Flagstar Bank, FSB v. The Loan Experts Corporation et al

Filing 218

ORDER by Judge Charles R. Breyer granting 166 Motion for Summary Judgment. (crblc1, COURT STAFF) (Filed on 10/9/2012)

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1 2 3 4 5 6 7 8 IN THE UNITED STATES DISTRICT COURT 9 FOR THE NORTHERN DISTRICT OF CALIFORNIA United States District Court For the Northern District of California 10 11 12 13 No. C 10-03190 CRB FLAGSTAR BANK, ORDER GRANTING SUMMARY JUDGMENT Plaintiff, v. 14 LOAN EXPERTS, et al., 15 Defendants. / 16 17 This case is about the fallout from a mortgage fraud. Flagstar Bank sued The Loan 18 Experts and The Loan Experts’s principal, Hotmoz Nazari, among others, alleging that the 19 defendants had engaged in a fraud in connection with twenty-two residential mortgage loan 20 transactions. See Notice of Removal Ex. 1 (dkt. 1) (Compl.) ¶ 2. The Loan Experts and 21 Nazari filed a Cross-Claim against Stewart Title of California, the title company that served 22 as the escrow agent on ten of the fraudulent loans. See generally Cross-Claim (dkt. 56); 23 Seymour Decl. (dkt. 168) ¶¶ 7-8. Stewart Title now moves for summary judgment, arguing 24 that (1) Flagstar’s dismissal of its claims against The Loan Experts and Nazari establish that 25 there is no genuine issue as to the Cross-Claim’s two indemnity claims; and (2) the evidence 26 demonstrates that the fraud did not cause The Loan Experts’s and Nazari’s harm, and so 27 there are no genuine issues as to the Cross-Claim’s fraud and negligent misrepresentation 28 claims. See generally MSJ (dkt. 166). The Court agrees and therefore GRANTS the Motion, 1 as explained below. 2 I. BACKGROUND 3 A. The Relationship Between Flagstar and The Loan Experts 4 In 2008, The Loan Experts was engaged both in mortgage brokering (brokering a 5 transaction to a lender to fund its loans) and in mortgage banking (using its own funds to 6 fund its loans). See Johnson Decl. (dkt. 167) Ex. T (Nazari Depo) at 14:21-15:3. The Loan 7 Experts established a relationship with Flagstar in 1994. Id. at 31:18-20. Initially, The Loan 8 Experts was a broker approved by Flagstar to submit residential loans in which Flagstar Bank 9 was the lender. Id. at 31:24-32:8. In 1996, The Loan Experts began a “correspondent United States District Court For the Northern District of California 10 relationship” with Flagstar, in which Flagstar agreed to let The Loan Experts fund loans, and 11 Flagstar would buy them, so long as the loans were within Flagstar’s guidelines. Id. at 12 33:10-18. To do correspondent loan business with Flagstar, The Loan Experts needed a 13 14 warehouse line of credit. Id. at 33:1-3. Flagstar provided that credit under a Mortgage 15 Warehousing and Security Agreement and related warehousing notes. Id. at 38:24-39:25. 16 Through those agreements, The Loan Experts obtained a $5,500,000 warehouse line of credit 17 to be used to sell loans to Flagstar, and a separate line of credit. See Johnson Decl. Exs. H 18 (Mortgage Warehousing and Security Agreement) and I (Warehousing Note). Often, “a loan 19 that was funded by Flagstar’s Warehouse Line of Credit would be paid off when [The Loan 20 Experts] sold the loan to Flagstar who was buying the note for its own financial purposes.” 21 Nazari Decl. (dkt. 180) ¶ 6. 22 In order to maintain the separate warehouse lines of credit with Flagstar, The Loan 23 Experts was required to submit annual audited financial statements and quarterly certified 24 financial statements. See Johnson Decl. Ex. H section 7.10. The Warehousing Agreement 25 was subject to termination by either party upon thirty days notice. Id. section 10.3. 26 // 27 // 28 // 2 B. 1 Flagstar Documents About Terminating the Warehouse Line of Credit 1. 2 Content of the Documents In March of 2008, Flagstar completed an Interim Review and Increase request form 3 4 relating to The Loan Experts. Johnson Decl. Ex. K. That form indicates that Flagstar’s 5 Credit Department and Loan Officer recommended denying The Loan Experts’s warehouse 6 line of credit based on The Loan Experts’s 2007 losses and “their high lock fallout.”1 Id. Other documents proffered by Stewart Title show that Flagstar then followed through 7 8 with this recommendation to deny the warehouse line of credit, for the same reasons. 