San Paolo U.S. Holding Co., Inc. v. 816 South Figueroa Co.

• Decision Date: 31 March 1998
• Docket Number: No. B103522,B103522
• Citation: 73 Cal.Rptr.2d 272,62 Cal.App.4th 1010
• Parties: , 98 Cal. Daily Op. Serv. 2388, 98 Daily Journal D.A.R. 3287 SAN PAOLO U.S. HOLDING COMPANY, INC., Plaintiff and Appellant, v. 816 SOUTH FIGUEROA COMPANY et al., Defendants and Appellants.
• Court: California Court of Appeals

Page 272

73 Cal.Rptr.2d 272

62 Cal.App.4th 1010, 98 Cal. Daily Op. Serv. 2388,

98 Daily Journal D.A.R. 3287

SAN PAOLO U.S. HOLDING COMPANY, INC., Plaintiff and Appellant, v.816 SOUTH FIGUEROA COMPANY et al., Defendants and Appellants.

No. B103522.

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

March 31, 1998.

Certified for Partial Publication. ^*

Review Denied July 8, 1998. ^**

Epport & Richman, Steven N. Richman, Beth Ann R. Young and Laura E. McSwiggin, Los Angeles, for Plaintiff and Appellant.

Allen, Matkins, Leck, Gamble & Mallory LLP, Patrick E. Breen and Mark R. Hartney, Los Angeles, and Gregory G. Gorman, Beverly Hills, for Defendants and Respondents.

KITCHING, Associate Justice.

IINTRODUCTION

Code of Civil Procedure section 726, subdivision (b) provides that following a judicial foreclosure of real property, the secured creditor may bring a motion to determine the amount, if any, of a deficiency judgment.¹The measure of the deficiency will be the amount by which the indebtedness exceeds the "fair value" of the real property.

The issue in this appeal is the definition of the term "fair value."

We define "fair value," within the context of section 726, subdivision (b), as the fair market value of the real property, as of the date of the foreclosure sale, without any reduction for the adverse impact of the foreclosure and the one-year right of redemption that would temporarily lower the market value of the real property.

The 816 South Figueroa Company(the Company) defaulted on a bank loan.The San Paolo U.S.Holding Company, Inc.(the Bank), as successor-in-interest to First Los Angeles Bank, foreclosed on the real property collateral and obtained a $1,541,727.58 deficiency judgment.

The Bank appeals from the judgment entered following the section 726, subdivision (b) valuation hearing, and challenges the trial court's determination of the fair value of the foreclosed property, and the denial of interest at the default rate.

We conclude that the trial court used an improper measure to determine the fair value of the property, which led to an erroneous calculation of the deficiency judgment.We also find that the Bank was entitled to the higher default rate of interest from the May 7, 1994 date of default, through the August 24, 1995 date of entry of the summary judgment order.Accordingly, we reverse and remand for a new hearing.

The Company cross-appeals from the trial court's award to the Bank of interest, attorney fees and costs.We find the Company's section 998 offer was untimely, and that the Bank was entitled to interest on the loan and costs for expert witness fees.Accordingly, we affirm.

IIFACTUAL AND PROCEDURAL BACKGROUND

In 1984, the law offices of Greene, O'Reilly, Broillet, Paul, Simon, McMillan, Wheeler & Rosenberg were located at 816 S. Figueroa Street in Los Angeles.The building was owned by the Company, a building partnership comprised of the general partners of the law firm.

On or about December 7, 1984, the Company borrowed $5,250,000 from the Bank, and executed a promissory note (note) secured by a deed of trust to the property at 816 South Figueroa.²The loan was obtained to pay off an existing note on the building.In December 1990, the partners disbanded the firm and terminated their tenancy in the building.In June 1994, the Company stopped making payments and defaulted on the loan.

On September 21, 1994, the Bank filed an action for judicial foreclosure and recovery of a deficiency.³The Company answered and, challenging the status of the loan, cross-complained for, inter alia, declaratory relief, reformation of the note, cancellation of the guaranties, and breach of contract.⁴In response, the Bank cross-complained and alleged causes of action for declaratory relief, fraud, negligent misrepresentation, breach of oral contract and negligence.

In July 1995, the Bank successfully moved for summary judgment on its complaint and cross-complaint.The motion for summary judgment included a declaration regarding the Company's obligations from Duane King, Vice President of Asset Management for First Los Angeles Bank.King declared that the Company owed $4,809,436.70 principal and $391,295.07 interest from May 7, 1994 to June 30, 1995, with the regular rate of interest continuing to accrue at $995.30 per day.The motion attached the promissory note as an exhibit.Section 2 of the note provided that in the event of default, the interest rate would increase by 5 percent.King's declaration failed to show interest calculations or that the Bank requested the higher default rate of interest.On August 24, 1995, the trial court entered an order finding that the Company owed $4,809,436.70, plus interest, costs, and attorney fees.Furthermore, the trial court determined that the Bank was entitled to proceed by judicial foreclosure and obtain a deficiency judgment.The order contained the trial judge's notation that interest, costs and attorney fees would "[be] determined by [the]court."

