GemCap Lending, LLC v. Quarles & Brady, LLP

269 F.Supp.3d 1007

GEMCAP LENDING, LLC, Plaintiff,

v.QUARLES & BRADY, LLP, James Gatziolis, and Does 1 through 10, inclusive, Defendants.

CV 14–07937–RSWL–Ex

United States District Court, C.D. California.

Signed September 13, 2017

Sanford L. Michelman, William E. Adams, Jeremy Todd Borden, Matthew F. Murray, Peter L. Steinman, Steven S. Davis, Michelman and Robinson LLP, Los Angeles, CA, David Crockett Lee, Michelman and Robinson LLP, San Francisco, CA, Jennifer A. Mauri, Mona Z. Hanna, Michelman and Robinson LLP, Irvine, CA, for Plaintiff.

Gabriela Rivera, Douglas A. Fretty, Mark T Drooks, Bird Marella Boxer Wolpert Nessim Drooks Lincenberg & Rhow, Los Angeles, CA, for Defendant.

ORDER re:

1. Defendants Quarles & Brady LLP and James Gatziolis' Motion for Summary Judgment or Partial Summary Judgment [116] ;

2. Plaintiff GemCap Lending I, LLC's Motion for Partial Summary Judgment[120];

3. Plaintiff's Motion to Strike Robert L. Kehr's Expert Report [113];

4. Defendants' Motion to Strike Stanley W. Lamport's Expert Report [114];

5. Defendants' Motion to Strike Portions of Douglas E. Johnston, Jr.'s Expert Report [115]

HONORABLE RONALD S.W. LEW, senior U.S. District Judge

Currently before Court are the following Motions: (1) Defendants Quarles & Brady LLP and James Gatziolis' Motion for Summary Judgment or Partial Summary Judgment [116]; and (2) Plaintiff GemCap Lending I, LLC's Motion for Partial Summary Judgment [120].¹ Defendants' Motion arises out of Plaintiff's action against Defendants for professional malpractice, intentional misrepresentation, negligent misrepresentation, and concealment under California law. Plaintiff's Motion relates to the latter three causes of action only. Having reviewed all papers submitted pertaining to these Motions, the Court NOW FINDS AND RULES AS FOLLOWS: the Court GRANTS Defendants' Motion. The Court DENIES Plaintiff's Motion.

I. BACKGROUND

A. Factual Background ²

1. Parties and Relevant Non–Parties

Plaintiff GemCap Lending I, LLC ("Plaintiff") is a Delaware LLC with its principal place of business in Malibu, California. Third Am. Compl. ("TAC") ¶ 1, ECF No. 76. Plaintiff is a commercial-asset based lender. Decl. of David Ellis in Supp. of Pl.'s Mot. ("D. Ellis Decl.") ¶ 13, ECF No. 120–12. In making loans, Plaintiff considers the value of a pledged asset that can be liquidated to pay off a debt in the event of default. Id. ¶ 3; Decl. of Richard Ellis in Supp. of Pl.'s Mot. ("R. Ellis Mot. Decl.") ¶ 3, ECF No. 120–10. If a borrower defaults, Plaintiff liquidates the collateral to pay its lenders. Pl.'s Statement of Undisputed Facts ("Pl.'s SUF") ¶ 6, ECF No. 136–1.

Defendant Quarles & Brady LLP ("Quarles & Brady") is a Wisconsin limited liability partnership. TAC ¶ 2. Defendant James Gatziolis ("Gatziolis") is an Illinois citizen and a partner at Quarles & Brady. Id. ¶ 3.

Non-party Crop USA Insurance Agency, Inc. and Crop USA Insurance Services, Inc. (collectively, "Crop USA") is an insurance agency, as well as an intermediary general agent, that enters into contracts with insurance companies to sell farm insurance policies. Pl.'s SUF ¶¶ 10–11; Pl.'s Suppl. Statement of Undisputed Facts ("Pl.'s SSUF") ¶¶ 1–2, ECF No. 143–2. Crop USA retained Quarles & Brady to help it secure loans from Plaintiff. Decl. of R. John Taylor in Supp. of Pl.'s Mot. ("Taylor Mot. Decl.") ¶ 9, ECF No. 120–6.

Crop USA does not transact directly with farmers, the insurance policy holders, but rather enters into contracts with other insurance agencies, "sub-agents," to sell crop insurance policies. Pl.'s SUF ¶ 13. Crop USA then pays a portion of the commissions received to its sub-agents for selling insurance policies directly to the farmers ("Sub–Agent Commissions"). Id. ¶ 14. In 2011, Crop USA had a contract with Diversified Crop Insurance Company ("Diversified").Id. ¶ 12. This contract involved the sale of insurance and corresponding commissions. Taylor Mot. Decl., Ex. B at 10–21.

2. 2011 Loan and Loan Agreement

On November 23, 2011, Plaintiff entered into a Loan and Security Agreement ("Loan Agreement") with Crop USA in connection with a $5,000,000 revolving loan (the "Loan"). TAC ¶ 13, Ex. 1. The Loan was structured as follows: Crop USA would deposit its collateral into a lockbox account (the "Lockbox"), which Plaintiff could take in event of a default. Pl.'s SUF ¶¶ 19–22.

As security for the Loan, Crop USA pledged all of its property and assets to Plaintiff (the "Collateral"). TAC ¶ 16. Paragraph 5.1 of the Loan Agreement makes pledging of this security an essential condition of the Loan. Taylor Mot. Decl., Ex. C ("Loan Agmt.") at 36–37. The Collateral includes "Accounts," id., encompassing "Contract Receivables," id. § 1.3, or "all of the right, title and interest" of Crop USA to "commissions otherwise payable under a Sales Agent Agreement," id. § 1.34.

