UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA
August 16, 2011
GERALD M. CASTLE, JR.; AND MICHELLE J. CASTLE, PLAINTIFFS,
MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC.; WELLS FARGO BANK, NA; FANNIE MAE; AND DOES 1-100, INCLUSIVE, DEFENDANTS.
The opinion of the court was delivered by: VIRGINIA A. Phillips United States District Judge
[Motion filed on July 14, 2011]
ORDER GRANTING DEFENDANTS' MOTION TO DISMISS
Plaintiffs, Gerald M. Castle, Jr. and Michelle J. Castle (collectively, "Plaintiffs"), filed this action in the Superior Court of California for the County of San Bernardino alleging that Defendants Mortgage Electronic Registration Systems, Inc. ("MERS"), Wells Fargo Bank, NA ("Wells Fargo"), and Fannie Mae ("Fannie Mae") (collectively, "Defendants") wrongfully foreclosed on their residence in San Bernardino, California. (See Doc. No. 1 (Not. of Removal), Ex. A (Compl.).) Defendants removed the action to this Court on the basis of diversity jurisdiction. (See Not. of Removal at 2-3 (citing 28 U.S.C. §§ 1332, 1441).) Plaintiffs subsequently filed a first amended complaint ("FAC"). (Doc. No. 8.) Defendants then filed a motion to dismiss Plaintiffs' FAC ("Motion"), pursuant to Federal Rule of Civil Procedure 12(b)(6). (Doc. No. 21.) The Court finds the Motion is appropriate for resolution without a hearing and accordingly VACATES the hearing set for August 15, 2011, at 2:00 p.m. See Fed. R. Civ. P. 78, L.R. 7-15. Having considered the papers filed in support of, and in opposition to, the Motion, the Court GRANTS the Motion for the reasons below.
A. Factual Summary
By grant deed, Plaintiffs acquired the residence located at 5907 N. Honeysuckle Lane, San Bernardino, California 92407 (the "Property") on September 25, 2005. (FAC. ¶ 8.) Plaintiffs signed a promissory note in the amount of $245,000.00, which was secured by a Deed of Trust recorded against the Property on November 15, 2005. (FAC ¶ 9, Ex. B.) The Deed of Trust identifies Alliance Title Co. as the "trustee" and MERS as both the "nominee" of the lender as well as the "beneficiary under this Security Instrument." (Id.) The Deed of Trust provides that MERS has the right to foreclose on the Property:
"Borrower understands and agrees that . . . MERS (as nominee for Lender and Lender's successors and assigns) has the right . . . to foreclose and sell the Property . . . ." (Id. at 3 (emphasis added).)
Plaintiffs defaulted on their mortgage payments, and Wells Fargo, care of Cal-Western Reconveyance Corporation ("Cal-Western"), recorded a "Notice of Default and Election to Sell under Deed of Trust" ("NOD") on March 15, 2010. (FAC, Ex. C.) The NOD states that MERS, as beneficiary of the Deed of Trust, "does hereby elect to cause the trust property to be sold to satisfy the obligations secured thereby." (Id. at 2.) On May 14, 2010, Cal-Western substituted for Alliance as the trustee. (FAC, Ex. D.) On June 16, 2010, Cal-Western recorded a "Notice of Trustee's Sale." (FAC, Ex. F.) Fannie Mae purchased the Property on July 6, 2010, at the Trustee's Sale. (FAC, Ex. H at 1-2.) On July 27, 2010, Wells Fargo assigned the Trust Deed to Fannie Mae. (FAC, Ex. G (Trustee's Deed Upon Sale).)
Plaintiffs failed to vacate the premises following the foreclosure. Accordingly, on November 29, 2010, Fannie Mae filed an unlawful detainer action ("Unlawful Detainer Action") against Plaintiffs in the Superior Court for the County of San Bernardino. (FAC ¶¶ 19-20; Ex. I at 1-2 (Writ of Possession); Defs.' Suppl. RJN, Ex. A (Unlawful Detainer Compl.).) On February 25, 2011, the Superior Court entered default judgment in Fannie Mae's favor and ordered Plaintiffs to relinquish possession of the Property. (Id.; Defs.' Suppl. RJN, Ex. B (Judgment); FAC, Ex. I at 1-2 (Writ of Possession).) On March 10, 2011, Fannie Mae obtained a Writ of Possession for the Property. (FAC ¶ 20, Ex. I at 1-2.) On March 30, 2011, the Superior Court issued a "Notice to Vacate," which stated, "By virtue of the Writ of Execution for Possession/Real Property (eviction), issued out of the above court, you are hereby ordered to vacate the premises described on the writ." (FAC, Ex. I at 3 (Notice to Vacate).)
