U.S. Cold Storage v. Great Western Savings v. Loan Assn.

• Decision Date: 25 March 1985
• Citation: 212 Cal.Rptr. 232,165 Cal.App.3d 1214
• Parties: UNITED STATES COLD STORAGE OF CALIFORNIA, Plaintiff and Appellant, v. GREAT WESTERN SAVINGS & LOAN ASSOCIATION; California Reconveyance Company, Inc., Defendants and Respondents. AO21115.
• Court: California Court of Appeals Court of Appeals

Page 232

212 Cal.Rptr. 232

165 Cal.App.3d 1214

UNITED STATES COLD STORAGE OF CALIFORNIA, Plaintiff and Appellant, v. GREAT WESTERN SAVINGS & LOAN ASSOCIATION; California Reconveyance Company, Inc., Defendants and Respondents.

AO21115.

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

March 25, 1985.

Review Denied June 25, 1985.

McCutchen, Doyle, Brown & Enersen, Richard Murray, Donn P. Pickett, J. Bradley O'Connell, San Francisco, for plaintiff and appellant.

Miller, Starr & Regalia, Harry D. Miller, Edmund L. Regalia, Oakland, for defendants and respondents.

HOLMDAHL, Associate Justice.

Statement of Facts ¹

Plaintiff United States Cold Storage of California is a corporation engaged in the building and operating of refrigerated warehouses. In 1975, plaintiff sold a refrigerated warehouse to the Sapp family (hereafter, Sapps). The sale price was $3,600,000. Sapps paid $400,000 in cash and borrowed the remaining $3,200,000 under the following terms. They obtained from defendant Great Western Savings & Loan Association (hereafter, Great Western) $2,250,000, secured by a first trust deed. They executed two promissory notes in favor of plaintiff, in the sums of $600,000 and $350,000, secured by second and third deeds of trust, respectively. The deeds of trust were executed as one transaction on the date of closing, December 30, 1975.

Sapps made payments to Great Western in a timely fashion throughout 1976, but soon defaulted on their notes held by plaintiff. Plaintiff at this time did not seek to foreclose, but instead chose to assist Sapps in improving their business. Nonetheless, Sapps failed to make their May, 1977, payment to Great Western. Great Western noticed a default on June 10, 1977. Plaintiff sought to assume Great Western's note and deed of trust. Great Western refused on the basis of a due-on-sale clause contained in its loan agreement with Sapps; it also insisted on the payment of late charges. Plaintiff contended that both the due-on-sale clause and the late charges were invalid.

On September 16, 1977, Great Western properly noticed a trustee's sale of the warehouse for October 21, 1977. In the meantime, however, Sapps were threatening to file bankruptcy. The petition's filing would stay a foreclosure sale. Aware of this fact, Great Western agreed to give Sapps five months to improve their finances. In turn, Sapps would file a bankruptcy petition which would stay the sale. If Sapps remained unable to redeem the property, they would then file to dismiss the petition. Thus, if Sapps remained in default at the end of the five months, Great Western would be able to pursue foreclosure without hindrance from a bankruptcy stay.

Pursuant to this agreement, Sapps transferred the warehouse property to their corporate shell, Merchants Ice and Cold Storage (hereafter, Merchants), which initiated Chapter 11 bankruptcy proceedings on October 20, 1977, the day before the scheduled sale. The filing of Merchant's petition automatically stayed the sale.

On October 21, 1977, Great Western's agent appeared at the time and place appointed for the sale and declared that the sale was being postponed to November 4, 1977. The room was empty save for the agent, however. Plaintiff, and presumably other potential bidders, had learned that the petition had been filed and, knowing that the sale would be stayed, chose not to attend. Plaintiff's attorney believed that the filing of the petition would prevent any act in furtherance of foreclosure, including a postponement of the sale.

On November 4, 1977, Great Western's agent stated again in an otherwise empty room that the sale was now being postponed to December 2, 1977. In the meantime, however, on November 30, 1977, the bankruptcy court approved the agreement between Great Western and Sapps, and ordered that no sale could occur until March 20, 1978.

Nonetheless, Great Western's agent, on December 2, 1977, postponed the sale to January 4, 1978. As before, the announcement was read to an empty room. No additional notice of the sale was given.

On the same date of December 2, 1977, Merchants filed for dismissal of the bankruptcy proceedings and the bankruptcy court dismissed the case on December 16, 1977. Following this dismissal, Great Western did not give new notice of the sale. On January 4, 1978, the date the sale was to take place, defendant's agent, again in an empty room, postponed the sale, a fourth and final time, this time to March 21, 1978. This date was the first date of all the dates scheduled for a sale on which a sale was permitted. But Great Western did not give additional notice of the sale.

