La Paz
v. U.S. Bank
Filed 7/18/13 La Paz Investments v. U.S. Bank CA4/2
NOT TO BE PUBLISHED IN OFFICIAL
REPORTS
California
Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or
relying on opinions not certified for publication or ordered published, except
as specified by rule 8.1115(b). This
opinion has not been certified for publication or ordered published for
purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE
STATE OF CALIFORNIA
FOURTH APPELLATE DISTRICT
DIVISION TWO
LA
PAZ
INVESTMENTS et al.,
Plaintiffs and Respondents,
v.
U.S. BANK, N.A.,
Defendant and Appellant.
E055080
(Super.Ct.No. RIC1113842)
OPINION
APPEAL
from the Superior Court of
County. Paulette
Durand-Barkley, Temporary Judge.
(Pursuant to Cal. Const., art. VI, §
21.) Reversed and remanded with
directions.
Katten
Muchin Rosenman, Joshua Wayser and Yonaton Rosenzweig for Defendant and
Appellant.
Spach,
Capaldi & Waggaman and Madison S. Spach, Jr., for Plaintiffs and
Respondents.
I
INTRODUCTION
Defendant and appellant U.S. Bank National Association (U.S. Bank)
appeals from an order granting a preliminary injunction (Code Civ. Proc.,
§ 904.1, subd. (a)(6)) against U.S. Bank’s foreclosure on deeds of trust
securing about $40 million in construction loans made by a predecessor bank,
PFF Loan & Trust (PFF), and assumed by U.S. Bank. Plaintiffs and respondents, La Paz Investments
(La Paz) and the Maurer Development Co. Money Purchase Pension Plan (the Maurer
Plan), are junior lienholders who contend U.S. Bank adversely modified their
subordination agreements, causing U.S. Bank to lose its senior priority.
In an action for declaratory relief, La Paz and the Maurer Plan
(collectively Maurer) seek permanently to enjoin U.S. Bank from foreclosing on
real property in Riverside County and for a declaration that
U.S. Bank’s senior deeds of trust on the properties should not maintain priority
over Maurer’s junior deeds. In a
separate action, U.S. Bank seeks to quiet title and declaratory relief.
After a thorough review of the record, we do not find any material
modifications to the subordination agreements which increased the risk of default
by Osborne Development Corporation (Osborne), the obligor under U.S.
Bank’s construction loans. Based on the record before us, U.S. Bank is
entitled to maintain its senior priority over any subordinated junior
lienors. Because respondents have not
established the likelihood of success in prevailing in the underlying
proceedings, the trial court abused its discretion in granting the motion for
preliminary injunction. We reverse and
remand.
II
FACTUAL AND PROCEDURAL BACKGROUND
The facts, as alleged in the
complaint and set forth in the declarations concerning the preliminary
injunction, are essentially undisputed, except as noted, in the following
summary.
In 2000, La Paz sold undeveloped property
in Hemet to Osborne Development Corporation (Osborne). The purchase price included $1.6 million in
cash, a note for another $1.6 million, and a profit participation agreement for
35 percent of the total net profits in a subsequent sale. As part of the transaction, Osborne and the
Maurer Plan entered into a second profit participation agreement for 15 percent
of the total net profits.
to Winchester
In 2005, Osborne transferred the property to Osborne
Development-Winchester Ranch, L.P. (Winchester). Winchester assumed all Osborne’s
obligations to La Paz and gave La Paz a note and deed of trust
for $7.262 million (the La Paz Note) as a substitute for the remaining purchase
price on the Hemet property.
Additionally, Winchester gave the Maurer Plan a note
and deed of trust for $3,112,286 (the Plan Note) as a substitute for the profit
participation agreement.
In January 2006, Osborne purchased the Hemet property and assumed the La Paz note and the Plan Note. The La Paz note and the Plan Note were
amended four times. As of January 1, 2011, the combined amount owing from Osborne to Maurer
under the La Paz note and the Plan note was nearly $9 million, with
interest continuing to accrue from that date.
Loans
In February 2006, to facilitate residential development of the Hemet property, Osborne executed
a note and deed of trust for a construction loan from PFF in the amount of
$29.422 million. The Maurer Plan and La Paz executed subordination
agreements, making their liens junior in interest to the construction loan from
PFF. A second construction loan in the
amount of $10,589,400, and related subordination agreements, were executed and
recorded in June and July 2007.
