Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_12-cv-02982/USCOURTS-casd-3_12-cv-02982-0/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 12:1819 FDIC: Corporate Powers

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

REZA JAFARI and FIRST AMERICAN

TITLE INSURANCE COMPANY

Plaintiffs,

CASE NO. 12cv2982-LAB (RBB)

ORDER GRANTING THIRD

PARTY DEFENDANT’S MOTION

vs. TO DISMISS

FEDERAL DEPOSIT INSURANCE

CORPORATION, as Receiver for

La Jolla Bank; et al.,

Defendant.

This case first came to the Court in early August 2012, when Jafari applied for a

temporary restraining order to block the FDIC from foreclosing on a home he’d just bought

in Rancho Santa Fe. The Court denied the application on August 22, for two reasons. First,

Jafari’s grievance with the FDIC hadn’t been exhausted administratively. Second, the Court

lacked the authority, anyway, to enjoin the FDIC’s exercise of its statutory powers as a

receiver. Jafari dismissed the case on August 30.

In the meantime, on August 27, First American Title Insurance paid the FDIC the

amount it claimed was due on the home loan, $3,649,067.10, so it would reconvey the deed

of trust, which it did. Then, on October 18, Jafari’s grievance with the FDIC was finally

resolved against him. That cleared the way to file a fresh lawsuit against the FDIC,

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essentially to recover the money First American paid to the FDIC. Indeed, Jafari concedes

that while he’s a named Plaintiff in this case, “First American is controlling the litigation and

has authority to resolve it.” (Doc. No. 20 at 2.) 

Several months after this case had been filed, the FDIC filed a third party complaint

against the seller of Jafari’s home, Birger Greg Bacino, as well as the escrow company,

Heritage Escrow. Now before the Court is Heritage’s motion to dismiss that complaint. The

crux of Heritage’s motion is that it’s an innocent middleman. It handled an escrow for Bacino

and Jafari and simply followed their instructions, and therefore can’t be liable to the FDIC for

any wrongdoing. 

I. General Factual Background

The essential facts of this case haven’t changed. Jafari bought a home from Bacino

that was encumbered by liens, one of which was a $2,540,000 construction loan from La

Jolla Bank. The bank had previously failed, however, and the FDIC held the lien as receiver.

Because the outstanding liens totaled more than the value of the home, Jafari and Bacino

agreed to a short sale, which the secured creditors had to bless. Along those lines, on

September 8, 2011 the FDIC and Bacino executed a release agreement—the FDIC calls it

a “proposal letter,” which shows how the parties spin its significance—in which, subject to

certain conditions, the FDIC would reconvey the deed of trust for $135,000. 

Those conditions turned out to be a sticking point. After escrow closed and Heritage

Escrow wired the FDIC $135,000 pursuant to the release agreement, the FDIC sent it back,

claiming certain conditions in the release agreement hadn’t been satisfied. The FDIC’s

position doesn’t seem to be in dispute. Rather, Jafari’s complaint against the FDIC rests on

the argument that the unsatisfied conditions “were unlawful, unenforceable, or not material

and therefore did not provide a valid basis for excusing the FDIC’s obligation of counterperformance, which was to reconvey the La Jolla Bank Deed of Trust.” (FAC ¶ 39.) 

The contested conditions each relate to the fact that Bacino personally guaranteed

the La Bank construction loan, and the FDIC didn’t want to release its lien in a way that

would prejudice its ongoing efforts to hold him accountable in ongoing bankruptcy

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proceedings. After all, “[t]he Proposal Letter discussed a release of collateral, not a

reduction in the amount that was due under the ALB Loan.” (ATPC ¶ 17.) The conditions

appear in a single paragraph in the release agreement:

On or about December 31, 2009, ALB Properties, LLC filed a

petition for relief under Chapter 7 of the United States Bankruptcy Code. The FDIC-R has

objected to the discharge sought by Mr. Bacino and litigation is ongoing concerning the

FDIC-R’s objection to discharge. The FDIC-R is willing to consent to the release of collateral

as outlined in this Letter so long as the Guarantor(s) acknowledge and agree that by

consenting to the release of collateral, the FDIC-R is not forbearing in any way with respect

to its remedies under the Loan Documents, and is not waiving or releasing any of its claims

with respect to the Borrower or the Guarantor(s) under the Loan Documents. Borrower and

Guarantor(s) are willing to sign this Letter to assure the FDIC-R that they acknowledge and

agree that the FDIC-R is not forbearing in any way with respect to its remedies under the

Loan Documents, and not waiving or releasing any of its claims with respect to the Borrower

or the Guarantor(s) under the Loan Documents. Prior to effectuating the release of collateral

referenced herein, Mr. Bacino acknowledges that he will be required to provide an opinion

from his bankruptcy counsel, in a form satisfactory to the FDIC-R in its sole and absolute

discretion, that the release of collateral contemplated by this letter and the continuing

obligation of Mr. Bacino under his Guarantee do not require approval of the Bankruptcy

Court and that the guarantee executed by Mr. Bacino will continue to be effective against

him in the current bankruptcy court litigation and in any subsequent litigation derived

therefrom. ALB shall also provide an opinion from bankruptcy counsel, in a form satisfactory

to the FDIC-R in its sole and absolute discretion, that the release of collateral contemplated

by this letter and the continuing obligation of ALB under the Loan Documents do not require

approval of the Bankruptcy Court and that the Loan Documents executed by ALB will

continue to be effective against ALB in subsequent litigation.

