# LRY, LLC v. Lake County

> District Court, D. Oregon · October 27, 2021

URL: https://www.frixlaw.com/law-library/cases/10394000

## Case

- **Court:** District Court, D. Oregon
- **Decided:** October 27, 2021
- **Opinion:** 100trialcourt
- **Cited by:** 0 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/10394000

## How later opinions describe it (automated extraction)

- stating that “[t]he law should not allow every breach of contract, even those accidental, inadvertent, or caused by honest mistake to deliver plaintiff a successful additional claim for the breach of the duty of good faith.”

## Opinion text

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF OREGON

MEDFORD DIVISION

LRY, LLC; FR, LLC, Civ. No. 1:17-cv-00675-MC

Plaintiffs, OPINION & ORDER
v.

LAKE COUNTY; BRUCE
ADDINGTON; CORNERSTONE
INDUSTRIAL MINERALS
CORPORATION U.S.A.;
JUDITH HEFFNER, as personal
representative for the ESTATE OF
JOHN D. HEFFNER; CLARK
HILL PLC,

Defendants,

And

BRUCE ADDINGTON;
CORNERSTONE INDUSTRIAL
MINERALS CORPORATION
U.S.A.,

Third-Party Plaintiffs,

v.

JUDITH HEFFNER, as personal
representative for the ESTATE OF
JOHN D. HEFFNER,

Third-Party Defendant.

_______________________________________

McSHANE, District Judge.
This matter comes before the Court on Motions for Partial Summary Judgment filed by
Plaintiffs LRY, LLC and FR, LLC against Defendant Lake County (the “County”), ECF No.
222, and against Defendants Judith Heffner as personal representative for the Estate of John D.
Heffner (the “Estate,”) and Clark Hill PLC (collectively, the “Clark Hill Defendants,”), ECF No.
232; on a Motion for Partial Summary Judgment filed by the County against Plaintiffs, ECF No.

239; on a Motion for Summary Judgment filed by the Clark Hill Defendants against Plaintiffs,
ECF No. 329; and on a Motion for Partial Summary Judgment filed by Defendants and Third-
Party Plaintiffs Cornerstone Industrial Minerals Corporation, U.S.A. (“Cornerstone,”) and
Bruce Addington against the Estate, ECF No. 187.
BACKGROUND
Plaintiff LRY, LLC is an Oregon limited liability company with its principal place of
business in Lakeview, Oregon. Fifth Amended Complaint (“FAC”) ¶ 1. ECF No. 140. Plaintiff
FR, LLC is a Washington limited liability company. Id. at ¶ 2. Paul Didelius is the president of
LRY and FR. Didelius Decl. ¶ 1. ECF No. 224.

Defendant Lake County is an Oregon county with its county seat at Lakeview, Oregon.
FAC ¶ 3.
Defendant Cornerstone is an Oregon corporation with its principal place of business in
Lakeview, Oregon. FAC ¶ 5. Cornerstone mines, processes, and markets perlite. Addington Decl.
¶ 2. ECF No. 188. Defendant Bruce Addington is the president of Cornerstone and a resident of
Florida. Addington Decl. ¶ 1; FAC ¶¶ 4, 6.
Defendant John D. Heffner was a resident of Virginia and an attorney licensed to practice
law in Washington, D.C. Heffner Decl. ¶ 2. ECF No. 143. Prior to 2011, Heffner maintained his
own law office in Washington D.C., the office of John D. Heffner, PLLC. Heffner Decl. ¶ 3;
Savage Decl. ¶ 3, ECF No. 153.
In October 2011, Heffner joined the Texas-based firm of Stasburger & Price LLP. Terry
Decl. Ex. 2, at 1. ECF No. 234. In 2018, Strasburger & Price merged with Defendant Clark Hill
PLC. Heffner Decl. ¶ 3. Heffner continued to work as senior counsel for Clark Hill in the firm’s

D.C. office after the merger. Id. ¶ 1. Heffner passed away in July 2019 and, in November 2019,
his widow Judith Heffner was appointed as the administrator for his Estate. Knight Decl. Ex. 1.
ECF No. 221. On April 2, 2020, the Court granted a motion to substitute Judith Heffner as personal
representative of the Estate. ECF No. 257.
I. The Lakeview Branch
Lake County owns a 55-mile stretch of railroad known as the Lakeview Branch, which the
County purchased in 1985. FAC ¶¶ 14, 17; Didelius Decl. ¶ 2. In 2009, the prior operator of the
Lakeview Branch became defunct and the County began a search for a new third-party operator
for the line. Didelius Decl. ¶ 2.

Following talks with the County, Paul Didelius formed LRY to operate the Lakeview
Branch and LRY commenced operations in May 2009 under Lake County’s operating certificate.
Didelius Decl. ¶ 2. At the time LRY took over the line, the Lakeview Branch had only two regular
shipping customers—the Collins Company (“Collins”) and Cornerstone. Id. at ¶ 4. “Shipments
had historically been neither timely nor frequent, due to poor track condition and limited demand.”
Id. In addition to the Lakeview Branch, LRY also leased 60 miles of track in northern California
from the Union Pacific Railroad Company (“UP”), which allowed LRY to operate between
Lakeview, Oregon and Perez, California. FAC ¶¶ 13-15.
II. LRY Retains Heffner to Negotiate the Lease
In 2009, LRY retained Heffner “to assist in drafting, negotiating, and approving a lease
with Lake County for the rail operation of the Lakeview Branch.” Second Didelius Decl. ¶ 2, ECF
No. 233. Heffner also represented LRY before the Surface Transportation Board (“STB”) and
assisted in securing an interim operating and agency agreement with Lake County. Id.

During this representation, Heffner was assisted by attorney James Savage. Second Savage
Decl. ¶ 4, ECF No. 338. Savage was “of counsel” to John D. Heffner, PLLC from August 2007
to October 2011. Savage Decl. ¶ 3. Savage affirms that Heffner “supervised my work with Paul
Didelius concerning the LRY proceedings,” and “regularly advised and instructed me regarding
the LRY matter.” Second Savage Decl. ¶ 4. In his deposition, Savage testified that all John D.
Heffner PLLC’s clients “were Heffner’s clients,” including LRY. Third Rossmiller Decl. Ex. 3,
at 8. ECF No. 336. All invoices for work done on the LRY file were paid to Heffner. Id. at 15.
In a sworn statement before the STB, Heffner stated that his work for LRY “never gave
me access to any confidential client documents.” Olson Decl. Ex. 12, at 2. ECF No. 282.

However, Savage affirms that both he and Heffner had privileged and confidential attorney-client
communications with LRY and Paul Didelius, which affected the course of their lease negotiations
with the County. Second Savage Decl. ¶ 2. Heffner was provided with copies of all
communications between Savage and Didelius concerning LRY, which Heffner maintained in a
paper file. Id. at ¶¶ 3-4. Communications between Heffner, Didelius, and Savage reveal that
Heffner played an active role in the negotiations. Third Rossmiller Decl. Ex. 1.
The County was aware of Heffner’s involvement, as evidenced by communication between
Savage, Heffner, and Lake County Attorney James Bailey during the lease negotiations. Third
Rossmiller Decl. Ex. 2.
III. The Lease
LRY and Lake County signed the Lease & Operating Agreement (the “Lease”) on
November 3, 2010. Didelius Decl. ¶ 3. Under the Lease, LRY was “fully responsible for high
quality personalized service in the operation of said rail lines,” and “in addition shall assume all
liability for the operation of said property, and LRY will be further responsible for all routine

maintenance . . . and for the general upkeep of the railroad property.” Didelius Decl. Ex. 1, at 1.
In turn, Paragraph 5.07 of the Lease provided that the County would be responsible for “the cost
of all capital replacements, repairs, or reconstruction” necessitated by “non-routine maintenance
of the structural integrity of the bridges and other infrastructure of the leased premises.” Id. at 4.
Under Paragraph 5.08, the County was also responsible for the cost of compliance with bridge
safety standards and for any replacements or repairs required. Id.
Section 24 of the Lease describes the circumstances of default, either by LRY or by the
County. Didelius Decl. Ex. 1, at 15-16. LRY would be in default in the event of failure to pay
rent, by filing for bankruptcy, or by failure “in the performance of any terms, conditions, or

covenants contained herein, which default results in the disruption of railroad services, as provided
for in this agreement.” Id. at 16. The County would be in default if it failed “in the performance
of any terms, conditions, or covenants contained herein, which default results in the impairment
of LRY’s ability to provide railroad services.” Id. Upon the occurrence of a breach by either
party, the injured party was to notify the breaching party in writing, specifying the breach and
“what corrective action is desired to cure the breach,” and the breaching party would have thirty
days in which to cure. Id.
Section 13 of the Lease governs termination and is divided into five Paragraphs. Didelius
Decl. Ex. 1, at 8-9. Paragraph 13.01 describes the circumstances in which for-cause termination
is permitted and provides that either party may terminate the Lease (1) in the event of unacceptable
substantive conditions imposed in the regulatory approvals or exemptions; (2) upon the occurrence
of a default, as defined in Section 24 of the Lease; (3) upon thirty days’ written notice in the event
of force majeure, lawful embargo, condemnation, or the taking of sufficient portions of the leased
premises by eminent domain so as to prevent continuation of services; or (4) upon thirty days’

