Opinion
No. 2:13-CV-2030-KJM-AC
11-07-2014
FIDELITY NATIONAL TITLE COMPANY, Plaintiff, v. U.S. SMALL BUSINESS ADMINISTRATION, et al., Defendants. AND RELATED COUNTER/CROSS CLAIMS.
ORDER
This matter is before the court on the motion by Counterdefendants East Bay Investors, LLC ("EBI"), Ferrari Investment, LLC, David J. Ferrari, and John C. Rogers (together, "Counterdefendants") to dismiss the counterclaim filed by Fredrick and Linda Hodgson ("Borrowers"). This matter is decided without a hearing. For the following reasons, the court DENIES the motion in part and GRANTS it in part. I. BACKGROUND
Borrowers entered into a business loan agreement with Bank of the West ("BofW") in July 2000. Declaration of John C. Rogers, Ex. 1, ECF No. 67 ("Rogers' Decl."). This agreement was for a promissory note of $820,000, secured by a recorded deed of trust ("DOT") for real property located at 8258 North Lake Tahoe Boulevard, Kings Beach, California, 96143 (the "Property"). Id. Ex. 2, ECF No. 67. This Property, the Falcon Lodge, was operated by Borrowers. The note and DOT combined are the relevant loan ("Loan").
In February 2011, Borrowers and BofW executed a Forbearance Agreement. Id. Ex. 6, ECF No. 67. The Forbearance Agreement modified the Loan and stated that any default under the Agreement would terminate the modification. It also modified the interest rate on the principal to 3.75%; the payment due date to the 25th of the month; and gave Borrowers ten days to cure a default on the Loan. Id., Ex. 6 at 5. At that time, the outstanding balance totaled $389,412.25. Id. On November 30, 2011, BofW notified Borrowers in a letter that their Loan was in default. Id., Ex. 9 at 4, ECF No. 67. The letter demanded payment of $10,540. Id.
On March 12, 2012, EBI bought the Loan from BofW and recorded an assignment of the DOT. Id., Ex. 8, ECF No. 67. On March 27, 2012, EBI, operating as creditor to the Borrowers, notified the Borrowers in writing of the reassignment of the Loan and Borrowers' current default status. Id., Ex. 9, ECF No. 67. In the letter, EBI asserted the terms of the Loan had reset to what they were before the forbearance period. Id. EBI also asserted the monthly payment was now $5,103.77, and to cure the default, Borrowers must pay all monthly payments from October 1, 2011 to the date of cure, plus "various expenses incurred and paid by the Bank which were part of the purchase price paid by EBI." Id. Borrowers tendered $37,413.94 to EBI on April 2, 2012. Id., Ex. 10, ECF No. 67. Borrowers asserted in the letter enclosed with the check to EBI that this was the amount due under the Forbearance Agreement. Id.
On April 5, 2012, EBI rejected that tender, stating the "amounts, calculations, and scope are incorrect." Id., Ex. 11 at 3, ECF No. 67. The rejection acknowledged the February 2011 modification but stated that "[o]n your defaults, the Forbearance Period and the modification ended and the original terms of the Note and Deed of Trust and other Related Documents were restored." Id. at 3. The letter also outlined additional "non-monetary and 'Compliance Defaults'" and "[d]emand is hereby made to cure each and every described default and provide proof that each default is cured on or before Monday, April 23, 3012." Id. at 6. On November 16, 2012, in the midst of Borrowers' filing for bankruptcy, Fidelity National Title Company ("Fidelity") held a foreclosure sale of the Property. Fidelity Mem. P. & A. at 2, ECF No. 112. EBI purchased the Property. Id.
Fidelity commenced this interpleader action in Placer County Superior Court on August 14, 2013, alleging it possessed surplus proceeds from a non-judicial sale of the Property. See generally Notice of Removal, Ex. A, ECF 1. Fidelity averred that because the Hodgsons, along with the other defendants, claimed an interest in those proceeds, an interpleader action was proper. Id. at 6. The Hodgsons and the additional defendants in this action, U.S. Small Business Administration ("SBA"), Placer County Environmental Health and Allan R. Frumkin, each "submitted . . . written claims of entitlement to the remaining surplus foreclosure proceeds." Id. at 8. The action was removed from state court to this court by defendant SBA. Id.
