-MJS Bedrock Financial, Inc. v. The United States of America, No. 1:2010cv02326 - Document 21 (E.D. Cal. 2011)

Court Description: MEMORANDUM DECISION and ORDER Re Plaintiff's Motion to Strike and Defendant's Motion to Strike, signed by Judge Oliver W. Wanger on 6/17/2011. (Bedrocks Motion to Strike is DENIED, without prejudice, The United States Motion to Strike is DENIED, without prejudice, Bedrock shall submit a proposed form of order consistent with this memorandum decision within five (5) days of electronic service of this memorandum decision.)(Gaumnitz, R)

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1 UNITED STATES DISTRICT COURT 2 FOR THE EASTERN DISTRICT OF CALIFORNIA 3 4 5 BEDROCK FINANCIAL, INC., a California Corporation, 1:10-cv-2326 OWW MJS 7 v. MEMORANDUM DECISION AND ORDER RE PLAINTIFF S MOTION TO STRIKE AND DEFENDANT S MOTION TO STRIKE 8 THE UNITED STATES OF AMERICA, (DOCS. 12, 14) 9 Defendant. Plaintiff, 6 10 I. INTRODUCTION 11 Plaintiff Bedrock Financial, Inc. ( Bedrock ) proceeds with 12 13 this action for equitable subrogation, declaratory relief, and 14 judicial foreclosure of equitable lien against the United States 15 of America ( United States ). Before the court are Bedrock s 16 motion to strike answer and counterclaim (Doc. 12) and the United 17 State s motion to strike (Doc. 13). The United States filed an 18 19 opposition to Bedrock s motion (Doc. 13), to which Bedrock replied (Doc. 14). Bedrock did not file an opposition to the 20 21 22 23 24 United States motion to strike. The motions were heard June 13, 2011. II. BACKGROUND In August 2006, Jose M. Fuentes and his wife, Irma Fuentes 25 (together, Debtors ), borrowed $150,000.00 from R.K. Lowe, 26 Trustee of the RK Lowe Revocable Trust ( Lowe Mortgage ), and 27 secured repayment with a first deed of trust ( Lowe Deed of 28 1 1 Trust ) against a vacant lot with commercial zoning in Atwater, 2 Merced County, California ( Property ). The Lowe Deed of Trust 3 was recorded on August 25, 2006 in Merced County. 4 On October 24, 2007, the Internal Revenue Service ( IRS ) 5 6 7 8 recorded a $42,458.12 tax lien against the Debtors in the Merced County records ( Tax Lien ). The Debtors became delinquent on their payments under the 9 Lowe Deed of Trust in 2007. On February 5, 2008, the Debtors 10 refinanced the Property with a $243,000.00 loan from Bedrock 11 Financial ( Bedrock Refinancing ), securing repayment with a deed 12 13 14 15 of trust encumbering the Property in favor of Bedrock Financial ( Bedrock Deed of Trust ). The Bedrock Financial Deed of Trust was recorded on February 5, 2008 in Merced County. The Debtors 16 defaulted on the Bedrock Deed of Trust, and Bedrock foreclosed on 17 the Property in October 2009. 18 Bedrock alleges that the Tax Lien was not discovered until 19 long after the Debtors went into default under the Bedrock Deed 20 of Trust. Bedrock alleges that based on the date of recordation 21 of the Tax Lien, the Bedrock Refinancing unintentionally put the 22 23 24 United States in a senior lien position on the Property. On May 3, 2010, Bedrock filed a state court action against the United 25 States seeking equitable subrogation and foreclosure of Bedrock s 26 equitable lien. The United States removed the action to federal 27 28 2 1 court and added First American ( FirstAm ) as a third-party on a 2 counterclaim of conversion of federal funds. 3 4 The California Secretary of State suspended Bedrock as a California corporation effective December 24, 2009. Due to 5 6 7 Bedrock s lack of standing to pursue or defend a lawsuit, on October 12, 2010 the Complaint and the United States' 8 counterclaim against Bedrock were voluntarily dismissed without 9 prejudice; the third-party complaint against FirstAm remains 10 pending. 