Federal Deposit Insurance Corporation v. Gulparast et al

Filing 23

ORDER denying 8 Motion to Dismiss by Judge Edward J. Davila. (ejdlc4, COURT STAFF) (Filed on 10/18/2012)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

United States District Court
For the Northern District of California

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SAN JOSE DIVISION

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FEDERAL DEPOSIT INSURANCE
CORPORATION, as Receiver for
BANKUNITED, F.S.B.,
Plaintiff,

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v.
FARAH GULPARAST, ET AL.,
Defendants.

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Case No.: 5:12-CV-02528-EJD
ORDER DENYING DEFENDANT
SWANSON’S MOTION TO DISMISS;
GRANTING IN PART AND DENYING
IN PART PLAINTIFF’S REQUEST
FOR JUDICIAL NOTICE;
GRANTING DEFENDANT
SWANSON’S REQUEST FOR
JUDICIAL NOTICE
[Re: Docket Nos. 8, 14, 16]

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Plaintiff, Federal Deposit Insurance Corporation (“FDIC”) (hereinafter “Plaintiff”), as the
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appointed receiver for BankUnited, F.S.B., brings this action asserting negligence and other
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common law claims against Defendants Farah Gulparast (“Gulparast”), d/b/a/ U.S. Appraisal
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Services, Cindy Swanson (“Swanson”), d/b/a/ Aldrich Appraisals, and Does 1-10 (collectively,
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“Defendants”). Plaintiff bases its claims on two appraisals conducted by Swanson and Gulparast
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for American Prime Funding. Plaintiff alleges that the Defendants negligently inflated the value of
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the residential properties in their appraisal reports, that BankUnited relied upon these appraisals to
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purchase the loans, and that the misrepresentations, failures, and deficiencies in the appraisals
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caused Plaintiff damage.
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Case No.: 5:12-CV-02528-EJD
ORDER DENYING DEFENDANT SWANSON’S MOTION TO DISMISS; GRANTING IN
PART AND DENYING IN PART PLAINTIFF’S REQUEST FOR JUDICIAL NOTICE;
GRANTING DEFENDANT SWANSON’S REQUEST FOR JUDICIAL NOTICE

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Presently before the court is Defendant Swanson’s Motion to Dismiss pursuant to Federal

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Rule of Civil Procedure 12(b)(6), Plaintiff’s Request for Judicial Notice, and Defendant Swanson’s

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Request for Judicial Notice. Pursuant to Civil Local Rule 7–1(b), the Court finds this matter

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appropriate for determination without oral argument and hereby VACATES the hearing set for

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October 12, 2012. Having considered the parties’ submissions and the relevant law, the Court

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GRANTS in part and DENIES in part Plaintiff’s Request for Judicial Notice, GRANTS

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Defendant’s Request for Judicial Notice, and DENIES Defendant’s Motion to Dismiss.

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United States District Court
For the Northern District of California

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I.

Background
The following facts have been taken from Plaintiff’s complaint, and are taken as true for

purposes of this motion.
On February 20, 2006, Defendants contracted with American Prime Funding to prepare a

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written Uniform Residential Appraisal Report for real property located at 1729 Christina Avenue,

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Stockton, California 95204. Compl. ¶ 10, Dkt. No. 1. Several weeks later, on March 29, 2006,

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Defendants prepared an appraisal report, appraising the property for $410,000 as of February 9,

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2006. Compl. ¶ 10. Gulparast served as a trainee appraiser on this appraisal, and the document

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bore Swanson’s signature as Supervisory Appraiser. Compl. ¶ 11. BankUnited relied on this

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appraisal to fund a mortgage loan for $369,000 as part of a cash-out refinance of the property.

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Compl. ¶ 17. Plaintiff subsequently discovered that the appraisal had been negligently prepared

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and contained material misrepresentations. Compl. ¶ 15. The true market value, according to

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Plaintiff, actually was less than $369,000 at the time BankUnited funded the loan. Compl. ¶ 18.

