Friday, November 10, 2017

FYI: Cal App Ct (2nd Dist) Holds Bank Did Not Assume Lease By Being Successful Bidder at Foreclosure Sale

The California Court of Appeals for the Second District recently held that the mortgage lender's purchase at foreclosure sale of a leasehold estate – identified in the deed of trust by reference to the lease – did not constitute an express agreement to assume the lease. 

A copy of the opinion is available at:  Link to Opinion

In December 2006, the original owner of a shopping center entered into a 15-year lease with the tenant for restaurant space.  After a series of transactions, the shopping center was eventually sold to a limited liability company (the "landlord").

The lease required the landlord's consent to any transfer, sale, assignment, or other conveyance.  Additionally, the lease permitted the tenant to encumber its leasehold interest through a mortgage, but presumed that a mortgage lender who succeeded to tenant's interest assumed the tenant's obligations:

"Tenant shall have the right … to encumber Tenant's leasehold interest under this Lease … through a Mortgage ("Leasehold Mortgage') with an institutional lender … Landlord agrees that in the event the Leasehold Mortgagee succeeds to Tenant's interest under this Lease (in which event it shall assume all of Tenant's obligations under this Lease), Landlord shall, at the time of such succession, recognize such mortgage, trustee or lender as the then Tenant under this Lease upon the same terms and conditions contained in this Lease and for the then unexpired portion of the Term."

Thus, the leasehold mortgagee had the right under the lease to acquire and succeed to the tenant's interest through a foreclosure sale.

In January 2007, the tenant recorded a memorandum of lease in the Los Angeles County Recorder's Office, executed by the original owner and the tenant.  It gave notice of the lease term of 15 years, and the memorandum notified successors of the transaction restrictions set forth in the lease.

A bank subsequently loaned funds to the tenant and recorded a construction deed of trust securing the loan. The deed of trust identified the property as "[a]n unrecorded leasehold estate established by a memorandum of lease…"  The tenant assigned its right, title, and interest in all present and future leases of the premises to the bank.

The tenant defaulted on the loan.  The bank initiated foreclosure and recorded a trustee's deed upon sale identifying itself as the successful bidder of the leasehold estate.  The bank transferred the leasehold estate to a limited liability company, whose managing member was the bank, and the asset was later sold to a second owner.

In August 2010, the general manager of the shopping center informed the bank that it was not notified of any transfer, which rendered the bank in default under the lease.  The general manager of the shopping center requested that the bank execute a tenant estoppel certificate, which listed the bank as the successor in interest of tenant and stated that the lease termination date is March 31, 2023.

The second owner received rent payments from the bank through July 2014.  After the second owner sold the property to the landlord in October 2014, the bank stopped paying rent and surrendered possession of the premises in December 2014, with the intent to terminate the leasehold estate.

The landlord filed a complaint against the bank and the limited liability company that purchased the leasehold estate, alleging causes of action for breach of contract and damages under California Civil Code section 1951.2 (lessor's remedies upon breach by lessee).

The landlord moved for summary judgment on the issue of whether the bank had a contractual duty as the successor to the tenant to comply with the lease.  The trial court granted the landlord's motion for summary judgment because the deed of trust and notice of sale specifically identified the lease, the lease provided that the bank was obligated by the lease terms upon foreclosure, and the bank elected to purchase the leasehold estate and succeeded to tenant's rights and obligations.

This appeal followed.

The Appellate Court began its analysis by examining the general principles governing assumptions of a real property lease.

As you may recall, "[a]n assignee's liability to the landlord turns on the nature of the assignment.  If the assignee takes possession of the premises but no more, privity of estate exists and he is bound by all lease covenants which run with the land.  Upon a subsequent assignment, privity of estate ends and, with it, all obligations to the landlord."  Kelly v. Tri-Cities Broadcasting, Inc. (1983) 147 Cal.App.3d 666, 678.

However, if the assignee expressly agrees with the assignor to assume the obligations of the lease, the assumption agreement creates a new privity of contract between landlord and assignee, enforceable by the landlord as a third party beneficiary, regardless of whether the landlord was a party to the assumption agreement.  As a result, the assuming assignee is required to perform all covenants of the lease for the remainder of its term, absent a release by the landlord.  See, e.g., Hartman Ranch Co. v. Associated Oil Co. (1937) 10 Cal.2d 232, 244-245.

