Beverly Hills Bancorp, Matter of

• Decision Date: 06 July 1981
• Docket Number: No. 79-3674,79-3674
• Citation: 649 F.2d 1329
• Parties: In the Matter of BEVERLY HILLS BANCORP, a California Corporation, Debtor. COMMERCIAL PAPER HOLDERS, Appellants, v. R. W. HINE, Trustee of Beverly Hills Bancorp, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1329

649 F.2d 1329

In the Matter of BEVERLY HILLS BANCORP, a California

Corporation, Debtor.

COMMERCIAL PAPER HOLDERS, Appellants, v. R. W. HINE, Trustee of Beverly Hills Bancorp, Appellee.

No. 79-3674.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted April 10, 1981.

Decided July 6, 1981.

Glenn R. Watson, Richards, Watson, Dreyfuss & Gershon, Los Angeles, Cal., for appellants.

Samuel Rees, Hahn, Cazier & Leff, Los Angeles, Cal., for appellee.

Appeal from the United States District Court for the Central District of California.

Before KENNEDY and NELSON, Circuit Judges, and RICHEY, ^* District Judge.

NELSON, Circuit Judge:

This is an appeal from an order of the district court affirming the bankruptcy court's order determining the amount of appellants' claim against the bankruptcy estate of Beverly Hills Bancorp ("Bancorp"). Appellants (hereafter "commercial paper Bancorp owned essentially all of the issued and outstanding shares of Beverly Hills National Bank ("the Bank"). In the early 1970's, Bancorp made a series of loans that were financed by issuing term notes, or commercial paper. Bancorp sold the commercial paper to appellants, all customers of Beverly Hills National Bank, without registration under the Securities Act of 1933.

holders" or "CPH") are a certified class of approximately 225 holders of Bancorp's commercial paper.

In 1973 Bancorp defaulted on the commercial paper. Thereafter a class action was brought on behalf of the CPH, alleging fraud and various Securities Act violations and seeking full recovery from the Bank for the approximately $12,500,000 paid out by the CPH.

In January 1974, the Bank's assets were sold to Wells Fargo Bank for $12,200,000, thus establishing the Bank Fund. The Bank was placed under a conservatorship, with the Chief Counsel of the Comptroller of the Currency appointed as Conservator. He agreed not to distribute the Bank Fund except pursuant to a court order in the class action.

In April 1974, Bancorp filed a petition for bankruptcy pursuant to Chapter X, former 11 U.S.C. §§ 501 et seq. Appellee R. W. Hine was appointed Trustee in reorganization. Despite the Trustee's efforts to gain control of the Bank Fund, the $12,200,000 remained in the Conservator's control, outside the bankruptcy court's jurisdiction.

In June 1974, the Conservator began a proceeding under the Bank Conservation Act, 12 U.S.C. §§ 201 et seq., to bring the numerous suits against the Bank into one courtroom. The Conservator determined that it was in the Bank's best interests to settle all of its liabilities and to distribute all of its assets; the total claims against the Bank, however, exceeded the total amount of the Bank Fund. The CPH, First National City Bank ("FNCB") and Wells Fargo asserted creditor claims against the fund, while the Trustee, standing in the shoes of Bancorp, claimed a shareholder interest.

Following extensive negotiations and numerous drafts, a final version of the Bank Fund Settlement Agreement ("BFSA" or "Settlement Agreement") was accepted and signed by all the parties in July of 1975. The agreement provided for distribution of the Bank Fund to the CPH, FNCB, Wells Fargo and others. In May 1976, the district court presiding over the conservatorship proceeding approved the liquidation of the Bank pursuant to the terms of the BFSA.

A dispute arose regarding the provisions of the BFSA, and a trial was held before the bankruptcy court to determine the effect of the compromise settlement. The bankruptcy court "revised, reformed and interpreted" the Settlement Agreement and sustained the Trustee's objection to the CPH's claim against Bancorp's estate in bankruptcy. The court's order was affirmed by the district court, and this appeal followed. We reverse.

DISCUSSION

I. Choice of Law

Both the bankruptcy court and the district court determined that the Settlement Agreement is a contract. If so, it is to be construed under the laws of California. The CPH contend, however, that federal law applies, because the Settlement Agreement is a United States government contract, citing United States v. County of Allegheny, 322 U.S. 174, 64 S.Ct. 908, 88 L.Ed. 1209 (1944) and Girard Trust Co. v. United States, 149 F.2d 872, 874 (3rd Cir. 1945). The cited cases are distinguishable, however, because each involved an agreement to which the United States government was a party. The government is not a party to the Settlement Agreement, and we have found no authority characterizing such an agreement as a "government contract". We therefore reject the CPH's argument that federal law governs the interpretation of the instrument in question.

