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

Cross-Cross-Complainants Lenders TD Service, Inc. (“Lenders TD”) and 26th Corp. (“26th Corp.”) (collectively, “Cross-Cross-Complainants”) demur to the Cross-Complaint filed by Cross-Complainants/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 than 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, 26th Corp. 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 the remaining 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 August 31, 2018, Cross-Defendants filed the instant demurrer to the Cross-Complaint and each of the claims asserted therein on the grounds of failure to state facts sufficient to constitute a cause of action and uncertainty. (Code Civ. Proc., § 430.10, subds. (e) and (f).) Cross-Complainants oppose the motion.

II. Demurrer

With their Cross-Complaint, Cross-Complainants seek indemnification from Cross-Defendants for damages caused to Plaintiffs by the loss of the Property.

Indemnity 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.) This obligation 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.4th 1036, 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.)

Here, the claimed duty that serves as the basis for Cross-Complainants’ causes of action for implied equitable indemnity and contribution as pleaded against Cross-Defendants is the obligation to provide timely and proper notice of the foreclosure sale to Plaintiffs’ at their residential address. As foreclosure trustee, Lenders TD purportedly had a duty to “take reasonable steps to find an interested party whose address is unknown to the trustee if the trustee has reason to believe such address can be found.” (Cross-Complaint, ¶ 32.) Lenders TD is alleged to have had actual knowledge of Plaintiffs’ last known home address and/or through reasonable diligence could have discovered it, but improperly mailed notice of the foreclosure sale to the Property rather than the home address. (Id.) Cross-Complainants maintain that it was this failure on the part of Cross-Defendants that was the proximate cause of Plaintiffs’ losing the Property at the foreclosure sale.

In demurring to the claims asserted against them in the Cross-Complaint, Cross-Defendants contend that these claims cannot be maintained because there is no legal basis for imputing the knowledge of a former beneficiary regarding Plaintiffs’ home address to successor lienholders or trustees such as themselves. The duties owed by a trustee are carefully circumscribed, Cross-Defendants explain, and do not require them to provide notices to an unknown address even if known by a prior beneficiary.

The arguments raised by the parties in this motion implicate the statutes involving nonjudicial foreclosures. Code of Civil Procedure sections 2924 through 2924k “provide a comprehensive framework for the regulation of a nonjudicial foreclosure sale pursuant to a power of sale contained in a deed of trust.” (Melendrez v. D & I Investment, Inc. (2005) 127 Cal.App.4th 1238, 1249-1250.) The foreclosure process is initiated by the recording of a notice of default and election to sell by the trustee; three months after the default is recorded, the trustee may proceed with the sale by properly publishing a notice of sale. (Code Civ. Proc., §§ 2924, subd. (b) and 2924f.) “It is well settled the trustee’s duties regarding the notice of default and sale are strictly defined and limited to what is described in the statutory scheme.” (Banc of America Leasing & Capital, LLC v. 3 Arch Trustee Services, Inc. (2009) 180 Cal.App.4th 1090, 1097.)

In this regard, a trustee is required to mail a copy of the notice of default to, as relevant here, “each trustor or mortgagor at his or her last known address if different than the address specified in the deed of trust or mortgage with power of sale.” (Code Civ. Proc., § 2924b, subd. (b)(1).) As used in the foregoing code section, the “last known address” of each trustor or mortgagor means “the last business or residence physical address actually known by the mortgagee, beneficiary, trustee, or other person authorized to record the notice of default.” (Code Civ. Proc., § 2924b, subd. (b)(3) [emphasis added].) An address is deemed to be “actually known” “if it is contained in the original deed of trust or mortgage, or in any subsequent written notification or a change of physical address from the trustor or mortgagor pursuant to the deed of trust or mortgage.” (Id.) The beneficiary must inform the trustee of the trustor’s last address actually known by the beneficiary, but the trustee will incur no liability for failing to send notice to that address unless the trustee had actual knowledge of it. (Id.)

Cross-Defendants’ argument that they had no duty to provide notices to an unknown address- Plaintiffs’ residence- is dependent on their contention that they did not have such knowledge being true, which is contrary to what is alleged in the Cross-Complaint. Cross-Complainants specifically allege that “Cross-Defendants and each of them, had actual knowledge of … Plaintiffs’ home address.” (Cross-Complaint, ¶ 24.) On demurrer, the Court is required to accept as true all material facts pleaded in the subject complaint. (See Moore v. Conliffe (1994) 7 Cal.4th 634, 638.) As knowledge is a fact, the Court is required to accept as true the foregoing allegations, i.e., that all of the cross-defendants had actual knowledge of Plaintiffs’ home address but failed to send the required notices regarding the foreclosure sale to it.

Cross-Defendants acknowledge that Cross-Complainants have alleged that they had actual knowledge of Plaintiffs’ home address, but emphasize that this allegation is directly contracted by another allegation in the Cross-Complaint that the address was known by certain parties, i.e., Chase, the former lienholder, who had a duty to provide notification of Plaintiffs’ home address to “any and all successor lienholders of the … Property” but failed to do so. (Cross-Complaint, ¶ 23.) Thus, Cross-Defendants explain, Cross-Complainants have both pleaded that they had actual knowledge of Plaintiffs’ home address and that they did not, rendering the pleading uncertain. This argument by Cross-Defendants, however, ignores the fact that a party is permitted to plead in the alternative and may make inconsistent allegations. (See, e.g., (Crowley v. Katleman (1994) 8 Cal.4th 666, 690-691; Rader v. Stone (1986) 178 Cal.App.3d 10, 29; Skelly v. Richman (1970) 10 Cal.App.3d 844, 856.) Furthermore, a demurrer for uncertainty only exists where the allegations of the complaint are so unintelligible that the defendant cannot reasonably respond to them (see Williams v. Beechnut Nutrition Corp. (1986) 185 Cal.App.3d 135, 139, fn. 2), and the allegations of the Cross-Complaint cannot adequately be described as such. Accordingly, Cross-Defendants’ arguments in support of their demurrer are not well taken and therefore do not provide a basis upon which to sustain their motion. Therefore, Cross-Defendants’ demurrer to the Cross-Complaint and each of the claims asserted therein on the grounds of uncertainty and failure to state facts sufficient to constitute a cause of action is OVERRULED.