Opinion
CV-21-01889-PHX-DWL
07-24-2024
Equity Recovery Specialists LLC, Plaintiff, v. Select Portfolio Servicing Incorporated, et al., Defendants.
ORDER
In December 2020, Equity Recovery Specialists, LLC (“Plaintiff') bought a parcel of real estate for around $16,000 at a public auction. The previous owner, who had taken out a $160,000 home loan on the parcel that was secured by a deed of trust (“DOT”) later assigned to Deutsche Bank National Trust Company (“Deutsche Bank”), stopped making mortgage payments or paying homeowners' association (“HOA”) fees in 2012.
In March 2021, Plaintiff sent a letter and $10,000 check to Deutsche Bank's loan servicer, Select Portfolio Servicing, Inc. (“SPS”) (together with Deutsche Bank, “Defendants”). Among other things, the letter stated: “[Plaintiff] would prefer to reach an amicable resolution as to all issues arising out of or relating to the Loan as opposed to litigating these contested issues. Enclosed herewith is a check for $10,000 offered in accord and satisfaction for you to release the DOT. See A.R.S. § 47-3311. Depositing the enclosed check will be deemed an acceptance of this offer.” (Doc. 11 at 56, emphasis in original.) SPS, in turn, endorsed and deposited the check but informed Plaintiff that it had applied the proceeds toward the outstanding loan balance. Nevertheless, Plaintiff interpreted SPS's conduct as proof that the offer in the March 2021 letter had been accepted (and that the property was no longer encumbered by the DOT). Afterward, Plaintiff took out a hard-money loan to develop the property, engaged in renovations, and eventually sold the property to a third-party buyer and guaranteed the sale with a warranty deed. Defendants have since refused to release the DOT, arguing among other things that SPS's act of cashing the $10,000 check did not serve as acceptance of the offer in the March 2021 letter. These developments provide the backdrop for this case, in which Plaintiff asserts contract claims and seeks a judicial determination that Defendants must release the DOT.
Now pending before the Court is Defendants' successive motion for summary judgment, which is limited to whether Plaintiff's contract claims are preempted by A.R.S. § 47-3311, which is Arizona's “accord and satisfaction” statute. (Doc. 61.) For the following reasons, the motion is denied.
BACKGROUND
I. Relevant Factual Background
In 2006, non-party Brian Schmid (“Schmid”) bought a home in Maricopa, Arizona, which is located in Pinal County (the “Property”). (Doc. 47-1.) Schmid also executed a note that was secured by a first-position DOT. (Doc. 47-2.) The note was for $160,000. (Id. at 1.) The DOT was recorded in October 2006 in the Pinal County Recorder's Office. (Doc. 47-4.) The current beneficiary of the DOT, following an assignment, is Deutsche Bank. (Doc. 11 at 37.)
In or around August 2012, Schmid abandoned the Property and stopped making mortgage and HOA fee payments. (Doc. 49-1 at 4 ¶ 11.) Neither Defendants nor their predecessor initiated foreclosure proceedings at that time. (Id. at 4 ¶ 14.)
On November 7, 2017, the HOA filed a lawsuit against Schmid in Pinal County Superior Court for unpaid assessments, fines, fees, and other monies owed to the HOA. Acacia Crossings Homeowners Ass'n v. Schmid, No. CV-2017-01-1999 (Pinal Cnty. Super. Ct. Nov. 7, 2017).
The Court takes judicial notice of the complaint and judgment. Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 988, 999 (9th Cir. 2018) (“[A] court may take judicial notice of matters of public record ....”).
On December 1, 2018, SPS took over as servicer of the underlying loan secured by the DOT. (Doc. 49-1 at 5 ¶ 16.)
On June 8, 2020, the HOA obtained a default judgment against Schmid. (Doc. 48 at 24.)
On September 23, 2020, the court in the HOA lawsuit ordered that the Property be sold by sheriff's sale pursuant to the default judgment. (Id. See also Acacia Crossings Homeowners Ass'n v. Schmid, No. CV-2017-01-1999 (Pinal Cnty. Super. Ct. June 8, 2020).)
On December 31, 2020, the Property was sold at a public auction conducted by the Pinal County Sheriff. (Doc. 11 at 44-45, 48.) Plaintiff purchased the Property for $16,655.54. (Id.)
After the sale, Steve Villarreal, Plaintiff's manager, contacted Schmid for additional information related to “the DOT and underlying loan” and learned that SPS “is acting as the loan servicer for the underlying loan secured by the DOT.” (Doc. 48 at 24.)
On March 22, 2021, Plaintiff sent a letter to SPS. (Doc. 11 at 55-56.) The caption of this letter included the phrases “NOTICE: DEBT BARRED BY STATUTE OF LIMITATIONS,” “DEMAND: RELEASE DEED OF TRUST,” and “ACCORD AND SATISFACTION.” (Id. at 55.) The letter in relevant part provided that:
[Plaintiff] would prefer to reach an amicable resolution as to all issues arising out of or relating to the Loan as opposed to litigating these contested issues.
Enclosed herewith is a check for $10,000 offered in accord and satisfaction for you to release the DOT. See A.R.S. § 47-3311. Depositing the enclosed check will be deemed an acceptance of this offer. [Plaintiff] takes no position with respect to any issues by and between Mr. Schmid and SPS.
Should you reject this offer, please consider this letter as [Plaintiff's] formal debt dispute pursuant to the FDCPA and request for debt verification. Please include the Loan's full payment history as well as any/all communications sent by SPS (or its predecessor(s) in interest) since January 1, 2009, for debt acceleration evaluation purposes.(Id. at 56, emphasis in original.) Enclosed with the letter was a $10,000 check made out to SPS, the Sheriff's Certificate Upon Sale, and a document titled “Authorization for Release of Information.” (Id. at 56, 58.) The “For” line of the check stated: “For accord & satisfaction 44916 W. Gavilan Dr. Maricopa 85239 Loan: 0023278708.” (Id. at 58.)
