Cruze v. Hudler

246 Or.App. 649

267 P.3d 176

Tyrone CRUZE, Sr. and Jacqueline Cruze, Trustees of The Tyrone Cruze, Sr. and Jacqueline Cruze Family Trust Agreement Dated March 6, 1987; and California National Bank Custodian FBO Tyone Cruze Ira Acct. CCT0300 and Custodian FBO Jacqueline Cruze Ira Acct. CCJ0150, Plaintiffs–Appellants,

v.Martin L. HUDLER, an individual; and Charles R. Markley, an individual, Defendants–Respondents,andCovenant Partners, LLC, a Nevada limited liability company, Defendant.

CV08090688; A145179.

Court of Appeals of Oregon.

Argued and Submitted July 19, 2011.Decided Nov. 23, 2011.

Steven L. Naito argued the cause for appellants. With him on the briefs was Tarlow Naito & Summers, LLP.

Brian R. Talcott, Portland, argued the cause for respondent Martin L. Hudler. With him on the brief was Dunn Carney Allen Higgins & Tongue LLP.

Jeffrey W. Hansen, Portland, argued the cause for respondent Charles R. Markley. With him on the brief were Joseph A. Rohner IV and Smith, Freed & Eberhard, P.C.Before SCHUMAN, Presiding Judge, and BREWER, Chief Judge, and WOLLHEIM, Judge.^*SCHUMAN, P.J.

Plaintiffs brought this action against two defendants, Martin L. Hudler and Charles R. Markley, who allegedly defrauded them by means of an investment scheme. The trial court granted summary judgment in favor of Markley on all of plaintiffs' claims, and refused to allow plaintiffs to amend their complaint to allege a racketeering claim against either defendant. Plaintiffs now appeal, arguing that the court erred in granting Markley's motion for summary judgment and in denying plaintiffs' motions to amend their complaint. We agree with plaintiffs in both respects, and we therefore reverse and remand.

I. SUMMARY JUDGMENT

We begin with plaintiffs' contentions regarding the trial court's grant of summary judgment on their claims against Markley. In reviewing the grant of such a motion, “[w]e take the facts from the summary judgment record and view those facts and all reasonable inferences that may be drawn from them in the light most favorable to plaintiff[s], the nonmoving party.” Morehouse v. Haynes, 350 Or. 318, 320, 253 P.3d 1068 (2011).

Plaintiffs Tyrone and Jacqueline Cruze¹ owned development property in Oregon and listed that property with Pat Jay, a real estate broker. In early 2007, Hudler contacted Jay about purchasing some of plaintiffs' property. Hudler visited plaintiffs' Idaho home in May to discuss that prospective purchase. During the visit, Hudler described a real estate development business that he and Markley owned. Hudler represented that he was an experienced and successful real estate developer and that Markley was an “experienced lawyer.” Hudler told plaintiffs that he and Markley had a portfolio of successful projects in Nevada, Oregon, and California, and he invited Tyrone Cruze to come to Reno, Nevada, to see some of those projects.

On May 30, 2007, Tyrone Cruze sent Jay to Reno on his behalf to see the real estate projects and gauge how successful they were. Hudler and Markley met Jay in Reno and showed him eight real estate projects. Jay gave a positive report of the visit, and over the summer Tyrone Cruze met with Hudler and Markley at Hudler's office. During that meeting, Hudler explained that Markley, his partner, was an owner of one of the biggest law firms in Portland. Hudler also told Cruze about other successful projects that Hudler and Markley were working on, including a development with Robert Praegitzer, a businessman Cruze respected. Markley “heard everything [Hudler] said as he was sitting in the same room.”

Hudler visited plaintiffs several more times in the fall of 2007 and ultimately convinced them to form a joint venture with Bridgeport Communities, LLC (Bridgeport), a limited liability company owned by Hudler and Markley, to develop plaintiffs' Oregon property.² To that end, Bridgeport and plaintiffs formed four separate limited liability companies—the “JTB Equities” companies.

Bridgeport, meanwhile, also owned all of the membership interests in Covenant Partners, LLC, a company that served as the “operations manager” for Keycom, a company that, in turn, was to develop a parcel of property in Nevada known as the “Keystone Property.” In March 2008, Hudler approached Tyrone Cruze about investing in Covenant. On March 19, Markley prepared a First Amended and Restated Operating Agreement of Covenant Partners, LLC, which Hudler then took to plaintiffs' home in order to finalize the investment. Hudler represented to plaintiffs that the investment was needed immediately because two loans related to and secured by the Keystone Property were in default. While at plaintiffs' home, Hudler spoke with Markley by phone and made changes to the operating agreement.

