United States District Court, D. Montana, Billings Division
May 14, 2014
WILLIAM J. PAATALO, Plaintiff,
FIRST AMERICAN TITLE COMPANY OF MONTANA, INC., et. al., Defendants.
ORDER and FINDINGS
AND RECOMMENDATIONS OF UNITED STATES MAGISTRATE JUDGE
CAROLYN S. OSTBY,
On March 20, 2014, this Court issued Findings and Recommendations
addressing various motions to dismiss and motions for summary judgment. See
Findings and Recommendations of U.S. Magistrate Judge (ECF 55) .
Judge Haddon adopted this Court's recommendations in full, resulting in the
dismissal of all claims against J.P. Morgan Chase Bank, N.A. ("Chase"), U.S.
Bank, N.A. ("U.S. Bank") as Trustee for WaMu Mortgage Pass-Through Certificate
Series 2007-OA3 Trust ("2007-OA3 Trust"), First American Title Company of
Montana, Inc. ("First American"), Dalia Martinez ("Martinez"), Stillwater
Abstract Company d/b/a Stillwater Abstract & Title Co. Inc. ("Stillwater"), and
Shelly Noe ("Noe"). See Order Adopting F&R (ECF 62). Accordingly, the
only defendants remaining in the case are the Mackoff Kellogg Law Firm - Charles
J. Peterson ("Mackoff Kellogg") and Jason J. Henderson ("Henderson").
Now pending is Mackoff Kellogg's and Henderson's joint motion to
dismiss for failure to state a claim. ECF 56. Also pending are Paatalo's
Motion and Request for Judicial Notice ( ECF 57 ) and Motion for
Extension to File Notice of Appeal ( ECF 71 ). Having considered the
parties' arguments and submissions, the Court rules as follows.
In the Court's March 20, 2014 Findings and Recommendations, the Court
reviewed the background facts pertinent to the pending motions. See ECF 55
at 2-8. The Court will not repeat those facts here except as necessary to
explain this ruling.
III. PARTIES' ARGUMENTS
Mackoff Kellogg and Henderson argue that all of Paatalo's claims
against them fail to state a claim upon which relief may be granted. They first
argue that the breach of contract and breach of the implied covenant claims fail
because it is clear that neither Mackoff Kellogg nor Henderson breached the
Settlement Agreement. ECF 56-1 at 6. They argue that the Settlement
Agreement only bound Paatalo and Mackoff Kellogg, and any action taken by a
party not subject to the agreement cannot constitute a breach. Id . at 6-7.
Second, Defendants argue that the fraud, constructive fraud, and
negligent misrepresentation claims fail because Paatalo has not met the pleading
requirements of such claims. Additionally, Mackoff Kellogg argues that it did
not make a representation that it had the capacity to bind any other Defendant.
Id. at 8. They argue that Mackoff Kellogg used the name "Mackoff Kellogg Law
Firm - Charles J. Peterson as successor Trustee to WAMU Mortgage Pass-Through
Certificate Series 2007-OA3 Trust" in the Settlement Agreement because that was
the precise name of the entity that Paatalo named in his Complaint in
Paatalo I (CV 10-119-BLG-RFC-CSO). Mackoff Kellogg argues that it never
acted as trustee of the 2007-OA3 Trust, but instead used the name above to avoid
confusion and ensure that the proper entity was dismissed from Paatalo I
pursuant to the Settlement Agreement. Id . at 10. Defendants further
argue that they owed no duty to Paatalo that could form a basis for constructive
fraud or negligent misrepresentation claims. Id . at 12-13.
Third, Defendants argue that the FDCPA claim fails because Mackoff
Kellogg was not acting as trustee of Paatalo's Deed of Trust at the time of the
foreclosure proceedings, and therefore it did not take any action as trustee to
enforce the debt Paatalo owed on the Note. Id . at 15. Defendants also
argue that any involvement in collection efforts by them as legal counsel for
others was not improper because the Settlement Agreement did not absolve Paatalo
of his obligation under the Note. Id.
