Federal Deposit Insurance Corporation v. Cuneo et al

Filing 31

ORDER Denying 20 Defendant's Motion to Compel Discovery and for Sanctions; Granting Plaintiff's 21 Motion for Protective Order. Signed by District Judge Gershwin A. Drain. (Bankston, T)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
FEDERAL DEPOSIT INSURANCE
CORPORATION AS RECEIVER OF
AMTRUST BANK,
Plaintiff,

Case No. 12-13438
Honorable Gershwin A. Drain

v.

CUNEO APPRAISALS & ASSOCIATES,
LLC, et al.,
Defendants.
____________________________/

ORDER GRANTING PLAINTIFF’S MOTION FOR PROTECTIVE ORDER [#21] AND
DENYING DEFENDANTS’ MOTION TO COMPEL DISCOVERY AND FOR
SANCTIONS [#20]
I.
INTRODUCTION
Plaintiff, Federal Deposit Insurance Corporation (FDIC), the Receiver for the now closed
federally chartered savings bank, AmTrust,1 filed the present action against Defendants Cuneo
Appraisals & Associates, LLC, James W. Cuneo, and Does 1 through 40 on August 6, 2012.
Plaintiff brings claims of breach of contract, negligent misrepresentation and negligence stemming
from Defendants preparation of an appraisal for property located in Dearborn, Michigan. Plaintiff
alleges that the appraisal overvalued the subject property resulting in damages to Plaintiff because
Plaintiff’s security interest in the property was not sufficient to satisfy the loan funded by AmTrust.

1

On December 4, 2009, AmTrust was closed by the Office of Thrift Supervision and the
FDIC was appointed as Receiver pursuant to 12 U.S.C. § 1464(d)(2)(A) and 12 U.S.C. §
1821(c)(5).
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Presently before the Court is Defendants’ Motion to Compel Discovery and for Sanctions
and Plaintiff’s Motion for Protective Order, both filed on April 22, 2013. The Court has ordered
resolution of these matters pursuant to E.D. Mich. L.R. 7.1(f)(2). These matters are fully briefed,
and for the reasons that follow, the Court denies Defendants’ Motion to Compel Discovery and for
Sanctions and grants Plaintiff’s Motion for Protective Order.
II.

FACTUAL BACKGROUND
On or about December 31, 2007, AmTrust funded a mortgage loan in the amount of

$370,000.00 to borrower Rana Ibrahim for the purchase of residential real property located at 6108
Neckel Street, Dearborn, Michigan. First Mortgage of Michigan, an independent mortgage broker,
originated and submitted the loan to AmTrust, and AmTrust funded the loan. On November 25,
2007, Defendant James Cuneo contracted to prepare a written appraisal for the subject property.
Cuneo knew that the appraisal was for the purpose of mortgage lending. On November 26, 2007,
Cuneo prepared an appraisal which valued the property at $370,000.00 as of November 25, 2007.
Plaintiff subsequently learned that the appraisal had been negligently prepared and contained
material misrepresentations. Cuneo’s appraisal omitted material information regarding the location
of the property, specifically he failed to report that the property was located within 215 feet of active
railroad tracks, within 205 feet of a four-lane highway, and within 150 feet of high-tension power
lines. Further, Cuneo used inappropriate properties as comparables because these properties did not
have similar negative aspects such as close proximity to railroad tracks, high-tension power lines
and a four lane highway. Cuneo failed to make appropriate adjustments to the value of the subject
property to account for these negative attributes. In contrast to the comparable properties used by
Cuneo, comparable properties with attributes similar to the subject property had an average sales

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price significantly less than the value Cuneo assigned to the subject property in his appraisal.
The borrower subsequently defaulted under the loan. Plaintiff maintains that the appraisal
overvalued the property resulting in a security interest in the subject property that was insufficient
to satisfy the loan. Plaintiff alleges that if AmTrust knew the true market value of the property, it
would not have funded the loan. Plaintiff filed the instant action on August 6, 2012. Cuneo
answered the complaint denying that he prepared the November 26, 2007 appraisal. The parties’
current scheduling order provides a discovery cut-off date of July 1, 2013 and a trial date of
November 12, 2013.
III.

