Jafari v. Federal Deposit Insurance Corporation et al, No. 3:2012cv02982 - Document 55 (S.D. Cal. 2014)
Court Description: ORDER granting third party defendant's 19 Motion to Dismiss. Heritage's motion to dismiss the FDIC's breach of fiduciary duty, negligence, and breach of contract claims is GRANTED. Those claims are DISMISSED WITH PREJUDICE. It follows that the FDICs claims for implied contractual indemnity and declaratory relief also fail, and they are DISMISSED WITH PREJUDICE. Signed by Judge Larry Alan Burns on 3/4/14. (kaj)
Download PDF
<![CDATA[
Jafari v. Federal Deposit Insurance Corporation et al Doc. 55 1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 11 12 13 14 15 16 REZA JAFARI and FIRST AMERICAN TITLE INSURANCE COMPANY vs. CASE NO. 12cv2982-LAB (RBB) ORDER GRANTING THIRD PARTY DEFENDANT’S MOTION TO DISMISS Plaintiffs, FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver for La Jolla Bank; et al., Defendant. 17 18 19 This case first came to the Court in early August 2012, when Jafari applied for a 20 temporary restraining order to block the FDIC from foreclosing on a home he’d just bought 21 in Rancho Santa Fe. The Court denied the application on August 22, for two reasons. First, 22 Jafari’s grievance with the FDIC hadn’t been exhausted administratively. Second, the Court 23 lacked the authority, anyway, to enjoin the FDIC’s exercise of its statutory powers as a 24 receiver. Jafari dismissed the case on August 30. 25 In the meantime, on August 27, First American Title Insurance paid the FDIC the 26 amount it claimed was due on the home loan, $3,649,067.10, so it would reconvey the deed 27 of trust, which it did. Then, on October 18, Jafari’s grievance with the FDIC was finally 28 resolved against him. That cleared the way to file a fresh lawsuit against the FDIC, -1- 12cv1971 Dockets.Justia.com 1 essentially to recover the money First American paid to the FDIC. Indeed, Jafari concedes 2 that while he’s a named Plaintiff in this case, “First American is controlling the litigation and 3 has authority to resolve it.” (Doc. No. 20 at 2.) 4 Several months after this case had been filed, the FDIC filed a third party complaint 5 against the seller of Jafari’s home, Birger Greg Bacino, as well as the escrow company, 6 Heritage Escrow. Now before the Court is Heritage’s motion to dismiss that complaint. The 7 crux of Heritage’s motion is that it’s an innocent middleman. It handled an escrow for Bacino 8 and Jafari and simply followed their instructions, and therefore can’t be liable to the FDIC for 9 any wrongdoing. 10 I. General Factual Background 11 The essential facts of this case haven’t changed. Jafari bought a home from Bacino 12 that was encumbered by liens, one of which was a $2,540,000 construction loan from La 13 Jolla Bank. The bank had previously failed, however, and the FDIC held the lien as receiver. 14 Because the outstanding liens totaled more than the value of the home, Jafari and Bacino 15 agreed to a short sale, which the secured creditors had to bless. Along those lines, on 16 September 8, 2011 the FDIC and Bacino executed a release agreement—the FDIC calls it 17 a “proposal letter,” which shows how the parties spin its significance—in which, subject to 18 certain conditions, the FDIC would reconvey the deed of trust for $135,000. 19 Those conditions turned out to be a sticking point. After escrow closed and Heritage 20 Escrow wired the FDIC $135,000 pursuant to the release agreement, the FDIC sent it back, 21 claiming certain conditions in the release agreement hadn’t been satisfied. The FDIC’s 22 position doesn’t seem to be in dispute. Rather, Jafari’s complaint against the FDIC rests on 23 the argument that the unsatisfied conditions “were unlawful, unenforceable, or not material 24 and therefore did not provide a valid basis for excusing the FDIC’s obligation of counter- 25 performance, which was to reconvey the La Jolla Bank Deed of Trust.” (FAC ¶ 39.) 26 The contested conditions each relate to the fact that Bacino personally guaranteed 27 the La Bank construction loan, and the FDIC didn’t want to release its lien in a way that 28 would prejudice its ongoing efforts to hold him accountable in ongoing bankruptcy -2- 12cv1971 1 proceedings. After all, “[t]he Proposal Letter discussed a release of collateral, not a 2 reduction in the amount that was due under the ALB Loan.” (ATPC ¶ 17.) The conditions 3 appear in a single paragraph in the release agreement: 4 On or about December 31, 2009, ALB Properties, LLC filed a petition for relief under Chapter 7 of the United States Bankruptcy Code. The FDIC-R has objected to the discharge sought by Mr. Bacino and litigation is ongoing concerning the FDIC-R’s objection to discharge. The FDIC-R is willing to consent to the release of collateral as outlined in this Letter so long as the Guarantor(s) acknowledge and agree that by consenting to the release of collateral, the FDIC-R is not forbearing in any way with respect to its remedies under the Loan Documents, and is not waiving or releasing any of its claims with respect to the Borrower or the Guarantor(s) under the Loan Documents. Borrower and Guarantor(s) are willing to sign this Letter to assure the FDIC-R that they acknowledge and agree that the FDIC-R is not forbearing in any way with respect to its remedies under the Loan Documents, and not waiving or releasing any of its claims with respect to the Borrower or the Guarantor(s) under the Loan Documents. Prior to effectuating the release of collateral referenced herein, Mr. Bacino acknowledges that he will be required to provide an opinion from his bankruptcy counsel, in a form satisfactory to the FDIC-R in its sole and absolute discretion, that the release of collateral contemplated by this letter and the continuing obligation of Mr. Bacino under his Guarantee do not require approval of the Bankruptcy Court and that the guarantee executed by Mr. Bacino will continue to be effective against him in the current bankruptcy court litigation and in any subsequent litigation derived therefrom. ALB shall also provide an opinion from bankruptcy counsel, in a form satisfactory to the FDIC-R in its sole and absolute discretion, that the release of collateral contemplated by this letter and the continuing obligation of ALB under the Loan Documents do not require approval of the Bankruptcy Court and that the Loan Documents executed by ALB will continue to be effective against ALB in subsequent litigation. 