Respecting the breach of contract and breach of the implied covenant
claims, Paatalo continues to maintain that the Settlement Agreement with Mackoff
Kellogg bound all other Defendants in the prior action, and therefore any
attempt to foreclose on his home constitutes a breach of that contract. ECF
66 at 6-10. Respecting the fraud, constructive fraud, and negligent
misrepresentation claims, Paatalo contends that Mackoff Kellogg intentionally
misrepresented that it was the trustee of the 2007-OA3 Trust, the beneficiary of
his Deed of Trust, and that he justifiably relied on this representation to his
detriment. Id . at 10-12. Finally, respecting the FDCPA claim, Paatalo
argues that Mackoff Kellogg and Henderson acted as legal counsel for both First
American and U.S. Bank, and therefore may be held liable for their actions in
attempting to collect a debt that Paatalo contends no longer existed. Id . at
IV. LEGAL STANDARD
A cause of action may be dismissed under Rule 12(b)(6) either when it
asserts a legal theory that is not cognizable as a matter of law, or if it fails
to allege sufficient facts to support an otherwise cognizable legal claim.
SmileCare Dental Group v. Delta Dental Plan of California, Inc., 88 F.3d
780, 783 (9th Cir. 1996). In addressing a Rule 12(b)(6) challenge, the Court
accepts all factual allegations in the complaint as true ( Hospital Bldg. Co.
v. Trustees of the Rex Hospital, 425 U.S. 738, 740 (1976)), and construes
the pleading in the light most favorable to the nonmoving party. Tanner v.
Heise, 879 F.2d 572, 576 (9th Cir. 1989). The Court is not, however,
required to accept as true allegations that contradict exhibits attached to the
complaint or allegations that are merely conclusory, unwarranted deductions of
fact, or unreasonable inferences. Daniels-Hall v. Nat'l Educ. Ass'n,
629 F.3d 992, 998 (9th Cir. 2010).
The Court's standard of review under Rule 12(b)(6) is informed by Rule
8(a)(2) which requires that a pleading contain "a short and plain statement of
the claim showing that the pleader is entitled to relief[.]" Ashcroft v.
Iqbal, 556 U.S. 662 (2009) (quoting Rule 8). To survive a motion to
dismiss under Rule 12(b)(6), "a complaint must contain sufficient factual
matter, accepted as true, to state a claim to relief that is plausible on its
face.'" Ashcroft, 129 S.Ct. at 1949. "A claim has facial plausibility
when the plaintiff pleads factual content that allows the court to draw the
reasonable inference that the defendant is liable for the misconduct alleged."
As a general rule "a district court may not consider any material
beyond the pleadings in ruling on a Rule 12(b)(6) motion." Lee v. City of
Los Angeles, 250 F.3d 668, 688 (9th Cir. 2001) (citation omitted). The
Court may, however, consider "material which is properly submitted as part of
the complaint[, ]" or take judicial notice of "matters of public record" without
converting a motion to dismiss to a motion for summary judgment. Id.,
250 F.3d at 688-89. Specifically, the Court may take judicial notice of other
court proceedings. Duckett v. Godinez, 67 F.3d 734, 741 (9th Cir.
1995), and Emrich v. Touche Ross & Co., 846 F.2d 1190, 1198 (9th Cir.
1988); see also Burbank-Glendale-Pasadena Airport Authority v. City
of Burbank, 136 F.3d 1360, 1364 (9th Cir. 1998) (allowing judicial notice
of pleadings in other cases).
Paatalo's claims against Mackoff Kellogg and Henderson are:
Count 1 - Breach of Contract;
Count 2 -
Breach of the Implied Covenant of Good Faith and Fair Dealing;
Count 3 - Actual Fraud;
Count 4 - Constructive Fraud;
Count 5 - Negligent Misrepresentation; and
Count 7 -
Violation of the Fair Debt Collection Practices Act ("FDCPA").
See Amend. Cmplt (ECF 1-1 at 13-25). The Court considers each in turn.