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Around the same time, in February 2006, Defendants again contracted with American

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Prime Funding to prepare a Uniform Residential Appraisal Report for real property, this time

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located at 1060 North Mitchell Avenue in Turlock, California. Compl. ¶ 20. Defendants’ appraisal

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valued this property at $460,000 as of December 2006. Compl. ¶ 21. Gulparast again served as a

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trainee appraiser and prepared the appraisal, but the appraisal still bore Swanson’s signature as the

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Supervisory Appraiser. Compl. ¶¶ 21-22. On April 18, 2006, BankUnited funded a mortgage

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Case No.: 5:12-CV-02528-EJD
ORDER DENYING DEFENDANT SWANSON’S MOTION TO DISMISS; GRANTING IN
PART AND DENYING IN PART PLAINTIFF’S REQUEST FOR JUDICIAL NOTICE;
GRANTING DEFENDANT SWANSON’S REQUEST FOR JUDICIAL NOTICE

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refinance loan in the amount of $414,000 secured by the property in reliance on the appraisal.

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Compl. ¶ 27. However, the market value at the time BankUnited funded the loan was “far less than

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$460,000.” Compl. ¶ 28. Plaintiff has ascertained information suggesting that the appraisal on

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this property was negligently prepared and contained material misrepresentations. Compl. ¶ 26.

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On both appraisals, Swanson, through her signature as the Supervisory Appraiser, made the
following representations:
1. I directly supervised the appraiser for this appraisal assignment, have read the appraisal
report, and agree with the appraiser’s analysis, opinions, statements, conclusions, and

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United States District Court
For the Northern District of California

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the appraiser’s certification.

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2. I accept full responsibility for the contents of this appraisal report including, but not

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limited to, the appraiser’s analysis, opinions, statements, conclusions, and the

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appraiser’s certification.

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3. This appraisal report complies with the Uniform Standards of Professional Appraisal

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Practice that were adopted and promulgated by the Appraisal Standards Board of the

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Appraisal Standards Foundation and that were in place at the time this appraisal report

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was prepared.

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Compl. ¶¶ 12, 22.
Additionally, both appraisals included an appraiser’s certification, which in relevant part to
this motion provided that:

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23.

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successors and assigns, mortgage insurers, government sponsored enterprises, and other

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secondary market participants may rely on this appraisal report as part of any mortgage

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finance transaction that involves one or more of these parties.

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The borrower, another lender at the request of the borrower, the mortgagee or its

Compl. ¶¶ 13, 24.

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On the basis of these facts, Plaintiff filed this action alleging three causes of action: breach

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of contract, negligent misrepresentation, and professional negligence. Defendant Cindy Swanson

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Case No.: 5:12-CV-02528-EJD
ORDER DENYING DEFENDANT SWANSON’S MOTION TO DISMISS; GRANTING IN
PART AND DENYING IN PART PLAINTIFF’S REQUEST FOR JUDICIAL NOTICE;
GRANTING DEFENDANT SWANSON’S REQUEST FOR JUDICIAL NOTICE

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has moved to dismiss Plaintiff’s Third Cause of Action for Professional Negligence, arguing that

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under California Law, a plaintiff suing an appraiser only has standing to bring a negligence cause

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of action if the plaintiff is the client of the appraiser.

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I.

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Jurisdiction
This court has subject matter jurisdiction pursuant to 12 U.S.C. § 1819(b)(2)(A), which

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provides that any civil suit to which the FDIC is a party “shall be deemed to arise under the laws of

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the United States.”

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II.

United States District Court
For the Northern District of California

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Judicial Notice
Plaintiff’s Request for Judicial Notice (“RFN”), Dkt. No. 14, is GRANTED as to Exhibit 1

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(Fannie Mae’s Revised Appraisal and Property Report Forms (Forms Dated March 2005 for

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Appraisals Dated On/After 11/1/2005) Frequently Asked Questions) and Exhibit 2 (Fannie Mae

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Single Family 2007 Selling Guide, Part XI, Property and Appraisal Guidelines). Plaintiff’s RFN is

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DENIED as to Exhibit 3 (Complaint dated April 30, 2010 in Federal Deposit Ins. Corp. v.

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Kirkland, No. 10-CV-3286 (C.D. Cal)) and Exhibit 4 (ruling in Kirkland, No. 10-CV-3286

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(C.D.Cal. Oct. 28, 2010), as the court does not take judicial notice of these types of documents.