The notes and deeds of trust held by PFF contained provisions for payment
to PFF of the loan principal and interest of 8.5 percent and 9.25 percent,
expenditure advancements or protective advancements, and cross-defaults of any
other agreements between Osborne and PFF.
The term “indebtedness,†as used to describe the construction loans, was
defined to include “all renewals of, extensions of, modifications of,
consolidations of, and substitutions†for the subject notes and trust deeds and
related documents.
The express language of the subordination agreements executed by Maurer
was as follows: “. . . in order to
induce Lender [PFF] to make the loan above referred to [the construction
loans], it is hereby declared, understood, and agreed as follows:
“(1) That said deed of trust
securing said note in favor of Lender [PFF], and any renewals or extensions
thereof, shall unconditionally be and remain at all times a lien or charge on
the property . . . prior and superior to [Maurer’s] lien or charge.†Additionally, “Beneficiary [Maurer] declares,
agrees, and acknowledges that [¶] (a) He consents to and approves (i) all
provisions of the note and deed of trust in favor of Lender [PFF]
. . . .â€
Thus, according to U.S. Bank and disputed by Maurer, the subordination
agreements provided that Maurer consented to all provisions in PFF’s deeds of trust and the underlying
notes, including the rights (1) to assert “cross-defaults†such that a breach
by Osborne of any of its obligations to PFF could result in the declaration of
a default under the PFF deeds; (2) to recover from Osborne the loan principal
plus interest at a minimum of 8 percent per year or more based on the prime
rate; and (3) to make expenditure advancements to protect the properties, which
could be added to the indebtedness. Maurer further agreed that Osborne’s
failure to perform could justify foreclosure either under existing or later
deeds securing the indebtedness.
U.S. Bank and Nonjudicial Foreclosure
Osborne eventually defaulted on its monthly loan payments. In November 2008, PFF became defunct and U.S.
Bank became its successor in interest on the construction loans.
In March 2009, in lieu of foreclosure, U.S. Bank and Osborne agreed to
forbearance agreements with various modifications of the construction loans,
including extending the loans’ maturity dates, suspending monthly payments of
principal and interest until maturity, lowering interest rates, and waiving
accrued interest and late fees if the principal was timely paid. Additionally, Osborne (1) agreed that five
other loans could cross-default with the loans at issue; (2) provided
additional collateral to protect U.S. Bank in the event of default; and (3)
agreed that the deferred lower interest would be due at maturity at the lower
interest rate unless the principal was repaid.
Osborne reiterated U.S. Bank’s right to make protective advances. According to Osborne, Maurer was informed
about the modifications and did not object to them. Maurer disputes this point.
In January 2010, U.S. Bank agreed to another one-year extension. As of January 1,
2011,
Osborne had failed to repay under the forbearance
agreements and related extensions.
U.S. Bank declared a default, based on the failure to repay the construction
loans, not on any other default. U.S.
Bank began nonjudicial foreclosure proceedings in March 2011. Maurer’s legal counsel wrote U.S. Bank
objecting to the foreclosure proceedings.
Maurer contends the value of the property is less than the amount owed
to U.S. Bank and a foreclosure by U.S. Bank will wipe out Maurer’s interest.
The parties filed their separate complaints in August 2011. Maurer alleges the modifications of the
construction loans increased the risk of Osborne’s default, causing U.S. Bank
to lose its senior position. U.S. Bank
asserts its priority interest is unaffected by the modifications.
Injunction
On September
20, 2011, Maurer filed a motion for a preliminary injunction. Maurer claimed the cross-default provisions
of the forbearance agreements made Osborne’s “likelihood of default more
probable.†In particular, Maurer
complained that Osborne’s various obligations to PFF were cross-defaulted with
one another and that the obligations of borrowers other than Osborne were also cross-defaulted with the loans secured by the PFF
trust deeds. Maurer next asserted that
it was harmed by adding collateral to secure the bank’s under-secured debt and
that Maurer suffered impairment from deferring interest payments to the end of
the extended maturity and by an increase in the principal balances of the
indebtedness.
In its opposition, U.S. Bank argued none of the modifications increased
the risk of Osborne’s default because the risks were consented to in the
original PFF deeds. U.S. Bank also
argued that full loss of priority is a limited remedy which is unjustified in
this case.
