Andlovec v. Spoto ( 2023 )

No. 312 June 22, 2023 525
IN THE COURT OF APPEALS OF THE
STATE OF OREGON
Jennifer ANDLOVEC,
an individual et al.,
Plaintiffs,
and
Jeffery CALLAHAN,
Intervenor Plaintiff-Appellant,
v.
Christopher SPOTO,
an individual et al.,
Defendants,
and
STORM 3, LLC,
Defendant-Respondent.
Deschutes County Circuit Court
17CV11011; A175537
Raymond D. Crutchley, Judge.
Argued and submitted September 21, 2022.
Nicholas A. Kampars argued the cause and filed the
briefs for appellant.
Shannon McCabe argued the cause for respondent.
Gregory P. Lynch and Lynch Murphy McLane LLP filed the
brief for respondent.
Before Shorr, Presiding Judge, and Mooney, Judge, and
Pagán, Judge.
MOONEY, J.
Reversed.
526 Andlovec v. Spoto
Cite as 326 Or App 525 (2023) 527
MOONEY, J.
This attorney fee case concerns a failed marijuana
production operation started by two individuals, Callahan
and Spoto, and run under the name of Farmington
Industries, LLC (Farmington), for the purpose of produc-
ing marketable medical and recreational marijuana. The
underlying lawsuit was filed by several Farmington inves-
tors against Spoto, Farmington’s attorney (Smiley), and
Storm 3, LLC (Storm 3), seeking damages for financial
losses that the investors alleged that they suffered when the
business failed. Callahan later intervened in that lawsuit
as a plaintiff. Spoto filed for bankruptcy, and any personal
liability that he might incur as a result of this lawsuit was
discharged by the bankruptcy court. In the end, the claims
of the investors who initially filed the lawsuit were volun-
tarily dismissed, followed by the trial court’s dismissal of
Callahan’s remaining claims against Storm 3 on summary
judgment. The only issue before us is whether the trial court
erred when it awarded Storm 3 attorney fees.
Callahan appeals from the Supplemental Judgment
and Money Award entered against him and he assigns error
to the trial court’s granting of Storm 3’s petition for attor-
ney fees under ORS 20.105.1 He first argues, correctly, that
the trial court erred when it considered the factors listed in
ORS 20.075 in deciding whether to award such fees to Storm
3. The trial court’s written opinion states that it “considered
the factors set forth in ORS 20.075(1) and (2) in determin-
ing whether an award of attorney fees and costs should be
ordered[.]” (Emphasis added.) But the factors in ORS 20.075
“apply when another source of law gives a court discretion
to award attorney fees,” and those factors do not apply to a
request for a mandatory award of fees under ORS 20.105.
Williams v. Salem Women’s Clinic, 245 Or App 476, 483,
263 P3d 1072 (2011) (emphasis in original). The court, thus,
erred in considering those factors in its decision-making
process regarding whether to award attorney fees.2
1
ORS 20.105 provides, in part, that the court shall award attorney fees to
a prevailing party if “there was no objectively reasonable basis for asserting the
claim[.]”
