Bedrock Financial, Inc. v. The United States of America
Filing
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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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UNITED STATES DISTRICT COURT
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FOR THE EASTERN DISTRICT OF CALIFORNIA
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BEDROCK FINANCIAL, INC., a
California Corporation,
1:10-cv-2326 OWW MJS
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v.
MEMORANDUM DECISION AND ORDER
RE PLAINTIFF‟S MOTION TO
STRIKE AND DEFENDANT‟S MOTION
TO STRIKE
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THE UNITED STATES OF AMERICA,
(DOCS. 12, 14)
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Defendant.
Plaintiff,
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I.
INTRODUCTION
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Plaintiff Bedrock Financial, Inc. (“Bedrock”) proceeds with
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this action for equitable subrogation, declaratory relief, and
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judicial foreclosure of equitable lien against the United States
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of America (“United States”). Before the court are Bedrock‟s
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motion to strike answer and counterclaim (Doc. 12) and the United
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State‟s motion to strike (Doc. 13). The United States filed an
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opposition to Bedrock‟s motion (Doc. 13), to which Bedrock
replied (Doc. 14). Bedrock did not file an opposition to the
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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
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(together, “Debtors”), borrowed $150,000.00 from R.K. Lowe,
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Trustee of the RK Lowe Revocable Trust (“Lowe Mortgage”), and
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secured repayment with a first deed of trust (“Lowe Deed of
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Trust”) against a vacant lot with commercial zoning in Atwater,
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Merced County, California (“Property”). The Lowe Deed of Trust
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was recorded on August 25, 2006 in Merced County.
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On October 24, 2007, the Internal Revenue Service (“IRS”)
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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
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Lowe Deed of Trust in 2007. On February 5, 2008, the Debtors
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refinanced the Property with a $243,000.00 loan from Bedrock
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Financial (“Bedrock Refinancing”), securing repayment with a deed
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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
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defaulted on the Bedrock Deed of Trust, and Bedrock foreclosed on
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the Property in October 2009.
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Bedrock alleges that the Tax Lien was not discovered until
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long after the Debtors went into default under the Bedrock Deed
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of Trust. Bedrock alleges that based on the date of recordation
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of the Tax Lien, the Bedrock Refinancing unintentionally put the
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United States in a senior lien position on the Property. On May
3, 2010, Bedrock filed a state court action against the United
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States seeking equitable subrogation and foreclosure of Bedrock‟s
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equitable lien. The United States removed the action to federal
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court and added First American (“FirstAm”) as a third-party on a
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counterclaim of conversion of federal funds.
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The California Secretary of State suspended Bedrock as a
California corporation effective December 24, 2009. Due to
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Bedrock‟s lack of standing to pursue or defend a lawsuit, on
October 12, 2010 the Complaint and the United States'
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counterclaim against Bedrock were voluntarily dismissed without
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prejudice; the third-party complaint against FirstAm remains
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pending.
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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
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judicial foreclosure. (Doc. 10). Bedrock filed a motion to strike
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portions of the United States‟ answer and counterclaim (Doc. 12),
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and the United States filed a motion to strike Bedrock‟s jury
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demand (Doc. 13).
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III. LEGAL STANDARD
Rule 12(f) provides that the court “may order stricken from
any pleading any insufficient defense or any redundant,
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immaterial, impertinent, or scandalous matter.” Fed. R. Civ. P.
12(f). The function of a Rule 12(f) motion to strike is to avoid
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the expenditure of time and money that might arise from
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litigating spurious issues by dispensing with those issues prior
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to trial. Fantasy, Inc. v. Fogerty, 984 F.2d 1524, 1527 (9th Cir.
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1993), rev'd on other grounds, Fogerty v. Fantasy, Inc., 510 U.S.
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517, 114 S.Ct. 1023 (1994). Motions to strike are disfavored and
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infrequently granted. E.g., Natural Res. Def. Counsel v.
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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
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shown that no evidence in support of the allegation would be
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admissible, or those issues could have no possible bearing on the
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issues in the litigation.” Gay-Straight Alliance Network v.
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Visalia Unified School Dist., 262 F.Supp.2d 1088, 1099 (E.D. Cal.
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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,
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ARTHUR R. MILLER, MARY KAY KANE & RICHARD L. MARCUS, FEDERAL PRACTICE
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PROCEDURE § 1381, (3d ed. 2011).