A. Breach of Contract, Breach of Implied Covenant Paatalo's claims for
Breach of Contract and Breach of the Implied
Covenant of Good Faith and Fair Dealing against Mackoff Kellogg and
Henderson fail as a matter of law. First, the claims fail against Henderson
because Henderson was not a party to the contract, and therefore may not be held
liable for breach. See Gruender v. Rosell, 2010 WL 2079759 (D. Ariz.
2010) ("It would be a novel holding for the [C]ourt to rule that a breach of
contract action can be maintained against a person who is not a party to the
contract being sued upon") (citation omitted); see also Credit Gen.
Ins. Co. v. Midwest Indemnity Corp., 916 F.Supp. 766, 772 (N.D. Ill.
Mackoff Kellogg and Paatalo were the parties to the Settlement
Agreement. The purpose of the Agreement was to "detail the terms of the
settlement reached by the parties." ECF 1-1 at 67. The "Settlement
Terms" section of the Agreement provided that: (1) Mackoff Kellogg agreed to pay
$6, 000 to Paatalo; (2) Paatalo agreed to release "all claims" against Mackoff
Kellogg; and (3) Paatalo agreed to dismiss Mackoff Kellogg with prejudice from
the then-pending Paatalo I lawsuit. Id. The Agreement also
contains a "Mutual Release of All Claims", wherein the parties agreed to
"release, discharge, waive and covenant not to sue upon any and all claims,
causes of action, and liabilities, asserted or unasserted, alleged or which
could have been alleged in the above proceedings." Id . at 67-68.
Paatalo does not contend that Mackoff Kellogg failed to pay him the
$6, 000 as provided in the Agreement, but instead argues that Mackoff Kellogg
breached the mutual release of claims clause by participating in the foreclosure
of his home. This breach-of-contract contention fails.
Subsequent to Mackoff Kellogg's dismissal from Paatalo I,
and prior to any further foreclosure action on Paatalo's property, First
American Title Company of Montana, Inc. was substituted as trustee of the Deed
of Trust. See Substitution of Trustee (ECF 1-1 at 79). First American,
not Mackoff Kellogg, filed the Notice of Trustee's Sale that led to the sale of
Paatalo's property. To the extent Paatalo argues that Mackoff Kellogg may be
held liable for the foreclosure actions taken by other Defendants, his claims
fail. This issue has already been litigated by these parties and resolved by
this Court, and is therefore barred.
In Paatalo I, this Court held that the Settlement Agreement
bound only Mackoff Kellogg and Paatalo. See Paatalo I Order (ECF 11-2) at
32. In this action, the Court has determined that Paatalo's renewed attempts
to enforce the Settlement Agreement against the other Defendants is therefore
barred by res judicata. See F&R (ECF 55); Order Adopting F&R (ECF 62).
The same authority and analysis applies with equal force here.
"Under the doctrine of res judicata, [a] final judgment on the merits
of an action precludes the parties or their privies from relitigating issues
that were or could have been raised in that action' even if that judgment may
have been wrong or rested on a legal principle subsequently overruled in another
case.'" Paulo v. Holder, 669 F.3d 911, 917 (9th Cir. 2011) (quoting
Federated Dep't Stores, Inc. v. Moitie, 452 U.S. 394, 398 (1981)). "[A]
party is precluded from relitigating an issue if four requirements are met: (1)
there was a full and fair opportunity to litigate the issue in the previous
action; (2) the issue was actually litigated; (3) there was final judgment on
the merits; and (4) the person against whom collateral estoppel is asserted was
a party to or in privity with a party in the previous action." Wolfson v.
Brammer, 616 F.3d 1045, 1064 (9th Cir. 2010). All four elements of res
judicata apply to preclude Paatalo from relitigating this issue.
Paatalo's claims for breach of contract and breach of the implied
covenant of good faith and fair dealing against Mackoff Kellogg and Henderson
fail as a matter of law, and should be dismissed. Paatalo's bare requests in his
brief for leave to amend these claims should be denied for failure to cite
authority or factual circumstances warranting leave to amend. There is no reason
to believe that Paatalo's claims could be saved by amendment.
