Sunset Bay Associates, In re

Decision Date24 September 1991
Docket NumberNos. 89-55705,89-55707,s. 89-55705
Citation944 F.2d 1503
Parties26 Collier Bankr.Cas.2d 572 In re SUNSET BAY ASSOCIATES, a California joint venture, Debtor. Richard J. PLASTINO, Janice Gudde Plastino; Doris L. Brown, Plaintiffs-Appellants, v. EUREKA FEDERAL SAVINGS AND LOAN ASSOCIATION, et al., Defendant, and Allan Jamieson, Defendant-Appellee. Richard J. PLASTINO; Janice Gudde Plastino; Doris L. Brown, Plaintiffs-Appellants, v. EUREKA FEDERAL SAVINGS & LOAN ASSOCIATION, et al., Defendant-Appellee.
CourtU.S. Court of Appeals — Ninth Circuit

Paul R. Pearlson, Cameron, Madden, Pearlson, Noblin and Sellars, Long Beach, Cal., for plaintiffs-appellants.

John A. Graham, Frandzel & Share, Los Angeles, Cal., for defendant-appellee, Eureka Federal Sav. & Loan Ass'n.

June D. Beltran, Khourie, Crew & Jaeger, P.C., San Francisco, Cal., for defendant-appellee, Allan Jamieson.

Appeal from the United States District Court for the Central District of California.

Before PREGERSON, REINHARDT and HALL, Circuit Judges.

REINHARDT, Circuit Judge:

Plaintiffs Richard J. Plastino, Janice Gudde Plastino and Doris L. Brown ("Plastino/Brown") appeal the district court's entry of summary judgment in favor of defendants Allan Jamieson and Eureka Savings and Loan Association ("Eureka") on Plastino/Brown's claims for declaratory relief and damages. We reverse and remand.


Because many of the issues raised on this appeal involve disputes over what factual inferences the evidence in the record supports, we begin by sketching only the undisputed facts. In June, 1983, Plastino/Brown agreed to sell realty to a joint venture known as Sunset Bay Associates ("Sunset") for the purpose of building a residential condominium project. In exchange for the property, Plastino/Brown received approximately $2.4 million in cash and a deed of trust secured by the property in the amount of $1.4 million.

Also in June, 1983, Sunset obtained financing for the project by signing a construction loan agreement with Eureka. Eureka was the principal lender of a group of 14 lenders. At that time, Allan Jamieson was Eureka's Chief Lending Officer and supervised Eureka employees who oversaw the construction funding on the project. Sunset's promissory note for $33 million was also secured by a deed of trust against the property.

There is no dispute as to the order of the recording of the deeds held by Plastino/Brown and Eureka. Both deeds were recorded on June 22, 1983: Eureka's was recorded first, and Plastino/Brown's second. There is also no dispute that both parties knew at the time of recording that Plastino/Brown were recording after Eureka for the purpose of making Eureka's lien senior to Plastino/Brown's lien.

The promissory note that Plastino/Brown received from Sunset and a rider to its deed of trust each contained a section titled "Construction Loan." Both the deed rider and the note stated that "loan fees" on the project could not exceed two points, that the loan funds had to be used exclusively for the project, and that Eureka was not obligated to "ensure the proper application or use of Construction Loan funds." 1 The parties dispute whether the record shows that Eureka knew of these terms before the filing of the Plastino/Brown deed.

Between June, 1983 and February, 1986, Eureka disbursed approximately $31 million under the loan. The parties dispute whether all of this money was properly applied to the project or whether, as Plastino/Brown contend, Jamieson and Eureka diverted up to $4.7 million to other recipients. The parties also dispute whether the "loan fees" for the project exceeded the two point limit.

For reasons that are not material to the resolution of this appeal, Sunset failed to complete the project on schedule or within budget. It defaulted and filed for bankruptcy before Eureka could foreclose. In August, 1987, the Bankruptcy Court approved a sale of the property to a realty company for $23.7 million.


Sunset filed its bankruptcy petition on December 26, 1985. On April 25, 1986, Plastino/Brown filed an amended complaint against Eureka, Jamieson, and several other defendants. 2 The complaint against Eureka included five claims for relief. Plastino/Brown sought a declaratory judgment that their lien is superior to Eureka's; a quiet title judgment to the same effect; money damages for two claims of intentional misrepresentation and conspiracy to commit fraud; and money damages for one claim of negligent misrepresentation. The complaint against Jamieson sought relief on the intentional misrepresentation claims.