2
Although we could remand the matter to the trial court to apply the correct
legal standard as contained in ORS 20.105, the question is one of law, and we
528 Andlovec v. Spoto
Callahan next argues that he had an objectively
reasonable basis on which to pursue his claims against
Storm 3 and, therefore, that the award of attorney fees to
Storm 3 was improper. Storm 3 counters that Callahan’s
“claims became objectively unreasonable following factual
determinations by the [bankruptcy court] in [the] adversary
proceeding directly related to the claims asserted in” this
case. We conclude that Callahan’s claims were not with-
out an objectively reasonable basis and, therefore, the trial
court erred when it awarded attorney fees to Storm 3 under
ORS 20.105. We reverse the attorney fee award and the sup-
plemental judgment awarding those fees to Storm 3.3
Whether a claim lacks an objectively reasonable
basis under ORS 20.105 is a question of law. See Secor
Investments, LLC v. Anderegg, 188 Or App 154, 175, 71
P3d 538 (2003). “[F]or purposes of ORS 20.105(1), a claim,
defense, or ground for appeal or review is meritless when
it is entirely devoid of legal or factual support at the time
it was made.” Mattiza v. Foster, 311 Or 1, 8, 803 P2d 723(1990) (footnotes omitted). Attorney fees under ORS 20.105
might also become appropriate when a party continues to
litigate a claim or defense “after it is clear that the plain-
tiff’s legal position no longer has any arguable support in
the law as applied to the facts.” McCarthy v. Oregon Freeze
Dry, Inc., 334 Or 77, 85, 46 P3d 721 (2002). We review the
record for any evidence that supports plaintiff’s claims. See
Magno, LLC v. Bowden, 313 Or App 686, 695, 496 P3d 1049
(2021) (“[T]he question is whether any evidence, if offered
and believed, or any legal authority, would support a finding
and a resulting judgment for plaintiff.”). “We describe the
pleadings, litigation, and evidence in light of that standard,
without considering the trial court’s resolution of disputed
historical facts.” Williams, 245 Or App at 478.
As mentioned, Callahan and Spoto operated as
Farmington, a limited liability company, for the purpose of
producing marketable marijuana. Both Callahan and Spoto
will, therefore, follow the more efficient path of applying the correct standard and
answering the legal question ourselves. Williams, 245 Or App at 483.
3
Our disposition obviates the need to address the parties’ arguments con-
cerning the amount of attorney fees and, therefore, we do not do so.
Cite as 326 Or App 525 (2023) 529
made financial and nonfinancial contributions to the mari-
juana operation. Although it is unclear whether Callahan
and Spoto were both listed as members of Farmington, they
were both actively involved in its marijuana production oper-
ations and business. In June of 2015, Farmington entered
into a five-year lease to construct and operate a marijuana
production facility in Bend. Under the lease, Farmington
was responsible for all improvements to the land, but such
improvements were to be surrendered to the landlord with
the leased premises upon expiration or termination of the
lease.
After the lease was signed, Callahan and Spoto
employed Smiley for legal advice and assistance concern-
ing Farmington’s business structure and operations. Smiley
proposed that Farmington adopt a structure in which two
trusts would be created with each trust to serve as a mem-
ber of the limited liability company. One trust would hold
the combined ownership interests of Callahan and Spoto,
and the other would hold the combined ownership interests
of other investors. Spoto was to be named the trustee of
both trusts and was also to serve as Farmington’s manager.
An operating agreement generally reflecting the proposed
structure was drafted, and Spoto signed it in April 2016.
Callahan did not sign that agreement, but he did agree con-
ceptually with the proposed structure.4
Tension developed between Spoto and Callahan,
primarily related to Farmington’s finances. That tension
grew and, in the fall of 2016, culminated in a disagree-
ment about whether to accept a particular investment from
4
Callahan and other investors later learned that Smiley did not draft
or otherwise memorialize the trusts that he proposed to create to hold the
Farmington ownership interests. The record does not include any written trust
agreements, and the testimony indicates that the agreements were never drafted.
Smiley admitted that he did not memorialize the trusts and that it was not clear
to him who the settlors of the trusts were to have been. The parties nevertheless
agree that the trusts that were supposed to be drafted were described accurately
in the April 2016 operating agreement, and they rely on that agreement in mak-
ing their respective arguments in this case. They litigated the dischargeability
of Spoto’s liability to them, in the bankruptcy proceeding that we later describe,
as if the trusts existed and in reliance on the April 2016 operating agreement.
There were also claims made by Callahan and the other investors against Smiley
for breach of fiduciary duty and legal malpractice alleging, among other things,
failure to create the trusts, but those claims are not before us.
530 Andlovec v. Spoto
Kevin Kahmann. Kahmann and his wife, Valerie, lived in
Minnesota at the time. They owned various companies, one
of which employed Spoto’s wife. The proposed investment
was to be from Storm 3, one of the Kahmanns’ companies.