B. Procedural History
On March 28, 2011, approximately one month after the Superior Court issued judgment in Fannie Mae's favor, Plaintiffs filed the instant action against Defendants in state court, alleging that the foreclosure and trustee's sale were procedurally improper. According to Plaintiffs, Cal-Western's substitution of trustee was invalid because it was recorded two months after the NOD. (FAC ¶ 20.) Thus, at the time Cal-Western initiated the foreclosure, it was not the Trustee. (FAC 11.)
Moreover, Plaintiffs allege Ohio Savings "had already been closed by the FDIC," (id.) and Wells Fargo was not a beneficiary in the chain of title (id. ¶ 12). Plaintiffs assert four claims: (1) wrongful foreclosure; (2) wrongful eviction; (3) quiet title; and (4) unfair business practices. (See generally FAC.)
On April 5, 2011, Defendants removed the action to this Court on the basis of diversity jurisdiction. (Not. of Removal at 2-3.) On May 22, 2011, Defendants filed a motion to dismiss (Doc. No. 6), and Plaintiffs responded by filing the FAC on June 2, 2011 (Doc. No. 8). The Court accordingly denied Defendants' motion to dismiss as moot. (Doc. No. 13.)
On July 14, 2011, Defendants filed the instant Motion (Doc. No. 21) and a request for judicial notice ("Defs.' RJN") (Doc. No. 22). Defendants move to dismiss the FAC on the grounds that Plaintiffs' claims are barred by res judicata. Alternatively, Defendants argue Plaintiffs fail to state claims for relief under Federal Rule of Civil Procedure 12(b)(6). Plaintiffs filed an opposition ("Opposition") to the Motion on July 27, 2011.*fn1 (Doc. No. 23.) Defendants filed a reply ("Reply") (Doc. No. 24) and a supplemental request for judicial notice ("Defs.' Suppl. RJN") (Doc. No. 25) on August 2, 2011.
II. LEGAL STANDARD
Federal Rule of Civil Procedure 12(b)(6) (hereafter "Rule 12(b)(6)") allows a party to bring a motion to dismiss for failure to state a claim upon which relief can be granted. As a general matter, the Federal Rules require only that a plaintiff provide "'a short and plain statement of the claim' that will give the defendant fair notice of what the plaintiff's claim is and the grounds upon which it rests." Conley v. Gibson, 355 U.S. 41, 47 (1957) (quoting Fed. R. Civ. P. 8(a)(2)); Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). In addition, the Court must accept all material allegations in the complaint as true and construe them in the light most favorable to the nonmoving party. See Doe v. United States, 419 F.3d 1058, 1062 (9th Cir. 2005); ARC Ecology v. U.S. Dep't of Air Force, 411 F.3d 1092, 1096 (9th Cir. 2005).
"While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the 'grounds' of his 'entitlement to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Bell Atl., 550 U.S. at 555 (citations omitted). Rather, the allegations in the complaint "must be enough to raise a right to relief above the speculative level." Id.
In other words, the allegations must be plausible on the face of the complaint. See Ashcroft v. Iqbal, 556 U.S. ___, 129 S. Ct. 1937, 1949 (2009). "The plausibility standard is not akin to a 'probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully. Where a complaint pleads facts that are 'merely consistent with' a defendant's liability, it stops short of the line between possibility and plausibility of 'entitlement to relief.'" Id. (citations and internal quotations omitted).
Although the scope of review is limited to the contents of the complaint, the Court also may consider exhibits submitted with the complaint, Hal Roach Studios, Inc. v. Richard Feiner & Co., 896 F.2d 1542, 1555 n.19 (9th Cir. 1990), and "take judicial notice of matters of public record outside the pleadings," Mir v. Little Co. of Mary Hosp., 844 F.2d 646, 649 (9th Cir. 1988).
If a court concludes dismissal is appropriate, leave to amend "shall be freely given when justice so requires." Fed. R. Civ. P. 15(a). The Ninth Circuit has held that "'[t]his policy is to be applied with extreme liberality.'" Eminence Capital, L.L.C. v. Aspeon, Inc., 316 F.3d 1048, 1051 (9th Cir. 2003) (quoting Owens v. Kaiser Found. Health Plan, Inc., 244 F.3d 708, 712 (9th Cir. 2001)). Leave to amend should only be denied on a showing of bad faith, undue delay, prejudice to the opposing party, or futility of the amendment. Royal Ins. Co. of Am. v. Sw. Marine, 194 F.3d 1009, 1016 (9th Cir. 1999).
