Wednesday, February 13, 2013
Court of Appeal Revives Suit Against Successor to Failed Bank
Panel Says Purchaser of Assets May Have Breached Duty of Care to Inherited Customer
By KENNETH OFGANG, Staff Writer
A financial institution that has assumed the assets of a failed bank may be held liable for breach of a duty to deal in good faith with a customer of its predecessor, the First District Court of Appeal has ruled.
Div. Two Monday reinstated Scott Call Jolley’s suit against JP Morgan Chase. Jolley claims that senior officials of the bank were planning to foreclose on his property—primarily because they wanted nothing to do with former WaMu loans—at the time their subordinates were telling him that his request for a loan modification would receive serious consideration.
Jolley entered into a construction loan agreement with Washington Mutual Bank in 2006. WaMu, which had previously loaned him more than $1.3 million to buy a house in Tiburon, made a new loan of $2.156 million. Part of that was used to pay off the original loan, leaving about $1 million to renovate the property before it could be rented out.
The project ran into problems, which Jolley claimed were because WaMu had lost the loan documents and failed to properly distribute construction funds. He reached a modification agreement with the bank in October 2006, with WaMu apparently making its last disbursement in June 2008, three months before the bank failed.
‘Purchase and Assumption’
Chase acquired the loan when it took over WaMu under a “purchase and assumption” agreement with the Federal Deposit Insurance Corporation, as receiver.
Chase began taking steps to foreclose on Jolley in late 2009. Jolley filed suit two days before the scheduled sale, claiming breach of contract, negligence, and misrepresentation.
Chase moved for summary judgment, largely on the ground that it had not assumed WaMu’s liabilities. It asked the court to take judicial notice of the P&A agreement, a purported copy of which was attached to the moving papers.
Jolley responded with a declaration by a former WaMu executive, who swore that he was familiar with the P&A agreement and that the document attached by Chase was not the entire agreement. Without specifically ruling on the declaration, Marin Superior Court Judge Lynne Duryee granted the request for judicial notice and the motion.
But Justice James Richman, writing for the Court of Appeal, said the request for judicial notice should have been denied, and that there were triable issues of fact with respect to the plaintiff’s claims for damages.
Nixes Judicial Notice
Richman explained that because the P&A agreement was not a court record or an official act within the meaning of the Evidence Code—notwithstanding certain federal district court cases that have taken judicial notice of similar agreements—the trial court could only take judicial notice of it as a matter of “common knowledge” or one that is “not reasonably subject to dispute.”
In this case, the justice said, there was a clear dispute as to what duties and obligations were owed to WaMu customers by Chase under the agreement.
Richman cited the declaration of Jeffrey Thorne, a former WaMu employee hired by Jolley to assist in the negotiations with his former employer over the modification. Thorne said that while the public document filed with the motion was 36 pages long, that was only part of a 118-page P&A agreement that he had read.
Thorne also testified that the full agreement required Chase “to work directly with the customers to do as much as possible to modify any loans . . . so that no foreclosures are made and borrowers are kept in their homes.”
While there were unresolved evidentiary objections to the declaration, Richman said, Thorne’s averments were at least sufficient to create a dispute that precludes the courts from taking judicial notice of the putative P&A agreement.
Duty of Ordinary Care
The justice went on to say that while Chase did not owe Jolley a fiduciary duty, it did owe him an ordinary duty of care that it may have breached, and may also be liable on theories of misrepresentation, breach of contract, and/or promissory estoppel.
Richman disagreed with the trial judge’s conclusion that the alleged misrepresentations about the prospects of modification were no more than expressions of opinion by an overoptimistic employee.
He cited Jolley’s testimony that he was told on multiple occasions, by an employee who said he was with the “executive office of Chase” that modification was likely to be approved.
“Drawing all inferences in favor of the nonmoving party, as we must…we conclude that prolonged communication—perhaps more accurately, miscommunication—about a possible loan modification raises a triable issue of fact of intent by Chase to profit by misleading Jolley about his loan modification prospects, a showing sufficient to withstand summary adjudication.”
As to the negligence claim, the justice wrote:
“Where there is a long running dispute whether the failed bank properly disbursed monies due under the loan, the acquiring bank owes a duty of care to investigate the history of the loan and take that into account in negotiating with the borrower for a loan modification.”
This is particularly so in the case of a construction loan, which creates an ongoing relationship between the parties, he said.
The case is Jolley v. Chase Home Loan Finance, LLC., 13 S.O.S. 817.
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