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 As the FDIC puts the point in its complaint, “Each of the conditions discussed in the Proposal Letter were extraordinarily important to the FDIC-R because it had claims in the pending Adversary Action against Bacino concerning the personal guarantees he provided in connection with the ALB loan, as well as other loans, and it was always intended that these obligations would remain in place following any release of the lien on the Property.” (ATPC ¶ 19.) // With the FDIC refusing to reconvey the deed of trust and threatening foreclosure, Jafari had no choice but to pay the FDIC the amount due on the loan. Then he sued the FDIC to enforce the release agreement as he construes it. II. The FDIC’s Complaint Against Heritage So what did Heritage do wrong? In a nutshell, the FDIC alleges that Heritage—and, for that matter, First American—had the release agreement/proposal letter with the FDIC’s -3- 12cv1971 1 conditions and ignored it, releasing the collateral without first obtaining the FDIC’s consent 2 or confirming that the critical conditions had been satisfied. (ATPC ¶¶ 20–22, 26.) In the 3 FDIC’s words, “Bacino and Jafari submitted joint escrow instructions to Heritage which 4 required Heritage, among other things, to obtain the appropriate releases and approvals 5 from the FDIC-R to allow the Property to be sold free and clear of all liens and 6 encumbrances.” 7 “Residential Purchase Agreement and Joint Escrow Instructions” directed that “This 8 purchase agreement is subject to the approvals of seller, seller’s attorney, seller’s 9 bankruptcy trustee, bankruptcy court, and the lenders/lienholders approval of short sale 10 (lenders Chevy Chase Bank and the successor of La Jolla Bank or the FDIC.” (Doc. No. 11 27-1.) (ATPC ¶ 20.) For example, a March 19, 2010 “Addendum” to the 12 The FDIC’s complaint asserts eights claims, but only five are directed at Heritage. 13 (The others are directed at Bacino.) The first three claims are for breach of contract, breach 14 of fiduciary duty, and negligence. The last two claims are for implied contractual indemnity 15 and declaratory relief. Heritage’s motion to dismiss challenges them all, its basic theory 16 being that Heritage simply did what it was told to by Bacino and Jafari, and owed no legal 17 duties to the FDIC. 18 III. Legal Standard 19 A 12(b)(6) motion to dismiss for failure to state a claim challenges the legal sufficiency 20 of a complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). The Court must accept 21 all factual allegations as true and construe them in the light most favorable to the FDIC. 22 Cedars-Sinai Med. Ctr. v. Nat’l League of Postmasters of U.S., 497 F.3d 972, 975 (9th Cir. 23 2007). To defeat Heritage’s motion to dismiss, the FDIC’s factual allegations needn’t be 24 detailed, but they must be sufficient to “raise a right to relief above the speculative level . . . .” 25 Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). That is, “some threshold of plausibility 26 must be crossed at the outset” before a case can go forward. Id. at 558 (internal quotations 27 omitted). A claim has “facial plausibility when the plaintiff pleads factual content that allows 28 the court to draw the reasonable inference that the defendant is liable for the misconduct -4- 12cv1971 1 alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). “The plausibility standard is not akin 2 to a ‘probability requirement,’ but it asks for more than a sheer possibility that a defendant 3 has acted unlawfully.” Id. 4 While the Court must draw all reasonable inferences in the FDIC’s favor, it need not 5 “necessarily assume the truth of legal conclusions merely because they are cast in the form 6 of factual allegations.” Warren v. Fox Family Worldwide, Inc., 328 F.3d 1136, 1139 (9th Cir. 7 2003) (internal quotations omitted). In fact, the Court does not need to accept any legal 8 conclusions as true. Iqbal, 556 U.S. at 678. A complaint does not suffice “if it tenders naked 9 assertions devoid of further factual enhancement.” Id. (internal quotations omitted). Nor 10 does it suffice if it contains a merely formulaic recitation of the elements of a cause of action. 11 Twombly, 550 U.S. at 555. 12 IV. Discussion 13 Heritage’s motion to dismiss challenges the breach of fiduciary duty and negligence 14 claims together, and separately challenges the breach of contract and implied contractual 15 indemnity claims. The Court’s analysis will follow that outline. 16 A. 17 Heritage has two arguments for the dismissal of the FDIC’s breach of fiduciary duty 18 and negligence claims. The first argument is that the FDIC was neither a party to the escrow 19 nor an intended third party beneficiary of it, and was therefore not owed the duty of care that 20 the claims require. The second argument is that the FDIC hasn’t suffered any damages, 21 which is fatal to the claims. 22 // 23 Breach of Fiduciary Duty and Negligence 1. Heritage’s Duty of Care to the FDIC 24 The FDIC can’t accuse Heritage of breaching a fiduciary duty, or of negligence, unless 25 Heritage owed the FDIC some duty of care. Heritage first that because the FDIC didn’t 26 deposit any instructions or money with Heritage in connection with the escrow, it wasn’t a 27 party to the escrow and wasn’t owed a duty of care. Heritage relies heavily on two cases for 28 this argument: Summit Fin. Holding, Ltd. v. Continental Lawyers Title Co., 27 Cal.4th 705 -5- 12cv1971 1 (2002) and Markowitz v. Fidelity Nat’l Title Co., 142 Cal.App.4th 508 (Cal. Ct. App. 2006). 