Henry Aguila vs First American Title Insurance Company et al
Henry Aguila vs First American Title Insurance Company et al
Case Number
23CV00204
Case Type
Hearing Date / Time
Mon, 05/20/2024 - 10:00
Nature of Proceedings
Motion: Strike Portions of Second Amended Complaint
Tentative Ruling
Henry Aguila v. First American Title Insurance Company, et al
Case No. # 23CV00204
Hearing Date: 5/20/2024
HEARING: Motion to strike first cause of action from SAC
ATTORNEYS: Ronald D. Tym of The Tym Firm for plaintiff Henry Aguila
Eric A Woosley of Law Office of Eric A Woosley for defendants Pico Rivera First Mortgage Investors, LP and Mortgage Co. of Santa Barbara, Inc.
TENTATIVE RULING:
The Court will grant the motion to strike, on the sole basis that the amendments which were made exceeded the scope of the leave to amend granted by the court, and therefore constituted improper matter filed without leave of court, subject to a motion to strike. For the reasons articulated below, the order related to the first cause of action is limited to striking the heading identifying the first cause of action as being for violation of Civil Code section 2822, and ¶¶ 20 and 22. For the reasons articulated below, the order related to the second cause of action is limited to striking ¶ 28.
The Court’s orders are made without prejudice to any future effort by plaintiff Aguila to file an appropriate motion for leave to file a further amended pleading.
Background: On January 18, 2023, plaintiff Henry Aguila (Aguila) filed a complaint, in pro per, against defendants First American Title Insurance Company (First American), Pico Rivera First Mortgage Investors, LP (Pico Rivera), Mortgage Co. of Santa Barbara (MCSB)—alleged to be a general partner in Pico Rivera, and Andrew Fuller (Fuller), alleging causes of action for (1) breach of contract, (2) breach of contract/third party beneficiary, (3) breach of the covenant of good faith and fair dealing, (4) inducing breach of contract, (5) intentional infliction of emotional distress, and (6) negligence.
After a motion to have Aguila declared a vexatious litigant, for a pre-filing order, and to post security of $35,000, was filed by defendants MCSB, Pico Rivera, and Fuller, attorney Ronald D. Tym substituted into the action on Aguila’s behalf. Because Aguila was now represented by counsel, the court denied the request for an order requiring Aguila to post security before proceeding with the action, but granted the motion finding Aguila to be a vexatious litigant (Code Civ. Proc., § 391, subd. (b)) and to require a prefiling order (Code Civ. Proc., § 391.7).
Aguila filed his First Amended Complaint (FAC) on July 31, 2023. The FAC named the same parties as defendants, and alleged causes of action for (1) breach of contract (against Pico Rivera and MCSB), (2) breach of the covenant of good faith and fair dealing (against Pico Rivera and MCSB), (3) breach of obligation to report payments on judgment (against Pico Rivera and MCSB), and (4) intentional interference with contractual relations (against First American).
The FAC’s first cause of action for breach of contract alleged that on July 16, 2015, Thee Aguila, Inc. (TAI) borrowed $5,700,000 from Pico Rivera, secured by property located at 8825 Washington Blvd. in Pico Rivera, CA. Plaintiff Aguila was, at that time, the sole shareholder of TAI. He entered into a personal guarantee of all of TAI’s obligations to Pico Rivera, including the loan. First American issued a lender’s policy of title insurance, insuring the priority of the Deed of Trust. Aguila believes that the policy was in an amount not to exceed the outstanding amount of the loan. Its purpose was to protect Pico Rivera against losses up to the outstanding amount of the loan, arising from the failure of Pico Rivera to be able to get fully repaid on the Loan due to encumbrances other than Excluded Encumbrances under the policy. First American’s obligation was directly connected to the status of the Loan, and the amount which was outstanding.
TAI defaulted on the Loan, and Pico Rivera conducted a trustee’s sale of the property on December 6, 2017, under which it took title to the property as a result of a credit bid of $5,105,000. Prior to the credit bid, $6,116,346.01 was due and owing on the loan. Following the trustee’s sale, no more than $1,011,346.01 remained due and owing on the Loan.
