Case Name: Afnani, et al. v. The Fuller Law Firm, et al.
Case No.: 17CV306307

Cross-defendant JP Morgan Chase Bank, N.A. (“Chase”) demurs to the cross-complaint (“Cross-Complaint”) filed by defendants/cross-complainants The Fuller Law Firm, Lars Fuller and Sam Taherian (collectively, “Cross-Complainants”).

I. Factual and Procedural Background

This is primarily an action for legal malpractice arising out of the provision of legal services in a bankruptcy proceeding. According to the allegations of the Third Amended Complaint (“TAC”), Plaintiffs Sasan Afnani (“Sasan”) and Nasim Afnani (“Nasim”) (collectively, “Plaintiffs”), a married couple, held title as joint tenants with a right of survivorship to a property located in San Jose (the “Property”). (TAC, ¶ 10.) First Federal Bank of California held a deed of trust on the Property in the amount of $392,905.88 (“First Federal Lien”), while JP Morgan Chase Bank (“Chase”) held a second deed of trust on the Property in the amount of $93,507 (the “Second Lien”). (Id., ¶ 11.)

Plaintiffs each separately retained and employed Cross-Complainants to represent them in Chapter 13 bankruptcy proceedings. (TAC, ¶ 12.) Cross-Complainants agreed to represent Plaintiffs in all work usually and customarily included in such a representation, including obtaining appropriate court orders relating to the Property. (Id.) The scope of Cross-Complainants’ employment also included giving notice of the automatic stay imposed by the bankruptcy filing on all lienholders who had a claim against any of Plaintiffs’ real property, as well as maintaining the stay in force against such lienholders for as long as necessary to secure for Plaintiffs the relief they sought with the filing. (Id., ¶ 13.) Thus, Cross-Complainants had a duty to oppose any motion by a lienholder for relief from the automatic stay. (Id., ¶ 14.)

Rather than filing a joint bankruptcy petition for Plaintiffs as husband and wife, Cross-Complainants chose to file two separate petitions (hereafter “Sasan’s Case” and “Nasim’s Case”) and maintained each plaintiff’s records in separate files. (TAC, ¶ 16.) Despite the fact that the Property was jointly held by Plaintiffs, Cross-Complainants negligently failed to list it as an asset in Nasim’s Case indicating, incorrectly, that it was Sasan’s property. (Id., ¶ 16.) Cross-Complainants also negligently failed to list the Second Lien in Nasim’s Case in the list of creditors holding secured claims. (Id.) In Sasan’s petition, the Property is listed as having a value of $355,000; as the First Federal Lien was $392,905.88 at the time of the bankruptcy filing, it was not fully supported by the equity in the Property, and the Second Lien was not supported by any equity at all. (Id., ¶ 17.)

U.S. Bankruptcy law includes a procedure, sometimes called “avoiding” or “stripping,” under which a debtor can obtain an order or judgment removing a lien from real property if that lien is found by the court not to be supported by equity in that property. (TAC, ¶ 18.) If this procedure is not properly followed, the lienholder retains a legal right to foreclose on the lien, with the result that the debtor-client might lose the property and all benefits of ownership, including the value of past payments made, any equity growth and any future stream of rental payments. (Id., ¶ 19.) On August 30, 2010 and October 19, 2010, Cross-Complainants filed and then re-filed a motion in Sasan’s Case to value the Second Lien at zero dollars, which the court determined to be the case. (TAC, ¶ 20.) There is no doubt that had such a motion been filed in Nasim’s Case, it also would have valued the Second Lien at zero dollars, and her subsequent completed plan would not have required her to pay anything toward the Second Lien because its valuation would have been zero as it was it Sasan’s Case. (Id.)

On December 3, 2010, the court issued an order in Sasan’s Case which directed that for the purposes of Sasan’s Chapter 13 plan, the Second Lien was valued at zero, JP Morgan did not have a secured claim, and the lien could not be enforced. (TAC, ¶ 21.) However, the order was contingent on Cross-Complainants also obtaining a zero valuation on the Second Lien in Nasim’s Case. (Id.) Further, the order provided that if Sasan’s Case was dismissed or converted to one under another chapter before Sasan obtained a discharge or completed the plan, the order would cease to be effective and the lien could be restored upon application by the lienholder. (Id.)