Spoto wanted to accept the investment, but Callahan was
opposed to that, expressing concerns about the Kahmanns’
financial stability. Storm 3 was registered in Oregon as a
limited liability company in February of 2017.
In January 2017, as Spoto and Callahan worked to
resolve their dispute, most of Farmington’s marijuana crop
disappeared.5 As a result, Farmington was no longer able to
meet its lease obligations and Spoto decided to terminate the
lease as of February 1, 2017. Within days, Valerie Kahmann
signed a new lease for the same property that then included
the significant improvements that had already been made by
Farmington. Valerie Kahmann signed the new lease as the
authorized representative of the new tenant, Storm 3, and
also personally, as guarantor. The effective date of the new
lease was February 1, 2017. Spoto dissolved Farmington by
the end of that same month.
In March 2017, the investors filed this lawsuit
alleging various claims against Spoto, Storm 3, and Smiley.
As relevant here, they asserted that Spoto had breached his
fiduciary duty to them, and that Storm 3 had worked in con-
cert with Spoto to facilitate what amounted to a fraudulent
transfer of the lease from Farmington to Storm 3. Callahan
filed a motion to intervene as a plaintiff, arguing that he
had a right to intervene under ORCP 33 B and that, in
any event, his intervention as a party would be permissi-
ble under ORCP 33 C. Storm 3 did not object to Callahan’s
motion and did not otherwise oppose his intervention into
this case as a plaintiff. The court granted the motion for
Callahan to intervene as a plaintiff in April of 2017.6
The plaintiffs, including Callahan, filed an amended
complaint in December of 2017, that, among other things,
5
It is unclear how or why the marijuana crop disappeared. Although there
is some suggestion that it was stolen, the record does not contain evidence of
any related investigative efforts or of any charges having been brought against
anyone.
6
Any reference to “investors” from this point forward includes Callahan
unless otherwise indicated.
Cite as 326 Or App 525 (2023) 531
added two new claims against Storm 3: intentional interfer-
ence with economic relations (IIER) and unjust enrichment.
Storm 3 filed a motion seeking dismissal of certain claims in
the amended complaint. The court dismissed the fraudulent
transfer and unjust enrichment claims; however, it denied
Storm 3’s motion to dismiss the IIER claim, and the parties
proceeded with discovery.
Spoto filed for bankruptcy after the lawsuit was
filed, and the investors initiated an adversarial bankruptcy
proceeding, seeking to prevent the discharge of Spoto’s
potential liability to them. They asserted two claims against
Spoto under 11 USC section 523(a): (1) fraud while acting in
a fiduciary capacity, 11 USC § 523(a)(4), and (2) willful and
malicious injury, 11 USC § 523(a)(6).7
At a hearing in November 2018, the bankruptcy
court found that Spoto did not owe a fiduciary duty to the
investors; however, it excluded Callahan from that finding.
It nevertheless denied the request of all investors, includ-
ing Callahan, to except their claims against Spoto from
discharge under 11 USC section 523(c) because it found
that Spoto’s actions did not “rise to the level of fraud”
under section 523(a)(4) of that code. The bankruptcy court
also declined to except the investors’ claims against Spoto
from discharge after finding that Spoto did not terminate
Farmington’s lease with the intention of injuring the inves-
tors within the meaning of 11 USC section 523(a)(6). Spoto’s
potential liability was, thus, determined to be dischargeable
by the bankruptcy court and the litigation below proceeded
on that basis, without Spoto.
The parties engaged in extensive discovery efforts
and motions, and Callahan and the other investors filed
7
11 USC section 523 provides, in relevant part:
“(a) A discharge under [relevant sections] of this title does not discharge
an individual debtor from any debt—
“* * * * *
“(4) for fraud or defalcation while acting in a fiduciary capacity, embez-
zlement, or larceny;
“* * * * *
“(6) for willful and malicious injury by the debtor to another entity or to
the property of another entity[.]”
