United California Bank v. Maltzman

• Decision Date: 23 December 1974
• Citation: 118 Cal.Rptr. 299,44 Cal.App.3d 41
• Court: California Court of Appeals Court of Appeals
• Parties: UNITED CALIFORNIA BANK, a corporation, Plaintiff, Cross-Defendant and Respondent, v. Elliott MALTZMAN et al., Defendants, Cross-Complainants and Appellants. Civ. 43648.

Page 299

118 Cal.Rptr. 299

44 Cal.App.3d 41

UNITED CALIFORNIA BANK, a corporation, Plaintiff, Cross-Defendant and Respondent, v. Elliott MALTZMAN et al., Defendants, Cross-Complainants and Appellants.

Civ. 43648.

Court of Appeal, Second District, Division 5, California.

Dec. 23, 1974.

Hearing Deniedl Feb. 19, 1975.

Hill, Farrer & Burrill, Jack R. White and William M. Bitting, Los Angeles, for defendants, cross-complainants and appellants.

Donnelly, Clark, Chase & Johnson and John A. Donnelly, Los Angeles, for plaintiff, cross-defendant and respondent.

LORING, ^* Associate Justice (Assigned).

United California Bank (UCB), plaintiff and cross-defendant commenced this action to recover money alleged to be due under a contract, entered into as part of a loan transaction, entitled 'Sponsor's Loan Purchase Agreement.' The terms of this agreement required Elliott Maltzman, W. E. Robertson, Harold Pollack, Harriette Maltzman, Pearl Robertson and Joyce Pollack (sponsors) to purchase a certain promissory note upon the occurrence of certain conditions precedent.

Saymur Investment Corp., H.D.P. Corp. and E.B.M. Corp., doing business as Santa Clarita Village, a joint venture (joint venture) and sponsors cross-complained alleging that UCB failed to disburse funds promised to be loaned to the joint venture under a 'Construction Loan Agreement.' After nonjury trial sponsors were found to be liable in the sum of $686,757.83, including principal, interest, and attorneys fees, together with costs of $447.90. The court also found that joint venture and sponsors were not entitled to recover anything from UCB under their cross-complaint. Sponsors and joint venture appeal from the entire judgment.

CONTENTIONS

Joint venture, as cross-complaint, and sponsors, as defendants, contend that:

I UCB's refusal to disburse funds for the construction of on-site improvements constituted a material breach of contract and failure of consideration, excusing sponsors from any obligation to perform under Sponsor's Loan Purchase Agreement, and entitling joint venture and sponsors to recover damages on their cross-complaint.

Sponsors, as defendants, contend on appeal that:

I Joint venture was not in default and the conditions precedent to sponsors' obligations under Sponsor's Loan Purchase Agreement did not occur.

II UCB failed to tender an assignment of the promissory note and deed of trust to sponsors and thus sponsors are not obliged to pay UCB the sum demanded.

III Sponsors were in fact the principal obligors under the promissory note, and Code of Civil Procedure section 726 bars suit against sponsors unless the security for the loan is exhausted.

IV If Sponsor's Loan Purchase Agreement is to be regarded as a true guarantee creating a separate obligation from the secured debt, sponsors were entitled to require UCB to proceed first against joint venture and the security as a prerequisite to asserting liability on their part and they are exonerated to the extent UCB failed to do so.

V The interest computed by UCB and awarded by the court is plainly excessive and contrary to the terms of the governing instruments.

FACTS

In 1966, sponsors Elliott Malzman and Harold Pollack entered into negotiations with Robert Hamer of UCB for a possible loan for the development of a parcel of land. Sponsors sought financing for the construction of single family dwellings. The tract of land was then owned by Halell Corporation, which was owned by Maltzman and Pollack. There were 73 residential lots in the tract, including six lots that were improved with model homes.

Hamer made an independent credit investigation of Halell Corp., Maltzman and Pollack. Cost estimates were submitted by Maltzman regarding off-site improvements (grading, curbing, gutters, sewers, storm drains and utilities) and on-site improvements (actual dwellings).

On March 16, 1967, UCB approved a loan of $1,273,000. to Halell, to be personally guaranteed by Maltzman, Pollack, and their wives. But just prior to the actual consummation of the loan, a joint venture was formed, known as Santa Clarita Village, to carry out the development in lieu of Halell Corp. The joint venture acquired ownership of the tract from Halell Corp. The joint venture consisted of three corporations: Saymur Investment Corp., described as W. E. Robertson's Corporation, E.B.M. Corp., whose officers were the Maltzmans and H.D.P. Corp., whose officers were the Pollacks. Robertson was brought into the joint venture because of his building experience and substantial personal wealth which might be needed by the joint venture. Hamer testified that with the exception of Saymur Corp., the financial condition of the corporations was 'less than minimal,' and that they were 'shell corporations.' UCB entered into the loan agreement in reliance on the individual credit of the defendants and would not have done so but for their individual commitments.

