Finney et al v. First Tennessee Bank et al, No. 2:2012cv01249 - Document 42 (D. Ariz. 2015)

Court Description: ORDER denying 37 Defendants' Motion for Summary Judgment. See attached Order. Signed by Senior Judge James A Teilborg on 3/31/2015.(TLB)
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Finney et al v. First Tennessee Bank et al Doc. 42 1 2 3 WO 4 5 6 7 8 IN THE UNITED STATES DISTRICT COURT 9 FOR THE DISTRICT OF ARIZONA 10 11 Mark A. Finney, et al., Plaintiffs, 12 13 ORDER v. 14 No. CV-12-01249-PHX-JAT First Tennessee Bank, et al., Defendants. 15 16 Pending before the Court is Defendants’ Motion for Summary Judgment (Doc. 17 18 19 20 21 22 23 24 25 26 27 28 37). The Court now rules on the motion. I. Background Plaintiff Mark A. Finney (“Finney”) is the president and principal shareholder of The Conlon Group, Inc., which in turn is the parent company of Plaintiff The Conlon Group Arizona LLC (“Conlon”). Conlon owns three units of the Arizona Biltmore Hotel Villas and Condominiums (the “Units”). Conlon refinanced the Units as rental properties through First Horizon Loan Corporation (“First Horizon”). As part of the refinancing process, First Horizon, who knew that the Units were to be used as rental properties and not owner-occupied homes, required Conlon to deed the Units to Finney. Finney then executed three separate notes secured by three deeds of trust (the “Deeds of Trust”). The Deeds of Trust each contained the following paragraph (“Paragraph 12”), which is at the 1 2 3 4 5 6 7 8 9 10 11 12 13 core of this lawsuit: 12. Borrower Not Released; Forbearance by Lender Not a Waiver. Extension of the time for payment or modification of amortization of the sums secured by this Security Instrument granted by Lender to Borrower or any Successor in Interest of Borrower shall not operate to release the liability of Borrower or any Successors in Interest of Borrower. Lender shall not be required to commence proceedings against any Successor in Interest of Borrower or to refuse to extend time for payment or otherwise modify amortization of the sums secured by this Security Instrument by reason of any demand made by the original Borrower or any Successors in Interest of Borrower. Any forbearance by Lender in exercising any right or remedy including, without limitation, Lender’s acceptance of payments from third persons, entities or Successors in Interest of Borrower or in accounts less than the amount then due, shall not be a waiver of or preclude the exercise of any right or remedy. (Doc. 37-2 at 46). 14 After executing the deeds of trust, Finney then deeded the Units back to Conlon. 15 First Horizon securitized Finney’s loans and transferred them to “The Bank of New York 16 Mellon as Trustee for the holder of the Certificates, First Horizon Mortgage Pass- 17 Through Certificates Series FHAMS 2007-FA4” (“FHAMS 2007-FA4”). (Doc. 37-1 ¶ 8). 18 First Horizon’s successor-in-interest, First Tennessee Bank (“First Tennessee”) acted as 19 the servicer on Finney’s loans for a number of years; Nationstar Mortgage LLC 20 (“Nationstar”) became the servicer beginning in 2011. 21 Eventually, the Arizona Biltmore Hotel filed for bankruptcy, adversely impacting 22 the rental of the Units. Finney contacted First Tennessee, and later Nationstar, to request 23 a modification of his loans. First Tennessee and Nationstar told Finney that they would 24 not consider a modification agreement because the Units were rental properties, not 25 owner-occupied properties, and the lender, FHAMS 2007-FA4, had a policy of not 26 considering or discussing loan modifications with owners of rental properties. 27 Finney and Conlon subsequently filed this lawsuit, and Defendants moved to 28 dismiss all of Plaintiffs’ claims. In ruling on the motion to dismiss, the Court concluded -2- 1 2 3 that Plaintiffs’ complaint alleged a single claim for the breach of the covenant of good 4 faith and fair dealing. (Doc. 20 at 9). Furthermore, the Court concluded that it could not 5 dismiss this claim on a motion to dismiss because Plaintiffs had alleged that the inclusion 6 of Paragraph 12 within the Deeds of Trust gave rise to a reasonable expectation that 7 Defendants would consider a loan modification for rental properties. (Id. at 8). The Court 8 framed the ultimate issue in this case as “whether, based on the language in the contract, 9 which contemplates a potential modification, Plaintiffs could have reasonably expected 10 that Defendants would in good faith consider Plaintiffs’ modification request.” (Id.) 11 Accordingly, the Court denied the motion to dismiss with respect to Plaintiffs’ claim for 12 breach of the covenant of good faith hand fair dealing. (Id.) 13 II. Legal Standard 14 A. Summary Judgment 15 Summary judgment is appropriate when “the movant shows that there is no 16 genuine dispute as to any material fact and the movant is entitled to judgment as a matter 17 of law.” Fed. R. Civ. P. 56(a). “A party asserting that a fact cannot be or is genuinely 18 disputed must support that assertion by . . . citing to particular parts of materials in the 19 record, including depositions, documents, electronically stored information, affidavits, or 20 declarations, stipulations . . . admissions, interrogatory answers, or other materials,” or by 21 “showing that materials cited do not establish the absence or presence of a genuine 22 dispute, or that an adverse party cannot produce admissible evidence to support the fact.” 23 Id. 56(c)(1)(A), (B). Thus, summary judgment is mandated “against a party who fails to 24 make a showing sufficient to establish the existence of an element essential to that party’s 25 case, and on which that party will bear the burden of proof at trial.” Celotex Corp. v. 26 Catrett, 477 U.S. 317, 322 (1986). 