Aguila alleged that he was fraudulently induced by Pico Rivera to enter into a Settlement Agreement in November 2020, in which he agreed to a stipulated judgment against him (Case No. 18CV04958) in the amount of $3,867,113.84, to settle his obligations under the Guarantee. However, that amount was far in excess of the amount actually due under the Guarantee, since Pico Rivera intentionally failed to credit its $5,105,000 credit bid against the amount due and owing under the loan. On information and belief, Aguila alleges that on December 28, 2021, Pico Rivera received $1,100,000 from First American under the Lender’s Policy of Title Insurance, but failed to credit this amount received towards the Loan, against the amount Aguila allegedly owed pursuant to the Guarantee and the stipulated judgment. Its failure to credit the amounts received towards the amount due under the Guarantee is a breach of the Guarantee Agreement, and an attempt to double dip by attempting to be paid twice for the same loan.
After Pico Rivera and MCSB demurred to the causes of action alleged against them, the Court sustained the demurrer to the breach of contract, with leave to amend solely on the ground that the cause of action failed to allege the contractual provision within the Guarantee Agreement alleged to have been breached (the cause of action had also been challenged on a number of other bases, but the Court found none of them meritorious). It overruled the demurrer to the second cause of action for breach of the implied covenant of good faith and fair dealing. Finally, it sustained the demurrer to the third cause of action for failure to properly report credits toward the judgment, without leave to amend, on the ground that the procedure set forth in Code of Civil Procedure section 724.050 constitute the exclusive method for a judgment debtor to obtain an order for entry of satisfaction of judgment, including obtaining offsets to the amount owed under the judgment. That procedure could only be accomplished within the action which gave rise to the judgment against him, i.e., Case No. 18CV04958.
Aguila filed his Second Amended Complaint (SAC) on February 22, 2024. Rather than amending the cause of action for breach of contract, for which leave to amend had been granted, Aguila eliminated any breach of contract cause of action from the SAC, and replaced it with a cause of action for violation of Civil Code section 2822, which provides, in relevant part:
(a) The acceptance, by a creditor, of anything in partial satisfaction of an obligation, reduces the obligation of a surety thereof, in the same measure as that of the principal, but does not otherwise affect it. However, if the surety is liable upon only a portion of an obligation and the principal provides partial satisfaction of the obligation, the principal may designate the portion of the obligation that is to be satisfied.
The cause of action seeks damages for emotional distress, [physical ailment, loss of qualify of life, and medical expenses, in an amount of at least $5,000,000, arising from Pico Rivera’s failure to properly credit the credit bid and the amount received from First American. (SAC @ ¶ 20)
Additionally, Aguila amended the cause of action for breach of the implied covenant of good faith and fair dealing—for which no leave to amend had been granted—by eliminating all reference to a breach of an express provision of the Guarantee (former ¶ 26), and adding new paragraphs 25, 26, and 28. Those paragraphs allege:
25. PRFMI breached the implied covenant of good faith and fair dealing included within the Guarantee Agreement by denying Aguila the benefits of the contract; namely, the right to only be obligated to pay the correct net amounts remaining due and owing on the Loan and to have payments properly credited towards his obligation under the Guarantee. [The new paragraph restates the allegations in former ¶ 25, by omitting language to the effect that “In the event that PRFMI and MCSB are not deemed to have breached an express provision of the Guarantee, they have breached the implied covenant . . . .”]
26. Aguila has been damaged by the actions of PRFMI in breach of the implied covenant of good faith and fair dealing, including but not limited to the costs and fees incurred and continuing to be incurred by Aguila to obtain proper credit for the credit bid and the amount received from First American. [Paragraph is a restatement and elaboration on prior ¶ 27, which stated “Aguila has been damaged as described in Paragraph 22 above.”--¶ 22 was in the now-deleted breach of contract claim.]
[¶ 27 is identical to former ¶ 28, and relates only to joint and several liability.]
28. There exists no judgment with respect to any cause of action by Aguila against PRFMI relating to PRFMI’s obligations pursuant to the Guarantee Agreement, including but not limited to the obligation pursuant to the covenant of good faith and fair dealing to properly apply credits against amounts due and owing by Aguila under the Guarantee Agreement. Thus, there has been no merger of the present cause of action into the Judgment or any other judgment. [Paragraph is new.]