B. Fraud, Constructive Fraud, Negligent Misrepresentation
Fraud claims are subject to a heightened pleading standard. "In
alleging fraud or mistake, a party must state with particularity the
circumstances constituting fraud or mistake." Fed.R.Civ.P. 9(b). The Federal
Rule 9(b)'s particularity requirement applies to state-law causes of action.
Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1103 (9th Cir. 2003). Federal
courts examine state law to determine whether the elements of fraud have been
pled sufficiently to state a cause of action, but apply Rule 9(b)'s requirement
that the circumstances of the fraud be stated with particularity. See id.
This requirement applies not only to claims of fraud but also other claims
"grounded in fraud." Id. at 1104; see also Sacramento E.D.M., Inc.
v. Hynes Aviation Indus., Inc., 965 F.Supp.2d 1141, 1152 (E.D. Cal. 2013)
(constructive fraud subject to Rule 9(b)), Olenicoff v. UBS AG, 2009
WL 481281 (C.D. Cal. 2009) (negligent misrepresentation claim subject to Rule
9(b)); Stickrath v. Globaistar, Inc., 527 F.Supp.2d 992, 998 ( N.C.
Cal. 2007) (non-fraudulent conduct allegations subject to heightened pleading
requirements of Rule 9(b) when the allegations are based on a "unified course of
"Rule 9(b) demands that the circumstances constituting the alleged
fraud be specific enough to give defendants notice of the particular
misconduct... so that they can defend against the charge and not just deny that
they have done anything wrong." Kearns v. Ford Motor Co., 567 F.3d
1120, 1124 (9th Cir. 2009) (citation and quotation marks omitted). The Rule
serves three purposes: "(1) to provide defendants with adequate notice to allow
them to defend the charge and deter plaintiffs from the filing of complaints as
a pretext for the discovery of unknown wrongs; (2) to protect those whose
reputation would be harmed as a result of being subject to fraud charges; and
(3) to prohibit plaintiffs from unilaterally imposing upon the court, the
parties and society enormous social and economic costs absent some factual
basis." Kearns, 567 F.3d at 1125 (internal quotations omitted).
To meet Rule 9(b)'s particularity standard, Paatalo's complaint must
"identify the who, what, when, where, and how of the misconduct charged, as well
as what is false or misleading about the purportedly fraudulent statement, and
why it is false." Salameh v. Tarsadia Hotel, 726 F.3d 1124, 1133 (9th
Cir. 2013) (citation omitted).
Despite the higher degree of notice required when alleging fraud, Rule
9 does not abrogate the Rule 8 notice pleading standard - the two rules must be
read together. See Novak v. Anaconda Sch. Dist., Sch. Dist. No. 10, Deer
Lodge Cnty., 2011 WL 2489760 at *8 (D. Mont. 2011), report and
recommendation adopted, 2011 WL 2472570 (D. Mont. 2011) (citing U.S.
ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 185-86 (5th Cir. 2009)). And,
under Rule 12(b)(6), Defendants retain the burden of proving that Paatalo has
failed to state his fraud claims. Id.
A federal court looks to state law to see whether the elements of
fraud have been pled sufficiently. Kearns, 567 F.3d at 1125. Under
Montana law, Paatalo must particularly plead the following nine elements to
properly state a fraud claim: (1) a representation; (2) the falsity of the
representation; (3) its materiality; (4) Defendants' knowledge of its falsity or
ignorance of its truth; (5) Defendants' intent that it should be relied on; (6)
Paatalo's ignorance of the falsity of the representation; (7) Paatalo's reliance
on the representation; (8)Paatalo's right to rely on the representation; and (9)
consequent and proximate injury caused by reliance on the representation. C.