532 Andlovec v. Spoto
a motion seeking to file a second amended complaint that
would add a claim against Storm 3 alleging that it had
aided and abetted Spoto in breaching Spoto’s fiduciary duty
to them (the AABFD claim). Although a hearing had been
scheduled for oral argument on that motion, it was can-
celed by agreement of the parties because the defendants,
including Storm 3, had no objection to its filing. The second
amended complaint was, thus, filed in March of 2019.
In August 2019, Storm 3 filed a motion seeking
summary judgment in its favor on the IIER and the AABFD
claims. The trial court heard that motion in December 2019,
and granted it in part, as to the AABFD claim, at the conclu-
sion of the hearing. In particular, the court explained that it
considered itself to “be bound by the factual findings of [the
bankruptcy court’s] judicial officer with respect to the acts
of Mr. Spoto.” Noting that the bankruptcy court had found
that Spoto did not owe a fiduciary duty to the investors, the
trial court reasoned that Storm 3 could not be held liable to
those investors for aiding and abetting Spoto in breaching a
duty that he did not owe them. The trial court reserved rul-
ing on the motion as to the IIER claim and took that matter
under advisement. By letter to counsel dated July 17, 2020,
the trial court stated that it had reviewed its files and the
record and concluded that “there is a genuine issue of mate-
rial fact as to the IIER cause of action” and it denied Storm
3’s motion for summary judgment on that claim.
Ultimately, all plaintiffs except for Callahan agreed
to dismiss their remaining claims, leaving Callahan’s IIER
claim against Storm 3 the only unresolved claim against
Storm 3. In August 2020, Storm 3 filed another summary
judgment motion against the IIER claim, this time asserting
that the claim belonged to Farmington, and that Callahan
lacked standing to pursue that claim as a nonmember. The
trial court granted that motion by written order “for the rea-
sons stated on the record.”
Storm 3 then filed its petition for attorney fees under
ORS 20.105(1), asserting that Callahan had no objectively
reasonable basis for pursuing his claims against Storm 3
and seeking the fees it incurred after the bankruptcy court
issued its ruling on the dischargeability of the investors’
Cite as 326 Or App 525 (2023) 533
claims. The trial court awarded attorney fees to Storm 3 in
the amount of $64,585. Callahan appeals from the associ-
ated supplemental judgment.
As a general rule, Oregon courts do not award attor-
ney fees to opposing parties in litigation absent a statutory
or contractual right. Swett v. Bradbury, 335 Or 378, 381, 67
P3d 391 (2003). ORS 20.105 provides one of the statutory
rights to attorney fees, and provides, in relevant part:
“In any civil action, suit or other proceeding in a circuit
court * * *, the court shall award reasonable attorney fees
to a party against whom a claim * * * is asserted, if that
party is a prevailing party in the proceeding and to be paid
by the party asserting the claim * * * upon a finding by the
court that * * * there was no objectively reasonable basis for
asserting the claim[.]”
Under ORS 20.105, the fact that a party does not
prevail on a claim does not mean that the claim was wholly
without merit. See Mattiza, 311 Or at 8. Indeed, the adver-
sarial nature of our justice system presumes that each case
has a winning and a losing argument. It is only when it is
obvious that a claim is without merit—because it is entirely
devoid of support—that a punitive award of attorney fees is
proper. This is not one of those cases.
As already mentioned, Storm 3 argues that once
the bankruptcy court found “that no fiduciary relation-
ship existed” between Spoto and Callahan as “relating to
Farmington,” Callahan had a “duty to evaluate his claims
in light of [that] ruling,” and dismiss the case because he
lacked the necessary standing to pursue it and, therefore, no
longer had an objectively reasonable basis to continue pursu-
ing his claims. The parties disagree about whether the trial
court was bound by the bankruptcy court’s factual findings.
Storm 3 points to the trial court’s conclusion “that [it] was
factually estopped from arriving at a conclusion contrary to”
that of the bankruptcy court, but Storm 3 cites no authority
and makes no legal argument to support the correctness of
that conclusion. For his part, Callahan describes the find-
ings made by the bankruptcy court under the bankruptcy
code, and he argues that those findings do not establish the
unreasonableness of his claims against Storm 3 in this case.