9 See Johnson Decl. Exs. L, M, N, and O. For example, on April 2, 2008, Flagstar sent a letter United States District Court For the Northern District of California 10 to Nazari and The Loan Experts, stating that the warehouse line of credit had been denied 11 “due to losses reported in 2008 and high lock fallout.” Johnson Decl. Ex. L. The letter 12 stated that funding requests would be honored until May 31, 2008 but not after that date. Id. 13 An internal Flagstar email dated May 30, 2008 stated of The Loan Experts that “based on the 14 significant loss in 2007 and their continued high lock fallout, we decided to not renew the 15 warehouse line. We will give them an additional 30 days to wind down the line.” Johnson 16 Decl. Ex. M. The email stated that The Loan Experts’s line would be closed July 1, 2008. 17 Id. Another internal Flagstar email dated June 13, 2008 reflected that Flagstar was 18 considering a further 30 day extension because “[t]hey are actively applying with other 19 warehouse lenders but don’t have anything in place yet” and because there were some 20 closing documents still in The Loan Experts’s name. Johnson Decl. Ex. N. A letter from 21 Flagstar to Nazari and The Loan Experts dated June 16, 2008 stated, “Your warehouse line of 22 credit in the amount of $5,500,000.00 has been extended with Flagstar Bank, FSB until 23 August 1, 2008.” Johnson Decl. Ex. O. No documents suggest that Flagstar extended the 24 warehouse line of credit beyond August 1, 2008. 25 // 26 // 27 28 1 According to Stewart Title, high lock fallout “refers to a situation in which an entity such as Loan Experts commits loans to Flagstar but then does not fund them.” MSJ at 3-4. 3 1 2. Admissibility of the Documents 2 The Loan Experts argues that those documents (Johnson Declaration Exhibits L 3 through O) are inadmissible hearsay. See Opp’n (dkt. 177) at 9. There is little question that 4 they are out of court statements offered for the truth: that Flagstar closed the line of credit 5 when it did, due to The Loan Experts’s 2007 losses and high lock fallout. Stewart Title 6 argues, though, that the documents are admissible as either business records or as reflections 7 of Flagstar’s state of mind. See Reply (dkt. 183) at 6-7. 8 The state of mind exception works, in part. First, it is not quite accurate to assert that 9 Flagstar – a company made up of numerous people – had a state of mind. But the statements United States District Court For the Northern District of California 10 made by individuals at Flagstar can be evidence of those individuals’ states of mind. 11 Statements by those individuals that they planned to close The Loan Experts’s line of credit 12 are admissible as statements of intent. See Fed. Rule of Evid. 803(3) (defining state of mind 13 as “motive, intent, or plan” as well as “mental feeling, pain, or bodily health”). However, 14 statements by those individuals as to the reasons for closing the line of credit are 15 inadmissible. See Wagner v. County of Maricopa, 673 F.3d 977, 987 (9th Cir. 2012) 16 (finding that “statements . . . offered to show not only that [individual] was agitated . . . but 17 also why he was agitated” were hearsay not permitted by Rule 803(3)); United States v. 18 Emmert, 829 F.2d 805, 810 (9th Cir. 1987) (state of mind exception does not permit witness 19 to relate statements as to why he had particular state of mind). Accordingly, the state of 20 mind exception would allow into evidence the correspondence expressing an intention to 21 close the line of credit on a particular date, but not the reasons for doing so. 22 The business record exception is a better fit. A document satisfies Federal Rule of 23 Evidence 803(6)’s business records exception to the hearsay rule if “(A) the record was made 24 at or near the time by . . . someone with knowledge; (B) the record was kept in the course of 25 a regularly conducted activity of a business . . . ; (C) making the record was a regular practice 26 of that activity; (D) all these conditions are shown by the testimony of the custodian or 27 another qualified witness . . . ; and (E) neither the source of information nor the method or 28 circumstances of preparation indicate a lack of trustworthiness.” Fed. R. Evid. 803(6). 4 1 Stewart Title initially did not produce testimony of a custodian at Flagstar or other qualified 2 witness that the documents were kept in the course of a regularly conducted activity. 