Ultimately, Cross-Complainants failed to complete or even start the process of valuing the Second Lien on the Property at zero in Nasim’s Case as provided by the court’s order, and also failed to give the court the required notice of that. (TAC, ¶ 22.) Additionally, Cross-Complainants negligently failed to do the following: notify the court in Sasan’s Case that Nasim had completed her Chapter 13 plan; obtain a judgment voiding the Second Lien on the Property in Sasan’s Case or otherwise before the Property was foreclosed on; record any judgment voiding the lien because they never obtained a judgment voiding the lien in the first place; and oppose a motion for relief from the automatic stay by the holder of the Second Lien against the Property. (Id.) The motion for relief from the stay was granted by the court, thereby enabling the lienholder of the Second Lien to proceed to foreclose on the Property. (Id., ¶ 23.)

Cross-Complainants did not inform Plaintiffs about the motion or its result, i.e., that the Property was now at risk of foreclosure if they did not resume making payments on the Second Lien. (Id.) Sasan’s Chapter 13 plan called for no payments to be made on the Second Lien and Cross-Complainants advised him that such payments would not be necessary because the lien was going to be avoided through the bankruptcy procedure. (Id., ¶ 24.) Plaintiffs allege that Cross-Complainants intentionally concealed the foregoing failings from them, as well as the fact that they needed to continue making payments on the Second Lien in order to avoid foreclosure. (Id., ¶¶ 25, 36.) Had they known, Plaintiffs allege, they would have continued making such payments and maintained possession of the Property. (Id., ¶ 38.)

Cross-Complainants negligently allowed the court to enter the discharge of Sasan’s bankruptcy on July 7, 2014 and close the case on August 19, 2014, without obtaining a judgment removing the Second Lien. (TAC, ¶ 26.) The foregoing failures fell below Cross-Complainants’ professional standard of care and left the Property exposed to foreclosure. (Id., ¶¶ 27-28.)

Prior to April 6, 2016, Plaintiffs were completely unaware that Cross-Complainants failed to take the required actions to protect their ownership interests and rights in the Property and were unaware of the foreclosure risk. (TAC, ¶ 35.) Cross-Complainants advised Plaintiffs that they had completed their work for them without verifying that this was in fact the case. (Id., ¶ 37.) Plaintiffs continued making payments on their primary mortgage on the Property until the foreclosure and, because of Cross-Complainants’ negligence, lost any value on the Property they might have obtained due to these payments. (Id., ¶ 39.) The first information Plaintiffs had about any threat to their ownership came from a tenant on the Property who told them they were being evicted. (Id., ¶ 40.) After their initial suspicions that they were in default on the First Federal Lien or were the victims of identity theft proved unfounded, Plaintiffs learned for the first time that Cross-Complainants had failed to remove the Second Lien and that it was being foreclosed on. (Id.)

On April 3, 2016, a successor owner of the Second Lien recorded a trustee’s deed in its favor and then, on April 6, 2016, sold the Property at a trustee’s sale to Duke Partners LLC. (TAC, ¶ 41.) On April 14, 2016, Cross-Complainants reopened Sasan’s Case in an effort to enjoin any re-sale of the Property and undo the foreclosure sale; they were unsuccessful. (Id.) Plaintiffs later learned that Cross-Complainants had also negligently failed to complete the lien avoidance procedure on their family home. (Id., ¶ 42.) Cross-Complainants were able to correct their errors in time to avoid the loss of this property. (Id.)

Plaintiffs filed their initial complaint in this action on June 29, 2017. After several rounds of demurrers, Plaintiffs’ operative pleading is the TAC, which asserts the following claims against Cross-Complainants: (1) attorney malpractice; and (2) breach of fiduciary duty (concealment). On June 25, 2018, Cross-Complainants filed the Cross-Complaint for indemnity and contribution. According to the allegations of this pleading, on November 9, 2015, cross-defendant Chase conveyed its interest in the Second Lien to cross-defendant Dreambuilder Investments, LLC (“Dreambuilder”). (Cross-Complaint, ¶ 19.) Dreambuilder then conveyed its interest to 26th Corp., who caused the foreclosure trustee, Lenders TD, to record a Notice of Default and Election to Sell. (Id., ¶¶ 20-21.) On February 22, 2016, 26thCorp. caused Lenders TD to record a Notice of Sale on the Property; Lenders TD thereafter conducted a foreclosure sale of the Property, which was sold to Duke Partners LLC. (Id., ¶ 22.)

