Morgan Creek Residential v. Kemp

• Decision Date: 24 July 2007
• Docket Number: No. C053098.,C053098.
• Citation: 63 Cal.Rptr.3d 232,153 Cal.App.4th 675
• Court: California Court of Appeals Court of Appeals
• Parties: MORGAN CREEK RESIDENTIAL, Plaintiff and Appellant, v. Earl S. KEMP et al., Defendants and Respondents.

63 Cal.Rptr.3d 232

153 Cal.App.4th 675

MORGAN CREEK RESIDENTIAL, Plaintiff and Appellant, v. Earl S. KEMP et al., Defendants and Respondents.

No. C053098.

Court of Appeal, Third District.

July 24, 2007.

Cox, Castle & Nicholson, Lawrence Teplin and Heather Stern, Los Angeles, for Plaintiff and Appellant.

Kirton & McConkie, Eric C. Olson and Christopher S. Hill, Salt Lake City, UT; Goldsberry, Freeman & Guzman, Francis M. Goldsberry, II and James T. Freeman, Sacramento, for Defendants and Respondents.

SIMS, J.

In this case involving claims of equitable contribution and subrogation, plaintiff Morgan Creek Residential appeals from a judgment of dismissal, following the sustaining of a demurrer without leave to amend, in favor of defendants Earl S. Kemp and Richard A. Haws.¹ Plaintiff contends its complaint states a claim for equitable contribution from co-obligors and for subrogation under the California Uniform Commercial Code (undesignated section references are to the California Uniform Commercial Code) for monies paid by plaintiff pursuant to a letter of credit.² As we shall explain, plaintiff is not entitled to contribution from the guarantors because the liabilities of an applicant³ of a letter of credit, on the one hand, and the guarantors, on the other, are not equal. We shall also conclude plaintiff is not entitled to subrogation under the Commercial Code. We shall therefore affirm the judgment.

BACKGROUND

In the operative pleading—the "FIRST AMENDED COMPLAINT FOR UNJUST ENRICHMENT, MONEY PAID, EQUITABLE CONTRIBUTION FROM CO-OBLIGORS, AND SUBROGATION"—plaintiff alleged as follows:

Plaintiff is a land developer formerly entitling and developing real estate in a residential development known as Morgan Creek. Defendants are developers and/or merchant builders engaged in entitling and developing real estate and/or homes for sale to the public in the Morgan Creek Development.

One of the planned amenities of the Morgan Creek Development was a golf course, golf club and clubhouse (the Amenities) to serve the surrounding developments. The ownership of the Amenities was in Morgan Creek Golf Club, LLC (the Golf Club), the members of which were West Placer Golf, LLC; Stonebridge Golf IV, LLC (Stonebridge), and the Stonebridge Group (TSG). Defendant Kemp was a principal of TSG. Defendant Haws was a principal of Stonebridge and TSG. The other individuals named as defendants were principals of defendant Lakemont Homes, which was the managing member of West Placer Golf, LLC. These Lakemont defendants are not parties to this appeal.

During the course of development, the Golf Club applied for a $10 million loan from Citicapital Commercial Corporation (Citicapital) in order to complete the golf course. As a condition of the loan, Citicapital required loan guarantees from all of the named defendants. The guarantees were as follows: Kemp up to the sum of $800,000; Haws up to the sum of $800,000; Lakemont Homes up to the sum of $1.6 million; and the individual Lakemont principals up to the sum of $400,000 each. The written guarantees, totaling $4,800,000 were submitted to Citicapital.

Citicapital subsequently advised the Golf Club, through its members West Placer Golf, LLC, Stonebridge and TSG, that the guarantees were insufficient. The Golf Club, through its members, requested that plaintiff loan or advance additional sums in order to complete the golf course. Plaintiff agreed and advanced and loaned the sum of approximately $2.8 million to West Placer Golf, LLC, the operating member of the Golf Club, to complete the golf course.

Additionally, at the request of the Golf Club and defendants, plaintiff obtained and underwrote an unconditional letter of credit in the sum of $1.4 million for the benefit of Citicapital, as security for the Loan. The issuing bank was Northern Trust Bank. The terms of the letter of credit allowed Citicapital to call the letter of credit upon any default in the loan from Citicapital to the Golf Club.

The Golf Club's $10 million loan application to Citicapital was thereafter reduced to $6.5 million. Citicapital approved the $6.5 million loan (the Loan), and the Golf Club commenced construction of the golf course. The Loan was secured by a note and deed of trust on the real property and personal property comprising the golf course and other Amenities (the Property).

