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Hofheins v. Bajio Mountain West LLC

Court of Appeals of Utah

December 29, 2017

Gordon Hofheins and Bryan Hofheins, Appellees,
Bajio Mountain West LLC, MG-Taylorsville LLC, and Logan Hunter, Appellants.

         Third District Court, Salt Lake Department The Honorable Todd M. Shaughnessy No. 120901276

          D. David Lambert, Leslie W. Slaugh, and Richard A. Roberts, Attorneys for Appellants

          David L. Arrington, Peter H. Donaldson, and Matthew J. Orme, Attorneys for Appellees

          Judge Jill M. Pohlman authored this Opinion, in which Judges Gregory K. Orme and Michele M. Christiansen concurred.

          POHLMAN, JUDGE.

         ¶1 Third-party defendants Bajio Mountain West LLC (Bajio), MG-Taylorsville LLC (MGT), and Logan Hunter appeal the trial court's judgment in which they were ordered to indemnify third-party plaintiffs Gordon Hofheins and Bryan Hofheins. We affirm.


         ¶2 In August 2010, Bajio entered into an Asset Purchase Agreement (the APA) with Bryan Hofheins and Mountain Pacific Farms (Mountain).[1] Under the terms of the APA, Bajio bought three restaurants that were owned and operated by Mountain and Bryan Hofheins. Each of the restaurants held a lease on the real property at their respective locations, including a property in Taylorsville, Utah (the Taylorsville Property). Also under the terms of the APA, Bajio assumed the leases for the three restaurants and agreed to "'indemnify and hold Seller harmless' from any liabilities or obligations thereunder, including the lease for the restaurant located at the Taylorsville Property" (the Lease).[2] Logan Hunter signed a guaranty (the Guaranty), in which he personally guaranteed Bajio's obligations under the APA.

         ¶3 In connection with the APA's closing, MGT, a Bajio-related entity, entered into a lease assignment agreement (the Assignment) with Bryan Hofheins and Gordon Hofheins, the named tenants on the Lease. Pursuant to the Assignment, MGT assumed all lease obligations on the Taylorsville Property and agreed to hold the Hofheinses harmless from any and all liability under the Lease. In addition, Bajio, MGT, and Logan Hunter (collectively, the Hunter Parties) repeatedly acknowledged that they were responsible for the rent payments at the Taylorsville Property.

         ¶4 With the exception of two months of common area maintenance payments, Bajio paid the obligations on the Lease from August 2010 through November 2011. After November 2011, Bajio made no rent or common area maintenance payments. About one month later, Bajio ceased operating the restaurant at the Taylorsville Property.

         ¶5 Bajio and related parties sued the Hofheinses and Mountain in the Fourth District Court in October 2011 (the Fourth District Case). Bajio alleged breach of the APA and breach of an associated settlement agreement between Mountain and Bajio (the Settlement Agreement).

         ¶6 Later, in February 2012, Redwood Road Retail LLC (Redwood), [3] the landlord of the Taylorsville Property, filed the present action in the Third District Court against the Hofheinses, the named tenants on the Lease, alleging breach of the Lease due to lack of payment. The Hunter Parties did not make payments to the Hofheinses or otherwise indemnify them for the unpaid rent or for Redwood's claims.

         ¶7 As a result, the Hofheinses subsequently filed a third-party complaint against the Hunter Parties based upon the Hunter Parties' respective obligations under the APA, the Assignment, and the Guaranty. In the third-party complaint, the Hofheinses' theories for breach of contract relied on the Hunter Parties' failure to make payments related to the Taylorsville Property and their failure to indemnify the Hofheinses for their expenses connected to defending against Redwood's first-party claims and for any and all amounts for which they may be held liable for such claims.

         ¶8 When the Hunter Parties answered the third-party complaint, they asserted a number of affirmative defenses. Those affirmative defenses included, among others, that the third-party claims were "barred to the extent that amounts owed to the Hofheins[es], if any, are offset by their liabilities to [the Hunter Parties]" and that, to the extent the Hofheinses have been damaged, "such damages were a result, either in whole or in part, or were contributed to by reason of their own acts, omissions, breach of the APA, negligence, or intentional conduct." The Hunter Parties did not assert any counterclaims against the Hofheinses.