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Defendant Cindy Swanson’s RFN, Dkt. No. 16, is GRANTED.

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III.

Motion to Dismiss
A. Legal Standard

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Federal Rule of Civil Procedure 8(a) requires a plaintiff to plead each claim in the

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complaint with sufficient specificity to “give the defendant fair notice of what the ... claim is and

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the grounds upon which it rests.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007)

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(internal quotations omitted). A complaint which falls short of the Rule 8(a) standard may be

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dismissed if it fails to state a claim upon which relief can be granted. Fed.R.Civ.P. 12(b)(6).

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Dismissal under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim is “proper only

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where there is no cognizable legal theory or an absence of sufficient facts alleged to support a

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cognizable legal theory.” Shroyer v. New Cingular Wireless Services, Inc., 606 F.3d 658, 664 (9th

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4
Case No.: 5:12-CV-02528-EJD
ORDER DENYING DEFENDANT SWANSON’S MOTION TO DISMISS; GRANTING IN
PART AND DENYING IN PART PLAINTIFF’S REQUEST FOR JUDICIAL NOTICE;
GRANTING DEFENDANT SWANSON’S REQUEST FOR JUDICIAL NOTICE

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Cir. 2010) (quoting Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001)). In considering whether

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the complaint is sufficient to state a claim, the court must accept as true all of the factual

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allegations contained in the complaint. Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009). While a

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complaint need not allege detailed factual allegations, it “must contain sufficient factual matter,

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accepted as true, to “‘state a claim to relief that is plausible on its face.’” Iqbal, 129 S.Ct. at 1949

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(quoting Twombly, 550 U.S. at 570).

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If a district court considers evidence outside the pleadings in a motion to dismiss, it must
normally convert the Rule 12(b)(6) motion into a Rule 56 motion for summary judgment, and must

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United States District Court
For the Northern District of California

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give the nonmoving party an opportunity to respond. See United States v. Ritchie, 342 F.3d 903,

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907 (9th Cir. 2003). A court may, however, consider documents attached to the complaint,

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documents incorporated by reference in the complaint, or matters of judicial notice without

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converting the motion to dismiss into a motion for summary judgment. Id. at 908. The court may

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treat such a document as part of the complaint, and may assume that its contents are true for

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purposes of a motion to dismiss under Rule 12(b)(6). See Knievel v. ESPN, 393 F.3d 1068, 1076

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(9th Cir. 2005).

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B. Discussion
The instant motion seeks only to dismiss Plaintiff’s Third Cause of Action for Professional

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Negligence as to individual defendant Cindy Swanson, d/b/a Aldrich Appraisals. Professional

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negligence is a “pure negligence” theory. See Flowers v. Torrance Mem’l Hosp. Med. Ctr., 8 Cal.

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4th 992 (1994). To state a claim for professional negligence, the Plaintiff must show “(1) the duty

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of the professional to use such skill, prudence, and diligence as other members of his profession

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commonly possess and exercise; (2) breach of that duty; (3) a proximate causal connection between

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the negligent conduct and the resulting injury; and (4) actual loss or damage resulting from the

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professional negligence.” Bucquet v. Livingston, 57 Cal.App.3d 914, 920-21 (Cal. Ct. App. 1976).

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This motion turns on whether Swanson owed a duty to Plaintiff, a third party beneficiary.

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The California Supreme Court considered the boundaries of professional negligence claims in Bily

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Case No.: 5:12-CV-02528-EJD
ORDER DENYING DEFENDANT SWANSON’S MOTION TO DISMISS; GRANTING IN
PART AND DENYING IN PART PLAINTIFF’S REQUEST FOR JUDICIAL NOTICE;
GRANTING DEFENDANT SWANSON’S REQUEST FOR JUDICIAL NOTICE

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v. Arthur Young & Co., which examined the question of “whether and to what extent an

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accountant’s duty of care in the preparation of an independent audit of a client’s financial

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statements extends to persons other than the client.” 3 Cal. 4th 370, 375 (1992). In that case, a

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company hired the defendant auditor to perform audits and issue audit reports. The defendant

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issued a “clean” audit report, on which several third parties relied in deciding to invest in the

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company. These investments faltered, and the investors sued the defendant auditor for several

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causes of action, including professional negligence.