In July 2004, several unpaid contractors filed mechanics' liens against the real property on which the golf course was being built. As a result of this and other issues, Citicapital gave notice of a Loan default and opportunity to cure. The Golf Club, through its members, failed to take any action to cure the Loan default.

Citicapital then called the letter of credit and was paid the sum of $1.4 million by Northern Trust Bank. As a result of the contractual relationship with Northern Trust Bank, plaintiff was required to and did immediately provide the sum of $1.4 million to Northern Trust Bank to satisfy the draw on the letter of credit.

The $1.4 million drawn down on the letter of credit and obtained by Citicapital was used to reduce the outstanding principal of the Loan from $6,173,738.68 to $4,773,738.68. It was not used to cure the default under the Loan. As a result of the draw on the letter of credit and reduction of the outstanding principal of the Loan, the amount of remaining secured debt on the Property was reduced to an amount substantially equal to the fair market value of the Property.

After the draw on the letter of credit and reduction of the outstanding principal of the Loan by $1.4 million, the Lakemont defendants entered into an agreement with Citicapital, pursuant to which the Lakemont defendants sold the assets of the Golf Glub, including the Property, to themselves—taking ownership in a new entity known as Step Golf Associates, LLC—and obtained restated and restructured financing from Citicapital in a loan amount already reduced by the $1.4 million draw on the letter of credit, in the sum of approximately $4.7 million (the New Loan).

The first two counts of the complaint, which are not at issue in this appeal, alleged unjust enrichment and money paid as against the Lakemont defendants.

The third count, against all defendants, was for equitable contribution from co-obligors. It alleged that, in obtaining and underwriting an unconditional letter of credit in the sum of $1.4 million as security for the Loan, plaintiff became a co-obligor and/or co-guarantor with defendants up to the sum of $1.4 million of the total guaranteed loan sum of $6.2 million on behalf of the Golf Club for the benefit of Citicapital. Plaintiff has disproportionately paid its share of the guarantee of $6.2 million and, by reducing the principal of the New Loan for which it has no obligation, has benefited defendants to the extent that their guarantee or proportionate share thereof has been reduced. Plaintiffs $1.4 million pro rata share of the $6.2 million Loan guarantee is only 22 percent.⁴ In paying $1.4 million as a result of the draw on the letter of credit, plaintiff paid substantially more than its 22 percent proportionate share of the total amounts paid by the guarantors to Citicapital following the Loan default. Plaintiff alleged that equity and justice require that the co-obligor defendants contribute to the $1.4 million payment made by plaintiff in proportion to their percentage of total guarantee so that plaintiff is not unjustifiably penalized and defendants are not unjustly enriched. Defendants refused plaintiffs written demand for contribution.

The fourth count of the complaint alleged subrogation against all defendants. It alleged plaintiff was an applicant for a letter of credit that reimbursed an issuer of a letter of credit (Northern Trust Bank) within the meaning of section 5117.⁵ Plaintiff is subrogated to the rights of Northern Trust Bank pursuant to section 5117, subdivision (b). Pursuant to section 5117, subdivision (a), Northern Trust Bank is subrogated to the rights of Citicapital to the same extent as if Northern Trust Bank were a secondary obligor of the Loan from Citicapital. Plaintiff is also subrogated to the rights of Citicapital to the same extent as if plaintiff were a secondary obligor of the Loan from Citicapital. Plaintiffs payment of $1.4 million to Northern Trust Bank was made to protect plaintiffs own interest and was made as a result of its obligation under the letter of credit, not as a volunteer. Pursuant to section 5117, plaintiffs $1.4 million payment was one for which plaintiff was not primarily liable. Plaintiff alleged it is subrogated to the rights of Citicapital as against defendants and can obtain contribution from them pursuant to those rights, and such subrogation will not work an injustice to the rights of others.

The pleading prayed for judgment against each defendant "in proportion to their percentage of total guarantee, such that plaintiff is reimbursed for all but its 22% pro rata share...."

Defendants Kemp and Haws filed a demurrer to this first amended complaint, noting that the trial court, in its order sustaining a demurrer to the original complaint, said: "A letter of credit is not a form of suretyship obligation. Assuming arguendo such obligation was created, plaintiff has not alleged that it has paid more than the $1.4 million it guaranteed so as to require contribution from the defendants. As the claims for contribution fail, the common count claim must also fail as it is alleged on the same facts. Additionally, any arguments made by plaintiff regarding subrogation, which are not plead [sic ] in the Complaint, would also fail. Such arguments directly contravene Civil Code [section] 2787."⁶

In their demurrer to the amended complaint, defendants Kemp and Haws argued plaintiff failed to add any new allegations that would avoid the legal effect of the court's ruling that plaintiff is not a coguarantor and has no right of contribution or subrogation against...