27 Initially, the movant bears the burden of pointing out to the Court the basis for the 28 motion and the elements of the causes of action upon which the non-movant will be -3- 1 2 3 unable to establish a genuine issue of material fact. Id. at 323. The burden then shifts to 4 the non-movant to establish the existence of material fact. Id. The non-movant “must do 5 more than simply show that there is some metaphysical doubt as to the material facts” by 6 “com[ing] forward with ‘specific facts showing that there is a genuine issue for trial.’” 7 Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586–87 (1986) (quoting 8 Fed. R. Civ. P. 56(e) (1963) (amended 2010)). A dispute about a fact is “genuine” if the 9 evidence is such that a reasonable jury could return a verdict for the non-moving party. 10 Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The non-movant’s bare 11 assertions, standing alone, are insufficient to create a material issue of fact and defeat a 12 motion for summary judgment. Id. at 247–48. However, in the summary judgment 13 context, the Court construes all disputed facts in the light most favorable to the non- 14 moving party. Ellison v. Robertson, 357 F.3d 1072, 1075 (9th Cir. 2004). 15 B. The Covenant of Good Faith and Fair Dealing 16 “Arizona law implies a covenant of good faith and fair dealing in every contract.” 17 Bike Fashion Corp. v. Kramer, 46 P.3d 431, 434 ¶ 13 (Ariz. Ct. App. 2002) (quoting 18 Rawlings v. Apodaca, 726 P.2d 565, 569 (Ariz. 1986)). “Such implied terms are as much 19 a part of a contract as are the express terms.” Wells Fargo Bank v. Ariz. Laborers, 20 Teamsters & Cement Masons Local No. 395 Pension Trust Fund, 38 P.3d 12, 28 ¶ 59 21 (Ariz. 2002). The purpose of this covenant is so “neither party will act to impair the right 22 of the other to receive the benefits which flow from their agreement or contractual 23 relationship.” Bike Fashion, 46 P.3d at 434 ¶ 13 (internal quotation marks omitted) 24 (quoting Rawlings, 726 P.2d at 569-70)). This covenant “guarantees the protection of the 25 parties’ reasonable expectations,” and is breached either “by exercising express discretion 26 in a way inconsistent with a party’s reasonable expectations and by acting in ways not 27 expressly excluded by the contract’s terms but which nevertheless bear adversely on the 28 party’s reasonably expected benefits of the bargain.” Id. at 434-35 ¶¶ 13-14. However, -4- 1 2 3 “an implied covenant of good faith and fair dealing cannot directly contradict an express 4 contract term.” Id. at 434-35 ¶ 14. 5 Finally, contract interpretation is a question of law “where the terms of a contract 6 are found to be plain and unambiguous.” Chandler Med. Bldg. Partners v. Chandler 7 Dental Grp., 855 P.2d 787, 791 (Ariz. Ct. App. 1993). 8 III. Analysis 9 Plaintiffs rely upon the Court’s prior ruling for the proposition that as a matter of 10 law, the language of Paragraph 12 supports a claim for breach of the covenant of good 11 faith and fair dealing when a lender fails to consider a loan modification. (Doc. 39 at 2- 12 4). Defendants argue that nothing in the plain language of Paragraph 12 suggests that 13 Defendants would consider in good faith Plaintiffs’ modification request. (Doc. 37 at 7). 14 Defendants are correct that nothing in the actual language of Paragraph 12 15 obligates them to consider a loan modification. The first sentence provides that if the 16 lender grants an extension of time for payment or modifies the amortization of the 17 mortgage, then this does not release the borrower’s liability. This sentence does not 18 require the lender to consider any such modification. The second sentence provides that if 19 the borrower or the borrower’s successor-in-interest makes certain demands from the 20 lender, the making of these demands does not cause the lender to be obligated to 21 “commence proceedings” against the borrower’s successor-in-interest or to refuse to 22 modify the loan. This sentence does not require the lender to consider a loan 23 modification. The third sentence provides that forbearance by the lender does not waive 24 any of the lender’s rights under the agreement. This sentence concerns situations in which 25 the lender agrees to accept a partial payment, for example, and clarifies that this does not 26 permanently modify the parties’ agreement; it does not require the lender to consider a 27 loan modification. 