On March 31, 2021, SPS mailed a letter to Schmid informing him that “SPS recently received a check sent to a non-payment address for SPS. This payment has been processed and credited to the account. In order to ensure all future payments are applied as efficiently as possible, please send all future payments to the payment address below.” (Doc. 49-1 at 149.)
On April 5, 2021, SPS mailed a letter to Plaintiff's counsel. (Id. at 151.) In relevant part, the letter stated: “SPS received your recent inquiry(ies) on 03/31/2021. We will review your request(s) and route to the appropriate department for handling. If a response is required, one will be provided to you within 30 days from the date we received your inquiry(ies).” (Id.)
That same day, SPS sent a separate letter to Plaintiff's counsel informing him that “Deutsche Bank National Trust Company” is the trustee and owner of the account and that “SPS is the mortgage servicer of the account.” (Id. at 153.)
On April 12, 2021, SPS endorsed and deposited the $10,000 check. (Doc. 11 at 60; Doc. 31 at 6 ¶ 48 [“Defendants admit only that SPS endorsed and deposited the check. SPS denies that it did so on April 14, 2021.”].)
On April 30, 2021, SPS sent another letter to Plaintiff's counsel. (Doc. 49-1 at 15557.) In relevant part, the letter stated that SPS “service[s] the account according to the terms of the InterestFirst Note and Deed of Trust.” (Id. at 156.) The letter concluded that “[a]s of the date of this letter, the account is due for June 1, 2013.” (Id.) Two documents were attached to the letter: (1) the “InterestFirst Note and Deed of Trust” and (2) the “SPS Transaction History and the SunTrust Mortgage Customer Account Activity Statement.” (Id.)
On July 22, 2021, Plaintiff (through Plaintiff's counsel) sent another letter to SPS. (Doc. 11 at 62-63.) The caption of this letter included the phrases “NOTICE: DEBT SETTLED VIA ACCORD AND SATISFACTION” and “DEMAND: RELEASE DEED OF TRUST.” (Id. at 62, emphasis omitted.) The letter provided, in relevant part, that the March 2021 letter “tendered an instrument as full satisfaction of the debt . . . pursuant to A.R.S. § 47-3311.... [Y]our deposit of [Plaintiff's] check constituted an acceptance of full satisfaction of the debt pursuant to A.R.S. § 47-3311.... [P]ursuant to A.R.S. § 47-3311(C)(2), SPS failed to tender the $10,000 back to [Plaintiff] thus the deed of trust must be released . . . no later than August 25, 2021.” (Id. at 62-63.)
To date, SPS has not returned the $10,000. (Doc. 31 at 7 ¶ 52 [“Defendants admit that SPS did not record a lien release, provide a release to Plaintiff's counsel, or return the $10,000.00 paid to SPS via the Check prior to the date of the filing of the [first amended complaint].”].)
On November 17, 2021, Plaintiff conveyed title to the Property by warranty deed to a non-party buyer for $322,000. (Doc. 11 at 51-53; Doc. 48 at 24.) “In order to facilitate the sale [Plaintiff] gave a guarantee that the lien would be released.” (Doc. 48 at 24.)
II. Procedural History
On September 27, 2021, Plaintiff initiated this action by filing a complaint in Pinal County Superior Court. (Doc. 1-3 at 5-12.) Defendants then timely removed the action to this Court. (Doc. 1.)
On December 6, 2021, Plaintiff filed its operative pleading, the first amended complaint (“FAC”). (Doc. 11.)
On December 28, 2021, Defendants filed a motion to dismiss. (Doc 15.)
On January 25, 2022, the parties filed a stipulation of dismissal as to Counts Three and Five of the FAC. (Doc. 21.)
On May 6, 2022, the Court granted the parties' stipulated dismissal of Counts Three and Five and Defendants' motion to dismiss on all but two of Plaintiff's claims: Counts One and Two. (Doc. 28.)
On February 3, 2023, the parties filed cross-motions for summary judgment. (Docs. 47, 48.) After those motions became fully briefed, the Court held oral argument. (Docs. 49-50, 52, 55-56, 59.)
On August 16, 2023, the Court denied both motions. (Doc. 60.) As an initial matter, the Court ruled on several evidentiary objections. (Id. at 3-15.) On the merits, the Court addressed the remaining counts-Counts One and Two-together. (Id. at 23.) The Court concluded that “Defendants' first argument, which addresses whether Plaintiff could have prevailed on a statutory accord-and-satisfaction claim under A.R.S. § 47-3311, does not provide a basis for granting summary judgment in Defendants' favor” because “Plaintiff has . . . clarified that its remaining breach-of-contract claims are not accord-and-satisfaction claims under § 47-3311.” (Id. at 24.) “As for Defendants' second argument, which is that § 47-3311 preempts Plaintiff's breach of contract claims, the Court concluded in the tentative ruling issued before oral argument that Defendants were not entitled to relief . . . in light of the Arizona courts' exacting standards for finding preemption and Defendants' failure, in their motion papers, to explore the legislative history of § 47-3311 or identify any express evidence of preemptive intent.” (Id. at 25, cleaned up.) However, during oral argument, “Defendants cited an array of new cases and statutory provisions that they did not cite in their motion papers,” so the Court “conclude[d] that the best, most efficient solution is to deny Defendants' current preemption-based request for summary judgment without prejudice and authorize Defendants to file a successive summary judgment motion limited to that issue.” (Id. at 25-26.) As for Defendants' third argument, which was that “there was no manifestation of mutual assent between Plaintiff and Defendants,” the Court concluded that Defendants were not entitled to summary judgment because they had “not demonstrated, at least for summary judgment purposes, that the purported contract is void due to a lack of mutual assent.” (Id. at 26, 29.) The Court explained that even though Defendants had “advanced a variety of reasons why a rational juror could conclude that they lacked any ‘reason to know' that Plaintiff would infer assent from the act of cashing the check,” cases from Arizona and Colorado supported Plaintiff's position that “the act of cashing a check and retaining the proceeds could be considered assent to a contract offer” and “[t]hese outcomes are consistent with the courts' usual approach of treating disputes over mutual assent as questions of fact to be resolved by the jury.” (Id. at 32-33.) The Court continued: “Assessing whether the misunderstandings of the parties are reasonable under the specific circumstances of the case . . . seems like a quintessential jury question here, where the reasonableness and reason-to-know inquiries will involve an evaluation both of Plaintiff's tactics (which a rational juror could view as intentionally calculated to generate a misunderstanding) and of Defendants' conduct in cashing the check without reading the cover letter (which a rational juror could view as negligent) and thereafter retaining the proceeds. Even though the basic facts are largely undisputed, the inferences to be drawn from those facts are hotly-and genuinely- disputed. Defendants are not entitled to summary judgment under these circumstances.” (Id. at 34, internal quotation marks omitted.) Finally, the Court denied Plaintiff's request for summary judgment for similar reasons, explaining that “[c]ontrary to Plaintiff's suggestion, a meeting of the minds (i.e., mutual assent) is required for both an express and implied contract” and that “the question of mutual assent presents a jury issue in this case.” (Id. at 36.)
