Aarons v. Patch of Land Lending, LLC (In re Aarons)

Matthew Abbasi, Abbasi Law Corporation, Woodland Hills, CA, Richard L. Antognini, Grass Valley, CA, Michael Tusken, Law Offices of Michael L. Tusken, La Habra, CA, for Plaintiff.

Joshua L. Scheer, Aliso Viejo, CA, for Defendants.

MEMORANDUM DECISION GRANTING DEFENDANTS’ MOTION TO DISMISS COMPLAINT FOR FAILURE TO STATE A CLAIM, WITHOUT LEAVE TO AMEND

Neil W. Bason, United States Bankruptcy Judge

Plaintiff has filed a First Amended Complaint (adv. dkt. 16, "FAC") asserting claims against Patch of Land Lending, LLC ("Patch") and others purportedly acting with it (collectively, "Defendants"). Plaintiff, who is Debtor's father, purchased a junior lien on the real property then owned by Debtor (the "Property"). Shortly after Plaintiff purchased that junior lien, it was wiped out in a nonjudicial foreclosure sale of the Property under Patch's senior deed of trust ("DOT").¹

The FAC does not allege any direct wrongs by Defendants against Plaintiff. Rather, it alleges that the foreclosure was fraudulent and wrongful as against Debtor, and therefore was fraudulent and wrongful as against Plaintiff. Broadly speaking, the FAC relies on two lines of attack.

First, the FAC alleges that there was no authority to foreclose because of assignments of Patch's DOT or the associated promissory Note that were somehow deficient in unspecified ways. But, as Defendants point out in their motion to dismiss (the "MTD," adv. dkt. 26), this is an unsupported, conclusory allegation. (In fact, the assignments appear on their face to be entirely proper.) Plaintiff has offered nothing in response, either in his written Opposition (adv. dkt. 36) or at oral argument, and he has not established that there were any irregularities in the foreclosure process, let alone any defects that would breach some sort of contractual or tort duty running from Defendants to him.

Second, the FAC alleges that Debtor offered to tender a sufficient payoff amount to Patch to stop the foreclosure, and that Patch (and/or the other Defendants) refused to accept that offer, allegedly based on flawed calculations of the amount owing. But Plaintiff has not shown that he has standing to assert these claims against Defendants based their alleged violations of their contracts with Debtor, to which Plaintiff was not a party. Alternatively, supposing for the sake of discussion that Plaintiff had standing to renew Debtor's arguments as to the dollar amounts, this Court has already rejected those arguments because (a) Debtor settled all of those claims and, alternatively, (b) those claims lack merit. See Memorandum Decision (Adv. No. 2:22-ap-01008-NB, adv. dkt. 43) and Order (id., adv. dkt. 55).²

For these reasons, the FAC fails to assert any plausible claims on which any relief can be granted. This Court will issue a separate order granting Defendants’ MTD. In addition, that order will deny leave to further amend the FAC, because Plaintiff's Opposition (adv. dkt. 36) and oral argument have not suggested any amendment that would overcome the defects in the FAC.

1. BACKGROUND

In September of 2020 Debtor executed a Modification and Release Agreement, both in her individual capacity (as guarantor) and as trustee of the Ashley S. Aarons 2015 Trust (as borrower). See dkt. 383 (copied at Ex. 9 to Request for Judicial Notice ("RJN"), adv. dkt. 26-3), at Ex. 9.³ That agreement included Debtor's broad release of all claims, whether known or unknown, against Defendants. Id., pp. 12-13 (dkt. 383 at PDF pp. 68-69 out of 153).

In exchange, Patch agreed to modify its claim. The modifications included the following:

(x) Patch agreed to reduce its claim from $4,006,291.07 (as of June 1, 2020) (id., Ex. 1, p. 4, recital L.) to a New Principal Balance of $3,432,916.07, plus a reserve then held by Defendants of $73,200.00 (id., p. 7, para. 4.a.),

(y) Patch agreed to apply that $73,200.00 reserve to the first three new monthly payments of $21,455.73 and some smaller obligations (id., p. 8, para. 4.d.), and

(z) Patch agreed to additional terms including a new interest rate, a new default rate, and a new maturity date of April 1, 2021 (id., p. 8, para. 4.b.), with a conditional waiver of the $60,000.00 extension fee for that new maturity date provided that certain Conditions for Waiver of Extension Fee were satisfied, including remaining current. Id., p. 9, para. 4.f.

This agreement was modified by four addenda to become the Final Modification Agreement, which Debtor incorporated into her proposed Plan (the "Final Settlement," dkt. 313). The fourth addendum includes an even broader release than the original agreement, by expanding the scope of Debtor's releases to include any claims related to the "CARES" Act. See dkt. 383, Ex. 1, p. 6, para. 6.d (at PDF p. 28 of 153).

