SMALL v. MORTGAGE ELECTRONIC REGISTRATION SYSTEMS

pient), in writing, of such proposed adjustment and of any action taken or proposed to be taken by any taxing authority with respect thereto and the Seller, for at least thirty (30) days after receiving such notice from any taxing authority, shall forbear, if such forbearance is permitted by law, from the payment of any Taxes (including interest, penalties and additions to Taxes) asserted to be payable as a result of such proposed adjustment. The recipient shall include with such notification a true, correct, and complete copy of any written communication with any taxing authority, and an accurate and complete summary of any oral communication with such taxing authority.

(b) Administrative and Judicial Proceedings. Unless otherwise instructed by the Buyer, the Seller agrees to diligently contest any proceeding relating to Taxes with any taxing authority relating to any Sale Event; and the Seller shall keep the Buyer promptly and fully informed of the progress of such contest and shall, if and to the extent requested, permit Buyer to attend any and all conferences with the contesting authority; and consider in good faith any and all advice rendered by the Buyer with respect to the conduct of such contest. On written request of the Buyer made within thirty (30) days of the receipt of notice of a proposed adjustment, the Buyer shall have the opportunity to be present at and participate in any administrative or judicial proceedings (to the extent permitted by law) relating to Taxes with any taxing authority relating to any Sale Event, but only if (i) the Seller shall have been provided with a written request by the Buyer for the Seller to jointly contest the adjustment in accordance with this Agreement; (ii) the proposed adjustment is in excess of $50,000; and (iii) the Buyer agrees to bear all of its costs and disbursements associated with such contest. In connection with any contest relating to any Sale Event, the Buyer agrees to pay on demand on an after-tax basis all reasonable out-of-pocket costs and expenses (including, without limitation, reasonable attorney fees and costs) which the Seller may incur in connection with contesting such claim. The Buyer shall determine the nature of all action to be taken to contest such proposed adjustment * * *. Buyer shall be afforded the opportunity to review and comment on in advance all material submissions relating to any potential Seller Loss. In the event that Seller does not adhere to Buyer's directions in any material respect with respect to the conduct of contesting such claim, Buyer shall not be obligated to make any Indemnity Payment. * * *

(c) Settlement. If, in the course of contesting any claim referred to in this Agreement, any taxing authority shall advise the Seller or the Buyer that it is willing to agree to a settlement of such claim, such party shall notify the other party of such settlement proposal. If, after receipt of such notice, the Buyer so requests, the Seller shall agree to the settlement as proposed by such taxing authority and described to the Buyer.

(d) Payment. If the Buyer or Seller shall have contested any proposed adjustment as above provided, the Buyer shall not be required to indemnify the Seller pursuant to this Agreement with respect to the claim being contested until there occurs a Final Determination with respect to the liability of the Seller for the Seller Loss. If the Buyer shall direct the Seller to contest a proposed adjustment that could result in a Seller Loss by paying the tax claimed (including such other amounts payable as interest, penalties, or additions to tax) and seeking a refund, then the Buyer shall advance to the Seller, on an interest-free basis, the aggregate amount of such taxes, interest, penalties and additions to tax applicable to such proposed adjustment (and shall indemnify the Seller in accordance with this Agreement from any adverse consequences of such advance), and the Seller shall not be obligated to take any further action pursuant to this Agreement unless Buyer shall make such advance. * * *

4.9 MISCELLANEOUS TAX MATTERS.

(a) Adjustment to Purchase Price. The amount of any Indemnity Payment under this Agreement shall be treated by the Seller and Buyer as an adjustment to the Purchase Price.

(b) Assumption of Indemnity Obligation. If Buyer sells all or any substantial portion of the assets of the LR Entities, as a condition to such sale, the purchaser(s) of such assets (or an affiliate thereof) (the "Subsequent Buyer") shall be required to assume the indemnity obligations and the liability for Taxes provided for in Section 4.7 (subject to Section 4.8) of this Agreement and in Section 5 of this Agreement and shall be required to meet the following liquidity and other requirements: (i) provide a $3 million letter of credit in form and substance reasonably acceptable to Seller which shall allow the Seller to draw down upon the letter of credit during the Reserve Period in the event that an Indemnity Payment is due in accordance with the Agreement and has not been made; * * * In the event of a sale whereby the Subsequent Buyer assumes the Buyer's indemnity obligations under the Agreement, Buyer shall no longer be liable for such indemnity obligations and the Person assuming such indemnity obligations shall be entitled to all provisions of Sections 4.7, 4.8 and 4.9.

(c) Consistent Tax Reporting Position. Seller and Buyer shall reflect the sale of the Shares as a sale of stock or other ownership interests consistent with the terms of this Agreement for all Tax and other filing and reporting purposes without any disclosure pursuant to Section 6662 or 6111 of the Code. * * *

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5. LIABILITY FOR TAXES.

(a) Except for Taxes that have been provided for as accrued in the computation of Net Working Capital and except as set forth in Section 4.7, Seller shall be responsible for all Taxes imposed on the LR Entities (the "Seller Taxes") for all taxable periods or portions of taxable periods, ending as of one day prior to the Closing Date (the "Pre-Closing Period"). Buyer shall be responsible for all Taxes imposed on the LR Entities (the "Buyer Taxes") for all taxable periods or portions of taxable periods beginning on the Closing Date (the "Post-Closing Period").

(b) Seller shall cause its accountants, American Express Tax and Business Services Inc. or such other accountants selected by Seller, to prepare the Tax Returns required to be filed by the LR Entities for all Pre-Closing Periods. * * * Items to be taken into account for the taxable year beginning on January 1, 2000 and ending as of one date prior to the Closing Date (the "Pre-Closing Short Period") shall be determined using the "closing-the-books" method as described in Section 1362(e)(3) of the Code and the regulations thereunder, and the Buyer and Seller agree to make an election, if necessary, under Section 1362(e)(3) of the Code.

(c) Consistent with the "closing-the-books" method under Section 1362(e)(3) of the Code, Seller shall be responsible for all Seller Taxes attributable to the Pre-Closing Short Period (except to the extent such Taxes have been provided for as accrued in the computation of Net Working Capital and except as provided in Section 4.7). * * * Except as set forth in Section 4.7, Seller shall indemnify and hold Buyer harmless from and against all liability from Seller Taxes attributable for the Pre-Closing Period to the extent such Taxes have not been paid or an accrual therefor has not been included in Net Working Capital.

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(f) If Buyer or any of the LR Entities receives a refund, credit or reduction of Taxes attributable to the Pre-Closing Period, Buyer shall promptly reimburse the Seller for such refund, credit or reduction of Taxes. If Seller or any of the LR Entities receive a refund or reduction of Taxes attributable to the Post-Closing Period, the Seller shall promptly reimburse the Buyer for such refund, credit or reduction of taxes.

(g) The Buyer and LR Entities shall cause their accountants to prepare and file all Tax Returns required to [be] filed by LR Entities for the taxable year beginning on the Closing Date (the "Post-Closing Short Period") and all subsequent tax years. Such Tax Returns shall be prepared on a basis consistent with the items and positions reflected in the Pre-Closing Period Tax Returns and in this Agreement; provided, however, that to the extent Buyer is entitled to make new tax elections, adopt methods of accounting other than those used by Seller or take reporting positions different from those taken by Seller, it may do so, so long as such items and positions could not reasonably be expected to cause any material adverse tax consequences to Seller with respect to the Pre-Closing Period. Items to be taken into account in the Post-Closing Short Period Tax Returns shall be determined using the "closing-the-books" method as described in Section 1362(e)(3) of the Code and the regulations thereunder, and the Buyer and Seller agree to make an election, if necessary, under Section 1362(e)(3) of the Code.

(h) Consistent with the "closing-the-books" method under Section 1362(e)(3) of the Code, Buyer shall be responsible for all Buyer Taxes for all taxable periods or portions of taxable periods beginning on the Closing Date (the "Post-Closing Period"). Exemptions, allowances, deductions and any other items that are calculated on an annual basis (including, but not limited to, depreciation and amortization deductions) shall be allocated between the Pre-Closing Short Period and the Post-Closing Short Period in the proportion which the number of days in each such period bears to the total number of days in the applicable annual period. If, as of the Closing Date, any of the LR Entities is a partner in a partnership which has a tax year that does not end as of the Closing Date, any item attributable to such partnership's activities shall be allocated among the Pre-Closing Short Period and the Post-Closing Short Period in a manner consistent with Treasury Regulation Section 1.1362-3(c). In addition to any obligation to Seller under Section 4.7, Buyer shall indemnify and hold Seller harmless from and against all liability from Buyer Taxes attributable to the Post-Closing Period, and for all Taxes attributable to the Pre-Closing Period which have been provided for as accrued in computation of Net Working Capital.

(i) Any refund of Taxes, credit or reduction of Taxes attributable to the Post-Closing Short Period and all subsequent periods will be for the benefit of Buyer.

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6. DEFINITIONS. For purposes of this Agreement, the following terms have the meanings specified:

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"Excluded Assets" — means all the direct and indirect interest of * * * [BCA] in 3169 N. Lincoln Corp., 3830-32 Lincoln Joint Venture, Dearborn Elm LLC, N.B.A.L. LLC, St. Benedicts Hotel, LLC, 310 N. Michigan, LLC, Vision AHC, LLC and Vision Capital, LLC, and each of the foregoing entities respective holdings.

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"Replacement Tax" — means the Illinois Personal Property Replacement tax due by the Company for the Pre-Closing Period.

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"Sale Event" — shall mean the sale of all or a substantial portion of the assets of the LR Entities by the Buyer within six months after the Closing that results in any taxing authority assessing or imposing any additional Tax against Seller either as a direct or indirect result of the sale of such assets.

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"Seller Loss" — shall mean the amount, if any, of Taxes owed by Seller (including, without limitation, Taxes resulting from the receipt of any Indemnity Payment) to any taxing authority in excess of the amount of Taxes owed to any taxing authority by the Seller with respect to the sale of the Shares, which amount arises from a Sale Event * * *

Pursuant to the SPA, the Abrams estate sold to Castanet all of the stock of BCA that the Abrams estate owned. Under section 5 of the SPA, Castanet expressly agreed to be responsible for, inter alia, all taxes imposed on BCA for taxable years ending after the closing of the SPA, including any tax attributable to any sale of certain of BCA's assets. Under section 4.9(b) of the SPA, any purchaser of all or a substantial part of BCA's assets was required to assume, inter alia, the taxes for which Castanet agreed to be responsible under section 5 of that agreement.