In Paragraph 5.4 of the Loan Agreement, Crop USA represents that the Collateral for the Loan belongs to Crop USA "free and clear of all Liens (including any claim of infringement) except those in Lender's favor." Id. at 38. Paragraph 8.24 of the Loan Agreement obligates Crop USA to provide Plaintiff with "true, accurate and complete" representations and warranties in connection with the Loan. Id. at 50.

3. First Legal Opinion Letter

In order for Plaintiff to approve the Loan, the Loan Agreement required Crop USA to give Plaintiff a written legal opinion that shall be "acceptable to" Plaintiff, the lender. Id. at 41. On November 23, 2011, Defendants sent Plaintiff a legal opinion letter ("2011 Opinion Letter"). Decl. of Douglas A. Fretty in Supp. of Defs.' Mot. ("Fretty Mot. Decl."), Ex. 3, ECF No. 118–3. Therein, Defendants made the following statements: (1) they reviewed various Loan transaction documents; (2) they assumed the Collateral was valid and enforceable; (3) Plaintiff has rights in the property and a security interest; (4) they were unaware of any facts which would suggest that specific representations in the Loan Agreement were untrue or inaccurate; and (5) they were unaware of any pending suits or investigations against Crop USA before a court or governmental authority that might adversely affect the validity of any Loan document. Id.

In the 2011 Opinion Letter, Defendants did not disclose that Crop USA was subject to multiple pending lawsuits. At the time, Crop USA was subject to at least two lawsuits. Defs.' SUF ¶ 18. These lawsuits were filed by Reed Taylor, the brother of Crop USA's president R. John Taylor ("Taylor") and by Donna Taylor, Reed Taylor's ex-wife (the "Litigation"). TAC ¶ 29; see also Decl. of R. John Taylor in Supp. of Pl.'s Opp'n ("Taylor Opp'n Decl.") ¶ 34. Defendants allegedly represented Crop USA in the Litigation. Taylor Opp'n Decl. ¶ 36. The Litigation included claims against Crop USA for breach of contract, engaging in fraudulent activities, breaching fiduciary duties of loyalty, and commingling assets, among other things. Fretty Mot. Decl., Ex. 22 at 109–20. Plaintiff alleges that the Litigation has jeopardized Crop USA's license status, financial viability, and thus, its ability to repay the Loan. TAC ¶ 29.

Defendants allegedly were also representing AIA Insurance, Inc. and AIA Insurance Services Corporation (collectively, "AIA"), Taylor's other insurance company, in various lawsuits filed by Reed and Donna Taylor, regarding AIA's alleged fraudulent business practices. TAC ¶ 30. Plaintiff avers that these lawsuits too might adversely affect Crop USA's ability to repay the Loan and are material to its Collateral. Id. ¶ 31.

Defendants also allegedly did not disclose facts regarding Crop USA's financial condition. Id. ¶ 32. In 2008, Crop USA could not fulfill its government requirements to sell crop insurance and thus sold its assets to Hudson Insurance Company, its largest creditor. Id. Plaintiff alleges that Defendants represented Crop USA in the asset sale and were thus aware of Crop USA's fragile financial status. Id. According to Plaintiff, as Crop USA's agents, Defendants entered into a written agreement with Hudson Insurance Group, to negotiate disputes between Crop USA and Clearwater Insurance Company. Id.

4. Borrower's Disclosure Schedule

Pursuant to section 1.11 of the Loan Agreement, Crop USA was required to disclose to Plaintiff material facts regarding its business operations, assets, and contractual obligations in a borrower's disclosure schedule ("Disclosure Schedule"). Loan Agmt. 24, 27, 31, 37, 47, 49. Specifically, Crop USA was obligated to share (1) contracts that would materially and adversely affect the Collateral or its liabilities and financial condition; and (2) all payments made to "affiliates," which were expressly prohibited without Plaintiff's approval. Id.; TAC ¶ 33a-b.

On January 1, 2009, Crop USA entered into an administrative agreement with its "affiliate," AIA (the "Administrative Agreement"). Pl.'s SUF ¶¶ 32, 35. Reed Taylor was AIA's majority shareholder. Id. ¶ 41. Pursuant to the Administrative Agreement, Crop USA would "pay and account for attorney's fees" incurred in defending lawsuits against AIA. Id. ¶ 36. On November 22, 2011, Defendants sent Plaintiff the Disclosure Schedule, which did not disclose the Administrative Agreement. Taylor Mot. Decl., Ex. E at 79, 81.

5. Second Legal Opinion Letter

On February 3, 2013, Plaintiff agreed to amend the Loan and increased the Loan from $5,000,000 to $10,000,00 ("Amended Loan"). TAC ¶ 35, Ex. 4. Defendants prepared a second legal opinion letter ("2013 Opinion Letter") on February 4, 2013. ECF No. 118–11. Defendants made similar statements as in the 2011 Opinion Letter, including "we know of no facts which lead us to believe such factual matters are untrue or inaccurate." Id. at 6. Plaintiff alleges that Defendants failed to disclose the Litigation, the 2008 asset sale to Hudson Insurance Company, and Crop USA's general financial instability, just as it had in the 2011 Opinion Letter. TAC ¶¶ 39, 41–44.

Before close of the original Loan Agreement in 2011...