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United States District Court
For the Northern District of California

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The California Supreme Court determined that “an auditor’s liability for general negligence
in the conduct of an audit of its [client’s] financial statements is confined to the client, i.e. the

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person who contracts for or engages the audit services. Other persons may not recover on a pure

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negligence theory.” Id. at 406. While holding that third parties may not generally recover on a

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pure negligence theory, the Bily court pointed out in a footnote that:

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In theory, there is an additional class of persons who may be the practical and legal

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equivalent of “clients.” It is possible the audit engagement contract might expressly identify

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a particular third party or parties so as to make them express third party beneficiaries of the

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contract. Third party beneficiaries may under appropriate circumstances possess the rights

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of parties to the contract. Id. at 406, n. 16.

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Immediately following that discussion, the Bily court went on to approve a negligent

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misrepresentation claim by third parties who do not qualify for recovery on a pure negligence

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claim, stating:

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There is, however, a further narrow class of persons who, although not clients, may

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reasonably come to receive and rely on an audit report and whose existence constitutes a

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risk of audit reporting that may fairly be imposed on the auditor. Such persons are

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specifically intended beneficiaries of the audit report who are known to the auditor and for

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whose benefit it renders the audit report. While such persons may not recover on a general

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Case No.: 5:12-CV-02528-EJD
ORDER DENYING DEFENDANT SWANSON’S MOTION TO DISMISS; GRANTING IN
PART AND DENYING IN PART PLAINTIFF’S REQUEST FOR JUDICIAL NOTICE;
GRANTING DEFENDANT SWANSON’S REQUEST FOR JUDICIAL NOTICE

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negligence theory, we hold they may…recover on a theory of negligent misrepresentation.

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Id. at 406-407.

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California courts have specifically applied Bily’s holding on auditors to real estate appraisers

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whose negligence may injure third parties. Soderberg v. McKinney, 44 Cal.App.4th 1760, 1768

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(Cal. Ct. App. 1996).

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1. Certification #23
Swanson’s appraisals included attached standard certifications developed by Fannie Mae.
See Compl. ¶¶ 13, 24, 52; Pl. RFN, Exhs. 1-2, Dkt. No. 14. Certification #23 requires an appraiser

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United States District Court
For the Northern District of California

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to acknowledge that certain parties other than the Lender/Client and/or the Intended User, such as

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“[t]he borrower, another lender at the request of the borrower, the mortgagee or its successors and

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assigns, mortgage insurers, government sponsored enterprises, and other secondary market

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participants,” may rely on the appraisal report. Compl. ¶ 13. In adding this certification, Fannie

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Mae intended “to clarify…that the appraiser is accountable for the quality of his or her work to

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those who often rely on it as part of a mortgage finance transaction.” Pl. RFN, Exh. 1 ¶ 6. Fannie

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Mae further explained that “the appraiser’s accountability for the quality of his or her appraisal for

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a mortgage finance transaction must not be limited to the Lender/Client because such limitations

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undermine [Fannie Mae’s] secondary market activity.” Id. at ¶ 9.

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2. Swanson’s Duty to Third Party Beneficiaries Under Certification #23

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Swanson argues that a recent case from the Central District of California, F.D.I.C. v.

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Kirkland, is “identical” to the case at bar” and clearly holds that under Bily an appraiser cannot be

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held liable on a pure professional negligence theory as to the FDIC because the FDIC is not the

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appraiser’s client. Def. MTD at 4:19-5:1, Dkt. No. 8. (citing No. 10-cv-3286 (C.D. Cal. Oct. 28,

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2010)). Plaintiff however argues that Certification #23 renders secondary market participants such

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as itself members of the “additional class of persons” considered to be express third party

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beneficiaries in the Bily footnote, and that as a result Swanson owed a duty to Plaintiff as a

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Case No.: 5:12-CV-02528-EJD
ORDER DENYING DEFENDANT SWANSON’S MOTION TO DISMISS; GRANTING IN
PART AND DENYING IN PART PLAINTIFF’S REQUEST FOR JUDICIAL NOTICE;
GRANTING DEFENDANT SWANSON’S REQUEST FOR JUDICIAL NOTICE

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member of the class of secondary market participants for whose express benefit Swanson and

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American Prime Funding contracted to prepare the appraisal.