As the FDIC puts the point in its complaint, “Each of the conditions discussed in the Proposal

Letter were extraordinarily important to the FDIC-R because it had claims in the pending

Adversary Action against Bacino concerning the personal guarantees he provided in

connection with the ALB loan, as well as other loans, and it was always intended that these

obligations would remain in place following any release of the lien on the Property.” (ATPC

¶ 19.) 

/ /

With the FDIC refusing to reconvey the deed of trust and threatening foreclosure,

Jafari had no choice but to pay the FDIC the amount due on the loan. Then he sued the

FDIC to enforce the release agreement as he construes it.

II. The FDIC’s Complaint Against Heritage

So what did Heritage do wrong? In a nutshell, the FDIC alleges that Heritage—and,

for that matter, First American—had the release agreement/proposal letter with the FDIC’s

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conditions and ignored it, releasing the collateral without first obtaining the FDIC’s consent

or confirming that the critical conditions had been satisfied. (ATPC ¶¶ 20–22, 26.) In the

FDIC’s words, “Bacino and Jafari submitted joint escrow instructions to Heritage which

required Heritage, among other things, to obtain the appropriate releases and approvals

from the FDIC-R to allow the Property to be sold free and clear of all liens and

encumbrances.” (ATPC ¶ 20.) For example, a March 19, 2010 “Addendum” to the

“Residential Purchase Agreement and Joint Escrow Instructions” directed that “This

purchase agreement is subject to the approvals of seller, seller’s attorney, seller’s

bankruptcy trustee, bankruptcy court, and the lenders/lienholders approval of short sale

(lenders Chevy Chase Bank and the successor of La Jolla Bank or the FDIC.” (Doc. No.

27-1.) 

The FDIC’s complaint asserts eights claims, but only five are directed at Heritage. 

(The others are directed at Bacino.) The first three claims are for breach of contract, breach

of fiduciary duty, and negligence. The last two claims are for implied contractual indemnity

and declaratory relief. Heritage’s motion to dismiss challenges them all, its basic theory

being that Heritage simply did what it was told to by Bacino and Jafari, and owed no legal

duties to the FDIC.

III. Legal Standard

A 12(b)(6) motion to dismiss for failure to state a claim challenges the legal sufficiency

of a complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). The Court must accept

all factual allegations as true and construe them in the light most favorable to the FDIC. 

Cedars-Sinai Med. Ctr. v. Nat’l League of Postmasters of U.S., 497 F.3d 972, 975 (9th Cir.

2007). To defeat Heritage’s motion to dismiss, the FDIC’s factual allegations needn’t be

detailed, but they must be sufficient to “raise a right to relief above the speculative level . . . .” 

Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). That is, “some threshold of plausibility

must be crossed at the outset” before a case can go forward. Id. at 558 (internal quotations

omitted). 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

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alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). “The plausibility standard is not akin

to a ‘probability requirement,’ but it asks for more than a sheer possibility that a defendant

has acted unlawfully.” Id. 

While the Court must draw all reasonable inferences in the FDIC’s favor, it need not

“necessarily assume the truth of legal conclusions merely because they are cast in the form

of factual allegations.” Warren v. Fox Family Worldwide, Inc., 328 F.3d 1136, 1139 (9th Cir.

2003) (internal quotations omitted). In fact, the Court does not need to accept any legal

conclusions as true. Iqbal, 556 U.S. at 678. A complaint does not suffice “if it tenders naked

assertions devoid of further factual enhancement.” Id. (internal quotations omitted). Nor

does it suffice if it contains a merely formulaic recitation of the elements of a cause of action. 

Twombly, 550 U.S. at 555.

IV. Discussion

Heritage’s motion to dismiss challenges the breach of fiduciary duty and negligence

claims together, and separately challenges the breach of contract and implied contractual

indemnity claims. The Court’s analysis will follow that outline.

A. Breach of Fiduciary Duty and Negligence

Heritage has two arguments for the dismissal of the FDIC’s breach of fiduciary duty

and negligence claims. The first argument is that the FDIC was neither a party to the escrow

nor an intended third party beneficiary of it, and was therefore not owed the duty of care that

the claims require. The second argument is that the FDIC hasn’t suffered any damages,

which is fatal to the claims.

/ /

1. Heritage’s Duty of Care to the FDIC

The FDIC can’t accuse Heritage of breaching a fiduciary duty, or of negligence, unless

Heritage owed the FDIC some duty of care. Heritage first that because the FDIC didn’t

deposit any instructions or money with Heritage in connection with the escrow, it wasn’t a

party to the escrow and wasn’t owed a duty of care. Heritage relies heavily on two cases for

this argument: Summit Fin. Holding, Ltd. v. Continental Lawyers Title Co., 27 Cal.4th 705

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(2002) and Markowitz v. Fidelity Nat’l Title Co., 142 Cal.App.4th 508 (Cal. Ct. App. 2006).