On October 13, 2011, the court filed its
one-sentence written ruling: “Upon
review of the [subordination] agreement, and the timeline of events (based on
Plaintiff’s argument that U.S. Bank took actions that adversely affected
Plaintiff’s position and value of security), the Court finds a basis for the
preliminary injunction request.â€
III
DISCUSSION
The parties ask this court to decide
whether the forbearance agreements and modifications between PFF and Osborne
materially increased the risk of default by Osborne and whether the trial court
abused its discretion by issuing a preliminary injunction against foreclosure. (Gluskin v. Atlantic Savings & Loan
Assn. (1973)
32 Cal.App.3d 307 (Gluskin).) If the loan modifications increased the risk
of default, an alternative question is whether the trial court abused its
discretion by enjoining foreclosure instead of limiting its injunction to
foreclosure based upon the modifications.
(Lennar Northeast Partners v.
Buice (1996) 49 Cal.App.4th 1576.)
Gluskin
held that modifications of senior liens can result in priority loss if they
materially affect the junior’s rights and materially increase the risk of default. (Gluskin,
supra, 32 Cal.App.3d at p. 314.)
U.S. Bank asserts a loan modification cannot present an increased risk
of default when it is based on conditions that existed before
modification. U.S. Bank contends that,
under the subordination agreements, Maurer consented and agreed to the terms in
PFF’s loans, allowing the lender to declare cross-defaults, to make protective
advances and add them to the indebtedness, and to earn interest. Having agreed in advance to these rights,
Maurer cannot now claim it was impaired by modifications asserting these
rights. In opposition, Maurer
strenuously objects to U.S. Bank’s characterization of the risks posed by the
modifications.
In reviewing the trial court’s
ruling granting a motion for preliminary injunction for abuse of discretion, we
consider the likelihood of success by the party seeking the injunction and
balance the relative interim harm to the parties. (Butt
v. State of California (1992) 4 Cal.4th 668, 677-678; People ex rel. Gallon v. Acuna (1997) 14 Cal.4th 1090, 1109;
Furlotti (1999) 70 Cal.App.4th 1487, 1493.)
Factual determinations supported by substantial evidence are resolved in
favor of the trial court’s ruling but an abuse of discretion occurs when, as a
matter of law, the trial court’s ruling contravenes the uncontradicted
evidence. (Smith v. Adventist Health System/West (2010) 182 Cal.App.4th 729,
739; Pro-Family Advocates v. Gomez (1996)
46 Cal.App.4th 1674, 1680; People v.
Mobile Magic Sales, Inc. (1979)
96 Cal.App.3d 1, 8.)
In considering the issue of
likelihood of success by Maurer, we must analyze the impact of the
modifications of the construction loans on the subordination agreements. Whether a modification has a material adverse
effect on a junior lienor is usually a question of fact. (Gluskin,
supra, 32 Cal.App.3d at p. 315.)
When reasonable minds cannot differ, the conclusion that the
modification resulted in a material adverse effect can be decided as a matter
of law. (Lennar Northeast Partners v. Buice, supra, 49 Cal.App.4th at pp.
1586-1588.)
There is no contradictory evidence
about the objective facts that the various parties executed the subject
construction loans and the subordination agreements in 2006 and the forbearance
agreements in 2009. It is not disputed
that Osborne’s default was not caused by the 2009 modifications but, rather, by
the economic conditions afflicting the United States between the end of 2008
and the present time. The parties
disagree, however, about whether the 2009 modifications of the construction
loans increased the risk of default by Osborne.
In other words, Maurer contends that a hypothetical risk caused by the
2009 loan modifications caused U.S. Bank to lose its priority position. The only evidence offered by Maurer was a
declaration in which Robert Maurer stated:
“I believe such modifications materially increased the risk that
[Osborne] would default on its obligations under the PFF Trust Deeds and
jeopardized the security represented by the La Paz and the Plan Trust
Deeds.†In the absence of any other
evidence in the record of a material risk caused by modification, we conduct an
independent legal review of the issue.
the Construction Loans
If modifications in the senior lien have a material adverse effect on the
junior lien either by increasing the risk of default or making protection of
the junior lienor’s position potentially more burdensome, then the senior lien
may lose priority to the junior lien. (
49 Cal.App.4th at pp. 1586-1587; Gluskin,
supra, 32 Cal.App.3d at p. 315.)
