Court Opinion

ID: 2775235
Source: CourtListenerOpinion
Date Created: 2015-01-30 20:53:06.371526+00
Date Added: 2024-06-11T11:27:56.759249
License: Public Domain

This opinion is subject to revision before final
                  publication in the Pacific Reporter.

                              2015 UT 27

                                IN THE
      SUPREME COURT OF THE STATE OF UTAH
                           ———————
                      COTTAGE CAPITAL, LLC,
                           Appellant,
                                   v.
                RED LEDGES LAND DEVELOPMENT,
                           Appellee.
                           ———————
                            No. 20130320
                        Filed January 30, 2015
                           ———————
                  Fourth District, Heber Dep’t
                 The Honorable Derek P. Pullan
                        No. 120500114
                           ———————
                              Attorneys:
         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 dis-
missed 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-
           COTTAGE CAPITAL v. RED LEDGES LAND DEV.
                      Opinion of the Court

claim that has not yet matured at the time of a civil proceeding.
And because we cannot conclude that Cottage Capital’s enforce-
ment claim had matured at the time of the earlier proceedings be-
tween 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 promisso-
ry note. On the same day, Cottage Capital also executed 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, Cot-
tage Capital had the option of collecting the debt from Red Ledges
instead. The relevant portion of the guaranty agreement is as fol-
lows:
      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 exten-
sions on the debt, but GC Pacific became delinquent on its pay-
ments 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 un-
enforceable 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 Pa-
cific’s payments on the loan, that Cottage Capital and GC Pacific
had conspired to modify the terms of the guaranty to increase Red

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                       Opinion of the Court

Ledges’ liability, and that Cottage Capital had breached the guar-
anty 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 judg-
ment in favor of Cottage Capital on all counts. It held that the in-
terest 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 according-
ly filed a motion to toll the proceedings.
  ¶7 Negotiations with GC Pacific eventually broke down, how-
ever, and Cottage Capital sought repayment from Red Ledges in-
stead. On June 12, 2012, it delivered notice to GC Pacific and Red
Ledges that it was declaring all amounts due and payable from

 1 In its ruling, the district court appears to have anticipated that
 a future enforcement action might be filed:
       At no time in this action did Cottage Capital seek to
       compel Red Ledges to comply with Red Ledges’ obli-
       gations under the decree. Rather, Cottage Capital suc-
       cessfully defended against Red Ledges’ claims that
       the Guaranty was void. The effect of the judgment in
       this case will be to limit Red Ledges’ defenses in any
       future enforcement action. However, this does not
       transform the case into an action to compel compli-
       ance with the Guaranty.

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            COTTAGE CAPITAL v. RED LEDGES LAND DEV.
                       Opinion of the Court

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 dis-
trict 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 that Cottage Capital’s en-
forcement 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 re-
lated 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 en-
forcement 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

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                       Opinion of the Court

  ¶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 ap-
plicability of rule 13(a) on various grounds. We reach only one of
them—the first—because we find it sufficient to sustain the viabil-
ity 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 counter-
claim 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 “ma-
turing 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 ques-
tion on a motion to dismiss, we accept the facts as alleged by Cot-
tage 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 con-
cluding 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’ obli-
gation 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 for by the parties, gave Cot-
tage Capital the discretion to decide when to give up on recover-

 2 See 6 CHARLES ALAN WRIGHT & ARTHUR R. MILLER, FEDERAL
PRACTICE AND PROCEDURE § 1411, at 89 (3d. ed. 2010) (explaining
that under the terms of the parallel federal rule, a “party need not
assert a counterclaim that has not matured at the time the party
serves a pleading”)

