Casenote: the Jolley Case
| Publication year | 2014 |
| Author | William Webb |
William Webb
Mr. Webb is the founder of the Webb Legal Group in San Francisco, which represents lenders and other businesses in complex commercial and consumer financial services cases. He attended the University of Notre Dame as well as its law school. Mr. Webb represents parties in cases throughout California, the U.S. and internationally. He can be reached by e-mail: wwebb@webblegalgroup. com
On February 11, 2013, the First District Court of Appeal decided Jolley v. Chase Home Finance, LLC,1 a case with implications for both construction lenders and borrowers. Lenders should heed its warnings, and borrowers are expected to try to use it to their advantage.
When a bank fails, the Federal Deposit Insurance Corporation ("FDIC") steps in as receiver. In the general course of events, the FDIC enters into a purchase and assumption agreement ("P&A Agreement") with a successor bank that wishes to take over the failed bank's assets. In general, the P&A Agreement limits the successor bank's liability for acts of its failed predecessor.
In addition, California courts observe a general "no duty" rule: i.e., a bank does not owe a duty of care to a borrower when the bank does not overstep its role as a mere lender.
In Jolley, a successor bank attempted, without success, to defeat a borrower's claim using these two bodies of law.2
Plaintiff Scott Jolley ("Jolley") entered into a construction loan agreement ("Loan Agreement") with Washington Mutual Bank ('WaMu") in 2006.3 According to Jolley, WaMu breached the Loan Agreement by failing to disburse construction funds as agreed.4 WaMu eventually went into receivership with the FDIC, and JP Morgan Chase ("Chase") purchased its assets through a P&A Agreement (the "Agreement").5 Jolley stopped making payments on the loan, and Chase began foreclosure proceedings.6 Just before the foreclosure sale, Jolley sued Chase and the trustee, alleging eight causes of action, including misrepresentation, breach of contract, and negligence, among others.7
Defendants jointly moved for summary judgment or summary adjudication.8 Chase argued that, under the Agreement, it had not assumed WaMu's liabilities in respect of the loan to Jolley.9 Chase asked the court to take judicial notice of what it represented to be the Agreement.10 However, Mr. Jolley secured an expert witness who testified that he had seen the complete Agreement, and that the purported copy of the Agreement that Chase had provided to the court was not complete.11The trial court granted summary judgment to the defendants, and Mr. Jolley appealed, asserting that:
- the copy of the Agreement that Chase had submitted to the trial court was not authentic, but also
- Chase itself had engaged in misconduct after it assumed the Loan Agreement.12
The First District Court of Appeals agreed with Jolley, and reversed the trial court's entry of summary judgment.13
The facts were as follows. At some point not specified in the opinion, Mr. Jolley purchased a rental home for $1,650,000, putting $330,000 down and financing the rest of the purchase through WaMu.14 In January 2006, Jolley obtained a construction loan from WaMu, in the amount of $2,156,000, to renovate the home.15 WaMu used approximately $1.3 million of the construction loan proceeds to pay off its first mortgage.16 Jolley testified that he believed approximately $1 million would be available for construction purposes.17
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After the Loan Agreement was entered into, WaMu lost the loan documents, which held up construction financing.18 While waiting for the loan to be funded, Jolley spent approximately $100,000 of his own money to finance the renovations.19 Jolley testified that WaMu made false representations, including that amounts prepaid for construction ($328,308.79) would be reimbursed to him.20 He also testified there were "irregularities" with the loan disbursements, in that WaMu claimed it had disbursed more money than Jolley had received.21 Jolley testified that these mistakes led to delays in construction, with resulting financial damages.22
Jolley hired Jeffrey Thorne, a former WaMu employee and FDIC contractor ("Thorne"), to assist him.23 Thorne concluded that Jolley had not received approximately $350,000 due him under the Loan Agreement.24 Thorne wrote to WaMu explaining the problems, and recommended that the loan amount be increased to $2,485,000.25
WaMu told Jolley that increasing the size and scope of the project would qualify him for a higher loan amount.26 In reliance on that representation, Jolley increased the size of the project from 2,500 square feet to 5,000 square feet.27 WaMu and Jolley executed a loan modification that provided that the new principal amount would be "Variable: new principal amount."28 And WaMu "'promised that if [Jolley] increased the square footage and scope of the work that [WaMu] would supply the additional funds needed to complete the construction . . . .'"29