3 However, the Court issued an order instructing Stewart Title to submit any evidence it 4 had that the documents were business records. See Order re Johnson Declaration Exhibits L, 5 M, N and O (dkt. 203). Stewart Title complied, submitting two declarations. The first is a 6 declaration from counsel for Stewart Title, which attaches a stipulation between The Loan 7 Experts and Flagstar that documents produced by Flagstar in response to discovery requests 8 were authentic, met the foundational requirements of the business records exception to the 9 hearsay rule, and could be sought to be admitted into evidence without the need for United States District Court For the Northern District of California 10 supporting witness testimony or a certification from a Flagstar custodian. See Picone Decl. 11 (dkt. 205) Ex. Y. The second is a declaration by Flagstar Bank’s records custodian, which 12 states that the records produced by Flagstar, including exhibits L, M, N, and O of the 13 Johnson Declaration, were related to the regular business activity of Flagstar, are true and 14 accurate copies of those records that were kept in the ordinary course of business, were made 15 at or near the time of the events to which they relate, by Flagstar employees who had 16 knowledge of the contents, and that the making of the records was done in the ordinary 17 course of Flagstar’s business. See Kolp Decl. (dkt. 206) ¶¶ 7, 8. The Court is now satisfied 18 that the business records exception applies, and allows Exhibits L, M, N and O to come into 19 evidence in their entirety. 20 The Loan Experts also argues that the documents were improperly authenticated. 21 See Opp’n at 9. The stipulation between The Loan Experts and Flagstar that documents 22 produced by Flagstar in response to discovery requests were authentic, see Picone Decl. Ex. 23 Y, undermines The Loan Experts’s current position. Moreover, although unauthenticated 24 documents cannot be considered in a motion for summary judgment, authentication can be 25 accomplished when a document is produced in response to a discovery request. See Metro- 26 Goldwyn-Mayer Studios, Inc. v. Grokster, Ltd., 454 F. Supp. 2d 966, 972 (C.D. Cal. 2006). 27 Here, Johnson Exhibit L and Exhibit O are written on Flagstar letterhead, were sent to 28 Nazari, who does not deny receiving them, and were produced by Flagstar when it was a 5 1 party to this case. See Johnson Exs. L and O; Johnson Decl. ¶ 14 (“[t]he Flagstar production 2 included the following documents”). Johnson Declaration Exhibits M and N include Flagstar 3 electronic signatures and logo, do not appear to be untrustworthy, and were produced by 4 Flagstar when it was a party to this case. See Johnson Exs. M and N; Johnson Decl. ¶ 14 5 (“[t]he Flagstar production included the following documents”). This is sufficient to 6 authenticate the documents. See Maljack Prods., Inc. v. GoodTimes Home Video Corp., 81 7 F.3d 881, 889 n.12 (9th Cir. 1996) (finding that documents were authenticated where party 8 produced them in case, many of documents were on party’s letterhead, and producing party 9 did not contest authenticity).2 United States District Court For the Northern District of California 10 C. The Fraud 11 In mid-July 2008, a loan made to borrower Marjorie Kraft closed. See Seymour Decl. 12 (dkt. 168) ¶ 15. That loan triggered the first discovery of fraud. See Supp. Johnson Decl. 13 Ex. V (Nazari Decl.) at 127:12-20, 200:2-20. The fraud worked as follows. The Branch 14 Manager in Stewart Title’s Campbell office, Donna Demello, “participated in a fraudulent 15 scheme to defraud financial institutions by concealing material information related to 16 mortgage loan applications.” Fredkin Decl. Ex. B (Demello plea transcript) at 13:22-24. 17 Demello was the escrow officer for the purchase of about 80 condominiums, purchased in the 18 name of straw buyers who were promised to be paid between five and ten thousand dollars in 19 exchange for allowing an individual named McConville to use their names and credit to 20 obtain financing. Id. at 14:4-15. McConville then received large payments described as 21 “marketing fees” (kickbacks) paid by the seller though escrow at the end of each transaction, 22 which Demello fraudulently concealed from the lending institutions. Id. at 14:16-24. 