Under 28 U.S.C. § 1738, federal courts are required to give full faith and credit to state court judgments. See San Remo Hotel, L.P. v. City & Cnty. of San Francisco, 545 U.S. 323, 336 (2005). That is, state court judgments have the same preclusive effect in federal court as they would have in the state's own court. Migra v. Warren City Sch. Dist. Bd. of Educ., 465 U.S. 75, 81 (1984) ("It is now settled that a federal court must give to a state-court judgment the same preclusive effect as would be given that judgment under the law of the State in which the judgment was rendered."); Brodheim v. Cry, 584 F.3d 1262, 1268 (9th Cir. 2009). "The fact that a plaintiff requests a different type of relief, or even presents a different legal theory, does not negate or lessen the binding effect of the previous state court judgment." Moore v. City of Costa Mesa, 678 F. Supp. 1448, 1450 (C.D. Cal. 1987).
A defendant may raise the affirmative defense of preclusion by way of a motion to dismiss under Rule 12(b)(6). See Scott v. Kuhlmann, 746 F.2d 1377, 1378 (9th Cir. 1984). The doctrine of res judicata "is a rule of fundamental and substantial justice, of policy and of private peace, which should be cordially regarded and enforced by the courts." Federated Dep't Stores, Inc. v. Moitie, 452 U.S. 394, 401 (1981) (citations omitted). The doctrine "rests upon the sound public policy that there must be an end of litigation" and, accordingly, persons who have had a fair opportunity to litigate an issue may not again have it adjudicated. Lai v. Quality Loan Serv. Corp., No. CV 10-2308 PSG (PLAx), 2010 WL 3419179, at *3 (C.D. Cal. Aug. 26, 2010) (citing Dillard v. McKnight, 34 Cal 2d 214 (1949)).
The term "res judicata" often is understood to encompass both claim preclusion and issue preclusion. Here, Defendants appear to raise claim preclusion, though their arguments could apply to either doctrine. The Court accordingly examines each doctrine in turn. For the reasons set forth below, the Court finds Plaintiffs' claims are barred under the doctrines of claim and issue preclusion.
1. Claim Preclusion (Res Judicata)
"Under res judicata, a final judgment on the merits of an action precludes the parties or their privies from relitigating issues that were or could have been raised in that action." Allen v. McCurry, 449 U.S. 90, 94 (1980). "California, as most states, recognizes that the doctrine of res judicata will bar not only those claims actually litigated in a prior proceeding, but also claims that could have been litigated." Palomar Mobilehome Park Ass'n v. City of San Marcos, 989 F.2d 362, 364 (9th Cir. 1993).
As a threshold matter, both parties employ federal claim preclusion law in their papers. (See Mot. at 4-5; Opp'n at 5-6.) In a diversity of citizenship action, however, a federal court applies the preclusion rules of the state in which it sits. Taylor v. Sturgell, 553 U.S. 880, 891 n.4 (2008); Semtek Int'l Inc. v. Lockheed Martin Corp., 531 U.S. 497, 508--09 (2001). Thus, as the basis for the Court's jurisdiction here is diversity, California, not federal, claim preclusion law applies.
In California, the doctrine of claim preclusion, also known as res judicata, "describes the preclusive effect of a final judgment on the merits." Mycogen Corp. v. Monsanto Co., 28 Cal. 4th 888, 896 (2002). In California, "claim preclusion . . . prevents relitigation
[(1) after a final judgment on the merits] [(2)] of the same cause of action in a second suit [(3)] between the same parties or parties in privity with them." Id. at 897 (citations omitted); Goddard v. Sec. Title Ins. & Guarantee Co., 14 Cal. 2d 47, 51 (1939) ("[A] final judgment, rendered upon the merits by a court having jurisdiction of the cause, is conclusive of the rights of the parties and those in privity with them, and is a complete bar to a new suit between them on the same cause of action.").
i. Final Judgment on the Merits
The parties sharply dispute whether there was a final judgment on the merits in the Unlawful Detainer Action. To determine the preclusive effect of a state court judgment, federal courts look to state law. Palomar Mobilehome Park Ass'n, 989 F.2d at 364. A dismissal for failure to state a claim, or failure to prosecute, constitutes final judgment for purposes of res judicata analysis. Plaut v. Spendthrift Farm, Inc., 514 U.S. 211, 228 (1995). Likewise, under California law, "[t]he doctrine of res judicata applies even against a default judgment." Carey v. United States, No. CIV S-08-2504-JAM-CMK, 2010 WL 1904841, at *6 (E.D. Cal. May 7, 2010) (citing Morris v. Jones, 329 U.S. 545, 550-51 (1947)).