Summit involved a home refinance. The defendant in the case, Continental Lawyers

Title Company, handled the escrow. The original lender, to be paid off in the refinance, was

Talbert Financial, but Talbert had previously assigned its rights to Summit, the plaintiff. 

Continental knew this. It prepared a preliminary title report that showed the assignment. 

Nonetheless, pursuant to a payoff demand from Talbert and instructions from the company

overseeing the refinance, Continental paid Talbert—and Summit never got paid. Summit

then sued Continental for negligence. The court held that because Summit was a stranger

to the escrow, it wasn’t owed any duty of care by Continental. 

The Summit opinion opens with the principle that “[a]n escrow holder is an agent and

fiduciary of the parties to the escrow,” and, for that reason, “an escrow holder must comply

strictly with the instructions of the parties.” Summit, 27 Cal.4th at 711. But, as the Court

reads the opinion, it was critical in Summit that both Talbert and Summit were strangers to

the escrow. Id. at 708. Indeed, it credited the Court of Appeal for distinguishing a case,

Builders’ Control Serv. of N. Cal., Inc. v. N. Am. Title Guar. Co., 205 Cal.App.2d 68 (Cal. Ct.

App. 1962) on the basis that “the principles it applied have no application to whether an

escrow holder owes duties to a nonparty based on an assignment made by [one] stranger

to the escrow to another [another] stranger to the escrow.” Id. at *713 (citation omitted). 

Here, by contrast, the question is whether an escrow holder owes a duty to a nonparty based

on the parties’ own terms and instructions. On that question, the holding in Summit seems

to leave an opening for liability to nonparties, as it quotes approvingly the Court of Appeal’s

statement that “Builders’ Control Service stands for the proposition only that an agent’s

obligation to disburse proceeds held by the agent for its principal is coextensive with the

principal’s obligation to disburse those proceeds to the assignee.” Id. at 714 (citation

omitted). See also Chen v. Dynasty Escrow, Inc., 2002 WL 1227478 at *10 (Cal. Ct. App.

June 6, 2002).

This case is a bit different from Summit because Bacino and Jafari were parties to

the escrow, and it is essentially their own terms and instructions that the FDIC accuses

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Heritage of failing to carefully follow. The addendum to the joint escrow instructions, dated

March 19, 2010 and which Bacino and Jafari signed, indicated that the short sale required

the FDIC’s approval. (Doc. No. 27-1.) Likewise, the joint escrow instructions themselves,

executed by Bacino and Jafari, indicated that the home would be transferred with monetary

liens attached only if the buyer was assuming them. (Doc. No. 27-1.) This lends credibility

to the FDIC’s allegation that Bacino and Jafari’s escrow instructions required Heritage to

obtain the FDIC’s approval of the short sale. (ATPC ¶ 20.) The FDIC also alleges that

1

Heritage had in its possession the release agreement/proposal letter with the conditions of

the short sale, which it collected and which was also provided by Bacino. (ATPC ¶¶ 21–22.) 

It’s true that Bacino and Jafari instructed Heritage to send $135,000 to the FDIC , and that 2

Summit limits an escrow company’s duties to the parties’ actual instructions, but that

instruction doesn’t complete the picture. So, Summit may be distinguishable from this case.

On the other side are the cases the FDIC cites for imposing a duty of care on

Heritage tries to argue that these instructions were rescinded when the escrow 1

instructions were amended on April 14, 2010 and September 9, 2011. (Reply. Br. at 6–7.) 

That is a stretch. The April 14, 2010 “amendment” was actually titled “Supplemental Escrow

Instructions,” and it even acknowledged that “the purchase contract and these supplemental

escrow instructions contain the entire agreement between Buyer and Seller.” (Uldall Decl.,

Ex. 2.) The “purchase contract,” however, is really just the “Residential Purchase Agreement

and Joint Escrow Instructions” that were originally executed on March 19. The addendum

that specifically requires the FDIC’s approval of the short sale even says, at the top, that it

is “hereby incorporated in and made a part of the Residential Purchase Agreement.” (Doc.

No. 27-1.) Likewise, the September 9, 2011 “amendment” begins with the statement, from

Bacino, “My previous instructions in the above numbered escrow are hereby modified –

supplemented in the following particularly only.” (Uldall Decl., Ex. 1.) The Court sees no

evidence in the April 14, 2010 or September 9, 2011 documents that Bacino and Jafari

intended for the March 19, 2010 joint escrow instructions and their addenda to be rescinded

entirely.

Heritage could do a better job of pointing directly to the evidence of this. In its reply 2

brief, it cites the so-called September 9, 2011 and April 14, 2010 “amendments” to the

escrow instructions, but it doesn’t point to the exact location of the directive to pay the FDIC

$135,000. (See Uldall Decl., Exs. 1, 2.) The Court sees a line item for a $135,000 payment

to Key Bank on the third page of the earlier document, and on the later document, executed

at the same time as the release agreement, that amount is reduced to $118,000. In its brief

accompanying the motion to dismiss, Heritage claims that “the FDIC acknowledges that Mr.

