In Re: Crystal Prop., 99-56038

CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)
Citation268 F.3d 743
Docket NumberNo. 99-56038,99-56038
Decision Date25 September 2001

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268 F.3d 743 (9th Cir. 2001)
No. 99-56038
Argued and Submitted June 11, 2001
Filed September 25, 2001

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Steven T. Gubner, Ezra, Brutzkus, & Gubner, Encino, California, for the appellant.

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Talin Keshishian, Ezra, Brutzkus, & Gubner, Encino, California, for the appellant.

William E. Crockett, Dion-Kindem & Crockett, Woodland Hills, California, for the appellee-debtor.

James R. Felton, Greenberg & Bass, L.L.P., Encino, California, for the appellee-debtor.

Appeal from the United States District Court for the Central District of California; Margaret M. Morrow, District Judge, Presiding. D.C. No. CV-98-05442-MMM

Before: Wardlaw, Paez, and Tallman, Circuit Judges.

Wardlaw, Circuit Judge

Beal Bank ("Beal") appeals the district court's order affirming the bankruptcy court's grant of summary judgment in favor of the debtor, Crystal Properties ("Crystal"). Beal asserts that the bankruptcy and district courts incorrectly concluded that Crystal was not required to pay interest at the default rate on seven defaulted loans Beal acquired from the Federal Deposit Insurance Corporation ("FDIC"). The central issue is whether, and, if so, when, the default interest rate, as provided in the original loan agreement between Beal's predecessors and the Ngs (later Crystal) is triggered. Beal argues that the default interest rate was triggered the moment the Ngs failed to make interest payments to its predecessors (early 1995). Crystal contends that the default rate became applicable after the first quarter of 1997, when Beal recorded the notices of default. We agree with the bankruptcy and district courts, concluding under well-established authority, that the default interest rate did not apply to Crystal's loans until the first quarter of 1997, when the holder first took affirmative action to put the debtor on notice that it intended to exercise its option to accelerate, and thus invoked the default rate under the contract at issue. We have jurisdiction pursuant to 28 U.S.C. § 158(d), and we affirm.


This case arises out of nine loans issued by Guardian Bank ("Guardian") to Thien Koan Ng and Carol Ng, either directly or indirectly through one of the entities they controlled. Each of the loans was executed in California. The collateral for the loans consisted of real property and/or pledged promissory notes secured by real property in California. The contract rate set forth in each loan document was Bank of America's prime interest rate, plus one percent. Each loan also included a Premium Interest Rate Clause providing that the unpaid balance would accelerate on default and bear interest at a rate 5% higher than the contract rate. The premium interest rate clause or "default interest clause" in each note states:

Should default be made in any payment provided for in this note, . . . at the option of the holder hereof and without notice or demand, the entire balance of principal and accrued interest then remaining unpaid shall become immediately due and payable, and thereafter bear interest, until paid in full, at the increased rate of five percent (5%) per annum over and above the rate contracted for herein. No delay or omission on the part of the holder hereof in exercising any right hereunder, . . . shall operate as a waiver of such right or any other right under this note . . . .

Although the Ngs originally acquired at least nine loans from Guardian, only the seven loans set forth below are at issue in this appeal:


Loans Maturity Date Date Default Notice was Recorded

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Loan A: Walnut March 15, 1999 April 3, 1997 (Article 9 Property foreclosure notice)


Loan B: Mountain May 5, 1998 February 14, 1997 View/San Bernardino (Notice of Default)


Loan C: Coldwater November 15, 1997 April 3, 1997 (Article 9 Canyon foreclosure notice)


Loan D: Arcadia May 10, 1997 February 27, 1997 Property (Notice of Default)


Loan E: Palmdale December 5, 1994 January 10, 1997 Property (Notice of Default)


Loan F: Grand December 5, 1994 January 10, 1997 Terrace Property (Notice of Default)


Loan G: Montclair September 5, 1995 April 3, 1997 Property (Notice of Default)


Of these seven notes, three (Loans E, F, and G) matured prior to the first quarter of 1997--the date upon which the parties agreed the default interest rate became applicable.