Here, the Superior Court entered judgment against Plaintiffs on February 25, 2011, and issued a Writ of Possession in Defendant Fannie Mae's favor on March 18, 2011. (Suppl. RJN, Ex. A; FAC, Ex. I.) As discussed more fully in Section III(A)(1)(ii) infra, courts have found that where a state court enters judgment against a borrower in an unlawful detainer action and issues a writ of possession, as here, this constitutes a final judgment on the merits, even if the judgment was entered in default. See, e.g., Albano v. Nw. Fin. Haw., Inc., 244 F.3d 1061, 1064 (9th Cir. 2001) (holding a default judgment in a foreclosure action was res judicata to borrowers' later-filed TILA claim).
ii. Same Cause of Action
In determining whether claim preclusion bars another action or proceeding, California courts examine whether the two actions concern a single cause of action under the primary rights doctrine. Mycogen, 28 Cal. 4th at 904; Manufactured Home Cmtys. v. City of San Jose, 420 F.3d 1022, 1031 (9th Cir. 2005). This doctrine provides:
A "cause of action" is comprised of a "primary right" of the plaintiff, a corresponding "primary duty" of the defendant, and a wrongful act by the defendant constituting a breach of that duty. The most salient characteristic of a primary right is that it is indivisible: the violation of a single primary right gives rise to but a single cause of action.
Mycogen, 28 Cal. 4th at 904 (internal quotation and alterations omitted). Thus, "all claims based on the same cause of action must be decided in a single suit; if not brought initially, they may not be raised at a later date." Id. at 897. "If an action involves the same injury to the plaintiff and the same wrong by the defendant then the same primary right is at stake even if in the second suit, the plaintiff pleads different theories of recovery, seeks different forms of relief and/or adds new facts supporting recovery." Eichman v. Fotomat Corp., 147 Cal. App. 3d 1170, 1174 (1983) (internal citations omitted); Manufactured Home Cmtys., 420 F.3d at 1032 ("Different theories of recovery are not separate primary rights."). "[T]he harm suffered" is "the significant factor" in defining a primary right. Craig v. Cnty. of Los Angeles, 221 Cal. App. 3d 1294, 1301 (1990); accord Balasubramanian v. San Diego Cmty. Coll. Dist., 80 Cal. App. 4th 977, 992 (2000); Branson v. Sun--Diamond Growers, 24 Cal. App. 4th 327, 340 (1994).
Accordingly, the threshold question presented is whether the Superior Court judgment in the Unlawful Detainer Action brought by Fannie Mae precludes Plaintiffs from challenging the validity of the foreclosure and trustee's sale in this action. The judgment in the Unlawful Detainer Action bars this action "if both suits seek to vindicate the same primary right." Mycogen, 28 Cal. 4th at 904. Defendants contend that all of the claims presented in this action were resolved in the unlawful detainer proceedings. Plaintiffs counter that the unlawful detainer judgment only has limited preclusive effect, given that the issues presented in this action were not litigated in the underlying state court action, i.e., the Superior Court did not reach the merits. Specifically, Plaintiffs assert that because the Superior Court entered default judgment, it did not consider their contention that the notice of default and trustee's sale were procedurally improper. (Opp'n at 5.) The Court finds Defendants' arguments more persuasive.
First, even if Plaintiffs did not raise the procedural defect defense in the Unlawful Detainer Action, res judicata bars litigation of any issue that could have been raised in the prior action. See Amin v. Khazindar, 112 Cal. App. 4th 582, 590 (2003). Thus, the Court must consider whether Plaintiffs could have raised their claims regarding irregularities in the foreclosure and trustee's sale in the Unlawful Detainer Action.
The defenses available to a defendant in an unlawful detainer action are limited. As the California Supreme Court explained, an unlawful detainer "proceeding is summary in character; . . . ordinarily, only claims bearing directly upon the right of immediate possession are cognizable." Vella v. Hudgins, 20 Cal. 3d 251, 255 (1977). As such, "a judgment in unlawful detainer usually has very limited res judicata effect and will not prevent one who is dispossessed from bringing a subsequent action to resolve questions of title or to adjudicate other legal and equitable claims between the parties." Id. at 255 (emphasis added); Mehr v. Super. Ct., 139 Cal. App. 3d 1044, 1049 (1983) ("Because of its summary character, an unlawful detainer action is not a suitable vehicle to try complicated ownership issues involving allegations of fraud."). Yet, title may be litigated in an unlawful detainer action to a "limited extent, as provided by" California Code of Civil Procedure section 1161a. Vella, 20 Cal. 3d at 255 (citing Cheney v. Trauzettel 9 Cal. 2d 158, 159 (1937)).
In Vella, the California Supreme Court held that a judgment in a prior unlawful detainer action did not bar a subsequent action alleging that the defendant had fraudulently induced the plaintiff to default on a note so the defendant could foreclose on the property. 20 Cal. 3d at 254-55. The court noted that title to property generally cannot be tried in an unlawful detainer action, but cited section 1161a as a "narrow and sharply focused" exception that permits a party "who has purchased property at a trustee's sale and seeks to evict the occupant in possession [to] show that he acquired the property at a regularly conducted sale and thereafter 'duly perfected' his title." Id. at 255-56 ("[C]courts have held that subsequent fraud or quiet title suits founded upon allegations of irregularity in a trustee's sale are barred by the prior unlawful detainer judgment." (emphasis added)); see also Freeze v. Salot, 122 Cal. App. 2d 561, 566-67 (1954); Bliss v. Sec. First Nat'l Bank, 81 Cal. App. 2d 50, 58 (1947); Seidell v. Ango-Cal. Trust Co., 55 Cal. App. 2d 913, 918, 921 (1942).
