010) (citing Wyshak, 607 F.2d at 827). A Rule 12(f) motion will not “be granted if 

there is a substantial question of fact or a mixed question of law and fact that cannot be 

resolved, even if it is possible to determine the issue by drawing inferences from acts and 

statements that are not disputed.” Cyber Acoustics, LLC v. Belkin Intern., Inc., 988 F. 

Supp.2d 1236, 1239-40 (D. Or. 2013) (quoting C. Wright, A. Miller, et al., 5C Fed. Prac. & 

Proc. Civ. § 1381 (3d ed.). 

As an initial point, it is apparent that Malbco understands that Heetan and Heetal 

Patel’s failure to mitigate (Third Affirmative Defense), estoppel (Seventh Affirmative 

Defense), unjust enrichment (Ninth Affirmative Defense), and unclean hands (Tenth 

Affirmative Defense) all relate to Malbco’s conduct in connection with the foreclosure 

proceeding. In Malbco’s Motion to Strike, it makes reference to counsel’s December 9, 2014 

letter to the Court, in which the foreclosure-related conduct is discussed. If the Court finds 

that these defenses do not adequately give Malbco fair notice of the nature of these defenses, 

then Heetan and Heetal Patel request leave to amend them. Malbco cannot claim prejudice if 

leave to amend is allowed, since the defenses were first raised in September and not 

challenged until December—after Malbco filed an amended complaint (which only corrected 

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Nila Patel’s name and added a few additional transfer allegations) in November and 

defendants raised identical affirmative defenses in their answer to that pleading.2

1. Failure to mitigate. 

A party injured by a breach of contract (such as a promissory note) has the burden of 

proving what damage, if any, it suffered as a result of the breach, Kulm v. Coast-to-Coast 

Stores Central Organization, Inc., 248 Or. 436, 442, 432 P.2d 1006 (1967), and has a duty to 

make reasonable efforts to minimize its loss, Schafer v. Sunset Packing Co., 256 Or. 539, 

542, 474 P.2d 529 (1970). A plaintiff who fails to mitigate cannot recover for that portion of 

the loss it reasonably could have avoided. Schafer, 256 Or. at 542.3

Malbco foreclosed on property that secured the note, and thereby mitigated a portion 

of the damages caused by the breach of the note. However, by engaging in collusion with 

the receiver and driving down the sale price for the hotel, Malbco increased its alleged 

damages that it sought in the deficiency action and, now, in this action. By doing so, and by 

manufacturing a situation where there were no competitive bids on the property, Malbco 

failed to mitigate its damages. 

If the Court finds that this defense does not adequately give Malbco fair notice of the 

nature of the defense, Heetan and Heetal Patel request leave to amend it. 

 

2

 Heetan and Heetal Patel agree to dismissal of their laches (Fifth Affirmative Defense) and 

waiver (Eighth Affirmative Defense) defenses. 

3

 As discussed above, the transaction at issue here is not simply the transfers to Heetan and 

Heetal Patel—but includes Malbco’s collusion with the receiver which resulted in an inflated 

“claim” on which it seeks to recover in this action. 

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2. Satisfaction. 

By foreclosing on the Idaho hotel, Malbco obtained at least partial satisfaction for the 

underlying loan. Heetal and Heetan Patel are entitled to a credit in the amount of the hotel’s 

non-collusive fair market value in the event that Malbco proves its Oregon UFTA claims 

against them. If the Court finds that this defense does not adequately give Malbco fair notice 

of the nature of the defense, Heetan and Heetal Patel request leave to amend it. 

3. Estoppel. 

Under Oregon law, equitable estoppel can be found in circumstances where there has 

“been some omission, misconduct, misrepresentation, or fraud by the party against whom the 

estoppel is asserted ... which caused another to be misled and, because of being misled, to 

have been induced to have altered his position.” Security S. & T. Co. v. Portland Flour Mills 

Co., 124 Or 276, 292, 261 P 432, 437 (1927). “The very basis of an equitable estoppel is that 

the party against whom it is urged, or someone in privity with him, has said or done 

something which he ought not to have said or done, or has omitted to say or do something 

which he ought to have said or done, and because thereof, some other person has been misled 

and thereby induced to change his position in some material respect.” Id. 

Here, Malbco’s conduct in connection with the foreclosure sale resulted in an 

artificially low sale price for the Idaho hotel, which in turn resulted in an Idaho court being 

misled into entering a deficiency judgment that was higher than it should have been, and 

would have been, without Malbco’s misconduct. 

If the Court finds that this defense does not adequately give Malbco fair notice of the 

nature of the defense, Heetan and Heetal Patel request leave to amend it. 

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4. Unjust enrichment. 

“The elements of the quasi-contractual claim of unjust enrichment are (1) a benefit 

conferred, (2) awareness by the recipient that she has received the benefit, and (3) it would 

be unjust to allow the recipient to retain the benefit without requiring her to pay for it.” Cron 

v. Zimmer, 255 Or. App. 114, 130, 296 P.3d 567 (2013). 

Here, by obtaining property that was more valuable than the extent to which the 

underlying debt was reduced, Malbco obtained a benefit when it foreclosed on the Idaho 

hotel and paid an artificially low purchase price. That benefit came at the expense of Bob 

and Nila Patel (the loan guarantors) and Heetan and Heetal Patel (if Malbco is allowed to 

recover against them). Malbco should be required to credit the full market value of the Idaho 

hotel as an offset against the amounts it seeks to recover in this lawsuit. 

If the Court finds that this defense does not adequately give Malbco fair notice of the 

nature of the defense, Heetan and Heetal Patel request leave to amend it. 

5. Unclean hands. 

As explained above, the unclean hands defense encompasses Malbco’s collusion with 

the receiver which resulted in an inflated “claim.” And because the unclean hands doctrine 

embraces all inequitable, unfair, and dishonest that relates to the parties, it also includes 

Malbco’s racial targeting of Bob and Nila Patel and their effort to take other hotels owned by 

the Patel family. 

If the Court finds that this defense does not adequately give Malbco fair notice of the 

nature of the defense, Heetan and Heetal Patel request leave to amend it. 

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6. Anti-deficiency statutes. 

Malbco’s only challenge to this defense is that the defendants have failed to specify 

the applicable anti-deficiency statute at issue. Heetan and Heetal Patel request leave to 

amend this defense to do so. 

7. Public policy. 

Malbco’s only challenge to this defense is that the defendants have failed to specify 

the applicable public policies at issue. Heetan and Heetal Patel request leave to amend this 

defense to do so. 

III. CONCLUSION 

For the foregoing reasons, Malbco’s motion to strike should be denied. 

DATED: December 19, 2014 

BULLIVANT HOUSER BAILEY PC 

By /s/ Laura Caldera Taylor 

Thomas L. Hutchinson, OSB #994896 

Laura Caldera Taylor, OSB #993786

Telephone: 503.228.6351 

Attorneys for Defendants Heetan B. Patel 

and Heetal B. Patel 

15351509.1 

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