By early 1995, the Ngs had missed payments on their loans. Thien Ng entered into negotiations with Guardian to induce the Bank to accept a fifteen percent (15%) discount on the loan balances. On January 20, 1995, the FDIC placed Guardian into conservatorship. After the FDIC assumed control of Guardian's affairs, Thien Ng continued to attempt to negotiate a pay out.

On February 23, 1995, the FDIC secured a written demand that the Ngs bring their loans current and informed them that failure to do so would result in the FDIC imposing the default rate. The letter notified the Ngs that the FDIC had frozen three of their accounts at Guardian, but had not set off any outstanding loan balances against the funds held in the frozen accounts. Although the letter concluded that the loans "are in default, which involks (sic) the default interest clause," it contained no statement regarding the amount of the default interest rate or whether the FDIC wished to accelerate the loans.

On March 6, 1995, the FDIC again demanded that the Ngs bring their loans current. This letter specifically stated that because the Ngs had transferred the real property security for three loans identified in the letter (only one of which is among the seven loans in this appeal) to a third party, the FDIC "had triggered the default interest provision of [the ] Deeds of Trust." Notwithstanding that statement, the calculations of the principal and accrued interest owed to the FDIC set forth in the letter were based on the contract rate--and not the default rate.

On May 9, 1995, the FDIC communicated with the Ngs again (in a letter erroneously dated March 9, 1995). The correspondence included a list of the outstanding balances of remaining principal and unpaid interest calculated at the contract rate. This letter made no reference to the default interest clause.

Ten days later, on May 19th, the FDIC wrote to the Ngs outlining their negotiations about a possible 15% discount on the outstanding loans. The FDIC indicated that because Guardian had negotiated a 15% discount on the loans, it might be willing to consider a discount if the Ngs provided financial statements and agreed to keep interest payments current during the negotiations. The letter also represented that the FDIC would withhold taking action on the three loans discussed in

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the March 6th letter during discount negotiations.

The FDIC and the Ngs subsequently reached an agreement to allow the Ngs to pay off all outstanding loans at a 12.5% discount. On August 15, 1996, the FDIC sent the Ngs an accounting statement calculating the principal and accrued interest due on each loan at the contract rate. The letter also noted that the "agreement that we had entered into with you to allow a discounted payoff will expire on September 17, 1996." Despite reaching this agreement, the Ngs failed to make the negotiated payments to the FDIC and never tendered the loan balances.

Around December 1996, Guardian, through the FDIC, assigned its beneficial rights in the Ngs's loans to Beal. Because Beal could not reach any settlement agreement with the Ngs as to the overall payoff amount, Beal sent notices of acceleration and default to the Ngs. By the first quarter of 1997, Beal recorded notices of default for all seven loans, an act that the parties agree was legally sufficient to trigger the default interest provision in the notes.

On June 25, 1997, Crystal, a real estate venture corporation owned and controlled by the Ngs, commenced a bankruptcy proceeding by filing a Chapter 11 petition in the Central District of California. One day before Crystal filed its Chapter 11 petition, the Ngs transferred the real property collateral for the seven loans to Crystal. To determine the maximum amount of Beal's claims, Crystal filed a motion for estimation on August 19, 1997, which was granted. Beal filed proofs of claims for the seven loans on September 12, 1997.

In April 1998, the parties cross-moved for summary judgment to determine, inter alia, whether Beal was entitled to apply the default interest rate before the date it filed the notices of default. The bankruptcy court held that it was not:

The real question is, as has always been, can Beal Bank come in as a successor in interest and go back and retroactively apply default interest from a period long before it had any connection with this loan, notwithstanding anything else that went on, and the answer, I think, can't be yes.

The bankruptcy court further reasoned that it would be inequitable to allow Beal to recover the default interest rate in a period during which it was not actively enforced by Beal's predecessors in interest. It concluded that the...

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