28 Paragraph 12 does, however, contemplate the possibility of a loan modification in -5- 1 2 3 general. The borrower might reasonably expect based on this language that there is the 4 possibility of a loan modification, and such a possibility can arise only if both parties are 5 willing to discuss a modification. Whether Plaintiffs in fact reasonably expected the 6 possibility of a loan modification is a genuine issue of material fact, and because the 7 implied covenant of good faith and fair dealing protects the parties’ reasonable 8 expectations, Defendants are not entitled to summary judgment. 9 Defendants cite a number of cases from other jurisdictions for the proposition that 10 a borrower under a residential mortgage loan has no reasonable expectation that the 11 lender will consider a loan modification. (Doc. 37 at 8). None of these cases are 12 controlling here. In Douglas v. U.S. Bank National Association, 2013 DNH 071, 2013 13 WL 1890728, at *4 (D.N.H. May 6, 2013), the court noted that the borrower did not 14 identify “any particular grant of discretion in the mortgage that they believe was 15 exercised unreasonably.” 2013 WL 1890728, at *6. Here, Plaintiffs identify the inclusion 16 of Paragraph 12 as implying that Defendants had discretion to consider a loan 17 modification. In Dohner v. Wachovia Mortgage FSB, 2011 WL 4064067 (D. Utah Sept. 18 13, 2011), the issue was not whether the lender was obligated to consider a loan 19 modification but whether the lender was obligated to modify the loan. 2011 WL 4064067, 20 at *2; see also Barna v. Wells Fargo Bank, N.A., 2013 WL 1182087, at *1, 3 (D. Nev. 21 Mar. 20, 2013) (same). 22 Defendants also argue that the Deeds of Trust contemplate a residential, rather 23 than a commercial, mortgage and therefore any language in Paragraph 12 referencing a 24 loan modification cannot create reasonable expectations on the part of Plaintiffs as to the 25 modification of a commercial loan. (Doc. 37 at 8). Although each of the Deeds of Trust 26 indeed provides that the borrower will occupy the property as a principal residence within 27 sixty days, (Doc. 37-2 at 43), it does not follow from this fact that Plaintiffs could not 28 reasonably expect Defendants to consider a loan modification request. -6- 1 2 3 Under Arizona law, ambiguities in contracts are construed against the drafter. See 4 MT Builders, L.L.C. v. Fisher Roofing, Inc., 197 P.3d 758, 763 ¶ 10 (Ariz. Ct. App. 5 2008). First Horizon, and indirectly Defendants, chose the form for the Deeds of Trust. 6 The fact that Defendants chose to use (or to assume the obligations under) a residential 7 deed of trust form for a commercial loan does not permit them to avoid the reasonable 8 expectations that arise on the part of the borrower under this form. If Defendants wished 9 to not create the reasonable expectation by Plaintiffs that they would consider a loan 10 modification, they should have used a commercial deed of trust form that more accurately 11 reflected their loan policies. 12 Defendants next argue that even if they were required to “consider” a loan 13 modification, they in fact considered Plaintiffs for a modification but informed Plaintiffs 14 that they could not proceed with a modification because the loans were non-residential. 15 (Doc. 37 at 9; Doc. 41 at 4). Defendants claim that this response constituted consideration 16 of Plaintiffs’ request for a loan modification. But a reasonable juror could conclude that if 17 Plaintiffs had a reasonable expectation that Defendants would consider a loan 18 modification, that consideration required Defendants to evaluate the merits of Plaintiffs’ 19 modification request. The Court cannot say as a matter of law that Defendants’ refusal to 20 address the merits of Plaintiffs’ loan modification request constituted consideration of 21 that request. 22 Defendants additionally contend that Plaintiffs cannot show that they suffered 23 damages as a result of any alleged breach of the covenant of good faith and fair dealing. 24 (Id. at 11). The Court cannot state on the record before it at summary judgment that 25 Plaintiffs have no evidence of damages. For example, Plaintiffs may have relied upon 26 Paragraph 12 in selecting First Horizon as their lender, a fact that could give rise to 27 damages. 28 Finally, Defendants contend that Conlon has no contractual relationship to -7- 1 2 3 Defendants and therefore no standing to raise any claim relating to Paragraph 12. (Id. at 4 12). Plaintiffs assert that Conlon is an assignee of Finney’s rights under the Deed of Trust 5 and therefore has standing. (Doc. 39 at 9). Although Plaintiffs offer no evidence in 6 support of this assertion, a genuine issue of material fact may exist as to whether Conlon 7 has standing, and the Court will not enter judgment against Conlon at this time. 8 IV. For the foregoing reasons, 9 IT IS ORDERED denying Defendants’ Motion for Summary Judgment (Doc. 10 11 12 Conclusion 37). Dated this 31st day of March, 2015. 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -8-