Opinion
No. 2:15-cv-02507-JAM-KJN
06-16-2016
FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver for AMTRUST BANK, Plaintiff, v. FIRST PRIORITY FINANCIAL, INC., a California corporation, Defendant.
ORDER GRANTING PLAINTIFF'S MOTION TO STRIKE DEFENDANT'S AFFIRMATIVE DEFENSES
This matter comes before the Court on Plaintiff Federal Deposit Insurance Corporation's (FDIC) ("Plaintiff") Motion to Strike Defendant First Priority Financial Inc.'s ("Defendant") twelfth, twenty-sixth, and twenty-seventh affirmative defenses (Doc. #12) from Defendant's answer (Doc. #5) to the complaint (Doc. #1). Defendant opposes the motion (Doc. #17). For the reasons set forth below, Plaintiff's motion is GRANTED.
This motion was determined to be suitable for decision without oral argument. E.D. Cal. L.R. 230(g). The hearing was scheduled for June 14, 2016.
I. FACTUAL ALLEGATIONS AND PROCEDURAL BACKGROUND
Plaintiff "is a corporation and instrumentality of the United States of America, . . . and is authorized to be appointed as receiver for insured depository institutions that have failed." Id. ¶ 5. "On December 4, 2009, the Office of Thrift Supervision closed AmTrust and appointed [Plaintiff] as Receiver." Id. Plaintiff is permitted to file a lawsuit in this court of law pursuant to 12 U.S.C. §§ 1819 and 1821(d)(2)(A)(i) and succeeded to all of AmTrust's claims. Plaintiff now owns the subject claims and has standing to prosecute this action as AmTrust's receiver.
Plaintiff alleges that in both 2004 and 2007, AmTrust and Defendant entered into a written Master Broker Agreement which "set[] forth terms and conditions, pursuant to which [Defendant] would originate and submit and AmTrust would accept and fund mortgage loans." Compl. ¶¶ 7, 11. Plaintiff alleges Defendant breached the terms and conditions of the referenced Master Broker Agreements, id. ¶¶ 24, 34, 43, 52, accordingly, Plaintiff filed this lawsuit for breach of contract, id. ¶ 1.
In Defendant's answer it denies the allegations in Plaintiff's complaint and asserts thirty-two affirmative defenses. Plaintiff seeks to strike Defendant's twelfth, twenty-sixth, and twenty-seventh affirmative defenses: (12) Negligence and Breach of Contract, (26) Comparative Indemnity, and (27) Fraud.
II. OPINION
A. Legal Standard
A Motion to Strike is brought under Federal Rule of Civil Procedure ("Rule") 12(f), which provides in pertinent part: "The court may strike from a pleading an insufficient defense or any redundant, immaterial, impertinent or scandalous matter." Fed. R. Civ. P. 12(f). "A defense which demonstrates that plaintiff has not met its burden of proof is not an affirmative defense." Zivkovic v. S. Cal. Edison Co., 302 F.3d 1080, 1088 (9th Cir. 2002). "On the other hand, '[a]n affirmative defense, under the meaning of [Rule] 8(c), is a defense that does not negate the elements of the plaintiff's claim, but instead precludes liability even if all of the elements of the plaintiff's claims are proven.'" Barnes v. AT & T Pension Benefit Plan—Nonbargained Program, 718 F. Supp. 2d 1167, 1173 (N.D. Cal. 2010) (first alteration in original) (quoting Roberge v. Hannah Marine Corp., No. 96-1691, 1997 WL 468330, at *3 (6th Cir. 1997)). "While courts rarely grant Rule 12(f) motions to strike affirmative defenses, if an affirmative defense is a negative defense and should instead be included as a denial in the answer, the motion to strike will be granted." Lexington Ins. Co v. Energetic Lath & Plaster, Inc., No. 2:15-CV-008 61-KJM, 2015 WL 5436784, at 12 (E.D. Cal. Sept. 15, 2015) (citing Barnes, 718 F. Supp. 2d at 1173).
B. Evidentiary Objections
Defendant objects (Doc. #18) to Plaintiff's Exhibit A attached to the Declaration of Lauren M. Gibbs (Plaintiff's attorney of record) in support of the Motion to Strike (Doc. #13-1). Exhibit A contains three pages of the seventeen page 2004 Master Broker Agreement between AmTrust bank and Defendant.
Defendant contends that "[t]he complete document has not been disclosed to Defendant by Plaintiff[, and] Plaintiff should not be allowed to select favorable portions of the alleged agreement . . . while disregarding the rest . . . ." Def.'s Objection to Pl.'s Ex. A 1:25-28. Defendant cites Federal Rule of Evidence 106 as the basis for its objection.