LAW & ANALYSIS
On February 19, 2013, Defendants served Plaintiff with their first set of interrogatories and

requests to produce. Plaintiff argues that Defendants’ discovery requests seek information that is
irrelevant to the claims in this action. On March 27, 2013, Defendants served Plaintiff with a Notice
of Taking Deposition of Corporate Designee. Plaintiff asserts that the Notice likewise demanded
testimony unrelated to the claims raised herein. Specifically, the Notice seeks testimony concerning
AmTrust’s lending guidelines, quality control measures, repurchase demands and mortgage loans
acquired through independent mortgage brokers.
On April 4, 2013, Plaintiff objected to Defendants’ written discovery requests as irrelevant.
Plaintiff maintains that the decision in American Home Mortgage Acceptance, Inc. v. Appraisal
Place, Inc., 476 F. Supp. 2d 636 (E.D. Mich. 2006) precludes Defendants from obtaining the
discovery sought because the requested discovery is irrelevant to Plaintiff’s claims of negligence
in preparing the appraisal. Defendants have responded to Plaintiff’s objection arguing that American
Home does not negate AmTrust’s comparative negligence. See Mot. for Pro. Ord., Ex. 2.

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Under Michigan law, joint and several liability has been abolished in favor of several
liability. See MICH. COMP. LAWS § 600.2957(1). Specifically, section 600.2957(1) states:
In an action based on tort or another legal theory seeking damages for personal
injury, property damage, or wrongful death, the liability of each person shall be
allocated under this section by the trier of fact and, subject to section 6304, in direct
proportion to the person’s percentage of fault. In assessing percentages of fault
under this subsection, the trier of fact shall consider the fault of each person,
regardless of whether the person is, or could have been, named as a party to this
action.
MICH. COMP. LAWS § 600.2957(1). However, under Michigan law “non-party fault principles
apply only to the cause of action alleged in the case . . . and not to the underlying cause(s) that might
have brought about the loss requiring the insurance payout.” American Home, 476 F.Supp. 2d at
641 (citing Holton v. A+ Insurance Assoc., Inc., 255 Mich. App. 318, 661 N.W. 248 (Mich. Ct.
App. 2003).
In Holton, supra, the Michigan Court of Appeals provided guidance as to the correct
application of Michigan’s fault system. In Holton, plaintiff homeowners contacted their insurance
agent to increase their insurance coverage after remodeling their home and having a new roof
installed. Holton, 225 Mich. App. at 320. Plaintiffs placed an electric heater on the roof to melt
ice dams that formed resulting in a fire to the roof and second story of the Holtons’ home. Id. The
damages stemming from the fire exceeded the insurance coverage, and the insurance company
refused to compensate the Holtons for the shortfall, insisting that the damages resulted from the
faulty roof installation and the Holtons’ negligence in placing an electric heater on the roof. Id. The
Holtons argued that any fault attributable to them or the contractor was irrelevant because they
sought damages arising from “defendants’ negligent failure to procure insurance and, therefore, the
notice of nonparty fault . . .was inapplicable.” Id. at 320-21.