notice to the County following LRY’s obtaining all necessary regulatory approvals or exemptions
needed to permit LRY to abandon or discontinue rail operations. Id. Paragraph 13.02 concerns
the abatement of rent in the event of termination, while Paragraphs 13.03 and 13.04 concern
transfer of operations on the Lakeview Branch in the event of termination. Id. at 9. The final
Paragraph, 13.05, provides:
In the event the County terminates this lease agreement without reasonable cause,
including through condemnation of all or a sufficient portion of the leased premises
to prevent service to one or more LRY customers, then, in that event, the County
shall pay termination costs of twenty five thousand dollars ($25,000) to LRY as
liquidated damages.
Didelius Decl. Ex. 1, at 9.
Section 27 of the Lease provided that all notices required by the Agreement should be
addressed to the parties, with a copy to counsel. Didelius Decl. Ex. 1, at 17. James Bailey is
listed as counsel for Lake County, while notices for LRY were to be sent to James Savage of
John D. Heffner, PLLC in Washington, D.C. Id.
For the County, the Lease was signed by the members of the Lake County Board of
Commissioners, including Brad Winters, and approved as to form by Bailey. Didelius Decl. Ex.
1, at 19. For LRY, the Lease was signed by Paul Didelius and approved as to form by Savage,
who is again listed as working for John D. Heffner, PLLC. Id. Heffner also approved the Lease
as part of his representation of LRY. Third Rossmiller Decl. Ex. 3, at 18.
The Lease was originally set to expire on December 31, 2014, with an option to renew.
Didelius Decl. Ex. 1, at 2. On November 3, 2010, LRY and the County amended the Lease to
extend the term of the Lease through December 31, 2035, in order to qualify for grants from the
State of Oregon. Id. at 20.
IV. LRY as Operator of the Lakeview Branch

During its time as operator of the Lakeview Branch, LRY made considerable investments
to improve the line, supported by loans from FR. Didelius Decl. ¶ 5. LRY and Lake County also
sought and received grant funding from the State of Oregon through the ConnectOregon program.
Id. at ¶ 6. “Because a 20-year commitment to the ConnectOregon grant was required, the Lease
was extended by another 21 years past its initial expiration date, to December 1, 2035, as reflected
in the amendment executed on January 30, 2013.” Id. at ¶ 7.
Following the extension of the Lease term, LRY secured the rights to handle shipping for
a new client, Red Rock Biofuels. Didelius Decl. ¶ 9. This contract was expected to be highly
profitable for LRY. Id.

Cornerstone and Addington were dissatisfied with LRY’s performance as the operator of
the Lakeview Branch and with the rates charged by LRY. Third Rossmiller Decl. Ex. 36, at 9.
LRY’s other shipping client, Collins, was similarly dissatisfied. Broadfoot Decl. ¶ 3, ECF No.
248. LRY’s shipping clients complained to the County and to one another about the poor quality
of service they received from LRY. Fourth Winters Decl., at 3, ECF No. 290; Second Knight
Decl., Ex. 1, ECF No. 265; Second Winters Decl. ¶ 12, ECF No. 249. The County was likewise
dissatisfied with LRY’s performance as operator of the Lakeview Branch. See, e.g., Third Franz
Decl. Ex. 209, at 13. ECF No. 291. Officials at the Oregon Department of Transport also
expressed concern about LRY’s operation of the Lakeview Branch, particularly regarding training
and record-keeping. Third Franz Decl. Ex. 208, at 35. In addition to service issues, LRY also
experienced derailments on the line. Third Franz Decl. Ex. 213; Ex. 214.
LRY, for its part, attributed the problems of the railway to the condition of the track and
bridges, which were the County’s responsibility under the Lease. Terry Supp. Decl. Ex. 2, at 1.
ECF No. 341. Regulators demanded significant investment in the Lakeview Branch and threatened

LRY with substantial fines unless large capital investments were made in the line. Third Franz
Decl. Ex. 208, at 55.
On more than one occasion, LRY sought to purchase the Lakeview Branch from the
County. LRY maintained that, as a tenant, it could not “put in their money for capital improvement
unless they are the owners of the railway.” Supp. Terry Decl. Ex. 2, at 1. LRY did not intend to
make large investments in improving the Lakeview Branch without first purchasing the line. Third
Franz Decl. Ex. 208, at 39. Nevertheless, LRY invested hundreds of thousands of dollars “to
improve and stabilize Lake County’s land infrastructure.” Didelius Decl. ¶ 5.
In May 2016, LRY presented Lake County with a proposal that LRY purchase the

Lakeview Branch for $50,000 in cash and $500,000 in infrastructure investment over four years
and LRY solicited its shipping clients for their support. Third Franz Decl. Ex. 208, at 47-49.
LRY’s shipping clients were not supportive of the proposal and communicated their opposition to
the County. Id. at 54.
V. The Events of 2016-2017 and the Termination of the Lease
In October 2016, Addington hired Heffner to represent Cornerstone to advise “on the
feasibility and process for terminating the lease between LRY and Lake County.” Addington Decl.
¶¶ 3-4; Terry Decl. Ex. 2, at 2. Addington “also understood that [Heffner] represented me in my
individual capacity.” Addington Decl. ¶ 3.
On October 14, 2016, Heffner sent an engagement letter to Addington confirming that
Heffner would represent Cornerstone “covering the provision of legal services in a matter
involving railroad service provided by Lake Railway (‘LRY’),” and that “[m]ore specifically, you
have expressed an interest in purchasing the railroad either through a voluntary transaction with
its existing owner or forcing the sale of the company and/or the underlying rail line (owned by

Lake County) though the regulatory process and installing a better operator.” Second Rossmiller
Decl. Ex. 1, at 2-3. ECF No. 281. Heffner did not obtain written consent from Addington or
Cornerstone concerning Heffner’s prior representation of LRY in connection with the negotiation
and drafting of the Lease. Addington Decl. ¶ 5.
In Heffner’s October 14, 2016 engagement letter, which was sent under Strasburger &
Price letterhead, Heffner reported “[w]e have checked our conflict of interest records and have
found no indication of any current or prior representation that would be a conflict.” Second
Rossmiller Decl. Ex. 1, at 3. In an email sent to Addington on the same day, Heffner wrote:
Please accept my apologies for taking a little more time to undertake the new client
intake process. As I had represented Frontier, Lake Railway’s owner, before
joining Strasburger more than 5 years ago, I wanted to make sure there would be
no conflict in undertaking your representation. I have confirmed by checking with
Lake County’s attorney that there is not conflict. I should note that the County’s
attorney, Jim Bailey, is very concerned about what Lake Railway is trying to do. I
have recommended that Lake County work with RL Banks.
Second Rossmiller Decl. Ex. 1, at 9-10.
Heffner subsequently affirmed in a Verified Statement that he had “contacted our firm’s
ethics partner and we concluded that there was no conflict due to the substantial passage of time,
as well as Lake Railway not being a current client, and the fact that this work did not entail the
railroad’s STB authority or the lease, i.e.—the matters were not substantially related.” Terry Decl.
Ex. 2, at 2.
Neither Heffner, nor Strasburger & Price/Clark Hill ever contacted Didelius to inquire
about the scope of the work Heffner had done for LRY. Third Didelius Decl. ¶ 6. ECF No. 337.
Heffner did not seek or receive written consent from LRY for his subsequent representation of
Cornerstone. Id. Nor did Winters or Bailey ever disclose to Didelius that they were working with
Heffner to remove LRY as the operator of the Lakeview Branch. Id. at ¶ 7.

On October 13, 2016, Heffner emailed Addington that “it is the County that needs to take
the lead here” because it “is the only party that has access to the rail line for the purpose of
inspection as well as access to the railroad’s records.” Second Rossmiller Decl. Ex. 1, at 1.
Heffner suggested that Cornerstone and Collins might pay for the inspection on the County’s
behalf and advised Addington that the County would need to pursue inspection “in order to be
successful,” and that his “strongest recommendation would be that the County retain RL Banks to
do any physical inspection and review of the railroad’s records.” Id.
Also on October 13, 2016, Tom Messer of RL Banks forwarded the Lease to Heffner with
the note “for your review.” Second Rossmiller Decl. Ex. 1, at 11. In an email to Messer, Heffner