Effective as of the closing on July 31, 2000, of the Abrams estate's sale of its BCA stock to Castanet, (1) Byron Canvasser, Robert Canvasser, and Andrew Hochberg resigned as directors of BCA, (2) BCA senior management, Mr. Kirshenbaum, and certain other executives of BCA resigned their positions with BCA, and (3) Castanet, as the sole stockholder of BCA, elected Ms. Dill as the sole director of BCA. On July 31, 2000, Ms. Dill, as the sole director of BCA, elected herself president, secretary, and treasurer of that company.

On July 31, 2000, each member of BCA senior management, except Mr. Rice, executed an employment agreement with LR Management Co., a company 100 percent of the stock of which petitioner owned.

On July 31, 2000, petitioner, Castanet, and BCA executed a document entitled " ASSET PURCHASE AGREEMENT" (APA) under which BCA agreed to sell and petitioner agreed to buy substantially all of BCA's assets. The APA provided in pertinent part:

This Asset Purchase Agreement (this "Agreement"), dated as of July 31, 2000, is between LR Development Company LLC, * * * ("Buyer"), Castanet, Inc., a Delaware corporation, (the "Seller") and Bruce C. Abrams, Inc., an Illinois corporation, * * * (the "Company").

1. SALE AND TRANSFER OF ASSETS; CLOSING 1.1 ASSETS AND ASSUMED LIABILITIES.

(a) Subject to the terms and conditions of this Agreement, at the Closing the Seller will, or will cause the Company to * * * sell, transfer, convey, assign and deliver to Buyer * * * all of the right, title, and interest in and to certain assets described in this Section 1.1(a) that are owned by the Seller or the Company (as applicable) as of the Closing Date * * * including, but not limited to, the following:

(i) the equity interests described on Exhibit 1.1-A attached hereto (collectively, the "Equity Interests");

(ii) all Proprietary Rights of the Company;

(iii) the rights of Seller from and after the Closing Date under the Stock Purchase Agreement and rights of Seller under the Escrow Agreement established in accordance with Section 1.4 of the Stock Purchase Agreement;

* * * * * * *

(b) Notwithstanding the foregoing, the following properties and assets of the Company are retained by the Company and are expressly excluded from the purchase and sale contemplated by this Agreement (collectively, the "Excluded Assets"):

* * * * * * *

(iii) the entities set forth on Exhibit 1.1-B (the "Excluded Entities"); and

(iv) those items identified or described in Section 1.1(a) above, to the extent said items relate solely to the Excluded Entities.

(c) Assumed and Excluded Liabilities.

As of the Closing Date, Buyer will assume and thereafter pay and fully satisfy when due: (A) liabilities arising after the Closing Date under the Applicable Contracts to which the Company is a party or by which the Company is bound or Governmental Authorizations held by the Company and assumed by Buyer pursuant to paragraph (a) of this section 1.1, (B) normal and customary trade accounts payable and accruals (other than income tax accruals) of the Company, in each case arising in the Ordinary Course of Business and only to the extent included in the calculation of Net Working Capital (the "Accounts Payable"), and (C) liabilities and obligations of the LR Entities. All such liabilities and obligations to be so assumed by Buyer are referred to herein as the "Assumed Obligations". Assumed Obligations shall not include (x) any of the items described in subparagraph 1.1(c)(A), (B), or (C) which relate to the Excluded Assets, or (y) any taxes of Seller or the Company of any nature due as a result of the purchase of the Shares by Seller, the sale of the Assets to Buyer, or the sale of the Excluded Assets by the Company.

1.2 PURCHASE PRICE.

(a) The purchase price (the "Purchase Price") for the Assets shall be Twenty Five Million Six Hundred Thirteen Thousand Three Hundred sixty Nine and No/100 Dollars ($25,613,369), payable in cash payable [sic] pursuant to the terms and provisions of the Escrow Agreement between Buyer, Seller and escrow agent.

(b) Exhibit 1.2 of this Agreement sets forth the allocation of (i) the Purchase Price, plus the (ii) allocable liabilities being assumed directly or indirectly by Buyer. The Seller and Buyer agree to make all appropriate tax filings on a basis consistent with the agreed allocation, * * * and not to take a position on any return or in any Proceeding that is inconsistent with the terms of the agreed allocation.

1.3 CLOSING. The closing of the purchase and sale of the Assets (the "Closing") will take place at the offices of Katten Muchin Zavis, 525 West Monroe Street, Suite 1600, Chicago, Illinois, at 10:00 a.m. (local time) on the Closing Date.

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6. DEFINITIONS. For purposes of this Agreement, the following terms have the meanings specified:

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"Closing Date" — the date and time as of which the Closing actually takes place.

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7.6 ASSIGNMENTS, SUCCESSORS, AND NO THIRD-PARTY RIGHTS. * * * Nothing expressed or referred to in this Agreement will be construed to give any Person other than the parties to this Agreement any legal or equitable right, remedy, or claim under or with respect to this Agreement or any provision of this Agreement.

EXHIBIT 1.1-A EQUITY INTERESTS

100% interest in LR Management Company * * *

100% interest in LR Contracting Company * * *

100% interest in Quality First Contracting Company

100% interest in LR Builders, Inc. * * *

100% interest in Lake Shore, LLC * * *

100% interest in LR Tower LLC * * *

100% interest in LR Fort Sheridan, LLC * * *

100% interest in LR Arcade, LLC * * *

100% interest in Plaines Town Center, LLC * * *

33.33% interest in Limits LLC * * *

33.33% Limited Partnership interest in Winners Limited Partnership * * *

100% interest in Ridge Partners LLC * * *

EXHIBIT 1.1-B EXCLUDED ASSETS

100% interest in Diversey and Sheffield, L.L.C. * * *

100% interest in Walton Associates, L.L.C. * * *

Pursuant to the APA, BCA sold to petitioner the following assets, some of which were subject to certain liabilities: Assets Fair Market Value Cash -0- Net current assets $8,873,149 Prepaid commissions 500,000 Other assets 260,484 Furniture and fixtures 100,000 Leases 50,000 Equity interests: Park Tower LLC 23,223,959 Arcade LLC 85,206 Lake Shore LLC 4,420,232 Limits LLC 170,126 Plaines Town Center LLC 1,447,596 LR Fort Sheridan LLC 3,621,026 Lawrence Partners LP 100 6133 N. Kenmore LP 100 Amber Manor LP 100 Estes Partners LP 100 Humboldt Ridge LP 100 Jackson Park LP 732 Madison Park Place LP 100 Madison Renaissance LLC 100 Magnolia Partners LP 100 New Southtown LP 100 Ridge Partners LP 67,387 Sheridan Park Partners LP 100 Union Square LP 100 Winthrop Partners LP 100 Winners LP 1,275,945 Quality First Inc. 100 LR Contracting Co. 100 LR Management Co. 100 Total assets 44,097,342 Less liabilities 18,882,973 Total assets net of liabilities 25,214,369

The assets that BCA sold to petitioner and that petitioner purchased from BCA under the APA constituted over 90 percent of the total value, and substantially all, of BCA's assets. The amount that petitioner paid for the assets that it purchased from BCA was equal to their total fair market value.

On July 31, 2000, Castanet, Related, and petitioner executed a document entitled " ASSUMPTION AGREEMENT " (assumption agreement). The assumption agreement provided in pertinent part:

This Assumption Agreement (this "Agreement") is made as of July 31, 2000 by and among CASTANET, INC., a Delaware corporation ("CNI"), THE RELATED COMPANIES, L.P., a Delaware limited partnership ("Related"), and LR Development Company LLC [petitioner], an Illinois limited liability company ("LDC"). CNI, Related, and LDC are collectively referred to herein as the "Parties".

WITNESSETH:

WHEREAS, CNI is a party to that certain Stock Purchase Agreement (the "Stock Purchase Agreement") dated July 31, 2000, by and between CNI and the Estate of Bruce C. Abrams (the "Estate") * * *

WHEREAS, CNI, LDC, and the Company [BCA] have entered into that certain Asset Purchase Agreement (the "Asset Purchase Agreement") dated July 31, 2000, * * *

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NOW, THEREFORE, * * * CNI and Related represent, warrant, covenant and agree as follows:

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2. Assignment and Assumption. LDC hereby accepts and assumes all of CNI's obligations under Sections 1.4(b) * * * and Article V of the Stock Purchase Agreement, and Related hereby accepts and assumes all of CNI's obligations under Sections 4.7, 4.8 and 4.9 of the Stock Purchase Agreement, including without limitation the obligations required of a Subsequent Buyer (as defined in the Stock Purchase Agreement) pursuant to Section 4.9(b)(i) — (iv) of the Stock Purchase Agreement (said obligations are collectively referred to herein as, the "Obligations"). This assumption is effective as of the date hereof and a copy of this Agreement has been delivered to the Estate.

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4.4 No Reliance. Except for any assignees permitted by Section 4.2 of this Agreement and except for the Estate who is hereby made a third party beneficiary to this Agreement: (a) no third party is entitled to rely on any of the agreements of the parties contained in this Agreement; and (b) the parties assume no liability to any third party because of any reliance on the agreements of the parties contained in this Agreement.

Under section 2 of the assumption agreement, petitioner expressly assumed all of Castanet's obligations under, inter alia, section 5 of the SPA.

On July 31, 2000, Castanet, Related, and petitioner executed a document entitled " ASSIGNMENT OF STOCK PURCHASE AGREEMENT ", which the Abrams estate accepted and to which Ms. Abrams agreed on behalf of the Abrams estate on July 31, 2000. That agreement provided in pertinent part:

3. Assignment of Representations, Warranties and Covenants.

(a) [Castanet] * * * by these presents, hereby (i) assigns to * * * [petitioner] and its successors and assigns, all of * * * [Castanet's] rights after the Closing Date under the Stock Purchase Agreement including without limitation all rights with respect to the representations and warranties contained in Section 2 of the Stock Purchase Agreement and the rights to indemnification contained in Section 4 of the Stock Purchase Agreement, but expressly excluding the rights assigned to Related under subparagraph 3(a)(ii) below, and (ii) assigns to Related and its successors and assigns all of * * * [Castanet's] rights after the Closing Date under Sections 1.4, 4.7, 4.8, and 4.9 of the Stock Purchase Agreement, in each case except to the extent any rights under such Sections 2 or 4 relate to Excluded Assets under the Asset Purchase Agreement or the business related thereto, but in any event including Excluded Liabilities relating thereto.