On September 15, 2023, Defendants filed a successive motion for summary judgment on the issue of preemption. (Doc. 61.) The motion is now fully briefed. (Docs. 64, 65.)
The parties' requests for oral argument are denied because the issues are fully briefed and argument would not aid the decisional process. See LRCiv 7.2(f).
DISCUSSION
I. Legal Standard
“The court shall grant summary judgment if [a] movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). “A fact is ‘material' only if it might affect the outcome of the case, and a dispute is ‘genuine' only if a reasonable trier of fact could resolve the issue in the non-movant's favor.” Fresno Motors, LLC v. Mercedes Benz USA, LLC, 771 F.3d 1119, 1125 (9th Cir. 2014). The court “must view the evidence in the light most favorable to the nonmoving party and draw all reasonable inference in the nonmoving party's favor.” Rookaird v. BNSF Ry. Co., 908 F.3d 451, 459 (9th Cir. 2018). “Summary judgment is improper where divergent ultimate inferences may reasonably be drawn from the undisputed facts.” Fresno Motors, 771 F.3d at 1125 (internal quotation marks and citation omitted).
A party moving for summary judgment “bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of ‘the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any,' which it believes demonstrate the absence of a genuine issue of material fact.” Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). “In order to carry its burden of production, the moving party must either produce evidence negating an essential element of the nonmoving party's claim or defense or show that the nonmoving party does not have enough evidence of an essential element to carry its ultimate burden of persuasion at trial.” Nissan Fire & Marine Ins. Co. v. Fritz Cos., 210 F.3d 1099, 1102 (9th Cir. 2000). “If . . . [the] moving party carries its burden of production, the nonmoving party must produce evidence to support its claim or defense.” Id. at 1103.
“If the nonmoving party fails to produce enough evidence to create a genuine issue of material fact, the moving party wins the motion for summary judgment.” Id. There is no issue for trial unless enough evidence favors the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986). “If the evidence is merely colorable or is not significantly probative, summary judgment may be granted.” Id. at 249-50 (internal citations omitted). At the same time, “[t]he evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in his favor.” Id. at 255. “[I]n ruling on a motion for summary judgment, the judge must view the evidence presented through the prism of the substantive evidentiary burden.” Id. at 254. Thus, “the trial judge's summary judgment inquiry as to whether a genuine issue exists will be whether the evidence presented is such that a jury applying that evidentiary standard could reasonably find for either the plaintiff or the defendant.” Id. at 255.
II. Threshold Considerations
Before turning to the merits of Defendants' preemption argument, it is necessary to address two threshold considerations raised in Plaintiff's response brief: standing and judicial estoppel.
A. Standing
1. The Parties' Arguments
Plaintiff argues that “Defendants lack standing to assert preemption” because “they are not the intended protected class of an oblige[e] under A.R.S. § 47-3311(A).” (Doc. 64 at 11, capitalization omitted.)
Defendants reply that “Plaintiff fails to put forward any authority in support of” this challenge. (Doc. 65 at 7.) Defendants add that “on its face, A.R.S. § 47-3311 clearly does impose protections for the party to whom an instrument is tendered in accord and satisfaction to protect them from an unfair and harsh result where such party has no intention of entering into such a transaction.” (Id.)
Defendants also argue that “Plaintiff asserts as part of this waiver argument that it, as owner of the property encumbered by the [DOT], is a person against whom the claim is asserted. Such a position not only supports Defendants' preemption argument, but also sinks Plaintiff's breach of contract claims even if they are not preempted (and again, they are). Whether Plaintiff wants to call its asserted contract an accord and satisfaction, a substituted contract, a novation, or just a general contract, Arizona law is resoundingly clear that consideration is required.” (Id., citation omitted.)
2. Analysis
Plaintiff's standing challenge lacks merit. In St. Thomas-St. John Hotel & Tourism Association, Inc. v. Government of U.S. Virgin Islands, 218 F.3d 232 (3d Cir. 2000), the court rejected a similar argument. There, certain tourism associations sought a determination that a territorial law of the Virgin Islands was preempted by § 7 of the National Labor Relations Act (“NLRA”). Id. at 235, 237. The defense argued that the plaintiffs lacked standing to raise this preemption challenge “because employers, unlike employees, have no substantive rights under § 7.” Id. at 241. Although the Third Circuit agreed that the plaintiffs would have lacked statutory standing to bring an affirmative claim under § 7 of the NLRA, it held this was “not determinative of the associations' standing to raise that [preemption] issue. We know of no governing authority to the effect that [a] statutory provision which allegedly preempts [a challenged law] . . . must confer a right on the party that argues in favor of preemption. On the contrary, a [law] can be unenforceable as preempted by federal law even when the federal law secures no individual substantive rights for the party arguing preemption.” Id.