2 Summit involved a home refinance. The defendant in the case, Continental Lawyers 3 Title Company, handled the escrow. The original lender, to be paid off in the refinance, was 4 Talbert Financial, but Talbert had previously assigned its rights to Summit, the plaintiff. 5 Continental knew this. It prepared a preliminary title report that showed the assignment. 6 Nonetheless, pursuant to a payoff demand from Talbert and instructions from the company 7 overseeing the refinance, Continental paid Talbert—and Summit never got paid. Summit 8 then sued Continental for negligence. The court held that because Summit was a stranger 9 to the escrow, it wasn’t owed any duty of care by Continental. 10 The Summit opinion opens with the principle that “[a]n escrow holder is an agent and 11 fiduciary of the parties to the escrow,” and, for that reason, “an escrow holder must comply 12 strictly with the instructions of the parties.” Summit, 27 Cal.4th at 711. But, as the Court 13 reads the opinion, it was critical in Summit that both Talbert and Summit were strangers to 14 the escrow. Id. at 708. Indeed, it credited the Court of Appeal for distinguishing a case, 15 Builders’ Control Serv. of N. Cal., Inc. v. N. Am. Title Guar. Co., 205 Cal.App.2d 68 (Cal. Ct. 16 App. 1962) on the basis that “the principles it applied have no application to whether an 17 escrow holder owes duties to a nonparty based on an assignment made by [one] stranger 18 to the escrow to another [another] stranger to the escrow.” Id. at *713 (citation omitted). 19 Here, by contrast, the question is whether an escrow holder owes a duty to a nonparty based 20 on the parties’ own terms and instructions. On that question, the holding in Summit seems 21 to leave an opening for liability to nonparties, as it quotes approvingly the Court of Appeal’s 22 statement that “Builders’ Control Service stands for the proposition only that an agent’s 23 obligation to disburse proceeds held by the agent for its principal is coextensive with the 24 principal’s obligation to disburse those proceeds to the assignee.” Id. at 714 (citation 25 omitted). See also Chen v. Dynasty Escrow, Inc., 2002 WL 1227478 at *10 (Cal. Ct. App. 26 June 6, 2002). 27 This case is a bit different from Summit because Bacino and Jafari were parties to 28 the escrow, and it is essentially their own terms and instructions that the FDIC accuses -6- 12cv1971 1 Heritage of failing to carefully follow. The addendum to the joint escrow instructions, dated 2 March 19, 2010 and which Bacino and Jafari signed, indicated that the short sale required 3 the FDIC’s approval. (Doc. No. 27-1.) Likewise, the joint escrow instructions themselves, 4 executed by Bacino and Jafari, indicated that the home would be transferred with monetary 5 liens attached only if the buyer was assuming them. (Doc. No. 27-1.) This lends credibility 6 to the FDIC’s allegation that Bacino and Jafari’s escrow instructions required Heritage to 7 obtain the FDIC’s approval of the short sale.1 (ATPC ¶ 20.) The FDIC also alleges that 8 Heritage had in its possession the release agreement/proposal letter with the conditions of 9 the short sale, which it collected and which was also provided by Bacino. (ATPC ¶¶ 21–22.) 10 It’s true that Bacino and Jafari instructed Heritage to send $135,000 to the FDIC2, and that 11 Summit limits an escrow company’s duties to the parties’ actual instructions, but that 12 instruction doesn’t complete the picture. So, Summit may be distinguishable from this case. 13 On the other side are the cases the FDIC cites for imposing a duty of care on 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 1 Heritage tries to argue that these instructions were rescinded when the escrow instructions were amended on April 14, 2010 and September 9, 2011. (Reply. Br. at 6–7.) That is a stretch. The April 14, 2010 “amendment” was actually titled “Supplemental Escrow Instructions,” and it even acknowledged that “the purchase contract and these supplemental escrow instructions contain the entire agreement between Buyer and Seller.” (Uldall Decl., Ex. 2.) The “purchase contract,” however, is really just the “Residential Purchase Agreement and Joint Escrow Instructions” that were originally executed on March 19. The addendum that specifically requires the FDIC’s approval of the short sale even says, at the top, that it is “hereby incorporated in and made a part of the Residential Purchase Agreement.” (Doc. No. 27-1.) Likewise, the September 9, 2011 “amendment” begins with the statement, from Bacino, “My previous instructions in the above numbered escrow are hereby modified – supplemented in the following particularly only.” (Uldall Decl., Ex. 1.) The Court sees no evidence in the April 14, 2010 or September 9, 2011 documents that Bacino and Jafari intended for the March 19, 2010 joint escrow instructions and their addenda to be rescinded entirely. 