(b) Notwithstanding the foregoing, if and to the extent * * * [Castanet] otherwise or the Company [BCA] directly suffers an indemnifiable Loss under Section 4 of the Stock Purchase Agreement, then * * * [Castanet] shall be entitled to recover directly against the [Abrams] Estate with respect thereto pursuant to the terms of the Stock Purchase Agreement.

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6.6 No Reliance. Except for any assignees permitted by Section 6.2 of this Agreement and except for the [Abrams] Estate, who is hereby made a third party beneficiary to this Assignment: (a) no third party is entitled to rely on any of the agreements of the parties contained in this Agreement; and (b) the parties assume no liability to any third party because of any reliance on the agreements of the parties contained in this Agreement.

Pursuant to section 1.2 of the SPA and section 2(c) of the escrow agreement, Castanet paid the $25,410,295 purchase price for all of the Abrams estate's BCA stock from a certain account that Castanet maintained at Rabobank (Castanet's account No. 9081 at Rabobank) into a certain escrow account established at Rabobank for the purpose of holding the funds representing that purchase price.

Before Castanet's payment of the $25,410,295 purchase price from Castanet's account No. 9081 at Rabobank, UAFC had deposited the $28 million that UAFC had lent to Castanet into that account.

Pursuant to section 1.2(a) of the APA and section 2(b) of the escrow agreement, on August 1, 2000, Hypo Bank deposited on behalf of petitioner the funds representing the purchase price for certain of BCA's assets (asset purchase price) into a certain escrow account maintained at Rabobank on behalf of Castanet (Castanet's escrow account No. 9107 at Rabobank). However, in contravention of the escrow agreement, on the same date Ms. Dill, acting as the sole officer of Castanet, directed Rabobank to transfer the funds representing the asset purchase price from that escrow account to a certain account that BCA maintained at Rabobank (BCA's account No. 9090 at Rabobank). Rabobank complied with Castanet's direction on August 1, 2000. Also on August 1, 2000, Ms. Dill, acting as the sole officer of BCA, directed Rabobank to transfer the funds representing the asset purchase price from BCA's account No. 9090 at Rabobank to Castanet's account No. 9081 at Rabobank. Rabobank complied with BCA's direction on that date. On August 1, 2000, Ms. Dill, acting as the sole officer of Castanet, requested that Rabobank use any funds in Castanet's account No. 9081 at Rabobank to repay Castanet's debt to UAFC. Rabobank complied with Castanet's direction on August 2, 2000, and used the funds in Castanet's account No. 9081 at Rabobank, including the funds representing the asset purchase price, to repay that debt.

Hypo Bank is the bank that made the loan to Related LR to fund petitioner's purchase of certain of BCA's assets.

As required by section 5(a) of the escrow agreement, Rabobank had (1) received the release notice and (2) made the transfers described in the first sentence of section 4 of that agreement.

In order to facilitate the contribution of the Canadian currency to BCA that was the subject of the July 21, 2000 fax that Mr. Bae of Fortrend sent to Mr. Fitzgerald, one of Fortrend's attorneys at Manatt, Castanet merged with and into BCA around September 11, 2000. Thereafter, SCALP owned 100 percent of the stock of BCA.

Around September 12, 2000, SCALP made a capital contribution to BCA of $68,000 (Canadian) in which SCALP claimed a tax basis of $17,268,000 (U.S.). (We shall refer to the $68,000 (Canadian) that SCALP contributed to BCA as the Canadian currency.)

On October 11, 2000, Mr. Fitzgerald sent a memorandum to certain other attorneys at Manatt. In that memorandum, Mr. Fitzgerald stated in pertinent part:

Subsequent to the stock purchase and the asset sale, the Fortrend entity that purchased the stock of * * * [BCA] merged downstream. This left * * * [BCA] as the surviving corporation wholly owned by Signal Capital Associates, L.P. ("SCALP"). SCALP then transferred to * * * [BCA] Canadian currency in the amount of $68,000 (Canadian) but with a tax basis in SCALP's hands stated to be $17,268,000.

We have been asked to render three tax opinions. First, Fortrend has asked us to provide an opinion as to the dollar amount of pre-contribution tax basis that SCALP had in the Canadian currency. We have no knowledge of this basis. SCALP will have to represent to us this basis figure. Fortrend entities have made such representations to us in other transactions. Second, Fortrend has asked us to provide an opinion that the transfer of the Canadian currency from SCALP to * * * [BCA] qualified under IRC Section 351. This is the same type of opinion we have rendered in other Fortrend transactions. Third, Fortrend has asked us to provide an opinion that * * * [BCA] took a carryover basis in the Canadian currency and the dollar amount of the basis * * * [BCA] had in the Canadian currency. Application of the IRC Section 362 carryover basis rules is a consequence of qualification under IRC Section 351. We would just use the basis dollar amount represented to us by SCALP.

Our opinions would be addressed solely to SCALP and * * * [BCA], which are now both Fortrend entities. This is an "inside" Fortrend opinion. * * *

Drafts of the tax opinion letter and the representations letter are enclosed. I am sending copies to Fortrend for their simultaneous review. Pursuant to policy decisions our firm has reached concerning Fortrend tax opinions and my review of the documents, I recommend approval of the enclosures.

On October 11, 2000, Mr. Fitzgerald sent a letter (Mr. Fitzgerald's October 11, 2000 letter) to Ms. Dill, the sole officer and the sole director of BCA and an employee of Fortrend, and attached to that letter "a draft tax opinion letter and a draft representations letter supporting the opinions for the LR Development contribution transaction [the contribution of the Canadian currency to BCA]."

The record does not contain the "draft tax opinion letter or the "draft representations letter" to which Mr. Fitzgerald referred in Mr. Fitzgerald's October 11, 2000 letter.

Around October 25, 2000, BCA converted the Canadian currency into U.S. dollars.

On November 1, 2000, BCA and SCALP sent a joint letter (November 1, 2000 representation letter) to Manatt. In that letter, BCA and SCALP made certain representations to Manatt on which Manatt relied in rendering its opinion regarding certain tax issues involved in SCALP's contribution to BCA of the Canadian currency. In the November 1, 2000 representation letter, BCA and SCALP stated in pertinent part:

Signal Capital Associates, L.P., * * * ("Parent") and Bruce C. Abrams, Inc., * * * ("Subsidiary"), have requested your opinion regarding certain federal income tax consequences of a transaction (the "Contribution") whereby Parent transferred certain Canadian currency in the denomination of $68,000 (Canadian) to Subsidiary.

* * * Parent was the sole shareholder of Subsidiary both before and after the Contribution. Accordingly, Parent joins in the representations and statements in this letter. Parent and Subsidiary understand that the conclusions in your opinion letter are dependent in part on the accuracy of this representations letter and that your opinion could be adversely affected if this representations letter is not true, correct and complete.

* * * * * * *

Parent and Subsidiary have asked you to address solely the federal income tax consequences of the Contribution that are specifically set forth in your draft tax opinion letter referred to above. Parent and Subsidiary are aware that the Contribution may involve many other tax issues and consequences under the Internal Revenue Code of 1986, as amended (the "Code"), and other tax statutes. However, Parent and Subsidiary have not asked you to consider or render an opinion regarding such other tax issues.

For purposes of your tax opinion, Parent and Subsidiary represent to you, after due investigation, as follows:

1. All factual statements in your draft tax opinion letter concerning the Contribution are true, correct and complete.

2. On September 12, 2000, Parent and Subsidiary took all proper action to transfer from Parent to Subsidiary beneficial ownership of Canadian currency with a denomination of $68,000 (Canadian) and a tax basis of $17,268,000 (U.S.). Parent's tax basis for the Canadian currency that Parent transferred to Subsidiary was $17,268,000 in the aggregate immediately before the Contribution.

3. Both Parent and Subsidiary had substantial non-tax business reasons for engaging in the Contribution. Both Parent and Subsidiary entered into the Contribution with a view toward making an economic profit apart from tax consequences.

4. Parent and Subsidiary have treated and will treat the Contribution in a manner that is consistent with its form.

5. At the time of the Contribution and thereafter, Parent owned 100% of the issued and outstanding shares of Subsidiary. Due to its ownership of all of the Subsidiary stock, issuance of more Subsidiary shares to Parent in connection with the Contribution would have been meaningless. For this reason, Subsidiary did not issue shares to Parent as a result of the contribution.

6. No stock or securities were or will be issued by Subsidiary for services rendered to or for the benefit of Subsidiary in connection with the Contribution. No stock or securities were or will be issued by Subsidiary for indebtedness of Subsidiary that is not evidenced by a security or for interest on indebtedness of Subsidiary which accrued on or after the beginning of the holding period of Parent for the debt.

7. Parent neither accumulated receivables nor made any extraordinary payment of payables in anticipation of the Contribution. Subsidiary has reported and will report items which, but for the Contribution, would have resulted in income or deduction to Parent in a period subsequent to the Contribution and such items have and will constitute income or deductions to Subsidiary when received or paid by Subsidiary.

8. The Contribution was not the result of solicitation by a promoter, broker or investment house.

9. Parent did not retain any beneficial ownership in the Canadian currency it transferred to Subsidiary.

10. Subsidiary did not take the Canadian currency subject to any debt and did not assume any debt of Parent in connection with the Contribution.

11. There was no indebtedness between Subsidiary and Parent and there was no indebtedness created in favor of Parent as a result of the Contribution.

12. The Contribution occurred under a plan agreed upon before the Contribution in which the rights of the parties were defined.

13. There was no plan or intention on the part of Subsidiary to redeem or otherwise reacquire any Subsidiary stock held by Parent.