The cross-defendants (particularly Chase and Dreambuilder) are alleged to have had fiduciary duties and/or obligations to provide sufficient notice of Plaintiffs’ home address and any and all successor lienholders of the Property but failed to do so, resulting in Plaintiffs’ loss of the Property at the foreclosure sale. (Id., ¶ 23.) Cross-Complainants allege that cross-defendants had actual knowledge of Plaintiffs’ home address, which was separate from the Property, but did not provide the requisite notice of the foreclosure-related activities to them at that address. Based on the foregoing allegations, Cross-Complainants assert claims for (1) implied equitable indemnity and (2) contribution.

On September 17, 2018, Chase filed the instant demurrer to the Cross-Complaint and the two claims asserted therein on the grounds of uncertainty and failure to state facts sufficient to constitute a cause of action. (Code Civ. Proc., § 430.10, subds. (e) and (f).) Cross-Complainants oppose the motion.

II. Requests for Judicial Notice

Both sides submit requests for judicial notice with their papers.

First, in support of its demurrer to the Cross-Complaint, Chase requests that the Court take judicial notice of various documents filed in Plaintiffs’ bankruptcy cases, as well as materials related to the foreclosure sale held on the Property. (See Chase’s Request for Judicial Notice, Exhibits 1-12.) As all of these items are either court records or recorded real property documents, they are proper subjects of judicial notice. (See Evid. Code, § 452, subds. (d) and (h); see also Fontenot v. Wells Fargo Bank, N.A. (2011) 198 Cal.App.4th 256, 264 [courts may take judicial notice of the existence and recordation of real property records, including deeds of trust].) Consequently, Chase’s request for judicial notice is GRANTED .

In connection with their opposition to the demurrer, Cross-Complainants request that the Court take judicial notice of correspondence sent from Chase and a debt collector referencing Plaintiffs’ account number with Chase, dated November 30, 2010 and February 8, 2010, respectively, to Plaintiffs’ home address pursuant to subdivision (h) of Evidence Code section 452. The Court finds that these items, as private correspondence between private parties, do not qualify as “[f]acts and propositions that are not reasonably subject to dispute and are capable of immediate and accurate determination by resort to sources of reasonably indisputable accuracy.” (Evid. Code, § 452, subd. (h); see, e.g., Sanchez v. Kern Emergency Medical Transportation Corporation (2017) 8 Cal.App.5th 146.) Accordingly, Cross-Complainants’ request for judicial notice is DENIED.

III. Demurrer

As a threshold issue, Chase maintains that Cross-Complainants lack standing to pursue claims for indemnity because the gravamen of the Cross-Complaint is Cross-Complainants’ disputed assertion that Plaintiffs did not receive proper foreclosure notices, and this claim belongs exclusively to Plaintiffs as the party that was legally entitled to receive such notices. (Cross-Complaint, ¶ 23.) As Cross-Complainants are not parties to the Deed of Trust and have no interest in the Property, Chase asserts, they themselves do not have any claims to assert and are legally incapable of doing so on Plaintiffs’ behalf. This argument is easily disposed of as in asserting it, Chase fails to recognize that Cross-Complainants are only asserting claims for indemnity, which is “the obligation resting on one party to make good a loss or damage another party has incurred.” (Rossmoor Sanitation, Inc. v. Pylon, Inc. (1975) 13 Cal.3d 622, 627.) Chase is not directly asserting claims for violations of obligations purportedly owed by Chase to Plaintiffs, but rather is asserting claims based on the contention that Chase contributed to the damages suffered by Plaintiffs and thus should bare its share of liability as a joint-tortfeasor. Accordingly, there is no standing issue which bars Cross-Complainants from asserting their claims against Chase.

With respect to the propriety of the entire Cross-Complaint, Chase also asserts that Cross-Complainants’ claims fail because they have not pleaded tender of the amount necessary to cure their default. In making this argument, Chase is asserting the so-called “tender rule,” which requires a trustor seeking to set aside a trustee’s sale to do equity, i.e., pay, or offer to pay the secured debt or at least all of the delinquencies, before the court will exercise its equitable powers to set aside a purportedly invalid foreclosure sale. (Lona v. Citibank, N.A. (2011) 202 Cal.App.4th 89, 112.) Here, neither Cross-Complainants nor Plaintiffs are seeking to set aside the trustee’s sale of the Property. Consequently, Cross-Complainants are not required to allege tender of the amounts owed under the foreclosed deed of trust.