In this case, there was no dispute that the deed of trust and sale upon deed created an assignment to the bank.  However, the landlord argued that the bank also assumed the lease obligations for the full term, because the foreclosure and purchase of the deed of trust that referenced the lease constituted an express assumption of the lease. 

The Appellate Court disagreed with the landlord's argument because an express assumption of a real property lease required specific affirmation by the assignee to bind itself to the leasehold obligations.  To establish a privity of contract, according to the Appellate Court, the assignee must expressly agree, in writing, to be bound by the specific terms of the lease. 

Relying on Kelly v. Tri-Cities Broadcasting, the Appellate Court determined that there was no express assumption of the lease obligations in this case.  The bank was not a signatory to the lease.  The contract between the original owner and the tenant contemplated engaging a mortgage lender, but the Appellate Court held that the provisions cannot form a binding contract on a non-party to the lease. 

In addition, the foreclosure documents did not contain an express agreement to assume the lease.  The deed of trust, notice of trustee's sale, and deed upon sale reference the memorandum of lease, but did not provide any express terms by which the bank agreed to uphold the lease covenants or provisions in the memorandum of lease.

Therefore, the Appellate Court held that the language in the documents merely acknowledged the lease rather than assumed its obligations.

The Appellate Court noted that the landlord could have protected itself by requiring the mortgage lender to execute the lease or a document assuming the lease obligations.  According to the Appellate Court, as a signatory to the initial lease, the landlord was in the best position to protect itself by including provisions in the lease requiring consent and assumptions.  But, as the Appellate Court noted, it did not do so.  The lease did not direct the tenant to obtain an assumption from the mortgage lender as it did in the event of a transfer of the leasehold estate.

Accordingly, the Appellate Court reversed the judgment and the order granting summary adjudication in favor of the landlord, and remanded the case for further proceedings. 


Eric Tsai
Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000
Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon




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Thursday, October 26, 2017

FYI: 9th Cir Holds No Remand When Only Portion of Putative Class Met CAFA's Home-State Controversy Exception

The U.S. Court of Appeals for the Ninth Circuit recent held that a plaintiff cannot force remand of a federal Class Action Fairness Act ("CAFA") removal under the home-state controversy exception when only a portion of the putative class met the two-third citizenship requirement.

A copy of the opinion is available at:  Link to Opinion

A financial services company ("Defendant") allegedly recorded or monitored its telephone conversations with the plaintiff ("Plaintiff") without giving her notice.  Plaintiff brought this action in California state court alleging (1) invasion of privacy in violation of California and Washington state law, (2) unlawful recording of telephone calls under California law; and (3) violation of California Business and Professions Code § 17200, et seq. 

Plaintiff brought her first and third claims on behalf of a class of:

[a]ll persons who, while physically located or residing in California and Washington, made or received one or more telephone calls with [Defendant] during the four year period preceding the filing of this lawsuit (the "Class Period") and did not receive notice at the beginning of the telephone call that their telephone conversation may be recorded or monitored[.]

After Defendant removed this action to federal court, Plaintiff moved to remand the case back to California state court pursuant to CAFA's home-state controversy exception, 28 U.S.C. § 1332(d)(4)(B).

As you may recall, CAFA vests federal courts with original diversity jurisdiction over class actions where (1) the aggregate amount in controversy exceeds $5,000,000; (2) any class member is a citizen of a state different from any defendant; and (3) there are at least 100 class members.  28 U.S.C. § 1332(d)(2), (d)(5)(B).

However, CAFA also contains some exceptions which require the federal court to decline to exercise jurisdiction and remand the matter to state court.  28 U.S.C. § 1332(d)(4).

Under the home-state controversy exception, a federal trial court must decline to exercise jurisdiction where "two-thirds or more of the members of all proposed plaintiff classes in the aggregate, and the primary defendants, are citizens of the State in which the action was originally filed."  28 U.S.C. § 1332(d)(4)(B).

