United States District Court, S.D. California
REZA JAFARI and FIRST AMERICAN TITLE INSURANCE COMPANY, Plaintiffs,
FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver for La Jolla Bank; et al., Defendant
Decided: March 4, 2014.
For Reza Jafari, First American Title Insurance Company, a California Corporation, Plaintiffs: Robert C. Braun, LEAD ATTORNEY, Rutan and Tucker, Costa Mesa, CA; Heather N. Herd, Rutan & Tucker, LLP, Costa Mesa, CA.
For Federal Deposit Insurance Corporation, as receiver for La Jolla Bank, Defendant: Mark Edward Bale, Paul Thomas Johnson, LEAD ATTORNEYS, Paul T. Johnson Law Group, APC, Carlsbad, CA.
For Federal Deposit Insurance Corporation, as receiver for La Jolla Bank, FSB, ThirdParty Plaintiff: Mark Edward Bale, Paul Thomas Johnson, LEAD ATTORNEYS, Paul T. Johnson Law Group, APC, Carlsbad, CA.
For The Heritage Escrow Company, ThirdParty Defendant: Jeffrey N Garland, LEAD ATTORNEY, Corinna S. Arbiter, Jason Lee Satterly, Andersen Hilbert & Parker, LLP, San Diego, CA; John Forest Hilbert, LEAD ATTORNEY, Andersen Mann Hilbert & Parker LLP, San Diego, CA.
ORDER GRANTING THIRD PARTY DEFENDANT'S MOTION TO DISMISS
Honorable Larry Alan Burns, United States District Judge.
This case first came to the Court in early August 2012, when Jafari applied for a temporary restraining order to block the FDIC from foreclosing on a home he'd just bought in Rancho Santa Fe. The Court denied the application on August 22, for two reasons. First, Jafari's grievance with the FDIC hadn't been exhausted administratively. Second, the Court lacked the authority, anyway, to enjoin the FDIC's exercise of its statutory powers as a receiver. Jafari dismissed the case on August 30.
In the meantime, on August 27, First American Title Insurance paid the FDIC the amount it claimed was due on the home loan, $3,649,067.10, so it would reconvey the deed of trust, which it did. Then, on October 18, Jafari's grievance with the FDIC was finally resolved against
him. That cleared the way to file a fresh lawsuit against the FDIC, essentially to recover the money First American paid to the FDIC. Indeed, Jafari concedes that while he's a named Plaintiff in this case, " First American is controlling the litigation and has authority to resolve it." (Doc. No. 20 at 2.)
Several months after this case had been filed, the FDIC filed a third party complaint against the seller of Jafari's home, Birger Greg Bacino, as well as the escrow company, Heritage Escrow. Now before the Court is Heritage's motion to dismiss that complaint. The crux of Heritage's motion is that it's an innocent middleman. It handled an escrow for Bacino and Jafari and simply followed their instructions, and therefore can't be liable to the FDIC for any wrongdoing.
I. General Factual Background
The essential facts of this case haven't changed. Jafari bought a home from Bacino that was encumbered by liens, one of which was a $2,540,000 construction loan from La Jolla Bank. The bank had previously failed, however, and the FDIC held the lien as receiver. Because the outstanding liens totaled more than the value of the home, Jafari and Bacino agreed to a short sale, which the secured creditors had to bless. Along those lines, on September 8, 2011 the FDIC and Bacino executed a release agreement--the FDIC calls it a " proposal letter," which shows how the parties spin its significance--in which, subject to certain conditions, the FDIC would reconvey the deed of trust for $135,000.
Those conditions turned out to be a sticking point. After escrow closed and Heritage Escrow wired the FDIC $135,000 pursuant to the release agreement, the FDIC sent it back, claiming certain conditions in the release agreement hadn't been satisfied. The FDIC's position doesn't seem to be in dispute. Rather, Jafari's complaint against the FDIC rests on the argument that the unsatisfied conditions " were unlawful, unenforceable, or not material and therefore did not provide a valid basis for excusing the FDIC's obligation of counter-performance, which was to reconvey the La Jolla Bank Deed of Trust." (FAC ¶ 39.)