Haydon Ltd. v. Montana Min. Properties, Inc., 864 P.2d 1253, 1256
For negligent misrepresentation, Paatalo must plead: (1) Defendants
made a representation as to a past or existing material fact; (2) the
representation was untrue; (3) regardless of actual belief, Defendants made the
representation without any reasonable ground for believing it to be true; (4)
the representation was made with the intent to induce Paatalo to rely on it; (5)
Paatalo was unaware of the falsity of the representation, acted in reliance upon
the truth of the representation, and was justified in relying upon the
representation; and (6) Paatalo, as a result of his reliance, sustained damage.
Harpole v. Powell Cnty. Title Co., 309 P.3d 34, 38 (Mont. 2013).
Finally, for constructive fraud, Paatalo must plead "any breach of
duty that, without an actually fraudulent intent, gains an advantage to the
person in fault or anyone claiming under the person in fault by misleading
another person to that person's prejudice or to the prejudice of anyone claiming
under that person[.]" MCA § 28-2-406(1). "The presence of a legal duty is an
essential element of a claim for constructive fraud." Harris v. St. Vincent
Healthcare, 305 P.3d 852, 858 (Mont. 2013) (citation omitted). As to the
legal duty owed, the Montana Supreme Court has stated:
Whether or not a legal duty exists is a question of law for the
court's determination. Although the legal duty which often exists in
constructive fraud cases is a fiduciary one, this Court has previously held
that Montana's constructive fraud statute "does not require that the plaintiff
demonstrate a fiduciary relationship, [but] merely requires the establishment
of a duty." Under certain "special circumstances, " neither a confidential nor
a fiduciary relationship is necessary for a finding of constructive fraud.
This Court has held special circumstances may exist where one party has acted
to mislead the other in some way.
Mattingly v. First Bank
of Lincoln, 947 P.2d 66, 72 (Mont. 1997) (internal citations omitted).
On this Rule 12(b)(6) motion to dismiss, the Court is required to take
all material allegations in the complaint as true, and construe all reasonable
inferences in Paatalo's favor. Rouse v. U.S. Dep't of State, 567 F.3d
408, 414 (9th Cir. 2009). And, as Paatalo is proceeding pro se, his pleadings
are to be construed liberally. See Jackson v. Barnes, No. 09-55763 at
15 (9th Cir. April 15, 2014) (acknowledging that plaintiff "must plead enough
facts to state a claim to relief that is plausible on its face[, ]" but noting
that "we continue to construe pro se filings liberally when evaluating
them under Iqbal [.]") (citation and quotation marks omitted).
Taking Paatalo's allegations as true, and bearing in mind both the
heightened standard for pleading allegations of fraud and the policy of
liberally construing pro se pleadings, the Court finds that Paatalo has stated
claims for fraud, constructive fraud, or negligent misrepresentation.
For his fraud claim, Paatalo alleges that Defendants knowingly made
false representations that Mackoff Kellogg was the trustee for the 2007-OA3
Trust, ECF 1-1 at 17, ¶ 73, that Defendants made these false
representations to induce him to enter into the Settlement Agreement, id. at
18, ¶ 76, that he relied on these false representations, had no way to
know they were false, and was entitled to rely on them, id. at 18, ¶¶ 77-79,
and that he was damaged as a result, id. at 19, ¶ 85. In his general
allegations, Paatalo alleges that Henderson, in executing the Settlement
Contract on behalf of Mackoff Kellogg, represented that he had the power to bind
the 2007-OA3 Trust. Id . at 6, ¶ 22. These allegations identify the "who,
what, where, when, and how" of the misconduct charged to sufficiently state a
claim for fraud, constructive fraud, and negligent misrepresentation.
The Settlement Agreement itself identifies Mackoff Kellogg as "Mackoff
Kellogg Law Firm - Charles J. Peterson as Successor Trustee to WAMU Mortgage
Pass-Through Certificate Series 2007-OA3 Trust[.]" ECF 1-1 at 67.