After the parties had completed discovery, the Bankruptcy Court heard cross-motions for summary judgment by Plastino/Brown, Eureka, and Jamieson on January 31, 1989. Because this is a non-core bankruptcy proceeding, the bankruptcy judge prepared a report and recommendation in which he made findings of fact and conclusions of law. See 11 U.S.C. § 105 (1988); 28 U.S.C. § 1334 (1988); 28 U.S.C. §§ 157(a), (b)(2)(K) and (C) (1988). He recommended granting the defendants' summary judgment motions and denying Plastino/Brown's summary judgment motions on all of Plastino/Brown's claims. The United States District Court for the Central District of California adopted the findings of the Bankruptcy Court. This appeal followed. 3 3]


We review the grant of a summary judgment motion de novo. Kruso v. International Tel. & Tel. Corp., 872 F.2d 1416, 1421 (9th Cir.1989) cert. denied, --- U.S. ----, 110 S.Ct. 3217, 110 L.Ed.2d 664 (1990). In order to uphold the grant of summary judgment on each claim we must find that there is no genuine issue of material fact which precludes a finding for the appellant on that claim. See Richards v. Neilsen Freight Lines, 810 F.2d 898, 902 (9th Cir.1987).

California law provides the rules of decision for determining the parties' substantive rights. See 11 U.S.C. § 510(a) (1988) (providing for enforcement of subordination agreements "to the same extent [as] applicable nonbankruptcy law"). Federal law governs the admissibility of evidence for purposes of summary judgment pursuant to Fed.R.Civ.P. 56(e). See American Title Ins. Co. v. Lacelaw Corp., 861 F.2d 224, 226 (9th Cir.1988) (stating that admissibility of evidence is governed by Federal Rules of Evidence even where state law provides the substantive rule of decision).

I. The Relative Priority of the Liens

Plastino/Brown argue that summary judgment was improper with respect to their first two causes of action against Eureka because, viewed in the light most favorable to Plastino/Brown, the evidence supports inferences that: (A) Eureka's lien was senior to Plastino/Brown's only if certain conditions in Plastino/Brown's deed rider and note were met; (B) those conditions were violated; and (C) as a result of the violation, Eureka's lien is not merely reduced to the extent of the violation, but is rendered entirely subordinate to Plastino/Brown's. In order for us to reverse we must find that the evidence could support each of these inferences. We address these issues in turn.

A. Whether the Priority of Eureka's Lien was Contingent Upon Compliance with the Terms of Plastino/Brown's Deed Rider and Note

Under California law, a purchase money deed of trust "has priority over all other liens created against the purchaser, subject to the operation of the recording laws." Cal.Civ.Code § 2898(a) (West Supp.1991). The recording laws mandate that the first recorded deed of trust on real property is superior to subsequently recorded deeds. Cal.Civ.Code § 1214 (West Supp.1991). Typically, a lender will not provide funds to a developer without assurance that his lien will be senior to any lien given to the seller. Taken together, sections 1214 and 2898(a) provide a simple mechanism to subordinate the seller's lien to the lender's: as happened in this case, the seller agrees to record his deed after the lender's deed is recorded, thus making the lender's lien superior to the seller's. The seller willingly subordinates his lien because he knows that absent such subordination, the developer would be unable to obtain financing, and therefore unwilling to purchase the property. We shall refer to this arrangement as a "subordination by subsequent recording."

In Middlebrook-Anderson Co. v. Southwest Savings and Loan Assoc., 18 Cal.App.3d 1023, 1029, 96 Cal.Rptr. 338, 341 (1971), the California Court of Appeals held that such an arrangement is in substance a subordination agreement, so "that the duties owed by a lender to a seller under a formal subordination agreement do not differ from the duties owed by a lender to a seller when the lender obtains priority over the seller under an agreement by the seller to record after the lender." In that case, the seller stated a valid cause of action for violation of the provisions of a subordination by subsequent recording where he alleged that the lender had "actual knowledge of the provisions of the seller's lien in general, and of the subordination therein in particular." Id. at 1037, 96 Cal.Rptr. at 347. It is therefore clear that if Eureka had actual knowledge of the terms of the Plastino/Brown deed rider and note, the priority of Eureka's lien would depend upon compliance with those terms.

1. Actual Knowledge

Eureka contends that there is no evidence in the record from which it could be inferred that it had actual knowledge of the terms of the Plastino/Brown deed rider and note. We disagree. First, although Jamieson did not recall discussing the actual terms of the Plastino/Brown deed rider and note, he stated in his deposition that Eureka "required a specific subordination agreement as a condition of financing." 4 The reference to a specific subordination agreement could imply that Eureka required the particular subordination agreement that ended up in the Plastino/Brown deed rider and note....

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