Where a seller’s lien is subordinated to a construction loan, the law
generally protects the subordinating seller and a breach of the terms of the
subordination, including a modification of terms of the senior loan that
materially increases the risk of default and makes it more expensive or urgent
for the junior lien to protect its position, can result in a complete loss of
priority by the senior lien. (
not to “make a material modification in the loan to which the seller has
subordinated, without the knowledge and consent of the seller to that
modification, if the modification materially affects the seller’s rights.†(Id.
at p. 314.) However, under some
circumstances a material modification of a senior lien may not result in loss
of priority absent a “special relationship†or contractual subordination. (Friery
v. Sutter Buttes Sav. Bank (1998) 61 Cal.App.4th 869, 877-879.)
The kind of modifications deemed material are like those discussed in
“substantial and drastic.†(
312.) The bank in Gluskin changed the basic financial structure of the original
agreement, causing a default because it accelerated maturity from 30 years to
10 months, doubled the interest rate, and halted the flow of construction
funds. As Lennar recognized: “The
effect of these modifications . . . was to allow the construction
lender ‘to escape its obligation to disburse construction funds. . . .’ The very short term with a large balloon
payment clearly enhanced the likelihood of default. . . . [And] the default occurred before
construction had enhanced the value of the property, . . .†(Lennar
Northeast Partners v. Buice, supra, 49 Cal.App.4th at p. 1589.) In Lennar,
the lender and borrower increased the interest rate and principal beyond the
originally approved levels. (
By contrast in this case, U.S. Bank here funded the entire loan promised;
the modifications extended maturity by two and a half years and decreased the
interest rate by half. As we discuss
below, the five modifications identified by Maurer do not qualify as increasing
Osborne’s risk of default.
Allow Default Based on Five Other Deeds of Trust
According to Maurer, the first material modification which
increased the risk of Osborne’s default under the PFF construction loans was
the addition of five “Other Deeds of Trust†as an amendment to the original
provisions for cross-default and cross-collateralization. The five other trust deeds were held by four
trustors who are affiliated with Osborne.
modification, as described by Maurer, was that “if the obligations . . . under
any of the five foregoing deeds of trust went into default, the Bank was
entitled to declare a default under the PFF Loans and foreclose on the Hemet
property even if [Osborne] was faithfully performing all of its obligations
under the notes secured by the PFF Trust
Deeds. The conclusion that such
an expansion of the circumstances under which the Bank was entitled to
foreclose is a material modification of the PFF Trust Deeds is not subject to
serious dispute.â€
We disagree with Maurer’s position
for two reasons. First, Osborne was not
faithfully performing its obligations and there is no evidence whatsoever that
the “Other Deeds of Trust†modification had any bearing on the risk of Osborne
defaulting on the construction loans from PFF.
Osborne’s default was not related to the five other deeds of trust.
Secondly, as U.S. Bank explains, it
is Osborne–not the four affiliated trustors–who is the obligor on the five
other deeds of trust. Contrary to Maurer’s assertion, the PFF trust
deeds were not amended to permit U.S. Bank to foreclose if the four affiliated
trustors defaulted on their obligations to U.S. Bank. Instead, the PFF trust deeds in their
original form permitted U.S. Bank to foreclose if Osborne defaulted on its
other obligations to PFF. If Osborne,
not the four trustors, had defaulted under the other deeds of trust, then U.S.
Bank could reasonably have declared a default by Osborne on the construction
loans. The modification did not increase
the risk of Osborne’s default on the construction loans held by U.S. Bank.
Allow Default If Osborne Defaulted on Its Obligations to Third Party Creditors
Maurer next contends the risk of Osborne’s default was increased because
of a change in the treatment of defaults involving third parties. Maurer contends that, although Osborne’s
default to third parties had to be material under the original construction
loans, the modification agreements permitted any default to third parties, even
one that was not material, to be treated as a default under the construction
loans. As framed by Maurer, “[f]ollowing
modification . . . [Osborne] was in default on the PFF Loans immediately upon
[Osborne’s] default on a third-party obligation, irrespective of whether there
was any effect whatsoever on the Bank’s position. The . . . Modification Agreements undeniably
effected a material change to the PFF Trust Deeds.â€
Again, we note the subject modification had no bearing on the actual
reason Osborne defaulted on the construction loans. U.S. Bank also argues this is a new argument
that was not made in the lower court.