Turning to the first cause of action for implied equitable indemnity, Chase maintains that the claim fails for the following reasons: (1) it does not owe a duty of care to Plaintiffs sounding in tort; (2) Cross-Complainants fail to establish joint and several liability; (3) Cross-Complainants fail to sufficiently allege a basis for tort liability against Chase; and (4) Cross-Complainants cannot require Chase to indemnify them for their own willful concealment.

As a general matter, the obligation to indemnify is created through contract or through equitable considerations. (See Prince v. Pacific Gas & Electric Co. (2009) 45 Cal.4th 1151, 1157 [explaining that California courts recognize “two basic types of indemnity: express indemnity and equitable indemnity”].) Equitable indemnity principles govern the allocation of loss or damages among multiple tortfeasors whose liability for the underlying injury is joint or several. (American Motorcycle v. Superior Court (1978) 20 Cal.3d 578, 583, 595, 597-598.) Such principles are designed, generally, to do equity among defendants who are legally responsible for an indivisible injury by providing a basis on which liability for damage will be borne by each joint tortfeasor “in direct proportion to [its] respective fault.” (Id. at 583, 598 [internal citations and quotations omitted].) With limited exception, there must be some basis for tort liability against the proposed indemnitor. (See Stop Loss Insurance Brokers, Inc. v. Brown & Toland Medical Group (2006) 143 Cal.App.4th1036, 1041-1042.) Generally, it is based on a duty to the underlying plaintiff, although vicarious liability, strict liability, and implied contractual indemnity can provide a basis for equitable indemnity. (See BFCG Architect Planners, Inc. v. Forcum/Mackey Construction, Inc. (2004) 1119 Cal.App.4th 848, 852.)

Chase maintains that no basis for equitable indemnity has been pleaded because the acts, events and harm alleged by Plaintiffs against Cross-Complainants are separate and distinct from the defective notice theory alleged in the Cross-Complaint. In fact, Chase continues, the defective notice claim against it is based upon a contract- not a tort- and there are no facts alleged to support a joint and several obligation to Plaintiffs.

There can be no indemnity without liability, i.e., the indemnitee and indemnitor must share liability for the injury and thus “no liability may be obtained from an entity that has no pertinent duty to the injured party ….” (Jocer Enterprises, Inc. v. Price (2010) 183 Cal.App.4th 559, 573.) The Court agrees with Chase that as pleaded in this action, there is no basis to find Chase and Cross-Complainants jointly and severally liable for Plaintiffs’ loss of the Property. Per the allegations of the underlying complaint, Plaintiffs’ loss of the Property was the result of professional malpractice by Cross-Complainants- specifically their failure to complete the necessary procedures in Plaintiffs’ bankruptcy cases to strip and obtain a judgment voiding the Second Lien on the Property. This wrongful conduct is entirely separate and distinct from any purported failure by Chase and the other cross-defendants to provide the statutorily mandated notice for the pending foreclosure and sale of the Property. As alleged, if Cross-Complainants had succeeded in voiding the Second Lien on the Property, that lien would have been removed and thus no foreclosure (with the accompanying notice obligations triggered) would have taken place. As Chase contends, there is simply no nexus between Cross-Complainants’ alleged misconduct and Chase’s. (See, e.g., Munoz v. Davis (1983) 141 Cal.App.3d 420, 427.) The injury arising from Cross-Complainants’ malpractice is a distinct harm unrelated to any purported claim relating to defective notice. It is Cross-Complainants’ alleged negligence, rather than the alleged defective notice by Chase, that is the proximate cause of Plaintiffs’ injury- the loss of the Property. Consequently, there is no basis to impose shared liability on Cross-Complainants and Chase for the harm suffered by Plaintiffs and therefore Cross-Complainants’ claim for implied equitable indemnity against Chase fails.

Because there is no basis to impose shared liability, it follows that Cross-Complainants’ claim for contribution also fails. (See Coca-Cola Bottling Co. v. Lucky Stores, Inc. (1992) 11 Cal.App.4th 1372, 1378 [stating that right of contribution, i.e., the distribution of a loss equally among tortfeasors, comes into existence only after the issuance of a judgment declaring more than one defendant jointly liable to the plaintiff].) Therefore, in accordance with the foregoing analysis, Chase’s demurrer to the Cross-Complaint and each of the claims asserted therein on the ground of failure to state facts sufficient to constitute a cause of action is SUSTAINED WITHOUT LEAVE TO AMEND.