acknowledged that John D. Heffner PLLC had approved the Lease as to form but said that Savage
had been the one to sign the document. Second Rossmiller Decl. Ex. 3. Heffner then forwarded
the Lease to Addington on October 24, 2016. Second Rossmiller Decl. Ex. 1, at 11.
On October 21, 2016, Heffner emailed Messer and Bailey with his analysis of the terms of
the Lease and a recommendation that the County and LRY’s shipping clients should pressure
Union Pacific concerning its contract with LRY:
I reviewed the agreement and see numerous default grounds. Sec. 5 contains some
provisions including maintenance requirements and reporting and sec. 6 contains
additional reporting requirements for which noncompliance would appear to be a
default ground. But I read sec. 26 as stating that failure to perform any conditions,
covenants, etc., will result in a default if the default results in a disruption of service
and continues for 30 days after notice is given. Arguably failure to maintain
resulting in a service suspension could be considered a default justifying a notice
of termination; however LRY could argue that the County is not entitled to give
notice of termination until it first provides notice of default and the default goes
uncured for 30 days . . . Regarding the termination w/o reasonable cause, I read this
as saying that the County would owe the railroad $25,000 but it would not preclude
the railroad from suing the county for breach of contract.
Second Rossmiller Decl. Ex. 1, at 13-14.
On October 24, 2016, Heffner emailed Addington to report that Heffner had spoken with
Bailey and “understood him to say that the County has had enough of Lake Railway and is on the
verge of sending out a letter (probably later this week) saying that they want to change operators,”
and
He says that they are amendable to hiring RL Banks with you and/or Collins bearing
all or most of the costs. Among other things, the work would include a current
track inspection which the County has the right to do but you don’t. I reviewed
with Jim my assessment as to the grounds that the County has under the agreement
for finding default as a basis for termination. I suggested that some of those grounds
give Lake Railway an opportunity to cure. The best approach may be to pay them
$25,000 or more to leave . . . I reviewed with Jim various regulatory legal scenarios
for Lake Railway’s departure from the line. Finally, I noted that any successful
replacement of Lake Railway also requires that the new operator become the new
lessee on the UP line from Alturas to Perez otherwise Lake Railway would have a
stranglehold on the County’s rail line. The County has more clout than you or
Collins to persuade UP to change lessees.
Second Rossmiller Decl. Ex. 1, at 15.
The next day, October 25, 2016, Heffner emailed Addington again to advise him that “I
am not going to communicate in writing with Tom Messer or others at RL Banks until they are
engaged and at that I want to make sure that nothing I say can be the subject of any discovery.
Communications between us and any consultants you hire is privileged and not discoverable.”
Second Rossmiller Decl. Ex. 1, at 16. Heffner reported that the County was preparing to send
LRY a letter “stating a desire to terminate their operating agreement,” and that “[t]he next thing
I’ve told the County they must do is arrange for an inspection of the line to compare its condition
today with that in 2009. That could be a basis for default.” Id. Heffner then advised Addington
on the steps to take to prepare his own carrier to take over operations on the Lakeview Branch. Id.
“Once we have the County on board, the County should exert some political muscle and go to the
UP about terminating the lease with Lake Railway and executing a new lease with your railroad.”
Id.

On October 31, 2016, Heffner emailed Addington to report that Bailey had confirmed that
“the County is moving on engaging RL Banks.” Second Rossmiller Decl. Ex. 1, at 23. On
November 2, 2016, Bailey emailed Heffner to inform him that the County had approved the
contract with RL Banks and that Bailey would be “sending a letter to Paul Didelius expressing
concern over operations and observing that Lake Rwy may be in breach of the Operating
Agreement.” Id. at 24. Heffner replied with an offer to assist with the County’s letter, to which
Bailey responded: “Not this one, maybe the next one in which we actually do assert that they’ve
breached the agreement. We want to get their response to a less threatening letter first.” Id.
On November 4, 2016, Heffner emailed Addington with additional advice about setting up

a new railway operator to replace LRY and to update Addington on the progress of the plan to
remove LRY:
Where things stand right now is that I am going to have lunch with Charlie Banks
Monday. I have asked Jim Bailey (Lake County) to hold off sending his letter to
Lake Railway so that Charlie and I can review it. Jim has agreed. You ought to
see it as well. I want to make sure everything is iron clad and we don’t want any
“wiggle room.” I expect that we shall have some things to talk about early next
week.
Second Rossmiller Decl. Ex. 1, at 25.
On November 7, 2016, Bailey sent a letter to LRY on behalf of the County informing LRY
that the County was concerned about LRY’s performance as the operator of the line and “it appears
that Lake Railway has either breached or come very close to breaching the Lease and Operating
Agreement.” Second Franz Decl. Ex. 206, at 1. ECF No. 245. The letter listed some specific
concerns and stated that “even if Lake Railway conducts its operations in a manner that technically
avoid a breach of the Agreement, Section 13.05 allows Lake County to terminate the agreement
‘without reasonable cause,’” but assured LRY “[a]gain, to be clear, Lake County is not at this point
declaring a breach or termination of the Agreement, but Lake County is notifying Lake Railway

of its concerns regarding the level of quality of operations.” Id. at 1-2.
On November 10, 2016, Heffner provided Addington with the promised update following
Heffner’s call with the County. In that email, Heffner informed Addington that the County would
be requiring LRY to allow RL Banks to review financial records from LRY, including the contract
with Red Rock, and that the County was “favorable to you taking over the line.” Second
Rossmiller Decl. Ex. 1, at 26-27. Heffner also reported “I need to confirm that ‘three-way
communications’ between or among us, the County, and Charlie Banks are not discoverable in any
litigation brought by LRY.” Id. at 26.
Ultimately, Addington and Cornerstone paid $20,000 for the RL Banks inspection and

Addington wrote in a November 2016 email that the inspection was “integral to the county in
confirming that the line is not in better shape today than the day LRY took it over and thus grounds
for replacing them along with their lousy service.” Third Rossmiller Decl. Ex. 14, at 1.
On January 10, 2017, Bailey emailed Heffner and Messer to confirm their mutual plan for
RL Banks to perform an inspection of the line and to get a copy of LRY’s contract with Red Rock.
Second Rossmiller Decl. Ex. 5, at 12-13. Among the steps contemplated was that the County
would put LRY on notice of the County’s desire to terminate the Lease, and “if Lake Rwy refuses,
then the County exercises Section 13.05 (termination without cause) and tenders $25,000 in
liquidated damages.” Id. at 13. The County would then seek a new operator for the Lakeview
Branch and Addington “might step in to fulfill this need.” Id. On January 13, 2017, Heffner
responded with revisions to the list, including the formal engagement of RL Banks to prepare a
report on the condition of the line. Id. at 10. Heffner also suggested that Addington would refrain
from communicating with LRY “except on routine service matters.” Id.
In a January 18, 2017 email, Heffner told Addington that “[l]itigation costs money and I

think you have more than LRY.” Third Rossmiller Decl. Ex. 18, at 1. Addington replied urging
him to “prod/support Lake county in getting rid of the Didalius [sic] brothers,” and that “[a]n
optimum time for them to be gone and the new operator (Goose Lake Line) to be set up and
operating is late July.” Id.
On January 19, 2017, LRY General Manager Rob Didelius emailed Addington, Collins,
and the County that LRY has tried to “run cheap” since 2009 but was “no longer willing to take
the risks associated with the bare bones style of operating demanded by our landlord.” Third
Rossmiller Decl. Ex. 20, at 2. LRY would “accelerate our replacement of dilapidated 100-year
old small rail and worn-out 50 year old ties,” but asserted that “Lake County has failed to fund the

bridge maintenance and track capital expenditures for which they are contractually responsible.”
Id. Rob Didelius informed them that LRY would be increasing its rates “to rebuild the railroad at
a pace that satisfies regulators and provides for safe and consistent operation by our crews.” Id.
On January 30, 2017, Heffner responded to a request from Bailey and offered his
interpretation of the Lease:
Jim [Bailey] per your request I looked at sec. 508. Literally speaking it does
obligate the County for the cost of compliance with FRA bridge maintenance
standards and any rehabilitation, reconstruction, replacements or repairs that might
be required. But the lease contains an ambiguity. Sec. 5.03 requires LRY to
maintain the lease premises (and premises includes bridges) to the condition that
they were in on the commencement date. But sec 5.07 requires the County to be
responsible for the cost of all capital replacements, repairs, or reconstruction
necessitated by non-routine maintenance of the structural integrity of the bridges
and other infrastructure of the leased premises.
Bruce [Addington] is confronted by the problem that LRY is threatening not to
deliver his cargo because of bridge damage. He needs to come up with a practical
solution. One remedy which he has suggested is Cornerstone advancing money to
the county so it can hire a contractor to undertake necessary repairs. Another
solution might be to have the surcharge that LRY wants to impose paid into a trust
account to fund necessary maintenance. But the RLBA inspection cannot begin
soon enough. We need to get them on the line while LRY perceives a need to be
somewhat cooperative. I believe that window is very short.
Third Rossmiller Decl. Ex. 21.
In early February 2017, Heffner and Bailey exchanged further emails concerning the proper
interpretation of the Lease and specifically which party bore responsibility for repair of the
Lakeview Branch. Second Rossmiller Decl. Ex. 5, at 7. Ultimately, Bailey concluded that the
County, rather than LRY, bore the duty of inspecting and repairing the line. Id.
On February 14, 2017, Heffner wrote to Bailey to discuss the results of the unreleased RL
Banks report on the inspection of the Lakeview Branch:
Jim, Tom Messer just called me to say that his inspector just finished a high rail
trip over the line. His report should be ready next week. Tom gave me a “heads
up.” Sounds like a gross case of mismanagement and incompetent maintenance by
the railroad and maybe the County as well. Rather than characterize things any
more than I can, I’d recommend that you read the report when it comes out. It also
appears that no report of the railroad’s condition was undertaken when Lake
Railway took over in 2009.
Second Rossmiller Decl. Ex. 5, at 6.
On February 21, 2017, Heffner also wrote to Addington to discuss the results of the RL
Banks inspection:
Bruce, I want to schedule a call sometime this week with RL Banks, the County,
and you . . . RLBA is through with its inspection and I suspect that there are some
lapses on the county end of things. So we need a “where do we go from here”
discussion.
Second Rossmiller Decl. Ex. 1, at 30.
On March 21, 2017, RL Banks submitted its inspection report on the condition of the
Lakeview Branch. Third Rossmiller Decl. Ex. 31. The report concluded that the Lakeview Branch
was in severely degraded condition and “a significant capital expenditure of nearly $30 million
would be required to decrease travel time over the 54.45 miles from five hours and twenty-four
minutes to two hours and nine minutes.” Id. at 12.