The following day, Hudler and plaintiffs executed the Covenant Operating Agreement, whereby plaintiffs purchased half of Bridgeport's interest in Covenant. In Section 2.1.2 of the Agreement, Bridgeport warranted that it had previously “contributed cash to or on behalf of Covenant in the amount of $1,026,298 through and including December 31, 2007 * * *.” As part of the purchase, plaintiffs agreed to pay Bridgeport $513,149—that is, half of the $1,026,298 that, according to Section 2.1.2 of the Agreement, Bridgeport had already contributed—plus an amount equal to one half of Bridgeport's previous contributions to Covenant between January 1, 2008 and March 20, 2008, the date of the agreement. Plaintiffs also agreed to loan $3,330,000 to Keycom and to make additional capital contributions. Hudler represented to plaintiffs that the loan to Keycom would be secured by a first priority trust deed on 40 acres of the Keystone Property.

Shortly after executing the Covenant Operating Agreement, plaintiffs paid the agreed $513,149 to Bridgeport. Hudler then requested a capital contribution of $160,000 to Covenant, pursuant to the agreement, and plaintiffs made that additional capital contribution the next day. Near the end of April 2008, plaintiffs also loaned just over $3 million to Keycom.

According to plaintiffs, their investment in Covenant was actually part of a fraudulent “Ponzi-like scheme” whereby Hudler and Markley operated businesses without profit, commingled funds of related companies, and raised new funds to repay earlier investors and hide the lack of profits. Companies owned by Hudler and Markley were, indeed, shuffling money among themselves. One of those companies, Mill Creek Equities, LLC (Mill Creek), owned by Hudler and Markley and their wives, in turn owned a minority interest in LMA Northwest Fitness LLC and LMA Northwest Retail LLC (the LMA companies). Hudler and Markley had access to the bank accounts of the LMA companies, and Mill Creek took nearly $800,000 from those companies without their controlling shareholders' knowledge or permission. Meanwhile, Hudler was using money from other companies—such as Keystone's loan proceeds—to borrow himself or to pay Bridgeport. (By way of example: Two days after receiving loan proceeds from Keystone, Bridgeport deposited $500,000 into an account for one of the LMA companies, which was then credited to Mill Creek.) Hudler later took $99,885.00 of an earnest money deposit to Keycom and put that deposit in Bridgeport's bank account as well.

At the same time, Hudler was diverting money from Bridgeport Construction Group, yet another company that Hudler and Markley formed in connection with their property development efforts. Bridgeport Construction Group was the general contractor for a townhome project that Bridgeport was developing with Chris and Heather Harrell. Between December 2007 and March 2008, Hudler had diverted more than $250,000 in construction loan proceeds to himself and other entities that he and Markley owned or controlled. In mid-March 2008, Chris Harrell confronted Hudler and demanded that the money be returned and threatened to contact the police.

Those convoluted intercompany dealings (and the fact that Hudler and Markley's various development companies were operating with very little cash), coupled with Harrell's demands, created an immediate need for a further influx of capital to Hudler and Markley's operations. The Cruzes were one potential source. On March 19, 2008—the day that Hudler arrived at plaintiffs' house to finalize the Covenant Operating Agreement—Bridgeport's bookkeeper e-mailed Hudler a list of the balances in the accounts of Hudler and Markley's limited liability companies (as well as other accounts) showing just over $5,000. The e-mail states, “Here are the current balances in the accounts. Am robbing Peter to pay Paul when necessary. Any update on Cru[z]e Wire? ” (Emphasis added.)

Plaintiffs were not told that their investment was needed, in part, to pay off Bridgeport Construction Group, but that is what happened, albeit in a roundabout way. On March 25, 2008, the same day that plaintiffs wired $513,149 to Covenant's bank account, Covenant transferred $331,000 to Hudler's personal bank account and another $7,200 to Bridgeport Construction Group. Also that day, from his personal account, Hudler transferred another $81,000 to Bridgeport Construction Group, and approximately $90,000 to other companies. Those other companies, still on March 25, used the money they received from Hudler to pay Bridgeport Construction Group. All told, Bridgeport Construction Group received $147,100 from Hudler and Markley's companies on the day that plaintiffs invested in Covenant.

Plaintiffs later discovered that, in addition to failing to disclose that their investment in Covenant would be used to pay off Bridgeport Construction Group, Hudler had made a number of inaccurate representations while courting plaintiffs. Those misrepresentations included (1) that a businessman plaintiffs respected, Robert Praegitzer, was an investor with Hudler and Markley, despite the fact that that investment relationship with Praegitzer had already been severed; (2)...