To meet this burden, the moving party must provide "some facts in evidence from which the district court may make findings regarding class members' citizenship."  Mondragon v. Capital One Auto Fin., 736 F.3d 880, 884 (9th Cir. 2013).

The magistrate judge ordered Defendant to produce a list of all putative California and Washington class members.  Purportedly complying with the order, Defendant produced a list of over 152,000 persons who had recorded calls with Defendant between October 15, 2009 and May 6, 2016, and had a California or Washington mailing address.

Plaintiff's expert analyzed the list produced by Defendant and segregated a random sample of individuals included in that list.  Defendant challenged the expert report because it did not limit the analysis to individuals who had telephone contact with Defendant before the class period ended on October 15, 2013.

The expert submitted a supplemental report purporting to be limited to individuals who made or received at least one call with Defendant during the defined class period.  However, the report contained no evidence of individuals who were physically located in, but were not residents of, California or Washington when they made or received a phone call with Defendant.

Based on the expert report, the federal trial court found that at least two-thirds of class members were California citizens, and granted Plaintiff's motion to remand.

On appeal, the Ninth Circuit had to determine whether two-thirds of class members are California citizens.

Initially, as the putative class was defined as all individuals who made or received a telephone call from Defendant "while physically located or residing in California and Washington," the Ninth Circuit determined that the class included individuals who were physically located in, but were not residents of, California or Washington when they made or received a call from Defendant (the "located in" subgroup).

During jurisdictional discovery, the trial court ordered Defendant to produce a list of putative California and Washington class members.  In response, Defendant produced a document "which contains a list of [Defendant's] accounts listing California and Washington street addresses with respect to which account telephone calls (to and/or from) were recorded between October 15, 2009 and May 6, 2016."  Plaintiff relied exclusively on its expert's analysis of this list to prove that two-third of all class members are California citizens. 

However, the Ninth Circuit found that this list addressed only a portion of the class – those who were "residing in California and Washington" when they made or received a call from Defendant. 

The Ninth Circuit noted that the list did not contain information about the size of the "located in" subgroup (i.e., individuals who were physically located in, but were not residents of, California or Washington when they made or received a call from Defendant), and Plaintiff never sought more information about the size of the class after she obtained this list, never appealed the magistrate judge's discovery order, and never argued that the list did not comply with the discovery order.

Because Plaintiff did not submit any evidence regarding the size of the "located in" subgroup, the Ninth Circuit could not determine the size of the entire class and whether two thirds class members are California citizens.  Therefore, the Ninth Circuit held that Plaintiff failed to meet her burden to show that the home-state controversy exception applied.

Plaintiff also argued that her class definition problem was a red herring because Defendant failed to identify a single non-California or Washington citizen whose telephone conversation it recorded.  However, the Ninth Circuit rejected this argument because Defendant did not have the burden to prove the inapplicability of a CAFA exception.  Instead, Plaintiff as the party seeking remand was required to prove the applicability of a CAFA exception. 

Accordingly, the Ninth Circuit vacated the trial court's order remanding the case to state court, and remanded the action to the trial court for further proceedings.


Eric Tsai
Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000
Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon




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Monday, October 16, 2017

FYI: 9th Cir Holds TCPA Claim Not Covered Due to "Invasion of Privacy" Exclusion

The U.S. Court of Appeals for the Ninth Circuit recently held that a liability insurance policy that broadly excluded coverage for invasion of privacy claims also excluded coverage for claims for violations of the federal Telephone Consumer Protection Act, 47 U.S.C. § 227, et seq. ("TCPA").

A copy of the opinion is available at:  Link to Opinion

In 2012, a class action complaint was filed against the Los Angeles Lakers for allegedly sending text messages using an automatic telephone dialing system in violation of the TCPA.  The Lakers asked their insurer to defend them against the lawsuit.

The insurance policy required the insurer to pay for losses (with some restrictions) suffered by the Lakers "resulting from any Insured Organization Claim … for Wrongful Acts."  The policy defined "Wrongful Acts" as "any error, misstatement, misleading statement, act, omission, neglect, or breach of duty committed, attempted, or allegedly committed or attempted by" the Lakers.