"In fact, '[a]lthough most issues unrelated to possession can be raised in a subsequent action between the parties, the issue of the irregularity of the foreclosure or execution sale is barred by a judgment in an unlawful detainer action.'" Lai, 2010 WL 3419179, at *4 (citing 7 Miller & Star, Cal. Real Est. § 19.223 (3d ed.)). Where the fraud alleged in a second action is not connected directly to the trustee's sale, however, relitigation is not barred unless the party asserting res judicata as a defense shows that the plaintiff had a full and fair opportunity to litigate the issue of ownership in the unlawful detainer proceeding. Vella, 20 Cal. 3d at 257.
This narrow exception is illustrated by the California Court of Appeal's holding in Malkoskie v. Option One Mortgage Corp., 188 Cal. App. 4th 968 (2010). There, the plaintiffs defaulted on their mortgage payments, which resulted in the commencement of foreclosure proceedings by Alliance Title Company, as trustee for Option One, the beneficiary named in the deed of trust. Id. at 971-72. Wells Fargo acquired the property at the trustee's sale and filed an unlawful detainer action against the plaintiffs. Id. In response, the plaintiffs argued that the foreclosure sale was invalid due to improper notice and because there were "irregularities in the sale." Id. at 972. The plaintiffs and Wells Fargo agreed to the entry of a stipulated judgment, and the plaintiffs were forcibly evicted. Id. The plaintiffs later filed a civil lawsuit against Option One and Wells Fargo, among others, alleging causes of action for declaratory relief, quiet title, cancellation of trustee's deed, willful wrongful foreclosure, negligent wrongful foreclosure, wrongful eviction, and negligence. The trial court sustained the defendants' demurrer without leave to amend. The California Court of Appeal affirmed, holding that "the stipulated judgment in the related unlawful detainer action brought by Wells Fargo against plaintiffs was res judicata as to plaintiffs' claims in this action which all arise from the alleged invalidity of the foreclosure sale." Id. at 973, 976 ("We therefore hold the unlawful detainer judgment has claim preclusive effect in this action challenging the validity of Wells Fargo's title.").
In reaching its decision, the California Court of Appeal rejected the plaintiffs' contention that the issue of whether the trustee had the legal authority to proceed with the foreclosure was not embraced or resolved by the unlawful detainer action. Id. at 973-76. The court explained that "the validity of Wells Fargo's title had to be resolved in the unlawful detainer action" and "by stipulating to judgment against them, plaintiffs conceded the validity of Wells Fargo's allegations that the sale had been duly conducted and operated to transfer 'duly perfected' legal title to the property." Id. at 974, 976. As a result, the court found that the plaintiffs' assertion "that no valid legal title passed to Wells Fargo in the sale . . . [was] precluded by their voluntary stipulation to a judgment that necessarily decided valid title passed to Wells Fargo entitling the bank to possess the property." Id. at 975-76.
As in Malkoskie, Plaintiffs' claims here are based on the same primary right at issue in the unlawful detainer proceeding, i.e., the right to the Property. Plaintiffs assert the Court should invalidate the foreclosure and trustee's sale because "at the time Cal-Western initiated the foreclosure, it was not appointed the Trustee" and "Ohio Savings had already been closed by the FDIC." (FAC ¶ 11.) Further, Plaintiffs allege that "Wells Fargo was not a beneficiary or in the chain of title." (Id. ¶ 12.) In the Unlawful Detainer Complaint, however, Fannie Mae alleged that it acquired the property at a regularly conducted trustee's sale and thereafter duly perfected its title. (Unlawful Detainer Compl. ¶ 1.) The validity of the foreclosure process, trustee's sale, and Fannie Mae's acquisition of the Property were all encompassed by the Unlawful Detainer Action.
Plaintiffs chose not to defend the Unlawful Detainer Action, however, and judgment was entered against them. Plaintiffs then chose not to move to set aside the default judgment or to appeal that ruling. Moreover, Plaintiffs have not alleged that they discovered new facts or evidence since the Superior Court issued the judgment nor have Plaintiffs provided any reason for their failure to defend that case. Instead, Plaintiffs filed this lawsuit in which the factual allegations exclusively relate to irregularities in the foreclosure proceedings and trustee's sale.
