Canadian Commercial Bank v. Ascher Findley Co.

• Decision Date: 01 May 1991
• Docket Number: No. B039160,B039160
• Citation: 280 Cal.Rptr. 521,229 Cal.App.3d 1139
• Court: California Court of Appeals Court of Appeals
• Parties: , 14 UCC Rep.Serv.2d 958 CANADIAN COMMERCIAL BANK, Plaintiff and Appellant, v. ASCHER FINDLEY COMPANY, Defendant and Appellant; Isaac Baranowicz et al., Defendants, Cross-complainants and Appellants; Montgomery Equipment Co., Cross-defendant and Appellant.

Page 521

280 Cal.Rptr. 521

229 Cal.App.3d 1139, 14 UCC Rep.Serv.2d 958

CANADIAN COMMERCIAL BANK, Plaintiff and Appellant, v. ASCHER FINDLEY COMPANY, Defendant and Appellant;

Isaac Baranowicz et al., Defendants, Cross-complainants and Appellants;

Montgomery Equipment Co., Cross-defendant and Appellant.

No. B039160.

Court of Appeal, Second District, Division 5, California.

May 1, 1991.

Review Denied Aug. 1, 1991.

Mudge, Rose, Guthrie, Alexander & Ferdon, Christopher Norgaard, Los Angeles, and Elizabeth M. Matthias, Pasadena, for plaintiff and appellant.

Parker, Milliken, Clark, O'Hara & Samuelian, Claire D. Johnson and Michael M. Mullins, Los Angeles, for defendants and appellants.

Rutter, O'Sullivan, Greene & Hobbs, Warren G. Greene and Olivia Goodkin, Los Angeles, for cross-defendants and appellants.

GRIGNON, Associate Justice.

This appeal is part of a complex web of litigation arising from a limited partnership tax shelter investment gone awry. The limited partners seek to reverse a judgment entered against them pursuant to a jury's general verdict rendered in connection with their agreement to assume certain obligations of the partnership. One of the questions presented in this appeal is whether a creditor's failure to comply with the notice and commercial reasonableness requirements of Commercial Code section 9504 necessarily bars a deficiency judgment against a limited guarantor of a note. We conclude that it does. We also consider the cross-appeal of the primary lender, which seeks reversal of the trial court's order setting aside and vacating the jury's general verdict in its favor and entering a different judgment in favor of the general partner and against the lender. Finally, we are asked to reverse the post-trial order of the court denying attorney's fees and costs to a tax shelter-related entity which claims prevailing party status even though no judgment was entered in its favor.

FACTS AND PROCEDURAL BACKGROUND

The HBDA II Limited Partnership

Prompted by the 1980 oil boom, the Montgomery Drilling Company ("MDC") ¹ began to expand its oil drilling operations through the establishment of a number of limited partnerships. Ascher Findley Company (the "General Partner") ² was created to serve as general partner of the limited partnerships and to solicit limited partner investors. The fourth such partnership established, Huntington Beach Drilling Associates II ("HBDA II"), is the subject of this litigation.

HBDA II contracted with MDC, through its wholly-owned subsidiary Montgomery Equipment Company ("MEC"), to fabricate a state-of-the-art oil drilling rig (the "Rig") for use by HBDA II (the "Fabrication and Reimbursement Agreement"). By this Fabrication and Reimbursement Agreement, MEC agreed to fabricate the Rig for $5,016,000, which represented estimated material and labor costs of $4,180,000, plus MEC's fabrication fee or profit of $836,000. The material and labor cost was to be financed in part by means of limited partner investments and in part by means of financing provided by a commercial lender (the "primary financing"). The fabrication fee was to be deferred (the "secondary financing") until the primary financing for the Rig was repaid. The Fabrication and Reimbursement Agreement conveyed a security interest in the Rig and reserved the rights of a secured creditor to MEC, including the right to a deficiency following post-default disposition of the Rig. HBDA II also contracted with MDC to operate the Rig and to obtain drilling contracts (the "Compensation and Reimbursement Agreement"). Pursuant to this Compensation and Reimbursement Agreement, MDC was to be paid all expenses as well as a drilling manager fee.

Defendants and appellants Isaac Baranowicz et al. (the "Limited Partners"), are the limited partners who invested in HBDA II. ³ In all, 144 limited partnership units were sold, at $15,000 per unit, which yielded a capital investment by the Limited Partners of $2,160,000.

The primary financing for the Rig, in the amount of $3,800,000, was provided by Crocker National Bank ("Crocker") to HBDA II pursuant to a Term Loan Agreement with amendments thereto, a Term Note, an Amended and Reinstated Promissory Note, and Security Agreement with amendments thereto (collectively, the "Loan Agreement"). Crocker took a primary security interest in the Rig and reserved the right to seek a deficiency from HBDA II. Shortly after the making of the Loan Agreement, Crocker sold a 25 percent participation in the loan to Canadian Commercial Bank ("CCB").

