New York Life Ins. Co. v. Watt West Inv. Corp.

• Decision Date: 08 January 1991
• Docket Number: No. Civ. S-90-1423-DFL.,Civ. S-90-1423-DFL.
• Citation: 755 F. Supp. 287
• Parties: NEW YORK LIFE INS. CO., Plaintiff, v. WATT WEST INVESTMENT CORP., et al., Defendants.
• Court: U.S. District Court — Eastern District of California

755 F. Supp. 287

NEW YORK LIFE INS. CO., Plaintiff, v. WATT WEST INVESTMENT CORP., et al., Defendants.

No. Civ. S-90-1423-DFL.

United States District Court, E.D. California, Sacramento Division.

January 8, 1991.

Erica B. Grubb and Frank A. McGuire, Morrison & Foerster, Walnut Creek, Cal., for plaintiff.

Paul Stewart and Gayle J. Gribble, Flynn & Stewart, San Francisco, Cal., for defendant William H. Cook.

L. Kent Wyatt, Weintraub, Genshlea, Hardy, Erich & Brown, Sacramento, Cal., for defendant Ertle.

MEMORANDUM OPINION

LEVI, District Judge.

This matter was heard on November 21, 1990, on plaintiff's application for appointment of a temporary receiver. Erica Grubb, Esq., appeared on behalf of New York Life Insurance Co. ("New York Life"). Despite notification by plaintiff, no appearance was entered on behalf of any defendant. For the reasons discussed below, the court approved plaintiff's application for appointment of a temporary receiver.¹

I. FACTS

A. The Loan Documents

On April 6, 1988, defendant Watt West Investment Corp. ("Watt West") executed a promissory note borrowing $7.5 million from plaintiff New York Life, secured by a commercial real estate property. Watt West executed a deed of trust, naming plaintiff New York Life as beneficiary. Watt West simultaneously executed an assignment of rents agreement conveying a present, unconditional, absolute assignment of rents and income to New York Life. Also on April 6, 1988, Watt West executed a financing statement to perfect New York Life's security interest in personal property granted under the deed of trust. On April 11, 1988, the deed of trust, the assignment of rents agreement, and the financing statement were recorded in Sacramento County. These instruments are referred to collectively as the "loan documents."

The deed of trust provides that New York Life is entitled to foreclose on the property in the event Watt West defaults, and defines the events constituting default. Deed of trust, Art. III, paragraphs 4.01(A) and 3.01(1)-(8) respectively. The deed of trust also provides that upon Watt West's default New York Life is entitled to appointment of a receiver. Deed of trust, paragraph 4.01(E).²

B. The Alleged Defaults

On October 10, 1990, and November 13, 1990, Watt West allegedly failed to make monthly mortgage payments of $63,065.00 to New York Life. Watt West also allegedly failed to pay late charges arising from these delinquent payments as of the date plaintiff filed this action. New York Life further contends that Watt West is diverting rents and other income from the property to pay unrelated obligations in violation of the loan documents.³ On both November 12, 1990, and November 14, 1990, New York Life gave written notice of Watt West's alleged default under the loan documents. New York Life then exercised its option to accelerate, declaring the outstanding principal and interest immediately due.

II. PROCEDURAL HISTORY

On November 16, 1990, New York Life filed a complaint for breach of the loan agreements, together with an ex parte application for appointment of a temporary receiver. The court denied plaintiff's ex parte application on November 16, 1990, ordering plaintiff to serve its pleadings on all defendants. The court ordered defendants to file opposing papers by 1:00 p.m. on November 20, 1990, and set the matter for hearing on November 21, 1990. Defendants failed to oppose the application for appointment of a temporary receiver and failed to appear at the hearing on November 21, 1990. The court is satisfied, based on the declarations and representations of plaintiff's counsel, that all reasonable efforts were made to provide defendants with notice of these proceedings. This court has subject matter jurisdiction pursuant to 28 U.S.C. § 1332. Venue is proper pursuant to 28 U.S.C. § 1391(a).

III. DISCUSSION

A. Federal Law Governs Appointment of Receivership

This court must first determine whether federal or state law applies to plaintiff's application in this diversity action. Plaintiff New York Life argues that the California law of receiverships applies to this petition,⁴ by operation of Fed.R.Civ.P. 64 and 66.

Rule 66, Fed.R.Civ.P., governing appointment of receivers, provides that:

The practice in the administration of estates by receivers or by other similar officers appointed by the court shall be in accordance with the practice heretofore followed in the courts of the United States or as provided in rules promulgated by the district courts. In all other respects the action in which the appointment of a receiver is sought or which is brought by or against a receiver is governed by these rules.