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“Although motions to strike a defense are generally
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disfavored, a Rule 12(f) motion to dismiss a defense is proper
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when the defense is insufficient as a matter of law.” Kaiser
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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,
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constitute a valid defense to the action can and should be
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deleted.” 5C CHARLES A. WRIGHT, ARTHUR R. MILLER, MARY KAY KANE & RICHARD
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L. MARCUS, FEDERAL PRACTICE
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AND
PROCEDURE § 1381, (3d ed. 2011). A
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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
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consists of statements that do not pertain, and are not
necessary, to the issues in question.” Id. Scandalous matters are
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allegations “that unnecessarily reflect [] on the moral character
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of an individual or state [] anything in repulsive language that
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detracts from the dignity of the court.” Consumer Solutions REO,
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LLC v. Hillery, 658 F.Supp.2d 1002, 1020 (N.D. Cal. 2009)
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(quoting Cobell v. Norton, 224 F.Rd.D. 1, 5 (D.D.C. 2004).
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IV.
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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
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insufficient to bar recovery under Bedrock‟s claims for equitable
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subrogation and judicial foreclosure. Bedrock argues that its
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Complaint seeks an equitable lien on the security itself-
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regardless of its value in 2008 or any time, and the property‟s
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fair market value in 2008 has no bearing on any claim.
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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
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enrichment,” or “prejudice,” is material to the balancing of
equities.
Weighing of equities is part of the test for equitable
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subrogation. See Caito v. United Cal. Bank, 20 Cal.3d 694, 704
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(1978) (“Subrogation must not work any injustice to the rights of
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others.”). In addition, the doctrine of superior equities is
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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
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subrogation. See In re Johnson, 240 Cal.App.2d 742, 746 (1966).
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Subrogation is applied liberally to prevent unjust enrichment.
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Haskel Eng‟g & Supply Co. v. Hartford Accident & Indem. Co., 78
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Cal.App.3d 371, 377, 144 Cal.Rptr. 189 (1978). The United States‟
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second affirmative defense is not insufficient as a matter of
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law.
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The United States further argues that the Property‟s 2008
valuation is a partial defense. The United States asserts that
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the valuation was adequate in 2008 to fully pay the Tax Lien,
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and, together with later interest accrual and other facts,
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reduces Bedrock‟s equities to zero. Motions to strike are denied
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if there is a mixed question of law and fact that cannot be
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resolved. 5C CHARLES A. WRIGHT, ARTHUR R. MILLER, MARY KAY KANE & RICHARD
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L. MARCUS, FEDERAL PRACTICE
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AND
PROCEDURE § 1381 (3d ed. 2011).
Finally, the United States correctly asserts that Bedrock
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has not shown any prejudice from the second affirmative defense.
“Motions to strike are rarely granted in the absence of a showing
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of prejudice to the moving party.” Ollier v. Sweetwater Union
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High School Dist., 735 F.Supp.2d 1222, 1224 (S.D. Cal. 2010).
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Bedrock‟s motion to strike the United States‟ second
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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.
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Doc. 10, 4. Bedrock contends that the United States‟ fifth and
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seventh affirmative defenses, based on the doctrine of merger,
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are insufficient because the merger doctrine does not bar the
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establishment or foreclosure of any equitable estate. Bedrock
argues that in order to assert such theories, the United States
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must plead that Bedrock intended a merger. Bedrock contends that
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because the allegation of intent does not appear in the United
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States‟ answer and it “cannot be made under the facts of the case
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at bar,” the fifth and seventh affirmative defenses are legally
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insufficient.
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The United States rejoins that a motion to strike cannot
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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
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only on the fact of the pleading and on judicially noticed
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facts.”). Whether Bedrock intended the merger is a question of
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fact. Sheldon v. La Brea Materials Co., 216 Cal. 686, 692, 15
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P.2d 1098 (1932) (“[I]ntention is a question of fact.”). The
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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
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affirmative defense can only be granted if there are no questions
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of fact. Levin-Richmond Terminal Corp. v. Int‟l Longshoremen‟s &
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Warehousemen‟s Union, Local 10, 751 F.Supp. 1373, 1375 (N.D. Cal.
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1990).
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In its reply, Bedrock argues that the doctrine of merger has
no application and is immaterial. Bedrock asserts that it seeks
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to impose and foreclose on an equitable lien, not on the original
trust deed, and whether Bedrock‟s original trust deed merged into
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its subsequent fee interest is of no consequence. Bedrock,
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however, does not provide legal support for this argument.