Bacino, a party to the Bacino-to-Jafari Escrow, instructed Heritage to pay the FDIC

$135,000.” (Mot. to Dismiss at 9.) But it then cites to a number of allegations in the FDIC’s

complaint that don’t say exactly that, for example, “The FDIC-R is informed and believes and

on that basis alleges that, prior to the close of escrow, Bacino signed a copy of the Proposal

Letter and provided it to Heritage.” (ATPC ¶ 22.)

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Heritage. They are Plaza Home Mort., Inc. v. N. Am. Title Co., Inc., 184 Cal.App.4th 130

(Cal. Ct. App. 2010), and Money Store Investment Corp. v. S. Cal. Bank, 98 Cal.App.4th

(Cal. Ct. App. 2002). In both cases, lenders who submitted “closing instructions” to an

escrow company, but weren’t themselves parties to the escrow, were allowed to pursue

claims against the escrow company when those instructions weren’t followed. As the court 3

in Money Store put it:

Unlike the new lender in Summit, the Money Store had a direct

contractual relationship with the [escrow company]. The

contract specified what [it] was to do. [The parties to the escrow]

authorized [the escrow company] to comply with those

directives. The Money Store’s instructions were at least

consistent with the [the parties’] original instructions . . . . 

Under these circumstances, the [escrow company’s] action—if

true as alleged—was morally blameworthy. It was foreseeable

the funds would be distributed contrary to the Money Store’s

instructions. And, there was a close connection between the

Bank’s action and the harm suffered. Money Store, 98

Cal.App.4th at 731.

Heritage argues that the cases are inapplicable because the lenders “funded the subject

transactions and provided instructions directly to escrow,” while the FDIC “did not fund the

Bacino-to-Jafari escrow” and “did not submit any instructions to Heritage in connection with

the escrow.” (Reply Br. at 8.) 

That’s true, descriptively. This facts of this case are perched somewhere between

those of Summit, in which the agreement the escrow company ignored was between two

non-parties to the escrow and not formally incorporated into the actual escrow instructions,

and Plaza Home and Money Store, in which the aggrieved parties weren’t parties to the

escrow but submitted specific instructions to the escrow company. This case would be on

all fours, or close to it, with Plaza Home and Money Store if the FDIC had itself transmitted

its conditions for the short sale to Heritage.

It’s worth noting that in both cases the plaintiff lenders asserted claims for breach 3

of contract, negligence, and equitable indemnity. Plaza Home, 184 Cal.App.4th at 134 n.4;

Money Store, 98 Cal.App.4th at 727. In Plaza Home the lender abandoned its negligence

and equitable indemnity claims, and the court’s ruling pertained only to a breach of contract

claim. Plaza Home, 184 Cal.App.4th at 134 n.4. In Money Store, the court addressed the

lender’s negligence claim, but relied on a discussion in Summit that addressed a statutory

duty of care under Cal. Civ. Code § 1714, which the FDIC doesn’t raise in this case. 

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With reasons to distinguish both Summit, and Plaza Home and Money Store, from the

facts of this case, the Court turns to Markowitz. For Heritage, Markowitz is really the case

establishing that it owed no duty of care to the FDIC. The facts are as follows. Markowitz

obtained a $200,000 line of credit from City National Bank, secured by a second deed of

trust on his home. But as a condition to the line of credit, the current holder of the second

deed of trust, the Kachlons, had to be paid off with the proceeds of the line of credit and their

deed reconveyed to City National. City National retained Fidelity as the escrow company,

and when the Kachlons delivered to Fidelity their payoff demand, an executed request for

reconveyance, and their original promissory note and deed of trust, Fidelity issued them a

check. Around this same time, City National sent a letter to Fidelity instructing it to record

the Kachlons’ reconveyance and its new deed of trust. Fidelity failed to do this, which

enabled the Kachlons to later initiate foreclosure proceedings against Markowitz. 

Following the same lead principles articulated in Summit, the court held that while

Markowitz had an interest in the escrow, he was not a party to it and had no meaningful

contact with Fidelity—and therefore couldn’t sue Fidelity on a breach of fiduciary duty or

negligence theory:

The defect in Donald [Markowitz’s] argument, however, is that

he was not a party to the escrow instructions on which he relies. 

Fidelity’s duties arising out of those instructions were defined,

and limited, by the terms of those instructions. Donald points

only to written instructions given to Fidelity by the Bank; he does

not allege that he gave Fidelity any written or oral instructions

regarding carrying out the escrow. As we shall explain, the duty

arising from the instruction authorizing recordation of the Bank’s

deed of trust “showing . . . in the second trust deed position” was

owed to the Bank, not to Donald.

Markowitz is certainly significant, and a bad case for the FDIC, insofar as it recognized that

just because a party is injured by an escrow holder’s failure to follow instructions doesn’t

mean it can bring a cause of action. Heritage is right to summarize the case as holding that

escrow holders don’t owe duties of care to non-parties “even when: the escrow holder

breached the instructions given by the actual parties; the non-party had a significant financial

stake in the transaction; and the non-party was damaged by the escrow holder’s breach of

the parties’ instructions.” (Mot. to Dismiss at 8.) And, Heritage has a point in comparing

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Bacino and Jafari’s instructions to Heritage in this case to City National’s instructions to

Fidelity in Markowitz to: The FDIC, like Markowitz, was an outsider who didn’t stand in any

relationship with the escrow holder. 