On December 18, 2013, Borrowers filed a motion to amend to assert compulsory counterclaims, including six claims against Fidelity and four third parties, as well as one claim against an additional third party. Mot. to Amend, ECF No. 8. The next day, Borrowers filed a motion to join counterdefendants as necessary parties to the counterclaim. Mot. to Join Necessary Parties, ECF No. 9. The motions to amend and to join were granted by this court on May 12, 2014. ECF No. 32.
These claims come after lengthy proceedings in both state and bankruptcy court. See Counterdefendants' Mot. at 10-11, ECF No. 65. Briefly, EBI filed a complaint for unlawful detainer following a nonjudicial closure. ECF No. 70, Ex. 28. Borrowers filed a general demurrer (id., Ex. 32), and EBI obtained a judgment in the action. Id., Ex. 31. On January 25, 2013, Borrowers filed an action in state court. Id., Ex. 22. It was removed, remanded, and removed again to bankruptcy court, where it was voluntarily dismissed on January 13, 2014. Id., Ex. 34. On September 3, 2013, Borrowers filed a third bankruptcy case in the Eastern District Bankruptcy Court (id., Ex. 32), which was dismissed on December 13, 2013. Id., Ex. 33.
Borrowers filed a counterclaim on May 13, 2014. Counterclaim, ECF No. 33. Counterdefendants filed a motion for a more definite statement and a motion to strike, which the court has denied. ECF Nos. 35, 36, 76. Counterdefendant BofW filed its answer to Borrowers' counterclaim on June 11, 2014. ECF No. 55. The remaining counterdefendants filed this motion to dismiss ("Counterdefendants' Motion") on July 3, 2014. ECF No. 65. With their motion to dismiss, counterdefendants filed a Request for Judicial Notice which included the DOT, Forbearance Agreement, assignment of the promissory note, and correspondence between the parties with regard to the alleged default status and attempts to cure. Req. for Jud. Notice ("RJN"), ECF No. 70. Borrowers filed objections to the RJN on August 8, 2014. ECF No. 91. Borrowers filed their opposition to the instant motion to dismiss on August 9, 2014. ECF No. 92. Counterdefendants filed their reply on August 15, 2014. ECF No. 99.
In their counterclaim, Borrowers bring six claims for relief against all Counterdefendants and plaintiff Fidelity: 1) Cancellation of Instrument(s); 2) Breach of Contract; 3) Violation of the Equal Credit Opportunity Act; 4) Elder Abuse (unfair advantage); 5) Elder Abuse (financial abuse); 6) unfair, unlawful, fraudulent business practices under the California Business and Professions Code; and 7) Negligence. Countercl., ECF No. 33. Borrowers assert counterdefendants formed EBI for the sole purpose of becoming the Borrowers' creditor and to take control of the Property, breached the terms of the Deed of Trust, and unlawfully prevented Borrowers and the Falcon Lodge from curing their defects and continuing to operate. Id. at 3. Borrowers and counterdefendants dispute whether Borrowers were in default, and the amount necessary to cure the alleged default. Id. at 7-8. Borrowers also claim counterdefendants did not provide notice of a non-monetary default and how such a default could be cured. Opp'n at 10. Defendants contend Borrowers have not alleged sufficient facts to state any claim for relief and Borrowers' material factual allegations are easily refuted. Counterdefendants' Mot. at 2. II. LEGAL STANDARD
A. Motion to Dismiss
Under Rule 12(b)(6) of the Federal Rules of Civil Procedure, a party may move to dismiss a complaint for "failure to state a claim upon which relief can be granted." A court may dismiss "based on the lack of cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory." Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990).
Although a complaint need contain only "a short and plain statement of the claim showing that the pleader is entitled to relief," FED. R. CIV. P. 8(a)(2), in order to survive a motion to dismiss this short and plain statement "must contain sufficient factual matter . . . to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A complaint must include something more than "an unadorned, the-defendant-unlawfully-harmed-me accusation" or "'labels and conclusions' or 'a formulaic recitation of the elements of a cause of action.'" Id. (quoting Twombly, 550 U.S. at 555). Determining whether a complaint will survive a motion to dismiss for failure to state a claim is a "context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Id. at 679. Ultimately, the inquiry focuses on the interplay between the factual allegations of the complaint and the dispositive issues of law in the action. See Hishon v. King & Spalding, 467 U.S. 69, 73 (1984).