534 Andlovec v. Spoto
To the extent that the parties appear to raise an estoppel or
preclusion argument, it is not “our proper function to make
or develop a party’s argument when that party has not
endeavored to do so itself.” Beall Transport Equipment Co.
v. Southern Pacific, 186 Or App 696, 700 n 2, 64 P3d 1193
(2003). We will nevertheless address the parties’ respective
arguments as we understand them, to the extent necessary
to carry out our “obligation to review the rulings of the trial
court for errors of law.” State v. Remsh, 221 Or App 471, 475,
190 P3d 476 (2008). We, thus, turn briefly to the bankruptcy
court’s findings.
The bankruptcy court limited its findings about
fiduciary duties and “fraud” to the context in which it made
those findings—determining the dischargeability of debt
under the federal bankruptcy code. As that court explained
when it ruled from the bench,
“[I]t is important to remember this Court’s role. * * *
Congress has defined nondischargeable debts narrowly
with the goal of targeting debtors who take affirmative
steps to inflict substantial injury. While Mr. Spoto may not
have conducted himself perfectly, he did not commit any
malfeasance significant enough to except [the investors’]
claims from discharge.”
The bankruptcy court carefully limited its findings to the
record before it under the law that it was applying. Moreover,
the bankruptcy court made clear findings, and it did not
find that Spoto owed no fiduciary duty to Farmington. It
did not find that no duty of loyalty existed between Spoto
and Callahan as “relating to Farmington” as Storm 3 now
argues. It concluded that Spoto owed no fiduciary duty to
the investors, but it excluded Callahan from that finding.
Regardless of whether the bankruptcy court findings were
binding on the trial court, an issue we do not decide, those
findings do not answer the question whether Callahan’s
claims lacked an objectively reasonable basis under ORS
20.105.
In determining whether to award Storm 3 attorney
fees under ORS 20.105, the trial court concluded that, “con-
sistent with the Court’s prior summary judgment rulings,
the Court also finds that Callahan lacked any objectively
Cite as 326 Or App 525 (2023) 535
reasonable basis for asserting his claims.” But the standard
under ORCP 47 by which a trial court evaluates a motion
for summary judgment to determine whether the moving
party is entitled to prevail as a matter of law is not the same
as the standard under ORS 20.105, by which a court evalu-
ates an attorney fee request to determine whether there was
an objectively reasonable basis for the claim at all. The fact
that the trial court granted summary judgment motions
does not necessarily mean that Callahan had no objectively
reasonable basis for asserting and pursuing his claims in
the first place, and it does not establish the unreasonable-
ness of those claims. We have held in an analogous context
that the denial of a motion for directed verdict does not nec-
essarily establish the reasonableness of the claim moved
against. See Daniels v. Johnson, 306 Or App 252, 473 P3d
1133 (2020). The converse of that—that the granting of sum-
mary judgment does not necessarily establish the unreason-
ableness of the claim moved against—is at least as true. As
we have explained, the question for the trial court under
ORS 20.105 is whether Callahan’s claims against Storm 3
were entirely devoid of legal or factual support. That is a
different question than the one that was presented to the
trial court on the earlier summary judgment motions.
Whether a party has an objectively reasonable
basis for asserting a claim is a function of the substantive
law governing that claim. Dimeo v. Gesik, 195 Or App 362,
369, 98 P3d 397 (2004), adh’d to as modified on recons, 197
Or App 560, 106 P3d 697 (2005). But, here, Storm 3’s focus
is not on the legal elements of Callahan’s AABFD or IIER
claims. It instead focuses on whether the record supports
a conclusion that Callahan had standing to pursue those
claims, in particular after the bankruptcy court made its
ruling. As we have explained, the bankruptcy court’s find-
ings are not dispositive of standing in this case.