Following the filing of the SAC, Case No. 23CV00204 was ordered related to Case No. 18CV04958 (the case in which the Stipulated Judgment was entered), and Case No. 23CV00204 was transferred to Dept. 5 and reassigned to the Honorable Collen K. Sterne for all purposes.
Motion to strike: Pico Rivera and MCSB have moved to strike from the SAC the first cause of action for violation of Civil Code section 2822, and the identified paragraphs which were added to the second cause of action for breach of the implied covenant of good faith and fair dealing, on the basis that they exceeded the scope of the leave to amend granted by the court. The motion also asserts that there is no private right of action under Civil Code section 2822.
Aguila has opposed the motion, and contends that replacement of the breach of contract cause of action with the cause of action for violation of Civil Code section 2822 was permissible because the new claim is based upon the same operative facts as the original one, and he simply substituted the correct legal theory for an incorrect one. He argues that a new cause of action is permitted following the sustaining of a demurrer where the new cause of action is directly related to the trial court’s reason for sustaining the demurrer, citing Patrick v. Alacer Corp. (2008) 167 Cal.App.4th 995, 1015. Since Dept. 4 was correct that there was no express provision of the Guarantee which was breached, Aguila contends it was appropriate to add the Section 2822 claim, since it requires that a creditor properly credit against the obligations of a surety all amounts received by the creditor that reduce the underlying debt that was guaranteed. Aguila further contends that a motion to strike is not the proper means of claiming there the allegations don’t state a cause of action because there is no private right of action, which must instead be done by demurrer.
To the extent the court reaches the issue, Aguila contends that Section 2822 “strongly implies” the existence of a private right of action, which can constitute the Legislature’s intention to create a private cause of action, citing Vasquez v. SOLO 1 Kustoms, Inc. (2018) 27 Cal.App.5th 84, 91. Even if the cause of action is improper, however, Aguila urges only that the heading be stricken, since the allegations set forth in ¶¶ 11-22 are also the factual allegations on which the cause of action for breach of the implied covenant of good faith and fair dealing are based.
Finally, Aguila contends that the amendments to the second cause of action should not be stricken, because they are not substantial and were necessitated by deletion of the cause of action for breach of contract. Aguila contends he has no objection to the striking of ¶ 28, since it was only added because defendants’ reply papers related to their earlier demurrer had argued that the merger of the Guarantee Agreement into the Judgment precluded a contract cause of action based upon the Guarantee Agreement. Dept. 4 refused to consider the new argument which appeared for the first time in reply papers; plaintiff just wanted to preclude the argument from being made again, but he can do so even if the paragraph is stricken.
In reply, defendants further explained and reiterated their contention that the new first cause of action was not within the scope of the trial court’s earlier grant of leave to amend, emphasizing that it was seeking tort damages in excess of $5,000,000, not breach of contract damages, and could not have been within the scope of leave to amend the breach of contract claim. Defendants further contended that Judge Geck had “debunked” plaintiff’s argument that he had a cause of action for violation of Section 2822 when she held that the exclusive method for Aguila to obtain any setoff was through the procedure set forth in Code of Civil Procedure section 724.050 (Note: The Court notes that this argument was not presented in the moving papers, and is impermissibly being raised for the first time in defendants’ reply papers.) Defendants further attempted to distinguish the authorities cited by Aguila to support the argument that the nonexistence of a private right of action could only be presented by demurrer, and not motion to strike. Finally, defendants reiterated their contention that the trial court had not granted leave to amend the cause of action for breach of the implied covenant of good faith and fair dealing, and the newly added paragraphs therefore must be stricken.
ANALYSIS: The Court will grant the motion to strike, on the sole basis that the amendments which were made exceeded the scope of the leave to amend granted by the court, and therefore constituted improper matter filed without leave of court, subject to a motion to strike. For the reasons articulated below, the order related to the first cause of action is limited to striking the heading identifying the first cause of action as being for violation of Civil Code section 2822, and ¶¶ 20 and 22. For the reasons articulated below, the order related to the second cause of action is limited to striking ¶ 28.
The Court’s orders are made without prejudice to any future effort by plaintiff Aguila to file an appropriate motion for leave to file a further amended pleading. The Court will advise the parties at this time, that it is this Court’s policy and practice not to resolve alleged substantive defects in a proposed pleading in the course of determining whether leave to amend should be granted, and to defer their resolution to an appropriate pleading challenge made after the amended pleading has been filed.