At the foreclosure sale on January 17, 1996, the Bank purchased the building for $1.5 million, and subsequently sold the property to a third party for $1 million.

On January 26, 1996, the Bank filed a "Notice of Motion and Motion for Determination of Fair Market Value and Entry of Deficiency Judgment" pursuant to section 726, subdivision (b).The Bank presented a "market value" appraisal report by Charles Reinagel(Reinagel) and argument to support its position that as of January 17, 1996, the Company owed $6,039,573.79, plus attorney fees and costs; the value of the property was $1.5 million and the Bank suffered a deficiency of $4,539,573.79, plus attorney fees and costs.In opposition, the Company argued that a "fair value" appraisal report by Arthur Gimmy(Gimmy) and evidence of the debt established by the "Amended Order for Issuance of Writ of Sale of Real Property," supported its position that since it owed the Bank only $4,809,436.70, and the value of the property was $5.1 million, the Bank did not suffer any deficiency.

On or about February 7, 1996, the Company served the Bank a written offer to compromise pursuant to section 998 for $2 million.The Bank did not respond, and the trial court later determined the offer was untimely.

On February 26 and 28, 1996, the trial court conducted the fair value hearing and heard testimony of appraisers Reinagel and Gimmy and argument of counsel.On March 8, 1996, the trial court determined that the fair value of the property on January 17, 1996 was $3,952,500 and the debt owed to the Bank was $5,519,227.58.

On April 12, 1996, the court entered judgment that the Bank recover a deficiency of $1,541,727.58, plus legal fees and costs.On August 5, 1996, the trial court amended the judgment to include $202,081.90 for the Bank's legal fees and costs.On or about August 30, 1996, the Bank filed a partial satisfaction in the sum of $1,880,199.81.

The Bank timely filed a notice of appeal.

The Company filed a notice of cross-appeal.

IIIDISCUSSION

1.As a Matter of Law, Fair Value is the Fair Market Value of the Real Property, as of the Date of the Foreclosure Sale, Without any Reduction for the Adverse Impact of the Foreclosure and One-Year Right of Redemption.

The Bank contends the trial court incorrectly interpreted the fair value analysis in Rainer Mortgage v. Silverwood(1985)163 Cal.App.3d 359, 209 Cal.Rptr. 294.This error the Bank argues, improperly limited the amount of its deficiency judgment.We agree.

a. Fair Value Hearing

(1) The Property

At the section 726, subdivision (b) hearing, the property to be valued consisted of approximately 7,750 square feet of land with a 5-story office building with 35,171 rentable square feet at 816 South Figueroa Street in the central business district of Los Angeles.The building was constructed in 1924.The Company purchased the property in June 1983 for approximately $3,752,634, and spent about $3,187,630 in 1984 to renovate and remodel the building.

(2) The Bank's Expert

Two expert witnesses testified.The first witness was Reinagel, the Bank's appraiser.Reinagel concluded that using market conditions at the time of the foreclosure sale, the property's fair value corresponded to its $1.5 million market value.His testimony repeated much of the information from his "Market Value Appraisal" which provided, in relevant part:

"RECONCILIATION OF VALUE"

"We have considered three approaches to value in estimating the market value for the subject property as of the date of valuation.The value indicated by the approaches used in our analysis are:

                                               As is
                          "Cost Approach                   Not Applicable
                          "Sales Comparison Approach         $1,500,000
                          "Income Capitalization Approach     $780,000
                

"....

"CONCLUSION

"Based upon our thorough review of the subject property, and according to the two approaches to value completed in this report, we have given the indication of the sales comparison approach, as supported by the conclusion of the income capitalization approach, the most significant weight in our final conclusion of value.Based upon the above analysis, it is our opinion that, as of the date of valuation, the leased fee value of the subject property, ..., is:

"ONE MILLION FIVE HUNDRED THOUSAND DOLLARS

"($1,500,000)

"We have also considered the concept of fair value in our analysis of the subject property.Fair value, as considered in this report, is explained as '... the intrinsic value of real property subject to judicial foreclosure, taking into consideration all the circumstances affecting the underlying worth of the property at the time of sale, without consideration of the impact of the foreclosure proceedings on the value.'This definition of Fair Value is from the case of Rainer Mortgage v. Silverwood Ltd.(1985)163 Cal.App.3d 359, 366, 209 Cal.Rptr. 294.Based on our understanding of...