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As an initial matter, it is clear that Kirkland is not “identical” to this case. While Kirkland

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did concern a similar factual background to the instant matter, the appraisal at issue did not contain

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Certification #23. The court may not therefore simply dispose of this motion by adopting the

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rationale of the Central District of California. Rather, this court must determine the import of

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Certification #23 in order to determine the extent of Swanson’s duty.

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United States District Court
For the Northern District of California

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The Bily court acknowledged third party beneficiaries may be “the practical and legal
equivalent of ‘clients’ for purposes of a general negligence claim.” 3 Cal. 4th at 406, n. 16. The

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fact that Plaintiff is not expressly named as a third party beneficiary in Certification #23 is not

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necessarily fatal to its claim. See Soderberg v. McKinney, 44 Cal.App.4th 1773, 1774 (1996). “All

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that the law requires is that the contract be made expressly for the benefit of third parties, and

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‘expressly’ simply means in an express manner; in direct or unmistakable terms; explicitly;

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definitely; directly. Thus, it is sufficient if the plaintiff belongs to a class for whose express benefit

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the contract was made.” Soderberg, 44 Cal.App.4th at 1774 (internal quotation marks and citations

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omitted).

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Plaintiff has pled that Swanson included Certification #23 in its appraisal contracted for by

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American Prime Funding, and that Plaintiff is the type of third party beneficiary contemplated by

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that certification. At this stage in the proceedings, it would not be appropriate to determine the

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intent of the parties to the contract. Rather, the facts as pleaded in the complaint, taken as true, and

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drawing all inferences in the light most favorable to the non-moving party, sufficiently show that

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Plaintiff is a member of the class for whose benefit the contract between Swanson and American

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Prime Funding was made. See Paulson v. CNF Inc., 559 F.3d 1061, 1079 (9th Cir. 2009) (reversing

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the district court’s dismissal of a professional negligence claim and holding that a consulting firm

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may owe a duty to a company’s former employees if the employees could be considered a third

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party beneficiary of the service agreement between the consulting firm and the company); F.D.I.C.

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Case No.: 5:12-CV-02528-EJD
ORDER DENYING DEFENDANT SWANSON’S MOTION TO DISMISS; GRANTING IN
PART AND DENYING IN PART PLAINTIFF’S REQUEST FOR JUDICIAL NOTICE;
GRANTING DEFENDANT SWANSON’S REQUEST FOR JUDICIAL NOTICE

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v. Grankel, No. 11-CV-03279, 2011 WL 5975262 at *3-4 (N.D. Cal. Nov. 29, 2011) (holding that

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Certification #23 provided a plausible basis on which to plead a third party beneficiary breach of

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contract claim and denying Defendant’s motion to dismiss as to that claim, but declining to hold at

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the motion to dismiss stage that the FDIC was actually an intended beneficiary of the appraisal).

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Plaintiff’s alleged status as an intended third party beneficiary to the contract allows it to proceed

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on a professional negligence theory. The motion to dismiss the professional negligence claim is

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therefore DENIED.

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3. Conclusion

United States District Court
For the Northern District of California

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For the foregoing reasons, Defendant Swanson’s motion to dismiss is DENIED; Plaintiff’s

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Request for Judicial Notice is GRANTED in part and DENIED in part; and Defendant Swanson’s

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Request for Judicial Notice is GRANTED.

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IT IS SO ORDERED.

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Dated: October 18, 2012

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_________________________________
EDWARD J. DAVILA
United States District Judge

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Case No.: 5:12-CV-02528-EJD
ORDER DENYING DEFENDANT SWANSON’S MOTION TO DISMISS; GRANTING IN
PART AND DENYING IN PART PLAINTIFF’S REQUEST FOR JUDICIAL NOTICE;
GRANTING DEFENDANT SWANSON’S REQUEST FOR JUDICIAL NOTICE