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“[W]hen there is no showing of prejudicial harm to the moving
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party, the courts generally are not willing to determine disputed
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and substantial questions of law upon a motion to strike.”
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Augustus v. Bd. of Pub. Instruction of Escambia Cnty., Fla., 306
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F.2d 862, 868 (5th Cir. 1962). “[T]hese questions quite properly
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are viewed as best determined only after further development by
way of discovery and a hearing on the merits, either on a summary
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judgment motion or at trial.” 5C CHARLES A. WRIGHT, ARTHUR R. MILLER,
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MARY KAY KANE & RICHARD L. MARCUS, FEDERAL PRACTICE
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ed. 2011).
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AND
PROCEDURE § 1381 (3d
Bedrock‟s motion to strike the United States‟ fifth and
seventh affirmative defenses is DENIED.
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3.
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“Immaterial” and “Impertinent” References to Title
Insurance in Counterclaim
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Bedrock contends that the following references to title
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insurance and purported indemnification of Bedrock in the United
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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.
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. . .
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.
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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
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to prejudice the fact-finder against Bedrock and jeopardize
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Bedrock‟s right to a fair trial.
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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
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of federal funds, and FirstAm‟s culpability in the related
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lawsuit should be considered in balancing the equities; and (3)
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as between Bedrock and FirstAm, FirstAm has the primary interest
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in the litigation, and, regardless of whether Bedrock prevails in
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this action, FirstAm will make Bedrock financially whole.
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Therefore, the United States argues that FirstAm‟s rights,
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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
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the Tax Lien is irrelevant, and any knowledge that FirstAm had of
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the Tax Lien during escrow cannot be imputed to Bedrock; (2)
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FirstAm is not Bedrock‟s agent; and (3) evidence of Bedrock‟s
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insurance coverage would not be admissible under Federal Rule of
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Evidence 411.
The court has issued an order to show cause why the first
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lawsuit, including the United States‟ third-party complaint for
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conversion against FirstAm, should not be consolidated with this
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lawsuit. Consolidation of the lawsuits would moot Bedrock‟s
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claims of immateriality and impertinence.
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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
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disputed allegations provide a better understanding of the United
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States‟ counterclaim. 5C CHARLES A. WRIGHT, ARTHUR R. MILLER, MARY KAY
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KANE & RICHARD L. MARCUS, FEDERAL PRACTICE
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2011). (“The Rule 12(f) motion to strike allegedly offensive
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matter also will be denied if the allegations might serve to
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PROCEDURE § 1382 (3d ed.
achieve a better understanding of the plaintiff's claim for
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relief.”).
Bedrock‟s motion to strike paragraphs 19-20 and 33-37 of the
United States‟ counterclaim is DENIED.
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“Scandalous” References to Title Insurance in
Counterclaim
Bedrock also moves to strike the following paragraphs as
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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.
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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
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litigating lien priority disputes with the federal government.
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Rather, Bedrock argues that these allegations cast it in a “cruel
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and deragotory light” and do not state any facts whatsoever. Doc.
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12-1, 10.
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The United States correctly argues that these allegations
fall far short of the Rule 12(f) standard for scandalous matters.
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The allegations do not reflect on the moral character of Bedrock
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or anyone else, state anything in repulsive language, or detract
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from the dignity of the court or parties.
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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
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States‟ answer. For the same reasons, Bedrock‟s motion to strike
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references to title insurance in the United States‟ answer is
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DENIED.
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B.
United States‟ Motion to Strike
The United States moves to strike the jury demand in the
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Complaint (1) due to lack of subject matter jurisdiction because
of sovereign immunity, and (2) because the parties‟ claims sound
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in equity. Bedrock did not file an opposition to the motion to
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strike or address it in its reply. The United States‟ motion
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cannot be addressed until the parties‟ claims are developed in
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discovery. The motion to strike the jury demand can be renewed.
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The United States‟ motion to strike is DENIED, without
prejudice.
V.
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CONCLUSION
For the reasons stated:
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1. Bedrock‟s Motion to Strike is DENIED, without prejudice.
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2. The United States‟ Motion to Strike is DENIED, without
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prejudice.
3. Bedrock shall submit a proposed form of order consistent
with this memorandum decision within five (5) days of
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electronic service of this memorandum decision.
SO ORDERED.
DATED: June 17, 2011
/s/ Oliver W. Wanger
Oliver W. Wanger
United States District Judge
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