Although St. Thomas-St. John Hotel is not directly on point, it suggests that when, as here, a defendant seeks to raise a preemption challenge as an affirmative defense, it is unnecessary for that defendant to demonstrate that it would have possessed statutory standing to assert an affirmative claim under the law or statute being wielded defensively. Cf. Costello v. Grundon, 651 F.3d 614, 622-29 (7th Cir. 2011) (reversing the district court's determination that the defendants “lacked standing to assert violations of Regulations G and U as an affirmative defense,” which was based on the district court's determination that “the defendants were outside the ‘zone of interests' protected by” those laws, because the defendants did “not seek to maintain an action under [those laws], but rather, to defend against an action based on alleged violations of the statute and regulations” and thus they were not required to “establish that they fit within the zone of interests protected by those laws to be entitled to assert their affirmative defense”). Plaintiff cites no case to the contrary.
B. Judicial Estoppel
1. The Parties' Arguments
Plaintiff argues that “Defendants are judicially estopped for a change of position” because “Defendants are trying to whipsaw Plaintiff between their early [motion to dismiss] position that the agreement is not an accord and satisfaction and their later [motion for summary judgment] position that A.R.S. § 47-3311 preempts the claim which is not an accord and satisfaction agreement.” (Doc. 64 at 14.)
Defendants reply that judicial estoppel is inapplicable because their “position on preemption is entirely consistent with [their] other arguments.” (Doc. 65 at 10-11.)
“Judicial estoppel is an equitable doctrine that precludes a party from gaining an advantage by asserting one position, and then later seeking an advantage by taking a clearly inconsistent position. This court invokes judicial estoppel not only to prevent a party from gaining an advantage by taking inconsistent positions, but also because of general considerations of the orderly administration of justice and regard for the dignity of judicial proceedings, and to protect against a litigant playing fast and loose with the courts.” Hamilton v. State Farm Fire & Cas. Co., 270 F.3d 778, 782 (9th Cir. 2001) (cleaned up). There are “three factors that courts may consider in determining whether to apply the doctrine of judicial estoppel.... First, a party's later position must be clearly inconsistent with its earlier position. Second, courts regularly inquire whether the party has succeeded in persuading a court to accept that party's earlier position, so that judicial acceptance of an inconsistent position in a later proceeding would create the perception that either the first or the second court was misled. Absent success in a prior proceeding, a party's later inconsistent position introduces no risk of inconsistent court determinations, and thus no threat to judicial integrity. A third consideration is whether the party seeking to assert an inconsistent position would derive an unfair advantage or impose an unfair detriment on the opposing party if not estopped.” Id. at 782-83 (cleaned up). However, these three factors “do not establish inflexible prerequisites or an exhaustive formula for determining the applicability of judicial estoppel. Additional considerations may inform the doctrine's application in specific factual contexts.” Id. at 783 (cleaned up).
2. Analysis
In their motion to dismiss, Defendants argued that “the elements for an accord and satisfaction of the underlying loan or [DOT] under A.R.S[.] § 47-3311 were not met” and also argued that the FAC “fail[ed] to state a claim for relief with respect to” Plaintiff's claims for “breach of express contract, breach of implied contract, quasi-contract estoppel, and equitable indemnification.” (Doc. 15 at 2.) However, before the Court could rule on Defendants' arguments regarding A.R.S. § 47-3311, the parties jointly stipulated to the dismissal of Count Three (Doc. 21), which was Plaintiff's express accord-and-satisfaction claim under A.R.S. § 47-3311 (Doc. 11 ¶¶ 79-89.) Thus, in the ensuing order resolving Defendants' motion to dismiss, the Court limited its analysis of Counts One and Two to the “one ground” identified by Defendants for seeking dismissal of those counts-“the failure to plead facts establishing that Defendants accepted the offer set forth in Plaintiff's March 2021 letter.” (Doc. 28 at 8-9.)
Because the Court did not have an opportunity to adopt or accept Defendants' arguments regarding A.R.S. § 47-3311 and Plaintiff's accord and satisfaction claim, judicial estoppel does not apply here. Hamilton, 270 F.3d at 782-83 (“Absent success in a prior proceeding, a party's later inconsistent position introduces no risk of inconsistent court determinations, and thus no threat to judicial integrity.”) (cleaned up).
III. Preemption
A. The Parties' Arguments
Defendants argue that “Plaintiff's remaining claims are preempted” because “[a]s recognized by Arizona courts, A.R.S. § 47-1103(A) expressly states that the purposes of U.C.C. include creating comprehensive sets of rules to simply [sic], clarify, and modernize commercial transactions. And A.R.S. § 47-3102(A) makes clear that Arizona's codification of U.C.C. Article 3 applies to all negotiable instruments.” (Doc. 61 at 6, 10, citation omitted.) Relying on Berthot v. Security Pacific Bank of Arizona, 823 P.2d 1326 (Ariz.Ct.App. 1991), and Koss Corporation v. American Express Company, 309 P.3d 898 (Ariz.Ct.App. 2013), Defendants argue that “Plaintiff is . . . barred from pleading around the requirements of A.R.S. § 47-3311 because it comprehensively covers the field of legal theories available when a check is tendered in accord and satisfaction.” (Id. at 6-11.) Defendants also argue that the commentary to U.C.C. § 3-311 establishes that A.R.S. § 471103 “displaces all common law regarding full satisfaction contracts obtained by use of a negotiable instrument.” (Id. at 11-12.) According to Defendants, this is the same approach taken in Michigan, where the “rules on preemption are analogous to Arizona's” and where the Michigan Supreme Court “found that U.C.C. § 3-311 displaces all common law claims pertaining to attempts to obtain an accord and satisfaction via check.” (Id. at 12-14.)