Alternatively, the CPH argue that the district court's order in the conservatorship proceeding approving liquidation of the Bank transformed the agreement into a consent decree that must be interpreted under federal law. This argument is without merit. The major purpose of the agreement was to compromise the CPH's claim in bankruptcy. The district court in the conservatorship action had no jurisdiction to order such a compromise, because § 2(a)(2) of the Bankruptcy Act, former 11 U.S.C. § 11, vests the bankruptcy court with exclusive jurisdiction to determine the amount of the CPH's claim against the estate in bankruptcy. See Thompson v. Magnolia Petroleum Co., 309 U.S. 478, 483, 60 S.Ct. 628, 84 L.Ed. 876 (1940). In BFSA § 2.1(b), the parties conditioned the effectiveness of their agreement on the issuance of an order in the conservatorship action approving the liquidation of the Bank, Bancorp's major asset. That order did not purport, however, to govern the CPH's claim against Bancorp's estate. The parties' agreement, rather than the order in the conservatorship action, is the primary source of their rights and obligations. Therefore, the Settlement Agreement is a contract and must be construed under the laws of California.

II. Reformation or Interpretation

The bankruptcy court found that "(s)ections 5(a) and 6.2(b) of the Bank Fund Settlement Agreement, as amended, are ambiguous and through mistake and accident fail to express the mutual intention of the parties. The Bank Fund Settlement Agreement, as amended, shall be revised, reformed and interpreted to conform to the mutual intention of the parties." ¹

Initially, we note that with regard to a single contractual provision, the processes of "interpretation" on the one hand, and of "revision" or "reformation" on the other hand are mutually exclusive. The former requires the interpreter to derive meaning from the written word, while the latter is invoked when the written word fails to express the parties' actual agreement. See A. Corbin, Contracts § 540 (1960).

A. Reformation

Under California law, a written instrument is presumed to express the true intent of the parties. See Security First Nat. Trust & Sav. Bank v. Loftus, 129 Cal.App. 650, 19 P.2d 297 (1933). Reformation or revision on the ground of mutual mistake (the only ground asserted here) requires clear and convincing evidence of the alleged mistake. See e. g., Taff v. Atlas Assur. Co., 58 Cal.App.2d 696, 137 P.2d 483 (1943).

This court has said that a lower court's finding of a mutual mistake justifying reformation is "based on the 'fact-finding tribunal's experience with the mainsprings of human conduct,' " and is thus reviewed under the "clearly erroneous" standard. See Lundgren v. Freeman, 307 F.2d 104, 115 (9th Cir. 1962), quoting Commissioner v. Duberstein, 363 U.S. 278, 80 S.Ct. 1190, 4 L.Ed.2d 1218 (1960). A finding of fact is clearly erroneous when "the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948); United States v. Missouri River Breaks Hunt Club, 641 F.2d 689, 694 (9th Cir. 1981). Here we are left with such a conviction.

None of the pleadings before the bankruptcy court contained a request for reformation or revision. Instead, both parties asked the court to interpret the Settlement Agreement as written. A review of the voluminous transcript of the bankruptcy proceeding reveals not only that the reformation/revision issue was never raised, but also that neither party alleged the mutual mistake that, under California law, would be the proper ground for revising the contract at issue here. See California Civil Code § 3399. In short, there is nothing in the record to support the conclusion that the Settlement Agreement, as written, fails to express the mutual intention of the parties. To the extent the bankruptcy court found to the contrary, that finding is clearly erroneous. ²

B. Interpretation

The interpretation of a contract presents a question of law, and this court "is not bound by the findings of the trial court." Republic Pictures Corp. v. Rogers, 213 F.2d 662, 665 (9th Cir.), cert. denied, 348 U.S. 858, 75 S.Ct. 83, 99 L.Ed. 676 (1954).

The CPH contend that, to the extent that the bankruptcy court purported to interpret the Settlement Agreement, the court erred in three respects: (1) in defining "interest earned"; (2) in allocating the cost of settling a tax claim; and (3) in construing § 6.2(b)(iv) of the agreement.

1. "Interest earned"

The CPH's first and primary contention on appeal is that the lower court erred in interpreting "interest earned" as used in BFSA § 5(c)(iii). That section provides that "the following amounts will not be treated as amounts received by CPH: (iii) The pro rata share of CPH of the interest earned by the Bank Fund."

Under the BFSA, payments to the CPH out of the Bank Fund reduce their claim against the estate in bankruptcy. Prior to distribution of the Bank Fund, however, the $12.2 million was invested in interest-bearing Treasury bills and certificates of deposit. Under § 5(c)(iii), the CPH's claim in bankruptcy is not reduced by its share of that interest.

The bankruptcy court...