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            COTTAGE CAPITAL v. RED LEDGES LAND DEV.
                       Opinion of the Court

ing the debt from GC Pacific and declare Red Ledges’ obligation
due and payable. Until that happened, Cottage Capital’s enforce-
ment action was not mature and could not be asserted. See O’Hair
v. Kounalis, 463 P.2d 799, 800 (Utah 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 con-
clude 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 op-
tion 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, we hold that Red Ledges’ motion to dismiss was
not well-founded, as there was at least a reasonable basis for con-
cluding that Cottage Capital’s claim was not a compulsory coun-
terclaim under the terms of civil rule 13(a). 3
  ¶16 Red Ledges’ contrary position is rooted in its assertion that
the Cottage Capital enforcement claim accrued earlier—at the
time that GC Pacific defaulted in May 2009. In support of this po-
sition, Red Ledges notes, as did the district court, that the terms of
the guaranty allowed Cottage Capital to declare the debt due and
payable “without demand or notice of any nature, such demand

 3  In so concluding, we do not foreclose the possibility that Red
Ledges could succeed in proving otherwise in further proceedings
on remand. Thus, we do not foreclose Red Ledges’ argument that
Cottage Capital may have effectively exercised its option by its
assertion of an affirmative defense in the declaratory judgment
action—a defense based on the allegation that Red Ledges’ de-
claratory judgment claims were “barred by its own breaches of
contract.” That position may eventually succeed upon discovery
and further argument on remand, as one reading of the affirma-
tive defense is as an allegation that Red Ledges had breached the
terms of the guaranty by nonpayment (and nonpayment could
have constituted a breach only if Cottage Capital had exercised its
option under the guaranty). But the question before us on appeal
is the viability of the district court’s decision granting Red Ledges’
motion to dismiss. And in considering the viability of that motion,
we must yield all reasonable inferences to Cottage Capital.

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                         Opinion of the Court

or notice being expressly waived by GUARANTOR.” In addition,
Red Ledges also marshals non-binding case citations from other
jurisdictions, purportedly demonstrating overwhelming judicial
support for its position in other states. We find neither point per-
suasive.
  ¶17 First, we do not read the “without demand or notice”
clause to override the clear terms of the option clause. Instead we
view each clause as independently significant. The option clause
preserved Cottage Capital’s right to decide when to pursue a
claim against Red Ledges as guarantor. And the “without demand
or notice” clause did not erase that option. Instead it simply clari-
fied that Cottage Capital was not required to give formal notice or
make a formal demand (as is required under the terms of some
notes). This provision, in other words, simply contracted away the
guarantor’s right to defend an enforcement action on the basis of a
lack of formal service or demand.
  ¶18 That is not to say that a claim for enforcement of the guar-
anty could be asserted in the absence of any communication of a
notice or demand for payment—since absent even an informal
communication, the obligation to pay the guaranty would not ac-
crue, and a breach could accordingly not be established. 4 But our
reading of the guaranty does not leave room for the Red Ledges

 4  See, e.g., Beal Bank v. Crystal City Props., Ltd. (In re Crystal Prop-
erties, Ltd.), 268 F.3d 743, 749 (9th Cir. 2001) (“Both state and feder-
al courts have made clear the unquestionable principle that, even
when the terms of a note do not require notice or demand as a
prerequisite to [exercising an option] to accelerat[e] a note, the
holder must take affirmative action to notify the debtor that it in-
tends to accelerate.”); Moss v. McDonald, 772 P.2d 626, 628 (Colo.
App. 1988) (“In the case of an acceleration provision exercisable at
the option of the obligee, the obligee must perform some clear,
unequivocal affirmative act evidencing his intention to take ad-
vantage of the accelerating provision . . . . even though the
amount is to become due at the option of the holder ‘without de-
mand or notice.’”).