During a mediation between LRY and the County in late March 2017, LRY made another
offer to purchase the Lakeview Branch, which County Commissioner Winters interpreted as an
ultimatum. Fourth Winters Decl., at 5. On March 27, 2017, Bailey emailed Heffner with a detailed
summary of the mediation. Second Rossmiller Decl. Ex. 5, at 3. Then, on March 28, 2017, Heffner
emailed Addington, Banks, Messer, and Bailey with a summary of the County’s mediation with
LRY. Id. at 1-2. Heffner recommended that the County not sell the Lakeview Branch to LRY “as
they simply cannot be trusted,” and that the County should have other operators bid on the line.
Id. at 2. Messer responded to the same group of recipients that he agreed with Heffner’s
recommendations and added that he believed that if Heffner and RL Banks “had adequate input

into the drafting of a new agreement by Jim [Bailey], we can draft language that would protect the
interests of the County, shippers and operators provided the County stayed on top of its investment
and responsibilities.” Id. at 1.
On April 5, 2017, the Lake County Board of Commissioners voted to reject LRY’s offer
to purchase the Lakeview Branch. Third Franz Decl. Ex. 208, at 15. On April 6, 2017, Bailey
informed Heffner that the County had rejected LRY’s offer and that “[w]e will be moving forward
to research options regarding finding another operator,” but that “[n]o formal decision has been
made regarding termination of the current contract because certain issues still need to be addressed
(such as talking to UP and determining if another short line operator is interested).” Id. at 10.
On the same day, April 6, 2017, Heffner emailed Bailey, Messer, Banks, and Addington,
that “our next steps would be to issue a notice of termination (Jim, is a notice of default required
first?) and ask if [LRY] will leave voluntarily.” Second Rossmiller Decl. Ex. 9, at 1-2. Bailey
responded: “We don’t actually have a basis for default under the lease—all of the default
provisions refer to providing service and we must give the RR 30 days to correct the problem. We

are going to terminate under the ‘terminate and pay $25,000.’” Second Rossmiller Decl. Ex. 10.
On April 7, 2017, Heffner emailed Addington, Bailey, and Messer to tell them that “the
County will soon notify Lake Railway (LRY) that its agreement to lease and operate the line is
terminated at a future date to be identified with LRY to cooperate in an orderly transition to a new
operator,” and discussed steps to be taken in the event Addington established his own railroad
company. Third Franz Decl. Ex. 208, at 6-7. Bailey replied to clarify that “the Board will meet
next week to discuss the question of termination of the lease” and that “[n]o decision has been
reached at this point.” Id. at 6.
On April 12, 2017, Bailey emailed Heffner to inform him that “[e]ffective April 30, the

lease will terminate. Lake County will contact UP to discuss the situation with them.” Second
Rossmiller Decl. Ex. 1, at 31. Bailey also asked Heffner to “[p]lease advise as to Bruce
Addington’s ability to function as nominal operator as well as anything you feel Lake County
should do at this point.” Id. Heffner forwarded the email to Addington, with the addition “Looks
like you just got your chance.” Id.
On April 12, 2017, the Lake County Board of Commissioners met in special session during
which Commissioner Winters “moved to terminate lease with Lake Railway referring to Section
13.05 effective April 30, 2017.” Third Franz Decl. Ex. 208, at 4. The motion carried unanimously.
Id. On the same day, Bailey notified LRY of the County’s decision in a letter, which read:
The Lake County Board of Commissioners has directed me to inform you that the
County is exercising its right to terminate the lease with Lake Railway under
Section 13.05 of the Lake Railway Lease Agreement. Termination of the Lease
will be effective as of April 30, 2017 at which time Lake County will forward
$25,000 to Lake Railway as called for under Section 13.05.
Didelius Decl. Ex. 5.
Winters maintains that he does not recall dealing directly with Heffner until after the
effective date of the termination and that the decision to terminate LRY as the operator of the
Lakeview Branch was not related to Heffner. Fourth Winters Decl., at 6. Winters attributes the
decision to terminate the Lease to LRY’s “ultimatum” concerning the sale of the Lakeview Branch.
Id. at 7.
After the Lease was terminated, Addington expressed reservations about taking over as the
operator of the Lakeview Branch. On April 20, 2017, Bailey emailed Heffner that “[y]our last
email make it sound as though, despite expressing a willingness to be the nominal owner/operator
of the line, Bruce’s level of interest has greatly diminished now that the County has terminated
the lease. This is puzzling to say the least.” Rossmiller Decl. Ex. 8, ECF No. 269. Bailey
informed Heffner that “the County has proposed to Lake Rwy that it meet with the shippers and
work out an agreement for continued operation” and that “[i]f an agreement can be reached
between Lake Rwy and the shippers, the County will consider rescinding the termination.” Id.
On April 28, 2017, LRY commenced this action and filed a motion for a temporary
restraining order (“TRO”) enjoining the County from terminating the Lease. ECF Nos. 1, 2. On
May 1, 2017, the Court granted the TRO and set a hearing for a preliminary injunction for May
12, 2017. ECF No. 8. Following the May 12, 2017 hearing, the Court denied the preliminary
injunction and dissolved the TRO. ECF Nos. 17, 18.
At some point after LRY was terminated as the operator of the Lakeview Branch, the
County retained Heffner to represent the County “in its efforts to remove Lake Railway as operator
of the County-owned rail line between Lakeview, OR and Alturas, CA.” Olson Decl. Ex. 3, at 1.
On May 23, 2017, Heffner sent a letter to Addington memorializing their understanding
concerning Heffner’s subsequent representation of the County. Id. In that letter Heffner explained

that his work for the County “essentially replaces some of the work that I was previously doing
for the County at Cornerstone’s expense,” and would include “supporting Jim Bailey’s civil
litigation efforts in Oregon,” but that Heffner would “continue to be available to represent
Cornerstone in any railroad service issues that it has with Lake Railway.” Id. Heffner also
informed Addington that he had “written Brad Winters a similar letter.” Id. at 2.
On June 7, 2017, Heffner emailed Addington to recommend one of Heffner’s former
associates to assist Addington in negotiating a lease with the County to take over operations on the
Lakeview Branch. Second Rossmiller Decl. Ex. 1, at 43. Heffner told Addington that Bailey
would be working for the County on the new lease and that, once the new lease was in place,

Heffner would represent both Addington and the County before the STB. Id.
On June 14, 2017, Bailey emailed Heffner on behalf of the County: “Whatever you can do
to light a fire under Bruce [Addington] and the attorney working on the lease proposal would be
greatly appreciated. The county is hemmoraging [sic] money and extremely motivated to move
forward.” Second Rossmiller Decl. Ex. 1, at 44. Heffner forwarded the email to Addington. Id.
On August 31, 2017, the County entered into a new lease with Goose Lake Railway, LLC,
under which Goose Lake would serve as the operator of the Lakeview Branch. Rossmiller Decl.
Ex. 3. ECF No. 225. Addington is the president of Goose Lake. FAC ¶ 71. LRY ceased
operations on the Lakeview Branch in September 2017. Didelius Decl. ¶ 14.
LEGAL STANDARD
Summary judgment is appropriate if the pleadings, depositions, answers to interrogatories,
affidavits, and admissions on file, if any, show “that there is no genuine dispute as to any material
fact and the [moving party] is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a).
Substantive law on an issue determines the materiality of a fact. T.W. Elec. Serv., Inc. v. Pac. Elec.

Contractors Ass’n, 809 F.2d 626, 630 (9th Cir. 1987). Whether the evidence is such that a
reasonable jury could return a verdict for the nonmoving party determines the authenticity of the
dispute. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).
The moving party has the burden of establishing the absence of a genuine issue of material
fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). If the moving party shows the absence of
a genuine issue of material fact, the nonmoving party must go beyond the pleadings and identify
facts which show a genuine issue for trial. Id. at 324.
Special rules of construction apply when evaluating a summary judgment motion: (1) all
reasonable doubts as to the existence of genuine issues of material fact should be resolved against

the moving party; and (2) all inferences to be drawn from the underlying facts must be viewed in
the light most favorable to the nonmoving party. T.W. Elec., 809 F.2d at 630-31.
DISCUSSION
The Court concludes that the pending motions are most efficiently addressed as cross-
motions between Plaintiffs and Lake County and between Plaintiffs and the Clark Hill Defendants,
with Cornerstone and Addington’s Motion for Partial Summary Judgment against the Estate
addressed separately.
I. Cross-Motions for Summary Judgment between Lake County and Plaintiffs
As relevant to the present motions, Plaintiffs bring claims for breach of contract against
Lake County, as well as claims for violation of Plaintiffs’ substantive and procedural due process
rights pursuant to 42 U.S.C. § 1983. Plaintiffs also seek declaratory judgment concerning the
proper interpretation of Paragraph 13.05 of the Lease.

