System Inv. Corp. v. Union Bank

• Decision Date: 15 November 1971
• Citation: 98 Cal.Rptr. 735,21 Cal.App.3d 137
• Court: California Court of Appeals Court of Appeals
• Parties: SYSTEM INVESTMENT CORPORATION, a California corporation; and The Bank of California, a national association, as Conservator of the Estate of Truitt Matthew Stewart, also know as B. M. Stewart, Plaintiffs, Appellants, and Respondents, v. UNION BANK, a California corporation, Defendant, Appellant, and Respondent. UNION BANK, a California corporation, Plaintiff and Appellant, v. Lean OMANSKY et al., Defendants and Respondents. Civ. 36059.

Page 735

98 Cal.Rptr. 735

21 Cal.App.3d 137

SYSTEM INVESTMENT CORPORATION, a California corporation; and The Bank of California, a national association, as Conservator of the Estate of Truitt Matthew Stewart, also know as B. M. Stewart, Plaintiffs, Appellants, and Respondents, v. UNION BANK, a California corporation, Defendant, Appellant, and Respondent.

UNION BANK, a California corporation, Plaintiff and Appellant, v. Lean OMANSKY et al., Defendants and Respondents.

Civ. 36059.

Court of Appeal, Second District, Division 1, California.

Nov. 15, 1971.

Loeb & Loeb, and Jerome L. Goldberg and William A. Halama, Los Angeles, for defendant, plaintiff, appellant and respondent Union Bank.

Paul, Hastings, Janofsky & Walker, and William B. Campbell and John E. Trinnaman, Los Angeles, for plaintiffs, defendants, appellants and respondents System Investment Corp. and The Bank of California as Conservator for the Estate of Truitt Matthew Stewart.

Joseph W. Fairfield and Ethelyn F. Black, Beverly Hills, for defendants and respondents Leon Omansky and Bertha Omansky.

WOOD, Presiding Justice.

In the trial court, two actions (No. 902126 and No. 908237) were consolidated for trial, and it was stipulated that they might be consolidated for purposes of appeal. In substance, the actions arose from agreements and conduct relating to financing by the Union Bank of the construction by Leon Omansky (and subsequently by System Investment Corporation, which was the alter ego of Truitt Matthew Stewart) of an apartment building at 505 Lafayette Park Place, Los Angeles, on property owned by Stewart. The California Bank was conservator of the estate of Stewart during a period while he was unable to manage his affairs by reason of a heart attack. In action No. 902126, plaintiffs System and California Bank sought (1) declaratory relief with reference to two notes (a note for $975,000 secured by deed of trust, and a note for $165,000) made by Omansky (and his wife, Bertha) ¹ payable to the Union Bank, (2) a decree setting aside a sale of the property under the deed of trust, and (3) an accounting between the parties. In action No. 908237, plaintiff Union Bank sought recovery from Omansky on the note for $165,000, recovery of $100,000 from Stewart, as guarantor of indebtedness relating to the note, and recovery of $76,807.30 from Stewart as the alleged balance due on the note for $975,000. The judgment in action No. 902126 set aside the trustee's sale upon certain conditions for redemption of the property (including tender of redemption price of.$1,123,494.14). Judgment in action No. 908237 was that plaintiff Union Bank take nothing by its complaint. Plaintiffs System and California Bank, and defendant Union Bank, appeal from the judgment in action No. 902126; and plaintiff Union Bank appeals from the judgment in action No. 908237.

Appellant Union Bank contends that the evidence and findings do not support the judgment setting aside the trustee's sale; that the redemption price ($1,123,494.14) fixed by the court was inadequate; that the court erred in disallowing recovery on the $165,000 note and on the guaranty relating thereto; and that the court erred in allowing attorney fees to the plaintiffs in action No. 902126 and to the defendants in action No. 908237.

Appellants System and California Bank contend that the redemption price was excessive.

System was formed in 1963 and Stewart was sole owner and president of System. The court found that throughout Stewart's dealing with Union Bank in connection with the subject matter of these actions System was the alter ego of Stewart.

In 1963 System (Stewart) owned five lots on Lafayette Park Place, including lot 4 at 505 Lafayette Park Place. In December 1963 Stewart and Omansky entered into an agreement whereby lot 4 was sold to Omansky for $169,000, and Omansky agreed to construct a building on the lot and to pay the purchase price of the lot from the proceeds of the sale of the property after the building was completed. It was also agreed that Stewart and Omansky would endeavor to obtain financing for the construction.