11 12 13 14 15 After Bedrock s corporate status was reinstated, it re-filed a complaint for equitable subrogation and judicial foreclosure on December 14, 2010. (Doc. 1). On March 17, 2011, the United States filed an answer and counterclaim for declaratory relief and 16 judicial foreclosure. (Doc. 10). Bedrock filed a motion to strike 17 portions of the United States answer and counterclaim (Doc. 12), 18 and the United States filed a motion to strike Bedrock s jury 19 demand (Doc. 13). 20 21 22 III. LEGAL STANDARD Rule 12(f) provides that the court may order stricken from any pleading any insufficient defense or any redundant, 23 24 25 immaterial, impertinent, or scandalous matter. Fed. R. Civ. P. 12(f). The function of a Rule 12(f) motion to strike is to avoid 26 the expenditure of time and money that might arise from 27 litigating spurious issues by dispensing with those issues prior 28 3 1 to trial. Fantasy, Inc. v. Fogerty, 984 F.2d 1524, 1527 (9th Cir. 2 1993), rev'd on other grounds, Fogerty v. Fantasy, Inc., 510 U.S. 3 517, 114 S.Ct. 1023 (1994). Motions to strike are disfavored and 4 infrequently granted. E.g., Natural Res. Def. Counsel v. 5 6 7 Kempthorne, 539 F.Supp.2d 1155, 1162 (E.D. Cal. 2008). A motion to strike under Rule 12(f) should be denied unless it can be 8 shown that no evidence in support of the allegation would be 9 admissible, or those issues could have no possible bearing on the 10 issues in the litigation. Gay-Straight Alliance Network v. 11 Visalia Unified School Dist., 262 F.Supp.2d 1088, 1099 (E.D. Cal. 12 13 14 15 2001). [E]ven when techinically appropriate and well-founded, Rule 12(f) motions often are not granted in the absence of a showing of prejudice to the moving party. 5C CHARLES A. WRIGHT, 16 ARTHUR R. MILLER, MARY KAY KANE & RICHARD L. MARCUS, FEDERAL PRACTICE 17 PROCEDURE § 1381, (3d ed. 2011). AND 18 Although motions to strike a defense are generally 19 disfavored, a Rule 12(f) motion to dismiss a defense is proper 20 when the defense is insufficient as a matter of law. Kaiser 21 22 23 24 Aluminum & Chem. Sales, Inc. v. Avondale Shipyards, Inc., 677 F.2d 1045, 1057 (5th Cir. 1982). A defense that might confuse the issues in the case and would not, under the facts alleged, 25 constitute a valid defense to the action can and should be 26 deleted. 5C CHARLES A. WRIGHT, ARTHUR R. MILLER, MARY KAY KANE & RICHARD 27 L. MARCUS, FEDERAL PRACTICE 28 AND PROCEDURE § 1381, (3d ed. 2011). A 4 1 2 3 4 partial defense is not insufficient. Id. Immaterial matter is that which has no essential or important relationship to the claim for relief or the defenses being pleaded. Fantasy, 984 F.2d at 1527. Impertinent matter 5 6 7 consists of statements that do not pertain, and are not necessary, to the issues in question. Id. Scandalous matters are 8 allegations that unnecessarily reflect [] on the moral character 9 of an individual or state [] anything in repulsive language that 10 detracts from the dignity of the court. Consumer Solutions REO, 11 LLC v. Hillery, 658 F.Supp.2d 1002, 1020 (N.D. Cal. 2009) 12 (quoting Cobell v. Norton, 224 F.Rd.D. 1, 5 (D.D.C. 2004). 13 IV. 14 15 16 17 18 19 20 21 22 23 A. DISCUSSION Bedrock s Motion to Strike 1. Second Affirmative Defense Bedrock moves to strike the United States second affirmative defense as an insufficient defense: (2) Plaintiff has waived by its conduct any contention that the property s fair market value in February 2008 was less than $243,000. Doc. 10, 4. Bedrock contends that the United States second affirmative defense, based on the doctrine of waiver, is legally 24 insufficient to bar recovery under Bedrock s claims for equitable 25 subrogation and judicial foreclosure. Bedrock argues that its 26 Complaint seeks an equitable lien on the security itself- 27 regardless of its value in 2008 or any time, and the property s 28 5 1 fair market value in 2008 has no bearing on any claim. 