First Interstate Bank of California v. Winncrest Homes, Inc.

Decision Date25 July 2003
Docket NumberC036722.,C035434.
CourtCalifornia Court of Appeals Court of Appeals
PartiesFIRST INTERSTATE BANK OF CALIFORNIA, as Cotrustee, etc., et al., Plaintiffs, Cross-defendants and Respondents, v. WINNCREST HOMES, INC., et al., Defendants, Cross-complainants and Appellants, McMORGAN & COMPANY, Cross-defendant and Respondent. FIRST INTERSTATE BANK OF CALIFORNIA, as Cotrustee, etc., et al., Plaintiffs, Cross-defendants and Appellants, v. WINNCREST HOMES, INC., Defendant, Cross-complainant and Respondent.

Affirmed. Matter remanded to trial court for further proceedings. Cross-defendants First Interstate, PFT, and McMorgan entitled to costs on appeal.


Defendant and cross-complainant Winncrest Homes, Inc. (Winncrest), appeals from a judgment in favor of First Interstate Bank of California (First Interstate), the corporate cotrustee of cross-defendant Pension Trust Fund for Operating Engineers (PTF), on First Interstate's action for judicial foreclosure and against Winncrest on its cross-complaint against PTF and McMorgan & Company (McMorgan). The dispute concerns the development of a residential golf course community at Rancho Murieta, approximately 25 miles from Sacramento. The trial court rejected Winncrest's defenses to First Interstate's foreclosure of a deed of trust on a portion of Rancho Murieta purchased by Winncrest. The court also found no merit in the misrepresentation, interference with contract and related causes of action of Winncrest's cross-complaint. Winncrest contends the trial court made numerous errors during the course of the litigation that prevented a full and fair consideration of Winncrest's claims. We find no merit in these contentions and affirm the judgment.


This dispute involves 3,590 acres of land commonly known as Rancho Murieta, purchased by PTF for use as a training facility for apprentice operating engineers. PTF is a multiemployer/employee pension trust fund that serves the members of Local No. 3 of the International Union of Operating Engineers. PTF later decided to develop Rancho Murieta into a residential, planned-unit development with a country club and two 18-hole golf courses and formed Rancho Murieta Properties, Inc. (RMPI), to conduct the development and marketing of the project. PTF owned all the stock of RMPI, and the trustees of PTF were the directors of RMPI.

RMPI began developing and marketing the project in May 1973, and hired Ray Henderson as the project and marketing manager. RMPI created a nonprofit, membership-based corporation, Rancho Murieta Country Club (RMCC), to manage the two golf courses, the clubhouse and related facilities (collectively the Country Club). RMCC entered into a contract with RMPI to lease the Country Club for a period of 55 years. The lease provided for annual payments of $ 164,835, increased to $ 219,000 on completion of the second golf course, and granted RMCC an option to purchase the Country Club after November 1978 for fair market value without regard to the lease.

PTF initially agreed to contribute up to $ 2.5 million to RMPI to fund RMCC's losses during the beginning of operations. This money was an advance of initiation fees for RMCC memberships. PTF and RMPI viewed the Country Club as a necessary ingredient to lot sales at Rancho Murieta. Under RMCC's bylaws, every lot owner at Rancho Murieta had a right to apply for either a golf or social membership. Initial monthly dues were set at $ 50 for golf memberships and $ 10 for social memberships. The RMCC Board of Directors had authority to increase dues by 5 percent per year. Higher increases had to be approved by the membership. Over the ensuing years, PTF, through RMPI, contributed additional sums to RMCC to cover the operating losses of the Country Club.

Because RMCC memberships were considered to be securities, RMCC was required to obtain a permit from the California Department of Corporations (DOC) before it could issue them to lot purchasers. After 1978, the DOC required RMCC to obtain annual permits to continue selling securities. DOC conditioned its permit on RMPI's commitment to fund RMCC's losses through capital contributions. RMPI consistently made this commitment.

PTF initially believed RMCC would be self-sufficient by 1980. However, because of the below-market dues charged by RMCC, a low number of members, and the inefficient layout of the golf courses, this did not occur. From time to time, RMCC was required to execute notes for equipment purchases financed by RMPI. By 1985, RMCC owed RMPI approximately $ 1.32 million.