The policy also contained an exclusion for claims "based upon, arising from, or in consequence of libel, slander, oral or written publication of defamatory or disparaging material, invasion of privacy, wrongful entry, eviction, false arrest, false imprisonment, malicious prosecution, malicious use or abuse of process, assault, battery or loss of consortium."

The insurer determined that the plaintiff had brought an invasion of privacy suit, which was specifically excluded from coverage, and therefore denied coverage and declined to defend the Lakers.

After the insurer's denial of coverage, the Lakers filed a complaint asserting claims for breach of contract and tortious breach of the implied covenant of good faith and fair dealing.

The trial court granted the insurer's motion to dismiss.  In so ruling, the trial court held that the TCPA claims were "implicit invasion-of-privacy claims" that fell squarely within the policy's "broad exclusionary clause." 

On appeal, the Ninth Circuit began its analysis by examining the terms of the policy under California law. 

As you may recall, California courts must "'give[] effect to the mutual intention of the parties as it existed' at the time the contract was executed."  Wolf v. Walt Disney Pictures & Television, 76 Cal. Rptr. 3d 585, 601 (Cal. Ct. App. 2008) (quoting Cal. Civ. Code § 1636).  In addition, courts must give a contract's terms their "ordinary and popular" meaning, "unless used by the parties in a technical sense or a special meaning is given to them by usage."  Palmer v. Truck Ins. Exch., 988 P.2d 568, 652 (Cal. 1999).

Additionally, California courts interpret coverage clauses in insurance contracts "broadly so as to afford the greatest possible protection to the insured."  Aroa Mktg., Inc. v. Hartford Ins. Of the Midwest, 130 Cal. Rptr. 3d 466, 470 (Cal. Ct. App. 2011).  However, courts should interpret "exclusionary clauses … narrowly against the insurer."  Id.

The Laker's insurance policy did not explicitly exclude coverage of TCPA claims.  As a result,  the Ninth Circuit had to determine whether the TCPA claims fell within the exclusion for claims "based upon, arising from, or in consequence of … invasion of privacy." 

Under the text of the TCPA, it is unlawful for any person within the United States, or any person outside the United States if the recipient is within the United States:

to make any call (other than a call made for emergency purposes or made with the prior express consent of the called party) using any automatic telephone dialing system or an artificial or prerecorded voice … to any telephone number assigned to a … cellular telephone service … or any service for which the called party is charged for the call ….

47 U.S.C. § 227(b)(1)(A)(iii).

In addition, the Ninth Circuit noted that the TCPA twice explicitly states that it is intended to protect privacy rights.  47 U.S.C. § 227(b)(2)(B)(ii)(I) ("will not adversely affect the privacy rights that this section is intended to protect…"); 227(b)(2)(C) ("the Commission may prescribe as necessary in the interest of the privacy rights this section is intended to protect").

Based on the lack of any other statements expressing an alternative intent, and focusing on the ruling making sections of the TCPA, the Ninth Circuit concluded that the purpose of the TCPA was to protect privacy rights and privacy rights alone.

Next, the Ninth Circuit analyzed the complaint based on its interpretation on the TCPA's goal of protecting privacy. 

The complaint asserted causes of action for negligent violation of the TCPA and knowing/willful violation of the TCPA.  In the Ninth Circuit's view, these two causes of action were unquestionably two invasion of privacy claims, and were excluded under the plain language of the insurance policy. 

Therefore, the Ninth Circuit held that the trial court properly concluded that the claims asserted in the complaint were excluded from coverage under the policy.

Finally, the Lakers argued that the insurer had a duty to defend, even if the policy did not require the insurer to indemnify costs incurred from the lawsuit, because the plaintiff asserted that he suffered multiple harms, not just an invasion of privacy.  The Lakers also argued that the complaint sought "recovery of economic injury" and explicitly swore off "any recovery for personal injury," and therefore the plaintiff did not seek relief for invasion of his privacy, which is generally a form of "personal injury." 

Essentially, the Lakers argued that the insurer had a duty to defend because the policy potentially entitled them to indemnity for other claims.

The Ninth Circuit rejected this argument and held that "a TCPA claim is an invasion of privacy claim, regardless of the type of relief sought."  As such, these claims were excluded under the terms of the policy.  Moreover, the Laker did not identify what other claims this set of facts could support.