A. Declaratory Judgment
Plaintiffs’ Fourth Claim for Relief seeks a declaratory judgment “of the proper
interpretation of Paragraph 13.05 and whether the liquidated damages provision is valid and
enforceable.” FAC ¶ 103. As noted, Paragraph 13.05 of the Lease provides:
In the event the County terminates this lease agreement without reasonable cause,
including through condemnation of all or a sufficient portion of the leased premises
to prevent service to one or more LRY customers, then, in that event, the County
shall pay termination costs of twenty five thousand dollars ($25,000) to LRY as
liquidated damages.

Didelius Decl. Ex. 1, at 9.
In order to determine whether a contract contains an unlawful liquidated damages clause,
Oregon courts engage in a two-step inquiry. The court must first determine if the disputed clause
“actually is a liquidated damages clause,” and the “if the disputed clause is a liquidated damages
clause, we must determine whether it is imposed as an unlawful penalty.” Kesterson v. Juhl, 157
Or. App. 544, 548 (1998) (citing DiTommaso Realty, Inc. v. Moak Motorcycles, Inc., 309 Or. 190,
195 (1990)).
With respect to the first step of the inquiry, “[a] liquidated damages clause consists of
‘words of a contract that set the amount of damages to be recovered by one party from another in
case of the latter’s failure to perform as agreed,’” as distinguished “from a clause that merely
requires payment when a contract term has been satisfied.” Kesterson, 157 Or. App. at 548
(quoting DiTommasso, 309 Or. at 195). The specific terms used by the parties are not necessarily
dispositive of the inquiry. See DiTommaso, 309 Or. at 194-95 (“This court, however, did not
address whether, despite any labels used in the contract, the provision constituted a liquidated
damages provision.” (emphasis in original)).
In this case, the Court concludes that Paragraph 13.05 is a liquidated damages provision.

Although the County seeks to present Paragraph 13.05 as permitting it to terminate the Lease at
will upon payment of $25,000, the plain language of Paragraph 13.05 does not support such a
reading. By the plain terms of the clause, payment of “termination costs” in the amount of $25,000
is only required in the event that the County terminates the Lease “without reasonable cause.” The
requirement that $25,000 be paid to LRY is presented as a consequence of termination “without
reasonable cause,” i.e., a breach of the contract, rather than as a condition precedent to at-will
termination.1 Additionally, the fact that the Lease specifically refers to this money as “liquidated
damages,” bolsters this reading because, as the Oregon Supreme Court observed in DiTammaso,
liquidated damages are only paid in the event that a party has “fail[ed] to perform as agreed.”

DiTommasso, 309 Or. at 195. The County has failed to offer any plausible alternative explanation
for the Lease’s use of the term “liquidated damages” and so the Court construes the term according
to its plain meaning. Such a reading is both internally consistent and gives effect to each term of
Paragraph 13.05. This reading also leads inexorably to the conclusion that Paragraph 13.05 is a
genuine liquidated damages provision.
Once a court has identified a genuine liquidated damages clause, the next step is to
determine if the clause is unlawful. The “initial point of departure for analyzing the validity of a

1 A clause that read, for example, that “upon payment of $25,000 to LRY, the County may terminate the Lease,”
would be more congruent with the County’s preferred interpretation of Paragraph 13.05.
liquidated damages provision is ORS 72.7180(1).” Kesterson, 157 Or. App. at 549 (quoting
Illingworth v. Bushong, 297 Or. 675, 692 (1984)).2 That statute in turn provides that
Damages for breach by either party may be liquidated in the agreement but only at
an amount which is reasonable in light of the anticipated or actual harm caused by
the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility
if otherwise obtaining an adequate remedy. A term fixing unreasonably large
liquidated damages is void as a penalty.
ORS 72.7180(1).
Although the statute expressly states that an unreasonably large liquidated damages clause
will be void as a penalty, Oregon courts have endorsed the Restatement (Second) of Contracts as
a source of guidance in assessing a disputed liquidated damages clause. Illingworth, 297 Or. at
693 (distinguished on other grounds in DiTommaso, 309 Or. 190). The Restatement in turn
provides that “[a] term that fixes an unreasonably small amount as damages may be unenforceable
as unconscionable.” Restatement (Second) of Contracts, § 356 cmnt. a (1981).
In this case, Plaintiffs have demonstrated that the $25,000 sum of liquidated damages
provided for in the Lease was not a reasonable forecast of their damages in the event of breach,
even if the sum was limited only to the “termination costs” of ending operations on the Lakeview
Branch, and that their actual damages exceeded $25,000 many times over. The record does not
support the conclusion that the damages flowing from termination without reasonable cause would
be particularly difficult to prove or that it would be inconvenient or unfeasible for LRY to obtain
an adequate remedy. Accordingly, the Court concludes that the liquidated damages clause of
Paragraph 13.05 is unenforceable.

2 Although “strictly speaking, [ORS 72.7180] applies only to contracts for the sale of goods,” Oregon courts apply
the same rule to other types of contract. Kesterson v. Juhl, 157 Or. App. 544, 549 (1998) (citing Illingworth v.
Bushong, 267 Or. 675, 692 (1984)).
In sum, the Court grants Plaintiffs’ motion for summary judgment as to the proper
interpretation of Paragraph 13.05 of the Lease. For the reasons set forth above, the Court concludes
that Paragraph 13.05 is a liquidated damages provision, and thus may only be invoked in the event
of a breach of contract, but that it is invalid and unenforceable as such because the amount of
liquidated damages provided for by Paragraph 13.05 is not reasonable.

B. Breach of Contract
Both Plaintiffs and the County seek summary judgment as to Plaintiffs’ claim for breach
of contract, although Plaintiffs seek summary judgment only as to the question of liability. To
sustain a claim for breach of contract under Oregon law, a plaintiff must plead and prove the
existence of a contract, the relevant terms of the contract, the plaintiff’s full performance and lack
of breach, and the defendant’s breach resulting in damage to the plaintiff. Slover v. Oregon State
Bd. of Clinical Soc. Workers, 144 Or. App. 565, 570 (1996).
All parties agree that the Lease is the relevant contract for purposes of this claim and that
the County invoked Paragraph 13.05 in terminating the Lease. The County contends that

Paragraph 13.05 gives it the right to terminate the Lease at will upon payment of $25,000 and that
the County’s exercise of that right does not constitute a breach of contract. As discussed in the
previous section, however, the Court has concluded that Paragraph 13.05 is a liquidated damages
clause and liquidated damages are only paid in the event of a breach of contract. DiTommasso,
309 Or. at 195. Consistent with that ruling, the Court concludes that Paragraph 13.05 did not give
the County the right to unilaterally terminate the Lease without cause. Accordingly, the Court
concludes that the County’s termination of the Lease constituted a breach and Plaintiffs have
produced evidence that the breach resulted in damages.
The only remaining element, therefore, is LRY’s own full performance and lack of breach
and the County contends that LRY cannot demonstrate its own full performance.
With regard to any breach of the express terms of the Lease, in an April 6, 2017 email
exchange between Heffner and Lake County Attorney James Bailey, Heffner asked if a notice of
default is required before the County issues a notice of termination. Second Rossmiller Decl. Ex.

10. Bailey responded:
We don’t actually have a basis for default under the lease—all of the default
provisions refer to providing service and we must give the RR 30 days to correct
the problem. We are going to terminate under the “terminate and pay $25,000.”
Second Rossmiller Decl. Ex. 10.
Consistent with that position, the April 12, 2017 termination letter sent to LRY only
references termination under Paragraph 13.05, without reference to breach or default of any
express term of the Lease by LRY. Didelius Decl. Ex. 5.
However dissatisfied the County may have been with LRY’s performance as the operator
of the Lakeview Branch, its own attorney affirmed that the County had no basis for declaring LRY
in default under the Lease. And, as previously discussed, Paragraph 13.05 is a liquidated damages
clause and liquidated damages are only provided for in the event of a breach of contract.
In its Reply brief, the County advances an entirely new argument—that LRY was in breach
of its duty of good faith and fair dealing and that LRY cannot, therefore, demonstrate full
performance and lack of breach for purposes of its claim for breach of contract. In support of this
argument, the County offers declarations and emails showing LRY’s poor performance as the
operator, its contentious relationship with its shipping clients, and what the County construed as
an “ultimatum” demanding that the County sell the Lakeview Branch to LRY for an unreasonably
low price. The County asserts that it was these issues that led it to terminate the Lease and that
LRY’s conduct amounted to a breach of the duty of good faith and fair dealing. The County further
contends that this breach will prevent Plaintiffs from showing that LRY had fully performed under
the Lease and defeat Plaintiffs’ motion for summary judgment on the breach of contract claim.
In Oregon, “[t]he law imposes a duty of good faith and fair dealing in the performance and
enforcement of every contract.” Hampton Tree Farms, Inc. v. Jewett, 320 Or. 599, 615 (1995).