14. Taking into account any issuance of additional shares of Subsidiary stock, any issuance of stock for services, the exercise of any Subsidiary stock rights, warrants or subscriptions, any public offering of Subsidiary stock and the sale, exchange, transfer by gift, or other disposition of any of the stock of Subsidiary held by Parent, Parent was in "control" of Subsidiary within the meaning of Section 368(c) of the Code at the time of the Contribution. At the time of the Contribution, Parent was not under a binding obligation, and had no plan or intention, to dispose of any portion of its stock in Subsidiary following the Contribution.

15. Subsidiary and Parent each paid their own expenses incurred in connection with the Contribution.

16. At the time of the Contribution, Subsidiary was not an "investment company" within the meaning of Section 351(e) of the Code.

17. You may rely on the accuracy of the representations herein for purposes of your tax opinion letter without further inquiry or independent investigation.

18. Parent and Subsidiary hereby consent to your reference to this representations letter in your tax opinion letter.

19. The undersigned have undertaken such investigation as the undersigned deemed necessary to ensure the accuracy of the foregoing representations.

On November 1, 2000, Manatt sent a tax opinion letter (Manatt's November 1, 2000 tax opinion letter) to BCA and SCALP. In that tax opinion letter, Manatt stated in pertinent part:

In accordance with your request, we provide the following analysis and opinions relating to certain federal income tax consequences of the transaction (the "Contribution") whereby Signal Capital Associates, L.P., * * * ("Parent"), contributed certain Canadian currency to Bruce C. Abrams, Inc., * * * ("Subsidiary").

At the time of the Contribution, Parent owned all of the issued and outstanding shares of Subsidiary. Subsidiary did not issue any shares of its stock to Parent as a result of the Contribution because (according to Parent) issuance of such shares in exchange for the Canadian currency would have been meaningless (due to the existing ownership by Parent of 100% of Subsidiary).

* * * * * * *

We have also relied for purposes of this letter on facts set forth in a representations letter from Parent and Subsidiary to us of even date herewith. Among the representations in that letter are representations that, for federal income tax purposes, Parent's tax basis for the Canadian currency that Parent contributed to Subsidiary was $17,268,000 immediately before the Contribution. We have assumed, without independent investigation, the accuracy and completeness of all such representations. If such representations at any time are not true, correct and complete, our opinions could be adversely affected.

Any change or inaccuracy in the facts set forth in the documents specified above or in the above-referenced representations letter could adversely affect our opinions. * * *.

* * * * * * *

In the case of transactions such as the Contribution, many federal, state and local income and other tax consequences arise. We have been asked only to address the issues specifically set forth below. No opinion is expressed regarding any other issues.

* * * * * * *

Subject to the foregoing, it is our opinion that, more likely than not:

(a) The Contribution satisfied the requirements of Section 351 of the [Internal Revenue] Code.

(b) The tax basis for the Canadian currency transferred from Parent to Subsidiary in the Contribution was a carryover tax basis in accordance with Section 362 of the [Internal Revenue] Code.

(c) Based on the representations made to us in the above-referenced representations letter from Parent and Subsidiary, the carryover tax basis for Subsidiary was $17,268,000 for the Canadian currency contributed to Subsidiary.

On February 8, 2002, BCA dissolved. On the same date, BCA filed with the secretary of state of the State of Illinois articles of dissolution, which Stephen Galler and Thomas Weeks had signed on behalf of BCA on January 14, 2002. Those articles stated that BCA's stockholders had authorized the dissolution of BCA on December 13, 2001.

On or before September 15, 2001, BCA filed Form 1120S, U.S. Income Tax Return for an S Corporation, for the taxable year that began January 1, 2000, and ended July 31, 2000 (7/31/00 BCA return). BCA indicated in the 7/31/00 BCA return that that return was its final S corporation return.

BCA included with the 7/31/00 BCA return Schedule L, Balance Sheets per Books (Schedule L). In that schedule, BCA reported total assets of $25,482,604 as of July 31, 2000, the end of the short taxable year for which that return was filed. BCA also included with the 7/31/00 BCA return a document that stated in pertinent part: "This is to provide notification under Reg. 1.1362-2(b)(1) that Bruce C. Abrams, Inc. terminated its S status effective as of July 31, 2000, due to a transfer of stock to a corporation; thereby terminating its S status under IRC Sec. 1361(b)(1)(B)."

On September 17, 2001, BCA timely filed Form 1120, U.S. Corporation Income Tax Return (Form 1120), for the taxable year that began August 1, 2000, and ended December 31, 2000 (12/31/00 BCA return). In the 12/31/00 BCA return, BCA reported total income of $17,972,779, that included a gain of $16,678,066 from the sale of certain assets that BCA sold to petitioner pursuant to the APA.

In the 12/31/00 BCA return, BCA claimed total deductions of $18,338,661 that included a deduction for a claimed loss of $17,223,844 (Canadian currency loss) for "IRC SEC. 988 loss on foreign currency" (i.e., the Canadian currency that SCALP contributed to BCA). That claimed loss deduction was calculated as the difference between BCA's claimed $17,268,000 carryover basis under section 362 in the Canadian currency and the claimed $44,156 fair market value of that currency at the time BCA converted it into U.S. dollars. In the 12/31/00 BCA return, BCA reported a net operating loss of $365,882 and total tax of zero.

BCA included with the 12/31/00 BCA return Schedule L. In that schedule, BCA reported total assets of $3,277,516 as of December 31, 2000, the end of the short taxable year for which that return was filed.

On September 17, 2002, BCA filed Form 1120 for its taxable year 2001 (12/31/01 BCA return). In that return, BCA stated that its address was in Alexandria, Virginia (last known address). In the 12/31/01 BCA return, BCA indicated that that return would be its final return.

In the 12/31/01 BCA return, BCA reported total income of $220,721, claimed total deductions of $48,319, and carried forward $172,402 of the $365,882 net operating loss that it had claimed in the 12/31/00 BCA return. In the 12/31/01 BCA return, BCA reported taxable income of zero and total tax of zero.

BCA included with the 12/31/01 BCA return Schedule L. In that schedule, BCA reported total assets of zero as of the end of its taxable year 2001.

Around September 19, 2001, petitioner filed with respondent Form 1065, U.S. Return of Partnership Income, for its taxable year that began July 31, 2000, and ended December 31, 2000. Petitioner included with that form Schedule L. In that schedule, petitioner reported total assets of $78,091,661 as of December 31, 2000, the end of its short taxable year.

On August 13, 2004, respondent issued to the Abrams estate a notice of deficiency (Abrams estate notice) with respect to its taxable year ended October 31, 2000. In that notice, respondent determined, inter alia, that the Abrams estate (1) had failed to substantiate the basis that it had claimed in the stock of BCA that it sold to Castanet under the SPA and (2) had additional ordinary income from BCA. Respondent did not determine in the Abrams estate notice to disregard the Abrams estate's sale of its BCA stock to Castanet and to treat BCA's sale of certain of its assets as having occurred while the Abrams estate owned the stock of BCA. As a result of the determinations in the Abrams estate notice, respondent determined a deficiency of $14,514,038 in the Abrams estate's tax.

The Abrams estate timely filed a petition with the Court in which it disputed the deficiency that respondent determined in the Abrams estate notice. On February 24, 2006, the Court entered a stipulated decision in that case that there was no deficiency in tax due from the Abrams estate for its taxable year ended October 31, 2000.

On August 13, 2004, respondent issued to BCA at its last known address a notice of deficiency for its taxable year ended December 31, 2000 (BCA notice). In that notice, respondent determined a deficiency of $7,507,972 in BCA's tax for that year. Virtually all of that deficiency resulted from respondent's determination to disallow the Canadian currency loss of $17,223,844 that BCA claimed in the 12/31/00 BCA return. Respondent disallowed that loss "because you [BCA] have failed to establish the basis in the assets or that a loss was otherwise sustained during taxable year 2000 in the amount claimed." In the BCA notice, respondent also determined an accuracy-related penalty under section 6662(a) of $1,501,594.50.

BCA did not file a petition with the Court with respect to the BCA notice. On February 7, 2005, respondent assessed the deficiency and the accuracy-related penalty totaling $9,009,566.50 that respondent had determined in the BCA notice as well as interest thereon as provided by law through that date. (We shall refer to those assessed amounts for BCA's short taxable year ended December 31, 2000, as well as all interest thereon as provided by law after February 7, 2005, as BCA's tax liability.) As of the time of the trial in this case, BCA had not paid any of BCA's tax liability.

On June 18, 2005, respondent opened a collection case, and on June 29, 2005, respondent assigned a revenue officer (first revenue officer) to conduct collection activities with respect to BCA's tax liability. On June 29, 2005, the first revenue officer reviewed respondent's Integrated Data Retrieval System database with respect to BCA.

On July 22, 2005, the first revenue officer went to BCA's last known address. On July 26, 2005, the first revenue officer used certain database systems in order to perform certain research with respect to BCA. On the same date, the first revenue officer requested authorization to file a notice of Federal tax lien (notice of tax lien) with respect to BCA's tax liability. On August 2, 2005, respondent recorded a notice of tax lien with respect to BCA's tax liability with the Virginia State Corporation Commission.

On July 27, 2005, the first revenue officer reviewed certain data transcripts maintained by the Internal Revenue Service and certain State and local government records relating to BCA in order to identify potential sources of income or assets of BCA on which respondent might levy. The first revenue officer did not identify any such sources from that review.

On July 27, 2005, respondent sent to BCA at its last known address Letter 1058, Notice of Intent to Levy and Notice of the Right to a Hearing (notice of levy). On August 1, 2005, respondent received confirmation that delivery of the notice of levy had been accepted.

The record does not establish who accepted the notice of levy on behalf of BCA. Nor does the record establish whether BCA appealed the notice of levy to respondent's Appeals Office.

On August 31, 2005, the first revenue officer requested assistance from another revenue officer (second revenue officer) in Chicago. The first revenue officer asked the second revenue officer to visit certain offices that petitioner was occupying at the time, which the second revenue officer did on October 4, 2005.

On September 16, 2005, the first revenue officer identified Golden Gate Bank as a potential source on which respondent might levy with respect to BCA's tax liability. On the same date, the first revenue officer mailed to Golden Gate Bank a copy of a notice of levy with respect to that liability. On September 29, 2005, the first revenue officer terminated the levy action involving Golden Gate Bank because BCA did not maintain any accounts at that bank. On October 5, 2005, the second revenue officer reviewed certain records maintained by the secretary of state of the State of Illinois. That review disclosed that BCA had dissolved. On October 19, 2005, respondent closed as noncollectible the collection case with respect to BCA's tax liability because BCA had dissolved.

