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Raffetto v. Cit Business Lending

March 5, 2010

GREG RAFFETTO, ET AL., PLAINTIFFS,
v.
CIT BUSINESS LENDING, DEFENDANT.



ORDER AND FINDINGS AND RECOMMENDATIONS

Defendant's motion for summary judgment came on for hearing November 18, 2009. Plaintiffs Gaylon Teslaa, Sara Teslaa and Greg Raffetto appeared telephonically in propria persona. Brian Blackman appeared for the defendant. Upon review of the documents in support and opposition, and good cause appearing therefor, THE COURT FINDS AS FOLLOWS:

I. Factual and Procedural Background

Plaintiffs bring this action alleging breach of contract, breach of covenant of good faith, breach of fiduciary duty, negligence, interference, fraud, unjust enrichment, and predatory lending. Defendant moves for summary judgment against plaintiffs on all claims, or in the alternative, partial summary judgment on plaintiff Raffetto's claims.

On March 24, 2006, defendant CIT Inc.'s affiliate, CIT Small Business Lending Corporation ("CIT SBLC"), closed escrow on a small business loan to Wagstop, Inc.*fn1 ("Wagstop"), which was guaranteed by plaintiffs Gaylon ("Dr. Teslaa") and Sara Teslaa ("Mrs. Teslaa"). The primary purpose of the loan was to purchase commercial property located at 3599 Main Street in Mammoth Lakes, California. A portion of the loan proceeds was to be used to renovate space for a veterinary clinic to be operated by Dr. and Mrs. Teslaa. Dr. and Mrs. Teslaa planned to lease the rest of the space at the property to tenants. At closing, Dr. Teslaa signed an Authorization, a Construction Loan Agreement, a Promissory Note, an Unconditional Guarantee, and a Deed of Trust on behalf of Wagstop, as a borrower, and himself, as a guarantor. (Doc. No. 55), see Declaration of Karen Bailey (Bailey Decl.) Exs. 14-18. Mrs. Teslaa also signed the Unconditional Guarantee, as a guarantor. Id., Ex 18.

Under the terms of the Authorization, CIT SBLC agreed to loan Wagstop $1,228,000, with $945,000 allocated to purchase the land and $67,000 allocated for renovations and improvements to the property. Bailey Decl., Ex. 14 at 5. The balance of the loan proceeds was allocated for equipment, working capital, contingencies, loan interest and fees. Id. The Construction Loan Agreement set forth the terms and conditions for the disbursement of the renovation funds. Bailey Decl., Ex. 15. Section 5.2 of the agreement specified that Wagstop could not make "any change in the Plans and Specifications" or order extra work from the contractor without prior written approval from CIT SBLC. Id. at 6. Section 6.1 of the agreement specified, in pertinent part, that "[d]isbursement of Loan proceeds will also be contingent upon a continuation of title to the date of each disbursement." Id. at 7-8. Section 7.2 stated that CIT SBLC had the right to withhold any disbursements in the event of default by the lender. Id. at 10-11. Section 8.1 of the agreement states that the "Agreement is solely for the benefit of Lender and Borrower and no third parties shall have any rights herein or hereunder." Id. at 12.

Wagstop purchased the aforementioned commercial property on the date of the loan closing, March 24, 2006. On April 4, 2006, Wagstop transferred title to the property to Mastadon Investments, LLC ("Mastadon"), which was Dr. Teslaa's new company. Request for Judicial Notice (Doc. No. 56), Ex. 36. Prior to the start of construction, the parties discovered that formal building permits and architectural drawings were required in order to change the use of the property. CIT SBLC requested that Dr. Teslaa submit both the building permit and architectural plans before it would agree to disburse construction funds. Wagstop's architect could not complete the architectural plans until October 2006. Declaration of Brian R. Blackman (Doc. No. 52) (Blackman Decl.), Ex. 27 (Teslaa Depo. at 99:15-100:21). In the intervening time period, Wagstop lost both of its tenants and could not find replacement tenants. Id., Ex. 27 (Teslaa Depo. at 113:16-118:19).

By November 2006, Dr. Teslaa had informed CIT SBLC that he had lost his tenants, and proposed expanding the scope of construction to renovate former tenant areas in order to install dog kennel, animal day care and grooming businesses. Bailey Decl., Ex. 19. The estimated increased construction costs were approximately $410,000. Blackman Decl., Ex. 35. In order to consider funding an expanded project, CIT SBLC requested that Dr. Teslaa authorize and pay for a new feasibility study and appraisal. Dr. Teslaa objected to the additional cost and refused. Id., Ex. 27.