By 1976 or 1977, PTF began looking into getting out of the project and asked Henderson to find a buyer for Rancho Murieta. The project represented only a small percentage of PTF's assets but was consuming 75 to 80 percent of PTF's management time. Rancho Murieta was also costing PTF money. Henderson presented John Anderson to PTF as a potential buyer. In early 1980, PTF and Anderson signed a letter of intent for the purchase of the project. However, the proposed transaction was never consummated.

Over the next several years, efforts to sell the project were stymied by RMCC's 55-year lease of the Country Club. These sales efforts were directed primarily by McMorgan, an investment manager for pension trust funds that had provided services to PTF since the early 1970s.

In or around 1983, Henderson sued PTF for a commission for arranging the 1980 sale to Anderson. About a year later, Anderson and John Boreta, who claimed a partnership with Anderson in the aborted 1980 sale, filed suit against PTF for damages and specific performance of the transaction that was the subject of the letter of intent.

By 1983, PTF did not wish to put any further money into the project. Jack McClurg, who had been hired to manage and sell the project, was directed to minimize PTF's further investment by reducing lot sales in order to avoid the necessity of opening new phases of the project.

Following arbitration of the Henderson lawsuit, PTF and Anderson entered into negotiations for the sale of Rancho Murieta and a joint settlement of the two lawsuits. Eventually, PTF agreed to sell the project to John and Edith Anderson (the Andersons), including all RMPI stock and all remaining Rancho Murieta property owned by RMPI or PTF, and the Andersons agreed to indemnify PTF against any recovery by Henderson or Boreta in the lawsuits. The Andersons thereafter assigned their rights in this purchase agreement to a corporation they owned, Spring Creek Development Company (Spring Creek).

The purchase price for the project was to be $ 42.2 million, with the Andersons providing a down payment of $ 14 million and the remainder to be in the form of a 10-year note secured by a portion of the property sold to the Andersons. Also pursuant to the agreement: (1) PTF accepted assignment of promissory notes from lot sales in lieu of cash payments on the 10-year note; (2) the Andersons agreed to maintain the golf courses and to fund RMCC to the extent required by the DOC to permit RMCC to issue memberships; (3) if the Andersons failed to do so, PTF could fund RMCC's losses and add the amount to the note from the Andersons; (4) the Andersons could obtain the release of large parcels of 70 to 110 acres from PTF's deed of trust for sale to third parties; and (5) upon default by Anderson, PTF had the option of declaring the full amount due or foreclosing.

Escrow on the sale closed in November 1985, and the Andersons paid Henderson slightly over $ 2 million to settle his claim. When the Andersons' first note payment came due in November 1986, a portion of the payment they presented to McMorgan consisted of notes totaling $ 3.2 million. The larger of the notes was from the sale of a 20-acre parcel to Frank Ramos, 12 acres of which contained a driving range. This sale was a sham designed to create a fictional note to provide to RMPI. Ramos had not made the down payment for the property and had no intention of making any payments on the note. RMPI and McMorgan accepted the Ramos note as partial payment. Ramos thereafter defaulted on the note, and PTF foreclosed and regained ownership of the property.

The Andersons failed to make their November 1987 note payment, but PTF did not foreclose. PTF did not want to reacquire the project.

In 1986, the Andersons funded RMCC's losses, but insisted that RMCC sign a note for the amount. RMCC refused, and the Andersons refused to provide further funding. RMCC was told all funding would be by way of loans. McMorgan did not force the Andersons to finance RMCC and did not declare default. RMCC requested relief from the DOC, but the DOC took no action on the matter. Without the Andersons' financial assistance, RMCC stopped making lease payments. McMorgan recommended that RMPI sue RMCC to terminate the lease.

On February 3, 1988, the DOC issued a desist and refrain order barring RMCC from issuing new memberships until it could show financial ability to run its operations.

Meanwhile, in June 1988, Winncrest entered into negotiations with RMPI to purchase all the property on the south side of Rancho Murieta, including one of the golf courses, for approximately $ 20 million. In August 1988, Winncrest entered into an agreement with RMPI to purchase a portion of parcel 7 on the south side of Rancho Murieta, consisting of approximately 150 acres (the parcel 7 agreement). The parcel 7 agreement contained a provision requiring RMPI to transfer to Winncrest, by the close of escrow, RMPI's right to the issuance of a certain number of RMCC memberships. It also required RMPI to use best efforts to cause the creation of a new class of memberships with limited golf course access. RMPI and Winncrest agreed that Winncrest would pay $ 4.845 million, $ 500,000 in cash and the rest in third party notes, and would give RMPI a note for $ 3.405 million. The...

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