Accordingly, the Ninth Circuit affirmed the dismissal of the complaint.

The dissent disagreed with the majority opinion, point out that "[w]hen Congress defines a cause of action based on specific and unambiguous statutory elements, what matters is what the statute says – not what motivated enactment of the statute."

Under the plain terms of the TCPA, statutory damages may be recovered when a plaintiff can prove: "(1) the defendant called a cellular telephone number; (2) using an [ATDS]; (3) without the recipient's prior express consent."  Mayer v Portfolio Recovery Assocs., LLC, 707 F.3d 1036, 1043 (9th Cir. 2012) (citing 47 U.S.C. § 227(b)(1)).

The dissent accused the majority of ignoring the elements of the claim, focusing instead on the misconception that Congress only enacted the TCPA to prevent invasion of privacy, yet nothing in the elements of a TCPA claim says anything about "privacy."

The dissent further disagreed the majority's interpretation of the TCPA, pointing out that that "[t]he TCPA specifically addresses public safety concerns, provides redress for economic injury, and protectives businesses from ATDS calls."  Thus, in the dissent's view, not all TCPA claims are privacy claims.

The dissent concluded that because the plaintiff only sought recovery based on an alleged violation of the TCPA, and expressly disavowed claims based on invasion of privacy, the insurer had a duty to defend the Lakers.


Eric Tsai
Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000
Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon




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Wednesday, October 11, 2017

FYI: 9th Cir Limits Subsequent Good-Faith Transferee Exception in Bankruptcy Fraudulent Transfer Actions

The U.S. Court of Appeals for the Ninth Circuit recently held that a debtor corporation's sole shareholder ("Sole Shareholder") and third parties who sold real property and services to the Sole Shareholder could be liable for fraudulent transfers. 

In so ruling, the Ninth Circuit held that the third parties were initial transferees of the debtor corporation's funds because the Sole Shareholder paid the third parties with checks directly from a corporate account, even though the third parties did not have a pre-existing relationship or an ongoing relationship with the Sole Shareholder, his family, or any of his businesses.

A copy of this opinion is available at:  Link to Opinion

As you may recall, the Bankruptcy Code makes a distinction between initial and subsequent transferees when it comes to the recovery of fraudulent transfers. 

The trustee and the debtor's creditors may recover the property (or its value) from "(1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or (2) any [subsequent] transferee of such initial transferee."  11 U.S.C. § 550(a). 

The trustee and creditors, however, may not recover the property or its value from a subsequent transferee if that transferee accepted the property "for value …, in good faith, and without knowledge of the voidability of the transfer."  Id. at § 550(b)(1).

In 2002, the Sole Shareholder of the debtor corporation opened a separate corporate account and deposited certain vendor rebates into that account over a ten-year span.  The Sole Shareholder concealed the separate account from the debtor corporation's general ledgers and later attempted to conceal its existence from the bankruptcy court. 

The Sole Shareholder used the separate account for personal expenses.  The Sole Shareholder purchased real property from real property sellers ("Sellers") and design services from an interior designer ("Interior Designer").  The Sole Shareholder made these purchases using corporate checks drawn on the separate account.  Neither the Sellers nor the Interior Designer had a pre-existing relationship or an ongoing relationship with the Sole Shareholder, his family, or any of his businesses.

In 2012, the corporation filed for bankruptcy.  The unsecured creditor's committee ("Committee") sought to avoid certain transfers made from the separate account, including the payments to the Sellers and the Interior Designer.  The bankruptcy court found that the Sellers and Interior Designer were subsequent transferees entitled to the safe harbor under § 550(b)(1). 

The trial court reversed the bankruptcy court's decision and found that the Sellers and Interior Designer were strictly liable to the Committee because they qualified as "initial transferees" of the fraudulent payments.  The Bankruptcy Appellate Panel affirmed the trial court's decision.

The Ninth Circuit began its analysis by noting that it had adopted the dominion test for determining who is a transferee for purposes of Section 550.  Under the dominion test, a transferee is one who has dominion over the money or other asset.  The dominion test turns on whether the recipient of funds has legal title to them and whether the recipient has the ability to use the funds as he sees fit.  The Ninth Circuit explained that the test focuses on whether the recipient of funds has legal title to them because dominion strongly correlates with legal title and dominion is akin to legal control.