At no time did the first revenue officer or the second revenue officer interview or issue a summons to Larry Austin, who had signed the 12/31/00 BCA return as BCA's president.

On April 18, 2006, respondent reopened the collection case with respect to BCA's tax liability and assigned it to respondent's examination division for consideration of possible transferee liability.

Respondent issued to petitioner a notice of liability in which respondent determined that petitioner is liable as a transferee of BCA for BCA's tax liability.

OPINION

Respondent bears the burden of establishing that petitioner is liable under section 6901 for BCA's tax liability as a transferee of property of BCA (BCA's transferee). See sec. 6902(a); see also Rule 142(d).

Petitioner bears the burden of establishing that BCA is not liable for BCA's tax liability. See Rule 142(a), (d). Petitioner alleged in the petition that respondent erred in determining that BCA is liable for BCA's tax liability. Petitioner presented no evidence at trial and advances no argument on brief that BCA is not liable for BCA's tax liability. We conclude that petitioner has abandoned the allegation in the petition that respondent erred in determining that BCA is liable for BCA's tax liability.

Section 6901 provides in pertinent part:

SEC. 6901. TRANSFERRED ASSETS.

(a) Method of Collection. — The amounts of the following liabilities shall, except as hereinafter in this section provided, be assessed, paid, and collected in the same manner and subject to the same provisions and limitations as in the case of the taxes with respect to which the liabilities were incurred:

(1) Income, estate, and gift taxes. —

(A) Transferees. — The liability, at law or in equity, of a transferee of property —

(i) of a taxpayer in the case of a tax imposed by subtitle A (relating to income taxes),

(h) Definition of Transferee. — As used in this section, the term "transferee" includes * * * distributee * * *.

Section 6901 does not create or define a substantive liability; it merely provides a procedure by which the Government may collect from a transferee of property unpaid taxes owed by the transferor of the property. SeeCommissioner v. Stern, 357 U.S. 39, 42 (1958); Hagaman v. Commissioner, 100 T.C. 180, 183 (1993). The existence and the extent of a transferee's liability are determined under applicable State law. See Commissioner v. Stern, supra at 42-45; Hagaman v. Commissioner,supra at 183-185. The parties agree that the applicable State law here is the law of the State of Illinois.

Respondent relies on the following grounds in support of respondent's position that petitioner is liable under section 6901 as BCA's transferee: (1) Petitioner is liable as BCA's transferee under the assumption agreement; (2) petitioner is liable as BCA's transferee under 740 Ill. Comp. Stat. Ann. 160/1-12 (West 2002) (Illinois fraudulent transfer statute); and (3) petitioner is liable as BCA's transferee under what respondent labels the "trust fund doctrine" (respondent's trust fund doctrine).

Respondent does not advance any other argument in support of respondent's position that petitioner is liable under sec. 6901 as BCA's transferee. In fact, respondent expressly abandons two such other arguments. On brief, respondent states:

Respondent does not seek to recast the BCA Intermediary Transaction as a stock sale by the [Abrams] Estate to petitioner, as in Enbridge Energy Co. v. United States, 553 F.Supp.2d 716 (S.D. Tex. 2008), because petitioners liability as a transferee can be established by following the form of the transaction it adopted. Nor does respondent seek to establish petitioner's liability as a transferee under the Federal Debt Collection Procedure Act, 28 U.S.C. § 3301 et seq.

Claimed Transferee of Property of BCA Under the Assumption Agreement

Respondent argues that petitioner is liable for BCA's tax liability as BCA's transferee because petitioner assumed that liability under the assumption agreement. In support of that argument, respondent asserts: (1) Pursuant to section 2 of the assumption agreement petitioner assumed from Castanet all of Castanet's obligations under, inter alia, section 5 of the SPA (i.e., the stock purchase agreement) and (2) pursuant to section 5 of the SPA Castanet obligated itself to be responsible for, inter alia, any tax attributable to the sale of certain of BCA's assets to petitioner (asset sale capital gains tax).

Section 2 of the assumption agreement provided in pertinent part: "LDC [petitioner] hereby accepts and assumes all of CNI's [Castanet's] obligations under * * * Article V of the Stock Purchase Agreement". "Article V of the Stock Purchase Agreement" to which section 2 of the assumption agreement referred is section 5 of the SPA. We have found on the record before us that petitioner expressly assumed in section 2 of the assumption agreement all of Castanet's obligations under, inter alia, section 5 of the SPA.

Section 5 of the SPA provided in pertinent part:

(a) Except for Taxes that have been provided for as accrued in the computation of Net Working Capital and except as set forth in Section 4.7, Seller shall be responsible for all Taxes imposed on the LR Entities (the "Seller Taxes") for all taxable periods or portions of taxable periods, ending as of one day prior to the Closing Date (the "Pre-Closing Period"). Buyer shall be responsible for all Taxes imposed on the LR Entities (the "Buyer Taxes") for all taxable periods or portions of taxable periods beginning on the Closing Date (the "Post-Closing Period").

* * * * * * *

(c) * * * Except as set forth in Section 4.7, Seller shall indemnify and hold Buyer harmless from and against all liability from Seller Taxes attributable for the Pre-Closing Period to the extent such Taxes have not been paid or an accrual therefor has not been included in Net Working Capital.

* * * * * * *

(f) If Buyer or any of the LR Entities receives a refund, credit or reduction of Taxes attributable to the Pre-Closing Period, Buyer shall promptly reimburse the Seller for such refund, credit, or reduction of Taxes. If Seller or any of the LR Entities receive a refund or reduction of Taxes attributable to the Post-Closing Period, the Seller shall promptly reimburse the Buyer for such refund, credit or reduction of taxes.

(g) The Buyer and LR Entities shall cause their accountants to prepare and file all Tax Returns required to be filed by LR Entities for the taxable year beginning on the Closing Date (the "Post-Closing Short Period") and all subsequent tax years. Such Tax Returns shall be prepared on a basis consistent with the items and positions reflected in the Pre-Closing Period Tax Returns and in this Agreement; provided, however, that to the extent Buyer is entitled to make new tax elections, adopt methods of accounting other than those used by Seller or take reporting positions different from those taken by Seller, it may do so, so long as such items and positions could not reasonably be expected to cause any material adverse tax consequences to Seller with respect to the Pre-Closing Period. Items to be taken into account in the Post-Closing Short Period Tax Returns shall be determined using the "closing-the-books" method as described in Section 1362(e)(3) of the Code and the regulations thereunder, and the Buyer and Seller agree to make an election, if necessary, under Section 1362(e)(3) of the Code.

(h) Consistent with the "closing-the-books" method under Section 1362(e)(3) of the Code, Buyer shall be responsible for all Buyer Taxes for all taxable periods or portions of taxable periods beginning on the Closing Date (the "Post-Closing Period"). Exemptions, allowances, deductions and any other items that are calculated on an annual basis (including, but not limited to, depreciation and amortization deductions) shall be allocated between the Pre-Closing Short Period and the Post-Closing Short Period in the proportion which the number of days in each such period bears to the total number of days in the applicable annual period. If, as of the Closing Date, any of the LR Entities is a partner in a partnership which has a tax year that does not end as of the Closing Date, any item attributable to such partnership's activities shall be allocated among the Pre-Closing Short Period and the Post-Closing Short Period in a manner consistent with Treasury Regulation Section 1.1362-3(c). In addition to any obligation to Seller under Section 4.7, Buyer shall indemnify and hold Seller harmless from and against all liability from Buyer Taxes attributable to the Post-Closing Period, and for all Taxes attributable to the Pre-Closing Period which have been provided for as accrued in computation of Net Working Capital.

(i) Any refund of Taxes, credit or reduction of Taxes attributable to the Post-Closing Short Period and all subsequent periods will be for the benefit of Buyer.

We have found on the record before us that Castanet, as the buyer of BCA's stock, expressly agreed in section 5(a) of the SPA to be responsible for, inter alia, BCA's tax liability, including any asset sale capital gains tax of BCA for the short taxable year of BCA that ended December 31, 2000.

Despite the express language of the assumption agreement and of the SPA, petitioner argues that Castanet did not obligate itself to be responsible for BCA's tax liability. According to petitioner:

Section 5 of the SPA simply means that, as between the stock seller and the stock buyer, the stock seller is responsible for all taxes incurred prior to the closing by BCA and the various entities in which it held an interest, and the stock buyer is responsible for all taxes incurred by those entities after the closing. By standing in Castanet's shoes with respect to this provision, Petitioner agreed that it, as opposed to the Estate or Castanet, would be responsible for making sure that the entities it owned and controlled as a result of the Asset Pu9th Cir. 1981).

With regard to claims of fraud, "the circumstances constituting fraud . . . shall be stated with particularity." Fed.R.Civ.P. 9(b). "Rule 9(b) serves not only to give notice to defendants of the specific fraudulent conduct against which they must defend, but also `to deter the filing of complaints as a pretext for the discovery of unknown wrongs, to protect [defendants] from the harm that comes from being subject to fraud charges, and to prohibit plaintiffs from unilaterally imposing upon the court, the parties and society enormous social and economic costs absent some factual basis.'" Bly-Magee v. California, 236 F.3d 1014, 1018 (9th Cir. 2001) (quoting In re Stac Elec. Sec. Litig., 89 F.3d 1399, 1405 (9th Cir. 1996)). Thus, pursuant to Rule 9(b), a plaintiff alleging fraud at a minimum must plead evidentiary facts such as the time, place, persons, statements and explanations of why allegedly misleading statements are misleading. In re GlenFed, Inc. Sec. Litig., 42 F. 3d 1541, 1547 n. 7 (9th Cir. 1994); see also Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 2003); Fecht v. Price Co., 70 F.3d 1078, 1082 (9th Cir. 1995).

"Under California law, the `indispensable elements of a fraud claim include a false representation, knowledge of its falsity, intent to defraud, justifiable reliance, and damages.'" Vess, 317 F.3d at 1105 (quoting Moore v. Brewster, 96 F.3d 1240, 1245 (9th Cir. 1996)).

