River Bank America v. Diller

• Citation: 45 Cal.Rptr.2d 790,38 Cal.App.4th 1400
• Decision Date: 03 October 1995
• Docket Number: A068152,Nos. A066477,s. A066477
• Court: California Court of Appeals
• Parties: , 95 Cal. Daily Op. Serv. 7844, 95 Daily Journal D.A.R. 13,372 RIVER BANK AMERICA, Plaintiff, Cross-defendant and Appellant, v. Sanford N. DILLER et al., Defendants, Cross-complainants and Appellants; Hacienda Gardens Venture, Cross-complainant and Appellant. RIVER BANK AMERICA, Plaintiff and Appellant, v. HACIENDA GARDENS VENTURE et al., Defendants and Respondents.

Page 790

45 Cal.Rptr.2d 790

38 Cal.App.4th 1400, 95 Cal. Daily Op. Serv. 7844,

95 Daily Journal D.A.R. 13,372

RIVER BANK AMERICA, Plaintiff, Cross-defendant and Appellant, v. Sanford N. DILLER et al., Defendants, Cross-complainants and Appellants;

Hacienda Gardens Venture, Cross-complainant and Appellant.

RIVER BANK AMERICA, Plaintiff and Appellant, v. HACIENDA GARDENS VENTURE et al., Defendants and Respondents.

Nos. A066477, A068152.

Court of Appeal, First District, Division 3, California.

Oct. 3, 1995.

Rehearings Denied Nov. 1, 1995.

Review Denied Jan. 18, 1996.

Joel A. Feuer and Richard Pachter, Gibson, Dunn & Crutcher, Los Angeles, for plaintiff, cross-defendant and appellant and for plaintiff and appellant.

Edmund L. Regalia, Lewis J. Soffer, Miller, Starr & Regalia, Oakland, for defendants, cross-complainants and appellants, for cross-complainant and appellant, and for defendants and respondents.

PARRILLI, Associate Justice.

We dispose of two related appeals in this opinion. In Appeal No. A066477, River Bank America (River Bank) appeals from a summary judgment granted in favor of defendants Sanford N. Diller and Helen P. Diller (individually and as trustees of the DNS Trust) and Prometheus Development Company, Inc. (Prometheus Development). In the underlying action, River Bank sought to enforce guaranties the Dillers and Prometheus Development had executed. The guaranties secured a portion of River Bank's nonrecourse construction loans to Hacienda Gardens Venture, a limited partnership (Hacienda). River Bank made the loans--totaling $38 million--to finance the construction of a large apartment complex in Pleasanton, California. The trial court concluded the guaranties were unenforceable because they imposed upon the guarantors obligations "larger in amount [or] in other respects more burdensome" than the nonrecourse obligations undertaken by the principal obligor (Hacienda). (Civ.Code, § 2809.) ¹ In a cross-appeal, defendants ² contend the trial court erred when it granted River Bank's motion for summary adjudication on defendants' claim of negligent misrepresentation against River Bank.

We reverse the summary judgment entered in favor of the guarantors, and affirm the summary adjudication of defendants' cross-claim for negligent misrepresentation. In addition, we affirm in part and reverse in part an order denying River Bank's motion for summary adjudication.

In Appeal No. A068152, River Bank appeals from an order entered after judgment awarding defendants $241,874.22 in attorneys' fees and costs. Because we reverse the summary judgment, the award of attorneys' fees as prevailing party is also reversed.

I. FACTS

Sanford Diller is a real estate developer based in Northern California. He and his wife Helen are the trustees of the DNS Trust, a revocable family trust, which owns all of the stock in Prometheus Development, the Dillers' principal development company. Sanford Diller is the principal officer of Prometheus Development.

In the spring of 1987 Prometheus Development had nearly completed the planning and approval process for a 456-unit apartment complex on property it owned in Pleasanton. To obtain capital for construction, Prometheus Development initially entered into negotiations with River Bank to form a joint venture to develop the property. However, those negotiations never resulted in a final joint venture agreement. Instead, River Bank ultimately agreed to make "participating construction loans" ³ to Prometheus Development.