Mackoff Kellogg does not dispute that it drafted the Settlement Agreement and
acknowledges that it was not the successor trustee to the WAMU Trust as
represented. In its brief, Mackoff Kellogg explains that it used that specific
name because it wanted to mirror the name Paatalo used in the Paatalo I
complaint to ensure it was properly dismissed from the prior lawsuit. But this
unsworn alternate explanation of Mackoff Kellogg's motive does not override the
allegations in the complaint, which, under a motion to dismiss, must be taken as
Paatalo's claims for fraud, constructive fraud, and negligent
misrepresentation against Mackoff Kellogg and Henderson survive dismissal under
Rule 12(b)(6). Defendants' motion to dismiss should be denied as to these
C. Violation of FDCPA
Paatalo's claim for violation of the FDCPA against Mackoff Kellogg and
Henderson alleges simply that the Defendants "violated the FDCPA by attempting
to collect a debt that [Paatalo] did not owe." Id at 25. This claim
fails as a matter of law.
As noted above, the issue of the enforceability of the Note and Deed
of Trust was resolved in Paatalo I. Recognizing that the "fundamental
premise of most of Paatalo's claims is his contention that Defendants had no
legal right to initiate a non-judicial foreclosure[, ]" the Court in Paatalo
I found both the Note and Deed of Trust enforceable. ECF 11-2 at 12, 19.
In reaching this finding, the Court considered and rejected Paatalo's numerous
challenges to the Note's enforceability, including: (1) the validity of
Paatalo's signature, (2) the split ownership of the Note and Deed of Trust, and
(3) the validity of the various assignments, purchase agreements, and pooling or
servicing agreements (finding that Paatalo lacked standing to challenge these
transactions). Id . at 15-19.
Because the Court previously determined that Paatalo's debt was due
and owing, Paatalo may not maintain a cause of action claiming that Defendants
violated the FDCPA by proceeding to foreclose such debt. These claims against
Mackoff Kellogg and Henderson fail as a matter of law.
VI. PAATALO'S REQUEST FOR JUDICIAL NOTICE
Paatalo requests the Court take judicial notice of a press release
copied from the Internet (ECF 57-1) and an uncertified, unverified
14page document (ECF 57-2). The latter document does not itself reveal
its source or authorship.
The Court will deny Paatalo's request for judicial notice at this time
because Paatalo does not explain how the materials qualify under Fed.R.Evid.
201(b), or how these materials are pertinent to any issue now before the Court.
VII. MOTION TO EXTENSION TO FILE NOTICE OF APPEAL
Paatalo has filed a two-sentence motion seeking a 30-day extension of
time to file a notice of appeal. He does not explain what he intends to appeal.
Federal appellate courts generally have jurisdiction only over appeals
from "final decisions" of federal district courts. See 28 U.S.C. § 1291.
Ordinarily, an order which terminates fewer than all claims, or claims against
fewer than all parties, does not constitute a "final" order for purposes of
appeal under 28 U.S.C. § 1291. There has been no final decision entered in this
case. For this reason, the motion, although unopposed, will be denied.
Based on the foregoing, IT IS ORDERED that Paatalo's Motion and
Request for Judicial Notice (ECF 57) and Motion for Extension of Time to
File Notice of Appeal (ECF 71) are DENIED.
Furthermore, IT IS RECOMMENDED that:
1. Mackoff Kellogg and Henderson's Motion to Dismiss (ECF 56)
be GRANTED as to Paatalo's claims for Breach of Contract (Court 1), Breach of
the Implied Covenant of Good Faith and Fair Dealing (Court 2), and Violation of
the FDCPA (Count 7), and such claims be dismissed with prejudice; and
2. Mackoff Kellogg and Henderson's Motion to Dismiss be DENIED as to
Paatalo's claims for Fraud (Court 3), Constructive Fraud (Count 4), and
Negligent Misrepresentation (Count 5).
NOW, THEREFORE, IT IS ORDERED that the Clerk shall serve a copy of
these Findings and Recommendations of United States Magistrate Judge upon the
parties. The parties are advised that pursuant to 28 U.S.C. § 636, any
objections to the Findings Recommendations must be filed with the Clerk of Court
and copies served on opposing counsel within fourteen (14) days after entry
hereof, or objection is waived.