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Salazar v. Downey Savings and Loan Association

March 12, 2009

ESTEBAN T. SALAZAR, PLAINTIFF,
v.
DOWNEY SAVINGS AND LOAN ASSOCIATION, F.A.; FEDERAL DEPOSIT INSURANCE CORPORATION; AND DOES 1-50, INCLUSIVE, DEFENDANTS.



The opinion of the court was delivered by: Irma E. Gonzalez, Chief Judge United States District Court

ORDER: (1) GRANTING FDIC'S MOTION TO SUBSTITUTE PARTY; (Doc. No. 8); (2) GRANTING FDIC'S MOTION TO STAY PROCEEDINGS; (Doc. No. 10); (3) DENYING AS MOOT DOWNEY SAVINGS AND LOAN ASSOCIATION, F.A.'S MOTION TO DISMISS; (Doc. No. 7) TRUSTEE CORPS; (4) GRANTING TRUSTEE CORPS' MOTION TO DISMISS COMPLAINT; (Doc. No. 3) and (5) DENYING AS MOOT TRUSTEE CORPS' MOTION FOR SUMMARY JUDGMENT. (Doc. No. 6.)

Presently before the Court are: (1) Defendant Federal Deposit Insurance Corporation's ("FDIC") Motion to Substitute FDIC as Receiver in Place of Downey Savings and Loan Association, F.A. ("Downey") (Doc. No. 8); (2) Defendant FDIC's Motion to Stay Proceedings Pending Exhaustion of Statutorily Mandated Administrative Remedies (Doc. No. 10); (3) Defendant Downey's Motion to Dismiss Complaint for Failure to State Claim (Doc. No. 7); (4) Defendant Trustee Corps' Motion to Dismiss Complaint For Failure to State Claim, or alternatively, (5) Motion for Summary Judgment (Doc. Nos. 3 and 6.)

FACTUAL AND PROCEDURAL BACKGROUND

On March 15, 2005, plaintiff Esteban Salazar ("Salazar") borrowed $620,000 from defendant Downey to purchase the property located at 2264 Mountain Ridge Road, Chula Vista, CA 91914 ("Property"). In exchange for the loan, plaintiff executed a promissory note secured by a deed of trust on the property. Downey assigned the deed and note to "Mortgage Electronic Registration Systems" ("MERS") acting as nominee for Central Mortgage Company ("CMC") in an instrument recorded on January 5, 2006. Defendant MTC Financial, Inc. (sued as, and hereinafter referred to as "Trustee Corps"), acting for CMC, issued a Notice of Default and Election to Sell Under Deed of Trust that was recorded on June 27, 2008. In a Substitution of Trustee recorded on August 19, 2008, CMC substituted Trustee Corps as the new trustee under the deed. Trustee Corps issued and recorded the Notice of Trustee's Sale referenced in the complaint on October 20, 2008.*fn1

The Complaint alleges Trustee Corps and Downey are "proceeding toward a Trustee's sale" of the Property (Compl. ¶ 5,) purportedly at Downey's "insistence." (Id. ¶ 1.) Plaintiff contends Downey is not the holder of the note secured by a deed of trust on the Property, is not in possession of the note properly endorsed to it, and does not have the legal right to foreclose. (Id. ¶ 7.) Plaintiff also contends that Downey has no right to direct Trustee Corps to foreclose and sell the Property. (Id. ¶ 8.) Plaintiff has allegedly notified Trustee Corps of his view that Downey has no right to foreclose, and has requested that Trustee Corps suspend the foreclosure sale "unless and until it has obtained proof that [Downey] actually has in its possession the original note properly endorsed to it or assigned to it as of a date preceding the notice of default recorded by Trustee Corps." (Id.) Plaintiff's letter to Trustee Corps, dated October 22, 2008, is attached as Exhibit 2 to the Complaint.

Plaintiff also alleges that defendants' conduct in this case is part of a "pattern and practice" of such activity. Plaintiff states, "the [d]efendants and each of them, in so acting in this case and with respect to many other mortgage or trust deed security instruments engage in a pattern and practice of utilizing the non-judicial foreclosure procedures of this State to foreclose on properties when they do not, in fact, have the right to do so"; (Id., ¶ 9) that "[i]n all the wrongful acts alleged in this complaint, the [d]efendants and each of them have utilized the United States mail in furtherance of their conspiracy"; (Id., ¶ 13) and finally that "[d]efendants, and each of them, in committing the acts alleged in this and in other cases are engaging in a pattern of unlawful activity." (Id., ¶ 14.)

Plaintiff brought the instant Complaint in San Diego County Superior Court on November 5, 2008, and the trustee's sale went forward on November 6, 2008. On November 25, 2008 several transactions were recorded: (1) MERS assigned the deed to CMC; CMC assigned all beneficial interest to Downey; and (3) Trustee Corps issued a Trustee's Deed Upon Sale conveying its interest in the Property to Deutsche Bank National Trust Company as Trustee for Downey.