Courts consistently have held that such claims may not be relitigated following the entry of judgment in an unlawful detainer action. See Ann v. Tindle, 321 Fed. Appx. 619, 619-20 (9th Cir. 2009) (holding an earlier unlawful detainer action was res judicata to plaintiff's breach of contract and civil rights claims because the claims "concern[ed] the same primary right as the unlawful detainer action . . .: [plaintiff's] rights to the apartment."); Dancy v. Aurora Loan Servs., No. C 10-2602 SBA, 2011 WL 835787, at *4-6 (N.D. Cal. Mar. 4, 2011) (holding an earlier unlawful detainer action was res judicata to plaintiff's action to quiet title); Carter v. U.S. Bank N.A., No. 10CV2365 DMS (POR), 2011 WL 1004830, at *3 (S.D. Cal. Mar. 18, 2011) (same as to plaintiff's claims to set aside the trustee's sale and cancel the trustee's deed); Lai, 2010 WL 3419179, at *3-6 (same as to plaintiff's claims to void or set aside the deed of trust and foreclosure sale); Velasquez v. U.S. Bank Nat'l Ass'n, No. CV 09-1104 PSG (AJWx), 2009 WL 1941807, at *2-3 (C.D. Cal. July 1, 2009) (same as to plaintiff's action to quiet title); Malkoskie, 188 Cal. App. 4th at 972-73; cf. Albano, 244 F.3d at 1064 (holding a default judgment in a foreclosure action was res judicata to borrowers' later-filed TILA claim under Hawaii law).
Plaintiffs attempt to avoid the preclusive effect of the Unlawful Detainer judgment by arguing that the Superior Court necessarily did not reach Plaintiffs' arguments because the case was decided on a default judgment basis. This argument fails for two reasons. First, as set forth above, California recognizes the preclusive effect of default judgments. Secondly, whether or not the Superior Court actually considered Plaintiffs' arguments is irrelevant to a res judicata inquiry because the Court considers not only those issues that actually were litigated, but also those that could have been litigated. Albano, 244 F.2d at 1064; Palomar Mobilehome Park Ass'n, 989 F.2d at 364.
Despite the summary nature of California's foreclosure proceedings, when a purchaser brings an unlawful detainer action pursuant to California Code of Civil Procedure section 1161a, the purchaser must demonstrate that it acquired the property at a regularly conducted sale and thereafter duly perfected its title. Cal. Code. Civ. P. § 1161a. In the Unlawful Detainer Complaint, Fannie Mae alleges it acquired title to the Property "following a non-judicial foreclosure sale held in accordance with California Civil Code §§ 2429 et seq." and that "Plaintiff's title was duly perfected by the Trustee's Deed Upon Sale recorded on July 27, 2010 . . . ." (Defs.' Suppl. RJN, Ex. A (Unlawful Detainer Compl.) ¶ 1.) Plaintiffs' defense of irregularities in the foreclosure and trustee's sale could have been litigated in the Unlawful Detainer Action. See Mehr, 139 Cal. App. at 1049. This defense, if meritorious, would have ineluctably prevented the unlawful detainer, as Fannie Mae was required to establish compliance with the applicable statutes governing the foreclosure and trustee's sale, as well as establish it had perfected title.
Thus, the judgment rendered in connection with Fannie's Mae's complaint "necessarily adjudicated issues relating to the propriety of the foreclosure." Dancy, 2011 WL 835787, at *6. If Plaintiffs wished to challenge that judgment, the proper procedure would have been to file a motion to set aside the default. Instead, Plaintiffs belatedly filed this action, seeking to relitigate claims they should have raised in the Unlawful Detainer Action. Bringing wrongful foreclosure, wrongful eviction, and quiet title claims "involves pleading a different theory of recovery, but addresses the same injury." Ann, 321 Fed. Appx. at 620 (citing Zimmerman v. Stotter, 160 Cal. App. 3d 1067 (1984)). Thus, the Unlawful Detainer Action and the instant action seek to vindicate the same primary right.
iii. Identity of the Parties
Finally, to establish a defense of claim preclusion, Defendants must show that the parties in each case are identical or in privity with each other. Mycogen Corp., 28 Cal. 4th at 896. Specifically, "[i]n order for res judicata to apply, the party against whom the defense is asserted must have been 'a party or was in privity with a party to the prior adjudication.'" Consumer Advocacy Grp., Inc., v. ExxonMobil, Corp., 168 Cal. App. 4th 675, 689 (2008) (citing Citizens for Open Access to Sand & Tide, Inc. v. Seadrift Ass'n, 60 Cal. App. 4th 1053, 1065 (1998)); see also Nguyen v. LaSalle Bank Nat'l Ass'n, No. 09-CV-0881 DOC (SSx), 2009 WL 3297269, *4, *8 (C.D. Cal. Oct. 13, 2009) (holding a plaintiff was barred from bringing claims related to foreclosure where bank brought an earlier suit against plaintiff for unlawful detainer). Here, Plaintiffs were defendants in the Unlawful Detainer Action brought in state court by Defendant Fannie Mae and res judicata is asserted against them. Accordingly, Defendants also satisfy this element.