The contested conditions each relate to the fact that Bacino personally guaranteed the La Bank construction loan, and the FDIC didn't want to release its lien in a way that would prejudice its ongoing efforts to hold him accountable in ongoing bankruptcy proceedings. After all, " [t]he Proposal Letter discussed a release of collateral, not a reduction in the amount that was due under the ALB Loan." (ATPC ¶ 17.) The conditions appear in a single paragraph in the release agreement:
On or about December 31, 2009, ALB Properties, LLC filed a petition for relief under Chapter 7 of the United States Bankruptcy Code. The FDIC-R has objected to the discharge sought by Mr. Bacino and litigation is ongoing concerning the FDIC-R's objection to discharge. The FDIC-R is willing to consent to the release of collateral as outlined in this Letter so long as the Guarantor(s) acknowledge and agree that by consenting to the release of collateral, the FDIC-R is not forbearing in any way with respect to its remedies under the Loan Documents, and is not waiving or releasing any of its
claims with respect to the Borrower or the Guarantor(s) under the Loan Documents. Borrower and Guarantor(s) are willing to sign this Letter to assure the FDIC-R that they acknowledge and agree that the FDIC-R is not forbearing in any way with respect to its remedies under the Loan Documents, and not waiving or releasing any of its claims with respect to the Borrower or the Guarantor(s) under the Loan Documents. Prior to effectuating the release of collateral referenced herein, Mr. Bacino acknowledges that he will be required to provide an opinion from his bankruptcy counsel, in a form satisfactory to the FDIC-R in its sole and absolute discretion, that the release of collateral contemplated by this letter and the continuing obligation of Mr. Bacino under his Guarantee do not require approval of the Bankruptcy Court and that the guarantee executed by Mr. Bacino will continue to be effective against him in the current bankruptcy court litigation and in any subsequent litigation derived therefrom. ALB shall also provide an opinion from bankruptcy counsel, in a form satisfactory to the FDIC-R in its sole and absolute discretion, that the release of collateral contemplated by this letter and the continuing obligation of ALB under the Loan Documents do not require approval of the Bankruptcy Court and that the Loan Documents executed by ALB will continue to be effective against ALB in subsequent litigation.
As the FDIC puts the point in its complaint, " Each of the conditions discussed in the Proposal Letter were extraordinarily important to the FDIC-R because it had claims in the pending Adversary Action against Bacino concerning the personal guarantees he provided in connection with the ALB loan, as well as other loans, and it was always intended that these obligations would remain in place following any release of the lien on the Property." (ATPC ¶ 19.)
With the FDIC refusing to reconvey the deed of trust and threatening foreclosure, Jafari had no choice but to pay the FDIC the amount due on the loan. Then he sued the FDIC to enforce the release agreement as he construes it.
II. The FDIC's Complaint Against Heritage
So what did Heritage do wrong? In a nutshell, the FDIC alleges that Heritage--and, for that matter, First American--had the release agreement/proposal letter with the FDIC's conditions and ignored it, releasing the collateral without first obtaining the FDIC's consent or confirming that the critical conditions had been satisfied. (ATPC ¶ ¶ 20--22, 26.) In the FDIC's words, " Bacino and Jafari submitted joint escrow instructions to Heritage which required Heritage, among other things, to obtain the appropriate releases and approvals from the FDIC-R to allow the Property to be sold free and clear of all liens and encumbrances." (ATPC ¶ 20.) For example, a March 19, 2010 " Addendum" to the " Residential Purchase Agreement and Joint Escrow Instructions" directed that " This purchase agreement is subject to the approvals of seller, seller's attorney, seller's bankruptcy trustee, bankruptcy court, and the lenders/lienholders approval of short sale (lenders Chevy Chase Bank and the successor of La Jolla Bank or the FDIC." (Doc. No. 27-1.)
The FDIC's complaint asserts eights claims, but only five are directed at Heritage. (The others are directed at Bacino.) The first three claims are for breach of contract, breach of fiduciary duty, and negligence. The last two claims are for implied contractual indemnity and declaratory relief. Heritage's motion to dismiss challenges them all, its basic theory being that Heritage simply did what it was told to by Bacino and Jafari, and owed no legal duties to the FDIC.
III. Legal Standard
A 12(b)(6) motion to dismiss for failure to state a claim challenges ...