The Ninth Circuit then observed that courts have taken two approaches when applying Section 550 to fraudulent transfers involving the misappropriation of corporate funds by company directors, officers, or other insiders. 

Under the majority approach (which the Ninth Circuit follows), a principal of a debtor corporation who misappropriates company funds to satisfy personal obligations is not an initial transferee because the mere power of a principal to direct the allocation of corporate resources does not amount to legal dominion and control, which is required for initial-transferee status.

In contrast, under the minority approach, corporate principals may be strictly liable as initial transferees when they misuse company funds for personal gain.  Under this "two-step transaction" approach, the debtor company is deemed to have made the initial transfer to the corporate principal, thus making him or her strictly liable as the initial transferee.

The Ninth Circuit explained the merits of the majority approach.  The Ninth Circuit pointed out that the "flow of funds" matters and that receipt of the transferred property is a necessary element for that entity to be a transferee under section 550.  The Ninth Circuit found that simply directing a transfer, i.e., such as directing a debtor to transfer funds, is not enough. 

In addition, the Court reasoned, section 550(a)(1)'s structure indicates that a principal does not become an initial transferee simply by using his or her control over corporate assets to effect a fraudulent transfer because section 550 imposes strict liability on both initial transferees and any beneficiaries of the fraudulent transfers. Thus, the Ninth Circuit held that section 550 indicates that initial transferees and beneficiaries are separate persons. 

Finally, the Ninth Circuit found that the alternative approach (under which every agent or principal of a corporation is deemed the initial transferee when he or she effected a transfer of property in his or her representative capacity) both misallocates the monitoring costs that section 550 seeks to impose and deprives the trustee of a potential source of recovery for creditors.  The Ninth Circuit observed that recovery from an embezzling principal would be difficult, thus Congress also made the first recipient of those funds liable to returning them.

The Ninth Circuit then held that the Sellers and the Interior Designer were initial transferees because legal control over the funds had never passed from the Corporation to the Sole Shareholder.  Recall that the Sole Shareholder had paid the Sellers and the Interior Designer using checks drawn on the Corporation's account, albeit a concealed, separate account.

Thus, the Ninth Circuit found that section 550 allowed the trustee to recover funds from the Sellers and the Interior Designer as initial transferees and from the Sole Shareholder as the beneficiary.

Judge Nguyen dissented from the majority's opinion.  Judge Nguyen suggested that the Ninth Circuit should abandon its dominion test, in favor of the control test used by other circuits.  Under the control test, courts "view the entire transaction as a whole to determine who truly had control of the money." In addition, Judge Nguyen argued that the debtor corporation did not have legal title to the funds prior to the transfer as a matter of state law.  Judge Nguyen argued that under state law, the Sole Shareholder converted corporate funds by transferring them into his personal account, making him the initial transferee.


Eric Tsai
Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000
Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon




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Saturday, September 23, 2017

FYI: 9th Cir Holds Nevada Deficiency Limitation Preempted as to Transferees of FDIC

The U.S. Court of Appeals for the Ninth Circuit recently affirmed final judgments against corporate borrowers and guarantors in three separate cases, holding that:

(a)  the Nevada statute limiting the amount of the deficiency recoverable in a foreclosure action was preempted by federal law as applied to transferees of the Federal Deposit Insurance Corporation (FDIC);
(b)  the plaintiff bank had standing to enforce the loans it acquired from the FDIC;
(c)  the bank was not-issue precluded from showing that the subject loans had been transferred to it;
(d)  the bank did not breach the implied covenant of good faith and fair dealing by suing instead of giving the borrowers more time to restructure the loans because the alleged oral promise of more time lacked consideration and without a binding contract the implied covenant did not apply, the loan documents provided that any modification must be in writing, and defendants had entered into written agreements acknowledging that the bank reserved it right to enforce the loans.;
(e)  the bank was not estopped and did not waive its right to enforce the loans because the defendants at all times knew the loan documents could only be modified in writing and the written acknowledgments reserved the bank's right to enforce the loans;
(f)  the doctrine of laches did not bar the bank's right to foreclose on two of the loans because the bank sued within the statute of limitations and no exceptional circumstances were shown to justify application of laches;
(g)  the bank did not fail to mitigate its damages because it owed no duty to time its foreclosure proceedings so as to minimize any deficiency;
(h)  the trial court did not abuse its discretion by refusing to extend the deadline to amend the pleadings to allow the defendant to add four new defenses and a counterclaim based on the alleged work-out agreement because they showed neither good cause nor excusable neglect for seeking to amend after the pretrial deadline had already passed;
(i)  the defendant debtors were not entitled to a jury trial on the fair market value of the property in two of the cases; and
(j)  the bank did not violate the Nevada statute requiring notice to beneficiaries of the family trusts that guaranteed the debts.