23 Demello pled guilty and was sentenced to prison for her role in the fraud. See generally id.; 24 Fredkin Decl. Ex. C (judgment in a criminal case). 25 26 27 28 2 In Maljack Productions, the document was being used against the producing party; here Flagstar is no longer a party and Stewart Title seeks to use them against The Loan Experts. Nonetheless, the Court has no reason to doubt that the documents here are what they purport to be, and Flagstar has not disputed their authenticity. 6 1 The Loan Experts discovered that it had written ten of the fraudulent loans. Nazari 2 Decl. ¶¶ 7, 8. The loans had been handled in the normal course, and Stewart Title, which had 3 handled the escrow on each of the ten loans, had provided the appropriate documentation. 4 Id. The Loan Experts “had absolutely no idea that those loans were part of the fraudulent 5 scheme.” Id. ¶ 7. 6 The Loan Experts and Nazari contend that Flagstar both (1) terminated The Loan 7 Experts’s line of credit as a result of the fraud, and (2) “placed The Loan Experts on a list of 8 questionable companies that was reviewed by others in the mortgage banking business” as a 9 result of the fraud. Id. ¶ 10; Opp’n at 11-13. Nazari closed The Loan Experts toward the end United States District Court For the Northern District of California 10 of 2008. See Supp. Johnson Decl. Ex. V at 182:23-25. 11 D. This Lawsuit 12 In January, 2010, Flagstar filed suit against The Loan Experts, Nazari, Stewart Title 13 and others, seeking to recover damages it claimed it suffered due to twenty two non- 14 performing “straw buyer” loans associated with McConville. See generally Compl. Flagstar 15 alleged that it had acquired the subject loans in reliance upon various misrepresentations as 16 to the identities of creditworthiness of the purported borrowers, the nature and terms of the 17 underlying transactions, and the value of the subject properties. Id. ¶¶ 19, 22. 18 In August 2010, The Loan Experts and Nazari filed a Cross-Claim against Stewart 19 Title, arguing that if Flagstar “sustained damages as alleged in the complaint, these damages 20 were caused, entirely or in part, by” Stewart Title. See Cross-Claim ¶ 12. The Loan 21 Experts’s theory is that it made loans in reliance upon Stewart Title’s misrepresentations, 22 and that, relying on those representations, it sold those loans to Flagstar, thereby causing 23 Flagstar’s injuries. Id. ¶¶ 13-14. The Cross-Claim includes causes of action for indemnity 24 and for fraud and negligent misrepresentation. Id. ¶¶ 10-47. 25 In November 2011, Stewart Title and Flagstar entered into a settlement through which 26 Stewart Title paid Flagstar a sum of money and Flagstar released Stewart Title, The Loan 27 Experts and Nazari from all claims. See Johnson Decl. ¶¶ 11-12. Neither The Loan Experts 28 nor Nazari were required to pay anything as part of the settlement. Id. ¶ 11; Nazari Decl. ¶ 7 1 11 (“We paid no money because we did nothing wrong.”); Johnson Decl. Ex. T at 186:19-24. 2 Flagstar then dismissed The Loan Experts and Nazari with prejudice. Nazari Decl. ¶ 11; 3 Johnson Decl. ¶ 12; Stipulation (dkt. 147). Stewart Titles now moves for summary judgment on the Cross-Claim. See 4 5 generally MSJ. 6 II. LEGAL STANDARD Summary judgment is proper when “the movant shows that there is no genuine 7 8 dispute as to any material fact and the movant is entitled to a judgment as a matter of law.” 9 Fed. R. Civ. P. 56(a). An issue is “genuine” only if there is a sufficient evidentiary basis on United States District Court For the Northern District of California 10 which a reasonable fact finder could find for the nonmoving party, and a dispute is 11 “material” only if it could affect the outcome of the suit under governing law. See Anderson 12 v. Liberty Lobby, Inc., 477 U.S. 242, 248-49 (1986). A principal purpose of the summary 13 judgment procedure “is to isolate and dispose of factually unsupported claims.” Celotex 14 Corp. v. Catrett, 477 U.S. 317, 323-24 (1986). “Where the record taken as a whole could not 15 lead a rational trier of fact to find for the non-moving party, there is no ‘genuine issue for 16 trial.’” Matsushita Elec. Ind. Co. v. Zenith Radio, 475 U.S. 574, 587 (1986). 