The Assumption Agreements

In connection with their investments in HBDA II, the Limited Partners executed primary and secondary financing assumption agreements (the "Assumption Agreements"). These Assumption Agreements were conditions precedent to the Loan Agreement. The Assumption Agreements provided that the Limited Partners would, in the event of a default by HBDA II, assume severally but not jointly, 100 percent of HBDA II's primary and secondary financing debt for the Rig. This assumption of liability could not exceed a Limited Partner's pro rata share of HBDA II and was further limited to 82 percent of each Limited Partner's capital contribution, or $12,300 per unit. The total assumed liability was $1,771,200. The assumption of liability was without any rights against the partnership or the collateral and, under prevailing tax law, increased the amount put "at risk" by each Limited Partner. Tax deductible losses for each Limited Partner equalled his or her capital contribution together with the liability assumed under the Assumption Agreements.

The Assumption Agreements were silent as to whether, in the event of default by HBDA II and disposition of the Rig collateral, disposition proceeds must first be credited against that portion of the liability which was assumed by the Limited Partners or could first be applied to that portion of the liability which was not assumed by the Limited Partners. The Assumption Agreements were also silent as to whether MEC or Crocker had the first right to claim payment of the assumed liability by the Limited Partners. The Assumption Agreements included several clear and unequivocal waivers of the rights of the Limited Partners, with respect to the sale of any collateral under Commercial Code section 9504, and similar provisions of other laws. ⁴

The Oil Market Collapse and Resulting Litigation

The Rig was completed in September 1981. In 1982, the oil drilling industry began an historic and precipitous decline, caused by falling oil prices and overbuilding of rigs, leading to sharply increased competition. HBDA II's drilling contract expired in March 1983, and the Rig was employed only intermittently thereafter. HBDA II had ceased making principal payments on the primary financing after 1982, and further ceased interest-only payments during 1983. Workout proposals were discussed by the Limited Partners and Crocker, but not executed. In November 1984, CCB and Crocker demanded payment from HBDA II under the Loan Agreement. Following demand by Crocker and CCB, HBDA II sought protection by filing a Chapter 11 petition in bankruptcy. Negotiations for the reorganization of HBDA II began among the parties.

In April 1985, Crocker assigned its remaining interest in the Loan Agreement to CCB, which asserted primary rights to the portion of the liability assumed by the Limited Partners. No reorganization plan was ever negotiated. In June 1986, following the expiration of its contract, MDC resigned as driller-manager. The Rig ceased operation.

In September 1986, CCB filed its First Amended Complaint in the instant matter, ⁵ by which it sought repayment of the amounts owing under the Loan Agreement from the General Partner by operation of law and from the Limited Partners, pursuant to the Assumption Agreements. In November 1986, the Limited Partners filed a cross-complaint against CCB, MEC and MDC, seeking declaratory relief as to the issue of priority between CCB's and MEC's claims, and seeking damages for MEC's and MDC's alleged negligence, breach of fiduciary duty, and misrepresentation. A First Amended Cross-complaint was filed by the Limited Partners in January 1987. In May 1987, MEC cross-complained against the Limited Partners for monies owed under the Assumption Agreements and at common law, and against the General Partner by operation of law.

The CCB-MDC-MEC Settlement

Sometime in April or May 1987, ⁶ CCB, MDC, and MEC settled their claims against each other, pursuant to a written settlement agreement (the "Settlement Agreement"). The Settlement Agreement provided that CCB would take primary responsibility for pursuing payment by the Limited Partners under the Assumption Agreements, and that an agreed-upon percentage of collected funds, net of costs, would be allocated to MEC. In addition, CCB agreed to seek relief from stay in the bankruptcy court to foreclose on the Rig collateral. The Settlement Agreement also provided that the Rig would be leased at no cost to MDC, with an option expiring at the end of 1987 to purchase the Rig for $175,000. An undated bill of sale was attached to the Settlement Agreement. The lease required MDC to insure the Rig. The policy, designating MDC as owner, insured the Rig for $900,000. CCB moved in the bankruptcy court for relief from stay in May 1987, requesting the right to foreclose on the Rig. No objections were filed and relief was granted. On December 29, 1987, MDC exercised its option to purchase the Rig for $175,000.

In the normal course of discovery, the Settlement Agreement between MEC, MDC, and CCB was produced to the Limited Partners in October 1987. The Limited Partners and the General Partner learned, for the first time, of the disposition of the Rig, which they believed had a fair market value in excess of the $175,000 for which CCB purchased it.

The Trial and Verdicts

Trial commenced on August 19, 1988. The jury returned the following verdicts: (1) on...