In July 1964 Omansky went to the Union Bank regarding financial assistance in constructing the building; and on September 14, 1964, the following notes and agreements were made: (1) note for $975,000, secured by deed of trust, made by Omansky payable to Union Bank on or before February 14, 1966; (2) note for $165,000 made by Omansky payable to Union Bank 'on demand, or, if not called, February 14, 1966'; (3) building loan agreement made by Omansky and Union Bank which referred to loans made by the bank ² in consideration for the notes, and which provided for the manner in which the loans would be disbursed by the bank for construction of the building; (4) an agreement made by Omansky, Stewart, and the bank (and one Miller) ³ which provided for disbursement of the loan for $165,000; (5) a completion agreement made by Omansky and the bank whereby Omansky agreed to complete construction of the building in accordance with certain terms and conditions; (6) a continuing guaranty made by Stewart whereby he guaranteed indebtedness of Omansky to the extent of $100,000; (7) a letter agreement executed by Omansky relating to disbursement and use of the proceeds of the loan for $165,000; (8) an agreement between Stewart and Omansky whereby Omansky agreed to indemnify Stewart for any liability Stewart might have to the bank by reason of the guaranty; (9) an agreement made by the bank and Omansky whereby the bank agreed to act as a 'permanent' or 'take-out' lender by making a loan of $975,000 at the rate of 9 per cent interest per annum for 12 years on certain conditions. ⁴

The building loan agreement provided in part that the proceeds of the $975,000 loan would be deposited in an 'Undisbursed Real Estate Loan Account'; Omansky would obtain 'borrower's funds' in the amount of $165,000, and Omansky 'and others' would obligate themselves to the commercial loan department of the bank in accordance with the terms of the letter agreement; the proceeds of the loan would be disbursed in progress payments, subject to retention by the bank of $97,500 to be held until notice of completion of the building was recorded; the proceeds would be disbursed for payment of labor and materials pursuant to statements by Omansky on a bank form entitled 'Certified For Progress Payment'; and the building was to be completed by September 14, 1965.

Omansky and the bank agreed upon the plans and specifications for the building (five-story building with seventy-one apartments); and the bank made the $975,000 loan available for construction (less deductions for fees and charges in the amount of $26,939).

Omansky commenced construction of the building; and in late 1964 and early 1965 the construction 'began to fall behind schedule,' primarily by reason of problems with the steel subcontractor. Between September 29, 1964, and June 5, 1965, progress payments in the amount of $245,783.21 were made (which included the bank's initial fees and charges of $26,939, which were treated as a progress payment). In May 1965, Omansky, without the knowledge or consent of the bank, used approximately $45,000 from the progress payments on another construction project.

On June 29, 1965, the bank notified Stewart and Omansky of the shortage of $45,000 caused by Omansky's unauthorized diversion of funds. Prior to that date, Stewart had not drawn any of the loan proceeds from the bank, had not participated in the construction, and had not directed the use of any of the funds drawn by Omansky.

In June 1965, Stewart had conversations with representatives of the bank regarding completion of the building--at that time the project was 'five months behind schedule,' the loan funds had been reduced $45,000 by reason of the diversion of funds by Omansky, and work on the project had stopped.

On July 1, 1965, Omansky and Stewart made an agreement whereby Omansky agreed to convey lot 4 to Stewart who agreed to complete construction of the building. Stewart (System) took over the construction; and, on July 9, 1965, Omansky conveyed lot 4 to Stewart.

On July 9, 1965, Stewart, Omansky and the bank made an 'Assumption Agreement' whereby System would assume the obligations of Omansky on the $975,000 note and the deed of trust which secured that note.

Also on July 9, 1965, Stewart, Omansky and the bank made a 'Modification Agreement' whereby the building loan agreement was modified to provide for a 'voucher system' for disbursement of the loan funds--authority to sign vouchers was given to Stewart only, and the bank would pay those vouchers. Provisions of the building loan agreement with reference to retention by the bank of $97,500 from the funds until notice of completion was recorded were omitted from the modification agreement. (The court found that the bank did not prove that the parties intended the 'retention provision' to be included in the modification agreement.)

Also on July 9, 1965, Stewart and the bank made a 'Completion Agreement' whereby Stewart agreed to guarantee completion of the building; and on July 12, 1969, Stewart executed a continuing guaranty whereby he agreed to guarantee all indebtedness of System.

When Stewart agreed to take over the project (in July 1965), and at times thereafter prior to July 1966, Stewart informed the bank that it would take nine to fourteen months to complete the building, he would need all of the funds remaining from the $975,000, he would advance any additional funds needed, and he would need an extension of three years within which to pay the loan because it was necessary to establish economic value of the improved property in order to obtain permanent financing. ⁵ When he took over the project, the unexpended proceeds remaining from the $975,000 loan were $729,216.79; and none of the proceeds of the $165,000 note had been 'called for' by the bank.

At the time Stewart...