17 III. 18 DISCUSSION Stewart Title moves for summary judgment on the two sets of claims in the Cross- 19 Claim: the indemnity claims (Counts I and II) and the claims for fraud and negligent 20 misrepresentation (Counts IV and V).3 The Court will address each in turn. 21 A. The Indemnity Claims 22 The two indemnity claims seek to recover from Stewart Title “any sums that [The 23 Loan Experts] may be compelled to pay as the result of any damages, judgment, or other 24 awards recovered by [Flagstar] against [The Loan Experts].” Cross-Claim ¶¶ 15(b), 25(b). 25 Stewart Title moves for summary judgment, arguing that “[t]here is no possibility that Loan 26 Experts or Nazari will be compelled to pay anything to Flagstar as a result of Flagstar’s 27 3 28 Count III of the Cross-Claim, for Declaratory Relief re: Express Indemnity, is brought only against the Roe defendants. See Cross-Claim ¶¶ 28-38. Stewart Title assumes that The Loan Experts has dropped that claim, and The Loan Experts does not assert otherwise in its papers. 8 1 Complaint, nor is there any possibility that Flagstar will recover any judgment or other award 2 against Loan Experts and Nazari.” MSJ at 14. 3 The Loan Experts does not dispute that, in light of the release and dismissal, it will not 4 have to pay anything to Flagstar. Instead, it argues that it is entitled to “any sums” it was 5 required to pay as a result of the fraud, which includes its attorneys’ fees and costs. Nazari 6 asserts that he spent $48,115 in legal fees for former counsel, and over $25,000 in fees and 7 over $100 in costs by current counsel. Nazari Decl. ¶ 11. The Loan Experts offers two 8 reasons why it is entitled to its attorneys’ fees, neither of which is compelling. 9 First, The Loan Experts points to language in the Cross-Claim as evidence that it has United States District Court For the Northern District of California 10 always sought attorneys’ fees. See Opp’n at 13 (citing Cross-Claim ¶¶ 16, 26-27). Although 11 there is some vague language in the Cross-Claim referring to “any sums that [The Loan 12 Experts] may be compelled to pay and for which [Stewart Title] is determined responsible, 13 entirely or in part,” see Cross-Claim ¶¶ 16, 26, that vague language is sandwiched between 14 two far more specific clauses, which limit The Loan Experts’s potential recovery to those 15 damages, judgment or awards recovered by Flagstar, see id. ¶¶ 15(b), 25(b) (“for any sums 16 that [The Loan Experts] may be compelled to pay as the result of any damages, judgment, or 17 other awards recovered by [Flagstar]” and id. ¶¶ 17, 27 (“for indemnification of sums that 18 [The Loan Experts] may be compelled to pay as a result of any damages, judgment, or other 19 awards recovered by [Flagstar] against [The Loan Experts].” Those more specific clauses 20 make clear that The Loan Experts did not seek to recover any sums it ever spent in 21 connection with the case, but only that money that Flagstar recovered from it. Further 22 support for that interpretation comes from the Cross-Claim’s Prayer for Relief, which also 23 does not mention attorneys’ fees. See Cross-Claim Prayer for Relief at 10 (“if [The Loan 24 Experts] are compelled to pay any sum as the result of any damages, judgment, or other 25 awards recovered by [Flagstar] against [The Loan Experts]”). The Cross-Claim therefore 26 does not entitle The Loan Experts to its attorneys’ fees. 27 Second, The Loan Experts argues that “[a]n innocent indemnitee that has incurred 28 attorney fees to defend itself may recover fees under California Code of Civil Procedure 9 1 section 1021.6 . . . following a meritorious and successful indemnity claim.” Opp’n at 13. 2 The Loan Experts further argues that, in California, “a party is not precluded from recovering 3 fees under Section 1021.6 because it never paid a judgment or settlement in the litigation. 4 Opp’n at 13 (citing Wilson, McCall & Daoro v. Am. Qualified Plans, Inc., 70 Cal. App. 4th 5 1030, 1037 (1999)). This last argument is true, but insufficient. 