But there are still reasons to distinguish the case. First, as the FDIC points out in its

opposition brief, the case went all the way to trial, where the court granted Fidelity’s motion

for a nonsuit. That cuts against dismissing a claim at the motion to dismiss phase, as

Heritage is attempting here. Second, it was significant to the court in Markowitz that “the

language of the instructions did not expressly evince an intent to benefit [Markowitz].” 

Markowitz, 142 Cal.App.4th at 527. That’s true. City National mentioned Markowitz in its

letter to Fidelity, so Fidelity presumably was on notice that he was the homeowner. But as

the court recognized, the escrow was opened for City National’s benefit, and Fidelity “had

no reason to know or expect that Donald was looking to Fidelity for protection as to facts

learned by it.” Id. at 528. In this case, by contrast, the escrow instructions—specifically the

addendum signed on March 19, 2010—indicated that the purchase agreement was subject

to the FDIC’s approval. Third, in Markowitz, “[t]here were no instructions submitted by him,

or to which he was a signatory, with which Fidelity was obligated to comply, or which it was

obligated to carry out with reasonable care in the exercise of ordinary skill and diligence.” 

Id. Again, there is a difference in this case. The FDIC alleges that Heritage had the release

agreement/proposal letter in its possession, to which the FDIC was a signatory and which

may have given Heritage reason to believe the FDIC was “relying on it for protection.” Id.

Of course, some of these principles may also have commanded a different result in Summit,

in which an escrow company knew that a party it paid had assigned its rights to another

party.

Having considered the parties briefs and the relevant caselaw, the Court concludes

that Heritage ultimately has the better argument here. It’s true that an escrow holder must

follow the parties’ instructions, and that the instructions in this case (along with the release

agreement) indicated that the FDIC would only accept $135,000 to reconvey the deed of

trust on Bacino’s home if certain conditions were met. At the same time, the latest set of

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instructions Heritage received, from Bacino on September 9, 2011, indicated that it was

“authorized and instructed to debit the Buyer’s account” for $135,000 for the FDIC. (Uldall

Decl., Ex. 1.) Heritage can’t be expected to resolve any apparent inconsistencies between

the parties’ instructions and the interests of an outside party. See TSF 53419, LLC v.

Fidelity Nat’l Title Ins. Co., 2013 WL 1750981 at (Cal. Ct. App. Apr. 24, 2013) (“Fidelity was

faced with an ostensible conflict between the escrow instructions of the parties to the escrow

on the one hand, and a claim by a third party, on the other. By faithfully following the

instructions of the parties to the escrow, Fidelity satisfied its obligations as an escrow holder

and cannot be liable to third parties, such as TSF, for doing so.”). The court in TSF explicitly

held that mere knowledge of a third party’s interest in an escrow or objection to the parties’

instructions doesn’t give rise to a duty of care. Id. 

Also, even the cases the FDIC cites are easily distinguishable, because the interested

party in those cases (the lenders) had submitted instructions to the escrow company such

that they could be considered parties to the escrow. Even if the cases Heritage

cites—Summit and Markowitz—are also distinguishable on various small points, as the Court

has shown, the overarching message in those cases is that an escrow holder owes a duty

of care only to actual parties to the escrow, not third parties with an interest in the escrow. 

Moreover, only parties that actually submit instructions to escrow can rightfully be considered

parties to it. See Logan v. Chicago Title Ins. Co., 2013 WL 1080300 at *3 (Cal. Ct. App.

Mar. 15, 2013) (“Here, of course, Southstar was not a stranger to the escrow, but submitted

instructions to escrow and was a party to the escrow . . . .”). The FDIC argues that “an

obligation was owed to the FDIC based on the terms of the JEI and the Proposal Letter, and

the that the FDIC was therefore a party to the escrow.” (Opp’n Br. at 21.) But it offers no

support for the proposition that an entity is a party to an escrow simply because the escrow

holder knows that it exists and has an interest in the escrow proceeds. The Court is given

some pause by the statement quoted approvingly in Summit that “an agent’s obligation to

disburse proceeds held by the agent for its principal is coextensive with the principal’s

obligation to disburse those proceeds to the assignee,” but that’s seemingly at odds with

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another statement in Summit, itself often quoted, that an escrow holder “has no general duty

to police the affairs of its depositors; rather, an escrow holder’s obligations are limited to

faithful compliance with the depositors instructions.” Summit, 27 Cal.4th at 711 (internal

quotations and citation omitted). 