2 Heritage could do a better job of pointing directly to the evidence of this. In its reply brief, it cites the so-called September 9, 2011 and April 14, 2010 “amendments” to the escrow instructions, but it doesn’t point to the exact location of the directive to pay the FDIC $135,000. (See Uldall Decl., Exs. 1, 2.) The Court sees a line item for a $135,000 payment to Key Bank on the third page of the earlier document, and on the later document, executed at the same time as the release agreement, that amount is reduced to $118,000. In its brief accompanying the motion to dismiss, Heritage claims that “the FDIC acknowledges that Mr. Bacino, a party to the Bacino-to-Jafari Escrow, instructed Heritage to pay the FDIC $135,000.” (Mot. to Dismiss at 9.) But it then cites to a number of allegations in the FDIC’s complaint that don’t say exactly that, for example, “The FDIC-R is informed and believes and on that basis alleges that, prior to the close of escrow, Bacino signed a copy of the Proposal Letter and provided it to Heritage.” (ATPC ¶ 22.) -7- 12cv1971 1 Heritage. They are Plaza Home Mort., Inc. v. N. Am. Title Co., Inc., 184 Cal.App.4th 130 2 (Cal. Ct. App. 2010), and Money Store Investment Corp. v. S. Cal. Bank, 98 Cal.App.4th 3 (Cal. Ct. App. 2002). In both cases, lenders who submitted “closing instructions” to an 4 escrow company, but weren’t themselves parties to the escrow, were allowed to pursue 5 claims against the escrow company when those instructions weren’t followed.3 As the court 6 in Money Store put it: Unlike the new lender in Summit, the Money Store had a direct contractual relationship with the [escrow company]. The contract specified what [it] was to do. [The parties to the escrow] authorized [the escrow company] to comply with those directives. The Money Store’s instructions were at least consistent with the [the parties’] original instructions . . . . 7 8 9 10 13 Under these circumstances, the [escrow company’s] action—if true as alleged—was morally blameworthy. It was foreseeable the funds would be distributed contrary to the Money Store’s instructions. And, there was a close connection between the Bank’s action and the harm suffered. Money Store, 98 Cal.App.4th at 731. 14 Heritage argues that the cases are inapplicable because the lenders “funded the subject 15 transactions and provided instructions directly to escrow,” while the FDIC “did not fund the 16 Bacino-to-Jafari escrow” and “did not submit any instructions to Heritage in connection with 17 the escrow.” (Reply Br. at 8.) 11 12 18 That’s true, descriptively. This facts of this case are perched somewhere between 19 those of Summit, in which the agreement the escrow company ignored was between two 20 non-parties to the escrow and not formally incorporated into the actual escrow instructions, 21 and Plaza Home and Money Store, in which the aggrieved parties weren’t parties to the 22 escrow but submitted specific instructions to the escrow company. This case would be on 23 all fours, or close to it, with Plaza Home and Money Store if the FDIC had itself transmitted 24 its conditions for the short sale to Heritage. 25 3 26 27 28 It’s worth noting that in both cases the plaintiff lenders asserted claims for breach of contract, negligence, and equitable indemnity. Plaza Home, 184 Cal.App.4th at 134 n.4; Money Store, 98 Cal.App.4th at 727. In Plaza Home the lender abandoned its negligence and equitable indemnity claims, and the court’s ruling pertained only to a breach of contract claim. Plaza Home, 184 Cal.App.4th at 134 n.4. In Money Store, the court addressed the lender’s negligence claim, but relied on a discussion in Summit that addressed a statutory duty of care under Cal. Civ. Code § 1714, which the FDIC doesn’t raise in this case. -8- 12cv1971 1 With reasons to distinguish both Summit, and Plaza Home and Money Store, from the 2 facts of this case, the Court turns to Markowitz. For Heritage, Markowitz is really the case 3 establishing that it owed no duty of care to the FDIC. The facts are as follows. Markowitz 4 obtained a $200,000 line of credit from City National Bank, secured by a second deed of 5 trust on his home. But as a condition to the line of credit, the current holder of the second 6 deed of trust, the Kachlons, had to be paid off with the proceeds of the line of credit and their 7 deed reconveyed to City National. City National retained Fidelity as the escrow company, 8 and when the Kachlons delivered to Fidelity their payoff demand, an executed request for 9 reconveyance, and their original promissory note and deed of trust, Fidelity issued them a 10 check. Around this same time, City National sent a letter to Fidelity instructing it to record 11 the Kachlons’ reconveyance and its new deed of trust. Fidelity failed to do this, which 12 enabled the Kachlons to later initiate foreclosure proceedings against Markowitz. 13 Following the same lead principles articulated in Summit, the court held that while 14 Markowitz had an interest in the escrow, he was not a party to it and had no meaningful 15 contact with Fidelity—and therefore couldn’t sue Fidelity on a breach of fiduciary duty or 16 negligence theory: 17 18 19 20 21 22 23 24 25 26 27 28 The defect in Donald [Markowitz’s] argument, however, is that he was not a party to the escrow instructions on which he relies. Fidelity’s duties arising out of those instructions were defined, and limited, by the terms of those instructions. Donald points only to written instructions given to Fidelity by the Bank; he does not allege that he gave Fidelity any written or oral instructions regarding carrying out the escrow. As we shall explain, the duty arising from the instruction authorizing recordation of the Bank’s deed of trust “showing . . . in the second trust deed position” was owed to the Bank, not to Donald. Markowitz is certainly significant, and a bad case for the FDIC, insofar as it recognized that just because a party is injured by an escrow holder’s failure to follow instructions doesn’t mean it can bring a cause of action. Heritage is right to summarize the case as holding that escrow holders don’t owe duties of care to non-parties “even when: the escrow holder breached the instructions given by the actual parties; the non-party had a significant financial stake in the transaction; and the non-party was damaged by the escrow holder’s breach of the parties’ instructions.” (Mot. to Dismiss at 8.) And, Heritage has a point in comparing -9- 12cv1971 1 Bacino and Jafari’s instructions to Heritage in this case to City National’s instructions to 2 Fidelity in Markowitz to: The FDIC, like Markowitz, was an outsider who didn’t stand in any 3 relationship with the escrow holder. 