The duty of good faith and fair dealing effectuates the reasonable contractual expectations of the
parties. See Best v. U.S. Nat’l Bank, 303 Or. 557, 565 (1987). The purpose of the duty “is to
prohibit improper behavior in the performance and enforcement of contracts, and to ensure that
the parties ‘will refrain from any act that would have the effect of destroying or injuring the right
of the other party to receive the fruits of the contract.’” Klamath Off-Project Water Users, Inc. v.
Pacificorp, 237 Or. App. 434, 445 (2020) (quoting Iron Horse Engineering v. Northwest Rubber,
193 Or. App. 402, 421 (2004)). A party may violate the covenant of good faith and fair dealing
without breaching the express terms of the contract. Id. The covenant, however, “‘cannot
contradict an express contractual term, nor otherwise provide a remedy for an unpleasantly

motivated act that is expressly permitted by the contract.’” Id. (quoting Zygar v. Johnson, 169 Or.
App. 638, 645 (2000)).
However, although a claim for breach of contract and a claim for breach of the covenant
of good faith and fair dealing are related, each is distinct. See Morrow v. Red Shield Ins. Co.,
212 Or. App. 653, 662 (2007) (holding that the insurer was entitled to summary judgment
on the plaintiffs’ breach of contract claim but allowing the duty of good faith and fair dealing
claim based on the same facts to proceed to trial); Veloz v. Foremost Ins. Co., 306 F. Supp. 3d
1271, 1281 (D. Or. 2018) (stating that “[t]he law should not allow every breach of contract, even
those accidental, inadvertent, or caused by honest mistake to deliver plaintiff a successful
additional claim for the breach of the duty of good faith.”).
Given that a claim for breach of contract and a claim for breach of the duty of good faith
and fair dealing are distinct and that, in cases where both claims are alleged, each may survive the
dismissal of the other, the Court concludes that the County’s arguments concerning an alleged

breach of the duty of good faith and fair dealing by LRY do not create a genuine issue of material
fact with respect to LRY’s full performance and lack of breach under the express terms of the
Lease. Given the County’s admission in its communications with Heffner that it could not show
that LRY was in default under the Lease, the Court concludes that LRY is entitled to summary
judgment on the issue of liability for its claim for breach of contract against the County. The issue
of damages must await further litigation.
C. Due Process
Plaintiffs’ Third Claim for Relief alleges that LRY had “a protectable property interest in
the Lease and the leased premises, in the ConnectOregon grant agreements and in the control of

its business and pricing.” FAC ¶ 95. Plaintiffs allege that, in terminating the Lease and removing
LRY as the operator of the Lakeview Branch, the County committed an illegal taking under the
Fifth Amendment and a denial of substantive and procedural due process and equal protection
under the Fifth and Fourteenth Amendments. Id. at ¶¶ 98-99. In its motion, the County seeks
summary judgment as to Plaintiffs’ claims for denial of due process protections under 42 U.S.C.
§1983 on the ground that Plaintiffs have failed to demonstrate a protectable property interest.
Title 42 U.S.C. § 1983 “provides a federal cause of action against any person who, acting
under color of state law, deprives another of his federal rights.” Conn v. Gabbert, 526 U.S. 286,
290 (1999). To maintain a claim under § 1983, “a plaintiff must both (1) allege the deprivation of
a right secured by the federal Constitution or statutory law, and (2) allege that the deprivation was
committed by a person acting under color of state law.” Anderson v. Warner, 451 F.3d 1063, 1067
(9th Cir. 2006).
The Due Process Clause of the Fourteenth Amendment provides that no state shall “deprive
any person of life, liberty, or property, without due process of law.” U.S. Const. amend. XIV, §

1. “A threshold requirement to a substantive or procedural due process claim is the plaintiff’s
showing of a liberty or property interest protected by the Constitution.” Wedges/Ledges of Cal.,
Inc. v. City of Phoenix, 24 F.3d 56, 62 (9th Cir. 1994).
Property interests “are created and their dimensions defined by existing rules or
understandings that stem from an independent source such as state law—rules or understandings
that secure certain benefits and that support claims of entitlement to those benefits.” Bd. of Regens
of State Colls. v. Roth, 408 U.S. 564, 577 (1972). “To have a property interest in a benefit, a person
clearly must have more than an abstract need or desire for it. He must have more than a unilateral
expectation of it. He must, instead, have a legitimate claim of entitlement to it.” Id. “[F]ederal

constitutional law determines whether that interest rises to the level of a ‘legitimate claim of
entitlement’ protected by the Due Process Clause.” Memphis Light, Gas, & Water Div. v. Craft,
436 U.S. 1, 9 (1978) (quoting Roth, 408 U.S. at 577).
In this case, the County contends that a commercial lease cannot create a protected property
interest for purposes of a due process claim. While it is true that “[p]roperty interests are most
often discussed in the context of public employment,” Addison v. City of Baker City, 258 F.
Supp. 3d 1207, 1233 (D. Or. 2017), that is not the only sort of property interest protected by the
Fourteenth Amendment. “Rather, ‘property’ denotes a broad range of interests that are secured by
existing rules or understandings” and a “person’s interest in a benefit is a ‘property’ interest for
due process purposes if there are such rules or mutually explicit understandings that support his
claim of entitlement to the benefit and that he may invoke at a hearing.” Perry v. Sindermann, 408
U.S. 593, 601 (1972) (internal quotation marks and citations omitted). More to the point, “[m]any
courts have recognized that leases, including commercial leases, involving the use of a property
give rise to a protected property interest.” Cross Continent Dev., LLC v. Town of Akron, 742 F.

Supp. 2d 1179, 1188-89 (D. Colo. 2010) (collecting cases). Accordingly, the Court concludes
that the Lease is not, by virtue of being a commercial lease, prevented from creating a
protected property interest for purposes of a due process claim.
More substantively, the County argues that the Lease does not create a protected property
interest because it was terminable at will under Paragraph 13.05. As discussed in the preceding
sections, however, the Court had concluded that Paragraph 13.05 was a liquidated damages
provision to be invoked in the event the County breached by terminating the Lease “without
reasonable cause,” rather than a provision that granted the County the power to unilaterally
terminate the Lease. Accordingly, the Court concludes that the County is not entitled to summary

judgment on Plaintiffs’ claims for violation of their due process rights under § 1983.
II. Cross-Motions for Summary Judgment between the Clark Hill Defendants and
Plaintiffs
In their Fifth Amended Complaint, Plaintiff bring claims for (1) tortious interference with
business relationships or expectations; (2) tortious interference with contracts; (3) tortious
interference with economic relations; (4) intentional interference with prospective economic
advantage; (5) breach of the fiduciary duty of loyalty; (6) breach of the fiduciary duty of
confidentiality; (7) legal malpractice; and (8) breach of contract against the Estate. As to Clark
Hill, Plaintiffs bring claims for negligent supervision and vicarious liability for the alleged
tortious interference, breaches of fiduciary duty, and malpractice by Heffner. Plaintiffs seek
punitive damages against the Clark Hill Defendants.
Plaintiffs seek summary judgment as to their claims for legal malpractice and breach of the
fiduciary duty of loyalty and for Clark Hill’s vicarious liability on those claims. In their cross-
motion for summary judgment, the Clark Hill Defendants seek summary judgment in their favor

on all claims.
A. Fiduciary Duty of Loyalty
Plaintiffs allege that Heffner owed LRY a fiduciary duty of loyalty and a fiduciary duty of
confidentiality arising out of his representation of LRY in the formation of the Lease. Plaintiffs
allege that Heffner’s duty of loyalty extended to refraining from representing another client in the
same or substantially related matter when the subsequent clients’ interests are materially adverse
to the interests of the former client without the informed consent of the former client. Plaintiffs
allege that Heffner breached his duty of loyalty by undertaking to represent Cornerstone and
Addington in their efforts to remove LRY as the operator of the Lakeview Branch.

Attorneys owe their clients “a duty of loyalty, good faith, and fair dealing.” Pereira v.
Thompson, 230 Or. App. 640, 654 (2009). To support a claim for breach of the fiduciary duty of
loyalty, the plaintiff “must plead and prove the breach, and must show that the breach caused an
identifiable loss or resulted in injury to the party.” Id. (internal quotation marks and citation
omitted). Breach of the duty of loyalty is established by showing that the attorney “had a conflict
of interest or was self-dealing” and it “is incumbent upon the [attorney] to defend against the claim
by showing full disclosure, or some other matter of defense.” Id. at 654-55 (internal quotation
marks and citation omitted).
The Clark Hill Defendants first challenge the existence of a continuing fiduciary duty
between Heffner and LRY after Heffner’s legal work for LRY was complete. This requires an
examination of the sometimes-vague boundaries of the duty of loyalty, which in turn requires
reference to the Oregon Rules of Professional Conduct. Standing alone, “[c]onduct violating a
disciplinary rule does not give rise to a private cause of action or a defense to a cause of action.”

Welsh v. Case, 180 Or. App. 370, 382 (2002). However, the Oregon Court of Appeals has held
that “outside the context of disciplinary proceedings—and particularly in breach of contract and
malpractice actions—disciplinary rules may define the scope of duties, including fiduciary duties,
that an attorney owes to a client.” Frost v. Lotspeich, 175 Or. App. 163, 187-88 (2001).
“Disciplinary rules, together with statutes and common-law principles relating to fiduciary
relationships, all help define the duty component of the fiduciary duty owed by a lawyer to their
client.” Welsh, 180 Or. App. at 382. In Oregon, Rule of Professional Conduct 1.9 provides that
A lawyer who has formerly represented a client in a matter shall not thereafter
represent another person in the same or substantially related matter in which that
person’s interests are materially adverse to the interests of the former client unless
each affected client gives informed consent, confirmed in writing.