A copy of the opinion is available at:  Link to Opinion

In 2004 and 2005, three limited liability companies received loans from a bank. The loans were guaranteed by the companies' principals in their capacity as trustees for family trusts. The borrowers failed to repay the loans.

The bank was succeeded by an Alabama bank of the same name, which in turn failed in 2009 and was placed in receivership by the FDIC.

The FDIC sold the failed bank's assets, including the subject loans, to a North Carolina bank. The sale was evidenced by a purchase and assumption agreement, a loss sharing agreement and an assignment.

The acquiring bank entered into negotiations with the borrowers about restructuring the loans and during this process the borrowers signed an acknowledgment providing that such negotiations were without prejudice to the lender's enforcement rights and specifically reserving the bank's right to enforce the loan documents.

In November of 2011, the acquiring bank sued to collect one of the loans, raising claims for breach of the promissory note, guaranty and breach of the covenant of good faith and fair dealing. The parties moved for summary judgment and the district court granted the acquiring bank's motion and entered judgment for 7.1 million dollars against the defendant debtors, from which they appealed.

In February of 2012, the properties securing the other two loans were sold at non-judicial sales and in March of 2012 the acquiring bank filed separate lawsuits against the borrowers and guarantors alleging breach of the promissory note, guaranty and breach of the covenant of good faith and fair dealing. The district courts granted summary judgment in the acquiring bank's favor in both actions, entering judgment for approximately $1.9 million dollars and $630,000 respectively against the defendant debtors, from which they appealed.

On appeal, the debtors argued that the acquiring bank lacked standing to enforce the loans when the complaints were filed. The Ninth Circuit rejected this argument, reasoning first that the purchase and assumption agreement, loss sharing agreement, assignment and deeds of trust securing two to loans sufficiently described and encompassed the subject loans and thus the acquiring bank had the right to enforce them.

Next, the Ninth Circuit rejected the debtors' argument that the acquiring bank was issue-precluded by a 2013 Nevada Supreme Court ruling that held that the same bank could not rely on the purchase and assumption agreement to prove that the loan involved in that case had been assigned.

The Court reasoned that the case cited by debtors did not involve the same loans and the Nevada Supreme Court's decision was not based on lack of standing, but instead on the acquiring bank's failure to "produce schedules to the [purchase and assumption agreement] listing assets excluded from the transfer. There was thus no evidence that the loan at issue there was not excluded from the [agreement] by one of those schedules." In the case at bar, by contrast, the acquiring bank "produced not only the [purchase and assumption agreement], but also the attendant schedules showing the loans at issue were not excluded from the terms of the [agreement]."

The Ninth Circuit then turned to analyze the debtors' argument that the acquiring bank "failed to prove each element of its deficiency action" because it did not prove the amount that it paid for the assignment of the subject loans and a Nevada statute limits the amount of the deficiency to the greater of the amount by which the amount paid for the loan "exceeds the fair market value of the property sold at the time of sale or the amount for which the property was actually sold…."

The Court rejected this argument, agreeing with the acquiring bank that the Nevada statute is unconstitutional and preempted by federal law. The Court relied upon a 2015 Nevada Supreme Court case which held that the statute at issue is preempted by [the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") "to the extent that it would limit recovery on loans transferred by the FDIC."  