Plaintiff remained unaware of the postponements, but inadvertently discovered on March 3, 1978, that the sale would take place on March 21. This occurred during a telephone conversation with a Great Western official, when plaintiff again attempted to assume the loan, and Great Western again insisted on the due-on-sale clause. Plaintiff complained to Great Western about its failure to give any notice of the sale since September 16, 1977. It offered to notify bidders at its own expense if Great Western would only agree to postpone the sale. Great Western, however refused; it justified its failure to provide notice on the ground that it was merely postponing the original date of the sale.

The sale took place on March 21, 1978. Plaintiff was present but refused to bid, primarily because it believed that the sale was illegal, and, therefore "would have no legal effect"; and also because there was some confusion as to whether the sale consisted of real property or of refrigeration equipment, or both.

Great Western was the only bidder. Its sister corporation, defendant California Reconveyance Company Inc. (hereafter, CRC), performed trustee functions at the instructions of Great Western. Its lawyer conducted the sale and accepted Great Western's bid of $1,352,044.40. The fair market value of the property was approximately $3,900,000.

Because the bid was insufficient to satisfy Great Western's own security interest, plaintiff took nothing from the sale. Plaintiff lost its entire security interest of $1,050,000. Sapps subsequently filed for bankruptcy, so that plaintiff no longer has any means to recover its interest.

On October 5, 1978, Great Western offered to sell the property to plaintiff for the amount of Great Western's investment. Plaintiff refused, and made a counter-offer to buy the property for the amount of Great Western's investment, minus the amount that its insurer would pay. Great Western did not respond.

Procedural History

On August 4, 1978, plaintiff filed in San Francisco County Superior Court a complaint against Great Western and CRC (hereafter, defendants) for damages or, alternatively, for injunctive and declaratory relief. Plaintiff alleged two causes of action: Failure to conduct the sale lawfully and breach of an implied covenant of good faith and fair dealing.

On March 19, 1982, Great Western moved for summary judgment. The motion was denied, and the cause was heard by the trial court in proceedings beginning November 2, 1982. Plaintiff waived a jury trial solely because the trial court indicated it intended to grant a nonsuit. Plaintiff pursued three legal theories at trial, based upon the same factual situation: violation of the automatic bankruptcy stay, interference with prospective economic advantage, and breach of an implied covenant of good faith and fair dealing. After plaintiff's opening statement, defendants moved for an order granting judgment of nonsuit. On November 24, 1982, the trial court granted the motion. The trial court decided that defendants owed no duty to plaintiff; that defendants' postponements of the sale did not violate the automatic stay provisions; and that, as a matter of law, defendants did not interfere with plaintiff's prospective economic advantage. ² Plaintiff's timely appeal followed.

Applicability of Arnolds Management Corp. v. Eischen

At the outset, we discuss the applicability of a recent case which defendants, in a supplemental brief, claim to be dispositive, because under the reasoning of that case, plaintiff would fail to state a cause of action. ³

The case in question is Arnolds Management Corp. v. Eischen (1984) 158 Cal.App.3d 575, 205 Cal.Rptr. 15. There, an appellate court held that a junior lienor could not challenge a foreclosure sale on the basis of procedural irregularities such as improper notice, unless that lienor had first tendered the full amount due on the senior obligation.

Arnolds is significant because it is the first case to apply the tender requirement to a junior lienor. Prior cases only concerned the duty of a trustor or the successor of a trustor to tender.

Defendants argue that plaintiff, as a junior lienor, was required by Arnolds to make a full tender of Great Western's senior obligation. Because plaintiff's complaint fails to allege such tender, it fails to allege facts sufficient to state a cause of action. Hence, this court should affirm the judgment.

Plaintiff responds with four arguments.

First, Arnolds is bad law.

Second, Arnolds is inapplicable to the situation before us: unlike Arnolds, this action is based upon the breach of a covenant, arising from an automatic subordination agreement between plaintiff and Great Western; this action seeks damages, not equitable relief, and Arnolds is an equity case; in this action, unlike in Arnolds, adequate notice of the sale would not have been futile.

Third, Arnolds should not be given retroactive application, because it is a major departure from the law.

Fourth, plaintiff in any event satisfied the tender requirment of Arnolds. It offered to assume the debt owed to Great Western. It was Great Western that refused the offer.

For the reasons stated below, we find persuasive plaintiff's argument that Arnolds should not be applied retroactively; hence we need not debate its merits or its applicability...