6 The Loan Experts’s problem with Section 1021.6 is not that it never paid a judgment 7 to Flagstar (that is its problem with the language in the Cross-Claim); its problem is that it 8 does not meet all of the requirements of Section 1021.6. That section provides: 9 United States District Court For the Northern District of California 10 11 12 13 14 Upon motion, a court after reviewing the evidence in the principal case may award attorney’s fees to a person who prevails on a claim for implied indemnity if the court finds (a) that the indemnitee through the tort of the indemnitor has been required to act in the protection of the indemnitee’s interest by bringing an action against or defending an action by a third person and (b) if that indemnitor was properly notified of the demand to bring the action or provide the defense and did not avail itself of the opportunity to do so, and (c) that the trier of fact determined that the indemnitee was without fault in the principal case which is the basis for the action in indemnity or that the indemnitee had a final judgment entered in his or her favor granting a summary judgment, a nonsuit, or a directed verdict. 15 Cal. Civ. Proc. § 1021.6. Here, no trier of fact determined that The Loan Experts was 16 without fault, and the Loan Experts had no final judgment entered in its favor granting 17 summary judgment, a nonsuit, or a directed verdict. See id. Wilson, 70 Cal. App. 4th at 18 1036, upon which The Loan Experts relies, nonetheless held that a party must have “satisfied 19 the requirements of section 1021.6.” The Loan Experts has not done so. 20 Because neither the Cross-Claim nor Section 1021.6 permit The Loan Experts to 21 recover its attorneys’ fees in this case, there is no genuine issue of material fact on the 22 indemnity claims, and the Court will enter judgment for Stewart Title on them. 23 B. The Fraud and Negligent Misrepresentation Claims 24 The fraud and negligent misrepresentation claims both allege that Stewart Title made 25 misrepresentations to The Loan Experts, and that “[a]s a proximate cause of [Stewart Title’s] 26 misrepresentations, The Loan Experts [has] been damaged in an amount to be proven at 27 trial.” See Cross-Claim ¶¶ 42, 47. Stewart Title does not deny wrongdoing by its escrow 28 officer, Demello, but takes aim only at The Loan Experts’s proof of causation, arguing that 10 1 “Loan Experts cannot connect the wrongdoing to the damages it claims, which is the loss of 2 profits it asserts it would have received had it not gone out of business after Flagstar Bank 3 terminated its warehouse line of credit.” MSJ at 10-11. Specifically, in an interrogatory 4 response, The Loan Experts stated that it “was put out of business as a result of its warehouse 5 line from Flagstar Bank being terminated and fraud allegations being made against it and its 6 principal, Mr. Nazari.” Johnson Decl. Ex. D (Supp. Response to Interrog. No. 7) at 4. 7 Stewart Title argues that The Loan Experts cannot prove either basis for causation. MSJ at 8 11-13. The Loan Experts argues that there is a genuine dispute of fact about both. Opp’n at 9 8-13. United States District Court For the Northern District of California 10 11 1. The Warehouse Line of Credit In March 2008, Flagstar decided to deny The Loan Experts’s warehouse line of credit. 12 See Johnson Decl. Ex. K (Interim Review and Increase Request). Flagstar communicated 13 that decision to The Loan Experts as early as April 2, 2008. Johnson Decl. Ex. L. The 14 reason Flagstar gave for terminating the warehouse line was not fraud, but “losses reported in 15 2008 and high lock fallout.” Id. In March and April of 2008, the fraud had not yet been 16 discovered; the Kraft loan did not even close until July 18, 2008. See Seymour Decl. ¶ 15; 17 Supp. Johnson Decl. Ex. V (Nazari Decl.) at 127:12-20, 200:2-20. Although Flagstar 18 extended the termination date from May 31, 2008 to August 1, 2008, see Johnson Decl. Ex. 19 O, there is no evidence that it was ever extended beyond August 1, 2008. 20 21 22 The Loan Experts nonetheless argues that the warehouse line of credit was cancelled after, and because of, discovery of the fraud. It argues, first, that Flagstar continued to fund loans after August 1st. See Nazari 23 Decl. ¶ 9; see also McAuley Decl. ¶ 9 (“Flagstar extended the warehouse line of credit 24 through August 1, 2008 and continued to fund loans for The Loan Experts well after that 25 date.”). In fact there were apparently six loans that closed in August 2008 and one in 26 September 2008. See Supp. Johnson Decl. Ex. U. But that six loans were funded does not 27 create a genuine dispute of fact – in part because one of Flagstar’s internal emails had 28 indicated the advantage of allowing The Loan Experts to close the loans already in progress 11 1 (because otherwise the loans would need to be redrawn), see Johnson Decl. Ex. N, and The 2 Loan Experts does not explain why Flagstar could not have continued to fund those loans and 3 still close the warehouse line of credit. In addition, the existence of such loans does not 4 undermine the evidence that Flagstar decided by March or April 2008 to terminate the line of 5 credit, or the corresponding conclusion that that decision could not have been motivated by 6 the fraud. 