         ¶9 Around the same time, and early on in the litigation, Bajio and Logan Hunter moved the court in the Fourth District Case to consolidate the third-party claims raised in the present action with the Fourth District Case. The court denied that request.

         ¶10 Thereafter, in the present action, the Hunter Parties moved for leave to amend their answer and to file counterclaims for breach of contract, breach of the covenant of good faith and fair dealing, and declaratory judgment.[4] They allowed their motion to languish, however, and did not submit it for decision until over a year later. The trial court ultimately denied the motion as untimely and prejudicial.

         ¶11 At the same time, the trial court granted summary judgment on the narrow issue of whether the Hunter Parties could rely on the "first breach" defense to the Hofheinses' breach of contract claim.[5] The Hunter Parties had asserted that the Hofheinses could not recover on their breach of contract claim because the Hofheinses had breached the agreements first. The Hunter Parties premised this assertion on the Hofheinses' alleged failure to obtain the landlord's consent to transfer the Lease. Under this theory, once the Hofheinses had breached the agreements, the Hunter Parties would have had no obligation to fulfill their side of the bargains. But the trial court ruled that, as a matter of law, "because [the Hunter Parties] elected to sue for damages under the contract rather than rescission of the contract, [the Hunter Parties] may not insulate [themselves] from liability from [their] own breach under the first breach rule." In other words, the court ruled that the Hunter Parties' "decision to retain the benefit of the bargain precludes [their] argument that [their] subsequent breach was excused." The trial court later clarified that while the Hunter Parties "may not rely on the first breach rule as a defense to the Hofheinses' claim for indemnification, " they retained their ability to "invoke [their] other defenses."

         ¶12 The Hunter Parties filed a motion for summary judgment on a purported claim for breach of the implied covenant of good faith and fair dealing. In response, the Hofheinses moved to strike the Hunter Parties' motion, arguing that it was improper because the Hunter Parties had not asserted any claims against the Hofheinses in the present action, including a claim for breach of the implied covenant of good faith and fair dealing. On September 15, 2014, the trial court agreed with the Hofheinses and struck the Hunter Parties' motion for summary judgment. Given that the court had previously denied the Hunter Parties' request to file a counterclaim, the court reasoned that the Hunter Parties had no cognizable causes of action. The court also stated that "the granting of the Hofheinses' Motion to Strike is not a ruling on the merits of any claims or defenses in this case."

         ¶13 Notwithstanding this decision, the Hunter Parties filed a second motion for summary judgment, again seeking a determination that the Hofheinses had breached the covenant of good faith and fair dealing. Again, the Hofheinses responded by moving to strike the motion. The trial court struck the Hunter Parties' second motion. The court explained that the Hunter Parties' "latest motion for summary judgment [was] akin to a motion for reconsideration of the Court's prior order granting the Hofheinses' motion to strike, " and the court "decline[d] to revisit its prior ruling."

         ¶14 Redwood's first-party claims against the Hofheinses were eventually resolved in favor of Redwood. All parties to this case stipulated to a damage amount of $295, 000 on Redwood's claims, exclusive of attorney fees and costs. The trial court then awarded Redwood a total of $132, 284.38 in attorney fees and costs, resulting in a total judgment of $427, 284.38 (the Redwood Judgment).

         ¶15 The Hofheinses prepared for trial on their third-party claims by filing several motions in limine. One of those motions sought to exclude any evidence of a purported offset to the obligations that the Hunter Parties allegedly owed to the Hofheinses. Another such motion sought exclusion of "any evidence or argument [the Hunter Parties] may seek to introduce regarding relief in the form of excused performance on the basis of prior material breach by the Hofheinses."

         ¶16 During the final pretrial conference, the trial court asked the Hunter Parties to explain the defense they intended to rely on at trial. The Hunter Parties responded that their defense would be that "there was a breach of the agreement by a breach of the covenant of good faith and fair dealing" and that, by proving breach, they would "reduce their obligation or eliminate their obligation" to indemnify the Hofheinses. The court then inquired whether their reliance on the alleged breach was not for the purpose of excusing performance but rather was the basis for an offset, to which the Hunter Parties responded, "Yes . . . it's all about offset." The court later tried to clarify, asking the Hunter Parties, "So the evidence that you seek to admit about a prior material breach is . . . the factual predicate to the amounts that you claim are an offset against the ...

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