Davis v. Leal

• Decision Date: 18 February 1999
• Docket Number: No. CIV.S-97-2432 DFL GGH.,CIV.S-97-2432 DFL GGH.
• Citation: 43 F.Supp.2d 1102
• Parties: Henry E. DAVIS, et al., Plaintiffs, v. Robert LEAL, et al., Defendants.
• Court: U.S. District Court — Eastern District of California

43 F.Supp.2d 1102

Henry E. DAVIS, et al., Plaintiffs, v. Robert LEAL, et al., Defendants.

No. CIV.S-97-2432 DFL GGH.

United States District Court, E.D. California.

February 18, 1999.

COPYRIGHT MATERIAL OMITTED

Joseph E. Maloney, U.S. Atty., Sacramento, CA, for Henry E. Davis.

John M. Brown, Mullin Hoard and Brown, Amarillo, TX, for Federal Deposit Ins. Corp.

Jared G. Carter, Rawles Hinkle Carter Behnke and Oglesby, Ukiah, CA, for Jack L. Cox, Raynette Cox.

Stanley A. Coolidge, Jr., Law Offices of Stanley A. Coolidge, Yuba City, CA, for Robert Leal.

ORDER

HOLLOWS, United States Magistrate Judge.

Introduction

Plaintiffs, Davis and F.D.I.C. (Federal Deposit Insurance Corporation) seek to compel from defendant Leal voluminous discovery including tax return information and general business records. Much of the outcome of the motion will depend on whose privilege law is applied-federal or state. To arrive at the proper determination, it is necessary to understand the nature of the claims brought, the law that will supply the "rule of decision" on the merits, and choice of law determination in actions where the F.D.I.C. is a party.

Background Facts

The complaint has survived a motion to dismiss; therefore, the truth of the factual assertions are accepted for purposes of this discovery motion.¹

Defendant Leal was in the business of managing large tracts of undeveloped real estate, and one of these tracts involved Barbican Farms, owner of a 642 acre tract in Yuba County. Thomas Nevis, who had previously been associated in business deals with Leal, approached Leal and informed him that he had located prospective buyers (the Smith Group) for the Barbican Farms property. In a transaction, the precise details of which need not be discussed here,² Leal made a deal with Barbican Farms to purchase the property himself (through Goshute Corp, a nominee and alter ego of Nevis) for $4,750,000 so that Leal could then sell the property to the Smith Group for $8,444,800. Although Leal never appeared in the chain of title, Leal ultimately had the Smith Group note and deed of trust assigned to the Leal Family Trust ("Leal") as payee on the Smith note (hereafter the "Leal Note"). In brief, after a "wash" downpayment scenario, Leal held a note of much greater value than the note held by Barbican Farms.

Leal promised Nevis a "finder's fee" in the amount of $750,000.00 for Nevis supplying the Smith Group buyers, and for Nevis' help in structuring the transactions. The finder's fee was to be split-one half to a principal of the Smith Group, and one half to Nevis, structured as a benefit to Nevis' son Richard. Leal then signed the finder's fee agreement with Richard concerning the one-half of the finder's fee which contained a "foreclosure provision." "If payments are not made on the All Inclusive Note [Smith Group Note], then Leal will not be obligated to pay Nevis per the terms of this Agreement. Likewise should the All Inclusive Note be foreclosed upon, then this Agreement shall become null and void." The finder's fee was supposed to be totally paid by August 1, 1993. On May 7, 1993, the provision for total payment by August 1993 was deleted by mutual, written modification.³

Soon after the initial transactions were completed, the Smith Group indicated that it could not meet its obligations under the note that had been assigned to Leal. Smith Group thereupon conveyed its interest in Barbican Farms to KCO Nordic Land Partners. After making some initial payments on the Leal Note, Nordic also became unable to fulfill its obligations, and in an agreement made on the same date as the finder's fee modification, May 7, 1993, KCO was given more time to make good its financial promises. Nevertheless, KCO soon again found itself unable to meet its obligations, and Leal initiated foreclosure action.

In order to forestall foreclosure, Leal then structured an arrangement with the principal partner of KCO (Karlshoej) to further extend the due dates on the Leal Note. The finder's fee agreement was modified a second time. Nevis, through his son Richard, (and Cox) agreed:

This will also confirm the agreement of the parties that a transfer or conveyance of said Note, in whole or in part, shall not accelerate the payment obligation (finder's fee) and in the event of foreclosure of the Deed of Trust as a result of default ... there shall be no obligation whatsoever to pay the finder's fee.