7 It next argues that R. Joe Lathrop, the former Vice President of the Warehouse 8 Lending division of Flagstar, spoke with Nazari and an expert for The Loan Experts, Michael 9 McAuley, and told them that The Loan Experts’s warehouse line of credit would not have United States District Court For the Northern District of California 10 been permanently cancelled absent the fraud allegations. See Opp’n at 11-12; Nazari Decl. ¶ 11 9, McAuley Decl. ¶ 12. As even The Loan Experts acknowledges, however, Lathrop’s 12 statement is hearsay, see Opp’n at 12, and cannot be considered. 13 Finally, it also submitted a few documents in connection with Nazari’s Supplemental 14 Declaration, which at first glance could suggest that the warehouse line of credit might have 15 continued beyond August 1, 2008 and been canceled due to the fraud. See Supp. Nazari 16 Decl. Exs. 1-4. Exhibit 1 shows Flagstar approving one of The Loan Experts’s employees as 17 an underwriter in October 2008. See Supp. Nazari Decl. Ex. 1. Exhibit 3 is an internal 18 Flagstar email from October 2008 stating that The Loan Experts would “be out [sic] into a 19 pending termination status immediately,” and Exhibit 4 is a letter canceling Flagstar’s 20 Wholesale Lending Agreement with The Loan Experts because “loan quality and delivery 21 issues have made conducting business with The Loan Experts Corp. not in our best interest.” 22 Sup. Nazari Decl. Exs. 3, 4. But, upon closer review, Exhibit 1 pertains to The Loan 23 Experts’s continued status as a broker, not a mortgage banker; the warehouse line of credit 24 was irrelevant to The Loan Experts’s broker function. Similarly, Exhibits 3 and 4 relate to 25 The Loan Experts as a broker and do not relate to the warehouse line of credit. Particularly 26 concerning, Stewart Title submitted to the Court correspondence in which counsel for The 27 Loan Experts stated that he had initially believed that Exhibit 4 was related to the 28 cancellation of the warehouse line, but that he learned that it in fact related to the (unrelated) 12 1 Correspondent Purchase Agreement. See Surrebuttal (dkt 200) at 4; Supp. Johnson Decl. Ex. 2 X. That The Loan Experts went on to submit the document to the Court as evidence of the 3 closing of the warehouse line, see Supp. Nazari Decl. ¶ 4 (“This is the letter which best 4 reflects the date the lending agreement with Flagstar was in fact terminated. The Loan 5 Experts warehouse line was officially terminated after I received this letter”), is misleading.4 6 7 There is therefore no genuine issue of fact as to whether the fraud caused Flagstar to cancel the warehouse line of credit; it did not. 2. 8 9 Stigmatizing Fraud Allegations The Loan Experts’s second basis for causation is that “[e]ven if Flagstar’s Warehouse United States District Court For the Northern District of California 10 Line had been terminated, there were other warehouse lenders who would have been 11 available to [The Loan Experts] but for [The Loan Experts]’s being stigmatized by having 12 made loans on real estate sales that turned out to be fraudulent.” Opp’n at 12. But The Loan 13 Experts offers no admissible evidence that it was stigmatized. 14 The Loan Experts’s best evidence of stigma is Nazari’s assertion in his declaration 15 that Flagstar “placed us on a list of questionable companies that was reviewed by others in 16 the mortgage banking business.” Nazari Decl. ¶ 10. Nazari, however, offers no foundation 17 4 18 19 20 21 22 23 24 25 26 27 28 At the motion hearing, counsel for The Loan Experts made an altogether new argument as to the cancellation of the correspondent line. Counsel asserted that its case was “not only about the warehouse line” but that the fraud also caused the correspondent line to be canceled, which impacted The Loan Experts’s ability to get other credit. This assertion is problematic for several reasons. First, The Loan Experts never relied on the cancellation of the correspondent line in its Opposition (or any) papers, and so opposing counsel never had