4 But there are still reasons to distinguish the case. First, as the FDIC points out in its 5 opposition brief, the case went all the way to trial, where the court granted Fidelity’s motion 6 for a nonsuit. That cuts against dismissing a claim at the motion to dismiss phase, as 7 Heritage is attempting here. Second, it was significant to the court in Markowitz that “the 8 language of the instructions did not expressly evince an intent to benefit [Markowitz].” 9 Markowitz, 142 Cal.App.4th at 527. That’s true. City National mentioned Markowitz in its 10 letter to Fidelity, so Fidelity presumably was on notice that he was the homeowner. But as 11 the court recognized, the escrow was opened for City National’s benefit, and Fidelity “had 12 no reason to know or expect that Donald was looking to Fidelity for protection as to facts 13 learned by it.” Id. at 528. In this case, by contrast, the escrow instructions—specifically the 14 addendum signed on March 19, 2010—indicated that the purchase agreement was subject 15 to the FDIC’s approval. Third, in Markowitz, “[t]here were no instructions submitted by him, 16 or to which he was a signatory, with which Fidelity was obligated to comply, or which it was 17 obligated to carry out with reasonable care in the exercise of ordinary skill and diligence.” 18 Id. Again, there is a difference in this case. The FDIC alleges that Heritage had the release 19 agreement/proposal letter in its possession, to which the FDIC was a signatory and which 20 may have given Heritage reason to believe the FDIC was “relying on it for protection.” Id. 21 Of course, some of these principles may also have commanded a different result in Summit, 22 in which an escrow company knew that a party it paid had assigned its rights to another 23 party. 24 Having considered the parties briefs and the relevant caselaw, the Court concludes 25 that Heritage ultimately has the better argument here. It’s true that an escrow holder must 26 follow the parties’ instructions, and that the instructions in this case (along with the release 27 agreement) indicated that the FDIC would only accept $135,000 to reconvey the deed of 28 trust on Bacino’s home if certain conditions were met. At the same time, the latest set of - 10 - 12cv1971 1 instructions Heritage received, from Bacino on September 9, 2011, indicated that it was 2 “authorized and instructed to debit the Buyer’s account” for $135,000 for the FDIC. (Uldall 3 Decl., Ex. 1.) Heritage can’t be expected to resolve any apparent inconsistencies between 4 the parties’ instructions and the interests of an outside party. See TSF 53419, LLC v. 5 Fidelity Nat’l Title Ins. Co., 2013 WL 1750981 at (Cal. Ct. App. Apr. 24, 2013) (“Fidelity was 6 faced with an ostensible conflict between the escrow instructions of the parties to the escrow 7 on the one hand, and a claim by a third party, on the other. By faithfully following the 8 instructions of the parties to the escrow, Fidelity satisfied its obligations as an escrow holder 9 and cannot be liable to third parties, such as TSF, for doing so.”). The court in TSF explicitly 10 held that mere knowledge of a third party’s interest in an escrow or objection to the parties’ 11 instructions doesn’t give rise to a duty of care. Id. 12 Also, even the cases the FDIC cites are easily distinguishable, because the interested 13 party in those cases (the lenders) had submitted instructions to the escrow company such 14 that they could be considered parties to the escrow. 15 cites—Summit and Markowitz—are also distinguishable on various small points, as the Court 16 has shown, the overarching message in those cases is that an escrow holder owes a duty 17 of care only to actual parties to the escrow, not third parties with an interest in the escrow. 18 Moreover, only parties that actually submit instructions to escrow can rightfully be considered 19 parties to it. See Logan v. Chicago Title Ins. Co., 2013 WL 1080300 at *3 (Cal. Ct. App. 20 Mar. 15, 2013) (“Here, of course, Southstar was not a stranger to the escrow, but submitted 21 instructions to escrow and was a party to the escrow . . . .”). The FDIC argues that “an 22 obligation was owed to the FDIC based on the terms of the JEI and the Proposal Letter, and 23 the that the FDIC was therefore a party to the escrow.” (Opp’n Br. at 21.) But it offers no 24 support for the proposition that an entity is a party to an escrow simply because the escrow 25 holder knows that it exists and has an interest in the escrow proceeds. The Court is given 26 some pause by the statement quoted approvingly in Summit that “an agent’s obligation to 27 disburse proceeds held by the agent for its principal is coextensive with the principal’s 28 obligation to disburse those proceeds to the assignee,” but that’s seemingly at odds with - 11 - Even if the cases Heritage 12cv1971 1 another statement in Summit, itself often quoted, that an escrow holder “has no general duty 2 to police the affairs of its depositors; rather, an escrow holder’s obligations are limited to 3 faithful compliance with the depositors instructions.” Summit, 27 Cal.4th at 711 (internal 4 quotations and citation omitted). 