Nevertheless, in the interests of judicial efficiency, we will address
this and Osborne’s other “new†arguments to the extent they are based on legal
issues that may be fairly said to have been encompassed by the arguments below.
On the merits, we conclude the
subject modification for third-party defaults caused no increase in the risk of
Osborne’s default to U.S. Bank. Under California law, a lender’s right to
declare a default is always subject to a requirement of materiality. (Tucker
v. Lassen Savings and Loan Assn. (1974) 12 Cal.3d 629, 639;
Inc. (1987) 195 Cal.App.3d 1032, 1051-1052.) Nothing about the modification allowed
Osborne’s nonmaterial default to third parties to be treated as a material
default under the construction loans. If
Osborne had defaulted under the forbearance agreement, U.S. Bank could still
have exercised its rights under the original PFF trust deeds. The subject modification, however, did not
increase the risk of Osborne’s default.
Notice of Default
In another new argument, Maurer
contends the forbearance agreements eliminated the grace period and notice of
default requirements–especially for lines of credit–to which Osborne was
entitled under the original PFF trust deeds, thus increasing the risk of
Osborne’s default to U.S. Bank. We
disregard this argument as it pertains to lines of credit because it was not
raised below. Nor was U.S. Bank’s
failure to give notice about default in lines of credit the reason for
Osborne’s default.
Furthermore, this argument is unsupported by the record because the
forbearance agreements require the same notice as required under the PFF trust
deeds and the deeds require notice be given allowing 15 days or more to cure a
default. Maurer does not assert there
was any lack of notice. The subject
modification cannot be said to have increased the risk of Osborne’s default to
U.S. Bank.
Regarding Protective Advances
At the time of modification in March 2009, U.S. Bank had made
protective advances of about $522,000, which were added to the principal
balance. Maurer argues there is no
evidence that this was a permissible advance under the original PFF trust
deeds, again an argument not made below, limiting our review to the legal
issue.
The right to make such advances is included in the PFF trust deeds and is
recognized by California law. (Manning
v. Queen (1968) 263 Cal.App.2d 672, 674.)
Maurer agreed to protective advances in the subordination agreements. The protective advances were not related to
the foreclosure and did not materially increase the risk of Osborne’s default
beyond the risk already anticipated in the PFF trust deeds and the
subordination agreements.
Regarding Interest
Finally, Maurer claims that U.S. Bank and Osborne increased the risk of
Osborne’s default by suspending Osborne’s obligation to pay any interest until
the extended maturity date and by lowering the interest rate from a floor of 8
percent to about 4 percent. The
obligation to pay monthly interest was also waived if the principal was paid on
time.
A senior lender is not liable for modifying its loan unless the
modification increased the risk of default and impaired the value of the junior
lien. An extension of time to repay a
debt does not increase the risk of default, even though interest accrues in the
meantime. Such a modification does not
adversely affect the junior lienholders rights or the value of their security. (Swiss
Property Management Co. v. Southern Cal. IBEW-NECA Pension Plan (1997) 60
Cal.App.4th 839, 843.) The courts do not
want to punish lenders for trying to help a borrower escape default. Accordingly, the deferral of interest
payments until maturity cannot be considered to cause an increased material
risk of default.
IV
DISPOSITION
The uncontroverted evidence shows that the five modifications of the
construction loans did not materially increase the risk of Osborne’s
default. Because Maurer did not
establish a likelihood of success in the underlying action, the issuance of the
preliminary injunction was an abuse of discretion. In light of our conclusion there were no
material modifications, we do not need to engage in balancing of interim harm
or address the issue of an alternative remedy.
We reverse the order granting the motion for preliminary injunction and
remand to the trial court with directions to enter an order denying the
motion. In the interests of justice, we
order the parties to bear their own costs on appeal.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
CODRINGTON
J.
We concur:
McKINSTER
Acting P. J.
KING
J.
name="_ftn1" title=""> [1]
Another construction loan in the amount of $11.488 million, and related
subordination agreements, were executed and recorded in November 2006. This loan has been repaid.
name="_ftn2" title=""> [2] The
supporting supplemental declaration of Robert Maurer does not appear in the
record.