Plaintiffs assert that Leal represented to Nevis and Cox that the non-acceleration clause was needed in order to allow Leal some flexibility in utilizing the Leal Note as security for another loan, or to transfer benefits to his family members. Plaintiffs also claim that Nevis and Cox were being "set up" for a deprivation of the finder's fee by virtue of this latest foreclosure clause. The true meaning and intent of this clause generates some of the requested discovery herein.

It should not be surprising, at this point, that further trouble in payment of the Leal Note occurred, and Leal then entered into an agreement to sell the Leal Note to Masana AG, a Liechtenstein corporation (whose only assets consisted of the Leal Note). Shortly after Leal sold the note, Masana foreclosed on the property, and Leal reaped a good profit, although not as much as he had initially envisioned on first sale of Barbican Farms. After Masana foreclosed, Nevis demanded that payment be made on the finder's fee.

Meanwhile, Nevis was being prosecuted civilly and criminally by the United States for activities that need not be detailed here, but which in some fashion involved the F.D.I.C. In pertinent part, the district court, Eastern District of California, appointed a receiver (plaintiff Davis) for Nevis' assets, and subsequently, all right title and interest in the Nevis finder's fee was awarded to the F.D.I.C. The F.D.I.C. in turn agreed with Davis that he would receive 4% of the finder's fee recovery. Meanwhile, Cox claimed that he held the superior interest in the finder's fee. The three plaintiffs, nevertheless, agreed to sort out their ownership interests after recovery from Leal.

Plaintiffs have sued Leal under three state law theories-breach of contract, unjust enrichment, and breach of implied covenant of good faith and fair dealing. For each of the contractual theories, plaintiffs seek the remainder owed on Nevis' half of the finder's fee — $375,000.00 plus interest. For the unjust enrichment claim, plaintiffs seek "at least" the $375,000.00.

The Discovery Motion

Even in its abridged, simplified form, this case presents a potential discovery juggernaut. Plaintiffs have sought information from Leal in interrogatories and requests for production concerning: Leal's tax records, Leal bank and business records, prior business dealings between Nevis and Leal, all facts and circumstances of the sale of the Barbican property, entities/individuals involved in the Barbican et al. transactions (including the Leal Family Trust), prior real estate management services unrelated to Barbican since 1985, including identification of individuals with whom business was conducted and agreements made, prior lawsuits, and more.⁴ Plaintiffs contend that Leal's state of mind (bad faith) in making the second finder's fee modification is at issue, and that it is necessary to probe his past conduct as well as all facets of the Barbican et al. transactions to establish that state of mind. Moreover, it is necessary to identify all individuals with whom Leal had business contact, regardless of their relationship to the pleaded facts, who could speak to that state of mind. Plaintiffs also contend that parol evidence will be permitted to explain the facts and circumstances and intent surrounding execution of the finder's fee modification.

Leal, on the other hand, asserts various privileges under state law — tax records, privacy and trade secrets. He also contests the broad parameters of plaintiffs' discovery requests in that California law narrowly defines what is at issue in the claims made in the complaint, and "state of mind" or "bad faith" are not pertinent to what are contractual claims. Plaintiffs, Leal contends, are essentially entitled to discovery related only to the transaction at issue, i.e., the modification of the finder's fee agreement just prior to the Masana foreclosure.

Choice of Law

Plaintiffs contend that this court has "original" jurisdiction over the [common law] claims of the receiver and F.D.I.C., and that therefore, this is a "federal question" case in which federal common law applies, including federal privilege law. With respect to application of federal law, in the words of a unanimous Supreme Court, plaintiffs are "so plainly wrong." O'Melveny & Myers v. F.D.I.C., 512 U.S. 79, 83, 114 S.Ct. 2048, 2052, 129 L.Ed.2d 67 (1994). Because application of the correct law (state law) is very important to the discovery motion in many particulars, the court expends some discussion on this issue.

Although the court has original jurisdiction over the F.D.I.C. on account of its federal agency status, 28 U.S.C. § 1345, and that for jurisdictional purposes, all claims involving the F.D.I.C. in any capacity, with exceptions not pertinent here, "arise under the laws of the United States," 12 U.S.C. § 1819(b)(2), it is not true therefore, that federal law must be applied for all claims asserted by the F.D.I.C. in litigation.

This Court has recently discussed what one might call "federal common law" in the strictest sense, i.e., a rule of decision that amounts, not simply to an interpretation of a federal statute or a properly promulgated administrative rule, but, rather, to the judicial "creation" of a special federal rule of decision. See Texas Industries, Inc. v. Radcliff Materials, Inc., 451 U.S. 630, 640-643, 101 S.Ct. 2061, 2066-2068, 68 L.Ed.2d 500 (1981). The Court has said that "cases in which judicial creation of a special federal rule would be justified ... are ... ...