1. Legal Authority.
Following an order sustaining a demurrer with leave to amend, a plaintiff may amend his or her complaint only as authorized by the court’s order. (Harris v. Wachovia Mortgage FSB (2010) 185 Cal.App.4th 1018, 1023.) The plaintiff may not amend the complaint to add a new cause of action without having obtained permission to do so, unless the new cause of action is within the scope of the order granting leave to amend. (Ibid.) Where the new cause of action is not within the scope of the order granting leave to amend, it cannot be properly alleged in the amended pleading. (Ibid.) Alleging a new cause of action is not ordinarily permissible, unless it directly responds to the trial court’s reason for sustaining the earlier demurrer. (Patrick v. Alacer Corp. (2008) 167 Cal.App.4th 995, 1015.) For example, in Patrick, supra, a demurrer to a complaint asserting shareholder’s derivative claims was sustained with leave to amend, based upon the plaintiff’s failure to establish that she had standing as a beneficial shareholder to bring shareholder derivative claims. In her amended pleading, plaintiff alleged a cause of action for declaratory relief, seeking a declaration that she had a community property interest in the shares of the corporation. The Patrick court noted that the plaintiff may not have been free to add “any cause of action under the sun” to her complaint, but should have been permitted to allege this cause of action to establish her standing, given that her lack of standing was the reason why the demurrer to her earlier pleading was sustained. (Ibid.)
2. First cause of action.
A. Permissibility of new cause of action.
The cause of action for breach of contract, as alleged in the FAC, contended that Pico Rivera and MCSB had breached the Guaranty Agreement by failing to credit the amount Aguila owed under the agreement by the amount of the credit bid made for the property, and for an amount received from First American Title, allegedly pursuant to a policy issued to protect Pico Rivera against losses up to the outstanding amount of the loan, arising from its inability to be fully repaid on the loan due to encumbrances other than Excluded Encumbrances under the policy. While defendants had raised numerous challenges to the cause of action on demurrer, the demurrer was sustained solely on the basis that the FAC had failed to allege any provision of the Guaranty Agreement which had been breached by the defendants.
Aguila contends that his completely new cause of action for violation of Civil Code section 2822 was within the scope of the order granting him leave to amend, based upon an argument that it seeks the same sort of relief that the breach of contract cause of action did, in terms of seeking compensation for defendants’ actions in failing to properly credit certain amounts toward the amount he owed on the Guaranty. However, the new cause of action seeks much more than that, in seeking $5 million in damages for “emotional distress, physical ailment, loss of quality of life, and medical expenses,” which could not have been sought under the previous breach of contract cause of action. More importantly, from the perspective of the rules set forth in Harris v. Wachovia Mortgage FSB, supra, and Patrick v. Alacer Corp., supra, nothing about the new cause of action directly responds to the trial court’s reason for sustaining the demurrer to the breach of contract cause of action, i.e., that it failed to allege any provision of the contract which was breached. Consequently, the Court cannot find that the cause of action for violation of Civil Code section 2822 could permissibly have been alleged pursuant to the trial court’s previous grant of leave to amend the breach of contract cause of action; its allegation exceeded the scope of leave which was granted, and it was not drawn or filed in conformity with the laws of the State of California. Consequently, it is the proper subject of a motion to strike made pursuant to Code of Civil Procedure section 436(b).
This leaves the question of whether the entire cause of action must be stricken, or whether, as plaintiff suggests in his opposition, only the title of the cause of action should be stricken, and the allegations of ¶¶ 11-22 should be permitted to remain, as necessary allegations in support of plaintiff’s second cause of action for breach of the implied covenant of good faith and fair dealing. Defendants did not address that issue in their reply, addressing the first cause of action only by reasserting that its substitution was beyond the scope of leave granted by the trial court in sustaining the demurrer, and reasserting that there was no private cause of action under Section 2822.