The Plan, accompanied by a disclosure statement, was served on all creditors, including Plaintiff's predecessor in interest, Mr. Haycock. Mr. Haycock did not object to confirmation of the Plan (which incorporated the Final Settlement). In fact, he voted in favor of it. See Ballot Summary (dkt. 330), p. 2:17 & Ex. 1 at PDF p. 16.

On February 11, 2021, this Court issued an order confirming the Plan and approving the Final Settlement (the "Confirmation Order," dkt. 390, para. 20). This Court expressly relied on Debtor's January 12, 2021 statement and declaration in support of the Plan. Id., p. 2:6-8 (relying on dkt. 369). Debtor did not, at that time, mention any concerns or alleged fraud in connection with the Final Settlement or confirmation of the Plan (nor did Mr. Haycock ever raise any such concerns).

On February 26, 2021, fifteen days after the Confirmation Order was issued, Debtor filed her declaration confirming that all preconditions had been satisfied "such that the Final Modification Agreement is effective." Aarons Decl. (dkt. 402), p. 2:10-11. In other words, she agreed that she had released Defendants (and that, in reliance on those releases, their claim had been reduced).

Debtor also reaffirmed her intention "to proceed with take-out financing to implement the Plan." Id., p. 2:12-13. But thereafter no take-out financing occurred, and she does not deny that meanwhile she failed to make any of the new monthly payments to which she had agreed.

Thereafter, this Court converted the case to chapter 7 on October 18, 2021. See Order (dkt. 464). On January 1, 2022, Plaintiff acquired Mr. Haycock's junior lien on the Property. Adv. dkt. 16, p. 4:22-5:4.

On March 30, 2022, the Property was sold at a nonjudicial foreclosure sale.

2. PLAINTIFF'S FIRST AMENDED COMPLAINT

Plaintiff's FAC alleges that the foreclosure sale was "wrongful and illegal," for broadly two reasons, either one of which purportedly renders the sale void. FAC (adv. dkt. 16). First, the FAC alleges that (a) Patch did not have the power to foreclose because previously it had transferred its lien to Invictus Residential Pooler Trust 3A ("Invictus") and (b) the various alleged transfers of the lien were improper because they lacked the correct endorsements or assignments. Id. , p. 7:6-10. These allegations are referred to herein as the "Chain Of Title" assertions.

Second, the FAC alleges that Defendants violated California Civil Code section 2924.11(b)(2) by failing to cancel the foreclosure sale after receiving Debtor's "unconditional offer to tender the full payoff" of the first lien by providing "written proof of funds of $5,000,000 from Simon Mundy." Id., pp. 7:11-8:18 (emphasis added). The allegation of a "full" payoff appears to rest on the FAC's allegation that Defendants’ June 15, 2020 notice of default was "false and fraudulent" because the "amount owed is overstated by hundreds of thousands of dollars in fees, interest and late charges that should not have been calculated based on the February 15, 2019 payment of $73,200.00." Id. p. 8:21-26 (emphasis added).

The FAC does not include any allegations addressing how any claims relating to this $73,200.00 payment could continue to exist, when they had been settled as part of the Final Settlement and confirmation of the Plan. Plaintiff implicitly relies on Debtor's allegations of some sort of unspecified fraud in connection with the Final Settlement.

In any event, whether or not this Court's attempt to discern the FAC's opaque assertions is accurate, Plaintiff's

overall assertion in the FAC is that Defendants wrongfully failed to accept what he alleges was a correct payoff amount under their contractual obligations with Debtor. These allegations are referred to herein as the "Payoff Amount" assertions.

Based on the foregoing allegations, the FAC asserts two claims. One is for wrongful foreclosure. The other is that the "foreclosure sale was an unfair business practice under the Unfair Competition Law, Business & Professions Code sections 17200, et seq. , because the defendants did not have the right to foreclose." Id. p. 9:8-14.

3. JURISDICTION, AUTHORITY, AND VENUE

This Bankruptcy Court has jurisdiction, and venue is proper, under 28 U.S.C. §§ 1334, 1408, and 1452. The FAC "does not concede that this Court has subject matter jurisdiction over this action." FAC (adv. dkt. 16), p. 6:6-10. But this Bankruptcy Court concludes that the FAC's claims are squarely within this Court's retention of jurisdiction to interpret and enforce the Plan. See Confirmation Order (dkt. 390), p. 11:24-26 (retention of jurisdiction over any "proceedings, whether or not commenced or contemplated as of the Effective Date, regarding the implementation, interpretation, or enforcement of this Plan or the administration of the bankruptcy...