Defendants have established all of the elements necessary to apply the doctrine of claim preclusion. The judgment rendered in the Unlawful Detainer Action thus bars all claims by Plaintiffs that challenge procedural defects in the foreclosure or trustee's sale. See Malkoskie, 188 Cal. App. 4th at 975-76. As all of Plaintiffs' allegations in the FAC relate to the irregularity of the foreclosure and trustee's sale, which is a defense Plaintiffs could have raised in the Unlawful Detainer Action, Plaintiffs' action is barred by the prior unlawful detainer proceeding. See Velasquez, 2009 WL 1941807, at *3 (reaching the same result on similar facts); see also FAC ¶¶ 24-26 (wrongful foreclosure claim), 33-34 (wrongful eviction claim), 39-40 (quiet title claim), 45 (unfair business practices claim). Defendants accordingly have met their burden of demonstrating that Plaintiffs' present attacks on the trust deed, foreclosure proceedings, and trustee's sale are an attempt to relitigate the same primary right between the same parties. Accordingly, Plaintiffs' claims are barred under the doctrine of claim preclusion.
2. Issue Preclusion (Collateral Estoppel)
As above, "a federal court considering whether to apply issue preclusion based on a prior state court judgment must look to state preclusion law." McInnes v. California, 943 F.2d 1088, 1092-93 (9th Cir. 1991) (citing 28 U.S.C. § 1738). The scope of the doctrine of issue preclusion, also known as collateral estoppel, differs from that of claim preclusion. While claim preclusion bars litigation in a subsequent action of any issue that could have been raised in the prior action, see Amin, 112 Cal. App. 4th at 590 ("the rule is that the prior judgment is res judicata on matters which were raised or could have been raised, on matters litigated or litigable"), issue preclusion, by contrast, bars relitigation of issues that were actually litigated and necessarily decided in a prior action, Morris v. Blank, 94 Cal. App. 4th 823, 830-31 (2001) ("Collateral estoppel bars relitigation of an issue actually litigated and necessarily decided in prior litigation."); see also Modesto City Sch. v. Educ. Audits Appeal Panel, 123 Cal. App. 4th 1365, 1379 (2004) ("Generally, collateral estoppel bars the party to a prior action, or one in privity with him, from relitigating issues finally decided against him in the earlier action") (citation omitted); U.S. Golf Ass'n v. Arroyo Software Corp., 69 Cal. App. 4th 607, 616 (1999) (to invoke collateral estoppel, a party must show that the identical issue was actually litigated in the prior action).
Under California law, a party is precluded from relitigating an issue if (1) the issue decided in a prior adjudication is identical with that presented in the action in question; (2) there was a final judgment on the merits; and (3) the party against whom preclusion is asserted was a party or in privity with a party to the prior adjudication. Clemmer v. Hartford Ins. Co., 22 Cal. 3d 865, 874 (1978).
i. Final Judgment on the Merits
Where a judgment is entered by default, as here, it collaterally estops relitigation of all of the material allegations of the complaint and every fact necessary to uphold the default judgment. See Mitchell v. Jones, 172 Cal. App. 2d 580, 586-87 (1959) ("[A] default judgment conclusively establishes, between the parties so far as subsequent proceedings on a different cause of action are concerned, the truth of all material allegations contained in the complaint in the first action, and every fact necessary to uphold the default judgment"); Four Star Elec., Inc. v. F & H Constr., 7 Cal. App. 4th 1375, 1380 (1992) (quoting Mitchell); Gottlieb v. Kest, 141 Cal. App. 4th 110, 149 (2006) ("California . . . accords collateral estoppel effect to default judgments . . . ."). The judgment is not conclusive, however, with respect to any defense or issue that was not raised and that is not necessary to uphold the judgment. Mitchell, 172 Cal. App. 2d at 586-87; Four Star Elec., Inc., 7 Cal. App. 4th at 1379-81.
ii. Identity of Issues
As noted above, "a default judgment conclusively establishes, between the parties so far as subsequent proceedings on a different cause of action are concerned, the truth of all material allegations contained in the complaint in the first action, and every fact necessary to uphold the default judgment." Mitchell, 172 Cal. App. 2d at 586-87.