5 The Court would see this case very differently if the FDIC reached out to Heritage to 6 insist that it be consulted before releasing its lien for a $135,000 payout. Then, this case 7 would be in line with Plaza Home, Money Store, and others, for example Am. Diversified 8 Props., Inc. v. Valleywide Escrow, Inc., 2008 WL 4060942 (Cal. Ct. App. Sept. 3, 2008). In 9 this latter case, two real estate brokers agreed to split the commissions in a property deal, 10 and after a dispute arose between them the aggrieved broker informed the escrow company 11 of it and insisted that it hold all commissions. The escrow company paid the commissions 12 anyway, before the dispute was resolved. The court held that the aggrieved broker could 13 pursue a claim against the escrow company, but only because it had the right to issue 14 instructions to the escrow holder and actually did so: 19 We do not find that, as a general matter, a broker has standing to assert that the escrow holder has failed to follow instructions and thus breached its contract with its principals, the seller and buyer. We confine our holding to the conclusion that, for the purposes of testing the legal sufficiency of the complaint on a demurrer, ADP’s interpretation is reasonable that the purchase agreement and the escrow instructions gave the brokers the right to issue instructions to respondent regarding the disbursement of brokerage fees. Id. at *4. 20 The FDIC’s rebuttal, of course, is that Heritage did have instructions from it in the form of the 21 release agreement/proposal letter, but it’s a stretch to call those instructions from the FDIC 22 to Heritage, or some kind of agreement that bound Heritage to the FDIC. The FDIC’s own 23 allegations are that Heritage “collected” the proposal letter, and also that Bacino provided 24 Heritage with a copy. (ATPC ¶¶ 21–22.) There is no allegation that the FDIC gave any 25 instructions to Heritage such that Heritage “had . . . reason to know or expect that [the FDIC] 15 16 17 18 26 27 28 - 12 - 12cv1971 1 was looking to [Heritage] for protection as to facts learned by it.”4 2 Cal.App.4th at 231. In fact, in First AFG Financial Corp. v. Security Union Title Ins. Co., the 3 court held that “payoff demand” letters from a lender that were in an escrow company’s 4 possession, but that weren’t addressed to it, didn’t bind the escrow company in any way. 5 2010 WL 4975501 at *7 (Cal. Ct. App. Dec. 8, 2010). Similarly in this case, the FDIC’s 6 proposal letter was addressed to Bacino and offered terms to Bacino for the release of the 7 FDIC’s lien. Just because it was in Heritage’s hands doesn’t mean it can be construed as 8 instructions from the FDIC to Heritage. Markowitz, 142 9 For all of the above reasons, the Court finds that Heritage owed the FDIC no duty of 10 care on the facts alleged, and that the FDIC’s breach of fiduciary duty and negligence claims 11 therefore fail. To the extent the Court’s finding turns on the FDIC not being a party to the 12 escrow, it wouldn’t reach a different finding on the theory that the FDIC was an explicit and 13 intended third party beneficiary of the Bacino-Jafari escrow. See Markowitz, 142 Cal.App.4th 14 at 527; Gateway Bank v. Ticor Title Co. of Cal., 2009 WL 4190455 at *15–17 (Cal. Ct. App. 15 2009). Admittedly, to a certain extent the analysis above traverses both theories without 16 clearly distinguishing between them, but so does the caselaw and the parties’ respective 17 briefs. 18 allowed a breach of contract claim but recognized that a related tort claim was legally 19 duplicative: “As alleged, the Money Store’s cause of action for negligence would be subject 20 to summary adjudication because it does not state a negligence cause of action apart from 21 its contract cause of action.” Money Store, 98 Cal.App.4th at 732. That is yet another 22 problem with the FDIC’s tort claims for breach of fiduciary duty and negligence. The Court should also note that in Money Store, the FDIC’s own case, the court 23 B. 24 This brings the Court to the FDIC’s claim for breach of contract. The essence of this 25 claim is that the FDIC was an intended beneficiary of the sale of Bacino’s home—and an 26 intended beneficiary in particular of the proposal letter and joint escrow instructions—and Breach of Contract 27 4 28 The FDIC insists in its opposition brief that it is entitled to discovery on this issue, but the FDIC can’t possibly need discovery to determine whether it, the FDIC, contacted Heritage to flag the conditions in the proposal letter. (Opp’n Br. at 12, 19 n.38.) - 13 - 12cv1971 1 that Heritage breached these “contracts” by disbursing to the FDIC $135,000 without 2 checking with it first to make sure the amount was right and the FDIC’s conditions for 3 accepting that amount were satisfied. (ATPC ¶¶ 42–43.) 4 From the FDIC’s perspective, this is really where Plaza Home and Money Store have 5 traction, even though it also relied on those cases to argue that Heritage owed it a duty of 6 care and could be liable for breach of fiduciary duty and negligence. The problem for the 7 FDIC is that the cases are easily distinguishable on the facts from this one. 8 A number of things happened in Money Store that the FDIC hasn’t alleged—and likely 9 can’t allege—happened in this case. First, the escrow instructions specifically authorized 10 the escrow holder to comply with the plaintiff lender’s own instructions. Money Store, 98 11 Cal.App.4th at 726. Second, as the Court has already explained, the lender actually 12 submitted closing instructions to the escrow holder. Id. Third, the escrow holder formally 13 acknowledged that it had received the lender’s instructions. Id. Each of these facts informed 14 the court’s decision that the lender had a potential breach of contract claim. For example, 15 the lender’s instructions, and the escrow’s holder’s acknowledged receipt of them, potentially 16 established the essential element of mutual consent: 17 18 19 20 21 22 23 24 25 26 27 28 The Money Store agreed to provide the loan funds to the Bank to facilitate the sale, which was the subject of the escrow, on condition the money would be distributed in a certain manner and the Money Store would be notified before any changes were made to the escrow instructions. The Bank acknowledged acceptance of the conditions when its employee signed the acknowledgment and acceptance. Id. at 728. These same facts also potentially established the essential element of consideration. In return for the Bank’s promises to disburse the funds as the Money Store designated, not to deviate from the Money Store’s instructions except at its own risk, and to provide an estimated closing statement for the Money Store’s review and approval, the Money Store deposited the loan funds with the Bank. This was adequate consideration. Id. at 729. The FDIC can’t allege facts close to these. By its own account, the instructions in the joint escrow instructions to obtain the FDIC’s approval came from Bacino and Jafari, not from the FDIC: “The FDIC-R is further informed and believes that Bacino and Jafari submitted joint escrow instructions to Heritage - 14 - 12cv1971 1 which required Heritage, among things, to obtain the appropriate releases and approvals 2 from the FDIC-R to allow the Property to be sold free and clear of all liens and 3 encumbrances.” 