The Ninth Circuit noted that "[i]t would be more difficult for the FDIC to dispose of the assets of failed banks if the transferee could not turn a profit on those assets." Thus, the Court adopted the Nevada Supreme Court's reasoning and held that the Nevada statute "is preempted by federal law as applied to transferees of the FDIC."

Next, the Court rejected the debtors' argument that the trial court erred in granting summary judgment because the acquiring bank breached the implied covenant of good faith and fair dealing by not honoring its oral promise to give the borrowers time to restructure the loans. It reasoned that the alleged work-out agreement was not an enforceable contract because it lacked consideration and, "[a]bsent a contract, there can be no implied covenant of good faith and fair dealing."

In addition, the Court noted that the loan documents provided that any modification must be in writing, such that the alleged oral modification was unenforceable.  Moreover, the Ninth Circuit noted, during the loan work-out negotiations, the debtors had entered into written agreements acknowledging that the acquiring bank reserved it right to enforce the loans.

The Ninth Circuit also rejected the debtors' argument that the acquiring bank was estopped or, alternatively, waived its right to enforce the loans, reasoning that even though "[e]stoppel can apply to a promise for which there was no consideration paid [and,] [i]n such a case, reliance is a substitute for consideration[,]" the third element of estoppel, "the party asserting estoppel must be ignorant of the true state of facts[,]" was missing.

The Court explained that the debtors at all times knew the loan documents could only be modified in writing and the written acknowledgments reserved the acquiring bank's right to enforce the loans. The waiver argument failed for the same reasons.

The Ninth Circuit next rejected the debtor's argument that laches barred the acquiring bank's right to foreclose on two of the loans because it waited to sue until the market value of the collateral had fallen, reasoning that "[e]specially strong circumstances must exist … to sustain a defense of laches when the statute of limitations has not run." No such circumstances were shown and the two lawsuits at issue were filed within the statute of limitations.

The debtors also argued that the acquiring bank failed to mitigate its damages because it "strung [them] along with promises of a work-out agreement, all the while intending to foreclose on the properties when the market bottomed out." The Court first noted that debtors cited no precedent showing that by doing this the acquiring bank "thereby breached a duty to them." The Court relied upon and found persuasive the Texas Supreme Court's holding in a 1990 case the "held that there is not duty for a secured creditor to time a foreclosure sale so as to minimize a deficiency."

The Ninth Circuit next rejected the debtors' argument that the trial court erred by refusing to allow them to amend their answer to "add four new defenses and a counterclaim based on the alleged work-out agreement" after the pretrial deadline had passed, reasoning that they did not show good cause or excusable neglect as required because "[t]he defenses and counterclaim they sought to add were based on the work-out agreement, which [they] knew about long before the deadline to amend had passed." The Court noted that this showed a lack of diligence, and the debtors could not show excusable neglect because they offered no explanation for the delay in seeking to amend.

In addition, the debtors argued that the trial court erred in two of the cases by deciding to "determine the fair market value of the … properties itself rather than submitting the issue to a jury … [thereby violating] their Seventh Amendment right to a jury trial…."

The Ninth Circuit rejected this argument, reasoning that "[u]nder the Seventh Amendment, the right to a jury trial exists in 'Suits at common law.'" "Nevada law appears to contemplate that fair market value in deficiency actions will be determined by the court, not by a jury. … Thus while the nature of the action may be legal, the nature of the remedy calculated based on fair market value is equitable. As the nature of remedy is the more important consideration under the Seventh Amendment, [the debtors] were not entitled to a jury trial on the fair market value of the property."

Finally, the Court rejected the debtors' argument that the bank violated Nevada's statute requiring that the foreclosing mortgagee give notice to known trust beneficiaries at least 30 days before obtaining a judgment, because the statute expressly provides that the notice may be given within such time as the court may fix, and the trial court "in these cases determined that the notice requirement was met by the service of the complaint and by a letter of August 29, 2013."  Because "[j]udgment in the cases was not entered until approximately two years after this letter, well before the 30-day limit in the statute[,]" the Ninth Circuit held that the acquiring bank did not violate the statute.

Accordingly, the judgments of the trial court in all three actions were affirmed.


Eric Tsai
Maurice Wutscher LLP 
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Email: etsai@MauriceWutscher.com

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