In making this context-specific evaluation, this court must construe the complaint in the light most favorable to the plaintiff and accept as true the factual allegations of the complaint. Erickson v. Pardus, 551 U.S. 89, 93-94 (2007). This rule does not apply to "'a legal conclusion couched as a factual allegation,'" Papasan v. Allain, 478 U.S. 265, 286 (1986) quoted in Twombly, 550 U.S. at 555, nor to "allegations that contradict matters properly subject to judicial notice" or to material attached to or incorporated by reference into the complaint. Sprewell v. Golden State Warriors, 266 F.3d 979, 988-89 (9th Cir. 2001). A court's consideration of documents attached to a complaint or incorporated by reference or matter of judicial notice will not convert a motion to dismiss into a motion for summary judgment. United States v. Ritchie, 342 F.3d 903, 907-08 (9th Cir. 2003); Parks Sch. of Bus. v. Symington, 51 F.3d 1480, 1484 (9th Cir. 1995); compare Van Buskirk v. Cable News Network, Inc., 284 F.3d 977, 980 (9th Cir. 2002) (noting that even though court may look beyond pleadings on motion to dismiss, generally court is limited to face of the complaint on 12(b)(6) motion).
B. Request for Judicial Notice
A court may incorporate documents into the complaint by reference for purposes of deciding the instant motion. Davis v. HSBC Bank Nevada, N.A., 691 F.3d 1152 (9th Cir. 2012). "Ordinarily, a court may look only at the face of the complaint to decide a motion to dismiss," Van Buskirk v. Cable News Network, 284 F.3d 977, 980 (9th Cir. 2002), and may not "consider[] evidence outside the pleadings," United States v. Ritchie, 342 F.3d 903, 907 (9th Cir. 2003). However, exceptions exist for "documents attached to the complaint, documents incorporated by reference in the complaint, or matters of judicial notice," which a court may properly consider "without converting the motion to dismiss into a motion for summary judgment." Id. (citations omitted). A document is "incorporated by reference into a complaint if the plaintiff refers extensively to the document or the document forms the basis of the plaintiff's claim," and "[c]ourts may only take judicial notice of adjudicative facts that are not subject to reasonable dispute" or "some public records." Id. (citations and internal quotation marks omitted).
The counterclaim refers to the DOT, the February 3, 2011 Forbearance Agreement; the November 30, 2011 letter from BofW notifying Borrowers of their default; the March 2012 transfer of the Loan from BofW to EBI; and the March/April 2012 correspondence in which EBI notified Borrowers of their default status, Borrowers attempted to cure, and EBI responded. The documents are authenticated by a sworn declaration from John C. Rogers, a counterdefendant with personal knowledge. Rogers Decl., ECF No. 67. These documents are germane to the counterclaim because the thrust of the dispute is whether Borrowers were aware of the entirety of their default, in what amount, and whether Borrowers sufficiently cured their default status. These documents are referenced extensively by both parties in the counterclaim, motion to dismiss and oppositional papers. ECF Nos. 33, 55, 65, 92, 99. These documents are therefore incorporated by reference into the counterclaim.
The court also takes judicial notice of the state court and bankruptcy court filings submitted with counterdefendants' motion to dismiss. See RJN Exhibits 13-34. These documents are public records and filings germane to the res judicata defense raised by the counterdefendants in their motion to dismiss. See Argueta v. J.P. Morgan Chase, 787 F. Supp. 2d 1099, 1103 (E.D. Cal. 2011) (taking judicial notice of documents that "are matters of public record whose accuracy cannot be questioned"); see also NuCal Foods, Inc. v. Quality Egg LLC, 887 F. Supp. 2d 977, 984 (E.D. Cal. 2012) (taking judicial notice of pleadings, affidavits and petitions in state court proceeding). III. ANALYSIS
A. Factual Allegations and Viability of Claims
Although the counterclaim need not contain detailed factual allegations, its "(f)actual allegations must be enough to raise a right to relief above the speculative level . . . on the assumption that all the allegations in the complaint are true (even if doubtful in fact)." In short, it must allege "enough facts to state a claim to relief that is plausible on its face." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 556-57, 570 (2007) (parentheses in original; emphasis added). Counterdefendants contend that each of the Borrowers' factual allegations is easily refuted by the documents judicially noticed by this Order. Although counterdefendants have produced documents that put Borrowers on notice of default and their nonmonetary obligations, these documents do not disprove Borrowers' factual allegations, which at this pleading stage must be taken as true. Borrowers allege counterdefendants conspired to foreclose the Property, misrepresented the debts owed, and acted against Borrowers by purchasing the Loan to take control of the Property. Opp'n at 4-8. These allegations are not refuted by the information in the documents. Taking Borrowers' contentions on their face, Borrowers have stated viable claims for relief.
