Westgate-California Corp. v. First Nat. Finance Corp., WESTGATE-CALIFORNIA

• Decision Date: 13 July 1981
• Docket Number: No. 78-2392,WESTGATE-CALIFORNIA,78-2392
• Citation: 650 F.2d 1040
• Parties: CORPORATION, et al., Debtors and Appellees, v. FIRST NATIONAL FINANCE CORPORATION, Claimant and Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1040

650 F.2d 1040

8 Bankr.Ct.Dec. 209

WESTGATE-CALIFORNIA CORPORATION, et al., Debtors and Appellees, v. FIRST NATIONAL FINANCE CORPORATION, Claimant and Appellant.

No. 78-2392.

United States Court of Appeals,

Ninth Circuit.

Argued and Submitted Oct. 21, 1981.

Decided July 13, 1981.

LeRoy A. Abelson, O'Neill & Huxtable, Los Angeles, Cal., for claimant and appellant.

Alan D. Croll, Los Angeles, Cal., argued for debtors and appellees; Jeffrey L. Levine, Los Angeles, Cal., on brief.

On Appeal from the United States District Court for the Southern District of California.

Before BROWNING, Chief Judge, POOLE, Circuit Judge, SOLOMON, ^* District Judge.

POOLE, Circuit Judge.

First National Finance Corporation ^F appeals the judgment of the United States District Court for the Southern District of California granting the motion for summary judgment brought by the trustees in bankruptcy for Westgate-California Corporation. The order disallowed FNF's claims numbered 73 and 203, and subordinated all of FNF's related claims against and equity interests in the debtor.

FNF is entirely owned by J. A. Smith. Smith is the brother of C. Arnholt Smith, who formerly controlled Westgate and its numerous subsidiaries, and who was convicted of fraud in connection with his operation of those companies. FNF had many business dealings with Westgate and with C. Arnholt Smith's now defunct United States National Bank (USNB). Claims 73 and 203 arise out of this close relationship.

I. CLAIM 73

Claim 73 is based on a note from Westgate to FNF in the amount of $2,550,000. It is undisputed that Westgate never received this money and never made any payments on the note. The district court found that a loan from FNF to Westgate was negotiated but never consummated, and that Westgate never received "valid, legally enforceable consideration for its note, and it is therefore unenforceable." That judgment would be appropriate in view of the above facts unless FNF could come forward with a specific showing that there remained as a genuine issue for trial whether Westgate received some other form of consideration for its note. Fed.R.Civ.P. 56(e).

FNF sought to establish that Westgate's note was made as part of a complicated "accommodation loan" arrangement, and that although Westgate itself received no actual funds in return, the note was supported by other consideration. FNF's theory is as follows: C. Arnholt Smith approached his brother with the proposition that FNF assist him in improving the financial outlook of USNB by assuming, at least on paper, some of the debts owed to USNB by Westgate's troubled subsidiary, Yellow Cab Company. When J. A. Smith expressed some doubt as to the wisdom of such an arrangement, his brother represented that FNF would never be called upon to make payments on its notes to USNB because Yellow Cab would repay them. As a guarantee of that promise, C. Arnholt Smith offered to give Westgate's note for the amount involved. J. A. Smith then acquiesced, and the desired result was achieved through a series of transactions: (1) on October 10, Westgate made its note for $2,550,000 to FNF; (2) that same day, FNF made two notes to USNB for $1,400,000 and $1,150,000, in return for cash from USNB; (3) somehow, that cash found its way into the USNB account of United Oil Well Supply Company (UOWSC), a subsidiary of FNF; (4) on October, 16, UOWSC wrote three checks to Yellow Cab in amounts totalling $1,400,000; (5) on October 24, UOWSC wrote four checks to Yellow Cab in amounts totalling $1,150,000; (6) Yellow Cab thereafter used the money to repay outstanding indebtedness to USNB. Yellow Cab never paid USNB or FNF any money on account of the cash transfer; rather, it went into bankruptcy. When USNB went into receivership, the FDIC sued and collected on FNF's two notes.

FNF argues that these specific facts, set forth in J. A. Smith's affidavit, raise a genuine issue whether Westgate's note was given as a guarantee that Yellow Cab would repay FNF's notes to USNB. FNF urges that resolution of this issue is necessary to determine whether Westgate received consideration for its note, pointing to California authority for the proposition that consideration may be constituted by bargained-for benefits accruing to a third party. The trustees deny that the Westgate note was given as security for FNF's loan to Yellow Cab, and in fact argue that the two were parts of separate and unconnected transactions, one consummated and the other not. Of course, absent any other considerations, this dispute would mean only that summary judgment is inappropriate.

The trustees argue, however, that there is undisputed evidence in the record that would, as a matter of law, preclude a trier of fact from determining that the Westgate note was given in return for FNF's loan to Yellow Cab. This evidence is FNF's verified complaint against British Columbia Investment Company (BCIC), in which FNF alleged that sometime after Yellow Cab received $2,550,000 from FNF, the president of BCIC represented to FNF that BCIC would assume Yellow Cab's debt. FNF alleged that BCIC requested that the debt be carried on FNF's books as the debt of BCIC, that FNF complied with this request, and that BCIC made payments on the debt.

While these facts undeniably constitute strong evidence for the trustees' position, we cannot conclude that they legally preclude a finding that Westgate stood as guarantor on the debt. If, as alleged in J. A. Smith's affidavit, the Westgate note was given as security for the debt, the fact that another party later assumed primary responsibility for the debt would not by itself relieve Westgate of its surety position. FNF could continue to look to Westgate as guarantor even though BCIC had assumed the debt.

Thus, FNF has raised a genuine issue of material fact as to whether Westgate received consideration for its note and the trustees have presented nothing that conclusively lays that issue to rest. In this situation, summary judgment was inappropriate. We therefore reverse the summary denial of FNF's claim 73, and remand for further proceedings.

II. CLAIM 203

Claim 203 arises out of a real estate transaction. The following facts are undisputed: in 1969, while J. A. Smith was serving as a director of the Westgate subsidiary Westgate Realty (Realty), Realty suggested that various properties in Kern County be accumulated for sale to a non-Westgate company, Swesga Land Corporation (Swesga). One parcel in the proposed accumulation belonged to FNF. FNF found the plan agreeable, and transferred its parcel to Realty, without consideration, for purposes of sale to Swesga. Realty sold the accumulation to Swesga, taking in return a series of notes secured by deeds of trust on the individual parcels in the accumulation. Realty recorded its deed of trust on the FNF parcel and then, in accordance with its agreement with FNF, assigned the deed of trust to FNF. Shortly before this assignment was accomplished, Don Heffner, an employee of Realty, wrote to J. A. Smith as follows:

Assignment of beneficial interest in the Deeds of Trust securing said notes and original Deeds of Trust will be forwarded to...