The advisory committee's note to Federal Rule of Evidence 106 states: "The rule is based on two considerations[—t]he first is the misleading impression created by taking matters out of context[; t]he second is the inadequacy of repair work when delayed to a point later in the trial." Fed. R. Evid. 106 advisory committee's note. Exhibit A is only relevant to this Court's analysis for the choice-of-law provision it contains. Further, Plaintiff also introduces Exhibit B—the 2007 Master Broker Agreement between AmTrust bank and Defendant—which contains an identical choice-of-law provision (Doc. #13-2). Defendant does not object to this Exhibit and Defendant does not contest Plaintiff's choice-of-law argument. Accordingly, neither of the concerns raised by the advisory committee is presented by the selected portions of the 2004 Master Broker Agreement in Plaintiff's Exhibit A, and Defendant's objection is overruled.
C. Analysis
1. Choice-of-law
Plaintiff contends that the agreements at issue in this action contain a choice-of-law provision electing Ohio law, and that because of this provision this Court should apply Ohio contract law. Mot. to Strike 6:3-4, 6 n.2. Defendant does not oppose this argument.
Jurisdiction in this case is based on federal question, therefore, federal common law applies to the choice-of-law rule determination. See Huynh v. Chase Manhattan Bank, 465 F.3d 992, 997 (9th Cir. 2006) (stating where jurisdiction is not based on diversity of citizenship, federal common law choice-of-law rules apply); see also Daugherty v. Experian Info. Solutions, Inc., 847 F. Supp. 2d 1189, 1194 (N.D. Cal. 2012) (same). "Federal common law follows the approach outlined in the Restatement (Second) of Conflict of Laws." Huynh, 465 F.3d at 997.
Under the Restatement, the parties' choice-of-law "to govern their contractual rights and duties will be applied if the particular issue is one which the parties could have resolved by an explicit provision in their agreement directed to that issue." Restatement (Second) of Conflicts of Laws § 187(1) (1988). Courts should honor the parties' choice unless "the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties' choice" or "application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue" and that state would be the state of the applicable law in the absence of an effective choice-of-law by the parties. Id. at § 187(2).
Here AmTrust was headquartered in Ohio, thus Ohio bears a substantial relationship to the parties. Application of Ohio contract law is not contrary to any fundamental California policy. The Court therefore defers to the parties' choice-of-law provision and applies Ohio contract law in analyzing this motion.
2. Comparative Negligence and Contributory Indemnity (Twelfth and Twenty-Sixth Affirmative Defenses)
Defendant alleges in its twelfth affirmative defense that "Plaintiff is barred from recovery herein by reason of its negligence at or about the time and place of the alleged transaction and failure to satisfy its contractual obligation to underwrite the loans." Answer 12:18-21. Defendant alleges in its twenty-sixth affirmative defense that "Plaintiff is barred from recovery on the alleged contract, because the equities of this case entitle this Defendant to comparative and/or implied indemnity from Plaintiff." Id. at 16:8-14.
Plaintiff argues these defenses must be stricken because "[i]t is black letter law in Ohio that the related defenses of comparative fault and contributory negligence are not valid defenses to a claim for breach of contract." Mot. to Strike 6:6-7.
Defendant counters that "[w]hile there is authority for the contention that generally negligence is not a defense to a breach of contract claim, the rule does not bar a plaintiff's negligence from remaining relevant to a breach of contract action . . . ." Opp'n at 12:7-10. Defendant provides examples of courts considering negligence in determining whether there has been a breach of implied contractual duties and whether causation is satisfied. See id. 12:22-13:10 (citing Ohio Oil Gathering Corp. III v. Welding, Inc., No. 2:09-cv-782, 2010 WL 5135999 (S.D. Ohio Dec. 9, 2010); Becker v. BancOhio Nat'l Bank, 17 Ohio St. 3d 158 (1985); Bailey PVS Oxide (Delta) LLC v. Plas-Tanks, Inc., No. 3:02CV7363, 2005 WL 1377874, at *1 (N.D. Ohio June 6, 2005)).
Ohio case law prescribes that "it is well settled that comparative negligence, contributory negligence, or assumption of the risk are not defenses in contract." Chase Bank of Ohio v. Nealco Leasing, Inc., 92 Ohio App. 3d 555, 569 (1993) (citing Becker, 17 Ohio St.3d 158); see also Ohio Oil Gathering Corp. III, 2010 WL 5135999, at *3 (precluding defendants from arguing that comparative fault is a defense to a contract claim); Bedillion v. Tri-Cty. Inc. Agency, No. 15722, 1993 WL 27381, at *3 (Ohio Ct. App. Feb. 3, 1993) ("Comparative negligence is not a defense in a contract action.").
Applying these cases to the instant case, the Court finds that Defendant's twelfth and twenty-sixth asserted defenses are improper affirmative defenses under Ohio contract law. Defendant is not precluded from arguing Plaintiff's own negligence undermines the elements of Plaintiff's claims, however, any such defense is a negative defense and is properly stricken under Rule 12(f). See Lexington Ins. Co, 2015 WL 5436784, at *11-12 (citing Barnes, 718 F. Supp. 2d at 1173). Plaintiff's motion to strike Defendant's twelfth and twenty-sixth defenses as improper affirmative defenses is GRANTED WITH PREJUDICE.