2 3 4 The United States rejoins that the second affirmative defense is not insufficient because equities are material to this lawsuit, and that valuation, i.e., windfall unjust 5 6 7 enrichment, or prejudice, is material to the balancing of equities. Weighing of equities is part of the test for equitable 8 9 subrogation. See Caito v. United Cal. Bank, 20 Cal.3d 694, 704 10 (1978) ( Subrogation must not work any injustice to the rights of 11 others. ). In addition, the doctrine of superior equities is 12 13 14 15 followed in subrogation litigation. Rokeby-Johnson v. Aquatronics Int l, Inc., 159 Cal.App.3d 1076, 1084, 206 Cal.Rptr. 232 (1984). Unjust enrichment is among the equities relevant to equitable 16 subrogation. See In re Johnson, 240 Cal.App.2d 742, 746 (1966). 17 Subrogation is applied liberally to prevent unjust enrichment. 18 Haskel Eng g & Supply Co. v. Hartford Accident & Indem. Co., 78 19 Cal.App.3d 371, 377, 144 Cal.Rptr. 189 (1978). The United States 20 second affirmative defense is not insufficient as a matter of 21 law. 22 23 24 The United States further argues that the Property s 2008 valuation is a partial defense. The United States asserts that 25 the valuation was adequate in 2008 to fully pay the Tax Lien, 26 and, together with later interest accrual and other facts, 27 reduces Bedrock s equities to zero. Motions to strike are denied 28 6 1 if there is a mixed question of law and fact that cannot be 2 resolved. 5C CHARLES A. WRIGHT, ARTHUR R. MILLER, MARY KAY KANE & RICHARD 3 L. MARCUS, FEDERAL PRACTICE 4 AND PROCEDURE § 1381 (3d ed. 2011). Finally, the United States correctly asserts that Bedrock 5 6 7 has not shown any prejudice from the second affirmative defense. Motions to strike are rarely granted in the absence of a showing 8 of prejudice to the moving party. Ollier v. Sweetwater Union 9 High School Dist., 735 F.Supp.2d 1222, 1224 (S.D. Cal. 2010). 10 Bedrock s motion to strike the United States second 11 12 13 14 15 16 17 18 19 affirmative defense is DENIED. 2. Fifth and Seventh Affirmative Defenses Bedrock also moves to strike the United States fifth and seventh affirmative defenses as insufficient defenses: (5) Plaintiff s acquisition of the fee interest in the property in October 2009 extinguished plaintiff s lien interest. . . . (7) Having foreclosed on its mortgage once in its October 2009 nonjudicial foreclosure, plaintiff cannot now foreclose on the same interest a second time. 20 Doc. 10, 4. Bedrock contends that the United States fifth and 21 seventh affirmative defenses, based on the doctrine of merger, 22 are insufficient because the merger doctrine does not bar the 23 24 25 establishment or foreclosure of any equitable estate. Bedrock argues that in order to assert such theories, the United States 26 must plead that Bedrock intended a merger. Bedrock contends that 27 because the allegation of intent does not appear in the United 28 7 1 States answer and it cannot be made under the facts of the case 2 at bar, the fifth and seventh affirmative defenses are legally 3 insufficient. 4 The United States rejoins that a motion to strike cannot 5 6 7 rely on extrinsic evidence, such as the facts of the case at bar. Fantasy, 984 F.2d at 1528 ( a motion to strike must rely 8 only on the fact of the pleading and on judicially noticed 9 facts. ). Whether Bedrock intended the merger is a question of 10 fact. Sheldon v. La Brea Materials Co., 216 Cal. 686, 692, 15 11 P.2d 1098 (1932) ( [I]ntention is a question of fact. ). The 12 13 14 15 United States further argues that the equities are important in merger questions, and that the application of the merger doctrine depends on further factual development. A motion to strike an 16 affirmative defense can only be granted if there are no questions 17 of fact. Levin-Richmond Terminal Corp. v. Int l Longshoremen s & 18 Warehousemen s Union, Local 10, 751 F.Supp. 1373, 1375 (N.D. Cal. 19 1990). 