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)
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
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?