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            COTTAGE CAPITAL v. RED LEDGES LAND DEV.
                        Opinion of the Court

view, which improperly construes the parties’ contract to take
away with one hand what it grants with another. 5
  ¶19 Second, we find the cited authority largely inapposite, and
in any event insufficient to overcome the clear terms of the guar-
anty at issue here. Many of the cited cases involve garden-variety
loan or mortgage contracts between borrowers and lenders, which
are (not surprisingly) deemed breached and enforceable at the
time of default. 6 And although other cases involve terms of a
guaranty by a third party, they do not generally arise under terms
like those at issue here—option terms that clarify that a guaran-
tor’s obligation is both separate from the underlying default of the
borrower and triggered only by the exercise of the option by the
lender. 7

 5  See Encon Utah, LLC v. Fluor Ames Kraemer, LLC, 2009 UT 7,
¶ 28, 210 P.3d 263 (“In interpreting a contract, we look for a read-
ing that harmonizes the provisions and avoids rendering any pro-
vision meaningless.”).
 6  See, e.g., Miss. Valley Title Ins. Co. v. Hardy, 541 So. 2d 1057,
1059–61 (Ala. 1989); Wright v. State, 824 P.2d 718, 722 (Alaska
1992); Linn v. NationsBank, 14 S.W.3d 500, 504–05 (Ark. 2000); Mott
v. State, 49 A.3d 1186, 1188–89 (Del. 2012); Ellis v. Crockett, 451 P.2d
814, 821 (Haw. 1969); Harrington v. Polk Cnty. Fed. Sav. & Loan
Ass’n, 196 N.W.2d 543, 544–46 (Iowa 1972); KeyBank Nat’l Ass’n v.
Sargent, 758 A.2d 528, 535 (Me. 2000).
 7 See, e.g., First Nat’l Bank of Ogden v. Taylor, 114 P. 529, 530 (Utah
1911) (guaranty, with no option clause, deemed enforceable
against the guarantor at the time of the borrower’s default); Chev-
ron Chem. Co. v. Mecham, 536 F. Supp. 1036, 1043 (D. Utah 1982)
(same); Prod. Credit Ass’n of Midlands v. Schmer, 448 N.W.2d 123,
128 (Neb. 1989) (same). Of the cited cases with any connection to
an option, all are distinguishable on their facts; and none of them
hold that a claim to enforce an option arises before the option has
been exercised. See Kissell Co. v. Farley, 417 F.2d 1180, 1184 (7th
Cir. 1969) (reversing district court’s finding that a contract includ-
ed an option clause as clearly erroneous, and instead concluding
that it was an outright contract to sell); Kendall Grp. Ltd. v. Fifth
Third Bank, 2010 WL 3821255, at *6 (Ohio Ct. App. Sept. 30, 2010)
(real estate purchase contract included an unexercised option to

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                        Opinion of the Court

  ¶20 At least one of the cases proffered by Red Ledges involves
an option clause in line with that at issue here. See Tallman v. Du-
russell, 721 P.2d 985 (Wash. Ct. App. 1986). But the Tallman case
undermines Red Ledges’ position. In Tallman a buyer and seller
entered into a promissory note that included an optional accelera-
tion clause, allowing the seller to elect to declare the entire
amount due and payable in the event of any default. Id. at 986–87.
The buyer defaulted, and the two engaged in litigation over an-
other issue. Id. Later, the seller accelerated the note and brought
an enforcement action for the entire balance due. Id. The Tallman
court held that the counterclaim was only partially barred by the
compulsory counterclaim rule. It concluded that only the en-
forcement of the amount due at the time of the previous suit was
barred, “[s]ince default alone is insufficient to accelerate the note
and [seller] did not exercise his option to accelerate.” Id. at 988.
And it clarified that the amount that would have been due if the
lender had exercised its option to accelerate was not a compulsory
counterclaim. Id. (“Since default alone is insufficient to accelerate
the note and Tallman did not exercise his option to accelerate . . . a
cause of action on the note was not entirely barred.”).
  ¶21 Tallman is consistent with our reading of the option clause
at issue here. The Red Ledges guaranty was not automatically
triggered at the moment of default. It matured only at Cottage
Capital’s option. Thus, the Red Ledges guaranty was subject to
two preconditions to its enforceability: GC Pacific’s default and
Cottage Capital’s decision to exercise its option to turn to Red
Ledges for payment. Red Ledges’ construction ignores and over-
rides the clear terms of the option clause; we reject it on that basis.
See Biesinger v. Behunin, 584 P.2d 801, 803 (Utah 1978) (“Persons
dealing at arm’s length are entitled to contract on their own terms
without the intervention of the courts for the purpose of relieving
one side or the other from the effects of a bad bargain.”).
  ¶22 As Red Ledges notes, this construction of the guaranty puts
Cottage Capital in control of the timing of Red Ledges’ obligation
as guarantor. It yields to Cottage Capital the contractual preroga-