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The trial court agreed and the Michigan Court of Appeals affirmed, finding that “a proper
application of comparative fault does not permit an allocation of fault for causing the fire, which is
merely the underlying basis of the insurance claim against defendants.” Id. at 324. The Michigan
Court of Appeals rejected the insurance company’s characterization of the Holtons’ claim,
concluding that the claim was properly viewed as an insurance property damage claim. Specifically,
the Holton court held that “allocation of fault for the underlying conduct, i.e., the fire, does not apply
to plaintiffs’ action to recover a shortfall in insurance proceeds and, therefore, defendants’ notice
of nonparty fault . . . was improper.” Id. at 321.
The American Home court relied on the Michigan Court of Appeals’ reasoning in Holton to
reject an argument, similar to the one asserted by Defendants herein, that the purported comparative
negligence of the plaintiff mortgage lender in the origination and underwriting of the loan is relevant
to the plaintiff mortgage lender’s negligent appraisal action. American Home, 476 F. Supp. 2d at
641-43. In American Home, the plaintiff mortgage lender brought suit against two real estate
appraisers claiming they negligently issued appraisals resulting in an under-securitized loan.. Id.
at 638. The defendant appraisers filed a Notice of Non-Party Fault identifying eight parties,
including employees of the plaintiff mortgage lender, as individuals involved with the origination
and underwriting of the loan to whom the appraisers contended fault should be allocated. Id. at
639-40. In moving to strike the Notice of Non-Party Fault, the plaintiff mortgage lender argued that
the defendant appraisers could not allocate blame to any other party for plaintiff’s injury because
the appraisers alone were responsible for the lender’s damages. Id. at 638.
The American Home court ultimately agreed with the plaintiff mortgage lender concluding
that “Plaintiff’s claim in this case is that its damages occurred because Defendants’ appraisals led

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it to believe that there would be adequate security for the loan in the event of a default, not because
of [the borrower’s] underlying default or any fraud he may have committed in connection with the
loan application.” Id. at 642. The court further opined that “defendants are entitled under the
statutory provisions for comparative fault, to seek an apportionment of fault for the alleged liability
concerning the inaccurate appraisal of the Property, but not for any alleged non-party wrongdoing
that contributed to [the borrower] obtaining the loan or that contributed to his default thereon.” Id.
at 643, n. 5.
Here, as in American Home, AmTrust sought to protect itself form the financial risk of the
borrower’s default by securing the loan with sufficient collateral. Thus, Defendants’ discovery
requests seeking information concerning AmTrust’s alleged negligent lending practices and
purported negligence in funding the loan is irrelevant to Defendants’ appraisal of the subject
property. Defendants’ discovery requests improperly seek information concerning the potential
fraud of third parties involved in the loan transaction and the “red flags” that AmTrust should have
discovered before funding the loan.
Contrary to Defendants’ argument, they are not entitled to the discovery they seek because
fault cannot be apportioned to individuals whom did not play a role “with respect to the performance
of the appraisals at issue in this action.” American Home Mortgage Acceptance, Inc. v. Appraisal
Place, Inc., 476 F. Supp. 2d 645, 649 (E.D. Mich. 2007). Thus, conduct unrelated to the inflated
appraisal cannot support a comparative fault defense because such conduct is not a proximate cause
of the inflated appraisal. Id. at 650. The majority of Defendants’ discovery requests seek
information relative to AmTrust’s negligent lending practices and negligent funding of the loan,
which are improper under Holton and American Home. While Holton and American Home permit

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discovery on the issue of AmTrust’s reliance upon Defendants’ appraisal, they do not permit
discovery on AmTrust’s purported negligence in funding the loan, lending practices and quality
control measures.
Based on the foregoing, the Court finds that Defendants’ Motion to Compel is properly
denied. Defendants seek information unrelated to the appraisal, rather Defendants seek discovery
concerning, among other things, AmTrust’s lending guidelines, and quality control measures used
to detect fraudulent loan applications. Further, the Court finds that all topics in the Notice of
Deposition which relate to mortgage loan transactions, other than the transaction at issue herein,
should be stricken and Defendants may not question Plaintiff’s corporate designee as to these
irrelevant matters. Defendants may conduct discovery concerning the mortgage loan transaction at
issue herein, but only as to Plaintiff’s reliance on and use of Defendants’ appraisal in the origination
of the loan.
IV.

CONCLUSION
For the reasons articulated above, Defendants’ Motion to Compel [#20] is DENIED.
Plaintiff’s Motion for Protective Order [#21] is GRANTED.
SO ORDERED.

Dated: May 30, 2013

/s/ Gershwin A Drain
GERSHWIN A. DRAIN
United States District Judge
CERTIFICATE OF SERVICE
Copies of this Order were served upon attorneys of record on
May 30, 2013, by electronic and/or ordinary mail.
/s/ Tanya Bankston
Deputy Clerk

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