When a purchaser brings an unlawful detainer action pursuant to California Code of Civil Procedure section 1161a, the purchaser must show that it acquired the property at a regularly conducted sale and thereafter duly perfected its title. Cal. Code. Civ. P. 1161a. In its Unlawful Detainer Complaint, Fannie Mae alleges it acquired title to the Property "following a non-judicial foreclosure sale held in accordance with California Civil Code §§ 2429 et seq." and that its "title was duly perfected by the Trustee's Deed Upon Sale recorded on July 27, 2010 . . . ." (Unlawful Detainer Compl. ¶ 1.) In the instant action, Plaintiffs request that Court declare the foreclosure and trustee's sale invalid and restore Plaintiffs as the owners of the Property. The issues of whether the foreclosure and trustee's sale were procedurally sound were material and necessary to uphold the default judgment, however. Accordingly, Plaintiffs' claims related to the foreclosure, trustee's sale, and unlawful detainer are barred because the Superior Court's judgment collaterally estops relitigation of those issues. See Mitchell, 172 Cal. App. 2d at 586-87.
iii. Identity of the Parties
Moreover, Defendants clearly meet the final factor -- the party against whom preclusion is asserted was a party or in privity with a party to the prior adjudication -- because Plaintiffs were defendants in the Unlawful Detainer Action. (See Unlawful Detainer Compl. ¶ 2.) Plaintiffs' claims accordingly also are barred under the doctrine of collateral estoppel.
B. Failure to Provide or Allege Tender
In addition to preclusion barring Plaintiffs from raising various arguments in favor of setting aside the foreclosure and trustee's sale, Plaintiffs' failure to make an offer of tender precludes relief.
"A tender is an offer of performance made with the intent to extinguish the obligation." Arnolds Mgmt. Corp. v. Eischen, 158 Cal. App. 3d 575, 580 (1984). Under California law, a party seeking to set aside a foreclosure or trustee's sale must make a "valid and viable tender of payment of the indebtedness owing." In re Worcester, 811 F.2d 1224, 1230 (9th Cir. 1987) (citation omitted); FCPI RE-HAB 01 v. E & G Invs., Inc., 207 Cal. App. 3d 1018, 1021 (1989) (holding a "valid and viable tender of payment of the indebtedness owing is essential to an action to cancel a voidable sale under a deed of trust."); Karlsen v. Am. Sav. & Loan Ass'n, 15 Cal. App. 3d 112, 117-18 (1971) (holding a party seeking to set aside a foreclosure sale must make a "valid and viable tender of payment of the indebtedness owing"). Without an allegation or offer of tender in the amount of the debt owed, a claim for "irregularity in the sale procedure" cannot be maintained. Abdallah v. United Sav. Bank, 43 Cal. App. 4th 1101, 1109 (1996); LaGrone v. Johnson, 534 F.2d 1360, 1362 (9th Cir. 1976) (reversing judgment in favor of borrower where rescission was not conditioned on tender of funds); Frison v. WMC Mortg. Corp., No. 09-1733 LAB NLS, 2010 WL 2894980, at *4 (S.D. Cal. Sept. 30, 2010) ("In other words, a plaintiff must plead that she has paid amount of indebtedness or at least is prepared to pay it if [injunctive relief] is granted."); Alicea v. GE Money Bank, No. C 09-00091 SBA, 2009 WL 2136969 *3 (N.D. Cal. July 16, 2009) ("When a debtor is in default of a home mortgage loan, and a foreclosure is either pending or has taken place, the debtor must allege a credible tender of the amount of the secured debt."); U.S. Cold Storage v. Great W. Sav. & Loan Ass'n, 165 Cal. App. 3d 1214, 1222 (1985) ("[T]he law is long-established that a trustor or his successor must tender the obligation in full as a prerequisite to challenge of the foreclosure sale.").
Plaintiffs made no offer to tender at the time they filed their Complaint nor have they made such an offer thereafter. Plaintiffs have not offered any equitable arguments to justify their requested interference with the completed foreclosure proceedings or the trustee's sale. As Plaintiffs have failed to offer tender, the Court cannot set aside the allegedly unlawful conveyance of title or trustee's sale. The Court accordingly GRANTS Defendants' Motion.
C. Leave to Amend
When granting a motion to dismiss, a court generally is required to grant leave to amend unless amending the pleadings would be futile. See Deveraturda v. Globe Aviation Sec. Servs., 454 F.3d 1043, 1049-50 (9th Cir. 2006); Bonin v. Calderon, 59 F.3d 815, 845 (9th Cir. 1995) (holding that futility is a sufficient ground upon which to deny leave to amend). As set forth above, Plaintiffs are barred under the doctrines of claim and issue preclusion from relitigating claims based on alleged improprieties in the foreclosure and trustee's sale. Thus, the Court concludes that further amendment to the pleadings would be futile. See Ann, 321 Fed. Appx. at 620 (affirming a district court's denial of leave to amend where the court found an earlier unlawful detainer action was res judicata to a plaintiff's action for breach of contract and civil rights violations).
For the reasons stated above, the Court GRANTS Defendants' Motion to Dismiss with prejudice.