20 21 In its reply, Bedrock argues that the doctrine of merger has no application and is immaterial. Bedrock asserts that it seeks 22 23 24 to impose and foreclose on an equitable lien, not on the original trust deed, and whether Bedrock s original trust deed merged into 25 its subsequent fee interest is of no consequence. Bedrock, 26 however, does not provide legal support for this argument. 27 [W]hen there is no showing of prejudicial harm to the moving 28 8 1 party, the courts generally are not willing to determine disputed 2 and substantial questions of law upon a motion to strike. 3 Augustus v. Bd. of Pub. Instruction of Escambia Cnty., Fla., 306 4 F.2d 862, 868 (5th Cir. 1962). [T]hese questions quite properly 5 6 7 are viewed as best determined only after further development by way of discovery and a hearing on the merits, either on a summary 8 judgment motion or at trial. 5C CHARLES A. WRIGHT, ARTHUR R. MILLER, 9 MARY KAY KANE & RICHARD L. MARCUS, FEDERAL PRACTICE 10 ed. 2011). 11 12 AND PROCEDURE § 1381 (3d Bedrock s motion to strike the United States fifth and seventh affirmative defenses is DENIED. 13 3. 14 Immaterial and Impertinent References to Title Insurance in Counterclaim 15 Bedrock contends that the following references to title 16 insurance and purported indemnification of Bedrock in the United 17 18 19 20 21 22 States counterclaims are immaterial and impertinent: 19. One or more of Dual Arch International, Bedrock and the Tax Debtors selected FirstAm, and all engaged FirstAm, to be their escrow agent and to provide title insurance. 20. At the direction of Dual Arch International, Bedrock and the Tax Debtors, with their approval and for their benefit, FirstAm set up and carried out an escrow for a loan by Bedrock and provided lender s title insurance to Bedrock. 23 24 25 26 . . . 33. Bedrock made a title insurance claim against FirstAm, complaining of the insured against federal tax lien. Upon receipt of the insurance claim, FirstAm did not pay the federal tax lien and did not pay Bedrock. 27 28 9 1 2 3 4 5 6 7 8 9 10 11 34. FirstAm instead, under a term of the title insurance policy, defended Bedrock s interest in the Parcel by promoting a court action by Bedrock against the federal government. 35. If the first-in-time federal tax lien is first in right, FirstAm will indemnify Bedrock under the terms of its title insurance policy for any loss suffered by Bedrock. 37. Should the first-in-time federal tax lien not be first in right, FirstAm would escape paying on Bedrock s insurance claim. Doc. 10, 7-9. Bedrock contends that the acts or omissions of First American Title Company and First American Title Insurance Company ( FirstAm ) are irrelevant to this lawsuit and are likely 12 to prejudice the fact-finder against Bedrock and jeopardize 13 Bedrock s right to a fair trial. 14 15 16 17 The United States rejoins that: (1) FirstAm had knowledge of the Tax Lien, and the court, sitting in equity, should consider FirstAm s knowledge in weighing the equities; (2) FirstAm is the alleged tort feasor in the first lawsuit s claim for conversion 18 19 of federal funds, and FirstAm s culpability in the related 20 lawsuit should be considered in balancing the equities; and (3) 21 as between Bedrock and FirstAm, FirstAm has the primary interest 22 in the litigation, and, regardless of whether Bedrock prevails in 23 this action, FirstAm will make Bedrock financially whole. 24 Therefore, the United States argues that FirstAm s rights, 25 26 27 28 obligations and behavior before, during, and after the litigation impact the equities as between the parties. Bedrock rejoins that: (1) whether FirstAm had knowledge of 10 1 the Tax Lien is irrelevant, and any knowledge that FirstAm had of 2 the Tax Lien during escrow cannot be imputed to Bedrock; (2) 3 FirstAm is not Bedrock s agent; and (3) evidence of Bedrock s 4 insurance coverage would not be admissible under Federal Rule of 5 6 7 Evidence 411. The court has issued an order to show cause why the first 8 lawsuit, including the United States third-party complaint for 9 conversion against FirstAm, should not be consolidated with this 10 lawsuit. Consolidation of the lawsuits would moot Bedrock s 11 claims of immateriality and impertinence. 