In the FAC, plaintiff alleged most of his background facts within the first cause of action for breach of contract, and the second cause of action for breach of the implied covenant incorporated by those allegations by reference and then simply alleged that to the extent defendants were not deemed to have breached an express provision of the guarantee, they breached the implied covenant by denying him the benefits of the contract. In large part, although there are a few minor differences, the allegations in the SAC cause of action for violation of Civil Code section 2822 track those that were contained in the FAC’s breach of contract cause of action, with a couple of notable exceptions, i.e., ¶ 20 (seeking tort damages for emotional distress, physical ailment, loss of quality of life, and medical expense, in an amount of at least $5,000,000) and ¶ 22 (related to the merger issue, and alleging that there has been no merger of this cause of action into the Judgment in Case No. 18CV04958).
Emotional distress and physical suffering damages are generally not permissible in breach of contract/breach of the implied covenant of good faith and fair dealing causes of action other than in the insurance context, unless the terms of the contract relate to matters that directly concern the comfort or personal welfare of a party. (See, e.g., Erlich v. Menezes (1999) 21 Cal.4th 543; Chelini v. Nieri (1948) 32 Cal.2d 480.) Consequently, ¶ 20 is not a permissible allegation as support for the cause of action for breach of the implied covenant of good faith and fair dealing. Further, ¶ 22 is largely similar to ¶ 28, which Aguila’s opposition acknowledged was only included because of defendants’ legal argument regarding merger which was made in their reply with respect to the demurrer to the FAC, and that he had no objection to it being stricken.
The Court will grant the motion to strike the first cause of action for violation of Civil Code section 2822, on the ground that its allegation was not directly related to the reason why the demurrer to the breach of contract cause of action was sustained, and therefore was beyond the scope of the leave to amend which was allowed by the trial court. However, the Court agrees with plaintiff that many of the allegations contained in the first cause of action are necessary to provide the factual support for his second cause of action for breach of the implied covenant of good faith and fair dealing. Consequently, the Court will limit the specific matters stricken to the heading (creating the alleged violations as a separate cause of action), and ¶¶ 11 (merely incorporating all previous allegations, which was rendered superfluous by the elimination of the separate cause of action which rendered the remaining paragraphs merely a part of the SAC’s general allegations), 20, and 22.
B. Impropriety of a motion to strike in reaching the merits of the newly-alleged cause of action.
Having found that the allegation of the first cause of action for violation of Civil Code section 2822 violated the leave to amend granted by the trial court in sustaining the demurrer to the breach of contract cause of action, and was therefore not drawn or filed in conformity with the laws of the State of California and subject to being stricken under Code of Civil Procedure section 436(b), the Court need not resolve the motion’s alternative ground for striking the cause of action, i.e., that Section 2822 does not give rise to private right of action.
Even if that were not the case, however, the Court would deny the motion to strike made on that ground, on the basis that the alleged defect is a substantive one, i.e., a claim that the allegations are insufficient to state a cause of action, and not a defect in the form of the complaint or in the procedures pursuant to which it was filed. Under Ferraro v. Camarlinghi (2008) 161 Cal.App.4th 509, 528-529, substantive challenges made on the basis that the pleading failed to state facts sufficient to constitute a cause of action is ground for a demurrer, and not a motion to strike.
2. Allegations added to second cause of action.
The Court will grant the motion to strike allegations of the second cause of action for breach of the implied covenant of good faith and fair dealing, on the ground that leave to amend the second cause of action was not permitted by the trial court’s ruling on the demurrer to the FAC. However, the motion will only be granted with respect to ¶ 28. The allegations contained in ¶ 25 are largely identical to those contained in previous ¶ 26, and the allegations contained in ¶ 26 were necessary to correct the reference in the FAC to the fact that Aguila had been damaged as described in his breach of contract cause of action, which no longer existed, and accurately stated the damages which are appropriate in a claim for breach of the covenant of good faith and fair dealing. As such, they were permissible and, in the case of ¶ 26, necessary to reflect the abandonment of the breach of contract cause of action.
3. Further amendment.
The orders of this Court are made without prejudice to any future motion by Aguila to properly seek leave to amend his pleading. Should a motion for leave to amend be filed, the Court will advise the parties in advance that it is this Court’s policy and practice not to address any alleged substantive defects in the amended pleading in the course of a motion for leave to amend, and instead to defer their resolution to appropriate pleading challenge made after the amended pleading has been filed.