728 F.Supp. 656 (D.Utah 1989), Civ. C-87-829, Castleglen, Inc. v. Commonwealth Sav. Ass'n

Docket Nº:Civ. C-87-829
Citation:728 F.Supp. 656
Party Name:Castleglen, Inc. v. Commonwealth Sav. Ass'n
Case Date:December 26, 1989
Court:United States District Courts, 10th Circuit, District of Utah

Page 656

728 F.Supp. 656 (D.Utah 1989)

CASTLEGLEN, INC., a California corporation, and Larry B. Harvey, an individual, Plaintiffs and Counterdefendants,

v.

COMMONWEALTH SAVINGS ASSOCIATION, a Texas savings and loan association; Klein Financial Corporation, a California corporation; Robert N. Klein II, an individual; Santa Fe Apartments, Ltd., a Utah limited partnership; Busch Management Company, a Utah corporation, and Western States Title Company, Defendants and Counterclaimants.

EMERSON REALTY & MANAGEMENT, Plaintiff,

v.

CASTLEGLEN, INC., a California corporation; and Commonwealth Savings Association, a Texas savings and loan association, Defendants.

Civ. Nos. C-87-829W, C-87-1076W.

United States District Court, D. Utah, Central Division.

Dec. 26, 1989

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[Copyrighted Material Omitted]

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Earl M. Benjamin, John A. O'Malley, Douglas J. Rovens and Jack A. Gould, Los Angeles, Cal., and David B. Erickson, Salt Lake City, Utah, for Castleglen and Harvey.

Stephen G. Crockett, Patricia W. Christensen, Ronald G. Russell and Heidi E.C. Leithead, Salt Lake City, Utah, for Commonwealth Sav. Ass'n.

Gary F. Bendinger, Richard W. Casey and Carol Clawson, Salt Lake City, Utah, for Klein Financial Corp. and Robert Klein II.

Michael R. Carlston, R. Brent Stephens, Stanley K. Stoll and Jerry D. Fenn, Salt Lake City, Utah, for Santa Fe and Busch.

Dennis L. Mangrum, Salt Lake City, Utah, for Emerson Realty & Management.

Neal B. Christensen, c/o Wicat Systems, Orem, Utah, for Neal B. Christensen.

MEMORANDUM DECISION AND ORDER

WINDER, District Judge.

The court heard argument on a number of motions on November 2, 1989. Plaintiffs Castleglen, Inc. ("Castleglen" or "plaintiffs") and Larry B. Harvey were

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represented by David B. Erickson, Earl M. Benjamin, John A. O'Malley, and Douglas A. Rovens. Emerson Realty and Management was represented by Dennis L. Mangrum. Defendants Resolution Trust Corporation and the FSLIC ("defendants"), as receiver for Commonwealth Savings Association and as conservator for Commonwealth Federal Savings Association, were represented by Clark Waddoups, Patricia W. Christensen, Ronald G. Russell and Heidi E.C. Leithead. Defendants Klein Financial Corporation and Robert N. Klein II were represented by Richard W. Casey, who was excused at the commencement of the hearing because of his clients' limited involvement in these motions.

This matter is before the court on the following motions: (1) defendants' motion for substitution; (2) defendants' motion for summary judgment; (3) plaintiffs' motion for writ of attachment; (4) plaintiffs' objections to defendants' proposed order for partial summary judgment; (5) plaintiffs' motion for issuance of an order to show cause for Rule 11 sanctions against defendants; and (6) plaintiffs' motion for leave to file a second amended complaint.

Prior to the hearing, the court had carefully reviewed the written materials submitted by the parties. After taking the matter under advisement, the court has further considered the voluminous record filed by the parties relating to these motions. The court, now being fully advised, renders the following memorandum decision and order.

BACKGROUND

This case involves the sale of the Santa Fe Apartments Project (the "Project"), located in Salt Lake City, Utah. The Project was originally developed and constructed with financing provided from the sale of tax exempt bonds issued by the Salt Lake County Housing Authority on September 1, 1984. Commonwealth Savings Association ("Commonwealth" or "Commonwealth Savings") facilitated the financing arrangement by issuing a Letter of Credit in the approximate amount of seventeen million dollars ($17,000,000) to Zions Bank, as Trustee for the bondholders, guaranteeing repayment of the principal and interest on the bond loan to the Housing Authority bondholders. In return for Commonwealth's participation in the financing of the Project, Santa Fe Ltd. ("Santa Fe") executed a Reimbursement Agreement with Commonwealth under which Santa Fe agreed to make monthly debt service payments to Commonwealth in anticipation of semi-annual draws against the Letter of Credit by Zions Bank and to pay Commonwealth a fee for providing its Letter of Credit and for servicing the bond loan. Santa Fe's monthly debt service obligations under the Reimbursement Agreement with Commonwealth were secured by a Second Lien Deed of Trust and Security Agreement, and a Second Assignment of Rents, Issues, and Profits on the Project.