an opportunity to respond. Cf. United States v. Ward, No. 11-1067, 2012 WL 1252692, at *3 n.3 (C.D. Cal. Apr. 13, 2012) (“defense counsel failed to raise it in the motion papers, the government had no opportunity to respond in writing, and the Court therefore declines to consider it.”); United States v. Rearden, 349 F.3d 608, 614 n.2 (9th Cir.2003) (“We decline to consider Rearden’s argument ... because it is raised for the first time in reply.”). Second, The Loan Experts affirmatively represented in an interrogatory response that it “was put out of business as a result of its warehouse line from Flagstar Bank being terminated and fraud allegations being made against it and its principal, Mr. Nazari.” See Johnson Decl. Ex. D (Supp. Response to Interrog. No. 7) at 4; see also Nazari Depo at 198:3-16 (stating that it was “the loss of the warehouse line due to fraud allegations that caused [The Loan Experts] to go out of business”). That response did not mention the correspondent line. Stewart Title was, and the Court is, entitled to take The Loan Experts at its word as to its theory of its case. Cf. Judge William W. Schwarzer, et al., Federal Civil Procedure Before Trial 15:188 (The Rutter Group 2012) (“Admissions in the opposing party’s pleadings . . . are admissible evidence and therefore can serve as the basis for summary judgment or opposition”). Third, even if the correspondent line was indeed canceled because of the fraud, The Loan Experts offers only conclusory argument, and no admissible evidence, that that cancellation contributed to The Loan Experts going out of business. For all of these reasons, the Court rejects The Loan Experts’s late assertion as to the correspondent line. 13 1 for his testimony about the list, does not say how he knows about the list or whether he ever 2 saw it, and does not attach the list. Nor is there any evidence that any other lenders saw and 3 relied on the list in refusing credit. Accordingly, the Court will ignore Nazari’s testimony 4 about the list. 5 Nazari also complains that “Flagstar sued The Loan Experts along with everyone else 6 who was in any manner touched [sic] the transactions that were tainted with the McConville 7 fraudulent scheme.” Id. ¶ 10. But Flagstar filed suit in January 2010, see generally Compl., 8 and Nazari testified that The Loan Experts went out of business in late 2008, Supp. Johnson 9 Decl. Ex. V at 182:23-25. McAuley’s testimony that “The Loan Experts would not have United States District Court For the Northern District of California 10 been able to get a replacement warehouse line after The Loan Experts was accused of 11 committing fraud against its warehouse lender,” McAuley Decl. ¶ 13, is therefore irrelevant.5 Moreover, although Nazari testified that he did call some other warehouse lenders to 12 13 obtain an alternative warehouse line, see Supp. Johnson Decl. Ex. V at 200:24-25, he did not 14 testify that those lenders knew of the fraud allegations, that they were aware of the blacklist 15 that Flagstar allegedly put The Loan Experts on, or that they declined to extend funds to The 16 Loan Experts because of the stigma of being a company that had been involved with a fraud. There is therefore no genuine issue of fact as to whether the fraud caused a stigma that 17 18 caused The Loan Experts to go out of business; it did not. 3. 19 Conclusion as to Fraud and Negligent Misrepresentation Claims Because the fraud allegations did not cause Flagstar to close the warehouse line of 20 21 credit or create a stigma that caused The Loan Experts to go out of business, there is no 22 genuine issue of material fact on the fraud and negligent misrepresentation claims, and the 23 Court will enter judgment for Stewart Title on them. 24 IV. For the foregoing reasons, the Court GRANTS Stewart Title’s Motion for Summary 25 26 CONCLUSION // 27 28 5 To the extent that McAuley’s language about accusations of fraud refers not to the lawsuit but to the generalized stigma or even the list Nazari referred to, it also lacks foundation. 14 1 2 Judgment. IT IS SO ORDERED. 3 4 CHARLES R. BREYER UNITED STATES DISTRICT JUDGE Dated: October 9, 2012 5 6 7 8 9 United States District Court For the Northern District of California 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 G:\CRBALL\2010\3190\order re MSJ.wpd 15

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