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Scott Call Jolley v. Chase Home Finance

February 11, 2013


Trial Court: Marin County Superior Court Trial Judge: Honorable Lynne Duryee (Marin County Super. Ct. No. CIV1002039)

The opinion of the court was delivered by: Richman, J.


Plaintiff Scott Call Jolley and Washington Mutual Bank (WaMu) entered into a construction loan agreement in 2006, which eventually encountered problems due to alleged failures by WaMu to properly disburse construction funds. As Jolley was continuing to attempt to salvage the transaction, WaMu went into receivership with the Federal Deposit Insurance Corporation (FDIC), and in September 2008 JP Morgan Chase*fn1 (Chase) bought WaMu's assets through a purchase and assumption agreement (Agreement or P&A Agreement). Jolley soon stopped making payments on the loan, and in late 2009 Chase took steps to foreclose.

Two days before the scheduled foreclosure sale, Jolley sued Chase and California Reconveyance Company (CRC), the trustee, alleging eight causes of action, including misrepresentation, breach of contract, and negligence. Defendants jointly moved for summary judgment or, in the alternative, summary adjudication, Chase's position based in large part on the theory that under the P&A Agreement Chase had not assumed the liabilities of WaMu. The Agreement was put before the court only in a request for judicial notice, which Agreement, an expert witness for Jolley declared, was not complete. Without addressing the expert's testimony, the trial court granted the request for judicial notice and, rejecting all of Jolley's arguments, granted summary judgment for both defendants.

Jolley appeals, arguing that there are triable issues of material fact relating to the financing debacle, not just limited to the claimed inauthenticity of the Agreement but also as to misconduct by Chase itself. We agree, and we reverse the summary judgment for Chase, concluding that six causes of action must proceed against it, all but the causes of action for declaratory relief and accounting. We affirm the summary judgment for CRC.


The Underlying Facts

In January 2006 Jolley entered into a construction loan agreement with WaMu through which he borrowed $2,156,000 to renovate a house to be used as a rental property in Tiburon, a property he had earlier purchased with a loan from WaMu, having put down $330,000 on the $1,650,000 purchase price. After the construction loan agreement was signed, WaMu disbursed the money to pay off its own first mortgage, approximately $1.3 million. Jolley understood that approximately $1 million would be available to cover construction costs for the renovation.

Jolley claims WaMu lost the loan documents, which held up construction financing for approximately eight months. Construction went forward nonetheless, with Jolley incurring at least $100,000 in construction expense. Jolley testified that WaMu made false representations, including that amounts prepaid for construction ($328,308.79) would be reimbursed to him. He further claims there were significant irregularities in the loan disbursements, with the result that WaMu claimed it had disbursed more of the money than he had actually received, which errors caused delays in construction that resulted in financial losses.

Jolley retained an attorney to assist him, and by May 2006 the attorney had written to WaMu to try to straighten out these problems. In August 2006 Jolley retained Jeffrey Thorne, a former WaMu employee, to review implementation of the agreement and to facilitate its modification. Thorne went through the files and concluded that Jolley had not received approximately $350,000 due him under the loan agreement. Thorne wrote a detailed memorandum to WaMu explaining the problems, which memorandum recommended that the loan amount be increased to $2,485,000.

WaMu "eventually agreed to the modification . . ." and on October 5, 2006 WaMu and Jolley executed a loan modification based on an expansion of the original construction project from 2500 square feet to 5000. This was done at WaMu's insistence, as Jolley was told that increasing the size and scope of the project would qualify him for a higher loan amount. Even at that time, Thorne warned that the loan amount needed to be increased by $400,000 to complete the enlarged project. The modification agreement itself does not specify a new maximum amount to be disbursed, but indicates the new principal amount would be "Variable: new principal amount." And WaMu "promised that if [Jolley] increased the square footage and scope of the work that [WaMu] would supply the additional funds needed to complete the construction . . . ."

The modified agreement called for completion of construction by July 1, 2007, and required Jolley to make monthly interest and principal payments of $16,181.12 beginning August 1.*fn2 Exactly what transpired from October 2006 to September 2008 is somewhat hazy from the record, but construction apparently continued, with Jolley continuing to make interest payments. If we read Chase's documents correctly, the last disbursement was in June 2008.

