Lehman Brothers Holdings, Inc. v. First Priority Financial, Inc.
2:12-cv-02500
E.D. Cal.
Feb 27, 2013
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Docket

LEHMAN BROTHERS HOLDINGS, INC., Plaintiff, v. FIRST PRIORITY FINANCIAL, INC., Defendant.

No. 12-CV-2500-JAM-KJN

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF CALIFORNIA

February 27, 2013

JOHN A. MENDEZ, UNITED STATES DISTRICT JUDGE

ORDER DENYING DEFENDANT’S MOTION TO DISMISS

This matter comes before the Court on Defendant First Priority Financial, Inc.’s (“Defendant” or “First Priority”) Motion to Dismiss (Doc. #5) Plaintiff Lehman Brothers Holdings, Inc.’s (“Plaintiff” or “Lehman Brothers”) Complaint (Doc. #1) pursuant to Federal Rule of Civil Procedure 12(b)(6).1 Plaintiff opposes the motion (Doc. #9). For the reasons set forth below, Defendant’s Motion is denied.

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I. FACTUAL AND PROCEDURAL BACKGROUND

Plaintiff initiated this action on October 4, 2012, alleging Defendant is liable for breach of contract and breach of express warranty. Doc. #1. In late 2005, Plaintiff, through its wholly owned subsidiary, funded residential mortgage loans brokered by Defendant. These loans were funded pursuant to a Broker Agreement entered into2 on or around November 9, 2005 (“subject agreement”). This agreement included duties and obligations of the Defendant, such as verifying “employment of the loan applicant, . . . [and] analyz[ing] the applicant’s income and debt . . . to determine the maximum mortgage amount the applicant [could] afford . . . .” Id. at ¶13. Additionally, the subject agreement contained a choice of law provision, stating:

“THIS AGREEMENT AND LENDER’S GUIDELINES SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK . . . .”

Doc. #9-2, Exhibit A to the Declaration of Scot Osborne, at pg. 6 (emphasis added).

Plaintiff alleges that it subsequently discovered that the packages submitted with the residential loans contained “misstated material facts of which Defendant knew or should have known . . . ,” were inaccurate or false. See Doc. #1 at ¶19. For example, one borrower’s monthly salary was “grossly exaggerated.” Id. As a result, Defendant allegedly breached the Broker Agreement and other express warranties in both the Agreement and the Lender’s Guidelines. Id. at ¶¶ 20-29.

On November 2, 2012, Defendant filed the pending Motion to Dismiss, arguing Plaintiff’s claims are barred by the statute of limitations. Defendant’s Motion to Dismiss, Doc. #5 (“MTD”). Plaintiff opposed the Motion, arguing its claims are timely under New York law (Plaintiff’s Opposition, Doc. #9 (“OPP”)), which Defendant challenged through its Reply (Defendant’s Reply, Doc. #11 (“REP”)). Plaintiff then filed a Motion to File a Sur-Reply (Doc. #13), which Defendant objected to (Doc. #14). On February 22, 2013, this Court issued an Order, denying Plaintiff’s request to file a Sur-Reply.

II. OPINION

A. Legal Standard

1. Motion to Dismiss

A party may move to dismiss an action for failure to state a claim upon which relief can be granted pursuant to Federal Rule of Civil Procedure 12(b)(6). In considering a motion to dismiss, the court must accept the allegations in the complaint as true and draw all reasonable inferences in favor of the plaintiff. , overruled on other grounds by ; . Assertions that are mere “legal conclusions,” however, are not entitled to the assumption of truth. (citing ). To survive a motion to dismiss, a plaintiff needs to plead “enough facts to state a claim to relief that is plausible on its face.” . Dismissal is appropriate where the plaintiff fails to state a claim supportable by a cognizable legal theory. .

Upon granting a motion to dismiss for failure to state a claim, the court has discretion to allow leave to amend the complaint pursuant to Federal Rule of Civil Procedure 15(a). “Dismissal with prejudice and without leave to amend is not appropriate unless it is clear . . . that the complaint could not be saved by amendment.” .

2. Statute of Limitations

A complaint may be dismissed under Rule 12(b)(6) if it was filed outside of the applicable statute of limitations and “the running of the statute is apparent on the face of the complaint.” ; see also . To determine whether it is apparent on the face of the complaint that the statute of limitations has run, the Court must: “‘First, . . . decide what choice-of-law rule governs the selection of the statute of limitations. Second, the Court must apply that rule to determine which jurisdiction’s limitations law applies. Third, and finally, the Court [must] determine whether [the] plaintiff’s claims fall within the relevant limitations period.’” (quoting ).

B. Defendant’s Motion to Dismiss

Defendant argues Plaintiff’s Complaint must be dismissed because it is based on loans that closed more than six years ago; therefore, Plaintiff’s claims are barred by California’s statute of limitations. MTD at pg. 1, 4-5. In addition, Defendant argues that Plaintiff’s Complaint is factually deficient, and therefore, the Motion to Dismiss should be granted with prejudice. Id. at pg. 1.

Defendant relies on California Code of Civil Procedure § 337, which provides the statute of limitations for breach of contract and breach of warranty actions is four years. Defendant argues “Plaintiff should have discovered the alleged discrepancies prior to, or at least immediately after, funding the subject loans.” MTD at pg. 5.