By documents dated May 17, 1967, the negotiations were reduced to writing. The documents were prepared by UCB. The Construction Loan Agreement was between UCB and joint venture. Under it a loan of $1,273,000. would be made by UCB to joint venture, secured by a trust deed on the 67 lots. The improvements were to be completed within 180 days from the date the trust deed was recorded. Joint venture was also required to remit to UCB such funds as were required to assure full payment for all of the improvements. The loan was to be disbursed for certain allocated uses: the payment of an existing encumbrance, off-site improvements, actual loan expenses, and the remainder was to be released as construction on the remaining improvements progressed. This agreement also provided that irrespective of provisions in other documents, interest on the loan disbursed was to be 7 percent per annum from the respective date of advancement until 18 months from the date of agreement, and thereafter at a rate of 10 percent.

The promissory note was in the principal amount of $1,273,000, all of which was payable in one lump sum in 18 months. Interest was stated to be payable monthly, at a rate of 7 percent per annum.

By a separate letter dated May 17, 1967, from joint venture to UCB, attached to the Construction Loan Agreement, it was stated that joint venture would improve 30 lots with single family dwellings. Construction of single family dwellings would not begin on the remaining 37 lots until it was mutually agreed that a satisfactory volume of sales of the first 30 lots had been effected.

Sponsor's Loan Purchase Agreement provided in essence that upon the occurrence of the condition precedent that the joint venture had not completed construction in time or defaulted in any other obligation, sponsors agreed to purchase the loan which was evidenced in part by the promissory note and deed of trust and the Construction Loan Agreement by paying UCB the full amount of principal disbursed and interest which had accrued and attorneys' fees.

The deed of trust was recorded by UCB on October 2, 1967. Joint venture was delayed in initiating construction because of delay in obtaining a subdivision report from the California Real Estate Division. Off-site construction was started in early 1968. The off-site improvements were completed in the spring of 1969.

On February 6, 1968, Hamer inspected the tract. In a memorandum dated February 8, 1968, Hamer stated that Maltzman and Robertson were urged to delay commencement of on-site construction until the houses were tested for marketability. E. W. Muhsfeld, a vice-president of UCB, shared the concern that the houses would be modest for the price and he was concerned about their marketability.

On September 5, 1968, Hamer, Muhsfeld, Pollack, Robertson and Maltzman met, and UCB was advised that off-site construction costs exceeded the estimates. Joint venture requested an increase in the loan allocated to off-site improvements. Later that month, Maltzman told UCB that $70,000 more was needed. Eventually, UCB proposed that joint venture deposit $40,000 into the loan account, and UCB would release $30,000 from loan funds previously allocated for purposes other than off-site improvements.

Muhsfeld told joint venture that funds would not be disbursed for on-site improvements. But the trial court found that UCB honored every request for disbursement and that joint venture never asked for disbursement for on-site improvements. Joint venture attempted to sell the tract in September 1968, and the court found that the project was abandoned at that time.

By letter dated July 14, 1969, UCB demanded that sponsors immediately purchase the promissory note and deed of trust. By letter dated July 22, 1969, sponsors declared to UCB that sponsors were not obliged to purchase because UCB failed to disburse the needed construction funds. No principal payments were made on the promissory note. Interest was paid through February 1969.

The total funds disbursed were $450,475.16. UCB's witness testified that interest in the amount of $210,599.38 was unpaid as of February 1, 1973. This was computed on the disbursed funds compounded on the delinquent interest at the rate of 7 percent until March 1, 1969, and 10 percent thereafter.

DISCUSSION

Sponsors contend that UCB refused to disburse loan funds earmarked for the onsite construction unless joint venture put up additional capital. Sponsors further argue that such required additional contribution by the joint venture amounted to a material breach of the Construction Loan Agreement. They argue that the additional capital to assure completion of the 67 units was unnecessary since the joint venture could build 30 of the units and use the profits made from the sale as additional capital to assure the completion of the remaining 37 units. Sponsors argue that the UCB requirement that additional capital needed to offset the increased cost of construction of the first 30 units be paid in at the time the 30 units were to be built...