Alternatively, Defendants argue that “even if one were to unreasonably find that the Legislature intended to leave such a loophole open for third parties to assist a debtor in circumventing the creditor protections of A.R.S. § 47-3311, here the Court should still find that the statute applies and displaces the common law because Plaintiff expressly invoked the statute and proposed to enter into an accord and satisfaction pursuant to the statute.” (Id. at 16.)
Much of Plaintiff's response addresses the type of contract the parties allegedly formed when SPS cashed the $10,000 check. (Doc. 64 at 6-9.) Plaintiff argues that “Defendants characterize the agreement pleaded in Count[s] I and II as a ‘failed attempt' to make an accord and satisfaction,” but “a failed . . . attempt to make an accord and satisfaction agreement could still be a valid contract.” (Id. at 6-7.) Plaintiff also contends that “A.R.S. § 47-3311 applies to the negotiation process of instruments; not common-law contracts.” (Id. at 6, capitalization omitted.) Plaintiff argues that the Court held “in its cross-summary judgment ruling that a common-law [contract] is proved subject to Defendants' mutual assent affirmative defense” and that because “Plaintiff sues for breach of contract, not to enforce an accord and satisfaction,” “[t]here is no preemption because the statute does not apply to the facts of the case.” (Id. at 9, citations omitted.) Alternatively, Plaintiff argues that “[e]ven if preemption applies, hypothetically and only for argument purposes, Defendants waived it as an affirmative defense by keeping the funds after depositing the check.” (Id. at 10.) Plaintiff then seeks to distinguish Berthot: “Berthot involves a claim for negligence against a bank for payment over forged signatures. It is a tort case with an at-fault third party. Here, there is no issue involving a forged signature by a third party.” (Id. at 11.) As for Koss, Plaintiff contends it “supports Plaintiff's position” because “[t]he . . . decision refused application of a U.C.C. preemption against common-law claims not directly involved in the negotiation of the instruments but arising instead after the process was completed.” (Id. at 13-14.) Plaintiff also argues that “U.C.C. comments are inapplicable as the statute does not apply.” (Id. at 14, capitalization omitted.) Citing Cornell v. Desert Financial Credit Union, 524 P.3d 1133 (Ariz. 2023), Plaintiff then argues that “the imposition of A.R.S. § 47-3311 to the agreement between [Plaintiff] and the Defendants is contrary to Arizona law as expressed in Berthot and Koss as well as Arizona's use of the clear language in the statute for its interpretation as held under Excell [Agent Services, L.L.C. v. Arizona Department of Revenue, 209 P.3d 1052 (Ariz.Ct.App. 2008)].” (Id. at 15.)
Elsewhere, Plaintiff asserts that the $10,000 check “qualifies as a substituted contract, likely a novation under Restatement (Second) Contracts §279 and §280.” (Id. at 8.) Plaintiff also argues that “[t]he Restatement comments state the original obligor (Schmid) must consent for a novation. Schmid's consent is not required under these circumstances found here as he lost title and gets no benefit as an owner of the property. Schmid has no stake and no interest in the new contract. He has nothing to gain or lose if the DOT is discharged with or without his consent as a matter of law.” (Id.)
In reply, Defendants argue that, “[t]aken on the whole, Plaintiff's Response fails to grapple with the case law cited by Defendants and fails to explain why Plaintiff's attempted accord and satisfaction through a negotiable instrument is not solely governed by the U.C.C. section entitled ‘accord and satisfaction by use of instrument.'” (Doc. 65 at 2, cleaned up.) Defendants also contend that “Plaintiff mischaracterizes this Court's prior order” because “Plaintiff construes this order as effectively granting it partial summary judgment on certain elements of its breach of contract claim.” (Id., capitalization omitted.) Defendants argue that “whether a contract between the parties was formed . . . is irrelevant to whether Plaintiff's contract claims are displaced by Arizona's codification of the Uniform Commercial Code.” (Id. at 3. See also id. at 8 [“Preemption is not impacted by the fact that Plaintiff cannot prevail on an accord and satisfaction claim.”].) Defendants also contend that “Berthot and Koss do not limit preemption to claims brought based on ‘defects or irregularities' in the negotiation of instruments.” (Id. at 3-5, cleaned up.) Next, Defendants argue that “Plaintiff wrongly claims that the Court cannot consider the U.C.C. commentary or cases from other jurisdictions.” (Id. at 5.) As for Plaintiff's waiver argument, Defendants contend it lacks merit because “[t]he common law regarding contracts, as reflected in the Restatement, is irrelevant where the contract claim is displaced by a superseding statute” and “SPS's treatment of the $10,000 Check was not in any way inconsistent with Plaintiff's ownership of the funds.” (Id. at 6.) Finally, Defendants argue that Plaintiff's reliance on Cornell is misplaced because “[t]hat case has absolutely nothing to do with preemption.” (Id. at 11.)
Defendants also argue that “Plaintiff's suggestion that its letter and accompanying check were a substitute contract or novation is fatally flawed” because “Plaintiff implicitly concedes Schmid did not consent, yet suggests that this requirement should be overlooked nevertheless.” (Id. at 8-9.) Defendants argue that “Plaintiff's argument relying on K-Line is inapposite to the question of preemption,” but regardless, “[t]o the extent K-Line applies, it weighs in Defendants' favor because the amount Plaintiff needs to pay under the preexisting contract was greater than the $10,000 consideration offered.” (Id. at 10.)