The Court would see this case very differently if the FDIC reached out to Heritage to

insist that it be consulted before releasing its lien for a $135,000 payout. Then, this case

would be in line with Plaza Home, Money Store, and others, for example Am. Diversified

Props., Inc. v. Valleywide Escrow, Inc., 2008 WL 4060942 (Cal. Ct. App. Sept. 3, 2008). In

this latter case, two real estate brokers agreed to split the commissions in a property deal,

and after a dispute arose between them the aggrieved broker informed the escrow company

of it and insisted that it hold all commissions. The escrow company paid the commissions

anyway, before the dispute was resolved. The court held that the aggrieved broker could

pursue a claim against the escrow company, but only because it had the right to issue

instructions to the escrow holder and actually did so:

We do not find that, as a general matter, a broker has standing

to assert that the escrow holder has failed to follow instructions

and thus breached its contract with its principals, the seller and

buyer. We confine our holding to the conclusion that, for the

purposes of testing the legal sufficiency of the complaint on a

demurrer, ADP’s interpretation is reasonable that the purchase

agreement and the escrow instructions gave the brokers the

right to issue instructions to respondent regarding the

disbursement of brokerage fees. Id. at *4.

The FDIC’s rebuttal, of course, is that Heritage did have instructions from it in the form of the

release agreement/proposal letter, but it’s a stretch to call those instructions from the FDIC

to Heritage, or some kind of agreement that bound Heritage to the FDIC. The FDIC’s own

allegations are that Heritage “collected” the proposal letter, and also that Bacino provided

Heritage with a copy. (ATPC ¶¶ 21–22.) There is no allegation that the FDIC gave any

instructions to Heritage such that Heritage “had . . . reason to know or expect that [the FDIC]

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was looking to [Heritage] for protection as to facts learned by it.” Markowitz, 142 4

Cal.App.4th at 231. In fact, in First AFG Financial Corp. v. Security Union Title Ins. Co., the

court held that “payoff demand” letters from a lender that were in an escrow company’s

possession, but that weren’t addressed to it, didn’t bind the escrow company in any way. 

2010 WL 4975501 at *7 (Cal. Ct. App. Dec. 8, 2010). Similarly in this case, the FDIC’s

proposal letter was addressed to Bacino and offered terms to Bacino for the release of the

FDIC’s lien. Just because it was in Heritage’s hands doesn’t mean it can be construed as

instructions from the FDIC to Heritage. 

For all of the above reasons, the Court finds that Heritage owed the FDIC no duty of

care on the facts alleged, and that the FDIC’s breach of fiduciary duty and negligence claims

therefore fail. To the extent the Court’s finding turns on the FDIC not being a party to the

escrow, it wouldn’t reach a different finding on the theory that the FDIC was an explicit and

intended third party beneficiary of the Bacino-Jafari escrow. See Markowitz, 142 Cal.App.4th

at 527; Gateway Bank v. Ticor Title Co. of Cal., 2009 WL 4190455 at *15–17 (Cal. Ct. App.

2009). Admittedly, to a certain extent the analysis above traverses both theories without

clearly distinguishing between them, but so does the caselaw and the parties’ respective

briefs. The Court should also note that in Money Store, the FDIC’s own case, the court

allowed a breach of contract claim but recognized that a related tort claim was legally

duplicative: “As alleged, the Money Store’s cause of action for negligence would be subject

to summary adjudication because it does not state a negligence cause of action apart from

its contract cause of action.” Money Store, 98 Cal.App.4th at 732. That is yet another

problem with the FDIC’s tort claims for breach of fiduciary duty and negligence. 

B. Breach of Contract

This brings the Court to the FDIC’s claim for breach of contract. The essence of this

claim is that the FDIC was an intended beneficiary of the sale of Bacino’s home—and an

intended beneficiary in particular of the proposal letter and joint escrow instructions—and

The FDIC insists in its opposition brief that it is entitled to discovery on this issue, 4

but the FDIC can’t possibly need discovery to determine whether it, the FDIC, contacted

Heritage to flag the conditions in the proposal letter. (Opp’n Br. at 12, 19 n.38.)

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that Heritage breached these “contracts” by disbursing to the FDIC $135,000 without

checking with it first to make sure the amount was right and the FDIC’s conditions for

accepting that amount were satisfied. (ATPC ¶¶ 42–43.)

From the FDIC’s perspective, this is really where Plaza Home and Money Store have

traction, even though it also relied on those cases to argue that Heritage owed it a duty of

care and could be liable for breach of fiduciary duty and negligence. The problem for the

FDIC is that the cases are easily distinguishable on the facts from this one. 

A number of things happened in Money Store that the FDIC hasn’t alleged—and likely

can’t allege—happened in this case. First, the escrow instructions specifically authorized

the escrow holder to comply with the plaintiff lender’s own instructions. Money Store, 98

Cal.App.4th at 726. Second, as the Court has already explained, the lender actually

submitted closing instructions to the escrow holder. Id. Third, the escrow holder formally

acknowledged that it had received the lender’s instructions. Id. Each of these facts informed

the court’s decision that the lender had a potential breach of contract claim. For example,

the lender’s instructions, and the escrow’s holder’s acknowledged receipt of them, potentially

established the essential element of mutual consent:

The Money Store agreed to provide the loan funds to the Bank

to facilitate the sale, which was the subject of the escrow, on

condition the money would be distributed in a certain manner

and the Money Store would be notified before any changes were

made to the escrow instructions. The Bank acknowledged

acceptance of the conditions when its employee signed the

acknowledgment and acceptance. Id. at 728.