B. California Tender Rule
Counterdefendants contend the entire counterclaim should be dismissed because Borrowers have failed to make an unconditional tender of the foreclosed debt. They argue that, absent an offer to tender the obligation in full, plaintiffs lack standing to challenge nonjudicial foreclosure proceedings. Counterdefendants' Mot. at 15. Borrowers contend they do not need to offer complete tender because they are not attempting to set aside the sale. Instead, their claims seek damages for the contention that EBI "contrived and falsified" the amount required to cure, wrongfully rejected their tender, and did so in furtherance of a conspiracy to take control of the property. See generally Countercl., ECF No. 33.
Under California law, in an action to set aside a trustee's sale, a plaintiff must demonstrate that he has made a valid and viable tender [offer] of payment of the indebtedness." Pantoja v. Countrywide Home Loans, Inc., 640 F.Supp.2d 1177, 1183-84 (N.D. Cal. 2009) (citations and quotation marks omitted); see also Alcaraz v. Wachovia Mortgage FSB, 592 F. Supp. 2d 1296, 1304 (E.D. Cal. 2009) ("'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.'") (citing Karlsen v. Am. Sav. & Loan Ass'n, 15 Cal. App. 3d 112 (Ct. App. 1971)). A tender must be one of full performance and must also be unconditional. Arnolds Mgmt. Corp. v. Eischen, 158 Cal. App. 3d 575, 580 (Ct. App. 1984).
The California tender rule applies in an action to set aside a trustee's sale for alleged irregularities in the sale notice or procedure. "The rationale behind the rule is that if plaintiffs could not have redeemed the property had the sale procedures been proper, any irregularities in the sale did not result in damages to the plaintiffs." FPCI RE-HAB 01 v. E & G Invs., Ltd, 207 Cal. App. 3d 1018, 1021 (Ct. App. 1989); see also Intengan v. BAC Home Loans Servicing LP, 214 Cal. App. 4th 1047, 1053 (2013) ("[A] plaintiff may not challenge the propriety of a foreclosure on his or her property without offering to repay what he or she borrowed against the property."). Furthermore, a party must allege full tender "in order to maintain any cause of action for irregularity in the sale procedure." Abdallah v. United Savs. Bank, 43 Cal. App. 4th 1101 (Ct. App. 1996); see also Arnolds Mgmt. Corp, 158 Cal. App. 3d at 579 ("A cause of action 'implicitly integrated' with the irregular sale fails unless the trustor can allege and establish a valid tender.") (citation omitted).
However, "the tender rule is not without exceptions." Tamburri v. Suntrust Mortgage, et. al., No. C-11-2899 EMC, 2011 WL 6294472 (N.D. Cal. Dec. 15, 2011). The exceptions and qualifications to California's tender rule counsel against a mechanical application of the rule at the pleading stage. Tamburri, 2011 WL 6294472 at *3. Several courts have recognized a general equitable exception to applying the tender rule where "it would be inequitable to do so." Onofrio v. Rice, 55 Cal. App. 4th 413, 424 (1997) (internal citations and quotations omitted); see, e.g., Humboldt Sav. Bank v. McCleverty, 161 Cal. 285, 291 (1911) (recognizing that there are "cases holding that, where a party has the right to avoid a sale, he is not bound to tender any payment in redemption;" adding that, "[w]hatever may be the correct rule, viewing the question generally, it is certainly not the law that an offer to pay the debt must be made, where it would be inequitable to exact such offer of the party complaining of the sale"); Robinson v. Bank of America, 12-CV-00494-RMW, 2012 WL 1932842, at *3 (N.D. Cal. May 29, 2012) (inequitable to apply tender rule in certain circumstances); Bowe v. Am. Mortg. Network, Inc., CV 11-08381 DDP SHX, 2012 WL 2071759, at *2 (C.D. Cal. June 8, 2012) (same); Giannini v. American Home Mortg. Servicing, Inc., No. 11-04489 TEH, 2012 WL 298254, at *3 (N.D. Cal. Feb. 1, 2012) (same).