ORPC 1.9(a).
Consistent with ORPC 1.9(a), the Court concludes that Heffner owed a continuing
fiduciary duty to LRY to refrain from representing another party in the “same or substantially
related matter” when the other party’s interest was materially adverse to LRY’s interest, absent
written consent from LRY and the new client.
The Clark Hill Defendants next challenge breach of that duty, arguing that Heffner’s
representation of Cornerstone and Addington did not concern the “same or substantially related
matter” as his representation of LRY. Again, the Court has recourse to the Oregon Rules of
Professional Conduct, which provide that matters are “substantially related” if
(1) the lawyer’s representation of the current client will injure or damage the former
client in connection with the same transaction or legal dispute in which the lawyer
previously represented the former client; or (2) there is a substantial risk that
confidential factual information as would normally have been obtained in the prior
representation of the former client would materially advance the current client’s
position in the subsequent matter.

ORPC 1.9(d).
In assessing whether subsequent representation concerns the same matter, Oregon courts
consider whether the “core thing sought in the first matter” is “at the heart of the lawyer’s
representation in the second matter.” Portland Gen. Elec. Co. v. Duncan, Weinberg, Miller &
Pembroke, P.C., 162 Or. App. 265, 283-84 (1999).
In this case, the “core” of Heffner’s representation of LRY was the Lease and securing
LRY’s position as the operator of the Lakeview Branch. LRY has presented evidence that
Heffner, together with his junior associate Savage, prepared the Lease and represented LRY in its
negotiations with the County. Meanwhile, the “heart” of Heffner’s later representation of
Cornerstone and Addington was clearly the removal of LRY as the operator of the Lakeview
Branch and the early termination of the Lease. The fact that these are substantially related matters
could not be more obvious. And, as it is undisputed that Heffner did not seek or receive LRY’s
written consent for the subsequent representation, the Court concludes that LRY has established a
breach of Heffner’s duty of loyalty.
The Clark Hill Defendants challenge to Plaintiffs’ showing on causation is three-fold.
First, the Clark Hill Defendants argue that the record establishes that there was such dissatisfaction
with LRY’s performance and conduct among both LRY’s clients and the County government that
LRY’s removal as the operator of the Lakeview Branch was inevitable, without regard to Heffner’s
involvement. The record reveals, however, that one of Heffner’s primary goals was to replace
LRY with a new carrier owned by Addington. After LRY had been removed, Addington expressed
reservations about taking over operations on the Lakeview Branch. In response, the County
discussed recalling LRY to resume operations, possibly under a new agreement. This suggests
that LRY’s removal was not a foregone or inevitable conclusion.
Second, and relatedly, the Clark Hill Defendants argue that the decision to terminate LRY
as the operator was solely in the hands of Lake County and that Lake County took this action

without reference to Heffner. In support of this argument, the Clark Hill Defendants point to the
Declarations of James Bailey and Bradley Winter, who affirm that they did not rely on Heffner in
terminating the Lease. Plaintiffs have, however, produced evidence of close collaboration between
Bailey and Heffner in devising the strategy and means of removing LRY and replacing it with a
new carrier owned by Addington. The record also shows that Heffner was so enmeshed with the
plan to remove LRY that when Heffner was later retained to represent the County directly, his
conflict disclosure letter described his new representation as a continuation of work he had already
been doing for the County at Cornerstone’s expense. This evidence casts doubt on Bailey and
Winter’s claim that Heffner’s involvement was not a causative factor in the County’s decision to

remove LRY.
And finally, the Clark Hill Defendants contend that Heffner’s involvement did not cause
LRY’s harm because a conflict-free attorney would have taken the same steps. In support of this,
the Clark Hill Defendants point to Bailey as an example of such a “conflict-free” attorney. Even
if the Court were to accept the “conflict-free attorney” standard for assessing causation in a case
of breach of fiduciary duties, the record shows that Bailey and Heffner worked so closely together
on the project of removing LRY that it is not possible, on this record, to fully disentangle their
actions. Bailey consulted and strategized with Heffner and the record suggests that Bailey was
relying, possibly to a substantial extent, on advice he received from Heffner. Bailey was also
aware of Heffner’s prior representation of LRY, not least because Heffner’s name appears in the
Lease itself and because Heffner consulted with Bailey about whether Heffner’s representation of
Cornerstone was a conflict of interest. Bailey’s utility as a “conflict-free” comparator is therefore
dubious, at best.
Nevertheless, the Court concludes that there are genuine issues of material fact with regard

to causation, which preclude summary judgment in favor of either Plaintiffs or the Clark Hill
Defendants on the issue of Heffner’s breach of his fiduciary duty of loyalty.
B. Fiduciary Duty of Confidentiality
Plaintiffs allege that Heffner owed LRY a fiduciary duty of confidentiality, which obliged
him to maintain the secrecy of any confidential information he learned about LRY in the course of
his representation and not to use that information to the detriment of LRY. Plaintiffs allege that
Heffner acquired confidential information about LRY and that he later used that information to
advance Cornerstone and Addington’s interests to the detriment of LRY. The Clark Hill
Defendants move for summary judgment as to Plaintiffs’ claim for breach of the fiduciary duty of

confidentiality.
As with the fiduciary duty of loyalty, the “party claiming a breach of fiduciary duty must
plead and prove the breach, and must show that the breach caused an identifiable loss or resulted
in injury to the party.” Lindland v. United Bus. Invs., Inc., 298 Or. 318, 327 (1984). As previously
noted, the Oregon Rules of Professional Conduct provide guidance in determining the scope of an
attorney’s fiduciary duties. ORPC 1.6 provides that a lawyer “shall not reveal information relating
to the representation of a client unless the client gives informed consent, the disclosure is impliedly
authorized in order to carry out the representation,” or if the disclosure is expressly permitted in
one of several presently-inapplicable circumstances. ORPC 1.6(a). Oregon statutory law likewise
provides that attorneys must “[m]aintain the confidences and secrets of the attorney’s clients
consistent with the rules of professional conduct[.]” ORS 9.460(3).
The Clark Hill Defendants assert that there is no evidence that Heffner possessed any
confidential information about LRY, or at least any current confidential information, when he
began representing Cornerstone and Addington. The Clark Hill Defendants also contend that there

is no evidence that Heffner used any such confidential information in the course of that
representation.
Plaintiffs have offered the Third Declaration of Paul Didelius, ECF No. 337, in which
Didelius affirms that he conveyed confidential information about LRY’s finances to Heffner
during Heffner’s representation of LRY and that Heffner used that information to guide his
negotiations with the County on behalf of LRY. Third Didelius Decl. ¶¶ 2-4. James Savage
confirmed that he also received confidential information about LRY during the negotiation of the
Lease and that this information was copied to Heffner and included in Heffner’s paper file on the
LRY case. Second Savage Decl. ¶¶ 2-3. Plaintiffs contend that Heffner later used this information

about LRY’s financial situation to guide Cornerstone’s strategy in pushing for the removal of LRY
as the operator of the Lakeview Branch.
The Court accepts that Heffner at some point possessed confidential information about
LRY, although it seems likely that whatever information Heffner possessed about LRY’s finances
at the time of the Lease would have been stale by the time Heffner was hired by Cornerstone and
Addington. The Court also notes that LRY made no secret of its precarious financial position in
its negotiations with the County and with its own shipping clients, which raises the question of
whether Heffner’s information about LRY’s financial situation crossed into the realm of “general
knowledge.” That issue must await resolution by the trier of fact, however. Whether Heffner used
any confidential information about LRY in the course of representing Cornerstone and Addington,
and whether the use of that information was the cause of Plaintiffs’ harm likewise represent
genuine questions of material fact, which preclude a grant of summary judgment.
C. Legal Malpractice
The Clark Hill Defendants and Plaintiffs both move for summary judgment on Plaintiffs’

claim for legal malpractice. To prove a claim for legal malpractice, “as in other tort actions in
which there is a special relationship between the plaintiff and the defendant,” the plaintiff must
show (1) a duty that runs from the defendant to the plaintiff; (2) a breach of that duty; (3) a resulting
harm to the plaintiff measurable in damages; and (4) “causation, i.e., a causal link between the
breach of duty and the harm.” Stevens v. Bispham, 316 Or. 221, 227 (1993).
The Clark Hill Defendants assert that any duty of care Heffner owed to LRY ended when
his representation of LRY was complete and that Heffner owed no further duty of care to LRY.
The Ninth Circuit has held however, that there is “in the common law a continuing duty owed by
attorneys to former clients not to represent an interest adverse to a former client on a matter

substantially related to the matter of engagement” and that “[w]hen such a duty is breached, the
former client may bring a cause of action at law.” Damon v. Herzog, 67 F.3d 211, 213 (9th Cir.
1995). The Ninth Circuit found it was “nonsensical to hold that the attorney-client relationship
does not remain intact with respect to matters substantially related to the initial matter of
engagement” and that such a result would be “contrary to the basic tenets of attorney-client
relationships.” Id. at 214. Although, as the Clark Hill Defendants point out, Damon involved a
claim for malpractice under Idaho law, the Ninth Circuit’s conclusion that the attorney-client
relationship continues for substantially related matters was rooted in the common law and so it is
readily applicable to a claim for malpractice under Oregon law. Consistent with Damon, the Court
concludes that Heffner owed LRY a continuing duty of care with respect to matters substantially
related to his representation of LRY, which would encompass the Lease.
The Court likewise concludes, based on the record, that Heffner’s subsequent
representation of Cornerstone and Addington in seeking to break the Lease and remove LRY as
the operator of the Lakeview Branch constituted a breach of that continuing duty because the