3. Fraud (Twenty-Seventh Affirmative Defense)
Defendant alleges in its twenty-seventh affirmative defense that "the Complaint, and each cause of action therein, is barred due to the fraudulent representations made by AmTrust instructing and directing First Priority Financial not to verify any income representations made by a borrower, while representing that AmTrust would be performing the underwriting of a loan." Answer 16:17-22.
Plaintiff contends that Defendant's twenty-seventh affirmative defense should be stricken for failure to meet the heightened pleading requirements of Rule 9(b). Defendant counters that it has met Rule 9(b)'s requirements. Defendant also contends that "the knowledge of specific persons that made the representations and sent/posted the instructions . . . are in possession of AmTrust." Opp'n 9:19-22.
Rule 9(b) prescribes: "in all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Fed. R. Civ. P. 9(b). Rule 9(b)'s particularity requirement applies to affirmative defenses. ADP Commercial Leasing, Inc. v. M.G. Santos, Inc., No. CV F 13-0587 LJO SKO, 2013 WL 3863897, at *9 (E.D. Cal. July 24, 2013) (citing Multimedia Patent Trust v. Microsoft Corp., 525 F. Supp. 2d 1200, 1210-11 (S.D. Cal. 2007)). "[Rule] 9(b) requires more specificity including an account of the 'time, place, and specific content of the false representations as well as the identities of the parties to the misrepresentations.'" Swartz v. KPMG LLP, 476 F.3d 756, 764 (9th Cir. 2007) (quoting Edwards v. Marin Park, Inc., 356 F.3d 1058, 1066 (9th Cir. 2004) (citation omitted)); see also Kearns v. Ford Motor Co., 567 F.3d 1120, 1124 (9th Cir. 2009) (citations omitted) ("Averments of fraud must be accompanied by the who, what, when, where, and how of the misconduct charged.").
An exception to the particularity standard exists. The Ninth Circuit "has held that the general rule that allegations of fraud based on information and belief do not satisfy Rule 9(b) may be relaxed with respect to matters within the opposing party's knowledge[; i]n such situations, [a party] cannot be expected to have personal knowledge of the relevant facts." Neubronner v. Milken, 6 F.3d 666, 672 (9th Cir. 1993). However, evidence of AmTrust's alleged fraudulent behavior has not been shown to be peculiarly within the possession of Plaintiff and thus the exception to Rule 9(b)'s heightened pleading standard does not apply.
While Defendant provides factual support for its fraud affirmative defense in its opposition, see Opp'n 9:13-22, "Defendant's allegations in [its o]pposition do not serve to cure the deficiency in [its a]nswer." See Shellabarger v. Dicharry, No. 2:13-CV-00188-TLN, 2014 WL 5797194, at *3 (E.D. Cal. Nov. 6, 2014). "Defendant must give Plaintiff[] fair notice of [its] affirmative defenses in [its a]nswer-not in an [o]pposition to Plaintiff['s] [m]otion filed at some later date." See id.; see also Fed. R. Civ. Proc. 8(c)(1) (requiring that a party state its affirmative defenses in a "responsive pleading"); Fed. R. Civ. Proc. 7(a) (defining the following documents as "pleadings": "(1) a complaint; (2) answer to a complaint; (3) answer to a counterclaim designated as a counterclaim; (4) answer to a crossclaim; (5) third-party complaint; (6) answer to a third-party complaint; and (7) if ordered by the court, a reply to an answer."); Morrison v. Mahoney, 399 F.3d 1042, 1046 (9th Cir. 2005) (explaining that "anything" not listed as a pleading under Rule 7(a) is a "motion or paper").
As pled, Defendant's fraud defense fails to allege the "who, where, and when" of the fraud. See Kearns, 567 F.3d at 1124. Accordingly, the Court GRANTS Plaintiff's motion to strike Defendant's twenty-seventh affirmative defense but Defendant is given to leave amend this defense. See Wyshak v. City Nat'l Bank, 607 F.2d 824, 826 (9th Cir. 1979) ("In the absence of prejudice to the opposing party, leave to amend should be freely given.").
III. ORDER
For the reasons set forth above, it is hereby ordered that Plaintiff's Motion to Strike is GRANTED as follows:
1. Plaintiff's Motion to Strike Defendant's twelfth and twenty-sixth affirmative defenses is GRANTED WITH PREJUDICE.
2. Plaintiff's Motion to Strike Defendant's twenty-seventh affirmative defense is GRANTED WITH LEAVE TO AMEND.
Defendant shall file any amended answer within twenty days of this Order.
As a final matter, Defendant's opposition is one page longer than the page limit allowed by this Court's standing order. See Order re Filing Requirements (Doc. #3-2) at p. 1. In accordance with that order, Defendant's counsel, Patton & Sullivan LLP, is sanctioned in the amount of $50.00. Id. ("A violation of this Order will result in monetary sanctions being imposed against counsel in the amount of $50.00 per page. . . .") Counsel is to pay this amount within five days of the date of this Order.
IT IS SO ORDERED. Dated: June 16, 2016
/s/ _________
JOHN A. MENDEZ,
UNITED STATES DISTRICT JUDGE