The modified agreement called for completion of the renovation by July 1, 2007, and required Jolley to make monthly payments.30 The court noted that, while the record regarding the period from October 2006 to September 2008 was "hazy," construction continued, and Jolley made interest payments.31 The last disbursement under the loan was in June 2008.32
Jolley testified that once construction had been completed, the balance of the loan was to have been rolled over into a fully amortized mortgage.33 The loan amount included a reserve to pay interest payments during construction.34 The reserve had been calculated based on the predicted length of construction, however, and was insufficient to cover interest payments during the extended construction period.35
On September 25, 2008, the Office of Thrift Supervision closed WaMu, and the FDIC was appointed as receiver.36 On the same date, the FDIC and Chase entered into the Agreement, pursuant to which Chase acquired certain of WaMu's assets, including all loans and loan commitments.37
After Chase became involved, Jolley (with Thorne's assistance) continued to seek a modification for an additional $400,000 to complete construction, and told Chase about the prior problems with the loan.38
In November 2008, about two months after Chase acquired the loan, Jolley made his last payment.39 He stated that he was then forced to default because of WaMu's breaches and negligence in the funding of the loan.40 At the time of the default, construction had not been completed, but was completed thereafter.41
Jolley contended that Chase assumed liability for WaMu's failures in servicing Jolley's loan, as part of its "mortgage servicing . . . obligations" under section 2.1 of the Agreement.42 However, Chase argued that it had not assumed liabilities associated with borrower claims arising from WaMu's lending obligations, pointing to section 2.5 of the Agreement, which stated that such claims were "specifically not assumed."43
Jolley testified that once Chase had taken over the operations, it continued using the same employees with whom Jolley had been dealing at WaMu.44 He also testified, "I was led to believe that because Chase had taken over the loan from [WaMu], it was still going to honor the original agreement which said in the addendum Construction/Permanent Loan Part One: 'When all conditions prior to rollover are met as described in the construction Loan Agreement, the loan will rollover to a fully amortized loan.'"45
Chase claimed it was not bound by the rollover provision, because Jolley defaulted while construction was continuing.46 However, Jolley testified that Chase had told him that, in light of the history of problems with WaMu, there was a "'high probability'" that Chase "'would be able to modify the loan so as to avoid the foreclosure.'"47 Chase's employee, a Mr. North, had said that the "'likelihood was good,'" that when construction was complete he could roll the construction loan into a fully amortized conventional loan.48
Jolley stated in his declaration that, as a result of these representations, he was induced to "'borrow heavily to finish the project.'"49
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Jolley claimed that the delays in construction and during the loan modification negotiations prevented him from selling the property before the housing market collapsed.50
Ultimately, instead of agreeing to a loan modification, Chase demanded payment of the loan. The trustee recorded a notice of default, and then recorded and served a notice of sale.51
Chase's representative then sent Jolley an email saying that he had requested the foreclosure department to hold off on foreclosure, "'which means any future sale dates will be postpone [sic] to give us the opportunity to see if we can modify the collateral property.'"52 The foreclosure department refused to postpone foreclosure.53
Two days before the scheduled foreclosure sale, Jolley filed suit against Chase and obtained both a temporary restraining order and a preliminary injunction prohibiting Chase from going forward.54
Jolley's lawsuit rested in part on language in paragraph 13 of the Loan Agreement, which made "'the covenants and agreements'" binding on "'the successors and assigns of [WaMu].'"55 Jolley also relied on Civil Code section 1589, which requires one who takes the benefit of a transaction to also assume its liabilities.56
Chase filed a motion for summary judgment or summary adjudication, arguing that it had no liability for borrower claims based on WaMu's conduct prior to the FDIC receivership.57 It relied on federal law and on the terms of the Agreement, arguing that it had acquired only assets, not liabilities.58
Chase also filed a request for judicial notice (the "Request"), asking the court to take judicial notice that, (among other facts), WaMu had been closed by the OTS; that the FDIC had been named receiver; and that Chase had acquired certain WaMu assets, including all loans and loan commitments of...
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