On December 28, 1986, Santa Fe entered into a written agreement to sell the Project to OMA Cypress Properties, a predecessor of Castleglen. OMA Cypress Properties, in turn, conveyed the Project to Cypress View, Ltd., also a predecessor to Castleglen. The Purchase Agreement specifically recognized the existence of the bond loan encumbrance and refers to the original promissory note, the first lien security instruments, the Reimbursement Agreement, and the second lien security instruments. Pursuant to an Assumption Agreement dated December 31, 1986 between Santa Fe and Cypress View Ltd., Cypress View Ltd. expressly assumed the obligations of the bond loan documents, including the Reimbursement Agreement and the second lien security instruments.

On or about July 21, 1987, Commonwealth served plaintiffs with written notice of default under the bond loan, indicating that they intended to exercise their remedies under the terms of the loan documents. Plaintiffs filed an amended complaint on March 14, 1988, asserting the following causes of action against Commonwealth: (1) violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5; (2) violation of Section 12(2) of the 1933 Securities Act; (3) fraud and misrepresentation; (4) negligent misrepresentation;

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(5) negligence; (6) violations of section 61-2-22 of the Utah Uniform Securities Act; (7) breach of fiduciary duty; and (8) breach of covenant of good faith and fair dealing.

In a Memorandum Decision and Order dated May 8, 1989, this court determined that the transaction at issue was not an investment contract and accordingly dismissed plaintiffs' state and federal securities claims. The specific claims against Commonwealth Savings which remain in this action following the May 8, 1989, decision are the state based claims of fraud and misrepresentation, negligent misrepresentation, negligence, breach of fiduciary duty, and breach of an implied covenant of good faith and fair dealing. 1 These remaining claims against Commonwealth Savings all stem from four alleged misrepresentations made in a conference telephone call between Harvey, Fisher, and Weakland on December 24, 1986. 2

Meanwhile, on March 8, 1989, the Federal Home Loan Bank Board ("FHLBB") determined that Commonwealth Savings was insolvent and appointed the Federal Savings and Loan Insurance Corporation ("FSLIC") sole conservator for Commonwealth Savings. See Resolution No. 89-703, Exhibit D, Defendants' Memorandum in Support of Motion for Summary Judgment. On May 16, 1989, the FSLIC, as conservator of Commonwealth Savings, filed a motion for summary judgment under the D'Oench doctrine. Defendants argue that these alleged oral misrepresentations constitute an unwritten side agreement falling squarely within the D'Oench doctrine. Subsequently, on May 23, 1989, the FHLBB replaced the FSLIC as conservator with the FSLIC as receiver for Commonwealth Savings. See Resolution No. 89-1501, Exhibit A, Defendants' Supplemental Memorandum in Support of Summary Judgment. Also on May 23, 1989, the FSLIC chartered a new federal mutual association, Commonwealth Federal Savings Association ("Commonwealth Federal") "to facilitate the liquidation of [Commonwealth Savings] and to make available accounts, including insured accounts, to the insured account holders of [Commonwealth Savings]." See Organization of Commonwealth Federal Savings Association, Exhibit D, Defendants' Supplemental Memorandum in Support of Summary Judgment. The FSLIC was appointed conservator of Commonwealth Federal on May 23, 1989. See Appointment of Conservator for Commonwealth Savings Association, Exhibit E, Defendants' Supplemental Memorandum in Support of Summary Judgment. On May 25, 1989, the FSLIC, as receiver of Commonwealth Savings, entered into an Acquisition Agreement with Commonwealth Federal whereby Commonwealth Federal purchased Commonwealth Savings' assets held by the FSLIC as receiver. See Acquisition Agreement, Exhibit B, Defendants' Supplemental Memorandum in Support of Summary Judgment. On June 16, 1989, the FSLIC, as conservator for Commonwealth Federal, filed a supplemental memorandum in support of their motion for summary judgment under the D'Oench doctrine.

Finally, after the parties had briefed the FSLIC's motion for summary judgment, President Bush signed into law the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (the "FIRRE Act") on August 9, 1989. The FIRRE Act abolished the FSLIC and created the Resolution

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Trust Corporation (the "RTC"), which "succeed[s] the Federal Savings and Loan Insurance Corporation as conservator or receiver with respect to any institution for which the Federal Savings and Loan Insurance Corporation was appointed conservator or receiver during the period beginning on January 1, 1989 and ending on [August 9, 1989]." Pub.L. No. 101-73, § 501, 103 Stat. 183, 363, 370 (1989). Defendants therefore request the court to substitute the RTC as the proper party defendant in this matter.

DEFENDANTS' MOTION FOR SUBSTITUTION

Commonwealth Savings was placed into conservatorship, under the FSLIC, on March 8, 1989. Commonwealth Savings then filed a motion to substitute the FSLIC, as conservator for Commonwealth Savings, as the proper party defendant in this action. Subsequently, Commonwealth Savings was placed into receivership under the FSLIC,...

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