On September 25, 2008, WaMu was closed by the Office of Thrift Supervision, and the FDIC was appointed receiver. (U.S. Dept. of the Treasury, Office of Thrift Supervision Order No. 2008-36 (Sep. 25, 2008); 12 U.S.C. § 1821(c).) On the same date, Chase acquired certain assets of WaMu, including all loans and loan commitments. According to Chase, the acquisition was pursuant to the P&A Agreement, which agreement was between the FDIC as receiver and Chase.

Section 2.1 of the Agreement specified the liabilities Chase was assuming: "Subject to Sections 2.5 and 4.8, the Assuming Bank expressly assumes at Book Value (subject to adjustment pursuant to Article VIII) and agrees to pay, perform, and discharge, all of the liabilities of the Failed Bank which are reflected on the Books and Records of the Failed Bank as of Bank Closing, including the Assumed Deposits and all liabilities associated with any and all employee benefit plans, except as listed on the attached Schedule 2.1, and as otherwise provided in this Agreement (such liabilities referred to as 'Liabilities Assumed'). Notwithstanding Section 4.8, the Assuming Bank specifically assumes all mortgage servicing rights and obligations of the Failed Bank." Jolley contends Chase assumed liability for WaMu's failures in servicing Jolley's loan as part of its "mortgage servicing . . . obligations."

Section 2.5 of the Agreement expressly provided, however, that Chase would assume no liabilities associated with borrower claims arising out of WaMu's lending activities: "Notwithstanding anything to the contrary in this Agreement, any liability associated with borrower claims for payment of or liability associated with borrower claims for payments of or liability to any borrower for monetary relief, or that provide for any other form of relief to any borrower, whether or not such liability is reduced to judgment, liquidated or unliquidated, fixed or contingent, matured or unmatured, disputed or undisputed, legal or equitable, judicial or extra-judicial, secured or unsecured, whether asserted affirmatively or defensively, related in any way to any loan or commitment to lend made by the failed Bank prior to the failure, or to any loan made by a third party in connection with a loan which is or was held by the Failed Bank, or otherwise arising in connection with the Failed Bank's lending and loan purchase activities are specifically not assumed by the assuming Bank." As will be seen, this paragraph played a central role in the trial court's decision granting summary judgment.

According to Jolley's testimony, "Once Chase had taken over the operations of [WaMu], they continued in the construction loan department with the same people that I had been dealing with when [Wamu] still owned the loan. I had dealt with Mabette Del Rosario, Neil Lampert, and Jed Sonstrom in the legal department . . . . After the takeover by Chase, Mabette Del Rosario continued to run the construction disbursement department. I was led to believe that because Chase had taken over the loan from [Wamu], it was still going to honor the original agreement which said in the addendum Construction/Permanent Loan Part One: 'When all conditions prior to rollover are met as described in the construction loan agreement, the loan will rollover to a fully amortized loan.' " Another Chase employee with whom Jolley would come to deal was Andrew North.

In November 2008, shortly after Chase had entered the picture, Jolley made his last monthly payment on the loan, claiming he was forced to default thereafter by WaMu's breaches and negligence in the funding of the construction loan. The total amount owing on the loan by the time of Jolley's default, according to Chase's records, was $2,426,650.00. At the time of Jolley's default, construction had not been completed, but was allegedly completed sometime between April 2009 and April 2010.

After Chase's involvement Jolley tried to secure a loan modification, with Thorne continuing to advocate on Jolley's behalf that he would need an additional $400,000 to complete construction. Thorne and Jolley both told Chase "in great detail" about the prior problems with the loan.

As indicated, the original construction loan contained a rollover provision. Chase claims it was not obligated to honor it because Jolley was in default and construction had not been completed when he went into default, and thus "all conditions prior to rollover" had not been met.