These same facts also potentially established the essential element of consideration.

In return for the Bank’s promises to disburse the funds as the

Money Store designated, not to deviate from the Money Store’s

instructions except at its own risk, and to provide an estimated

closing statement for the Money Store’s review and approval,

the Money Store deposited the loan funds with the Bank. This

was adequate consideration. Id. at 729.

The FDIC can’t allege facts close to these. 

By its own account, the instructions in the joint escrow instructions to obtain the

FDIC’s approval came from Bacino and Jafari, not from the FDIC: “The FDIC-R is further

informed and believes that Bacino and Jafari submitted joint escrow instructions to Heritage

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which required Heritage, among things, to obtain the appropriate releases and approvals

from the FDIC-R to allow the Property to be sold free and clear of all liens and

encumbrances.” (ATPC ¶ 20.) And while the FDIC was a party to the release

agreement/proposal letter, there is no allegation that the FDIC provided it to Heritage, to be

clear that its receipt of $135,000 was conditional. To the contrary, the allegation is that

Heritage “collected” the document, and that Bacino provided it to Heritage. (ATPC ¶¶

21–22.) Absent the allegation of any meaningful content between the FDIC and Heritage,

it is hard to see how the joint escrow instructions and proposal letter could give rise to the

kind of mutual consent and consideration that the court found potentially existed in Money

Store. Indeed, there is a fundamental disconnect between the FDIC’s argument that it was

a third-party beneficiary of the Bacino-Jafari escrow and its reliance on Money Store, which

isn’t a third-party beneficiary case. The plaintiff lender’s argument in Money Store wasn’t

that it was the intended beneficiary of the escrow, but that it had reached out directly to the

escrow holder and entered into a contractual relationship with it. 

Plaza Home is as easy to distinguish as Money Store. The case involved the sale of

a home; Plaza Home was the lender and North American Title was the escrow company. 

Plaza Home submitted closing instructions to North American, which the parties agreed

constituted a contract. Plaza Home, 184 Cal.App.4th at 133. Not only were those

instructions received by North American, they were signed by a North American

representative. Id. at 137. The instructions laid out the terms of Plaza’s loan, and they were

very clear that all fees paid out had to be disclosed on a standard HUD-1 form prepared by

North American for Plaza:

[T]he closing instructions at issue here set forth the terms and

conditions of closing the loans funded by Plaza, and set out the

duties and responsibilities of the settling agent, North American,

in connection with that closing. The closing instructions required

North American to ensure that the loan documents were signed

by the borrower and returned to Plaza before disbursement of

the loan proceeds, and to disclose the fees and costs of the

loans (e.g., broker, processing and other administrative fees),

any payments outside of, or credits in connection with, the loans,

and details of the loans themselves . . . . Id. at 136.

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In this case, again, the FDIC doesn’t allege that it provided any closing instructions to directly

to Heritage that are identical to the closing instructions provided by the lender in Plaza

Home. Instead, it tries to argue that the joint escrow instructions (which appear to have been

executed by Bacino and Jafari only), and the release agreement/proposal letter were their

functional equivalent—and amounted to a contract between the FDIC and Heritage. That

is too much of a stretch. Even Plaza Home recognized the difference between “escrow

instructions, which constitute an agreement between the escrow company, on the one hand,

and the buyer and seller, on the other hand,” and actual closing instructions, which “set forth 

the terms and conditions of closing the loans . . . and set out the duties and responsibilities

of the settling agent . . . in connection with that closing.” Id. at 136. The FDIC wants to

elevate the escrow instructions from Bacino and Jafari into closing instructions from the

FDIC, and the Plaza Home opinion couldn’t be more clear that they are legally distinctive.

Likewise, the FDIC tries to argue that “Heritage’s acceptance of the Proposal Letter

obligated it to ensure that it was accurate and that the conditions precedent had been

satisfied,” but that runs into the same problem. (Opp’n Br. at 19.) As the Court has

repeatedly observed, the proposal letter, even according to the FDIC, was never presented

to Heritage by the FDIC in such a way that it can reasonably be construed as “instructions”

from the FDIC, or as the basis of some sort of contractual relationship. The FDIC’s own

complaint alleges that the documents “were submitted to Heritage by Bacino and Jafari in

connection with the transaction.” (ATPC ¶ 43.) The FDIC insists in its opposition brief that

Heritage received and accepted the terms of the proposal letter just by disbursing $135,000

to the FDIC, but that gives the mistaken representation that, comparable to the facts of

Money Store and Plaza Home, the document was produced by the FDIC as some sort of

separate escrow instruction and consciously accepted as such by Heritage. (See Opp’n Br.

at 13–14.) Indeed, when the FDIC filed this case it didn’t even know what Heritage’s escrow

instructions were, which makes it extremely difficult to claim that a contractual relationship

existed between the FDIC and Heritage. (ATPC ¶¶ 20, 44.)