In early 2007, the parties discussed the possibility of funding the expanded project without a feasibility study and appraisal by obtaining a second loan. Greg Raffetto served as Dr. Teslaa's representative in these discussions. However, no agreement was reached on a second loan. Bailey Decl., Exs. 22 & 23.

On May 29, 2007, CIT SBLC informed Dr. Teslaa that it would stop disbursing funds from the original loan due to Dr. Teslaa's failure to submit invoices for construction reimbursement and because the loan was in default. Bailey Decl., Ex. 24. At this point, approximately $115,000 remained to be disbursed under the original loan, including $57,000 allocated for construction. Id., Exs. 20 & 24.

In about May 2007, Dr. Teslaa began construction on the expanded portion of the project using personal and other borrowed funds. Specifically, Mastadon borrowed approximately $125,000 from Ms. Peggy Chew and this loan was recorded as a lien against the property in July 2007. Blackman Decl., Ex. 27 (Teslaa Depo. at 136:14-137:20). Raffetto supervised the construction work on the expanded project. Also in May 2007, Dr. and Mrs. Teslaa were informed by CIT SBLC that payments on the loan it had made had become due in March 2007. Neither Wagstop nor the Teslaas had made any payments from March through May of 2007. Dr. Teslaa asked Raffetto to contact CIT SBLC to negotiate a loan modification or continuance. Id., Ex. 27 at 194:4-195:6. On May 29, 2007, CIT requested updated project plans, construction cost breakdowns, and other information in order to consider a loan modification. Bailey Decl., Ex. 24. Dr. Teslaa did not respond to this initial request. Id.

In September 2007, defendant's counsel, Alan Guttenberg and David Rapson, initiated foreclosure proceedings. Declaration of Alan Guttenberg (Doc. No. 53) (Guttenberg Decl.), Ex. 1. The parties subsequently attempted to negotiate a forbearance agreement. CIT SBLC requested eleven categories of information from Dr. Teslaa in order to consider forbearance. Id., Ex. 2. Raffetto inquired about possible reimbursement for Dr. Teslaa's out of pocket expenditures to date if the eleven requests were satisfied. Guttenberg sent a written response stating that CIT would not reimburse Dr. Teslaa for out of pocket expenses. Id., Ex. 3. Despite several other email exchanges between plaintiffs and defendant's representatives, an agreement regarding forbearance was not reached. On February 14, 2008, CIT SBLC completed a non-judicial foreclosure sale of the property. Bailey Decl., Ex. 26.

On January 23, 2008, prior to the sale, plaintiffs had initiated a state court action. The action was removed from state court on the basis of diversity, becoming this action. See Docket No. 1. Plaintiffs' current claims are predicated on defendant's refusal to disburse the approximately $115,000 in funds remaining from the original loan. In addition, plaintiffs allege that CIT representatives made promises to disburse additional funds, or made representations that "previously approved" funds would be forthcoming. Plaintiffs allege that these statements induced plaintiffs to spend personal and borrowed funds to continue an ultimately futile construction project. Second Am. Compl. ¶ 17.

II. Summary Judgment Standards Under Rule 56

Summary judgment is appropriate when it is demonstrated that there exists "no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c).

Under summary judgment practice, the moving party always bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any," which it believes demonstrate the absence of a genuine issue of material fact.

Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986) (quoting Fed. R. Civ. P. 56(c)). "[W]here the nonmoving party will bear the burden of proof at trial on a dispositive issue, a summary judgment motion may properly be made in reliance solely on the 'pleadings, depositions, answers to interrogatories, and admissions on file.'" Id. Indeed, summary judgment should be entered, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial. See id. at 322. "[A] complete failure of proof concerning an essential element of the nonmoving party's case necessarily renders all other facts immaterial." Id. In such a circumstance, summary judgment should be granted, "so long as whatever is before the district court demonstrates that the standard for entry of summary judgment, as set forth in Rule 56(c), is satisfied." Id. at 323.

If the moving party meets its initial responsibility, the burden then shifts to the opposing party to establish that a genuine issue as to any material fact actually does exist. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). In attempting to establish the existence of this factual dispute, the opposing party may not rely upon the allegations or denials of its pleadings but is required to tender evidence of specific facts in the form of affidavits, and/or admissible discovery material, in support of its contention that the dispute exists. See Fed. R. Civ. P. 56(e); Matsushita, 475 U.S. at 586 n.11. The opposing party must demonstrate that the fact in contention is material, i.e., a fact that might affect the outcome of the suit under the governing law, see Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); T.W. Elec. Serv., Inc. v. Pacific Elec. Contractors Ass'n, 809 ...


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