B. Analysis
A.R.S. § 47-3311, which is entitled “Accord and satisfaction by use of instrument,” was enacted by the Arizona legislature in 1993. In a nutshell, it provides that “[i]f a person against whom a claim is asserted proves that the person in good faith tendered an instrument to the claimant as full satisfaction of the claim, the amount of the claim was unliquidated or subject to a bona fide dispute and the claimant obtained payment of the instrument,” and unless certain exceptions apply, “the claim is discharged if the person against whom the claim is asserted proves that the instrument or an accompanying written communication contained a conspicuous statement to the effect that the instrument was tendered as full satisfaction of the claim.” A.R.S. § 47-3311(A)-(C). As the Arizona Supreme Court has explained, “[a]n accord and satisfaction discharges a contractual obligation or cause of action when the parties agree to exchange something of value in resolution of a claim or demand and then perform on that agreement, the accord being the agreement, and the satisfaction its execution or performance.'” Abbott v. Banner Health Network, 372 P.3d 933, 937 (Ariz. 2016). “The four elements of an accord and satisfaction are (1) proper subject matter, (2) competent parties, (3) assent or meeting of the minds of the parties, and (4) consideration.” Id.
Turning to preemption, the standard in Arizona is that “even in situations in which the legislature can constitutionally abrogate, preempt, or deny common-law rights, given the importance of those concepts in Arizona history and jurisprudence, we are reluctant to interpret a statute in favor of denial or preemption . . . if there is any reasonable doubt about the legislature's intent.” Hayes v. Continental Ins. Co., 872 P.2d 668, 676 (Ariz. 1994) (footnote omitted). Thus, when considering whether an Arizona common-law cause of action has been preempted by a legislative enactment, courts “will not find divestiture unless stated clearly, explicitly, and unambiguously” and should “generally decline[] to find preemption of a cause of action in the absence of a very clear statement of legislative intent or, better yet, a clear statement in the statute's text.” Id. at 677. Put another way, the “general and fixed rule to be applied when we are asked to construe a statute in such a way as to deny common-law actions” is that “[if] the legislature seeks to preempt a cause of action or to deprive the courts of jurisdiction, the law's text or at least the legislative record should say so explicitly. This court will then know the legislature's intent and will not have to look for the friendly face or use the divining rod of judicial speculation to find it. Such a rule-refusing to construe ambiguous statutes to deny common-law rights- saves us from having to ascertain what is often unknowable. It also forces the debate over the propriety of denial, preemption, and abrogation of our citizens' rights to be held at the place where such disputes should be settled: at the legislature.” Id. “[T]his policy encourages legislators to avoid leaving something as important as the existence or nonexistence of common-law rights to inference or implication.” Id. at 678.
Although Hayes addressed the preemption of tort claims, its repeated references to “common-law rights,” “common-law actions,” and “common-law rights of action” suggest that its principles also apply when evaluating whether a common-law contract claim has been preempted. See generally Zambrano v. M & RC II, LLC, 517 P.3d 1168, 1173 (Ariz. 2022) (“The freedom to contract has long been considered a ‘paramount public policy' under our common law that courts do not lightly infringe.”) (citation omitted).
Applying these standards, Defendants have not established that Plaintiff's commonlaw contract claims are preempted. Most important, A.R.S. § 47-3311 does not contain an express preemption provision. See also Scheele v. Justs. of the Supreme Ct. of the State of Arizona, 120 P.3d 1092, 1098-99 (Ariz. 2005) (“We do not interpret a statute as intending to limit the court's ability to otherwise act unless the legislature explicitly indicates such an intent.”); Fry's Food Stores of Ariz., Inc. v. Mather & Assocs., Inc., 900 P.2d 1225, 1227 (Ariz.Ct.App. 1995) (“Unless the legislature makes explicit an abrogative or preemptive purpose, avoid construing a statute in a manner that preempts or abrogates a common-law action.”).
Despite this omission, Defendants argue that proof of the Arizona legislature's preemptive intent can be found in the commentary to § 3-311 of the U.C.C. Under Arizona law, it is permissible to look to the U.C.C. commentary for this purpose-because the language in A.R.S. § 47-3311 mirrors the language in U.C.C. § 3-311, the commentary to U.C.C. § 3-311 is at least a potential source of insight into the Arizona legislature's intent when enacting A.R.S. § 47-3311. See, e.g., Cao v. PFP Dorsey Invs., LLC, 545 P.3d 459, 466 (Ariz. 2024) (“When a statute is based on a uniform act, we assume that the legislature intended to adopt the construction placed on the act by its drafters. Commentary to such a uniform act is highly persuasive unless erroneous or contrary to the settled policy of Arizona.”) (cleaned up); Koss, 309 P.3d at 904 n.7 (“While the comments to the U.C.C. were not adopted by the legislature as comments to the Arizona version of the U.C.C[.], we look to cases arising under the uniform act and the U.C.C. commentary for guidance because the relevant provisions of the state act mirror the U.C.C.”).
Comment 3 to U.C.C. § 3-311 provides as follows:
As part of the revision of Article 3, Section 1-207 has been amended to add subsection (2) stating that Section 1-207 “does not apply to an accord and satisfaction.” Because of that amendment and revised Article 3, Section 3311 governs full satisfaction checks. Section 3-311 follows the common law rule with some minor variations to reflect modern business conditions. In cases covered by Section 3-311 there will often be an individual on one side of the dispute and a business organization on the other. This section is not designed to favor either the individual or the business organization. In Case #1 the person seeking the accord and satisfaction is an individual. In Case #2 the person seeking the accord and satisfaction is an insurance company. Section 3-311 is based on a belief that the common law rule produces a fair result and that informal dispute resolution by full satisfaction checks should be encouraged.Id.
In their motion papers, Defendants place heavy emphasis on Hoerstman General Contracting, Inc. v. Hahn, 711 N.W.2d 340 (Mich. 2006), in which the Michigan Supreme Court interpreted Comment 3 as expressing an intent to preempt common-law rules regarding an accord and satisfaction: “Our conclusion is buoyed by the UCC comment . . . [which] informs us [that] the Legislature intended to alleviate these conflicts and update the law of accord and satisfaction.... These comments support a finding of preemption. They demonstrate the Legislature's intent to modify and update the common law. Therefore, we hold that MCL 440.3311, not the common law, applies to an accord and satisfaction involving a negotiable instrument such as a check.” Id. at 346-47. Although it is understandable why Defendants might view Hoerstman as supporting their position, the Court discerns several reasons why it does not compel a ruling in their favor.