“ ‘[S]tanding’ means the right to obtain an adjudica-
tion. It is thus logically considered prior to consideration of
the merits of a claim. To say that a plaintiff has ‘no stand-
ing’ is to say that the plaintiff has no right to have a tribunal
decide a claim under the law defining the requested relief[.]”
Eckles v. State of Oregon, 306 Or 380, 383, 760 P2d 846536 Andlovec v. Spoto
(1988). As explained by one constitutional scholar, stand-
ing “is an answer to the very first question that is some-
times rudely asked when one person complains of another’s
actions: ‘What’s it to you?’ ” Antonin Scalia, The Doctrine
of Standing as an Essential Element of the Separation of
Powers, 17 Suffolk U L Rev 881, 882 (1983).
The basis of Callahan’s standing was set forth in his
motion to intervene and is set forth in the second amended
complaint, where it is alleged that plaintiffs “bring this
action derivatively, on behalf of [Farmington] and on their
own behalf as members of [Farmington].” Callahan first
joined this lawsuit as a plaintiff after filing his ORCP 33
motion to intervene. In that motion, he asserted, among
other things, that he had assisted in founding and develop-
ing Farmington’s business through cash and noncash con-
tributions, and that he was promised an equal ownership
in that business by Spoto and Smiley. He alleged that his
cash contributions were to be combined with Spoto’s cash
contributions and held in a trust, with Callahan and Spoto
as settlors, and Spoto as trustee. That trust was to be one of
two members of the Farmington limited liability company.
Callahan alleged that Spoto breached his fiduciary duty to
Farmington, to its investors, and to Callahan, when Spoto’s
mismanagement of Farmington’s business and the trusts
led to the termination of the lease for the production facility
and the subsequent transfer of that lease to Storm 3. Storm
3 did not object to Callahan’s motion, and he was permitted
to intervene.
After Callahan and the other plaintiffs added the
IIER claim against Storm 3, the trial court denied Storm
3’s ORCP 21 A motion to dismiss that claim. And although
Storm 3 initially objected to plaintiffs’ motion to file a sec-
ond amended complaint, which included the IIER claim and
added the AABFD claim, Storm 3 withdrew its objection,
and the motion was granted without a hearing. Callahan
does not make a waiver argument based on Storm 3’s acqui-
escence to Callahan’s intervention as a plaintiff or to the
amendment. But this case is factually and procedurally com-
plex, and whether there was support for Callahan’s claims
at any given point cannot be analyzed in a vacuum, without
Cite as 326 Or App 525 (2023) 537
regard to the context in which Callahan was permitted to
join this case.
Whether Callahan was a member of Farmington or
whether the trusts referred to in the operating agreement
became the members in 2015 or 2016 is unclear. As noted
above, no trust agreements were ever drafted or signed.
However, the parties rely on the operating agreement for
their arguments here, and the agreement states that the
manager has a fiduciary duty to Farmington and to its
members. Despite any confusion about whether the trusts
exist,8 there is support in the record for Callahan’s claim
that Spoto owed him a duty of loyalty in relationship to the
trust that held, or was supposed to hold, their joint interests
in Farmington and was, according to the operating agree-
ment, itself a member of Farmington to which Spoto owed a
duty under ORS 63.155.
“[T]he overall persuasiveness of evidence is not the
question before us” under ORS 20.105. Daniels, 306 Or App
at 257. Our task is not to determine whether the evidence
creates a genuine issue of material fact for Callahan’s
claims to survive a summary judgment motion, and it is not
to decide whether the evidence is sufficient to support a ver-
dict in Callahan’s favor. Our task is to determine whether
the record was “entirely devoid” of legal or factual support
for Callahan’s claims, because it is only when the record is
devoid of such support that an award of attorney fees under
ORS 20.105 would be proper. After reviewing the record
before us, we conclude that the record was not entirely devoid
of support for Callahan’s claims. The trial court erred when
it concluded otherwise. The supplemental judgment award-
ing attorney fees to Storm 3 is therefore reversed.
Reversed.
8
We need not determine whether the trusts could, or might, have arisen by
operation of law without written trust documents.