Plaintiff challenges the Motion to Dismiss, arguing that New York law, not California law, applies to this case. OPP at pg. 1, 4-5. As such, Plaintiff’s Complaint is timely, because the statute of limitations under New York law is six years. OPP at pg. 2, 6-13 (citing New York Civil Practice Law and Rules § 213(2)).

1. Choice of Law

In ruling on a Motion to Dismiss based on an alleged violation of the applicable statute of limitations, the Court must initially “decide what choice-of-law rule governs the selection of the statute of limitations.” (quoting ). The parties agree that this Court must apply California law to its choice of law analysis. Cf. OPP at pg. 4 with REP at pg. 4; see also (“A district court in a diversity case must apply the law of the state in which it sits to a choice of law analysis.”) (citations omitted).

Next, the Court must apply California law to “to determine which jurisdiction’s limitations law applies.” (quotations and citations omitted). Plaintiffs are correct that in California, the two-prong “governmental interest” test applies. REP. at 2 (citing ; ); see also . Under the governmental interest test, the Court must “first determine[] whether the ‘interest’ or policy underlying the law will be significantly furthered by its application to the case at hand.” (citing ). “If both California and the foreign state have a strong interest in applying their own law, a true conflict exists. The court then [must] engage[] in a ‘comparative impairment’ analysis, and appl[y] ‘the law of the state whose interest would be [] more impaired if its law were not applied.’” (quoting ).

Under California law, there is “‘a strong policy favoring enforcement of [contractual choice-of-law] provisions.’” (quoting and citing Restatement section 187). Where the chosen state has a substantial relationship to the parties, the parties’ mandatory choice-of-law provision will only be disregarded where the “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 chose state in the determination of the particular issue . . . .” Here, the parties do have a substantial relationship to New York. As pled in the Complaint, Plaintiff maintains its principal place of business in New York. See Doc. #1; (noting there is a substantial relationship when one of the parties is domiciled in the chosen state).

Turning to the issue of conflicting policy, Defendant argues New York law conflicts with California law because New York provides for a longer statute of limitations, namely six years as opposed to California’s four years. REP. at 3-5. The only case cited by Defendant where the chosen state had a longer statute of limitations than the forum state is , which Defendant relies on heavily in its Reply. In that case, the contract at issue contained a choice-of-law provision requiring Kentucky’s statute of limitations to be applied to the parties’ dispute. The Fourth District Court of Appeal found the provision unenforceable for two reasons. First, the court found neither party had any connection to Kentucky. . In addition, the Court found the laws of Kentucky and California were in conflict, and the application of Kentucky law “violate[d] the protective policy underlying California’s statute of limitations,” because Kentucky provided for a fifteen year statute of limitations, where California’s was only four years. . Unlike , there is only a two year difference in the statutes of limitation at issue here. The cases cited by Defendant are instructive and actually support a finding that the small discrepancy between the statutes does not mean the statutes are in conflict. See REP. at 2-5. In applying California’s strong preference for honoring a negotiated choice-of-law provision, the Court finds applying New York law in this case does not “violate the protective policy underlying California’s statute of limitations,” e.g., , especially since Defendant has not directed this Court to binding or persuasive authority supporting its position. Thus, the Court finds the choice-of-law provision enforceable and binding in this case.

2. Analysis of Statute of Limitations

“Third, and finally, the Court [must] determine whether [the] plaintiff’s claims fall within the relevant limitations period.’” (quoting ). However, since the moving party, Defendant, did not present any argument that the applicable limitations period under New York law has been violated, the Court need not reach the issue of whether Plaintiff’s claims are timely under the applicable statute of limitations.

3. Defendant’s Request for Dismissal with Prejudice

Defendant argues in its Motion and Reply that Plaintiff’s Complaint should be dismissed with prejudice because Plaintiff was “the real culprit in causing Plaintiff’s damages.” See REP. at 7. According to Defendant, Plaintiff cannot state a viable cause of action against it because Plaintiff’s own guidelines contradict the allegations of the Complaint. Id. Plaintiff rebuts these arguments by arguing that the proper standard for evaluating the viability of Plaintiff’s Complaint is Federal Rule of Civil Procedure 8(a), which is not cited by Defendant. OPP at pg. 13-14. Without a discussion of why Plaintiff has not complied with Rule 8(a), this Court cannot entertain Defendant’s argument that Plaintiff’s Complaint is somehow defective. More importantly, “[d]ismissal with prejudice and without leave to amend is not appropriate unless it is clear . . . that the complaint could not be saved by amendment.” . Defendant has made no argument, and has not cited any cases, to demonstrate that it is clear Plaintiff’s Complaint could not be saved by amendment. For these reasons, Defendant’s Motion to Dismiss on this basis is also denied.

III. ORDER

For the reasons set forth above, Defendants’ Motion to Dismiss is DENIED.

IT IS SO ORDERED.

Dated: February 26, 2013

JOHN A. MENDEZ,

UNITED STATES DISTRICT JUDGE

Notes

1
This motion was determined to be suitable for decision without oral argument. E.D. Cal. L.R. 230(g). The hearing was originally scheduled for January 23, 2013.
2
Lehman Brothers’ subsidiary entered into the Agreement and subsequently assigned its rights under the Agreement to Lehman Brothers. See Doc. #1.
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