First, although Comment 3 states that U.C.C. § 3-311 “governs full satisfaction checks” and “follows the common law rule with some minor variations to reflect modern business conditions,” it does not expressly state that U.C.C. § 3-311 is intended to preempt common-law claims. As discussed, Arizona courts ordinarily require such an express statement of preemptive intent. Hayes, 872 P.2d at 674 (“[T]he absence of explicit preemptive language may indicate an intent not to preempt, especially when the legislature is well aware of the words of art that should be used to accomplish such a result.”); Scheele, 120 P.3d at 1098-99; Fry's Food Stores of Ariz., 900 P.2d at 1227. Furthermore, although preemption “by necessary implication” is possible under Arizona law, there still must be “a clear manifestation of legislative intent to abrogate the common law,” and courts must “interpret statutes with every intendment in favor of consistency with the common law.” Pleak v. Entrada Prop. Owners' Ass'n, 87 P.3d 831, 835 (Ariz. 2004) (cleaned up). In Hoerstman, the court did not purport to apply those exacting standards when discussing Comment 3-instead, it simply found that “the Legislature's intent to modify and update the common law,” as expressed in Comment 3, helped “support a finding of preemption.” 711 N.W.2d at 347. But a mere intent to “modify and update the common law” is not, alone, enough to support a finding of preemptive intent under Arizona law.
Second, in a related vein, Hoerstman relied on the interpretive canon known as expressio unius est exclusio alterius-“the expression of one thing is the exclusion of another”-in support of its finding of preemptive intent, explaining that Michigan courts had “long ago stated that no maxim is more uniformly used to properly construe statutes.” Id. at 346 & n.8 (citation omitted). This may be a valid method of inferring preemptive intent under Michigan law, but Arizona courts have rejected it. Jett v. City of Tucson, 882 P.2d 426, 433 (Ariz. 1994) (“[W]e will not infer from the fact that the Legislature has addressed some areas concerning the employment of magistrates, while remaining silent on others, an intent to preempt cities from authorizing in their city charters the removal of their magistrates from office.”) (citing Hayes, 872 P.2d at 676).
Third, and more broadly, the significant factual differences between this case and Hoerstman suggest that its finding of preemption would not be applicable here even if that finding were otherwise consistent with Arizona law. There, a home remodeling company claimed that it was owed money for changes to a project and offered to accept $16,910.79 in “an apparent attempt to settle the dispute.” Hoerstman, 711 N.W.2d at 343. The homeowners responded by sending the home remodeling company a $5,144.79 check that included the phrase “final payment” written on it. Id. The home remodeling company, in turn, “crossed out the words ‘final payment' on the check,” cashed the check, and then sued the homeowners for the additional sum it believed was still owed. Id. In the ensuing lawsuit, the homeowners “asserted the affirmative defense of accord and satisfaction.” Id. The trial court ruled in the home remodeling company's favor, albeit without “explicitly rul[ing] on the issue of accord and satisfaction,” and the Michigan Court of Appeals affirmed on the ground that under Michigan's common law of accord and satisfaction, “the words ‘final payment' on the check were not sufficient to inform [the home remodeling company] that acceptance of the check discharged the entire claim.” Id. at 343-44. The Michigan Supreme Court reversed, explaining that (1) the lower courts “erred in not applying the UCC to this case,” as the Michigan legislature “intended to preempt the common law on accord and satisfactions in the area of negotiable instruments”; and (2) under the U.C.C., the homeowners “sufficiently met their burden of proof on the affirmative defense of accord and satisfaction.” Id. at 349.
These details are significant because U.C.C. § 3-311 and its state-law counterparts address how an accord and satisfaction may arise between “a person against whom a claim is asserted” and “the claimant.” In Hoerstman, both categories of litigants were present- the homeowners (i.e., “part[ies] against whom a claim is asserted”) sought to question the validity of a claim pursued by the home remodeling company (i.e., “the claimant”). Thus, Hoerstman is best understood as holding that when parties who are covered by U.C.C. § 3311 dispute the adequacy of an asserted accord and satisfaction involving a negotiable instrument, courts must apply the standards established by U.C.C. § 3-311 (which preempts otherwise applicable common-law standards).
But the posture of this case is different. Defendants have repeatedly argued throughout this case (Doc. 15 at 6-8; Doc. 47 at 2, 10-11; Doc. 52 at 5-6; Doc. 55 at 6-7) that Plaintiff does not qualify as “a person against whom a claim is asserted” because any claim by Defendants would be against Schmid, not Plaintiff. Similarly, in the tentative ruling issued before the hearing on the parties' earlier cross-motions for summary judgment, the Court expressed skepticism that Plaintiff is a party covered by A.R.S. § 473311. (Doc. 58 at 26.) Although Plaintiff has taken the opposite position, Plaintiff has not cited any case supporting its position. Nor does it make sense to the Court that the owner of a property encumbered by a DOT could qualify as “a person against whom a claim is asserted,” at least when, as here, that owner did not borrow the money the led to the recording of the DOT and has never received a claim for payment from the beneficiary of the DOT or the loan servicer. Indeed, a DOT merely serves as a lien against a property that “empowers the trustee to sell the real property securing the underlying note through a non-judicial sale” if “the debtor . . . defaults.” Hogan v. Washington Mut. Bank, N.A., 277 P.3d 781, 782-83 (Ariz. 2012) (en banc). “[T]he note and the deed of trust are . . . distinct instruments that serve different purposes. The note is a contract that evidences the loan and the obligor's duty to repay. The trust deed transfers an interest in real property, securing the repayment of the money owed under the note.” Id. at 784 (internal citation omitted). Nothing in Hoerstman or in Comment 3 suggests that U.C.C. § 3-311 was meant to preempt the common law's application under these factual circumstances.