ANALYSIS

At the outset, the court addresses defendants' requests for judicial notice of documents related to the matters at issue. In both cases, defendants request that the court take judicial notice of the following documents recorded in the official records of the Sutter County Recorder's Office: (1) the Deed of Trust re: plaintiffs' $261,865 loan, including Department of Veterans Affairs Guaranteed Loan and Assumption Policy Rider, recorded May 27, 2004; (2) the Notice of Default of plaintiffs' loan, recorded August 14, 2008; (3) the Notice of Trustee's Sale set for April 9, 2009 re: plaintiffs' loan, recorded March 24, 2009; (4) the Trustee's Deed Upon Sale on April 9, 2009, recorded April 22, 2009; and (5) the Corporation Grant Deed and U.S. Department of Veterans Affairs Certificate of Acceptance following April 9, 2009 Trustee's Sale re: plaintiffs' loan, recorded April 22, 2009. (Case No. 09-cv-0458, Doc. No. 15, Req. Judicial Notice, Exs. A-E; Case No. 10-cv-0342, Doc. No. 10, Req. Judicial Notice, Exs. A-E.)

In the quiet title action, defendant requests judicial notice of six documents filed in plaintiffs' foreclosure case: (1) plaintiffs' second amended complaint; (2) defendants' motion to dismiss; (3) plaintiffs' filings in opposition to defendants' motion to dismiss; (4) defendants' reply to plaintiffs' opposition; (5) plaintiffs' sur-reply to defendants' reply; and (6) the court's minute order taking defendants' motion to dismiss under submission after hearing on October 30, 2009. (Case No. 10-cv-0342, Doc. No. 10, Req. Judicial Notice, Exs. F-K.)

On a motion to dismiss, the court may consider matters of public record. Lee v. City of Los Angeles, 250 F.3d 668, 688-89 (9th Cir. 2001); MGIC Indem. Corp. v. Weisman, 803 F.2d 500, 504 (9th Cir. 1986). A court may take judicial notice of its own files and documents filed in other courts. Reyn's Pasta Bella, LLC v. Visa USA, Inc., 442 F.3d 741, 746 n. 6 (9th Cir. 2006) (taking judicial notice of documents related to a settlement in another case that bore on whether the plaintiff was still able to assert its claims in the pending case); BurbankGlendale-Pasadena Airport Auth. v. City of Burbank, 136 F.3d 1360, 1364 (9th Cir. 1998) (taking judicial notice of court filings in a state court case where the same plaintiff asserted similar and related claims). Accordingly, defendants' requests for judicial notice of official records, including court records, are granted.

I. The Foreclosure Action (2:09-cv-0458 GEB DAD PS)

A. Lack of Standing

Defendants argue that plaintiffs lack standing to sue on eight of their claims: the claim for denial of a "mortgage workout" pursuant to TARP, 12 U.S.C. § 5201, et seq. (count 1, denial of workout) and the claims brought pursuant to criminal statutes 18 U.S.C. § 666 (count 2, theft of federal funds); 18 U.S.C. § 1344 (count 3, frauds and swindles); 18 U.S.C. §§ 1341 and 1343 (count 6, wire fraud); 26 U.S.C. §§ 7201 and 7203 (count 8, tax evasion); and California Penal Code § 422 (count 9, death threats). The court agrees.

Defendants erroneously describe TARP as the "Temporary Asset Redistribution Program." (Doc. No. 14, Def'ts' Mot. to Dismiss, at 10.) The acronym stands for Troubled Asset Relief Program (TARP), codified as the Emergency Economic Stabilization Act of 2008, 12 U.S.C. § 5201. See Historical Statutory Notes foll. 12 U.S.C. § 5201.

"The fact that a federal statute has been violated and some person harmed does not automatically give rise to a private right of action." Touche Ross Co. v. Redington, 442 U.S. 560, 568 (1979). "Instead, the statute must either explicitly create a right of action or implicitly contain one." Diaz v. Davis (In re Digimarc Corp. Derivative Litig.), 549 F.3d 1223, 1230 (9th Cir. 2008).

In creating TARP, Congress expressly provided for judicial review of the actions of the Secretary of the Treasury, thus granting a private right of action against the Secretary for persons or entities harmed by the Secretary's actions. See 12 U.S.C. § 5229. The judicial review section of the Act contains no mention of a right of action against non-governmental entities, such as the financial institutions that receive TARP funds. Thus, no express right of action was created. See Gardner v. American Home Mortgage Servicing, Inc., 691 F. Supp. 2d 1192, 1203-04 (E.D. Cal. 2010); Pantoja v. Countrywide Home Loans, Inc., 640 F. Supp. 2d 1177, 1185 (N.D. Cal. 2009). See also Manabat v. Sierra Pacific Mortgage Co., Inc., No. CV F 10-1018 LJO JLT, 2010 WL 2574161, at *11 (E.D. Cal. June 25, 2010); Robinson v. Wells Fargo Bank, N.A., No. CV 09-2066-PHX-JAT, 2010 WL 2534192, at *6 (D. Ariz. June 18, 2010); Logan v. U.S. Bank N.A., No. CV 09-08950 MMM (PLAx), 2010 WL 1444878, at *8-9 (C.D. Cal. Apr. 12, 2010). In the absence of any indication that Congress intended to create an implied right of action against recipients of TARP funds, courts in this circuit have declined to find an implied right of action for individuals who wish to sue financial institutions. See Pantoja, 640 F. Supp. at 1185; Manabat, 2010 WL 2574161, at *11; Robinson, 2010 WL 2534192, at **6-7; Logan, 2010 WL 1444878, at *9-10. See also Wilder v. Virginia Hosp. Ass'n, 496 U.S. 498, 509 n. 9 (1990) (noting that courts must proceed with caution in deciding whether a statute provides an implied private right of action because Congress, rather than the courts, controls the availability of remedies for violation of federal statutes).

In general, criminal statutes do not provide a private cause of action or a basis for civil liability. See Ellis v. City of San Diego, 176 F.3d 1183, 1189 (9th Cir. 1999) (affirming district court's dismissal of sixteen claims based on California Penal Code sections because "these code sections do not create enforceable individual rights"); Aldabe v. Aldabe, 616 F.2d 1089, 1092 (9th Cir. 1980) (holding that criminal statutes 18 U.S.C. §§ 241 and 242 "provide no basis for civil liability"). While the provision of a criminal penalty does not necessarily preclude implication of a private cause of action, there must be "`at least a statutory basis for inferring that a civil cause of action of some sort lay in favor of someone.'" Chrysler Corp. v. Brown, 441 U.S. 281, 316 (1979) (quoting Cort v. Ash, 422 U.S. 66, 79 (1975)). See also Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 190-91 (1994) ("We have been quite reluctant to infer a private right of action from a criminal prohibition alone . . . and have not suggested that a private right of action exists for all injuries caused by violations of criminal prohibitions."). Here, plaintiffs have not argued that a private cause of action is implied in any criminal statute they rely upon.

The court finds no statutory basis for inferring civil causes of action from TARP or the criminal statutes cited by plaintiffs. Accordingly, plaintiffs' claims alleged under TARP, 12 U.S.C. § 5201 (denial of mortgage workout); 18 U.S.C. § 666 (theft of federal funds); 18 U.S.C. § 1344 (frauds and swindles); 18 U.S.C. §§ 1341 and 1343 (wire fraud); 26 U.S.C. §§ 7201 and 7203 (tax evasion); and California Penal Code § 422 (death threats) should all be dismissed with prejudice.

B. Failure to Allege Sufficient or Plausible Facts to State a Claim

1. Civil Rights Claims Under 42 U.S.C. §§ 1981 and 1982

After careful consideration of plaintiff's allegations of discrimination, the court agrees with defendants that plaintiffs have failed to allege a plausible claim of racial discrimination under the civil rights statutes relied upon.

Section 1981 provides that

[a]ll persons within the jurisdiction of the United States shall have the same right in every State and Territory to make and enforce contracts, to sue, be parties, give evidence, and to the full and equal benefit of all laws and proceedings for the security of persons and property as is enjoyed by white citizens, and shall be subject to like punishment, pains, penalties, taxes, licenses, and exactions of every kind, and to no other.

42 U.S.C. § 1981(a). The phrase "make and enforce contracts" is defined as including "the making, performance, modification, and termination of contracts, and the enjoyment of all benefits, privileges, terms, and conditions of the contractual relationship." 42 U.S.C. § 1981(b). The rights protected by § 1981 are protected against impairment by non-governmental discrimination as well as impairment under color of State law. 42 U.S.C. § 1981(c). Section 1982 provides that "[a]ll citizens of the United States shall have the same right, in every State and Territory, as is enjoyed by white citizens thereof to inherit, purchase, lease, sell, hold, and convey real and personal property." 42 U.S.C. § 1982.

By its terms, § 1981 protect the plaintiffs, who allege that Mr. Small is Hispanic and Mrs. Small is African-American, in the making and enforcement of contracts, as defined by the statute, with the defendants, who are non-governmental entities and individuals. However, plaintiffs allege only that they "were denied privileges to do a `mortgage workout' under HR 1424 TARP as a proximate result of discrimination based on Race compared to similarly situated Caucasians." (Doc. 10, Pls.' Second Amended Compl. ¶ 3.) Plaintiffs' unauthorized sur-reply demonstrates that plaintiffs are unable to present factual allegations that support their claim of racial discrimination. Plaintiffs merely argue that their attempted eviction in January 2009 by use of threats, vandalism, and terror is evidence of racial discrimination because such acts are "consistent with the trickery, extortion, and intimidation commonly associated with racial discrimination levied against vulnerable people of color." (Doc. 30, Pls.' Unauthorized Sur-reply at 3.) Plaintiffs argue further that the acts of defendants "suggest to a reasonable person that racial discrimination is a plausible explanation." (Id.)

The court finds that plaintiffs' second amended complaint is devoid of factual allegations that support their claims of racial discrimination and that plaintiffs are unable to allege facts that would state a plausible claim upon which relief can be granted. The claim or claims of racial discrimination should be dismissed for failure to state a claim.

2. Equal Credit Violations Under 15 U.S.C. §§ 1691 and 1692

Plaintiffs' allegation that defendants violated the Equal Credit Opportunity Act (ECOA), 15 U.S.C. § 1691, et seq. is based on the same conclusory assertion of racial discrimination discussed above. The statute, which is pending amendment, provided at the relevant times that it is "unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction — (1) on the basis of race. . . ." 15 U.S.C. § 1691(a). Section 1692 defines various terms used in the ECOA.