Plaintiff interprets the last sentence of the Rule as a cross reference to Fed.R.Civ.P. 64 which addresses the seizure of property for the purpose of satisfying a judgment to be entered. Rule 64 in turn sends the court to state law: "all remedies providing for seizure of ... property to secure satisfaction of a prospective judgment are available under the circumstances and in the manner provided by state law," subject to two qualifications which are not relevant here. Thus, plaintiff concludes that the court should apply California law governing the appointment of receiverships. See Cal.Code Civ.Proc. § 564.

Although plaintiff's position is certainly reasonable, Rule 66 is subject to a different interpretation. The language of Rule 66 may be read to assert the primacy of federal law and federal practice in the appointment of receivers. Indeed, it appears to the court that this is the most natural reading of the Rule. The Rule states that the practice in the administration of estates by receivers — and the term "practice" surely includes the appointment of the receiver — shall be governed by federal precedent or federal district court local rules. It is because of this very language that plaintiff came to federal court seeking appointment of a temporary receiver under authority of the Local Rules of this court. Local Rule 232 governs receiverships and provides for temporary appointment of receivers.⁵ The temporary receivership which plaintiff seeks is a creation of Local Rule 232(b) rather than the state law of receiverships. Plaintiff's position thus appears somewhat inconsistent: it seeks application of the local rules which create the device of a temporary receivership but then asserts that state law standards control as to the appointment of that temporary receiver.

The intent of Rule 66 to apply federal law to the appointment of a receiver also may be gathered from the note of the advisory committee. The note states that the final sentence of the Rule was added in 1948 to assure "the application of the federal rules to all matters except actual administration of the receivership estate itself." Fed.R.Civ.P. 66 Advisory Committee's Note. Read literally, this language is not technically inconsistent with plaintiff's position that Rule 64, and then state law, applies to the appointment of a receiver. But the intention of the drafters appears to have been to assure application of federal standards and procedure to the appointment of receiverships by federal courts.

Because a federal court's appointment of a receiver is an equitable act,⁶ the court's conclusion that federal law controls this matter is further supported by — or at least is consistent with — the principle, stated by the Supreme Court in Guaranty Trust Co. of New York v. York, 326 U.S. 99, 109, 65 S.Ct. 1464, 1470, 89 L.Ed. 2079 (1945), that the federal court's equity power in diversity cases is not simply equated with state law under the Erie doctrine.⁷ In York the court stated that the Erie doctrine did "not mean that whatever equitable remedy is available in a State court must be available in a diversity suit in a federal court, or conversely, that a federal court may not afford an equitable remedy not available in a State court." York, 326 U.S. at 105, 65 S.Ct. at 1468. The Ninth Circuit has reiterated the vitality of the federal court's independent and inherent equitable power and jurisdiction in FTC v. H.N. Singer, Inc., 668 F.2d 1107, 1112 (9th Cir.1982) (Duniway, J.). In Singer the court held that the district court had the equitable power to freeze assets even though conditions for an attachment of assets under Fed.R.Civ.P. 64 and state law were not met. See also Skelly Oil Co. v. Phillips Petroleum Co., 339 U.S. 667, 674, 70 S.Ct. 876, 880, 94 L.Ed. 1194 (1950) (in a diversity case, the fact that "the declaratory remedy which may be given by the federal courts may not be available in the State courts is immaterial"); Pusey & Jones Co. v. Hanssen, 261 U.S. 491, 497, 43 S.Ct. 454, 455, 67 L.Ed. 763 (1923) ("That a remedial right to proceed in a federal court sitting in equity cannot be enlarged by a state statute is likewise clear. The federal court may therefore be obliged to deny an equitable remedy which the plaintiff might have secured in state court") (citations omitted); Irving Trust Co. v. Braswell, 596 F.Supp. 1441, 1444 (S.D.N.Y.1984) (federal courts may issue a preliminary injunction in a diversity contract action even if state court could not do so under state law).

Moreover, the application of federal law to the appointment of a receiver in a diversity case is consistent with the Erie doctrine because the appointment of a receiver does not directly affect the outcome of the action. See Pusey & Jones Co., 261 U.S. at 497, 43 S.Ct. at 455 ("the appointment of a receiver is merely an ancillary and incidental remedy. A receivership is not final relief. The appointment determines no substantive right, nor is it a step in the determination of such a right."); Securities and Exchange Commission v. Republic Nat. Life Ins. Co., 378 F.Supp. 430 (S.D.N.Y.1974) (appointment of receiver in equity is not a substantive right, but is a remedy that is ancillary to the primary relief prayed for in a suit). Thus the appointment of a receiver is...