4 agreement/proposal letter, there is no allegation that the FDIC provided it to Heritage, to be 5 clear that its receipt of $135,000 was conditional. To the contrary, the allegation is that 6 Heritage “collected” the document, and that Bacino provided it to Heritage. (ATPC ¶¶ 7 21–22.) Absent the allegation of any meaningful content between the FDIC and Heritage, 8 it is hard to see how the joint escrow instructions and proposal letter could give rise to the 9 kind of mutual consent and consideration that the court found potentially existed in Money 10 Store. Indeed, there is a fundamental disconnect between the FDIC’s argument that it was 11 a third-party beneficiary of the Bacino-Jafari escrow and its reliance on Money Store, which 12 isn’t a third-party beneficiary case. The plaintiff lender’s argument in Money Store wasn’t 13 that it was the intended beneficiary of the escrow, but that it had reached out directly to the 14 escrow holder and entered into a contractual relationship with it. (ATPC ¶ 20.) And while the FDIC was a party to the release 15 Plaza Home is as easy to distinguish as Money Store. The case involved the sale of 16 a home; Plaza Home was the lender and North American Title was the escrow company. 17 Plaza Home submitted closing instructions to North American, which the parties agreed 18 constituted a contract. 19 instructions received by North American, they were signed by a North American 20 representative. Id. at 137. The instructions laid out the terms of Plaza’s loan, and they were 21 very clear that all fees paid out had to be disclosed on a standard HUD-1 form prepared by 22 North American for Plaza: 23 24 25 26 27 28 Plaza Home, 184 Cal.App.4th at 133. Not only were those [T]he closing instructions at issue here set forth the terms and conditions of closing the loans funded by Plaza, and set out the duties and responsibilities of the settling agent, North American, in connection with that closing. The closing instructions required North American to ensure that the loan documents were signed by the borrower and returned to Plaza before disbursement of the loan proceeds, and to disclose the fees and costs of the loans (e.g., broker, processing and other administrative fees), any payments outside of, or credits in connection with, the loans, and details of the loans themselves . . . . Id. at 136. - 15 - 12cv1971 1 In this case, again, the FDIC doesn’t allege that it provided any closing instructions to directly 2 to Heritage that are identical to the closing instructions provided by the lender in Plaza 3 Home. Instead, it tries to argue that the joint escrow instructions (which appear to have been 4 executed by Bacino and Jafari only), and the release agreement/proposal letter were their 5 functional equivalent—and amounted to a contract between the FDIC and Heritage. That 6 is too much of a stretch. Even Plaza Home recognized the difference between “escrow 7 instructions, which constitute an agreement between the escrow company, on the one hand, 8 and the buyer and seller, on the other hand,” and actual closing instructions, which “set forth 9 the terms and conditions of closing the loans . . . and set out the duties and responsibilities 10 of the settling agent . . . in connection with that closing.” Id. at 136. The FDIC wants to 11 elevate the escrow instructions from Bacino and Jafari into closing instructions from the 12 FDIC, and the Plaza Home opinion couldn’t be more clear that they are legally distinctive. 13 Likewise, the FDIC tries to argue that “Heritage’s acceptance of the Proposal Letter 14 obligated it to ensure that it was accurate and that the conditions precedent had been 15 satisfied,” but that runs into the same problem. (Opp’n Br. at 19.) As the Court has 16 repeatedly observed, the proposal letter, even according to the FDIC, was never presented 17 to Heritage by the FDIC in such a way that it can reasonably be construed as “instructions” 18 from the FDIC, or as the basis of some sort of contractual relationship. The FDIC’s own 19 complaint alleges that the documents “were submitted to Heritage by Bacino and Jafari in 20 connection with the transaction.” (ATPC ¶ 43.) The FDIC insists in its opposition brief that 21 Heritage received and accepted the terms of the proposal letter just by disbursing $135,000 22 to the FDIC, but that gives the mistaken representation that, comparable to the facts of 23 Money Store and Plaza Home, the document was produced by the FDIC as some sort of 24 separate escrow instruction and consciously accepted as such by Heritage. (See Opp’n Br. 25 at 13–14.) Indeed, when the FDIC filed this case it didn’t even know what Heritage’s escrow 26 instructions were, which makes it extremely difficult to claim that a contractual relationship 27 existed between the FDIC and Heritage. (ATPC ¶¶ 20, 44.) 