purchase additional acreage, but did not affect the foreclosure ac-
tion by bank and subsequent lawsuit by borrower against the
bank that was dismissed as a compulsory counterclaim).

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            COTTAGE CAPITAL v. RED LEDGES LAND DEV.
                       Opinion of the Court

tive of choosing whether and when to cease negotiating with GC
Pacific and to turn its collection efforts to Red Ledges as the guar-
antor. The district court was understandably reticent to yield carte
blanche authority to a lender, in a manner that might be abused
for the purpose of “letting interest accrue at a very high rate” for
many years before asserting a claim. And Red Ledges echoes that
concern on this appeal.
  ¶23 We acknowledge this concern, but find it insufficient to
foreclose the express authority conferred by the clear terms of the
parties’ contract—for a couple of reasons. First, as noted above, is
the fact that the parties to an arm’s-length contract “are entitled to
contract on their own terms without the intervention of the courts
for the purpose of relieving one side or the other from the effects
of a bad bargain.” Id. And second is the notion, recognized in au-
thority outside of Utah, and which we hereby adopt as the law of
this state, that an option clause must be exercised in a reasonable
period of time.8 This is consistent with the longstanding principle
of good faith and fair dealing, which requires parties to act in
ways that are “consistent with the agreed common purpose and
the justified expectations of the other party,” Oakwood Village LLC
v. Albertsons, Inc., 2004 UT 101, ¶ 43, 104 P.3d 1226 (internal quota-
tion marks omitted), and with the doctrine of laches, which can
bar a plaintiff from prevailing where it delays asserting a claim in
a way that works to injure the defendant, Fundamentalist Church of
Jesus Christ of Latter-Day Saint v. Horne, 2012 UT 66, ¶ 29, 289 P.3d
502.
  ¶24 This proviso is a sufficient response to the concern for
abuse articulated by the district court and echoed by Red Ledges.
If a party refused to exercise an option for recourse against a
guarantor for an unreasonable period of time in an effort to accu-
mulate interest, its acts would run counter to the general purpose
of a guaranty agreement and injure the plaintiff through delay, in

 8  See Malouff v. Midland Fed. Sav. & Loan Ass’n, 509 P.2d 1240,
1246 (Colo. 1973) (en banc) (“[W]here, as here, no definite time is
specified by which the election to accelerate must be exercised,
such election to do so must be made within a reasonable time.”);
Greene v. Bursey, 733 So. 2d 1111, 1115 (Fla. Dist. Ct. App. 1999)
(statute of limitations does not commence unless lender unrea-
sonably delays demanding payment).

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                       Opinion of the Court

a manner running afoul of the covenant of good faith and fair
dealing and the doctrine of laches. And on that basis, a guaranty
obligation that remains viable under the terms of a contract could
be rendered unenforceable if pressed after an unreasonable delay.
No such allegation is or is likely to be made here, however, as
both parties acknowledged during the pendency of the declarato-
ry judgment action that it was likely that GC Pacific would still
satisfy its own debt, supra ¶ 6—a fact suggesting that it was rea-
sonable for Cottage Capital to continue negotiating with GC Pacif-
ic instead of turning its sights to Red Ledges. So this is not a case
implicating the concern for abusive exercise of an option under a
guaranty agreement, and the terms of the agreement must accord-
ingly control.
  ¶25 We reverse on the basis of the terms of the guaranty as we
construe them. And we remand for further proceedings not in-
consistent with this opinion.
                          ———————

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