But, Jolley testified, he was encouraged on many occasions by North that, in light of the history of problems with WaMu, there was a "high probability" that Chase "would be able to modify the loan so as to avoid the foreclosure." North said the "likelihood was good," that it was "likely" when construction was complete he could roll the construction loan into a fully amortized conventional loan. Jolley further testified that as a result of these representations he was induced to complete construction at a cost of $100,000, borrowing from family and friends to do so. In addition to other damages, Jolley claims the construction delays and "inordinate delay" during the loan modification negotiations prevented him from selling the property before the housing market collapsed.

Ultimately, instead of agreeing to a loan modification, Chase demanded payment of the loan in full.*fn3 On December 29, 2009, CRC, as trustee, recorded a notice of default, and on March 30, 2010, recorded and served a notice of sale.

On April 5, 2010 North sent Jolley an email saying he had requested the Chase foreclosure department to hold off on its planned foreclosure, "which means any future sale dates will be postpone [sic] to give us the opportunity to see if we can modify the collateral property." Chase refused.

The Proceedings Below

The Complaint

On April 19, 2010, two days before the scheduled foreclosure sale, Jolley filed this lawsuit. It named Chase Home Finance LLC and CRC, and alleged eight causes of action: (1) fraud and deceit―intentional misrepresentation;*fn4 (2) fraud and deceit―negligent misrepresentation; (3) breach of contract/promissory estoppel; (4) negligence; (5) violation of Business and Professions Code section 17200 et. seq.; (6) declaratory relief; (7) accounting; and (8) reformation. Though CRC was named as a defendant, no specific wrongdoing was alleged with respect to it.

On April 20, 2010, Jolley obtained a temporary restraining order prohibiting Chase from going forward with the trustee's sale. And on August 20, 2010, a preliminary injunction was issued, with Jolley putting up a $50,000 bond.

Meanwhile, an answer was filed on behalf of Chase and CRC jointly.

Jolley's lawsuit rested in part on the theory that Chase was the successor in interest to WaMu and therefore had "stepp[ed] into the shoes" of WaMu and was liable for any misrepresentation, negligence, or breach of contract on its part under California law and under the construction contract he had signed with WaMu. Jolley relied on language in paragraph 13 of his agreement with WaMu that made "the covenants and agreements" binding on "the successors and assigns of [WaMu]." Jolley also relied on Civil Code section 1589, which requires one who takes the benefit of a transaction to also assume its liabilities.*fn5

The Motion and the Request for Judicial Notice

On August 25, 2011, Chase*fn6 filed a motion for summary judgment or, in the alternative, summary adjudication, fundamentally claiming that it had no liability for borrower claims based on WaMu's conduct prior to the FDIC receivership. It relied on federal law relating to the powers of the FDIC as receiver and on the terms of the P&A Agreement, specifically that it had acquired only the assets of WaMu in its purchase from the FDIC, not the liabilities. This contention was based on section 2.5 of the Agreement quoted above, which had also been asserted as an affirmative defense in Chase's answer. The motion was set for hearing on November 15, 2011.

Simultaneously with filing its motion, Chase filed a request for judicial notice that requested "the Court to take judicial notice pursuant to California Evidence Code Sections 450-460" of five facts, the first of which was as follows:

"1. On September 25, 2008, Washington Mutual Bank, _.A. ("WaMu") was closed by the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation (FDIC) was named Receiver for WaMu pursuant to its authority under the Federal Deposit Insurance Act, 12 U.S.C. § 1821(d). Pursuant to the Purchase and Assumption Agreement between the FDIC as Receiver for WaMu, and Chase, dated September 25, 2008, Chase acquired certain of the assets of WaMu, including all loans and loan commitments of WaMu. A copy of that Purchase and Assumption Agreement is attached hereto as Exhibit A and can be found on the FDIC's website at _A.pdf."*fn7 The attached copy was 39 pages, including exhibits. No separate points and authorities accompanied Chase's request for judicial notice.

Jolley's Opposition

Jolley filed opposition to the motion. He also objected to the request for judicial notice as to the P&A Agreement, and filed points and authorities supporting his position, most fundamentally disputing that the 39-page Agreement was the complete document governing Chase's purchase of WaMu. Thorne, who at one time worked at the FDIC as an independent contractor, filed a declaration stating he had seen and read a 118-page P&A Agreement for the Chase purchase of WaMu. Thorne claimed the longer document had never been made public and its provision governing assumption of liability was different.