28 The only direct correspondence from the FDIC to Heritage that the Court can locate - 16 - 12cv1971 1 in the record is the September 27, 2011 letter in which it informed Heritage that the 2 conditions of its accepting the short sale hadn’t been satisfied and that it would be returning 3 the $135,000. (Case No. 12-CV-1971, Castillo Decl., Ex. J.) But that letter isn’t the basis 4 of the FDIC’s claims against Heritage. The FDIC isn’t claiming in this case that when it 5 refused the $135,000 Heritage failed to act. It is arguing that the damage was done prior to 6 that, when Heritage disbursed $135,000 to the FDIC, closed escrow, and Jafari’s lender 7 recorded a deed of trust on the property that conflicts with the FDIC’s–all without checking 8 with the FDIC first. (ATPC ¶¶ 30–34.) 9 Because Money Store and Plaza Home don’t carry the weight the FDIC needs them 10 to, the Court turns, finally, to general principles of contract law on which the FDIC leans to 11 argue that it stood in a contractual relationship with Heritage. Those principles are few and 12 undisputed. First, a third party can enforce a contract of which it is expressly an intended 13 beneficiary. Cal. Civ. Code § 1559; Cal. Emergency Physicians Med. Group v. PacifiCare 14 of Cal., 111 Cal.App.4th 1127, 1138 (Cal. Ct. App. 2003). The word “expressly” matters. 15 A party that is only incidentally or remotely benefitted by a contract can’t enforce it. Id. at 16 1137. Rather, it must clearly appear that the third party is a beneficiary of the contract; 17 “expressly” means “in direct or unmistakable terms; explicitly; definitely; directly.” Schauer 18 v. Mandarin Gems of Cal., Inc., 125 Cal.App.4th 949, 958–59 (Cal. Ct. App. 2005) (citations 19 omitted). “It is not necessary that an express beneficiary be specifically identified in the 20 contract; he or she may enforce it if he or she is a member of a class for whose benefit the 21 contract was created.” Outdoor Servs., Inc. v. Pabagold, Inc., 185 Cal.App.3d 676, 681 (Cal. 22 Ct. App. 1986). 23 There are two “contracts” of which the FDIC claims to be an intended beneficiary. 24 One is the release agreement/proposal letter, but as Heritage points out, the FDIC was a 25 party to that, so it is not coherent to assert a breach based on being a third party beneficiary. 26 The other document is the joint escrow instructions, including the addendum, which indicated 27 that certain conditions had to met to the FDIC’s satisfaction before it would reconvey its deed 28 of trust for $135,000. The FDIC seizes on the Second Restatement’s definition of an - 17 - 12cv1971 1 intended beneficiary, quoted in Outdoor Servs., that “a beneficiary of a promise is an 2 intended beneficiary if recognition of a right to performance in the beneficiary is appropriate 3 to effectuate the intention of the parties and . . . the performance of the promise will satisfy 4 an obligation of the promisee to pay money to the beneficiary.” Id. at 684. As the FDIC sees 5 it, the statement in the addendum to the joint escrow instructions that “[t]his purchase 6 agreement is subject to the approvals of . . . the FDIC” was a promise from Bacino to Jafari 7 to obtain the FDIC’s approval. Moreover, recognizing the FDIC’s right to insist on that 8 approval is necessary to effectuate the intent of Bacino to convey his home to Jafari free and 9 clear of any liens. The Court disagrees. 10 First, the real promisor in this case, even according to the FDIC, is Bacino. Heritage 11 may have accepted the joint escrow instructions, but it’s simply inaccurate to spin this 12 acceptance as Heritage itself making a promise to Jafari, or to Bacino, to obtain the FDIC’s 13 approval before disbursing $135,000 to it. So, even if the FDIC is an intended beneficiary 14 of the Bacino-Jafari escrow, which is itself an agreement with Heritage, any breach of 15 contract claim should probably be asserted against Bacino. Second, the FDIC identifies no 16 case in which an escrow company was found potentially liable under a third party beneficiary 17 theory for improperly heeding the parties’ own terms. Third, the one case it does cite, 18 Outdoor Servs., is easily distinguishable. In that case, Pabagold hired a company called 19 Mediasmith to run an advertising campaign, and authorized it to enter into contracts with 20 third party advertisers. Mediasmith then retained Outdoor Services to buy billboard space, 21 and when Pabagold failed to reimburse Mediasmith, Outdoor Services went after Pabagold 22 as a third party beneficiary of its contract with Mediasmith. This case doesn’t map onto 23 those facts at all. For at least these reasons, the Court finds that an intended beneficiary 24 theory of liability is simply inapt in this case. 25 V. Conclusion 26 For the reasons given above, Heritage’s motion to dismiss the FDIC’s breach of 27 fiduciary duty, negligence, and breach of contract claims is GRANTED. Those claims are 28 DISMISSED WITH PREJUDICE. It follows that the FDIC’s claims for implied contractual - 18 - 12cv1971 1 indemnity and declaratory relief also fail, and they are DISMISSED WITH PREJUDICE. The 2 Court certainly understands the FDIC’s frustration in this case, especially considering its 3 allegation that First American, which is driving this litigation, has some sort of professional 4 relationship with Heritage. But it may continue to press its claims against Bacino, and it may 5 certainly raise all of the arguments it raises with respect to this motion in defending against 6 Jafari’s claims against it. The Court’s finding here is narrow: the FDIC cannot press the 7 asserted claims against Heritage for its handing of the Bacino-Jafari escrow. 8 IT IS SO ORDERED. 9 10 DATED: March 4, 2014 11 12 13 HONORABLE LARRY ALAN BURNS United States District Judge 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 19 - 12cv1971
]]>
Some case metadata and case summaries were written with the help of AI, which can produce inaccuracies. You
should read the full case before relying on it for legal research purposes.
This site is protected by reCAPTCHA and the Google
Privacy Policy and
Terms of Service apply.