In the instant case, Borrowers contend that tender, or at least full tender, should not be required because they are not contesting irregularities in sale notice or procedure. Borrowers do not even state a claim for wrongful foreclosure, which would implicate sale procedures. A growing number of courts have explicitly held that the tender rule only applies in cases seeking to set aside a completed sale. See, e.g., Vissuet v. Indymac Mortg. Services, No. 09-CV-2321-IEG (CAB), 2010 WL 1031013, at *2 (S.D. Cal. Mar. 19, 2010) ("[T]he California 'tender rule' applies only where the plaintiff is trying to set aside a foreclosure sale due to some irregularity."); Lona v. Citibank, N.A, 202 Cal. App. 4th 112-114 (2011) ("Courts recognize certain exceptions to the tender rule, such as when the borrower challenges the validity of the underlying debt . . . if the borrower's action attacks the validity of the underlying debt, a tender is not required since it would constitute an affirmation of the debt.").
Both parties agree an amount was tendered, but dispute whether that amount was enough to cure the default. Although a sale has taken place, Borrowers seek relief from counterdefendants for their alleged wrongdoing leading up to the sale, their intention to wrongfully take control of the Property, and their false demands for tender to cure the default. Borrowers' claim challenges pre-sale actions and is not barred by the tender rule.
C. Res Judicata
The counterdefendants contend the counterclaim is barred by res judicata because the question of legal title is covered by the previous unlawful detainer action. EBI obtained a judgment in an unlawful detainer action concerning the Property in July 2013. Counter-defendants' Mot. at 10, 16. However, such an action is given limited preclusive effect. A judgment in unlawful detainer 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. Vella v. Hudgins, 20 Cal. 3d 251, 255 (1977) (collecting cases).
Applying the traditional rule that a judgment rendered by a court of competent jurisdiction is conclusive as to any issues necessarily determined in that action, courts have held that subsequent fraud or quiet title suits founded upon allegations of irregularity in a trustee's sale are barred by a prior unlawful detainer judgment. Freeze v. Salot, 122 Cal. App. 2d 561 (1954); Bliss v. Security-First Nat. Bank, 81 Cal. App. 2d 50 (1947); Seidell v. Anglo-California Trust Co., 55 Cal. App. 2d 913 (1942). "Where, however, the claim sought to be asserted in the second action encompasses activities not directly connected with the conduct of the sale, applicability of the res judicata doctrine, either as a complete bar to further proceedings or as a source of collateral estoppel, is much less clear." Vella, 20 Cal. 3d at 256. A detainer action has statutory time constraints and limited resources; it does not require a litigant to argue a "complex fraud claim involving activities not directly related to the technical regularity of the trustee's sale." Id. at 258. Borrowers' claims go beyond the scope of technical regularity because they involve claims of misrepresentation, conspiracy to foreclose the property and an attempt by Borrowers to cure the debt. Borrowers allege wrongdoing in the actions and representations made prior to the foreclosure. The unlawful detainer action was limited in scope and did not fully and completely adjudicate the issues before the court in this action. For these reasons, the counterclaim is not barred by res judicata.
D. Claims against Ferrari Investment, LLC, David J. Ferrari, and John C. Rogers.
Counterdefendants allege the complaint is rife with conclusory allegations against Ferrari Investment, David Ferrari, and John Rogers. Counterdefendants' Mot. at 18. Counterdefendants also contend that title has vested with EBI, and therefore the claims against these other parties are not proper. Id. at 19. The court agrees that Borrowers' counterclaim fails to allege any facts against these parties. The counterclaim contains only conclusory statements of conspiracy that each "immediately began to exercise over [c]ounterclaimants by concocting a fictitious monetary default" and that fiction was "created for the malevolent purpose of acquiring [c]ounterclaimants' Property." Countercl. at 8. Plaintiffs do not, as required under the heightened pleading standard of Rule 9, assert the particular circumstances against these individuals that constitute fraud. Fed. R. Civ. P. 9(b). Moreover, the facts alleged in the counterclaim, the rejection of tender and misrepresentation of debt owed to cure, are against the creditor EBI, not these other parties. Because the court cannot find these defects cannot be cured by amendment, however, the court grants with leave to amend. IV. CONCLUSION
For the foregoing reasons, Counterdefendants' motion to dismiss is GRANTED with respect to the claims against Ferrari Investment, LLC, David J. Ferrari, and John C. Rogers; the motion is DENIED in all other respects. Plaintiffs should file an amended complaint within 21 days of the filed date of this order.
IT IS SO ORDERED. DATED: November 7, 2014.
/s/_________
UNITED STATES DISTRICT JUDGE