Circuit courts that have considered the standards for stating a claim under ECOA have developed a four-element test to determine whether a plaintiff has properly pleaded an ECOA claim. Hafiz v. Greenpoint Mortgage Funding, Inc., 652 F. Supp. 2d 1039, 1045 (N.D. Cal. 2009). To satisfy the test, plaintiffs must allege that: (1) they are members of a protected class; (2) they applied for credit with defendants; (3) they qualified for credit; and (4) they were denied credit, despite being qualified. Id. (citing decisions of the Third, Fifth, and Tenth Circuits).

Here, as defendants point out, plaintiffs obviously did obtain credit in the form of a VA-guaranteed mortgage loan in 2004, and they have not alleged that they applied for credit with any defendant, that they qualified for credit from any defendant, or that any defendant denied them credit. In their opposition to defendants' motion, plaintiffs have failed to show that they can allege all four elements of an ECOA claim that they were denied an equal opportunity to obtain credit in 2004 or at the time of their demand for a loan modification. Plaintiffs' ECOA claim should therefore be dismissed without leave to amend.

3. False Designation of Origin Under 15 U.S.C. § 1125

Plaintiffs' Second Amended Complaint refers to "false designation of origin" at least ten times, citing 11 U.S.C. § 1125. The Lanham Act, which concerns trademarks, provides for a private right of action by any person who believes he or she is likely to be damaged by a person who, in connection with any goods or services, uses in commerce "any false designation of origin" that is likely to cause confusion or mistake or deceive as to the origin of his or her goods or services. 15 U.S.C. § 1125(a)(1). This provision does not appear to have any application in the mortgage context. Moreover, plaintiffs have failed to address this issue in their opposition or their unauthorized sur-reply. The court finds that plaintiffs have failed to state a plausible Lanham Act claim on which relief may be granted. Accordingly, plaintiffs' claim of false designation of origin under 15 U.S.C. § 1125 should be dismissed without leave to amend.

4. Violations of the Truth in Lending Act (TILA), 15 U.S.C. § 1601

Plaintiffs' Second Amended Complaint does not include 15 U.S.C. § 1601, et seq. in the list of statutes contained in the caption. However, plaintiffs' cause of action for illegal foreclosure concludes with allegations that defendant Countrywide Home Loans is subject to the Truth in Lending Act, is a creditor within the meaning of the Act, and owes damages and unspecified injunctive relief to plaintiffs as a result of TILA violations that are not described. (Doc. No. 10, Second Amended Compl. ¶¶ 133-138.)

The court finds it impossible to ascertain with any degree of particularity the conduct of defendants being alleged by plaintiffs as TILA violations. As such, plaintiffs have failed to place defendants on notice of the claims being asserted against them. Plaintiffs' wholly conclusory allegations fail to state a cognizable claim.

Moreover, any TILA claim for damages is barred because such a suit for damages must be filed within one year following the alleged violation. 15 U.S.C. § 1640(e). The failure to make required disclosures for purposes of a damages claim under TILA occurs on the date loan documents are signed, because on that date the buyers are in possession of all information relevant to the buyers' discovery of the TILA violation and the basis for a damages claim. Meyer v. Ameriquest Mortgage Co., 342 F.3d 899, 902 (9th Cir. 2003). Here, plaintiffs commenced this suit almost five years after the mortgage loan was made and any TILA violations could have occurred, and almost four years after the statute of limitations expired.

If plaintiffs' assertion of entitlement to injunctive relief under TILA is a demand for rescission, any such claim would fail for several reasons. To state a claim for rescission under TILA, the plaintiffs must allege that they are able to tender the proceeds of their loan. See Yamamoto v. Bank of New York, 329 F.3d 1167, 1171 (9th Cir. 2003) (holding that rescission under TILA " should be conditioned on repayment of the amounts advanced by the lender" and explaining that, because rescission is a remedy that restores the status quo ante, a borrower seeking rescission is required to allege ability to tender the loan proceeds). There are no such allegations in plaintiffs' complaint. Moreover, any claim for rescission under TILA would also be time-barred, since such claims are governed by "a three-year absolute limitation on rescission actions." 15 U.S.C. § 1635(f). See also King v. State of California, 784 F.2d 910, 913 (9th Cir. 1986). The three years begin to run upon the consummation of the credit transaction or upon the sale of the property, whichever occurs first. King, 784 F.2d at 913. Plaintiffs filed this action more than three years after the consummation of the loan, which occurred prior to the foreclosure sale of the property.

Plaintiffs' TILA claims fail to state claims upon which relief may be granted, and it is evident that any TILA claim plaintiffs might allege is barred by the applicable statute of limitations. Plaintiffs cannot cure the fundamental defects of their TILA claims.

5. Unfair Competition Under Cal. Bus. Prof. Code § 17200

Plaintiffs' Second Amended Complaint does not include California Business and Professions Code § 17200 in the list of statutes contained in the caption, but the pleading contains references to this statute. (See Doc. No. 10, Second Amended Compl. ¶¶ 3, 12.) Defendants argue that plaintiffs' cursory reference to the unfair competition law is not supported by the allegation of any predicate act and fails to allege how plaintiffs lost any money or property as a result of any alleged act. Defendants argue further that, to the extent that plaintiffs would base an unfair competition claim on fraud, there is a complete lack of specificity for such a claim.

In order to bring a claim under § 17200, a plaintiff must have "suffered injury in fact and . . . lost money or property as a result of the unfair competition." Cal. Bus. Prof. Code § 17204. This statutory limitation requires that a plaintiff show he has suffered losses capable of restitution. Buckland v. Threshold Enters., Ltd., 155 Cal. App.4th 798, 817 (2007). Restitution is only possible if the § 17200 action can "restore to any person any money or property, real or personal, which may have been acquired by means of such unfair competition." Cal. Bus. Prof. Code § 17203. Here, plaintiffs have failed to state a claim for damages under another statute which would provide a basis for pursuing a claim under § 17200. See Kariguddaiah v. Wells Fargo Bank, N.A., No. C 09-5716 MHP, 2010 WL 2650492, at *7 (N.D. Cal. July 1, 2010) (dismissing § 17200 claim due to plaintiff's failure to state a claim for either breach of contract or wrongful foreclosure upon which the § 17200 claim was based); Powell v. Residential Mortgage Capital, No. C 09-04928 JF (PVT), 2010 WL 2133011, at * 9 (N.D. Cal. May 24, 2010) (same);see also Berryman v. Merit Property Mgmt. Inc., 152 Cal. App. 4th 1544, 1554 (2007) ("Thus, a violation of another law is a predicate for stating a cause of action under" § 17200); Lazar v. Hertz Corp., 69 Cal. App. 4th 1494, 1505 (1999) (§ 17200 "borrows violations of other laws . . . and makes those unlawful practices actionable"). Nor have plaintiffs stated a claim of any other unfair or fraudulent conduct on the part of defendants that could give rise to a claim under this provision. See Chavez v. Bank of America, N.A., No. CV-F-09-2133 OWW/SKO, 2010 WL 1854087, at *19-20 (E.D. Cal. May 6, 2010) (discussing the "unfairness," as opposed to "unlawful," prong of § 17200, et seq.)

The court finds that plaintiffs have failed to state a plausible claim for relief under California Business and Professional Code § 17200, et seq. Because there is no indication that plaintiffs can allege the elements of such a claim, the claim should be dismissed with prejudice.

6. Fraud

Plaintiffs' third cause of action alleges fraud. Defendants argue that plaintiffs' bald allegation of fraud fails to satisfy the requirements of Rule 9(b) and should be dismissed.

As noted above, Rule 9 provides that "the circumstances constituting fraud . . . shall be stated with particularity." Fed.R.Civ.P. 9(b). This requirement ensures that the plaintiff gives notice to each defendant of the specific fraudulent conduct against which he or she must defend, deters plaintiffs from filing complaints as a pretext for discovery of unknown wrongs, protects defendants from the harm that comes from being subject to fraud charges, and prohibits plaintiffs from unilaterally imposing on the court, parties, and society enormous social and economic costs without any factual basis. Bly-Magee, 236 F.3d at 1018.

At the very least, a plaintiff alleging fraud must plead evidentiary facts such as the time, place, persons, statements, and explanations of why allegedly misleading statements were misleading. In re GlenFed, Inc. Sec. Litig., 42 F.3d at 1547 n. 7. The Ninth Circuit has "interpreted Rule 9(b) to mean that the pleader must state the time, place and specific content of the false representations as well as the identities of the parties to the misrepresentation." Alan Neuman Prods., Inc. v. Albright, 862 F.2d 1388, 1393 (9th Cir. 1988). See also Cooper v. Pickett, 137 F.3d 616, 627 (9th Cir. 1997) ("fraud allegations must be accompanied by `the who, what, when, where, and how' of the misconduct alleged"). When asserting a fraud claim against a corporation, "the plaintiff's burden . . . is even greater. . . . The plaintiff must `allege the names of the persons who made the allegedly fraudulent representations, their authority to speak, to whom they spoke, what they said or wrote, and when it was said or written.'" Lazar, 12 Cal. 4th at 645 (quoting Tarmann v. State Farm Mut. Auto. Ins. Co., 2 Cal. App. 4th 153, 157 (1991)). See also Spencer v. DHI Mortgage Co., No. CV F 09-0925 LJO DLB, 2009 WL 1930161, at *6 (E.D. Cal. June 30, 2009).

Under California law, a claim of fraud must establish the following elements: "(a) a misrepresentation (false representation, concealment, or nondisclosure); (b) knowledge of falsity (or `scienter'); (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and (e) resulting damage." In re Estate of Young, 160 Cal. App. 4th 62, 79 (2008) (quotingLazar v. Superior Court, 12 Cal.4th 631, 638 (1996) (internal quotation marks omitted). See also Vess, 317 F.3d at 1105.

Dismissal of a fraud claim is appropriate when its allegations fail to meet the required pleading standards. Vess, 317 F.3d at 1107. Plaintiffs' fraud claim fails to plead even minimal evidentiary facts, and plaintiffs have not demonstrated that they can allege such facts against any defendant. Defendants' motion to dismiss plaintiffs' fraud cause of action for failure to state a claim should be granted and plaintiffs' fraud cause of action should be dismissed.