12 13 14 15 Even if the two lawsuits are not consolidated, an inquiry into the admissibility of evidence of Bedrock s insurance coverage is premature at the pleading stage. In addition, the 16 disputed allegations provide a better understanding of the United 17 States counterclaim. 5C CHARLES A. WRIGHT, ARTHUR R. MILLER, MARY KAY 18 KANE & RICHARD L. MARCUS, FEDERAL PRACTICE 19 2011). ( The Rule 12(f) motion to strike allegedly offensive 20 matter also will be denied if the allegations might serve to 21 AND PROCEDURE § 1382 (3d ed. achieve a better understanding of the plaintiff's claim for 22 23 24 25 26 27 28 relief. ). Bedrock s motion to strike paragraphs 19-20 and 33-37 of the United States counterclaim is DENIED. 4. Scandalous References to Title Insurance in Counterclaim Bedrock also moves to strike the following paragraphs as 11 1 2 3 4 scandalous: 38. Should title insurers be allowed to escape payment of valid insurance claims by the device of actions against taxing authorities with recorded tax lien notices, title companies and escrow agents would have incentives to ignore and pass clouds on title to their customers. 5 6 7 8 9 10 11 39. Should title insurers be allowed to escape payment of valid insurance claims by actions against taxing authorities with recorded tax lien notices, the insurers would have incentives to insure clear title, at nominal risk to themselves, when the insured interests actually are clouded by valid tax liens. Doc. 10, 9. Bedrock contends that no lender or title insurer would ever want to risk the expense, hassle, and difficulty of 12 litigating lien priority disputes with the federal government. 13 Rather, Bedrock argues that these allegations cast it in a cruel 14 and deragotory light and do not state any facts whatsoever. Doc. 15 12-1, 10. 16 17 The United States correctly argues that these allegations fall far short of the Rule 12(f) standard for scandalous matters. 18 19 The allegations do not reflect on the moral character of Bedrock 20 or anyone else, state anything in repulsive language, or detract 21 from the dignity of the court or parties. 22 23 24 25 26 27 28 Bedrock s motion to strike paragraphs 38 and 39 of the United States counterclaim is DENIED. 5. References to Title Insurance in Body of Answer Based on its arguments supporting the motion to strike references to title insurance in the Counterclaim, Bedrock moves to strike references to title insurance in the body of the United 12 1 States answer. For the same reasons, Bedrock s motion to strike 2 references to title insurance in the United States answer is 3 DENIED. 4 5 B. United States Motion to Strike The United States moves to strike the jury demand in the 6 7 8 Complaint (1) due to lack of subject matter jurisdiction because of sovereign immunity, and (2) because the parties claims sound 9 in equity. Bedrock did not file an opposition to the motion to 10 strike or address it in its reply. The United States motion 11 cannot be addressed until the parties claims are developed in 12 discovery. The motion to strike the jury demand can be renewed. 13 14 15 The United States motion to strike is DENIED, without prejudice. V. 16 17 CONCLUSION For the reasons stated: 18 1. Bedrock s Motion to Strike is DENIED, without prejudice. 19 2. The United States Motion to Strike is DENIED, without 20 21 22 prejudice. 3. Bedrock shall submit a proposed form of order consistent with this memorandum decision within five (5) days of 23 24 25 26 electronic service of this memorandum decision. SO ORDERED. DATED: June 17, 2011 /s/ Oliver W. Wanger Oliver W. Wanger United States District Judge 27 28 13

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