Carmel Fin. v. Schoenmann
| Decision Date | 23 August 2022 |
| Docket Number | 3:21-cv-07387-WHO |
| Parties | CARMEL FINANCING, LLC, Appellant, v. SCHOENMANN, Respondent. |
| Court | U.S. District Court — Northern District of California |
ORDER ON BANKRUPTCY APPEALS
Appellant and cross-respondent Carmel Financing, LLC (“Carmel”) loaned debtor Mayacamas Holdings LLC (“Mayacamas”) $2,000,000 to refinance its purchase of a parcel of land, secured by a deed of trust. Mayacamas entered bankruptcy proceedings and, soon after, the Tubbs Fire burned through the land. In these consolidated appeals, the parties challenge the Bankruptcy Court's orders (1) finding that bankruptcy trustee E. Lynn Schoenmann (“the Trustee”) can use her “strong-arm” powers to avoid Carmel's security interest in insurance proceeds from the fire, (2) dismissing the Trustee's claim that certain default loan terms were unlawful, and (3) declining to award the Trustee's attorney's fees.
The Bankruptcy Court's judgment is affirmed in part, reversed in part, and remanded. I agree with the Bankruptcy Court that the Trustee can avoid Carmel's interest in the insurance proceeds and its grant of summary judgment is affirmed. I disagree with its other two determinations. On the first, it applied incorrect choice-of-law principles to dismiss the Trustee's claim. On the second, it incorrectly held this action did not fall within the attorney's fees statute at issue. Its bottom-line conclusions about these issues may be correct in the end, but the case is remanded for it to address them under the proper tests in the first instance.[1]
Mayacamas the debtor in this bankruptcy proceeding, acquired a parcel of land in Sonoma County, California (“the Sonoma Property”) in 2006. See Stipulation Between Trustee and Carmel Holdings, LLC (“Stip.”) [2 AA 4-10] ¶¶ 1-2.[2] Mayacamas purchased it with a $2,000,000 loan, secured by a deed of trust, from Tom Steyer. Id. ¶ 3. In April 2014, Mayacamas and Carmel executed a promissory note to refinance that loan, paying Steyer the outstanding amount and releasing the deed of trust. See id. ¶ 3; see also Promissory Note (“PN”) [2 AA 1215]. Under that promissory note, Carmel would give Mayacamas a loan with a principal amount of $2,000,000 with a six percent annual interest rate. PN at 12. The note was secured by a first priority deed of trust that encumbered the Sonoma Property. Id. § 2; see also Deed of Trust (“DOT”) [2 AA 17-28].
Several provisions of the promissory note are relevant here. The note incorporated the terms of the deed of trust. PN § 2. It had a maturity date of May 8, 2015. Id. §4(a); see also Stip. ¶ 3 (). The entire principal and accrued interest were due on that date. PN § 4(a). The note also imposed a $75,000 exit fee on Mayacamas due automatically on the maturity date. Id. §§ 4(a), 5. If Mayacamas defaulted and at any point after the maturity date, the interest increased to 18 percent per year. Id. § 3. The note contained a choice-of-law provision that reads as follows:
This note was negotiated in the State of Colorado, and made by the Company [Mayacamas] and accepted by Holder [Carmel] in the State of Colorado, and the proceeds of this Note were disbursed from the State of Colorado which state the parties agree has a substantial relationship to the parties and to the underlying transaction embodied hereby and in all respects, including, without limiting the generality of the foregoing, matters of construction, validity and performance, this Note and the obligations arising hereunder shall be governed by, and construed in accordance with, the laws of the State of Colorado applicable to contracts made and performed in such state (without regard to principles of conflict of laws) and any applicable law of the United States of America. To the fullest extent permitted by law, Company hereby unconditionally and irrevocably waives any claim to assert that the law of any other jurisdiction governs this Note and this Note shall be governed by and construed in accordance with the laws of the State of Colorado.
Id. § 10 (capitalization altered). The note also provided that Mayacamas submitted to the jurisdiction of courts in Denver, Colorado, for actions “arising out of this Agreement.” Id. § 11.