C. Failure to Allege Tender of Loan Amount

Defendants argue that the last three of plaintiffs' twelve enumerated claims, alleging wrongful foreclosure under California Code of Civil Procedure §§ 512.010, 1161, and 1162, and California Civil Code §§ 2924f and 2934, should be dismissed because plaintiffs have not alleged their ability to tender the entire loan amount to the lender.

"A valid and viable tender of payment of the indebtedness owing is essential to an action to cancel a voidable sale under a deed of trust." Karlsen v. American Sav. Loan Assn., 15 Cal. App. 3d 112,117 (Cal. App. 2d Dist. 1971). The overwhelming majority of California district courts utilize the Karlsen rationale in examining wrongful foreclosure claims. Anaya v. Advisors Lending Group, 2009 U.S. Dist. LEXIS 68373, 2009 WL 2424037 (E.D. Cal. August 3, 2009) ("Plaintiff offers nothing to indicate that she is able to tender her debt to warrant disruption of non-judicial foreclosure"); Alicea v. GE Money Bank, 2009 U.S. Dist. LEXIS 60813, 2009 WL 2136969 (N.D. Cal. July 16, 2009) ("When a debtor is in default of a home mortgage loan, and a foreclosure is either pending or has taken place, the debtor must allege a credible tender of the amount of the secured debt to maintain any cause of action for foreclosure."); Montoya v. Countrywide Bank, 2009 U.S. Dist. LEXIS 53920, 2009 WL 1813973 (N.D. Cal. June 25, 2009) ("Under California law, the "tender rule" requires that as a precondition to challenging a foreclosure sale, or any cause of action implicitly integrated to the sale, the borrower must make a valid and viable tender of payment of the secured debt"). The application of the "tender rule" prevents "a court from uselessly setting aside a foreclosure sale on a technical ground when the party making the challenge has not established his ability to purchase the property." Williams v. Countrywide Home Loans, 1999 U.S. Dist. LEXIS 14550, 1999 WL 740375 (N.D. Cal. Sept. 15, 1999).

Somera v. Indymac Fed. Bank, FSB, No. 2:09-cv-1947-FCD-DAD, 2010 WL 761221, at *8 (E.D. Cal. Mar. 3, 2010). See also Yamamoto, 329 F.3d at 1171-73 (holding that rescission under TILA " should be conditioned on repayment of the amounts advanced by the lender" and explaining that, because rescission is a remedy that restores the status quo ante, a borrower seeking rescission is required to allege ability to tender the loan proceeds).

In the caption of plaintiffs' second amended complaint, the statute is cited as § 512.10. Within the pleading, however, the statute is cited as § 512.010.

Although plaintiffs' second amended complaint does not contain the word "rescission" in the prayer for relief, plaintiffs request that the court compel defendants to surrender to them full satisfaction of the note and mortgage and that the court dismiss with prejudice defendants' efforts to foreclose. Plaintiffs seek to be awarded ownership of the subject property without paying any additional money, with a full refund of the mortgage payments they made before defaulting on their loan, and with approximately half a million dollars in damages as a bonus. Plaintiffs have not alleged tender or ability to tender in their pleading and have not alleged any willingness to tender the required amount.

Plaintiffs' claims under California Code of Civil Procedure § 512.10, California Code of Civil Procedure §§ 1161 and 1162, and California Civil Code §§ 2924f and 2934 are wrongful foreclosure claims. Under California law, plaintiffs "are required to allege tender of the amount of [defendant's] secured indebtedness in order to maintain any cause of action for irregularity in the sale procedure." Abdallah v. United Sav. Bank, 43 Cal. App. 4th 1101, 1109 (Cal. App. 1st Dist. 1996). See also Grant v. Aurora Loan Servs., Inc., F. Supp. 2d, No. CV 09-08174 MM(CTx), 2010 WL 3517399, at *8 (C.D. Cal. Sept. 10, 2010); Saldate v. Wilshire Credit Corp., 268 F.R.D. 87, 104-05 (E.D. Cal. 2010); Labra v. Cal-Western Reconveyance Corp., No. C 09-2537 PJH, 2010 WL 889537, at *9 (N.D. Cal. Mar. 11, 2010). The plaintiff must demonstrate both a willingness to pay and the ability to pay. In re Worcester, 811 F.2d 1224, 1231 (9th Cir. 1987).

Plaintiffs have not alleged facts that warrant "dismissal" of the foreclosure sale, but even if they had alleged such facts, they have not alleged tender or the ability to offer tender. Accordingly, defendants' motion to dismiss plaintiffs' state law claims of wrongful disclosure should be granted, and those claims should be dismissed with prejudice.

II. The Quiet Title Action (2:10-cv-0342 GEB DAD PS)

Defendant Countrywide's arguments in favor of dismissal of plaintiffs' quiet title action are persuasive. Plaintiffs' complaint plainly fails to allege the elements of a quiet title claim, and the pleading fails to allege facts stating a plausible claim of adverse possession. Moreover, plaintiffs have admittedly not paid the debt owed, and therefore cannot quiet title. In this regard, "a mortgagor cannot quiet his title against the mortgagee without paying the debt secured." Shimpones v. Stickney, 219 Cal. 637, 649 (1934). See also Aguilar v. Bocci, 39 Cal. App. 3d 475, 477 (1974); Kelley v. Mortgage Electronic Registration, 642 F. Supp. 2d 1048, 1057 (N.D. Cal. 2009) ("Plaintiffs have not alleged . . . that they have satisfied their obligation under the Deed of Trust. As such, they have not stated a claim to quiet title."). As discussed in detail above, plaintiffs' quiet title complaint does not allege that plaintiffs have tendered, or are able and willing to tender, the debt secured by the subject property. As such, plaintiffs cannot state a cognizable claim for quiet title. Accordingly, plaintiffs' quiet title action should also be dismissed with prejudice.

III. Defendants Who Have Not Been Served

For the reasons set forth above, the undersigned has determined that defendants' motions to dismiss should be granted and that all claims against the moving defendants in both actions should be dismissed.

The claims against the four non-appearing defendants in plaintiffs' foreclosure action should also be dismissed for two reasons. First, "[a] District Court may properly on its own motion dismiss an action as to defendants who have not moved to dismiss where such defendants are in a position similar to that of moving defendants or where claims against such defendants are integrally related." Silverton v. Dep't of Treasury, 644 F.2d 1341, 1345 (9th Cir. 1981). "Such a dismissal may be made without notice where the [plaintiffs] cannot possibly win relief." Omar v. Sea-Land Serv., Inc., 813 F.2d 986, 991 (9th Cir. 1987). The court's authority in this regard includes sua sponte dismissal as to defendants who have not been served and defendants who have not yet answered or appeared. Columbia Steel Fabricators, Inc. v. Ahlstrom Recovery, 44 F.3d 800, 802 (9th Cir. 1995) ("We have upheld dismissal with prejudice in favor of a party which had not yet appeared, on the basis of facts presented by other defendants which had appeared."). See also Bach v. Mason, 190 F.R.D. 567, 571 (D. Idaho 1999); Ricotta v. California, 4 F. Supp. 2d 961, 978-79 (S.D. Cal. 1998). Here, the four non-appearing defendants are in a position similar to that of the seven individual defendants who have moved for dismissal of plaintiffs' foreclosure action, and the claims of all eleven individuals and the three entity defendants are integrally related.

Second, the four non-appearing defendants should be dismissed pursuant to Federal Rule of Civil Procedure 4(m), which provides that, absent a showing of good cause, the court must dismiss the action without prejudice against any defendant who was not served with a summons and complaint within 120 days after the complaint was filed. Plaintiffs have failed to make a showing of good cause for their failure to locate the four unserved defendants for service of process.

Accordingly, the undersigned will recommend that all claims against defendants Kristi Brockman, Nelson A. Hernandez, Carlos Sotelo, and Elizavet Meza be dismissed along with all claims against the moving defendants.

IV. Whether Leave to Amend Would Be Futile

The undersigned has carefully considered whether plaintiffs may be able to amend their second amended complaint to state any claim upon which relief can be granted. "Valid reasons for denying leave to amend include undue delay, bad faith, prejudice, and futility." California Architectural Bldg. Prod. v. Franciscan Ceramics, 818 F.2d 1466, 1472 (9th Cir. 1988). See also Klamath-Lake Pharm. Ass'n v. Klamath Med. Serv. Bureau, 701 F.2d 1276, 1293 (9th Cir. 1983) (holding that while leave to amend shall be freely given, the court does not have to allow futile amendments). In this case, plaintiffs have already amended their pleading and filing a third amended complaint would be futile, given the fundamental deficiencies in plaintiffs' second amended complaint as addressed above. Accordingly, the undersigned will recommend that both of plaintiffs' actions be dismissed with prejudice.

CONCLUSION

For the reasons set forth above, IT IS RECOMMENDED that:

1. Defendants' motion to dismiss (Doc. No. 14) filed September 14, 2009 in case No. 2:09-cv-0458 GEB DAD PS, be granted in its entirety pursuant to Federal Rule of Civil Procedure 12(b)(6);

2. Defendant's motion to dismiss (Doc. No. 9) filed February 16, 2010 in case No. 2:10-cv-0342 GEB DAD PS be granted in its entirety pursuant to Federal Rule of Civil Procedure 12(b)(6); and

3. Plaintiffs' second amended complaint in case No. 2:09-cv-0458 and plaintiffs' complaint in case No. 2:10-cv-0342 be dismissed with prejudice and both cases be closed.

These findings and recommendations will be submitted to the United States District Judge assigned to this case, pursuant to the provisions of 28 U.S.C. § 636(b)(1). Within fourteen days after being served with these findings and recommendations, any party may file and serve written objections with the court. A document containing objections should be titled "Objections to Magistrate Judge's Findings and Recommendations." Any reply to objections shall be filed and served within seven days after the objections are served. The parties are advised that failure to file objections within the specified time may, under certain circumstances, waive the right to appeal the District Court's order. See Martinez v. Ylst, 951 F.2d 1153 (9th Cir. 1991).

DATED: September 15, 2010.