The only direct correspondence from the FDIC to Heritage that the Court can locate

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in the record is the September 27, 2011 letter in which it informed Heritage that the

conditions of its accepting the short sale hadn’t been satisfied and that it would be returning

the $135,000. (Case No. 12-CV-1971, Castillo Decl., Ex. J.) But that letter isn’t the basis

of the FDIC’s claims against Heritage. The FDIC isn’t claiming in this case that when it

refused the $135,000 Heritage failed to act. It is arguing that the damage was done prior to

that, when Heritage disbursed $135,000 to the FDIC, closed escrow, and Jafari’s lender

recorded a deed of trust on the property that conflicts with the FDIC’s–all without checking

with the FDIC first. (ATPC ¶¶ 30–34.) 

Because Money Store and Plaza Home don’t carry the weight the FDIC needs them

to, the Court turns, finally, to general principles of contract law on which the FDIC leans to 

argue that it stood in a contractual relationship with Heritage. Those principles are few and

undisputed. First, a third party can enforce a contract of which it is expressly an intended

beneficiary. Cal. Civ. Code § 1559; Cal. Emergency Physicians Med. Group v. PacifiCare

of Cal., 111 Cal.App.4th 1127, 1138 (Cal. Ct. App. 2003). The word “expressly” matters. 

A party that is only incidentally or remotely benefitted by a contract can’t enforce it. Id. at

1137. Rather, it must clearly appear that the third party is a beneficiary of the contract;

“expressly” means “in direct or unmistakable terms; explicitly; definitely; directly.” Schauer

v. Mandarin Gems of Cal., Inc., 125 Cal.App.4th 949, 958–59 (Cal. Ct. App. 2005) (citations

omitted). “It is not necessary that an express beneficiary be specifically identified in the

contract; he or she may enforce it if he or she is a member of a class for whose benefit the

contract was created.” Outdoor Servs., Inc. v. Pabagold, Inc., 185 Cal.App.3d 676, 681 (Cal.

Ct. App. 1986). 

There are two “contracts” of which the FDIC claims to be an intended beneficiary. 

One is the release agreement/proposal letter, but as Heritage points out, the FDIC was a

party to that, so it is not coherent to assert a breach based on being a third party beneficiary. 

The other document is the joint escrowinstructions, including the addendum, which indicated

that certain conditions had to met to the FDIC’s satisfaction before it would reconvey its deed

of trust for $135,000. The FDIC seizes on the Second Restatement’s definition of an

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intended beneficiary, quoted in Outdoor Servs., that “a beneficiary of a promise is an

intended beneficiary if recognition of a right to performance in the beneficiary is appropriate

to effectuate the intention of the parties and . . . the performance of the promise will satisfy

an obligation of the promisee to pay money to the beneficiary.” Id. at 684. As the FDIC sees

it, the statement in the addendum to the joint escrow instructions that “[t]his purchase

agreement is subject to the approvals of . . . the FDIC” was a promise from Bacino to Jafari

to obtain the FDIC’s approval. Moreover, recognizing the FDIC’s right to insist on that

approval is necessary to effectuate the intent of Bacino to convey his home to Jafari free and

clear of any liens. The Court disagrees. 

First, the real promisor in this case, even according to the FDIC, is Bacino. Heritage

may have accepted the joint escrow instructions, but it’s simply inaccurate to spin this

acceptance as Heritage itself making a promise to Jafari, or to Bacino, to obtain the FDIC’s

approval before disbursing $135,000 to it. So, even if the FDIC is an intended beneficiary

of the Bacino-Jafari escrow, which is itself an agreement with Heritage, any breach of

contract claim should probably be asserted against Bacino. Second, the FDIC identifies no

case in which an escrow company was found potentially liable under a third party beneficiary

theory for improperly heeding the parties’ own terms. Third, the one case it does cite,

Outdoor Servs., is easily distinguishable. In that case, Pabagold hired a company called

Mediasmith to run an advertising campaign, and authorized it to enter into contracts with

third party advertisers. Mediasmith then retained Outdoor Services to buy billboard space,

and when Pabagold failed to reimburse Mediasmith, Outdoor Services went after Pabagold

as a third party beneficiary of its contract with Mediasmith. This case doesn’t map onto

those facts at all. For at least these reasons, the Court finds that an intended beneficiary

theory of liability is simply inapt in this case.

V. Conclusion

For the reasons given above, Heritage’s motion to dismiss the FDIC’s breach of

fiduciary duty, negligence, and breach of contract claims is GRANTED. Those claims are

DISMISSED WITH PREJUDICE. It follows that the FDIC’s claims for implied contractual

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indemnity and declaratory relief also fail, and they are DISMISSED WITH PREJUDICE. The

Court certainly understands the FDIC’s frustration in this case, especially considering its

allegation that First American, which is driving this litigation, has some sort of professional

relationship with Heritage. But it may continue to press its claims against Bacino, and it may

certainly raise all of the arguments it raises with respect to this motion in defending against

Jafari’s claims against it. The Court’s finding here is narrow: the FDIC cannot press the

asserted claims against Heritage for its handing of the Bacino-Jafari escrow.

IT IS SO ORDERED.

DATED: March 4, 2014

HONORABLE LARRY ALAN BURNS

United States District Judge

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