In October 1987 River Bank made two construction loans to Hacienda, which is a limited partnership the Dillers formed for the specific purpose of obtaining the construction loans. ⁴ The loans were for $36 million and $2 million, respectively, and were secured by first and second deeds of trust on the development property. A separate note evidenced each loan. Each note contained a "nonrecourse" clause that provided: "Notwithstanding anything to the contrary contained in this Note or any of the Security Documents, neither Maker [Hacienda], nor any partner in Maker, any legal representative, heir, estate, successor or assign of any such partner or any officer, director, shareholder or partner in any such partner, shall have personal liability for (i) the payment of any sum of money which is or may be payable hereunder or under any of the Security Documents, or (ii) the performance or discharge of any covenants or undertakings of Borrower hereunder or under any of the Security Documents; provided, however, that the foregoing shall not limit the personal liability of any such entity or person in its capacity as a guarantor under any guaranty of the Note or of guaranty of completion of the construction. The holder shall proceed solely against the premises and any other collateral given as security for the loan (including any guaranties), and it is expressly understood and agreed by and between Maker and the holder that no separate liability is assumed by, nor shall at any time be asserted or enforceable against Maker, under this Note or any other Security Document." (Italics added.) This nonrecourse clause was added to the notes at the insistence of Sanford Diller.

As further security for the construction loans, the Dillers and Prometheus Development (collectively "the guarantors") executed four separate guaranty agreements. The Dillers executed two of the guaranty agreements on behalf of themselves and the DNS Trust. Each agreement guaranteed payment of ten percent ($3.6 million and $200,000, respectively) of the two notes. Similarly, Sanford Diller executed two guaranty agreements on behalf of Prometheus Development. Again, each agreement guaranteed payment of ten percent ($3.6 million and $200,000, respectively) of the two notes. The net effect of the guaranty agreements was that the Dillers personally guaranteed $3.8 million of the construction loans, and Prometheus Development separately and independently guaranteed an additional $3.8 million of the construction loans. Thus, between them, the Dillers and Prometheus Development guaranteed 20 percent ($7.6 million) of the aggregate construction loan.

River Bank funded the construction loans and Hacienda completed the apartment complex in late 1988. However, the rental income from the project was insufficient to pay all debt service on the property. Consequently, by October 10, 1991, Hacienda was delinquent in the amount of $830,445.

On October 15, 1991, River Bank commenced this action to foreclose on the property, to appoint a receiver, and to enforce the guaranty agreements. Defendants filed a cross-complaint alleging a cause of action for negligent misrepresentation against River Bank. The court appointed a receiver, and River Bank completed a nonjudicial foreclosure sale of the property on February 24, 1993. At the time of foreclosure, the outstanding debt was $42.9 million, but the property sold for only $30 million, leaving a $12.9 million deficiency. The receivership estate terminated on May 7, 1993.

After the foreclosure, River Bank proceeded against the guarantors to recoup a portion of the $12.9 million deficiency. In December 1993 River Bank filed a motion for summary adjudication on its cause of action to enforce the guaranty agreements against the Dillers and the DNS Trust (but did not file a similar motion as to Prometheus Development). In response, the Dillers and Prometheus Development filed their own motion for summary judgment as to the guaranty causes of action on the ground section 2809 provided a complete defense which the guarantors had not expressly or impliedly waived. While these motions were pending, River Bank also filed a motion for summary adjudication on the negligent misrepresentation causes of action in the cross-complaint. In addition, River Bank filed a motion to amend its complaint to add a cause of action to reform the guaranty agreements to reflect that the parties had intended that the guarantors would waive any defense based on section 2809.

On February 15, 1994, the trial court granted the Dillers' and Prometheus Development's motion for summary judgment on the causes of action to enforce the guaranties, and denied River Bank's motion for summary adjudication on those causes of action. On that same date, the trial court granted River Bank's motion for summary adjudication on defendants' cross-claim for negligent misrepresentation, and denied River Bank's motion for leave to file an amended complaint. On May 12, 1994, the trial court entered judgment disposing of the entire case. River Bank filed a timely notice of appeal from that judgment and Hacienda, the Dillers and Prometheus Development filed a cross-appeal from the portion of the judgment granting summary adjudication on their cause of action for negligent misrepresentation.

On August 26, 1994, the trial court granted defendants' motion for award of attorneys' fees and ordered River Bank to pay defendants $241,874 in attorneys' fees and other costs. River Bank filed a separate notice of appeal from that post-judgment order (Code Civ.Proc., § 904.1, subd. (a)(2)).

II. DISCUSSION

A. Section 2809

The threshold issue in this case is whether section 2809 provides the Dillers and Prometheus Development with a complete defense to enforcement of their guaranties. Section 2809 states: "The obligation of a surety must be neither larger in amount nor in other respects more burdensome than that of the principal; and if in its terms it exceeds it, it is reducible in proportion to the principal obligation." In granting summary judgment, the trial court relied on this section, and concluded that "the obligation purportedly assumed by [the guarantors] under their 'guaranties' was 'larger in amount [or] in other respects more burdensome than that of the principal,' in that under the terms of the loan documents, and particularly the 'nonrecourse' provisions thereof, the principal obligor, [Hacienda], had from the...