Several provisions of the deed of trust are also relevant. As noted, Carmel was the beneficiary of that deed, which secured the promissory note See DOT at 17. In the deed, Mayacamas placed in trust, among other things, “insurance policies (whether or not required to be carried by [Mayacamas] pursuant to the terms hereof), together with insurance payments and unearned insurance premiums” and “claims, demands, awards, settlements and other payments arising or resulting from or otherwise relating to any insurance (whether or not [Carmel] is named as a loss payee of such insurance.” Id. ¶ (f). Mayacamas also granted Carmel, under the Uniform Commercial Code of Colorado, a security interest in, among other things, these insurance-related intangibles. See id. at 18 (). The deed referenced the promissory note and loan made under it as the secured agreement. Id. at 18-19. The deed also obligated Mayacamas to insure improvements on the property against hazards (to the extent they were not otherwise insured) as Carmel “may reasonably require.” Id. § 3.2. It provided that “[t]he amount collected by [Mayacamas] under any insurance policy may be applied by [Carmel] upon any indebtedness secured hereby.” Id. The deed also had a lengthy choice-of-law and jurisdiction provision that, in short, provided that Colorado law applied to any issue arising under or related to it. Id. § 11. The parties stipulated that the deed of trust was “duly recorded” in Sonoma County. Stip. ¶ 4.
When the promissory note and deed of trust were executed, the Sonoma Property was insured against fire by Philadelphia Indemnity Insurance Company (“Philadelphia Indemnity”) for a policy that lasted from April 6, 2014 to April 6, 2015 (“the 2014-15 Policy”). Stip. ¶ 5; see also 2 AA, Ex. 3. Steyer was listed as a “mortgagee” on that policy. Stip. ¶ 5. The parties agree that Carmel did not provide Philadelphia Indemnity with its deed of trust or promissory note, and did not notify it that it was a mortgagee or ask that it be added to the policy. Id. ¶ 6. In January 2015, Philadelphia Indemnity sent Mayacamas's insurance broker a document stating that the policy would expire soon and that, to renew it, the broker must “update and return the attached renewal survey” and could “update any changes and email or fax it back to us.” 2 AA 84. Mayacamas's broker sent it to Mayacamas, which made several handwritten edits. Relevant here, on the “Additional Insured(s) Schedule,” Mayacamas crossed out Steyer's name and address under “Additional Insured” and wrote in Carmel's name and address. 2 AA 97. Mayacamas's broker emailed back the form. 2 AA 100-01. Philadelphia Indemnity subsequently issued three further insurance policies, for year-long periods from April 6, 2015 to 2016, 2016 to 2017, and 2017 to 2018, respectively. Stip. ¶¶ 9-11. None of those updated policies identified Carmel as a loss payee or mortgagee. Id. Steyer was still (mistakenly) identified as the mortgagee on the 2017-18 policy. Id. ¶ 15.
On April 7, 2017, Mayacamas filed a Chapter 11 bankruptcy petition, which was later converted to a Chapter 7 proceeding. Id. ¶¶ 14, 15. The Trustee was appointed for both. Id.
On October 8, 2017, the Tubbs Fire broke out in Sonoma County, reached the Sonoma Property, and “destroyed [its] buildings, improvements, and much of [its] flora and fauna.” Id. On October 13, 2017, Mayacamas's manager sent an email to the insurance broker that, as the parties stipulate, “direct[ed] it to add Carmel as a ‘Mortgagee/Lend Loss payable to the policy effective immediately.'” Id. ¶ 16; see also 2 AA, Ex. 9 (copy of email). That day, Philadelphia Indemnity issued a document replacing Steyer with Carmel as mortgagee and as the loss payee. Id. ¶ 17.
On October 18, 2017, the Trustee presented a claim to Philadelphia Indemnity and received $2,107,438.76 in insurance proceeds. Id. ¶ 19. The Bankruptcy Court approved $500,00 of that for use cleaning up the Sonoma Property. Id. $1,688,906.07 now remains with the Trustee, unspent. Id.
In April 2019, the Trustee filed an adversary proceeding in the bankruptcy against 23 defendants, including Carmel. See Memorandum Decision on Motion to Dismiss (“MTD Op.”) [1 AA 43-54]; Memorandum Decision Regarding Cross-Motions for Summary Judgment (“MSJ Op.”) [3 AA 4-11].[3]
In September 2019, the Bankruptcy Court granted in part and denied in part Carmel's motion to dismiss the adversary proceeding. See generally MTD Op. First, the court found that California law governed “issues pertaining to the [deed of trust], the [Sonoma] Property, and the Insurance Proceeds” but that Colorado law applied “when interpreting, enforcing, or resolving a challenge to terms of the [promissory] Note.” Id. 8. Next, the court held that the Trustee had failed to state a claim that the increased 18 percent default interest rate late charges, and exit fee were invalid; the Trustee had argued that California law barred them, but because the Bankruptcy Court held that Colorado law governed, it rejected her argument. Id. 8-9. Last, the court found adequately pleaded the Trustee's claim that the estate, not Carmel, was entitled to the insurance proceeds. Id. 9-11. I denied Carmel's application for leave to file an interlocutory appeal. Schoenmann v. Carmel Fin. LLC, No....
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