In November 2011, Jolley began trying to secure a copy of the 118-page agreement referred to in Thorne's declaration. His counsel requested a copy from the FDIC, and also apparently served a subpoena duces tecum seeking production of it. According to Jolley's counsel, the FDIC refused to produce the document unless all parties to the litigation signed a confidentiality agreement. On November 9, 2011, six days before the motion was to be heard, Jolley requested that counsel for Chase sign a confidentiality agreement. She refused to do so.*fn8 On or about November 14, 2011, Jolley filed an ex parte application seeking to continue the motion, to keep discovery open, and to continue the trial date so that further efforts could be made to obtain the longer agreement.*fn9

Meanwhile, Chase had filed a reply to Jolley's opposition, which included 62 objections to Jolley's evidence, 40 of which objected to particular testimony in Thorne's declaration or his deposition.

The Ruling on the Motion

Argument on the motion was heard on November 15, most of which focused on Thorne's declaration, at the conclusion of which the matter was taken under submission. On December 1, the court entered its order granting summary judgment, which order reads in pertinent part as follows:

"The Court affirms its tentative ruling which stated as follows:

"The undisputed evidence establishes that Defendant Chase Home Finance, LLC (Chase) is not liable for the alleged intentional and negligent misrepresentations (causes of action nos. 1 & 2), made to Plaintiff by employees of the Washington Mutual Bank in relation to the Construction Loan issued to Plaintiff, pursuant to the Purchase and Assumption Agreement through which Chase acquired Washington Mutual from the FDIC on September 25, 2008.

"Under that Agreement, Chase expressly did not assume liability for borrower's claims 'related in any way to any loan or commitment to lend made by the Failed Bank prior to failure, . . .' or 'otherwise arising in connection with [WaMu's] lending or loan purchase activities . . . .' (Request to Take Judicial Notice, Ex. 1, P&A Agreement ¶ 2.5) [¶] . . . [¶]

"The third cause of action for Breach of Contract/Promissory Estoppel also fails, as the undisputed evidence shows that Defendants never promised to modify the Washington Mutual Construction, or to issue Plaintiff any additional funds to complete the Project. No enforceable promise or loan modification agreement was created by Chase's conduct.

"Chase's employee Mr. North's representations to Plaintiff that approval of his loan modification application was "likely", "highly probable", and "looks good", are all opinions of Mr. North, which do not create a binding commitment to modify a loan, nor do they represent the fact that the loan has been approved.

"These hopes or expectations expressed by North do not constitute either: a clear and unambiguous promise to approve the application; nor do they evidence any terms to create an enforceable contract. (See Laks v. Coast Fed. Sav. & Loan Assn. (1976) 60 Cal.App.3d 885, 891, 893 [agreement to make construction loan was expressly conditional, and lacked essential terms of the loan, and could not support a cause of action for promissory estoppel].)

"Also, there is no evidence to suggest that Mr. North had authority to approve a loan modification either by himself, or with the consent of others.

"A borrower's 'understanding or expectation that the Bank would extend a loan is not sufficient to establish an agreement to make a loan. [Citation.]' (Conrad v. Bank of America (1996) 48 Cal.App.4th 133, 156.) 'To be enforceable, a promise must be definite enough that a court can determine the scope of the duty and the limits of performance must be sufficiently defined to provide a rational basis for the assessment of damages. [Citations.]' (Ladas v. California State Auto. Assn. (1993) 19 Cal.App.4th 761, 770.) 'When the evidence clearly shows that the only (and the complete) subject matter that is under consideration is left for further negotiation and agreement, there is no contract, not for vagueness or indefiniteness of terms but for lack of any terms. [Citation.]' (Kruse v. Bank of America (1988) 202 Cal.App.3d 38, 59.)

"The motion is granted on the fourth cause of action for Negligence.

" 'Under California law, a lender does not owe a borrower or third party any duties beyond those expressed in the loan agreement, except those imposed due to special circumstance.' (Sipe v. Countrywide Bank (E.D.Cal. 2010) 690 F.Supp.2d 1141, 1153, citing Nymark v. ...

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