Trustee Corps filed a motion to dismiss the Complaint, or alternatively a motion for summary judgment on December 5, 2008. (Doc. Nos. 3 and 6.) Downey filed a motion to dismiss the Complaint on December 8, 2008. (Doc. No. 7.) The FDIC filed its motion to substitute itself as a receiver in place of Downey and a motion to stay proceedings pending exhaustion of statutorily mandated administrative remedies on December 8, 2008. (Doc. No. 8.) No party has not filed an opposition to any of these motions. The Court finds the motions suitable for disposition without oral argument pursuant to Local Civil Rule 7.1(d)(1).

DISCUSSION

I. FDIC'S Motion to Substitute Party

On November 21, 2008 the United States Treasury Department's Office of Thrift Supervision ("OTS") declared Downey insolvent and appointed the FDIC as Downey's receiver.*fn2 The FDIC accepted the receivership pursuant to 12 U.S.C. § 1821(c)(3)(A).*fn3 The FDIC now moves the Court for substitution of the FDIC in Downey's place as a party in interest in this case. The motion is based on Fed. R. Civ. P. 25(c), which states "[i]f an interest is transferred, the action may be continued by or against the original party unless the court, on motion, orders the transferee to be substituted in the action or joined with the original party." Fed. R. Civ. P. 25(c) (2009). Rule 25(c) allows an action to continue unabated when an interest in a lawsuit changes hands, rather than requiring the initiation of an entirely new lawsuit. ELCA Enters. v. Sisco Equip. Rental & Sales, 53 F.3d 186, 191 (8th Cir. 1995). The decision to grant or deny substitution on the basis of a transfer of interest rests in the Court's discretion. Educational Credit Mgmt. Corp. v. Bernal, 207 F.3d 595, 598 (9th Cir. 2000).

The FDIC, as receiver of an institution, succeeds to "all rights, titles, powers, and privileges" of that institution, including taking over all the institution's assets and obligations. 12 U.S.C. § 1821(d)(2)(A)-(B), (H)(2008); Sharpe v. FDIC, 126 F.3d 1147, 1152 (9th Cir. 1997). The FDIC argues there has been a transfer of interest because on November 21, 2008 the OTS declared Downey insolvent and appointed the FDIC as Downey's receiver. Given these rights and responsibilities, entities appointed as receivers have been found to be appropriately substituted under Rule 25(c). See, e.g. FDIC v. Wrapwell Corp., 922 F. Supp. 913, 917 (S.D.N.Y. 1996) (finding the FDIC, as receiver for plaintiff, was properly substituted into the case under Rule 25(c)). Compare First American Sav. Bank, F.S.B. v. Westside Federal Sav. & Loan Asso., 639 F. Supp. 93, 96 (W.D. Wash. 1986) (finding the Federal Savings and Loan Insurance Corporation, as receiver for the defendant savings and loan association, was properly substituted as party defendant under Rule 25(c)). Accordingly, when the OTS declared Downey insolvent and appointed the FDIC as Downey's receiver, a transfer of interest took place, as contemplated by Fed. R. Civ. P. 25(c). The Court therefore GRANTS the FDIC's motion to substitute itself as a party in interest for Downey.

II. FDIC's Motion to Stay Proceedings

The FDIC moves the Court to stay plaintiff's claim pending plaintiff's exhaustion of the administrative claims process required by the Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA"), 12 U.S.C. § 1811 et seq. The FDIC requests the Court stay the proceedings until the earlier of 180 days from the filing of plaintiff's administrative claim or 10 days after the FDIC has made a final determination upon the claim.

A) Legal Standard

Section 1821(d)(3)(A) of FIRREA*fn4 provides the FDIC, acting in its capacity as receiver, with the authority to determine claims against a failed depository institution. Under § 1821(d)(3), the FDIC must give mailed notice of the claims process to the failed institution's known creditors within thirty days of discovery of the creditors' names and addresses. The FDIC must promptly give publication notice to all other creditors. In either case, the notice must establish a deadline of no less than ninety (90) days from the date of notice for receipt of claims for the creditors to assert their claims against the institution's assets. 12 U.S.C. § 1821(d)(5)(C) bars payment on those claims filed beyond the date fixed by FDIC.

If a claimant submits a timely claim to the FDIC, the FDIC must determine within 180 days whether to allow or disallow the claim.*fn5 If the FDIC fails to determine the claim or disallows the claim, then, under § 1821(d)(6)(A), the claimant has 60 days to request administrative review or file or continue suit on such claim in the district court.*fn6 No court has jurisdiction over the claim until the exhaustion of this administrative process.*fn7 The Ninth Circuit has unequivocally held that a claimant must exhaust his administrative remedies as mandated by § 1821 before pursuing a claim in federal court against an failed financial institution. International Travel Mktg. v. FDIC, 45 F.3d 1278, ...


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