Doc. 50 at 5 (“The DOT, as the enforcement tool, embodies a claim for money conferring standing to Plaintiff as the party against whom a claim is made.”); Doc. 64 at 11 (“The DOT is a claim asserted against the property held by the owner of title.”).
In the FAC, Plaintiff acknowledged that “Defendants have not made demand on Plaintiff for payment of any amount claimed to be due under the Note secured by the DOT against the Property.” (Doc. 11 ¶ 33.)
For similar reasons, Defendants' reliance on Comment 4 to U.C.C. § 3-311 is misplaced. According to Defendants, the portion of this Comment explaining that “[t]he person seeking the accord and satisfaction must prove the requirements of subsection (a) are met” means that “any person seeking an accord and satisfaction must prove the requirements of subsection (a) or otherwise be denied relief.” (Doc. 61 at 12.) But if anything, this provision cuts against a finding of preemption in this case. Because Plaintiff is not “a person against whom a claim is asserted,” Plaintiff's act of sending the $10,000 check to Defendants in an effort to discharge the DOT was, on its face, conduct that falls outside the scope of A.R.S. § 47-3311 and U.C.C. § 3-311. Comment 4 does not remotely evince an intent to preempt the common law under these circumstances-it at most speaks of the requirements that apply to “any person seeking an accord and satisfaction.”
Nor are Defendants aided by their reference to the U.C.C.'s purpose. The U.C.C. aims, in part, “[t]o simplify, clarify and modernize the law governing commercial transactions; . . . and [t]o make uniform the law among the various jurisdictions.” A.R.S. § 47-1103(A). But statements expressing a general goal to clarify and unify the law fail to supply the sort of clear and unambiguous preemptive intent required in Arizona.
Berthot and Koss do not compel a different result. In Berthot, the plaintiff sued the defendant bank under a common-law theory of negligence for cashing two checks based on forged endorsements and paying the proceeds to the plaintiff's father. 823 P.2d at 132728. The court held that A.R.S. § 47-3419 “displaced and subsumed” the plaintiff's common-law negligence claim. Id. at 1331-32. However, the statute at issue in Berthot included an express statement of preemptive intent: “A.R.S. § 47-1103 (U.C.C. § 1-103) provides: Unless [displaced] by the particular provisions of this title, the principles of law and equity, including the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, or other validating or invalidating cause shall supplement its provisions.” Id. at 1329 (emphasis added). The court explained that A.R.S. § 47-1103 displaced any common-law negligence claim because “there is a direct conflict between the common law and the U.C.C. with regard to the burden of proof” and “[i]f a negligence action were reformed to fit the due care proof burden of § 3-419, ‘the negligence action would have no independent significance apart from the Code.'” Id. at 1331 (citation omitted). Here, A.R.S. § 47-3311 does not contain express preemption language like that in A.R.S. § 47-1103. Additionally, as noted, Defendants argue that Plaintiff's offer did not fall within § 47-3311 at all because Plaintiff was not “a person against whom a claim is asserted.” Further, Arizona courts have limited Berthot to its facts because the defense at issue in that case was amended out of the statute: “San Tan is correct to abandon its assertion made at the trial court that Berthot is the controlling precedent.... Berthot's continuing vitality lies principally in its holding that statutory conversion subsumes and replaces the previous remedy of negligence.” San Tan Irr. Dist. v. Wells Fargo Bank, 3 P.3d 1113, 1115 n.1 (Ariz.Ct.App. 2000). When limited to its facts, Berthot is irrelevant to this case, which does not involve negligence and conversion claims.
In Koss, the plaintiff asserted common-law negligence and conversion claims against the defendant bank for accepting wire transfers and cashier's checks of embezzled funds from the plaintiff's former employee. 309 P.3d at 901-02. The court concluded that neither Article 3 nor Article 4 of the U.C.C. precluded the plaintiff's common-law claims. Id. at 904-14. More specifically, the court explained that “Article 4A does not preempt common-law claims when, as here, the alleged misconduct occurred outside the wire transfer process” and the bank “would be using the U.C.C. to preclude Koss from obtaining a remedy for fraud, which is not the objective of the U.C.C.” Id. at 905-07. As for Article 3, the court concluded it did not preempt the common-law claims because “A.R.S. § 47-3420(A)(1) only bars common-law conversion claims brought by the ‘drafter' and ‘issuer' of negotiable instruments, and as a matter of law, Koss was neither the ‘drafter' nor ‘issuer' of the cashier's checks.” Id. at 904. The court also distinguished Berthot because it “was decided under a prior version of the U.C.C. and concerned fraudulent endorsements, which are not present here.” Id. at 910.
Defendants argue that Koss helps their position because “[u]nlike the conversion claims in Koss, the U.C.C. does have a statute that specifically governs all accord-and-satisfaction contracts which involve negotiable instruments.” (Doc. 65 at 4.) This argument is unavailing because, as discussed, A.R.S. § 47-3311 covers only an accord and satisfaction between “a person against whom a claim is asserted” and “the claimant.” If anything, Koss cuts against a finding of preemption in these circumstances. Koss, 309 P.3d at 904 (“A.R.S. § 47-3420(A)(1) only bars common-law conversion claims brought by the ‘drafter' and ‘issuer' of negotiable instruments, and as a matter of law, Koss was neither the ‘drafter' nor ‘issuer' of the cashier's checks.”).
Because the Court concludes that Defendants have not established that Plaintiff's common-law contract claims are preempted, the Court need not address Plaintiff's waiver argument.
IV. Attorneys' Fees And Costs
Defendants request “an award of their attorneys' fees and costs pursuant to A.R.S. §§ 12-341.01.” (Doc. 61 at 17.) A.R.S. § 12-341.01(A) provides that “[i]n any contested action arising out of a contract, express or implied, the court may award the successful party reasonable attorney fees.” Id. Here, because there is not yet any successful party, Defendants' request is premature.
Accordingly, IT IS ORDERED that Defendants' successive motion for summary judgment (Doc. 61) is denied.