matters were “substantially related.” For the reasons discussed in the previous sections, however,
the Court concludes that there are genuine issues of material fact remaining with respect to
causation. The claim is not, therefore, proper for resolution on summary judgment.
D. The “Interference” Claims
Plaintiffs’ various claims for tortious and intentional interference each require a showing
of causation, in addition to the other elements of each claim. Uptown Heights Assocs. Ltd. P’ship
v. Seafirst Corp., 320 Or. 638, 651 (1995); McGanty v. Staudenraus, 321 Or. 532, 535 (1995).
The Clark Hill Defendants challenge Plaintiffs’ showing of causation for these claims on
essentially the same grounds as their challenge to Plaintiffs’ claims for breach of the fiduciary duty

of loyalty and legal malpractice. In essence, the Clark Hill Defendants argue that LRY’s
termination as the operator of the Lakeview Branch was inevitable by virtue of its poor
performance and contentious relationship with the County and that nothing the Clark Hill
Defendants did had any effect on the outcome. As discussed in the preceding sections, the question
of causation is rife with genuine issues of material fact and must await resolution by the trier of
fact. The Clark Hill Defendants are not, therefore, entitled to summary judgment on these claims.
E. Breach of Contract
Plaintiffs’ sixteenth claim for relief alleges breach of contract against the Estate. Plaintiffs
allege that Heffner “impliedly promised to uphold his fiduciary duties of loyalty and
confidentiality and not to take any actions that would undermine or harm LRY’s exclusive Lease,”
and “to not undermine LRY’s operations of the Lakeview Branch pursuant to the Lease and STB
authority.” FAC ¶ 180. Plaintiffs allege that Heffner breached this implied promise in the course
of his subsequent representation of Cornerstone, Addington, and Lake County and that the breach
was to Plaintiffs’ detriment. Id. at ¶¶ 181-183.

The Clark Hill Defendants move for summary judgment on the basis that Plaintiff has not
established the existence of an implied contract as alleged in the FAC, apart from Heffner’s
ordinary fiduciary and ethical duties as an attorney. The Clark Hill Defendants point out that
Plaintiffs have not produced evidence of such an agreement and, as Heffner is now deceased, he
cannot be questioned about the existence of any implied contract. Plaintiffs have not responded
to the Clark Hill Defendants’ motion on this point.
The elements of a claim for breach of contract are set forth in the previous sections. And
although Plaintiffs have not responded to this portion of the Clark Hill Defendants’ motion, “[a]
district court may not grant a motion for summary judgment simply because the nonmoving party

does not file opposing material[.]” Brydges v. Lewis, 18 F.3d 651, 652 (9th Cir. 1994).
In this case, the record is sufficient to establish that an agreement of some kind existed
between LRY and Heffner concerning the provision of legal services in the formulation of the
Lease. And the terms of that agreement clearly involved some continuing obligations as evidenced
by the Lease’s directions that Heffner’s law office be contacted as counsel for LRY. And, as an
attorney, Heffner obviously bears certain continuing obligations to his clients.
But there is no evidence of a separate express or implied contract between Heffner and
LRY concerning maintenance of his fiduciary duties to LRY or refraining from undermining
LRY’s interests, nor is there evidence of the terms of such a contract. The Court therefore
concludes that the Clark Hill Defendants are entitled to summary judgment as to Plaintiff’s claim
for breach of contract and that claim is dismissed.
F. Vicarious Liability
Plaintiffs contend that Clark Hill is vicariously liable for Heffner’s breach of fiduciary
duties, intentional interference, and legal malpractice. Clark Hill moves for summary judgment

on these claims on the basis that they must stand or fall with the claims against the Estate, which
the Clark Hill Defendants assert are defective. As discussed in the preceding sections, the Court
has denied summary judgment on those claims and so the question of Clark Hill’s vicarious
liability must likewise await resolution by the trier of fact.
G. Negligent Supervision
Plaintiffs contend that Clark Hill was negligent in its supervision of Heffner. A claim for
negligent supervision requires a plaintiff to plead and prove that the employer knew or should have
known of a foreseeable risk that the employee, if inadequately supervised, would engage in the
type of conduct that ultimately harmed the plaintiff. Pearson v. Reynolds Sch. Dist. No. 7, 998 F.

Supp. 2d 1004, 1029 (D. Or. 2014). As with Plaintiffs’ claims for breach of fiduciary duties,
legal malpractice, and tortious interference, the Clark Hill Defendants challenge Plaintiffs’
showing of causation on the same grounds as previously discussed. And, for the same
reasons, the Court concludes that there are genuine issues of material fact remaining with
respect to causation. Summary judgment is therefore inappropriate at this juncture.
H. Punitive Damages
Plaintiffs seek punitive damages in connection with their claims against the Clark Hill
Defendants. Heffner has passed away and Plaintiffs concede that they cannot maintain a claim for
punitive damages against the Estate. See Pearson v. Galvin, 253 Or. 331, 339 (1969). Plaintiffs
claim for punitive damages against the Estate is therefore dismissed.
The Clark Hill Defendants assert that Plaintiffs cannot maintain a claim for punitive
damages against Clark Hill because the only direct claim against the firm is one for negligent
misrepresentation and all of Plaintiffs’ other claims against the firm are for vicarious liability based

on Heffner’s conduct. As Heffner is now deceased, the Clark Hill Defendants argue that a claim
for punitive damages against the firm would amount to vicarious punishment. However, Oregon
law permits an employer to be held vicariously liable for punitive damages, even absent evidence
of fault on the part of the employer. Johannesen v. Salem Hosp., 336 Or. 211, 219 (2003); see
also Stroud v. Denny’s Restaurant, Inc., 271 Or. 430, 435 (1975) (“[I]f the servant has committed
a tort within the scope of his employment so as to render the corporation liable for compensatory
damages, and if the servant’s act is such as to render him liable for punitive damages, then the
corporation is likewise liable for punitive damages.”). The Court therefore declines to dismiss
Plaintiffs’ claim for punitive damages against Clark Hill at this stage of the case.

III. Cornerstone and Addington’s Motion for Partial Summary Judgment
Cornerstone and Addington have asserted cross-claims for legal malpractice and breach of
the fiduciary duty of loyalty against the Estate. Cornerstone and Addington initially moved for
partial summary judgment as to liability on both claims, but have subsequently confined their
motion to the issue of liability on Cornerstone’s claim for legal malpractice.
As discussed in the previous section, to prove a claim for legal malpractice, the plaintiff
must show (1) a duty that runs from the defendant to the plaintiff; (2) a breach of that duty; (3) a
resulting harm to the plaintiff measurable in damages; and (4) a causal link between the breach of
duty and the harm. Stevens, 316 Or. at 227.
In this case, there is no question that Heffner owed a duty to Cornerstone by virtue of the
attorney-client relationship.3 Cornerstone contends that Heffner breached that duty by undertaking
to represent it on a matter substantially related to his prior representation of LRY and in which
Cornerstone’s interests were materially adverse to the interests of LRY, without first obtaining the
written consent of both Cornerstone and LRY. Cornerstone contends that Heffner’s failure to

secure written consent from LRY for his subsequent representation of Cornerstone was the cause
of its damages because at least some of LRY’s claims against Cornerstone are based on
Cornerstone’s use of Heffner as its attorney. The Court concludes, however, that there are
substantial questions of material fact remaining with respect to causation, which render this claim
unsuited for summary judgment. Accordingly, the Court need not consider Cornerstone’s showing
on the other elements and Cornerstone’s motion is denied.
CONCLUSION
Lake County’s Motion for Partial Summary Judgment against Plaintiffs, ECF No. 239, is
DENIED.

Plaintiffs’ Motion for Partial Summary Judgment against Lake County, ECF No. 222, is
GRANTED. As set forth above, the Court concludes that Paragraph 13.05 of the Lease is a
liquidated damages clause, but that it is void as unlawful. The Court further concludes that
Plaintiffs are entitled to summary judgment as to liability for their claim for breach of contract
against Lake County.
Plaintiffs’ Motion for Partial Summary Judgment as to the Clark Hill Defendants, ECF No.
232, is DENIED.

3 There is a disputed question of fact as to whether Heffner also represented Addington and, for purposes of this
motion, the Court will assume that Heffner only represented Cornerstone.
The Clark Hill Defendants’ Motion for Summary Judgment, ECF No. 329, is GRANTED
in part and DENIED in part. Plaintiffs’ claim for punitive damages against the Estate is
DISMISSED. Plaintiffs’ claim for breach of contract against the Estate is DISMISSED. The Clark
Hill Defendants’ Motion is DENIED as to all other claims.
Cornerstone and Addington’s Motion for Partial Summary Judgment, ECF No. 187, is

DENIED.
It is so ORDERED and DATED this 27th day of October 2021.
s/Michael J. McShane
MICHAEL McSHANE
United States District Judge

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/10394000. Public record. Not legal advice.