Westminster House, LLC v. Jao et al

Filing 32

ORDER DENYING DEFENDANTS' MOTION TO DISMISS by Judge William Alsup [denying (9) Motion to Dismiss in case 3:12-cv-02027-WHA; denying (13) Motion to Dismiss in case 3:12-cv-02026-WHA]. (whasec, COURT STAFF) (Filed on 9/6/2012)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA
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WESTMINSTER HOUSE, LLC,

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For the Northern District of California

United States District Court

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No. C 12-02026 WHA

Plaintiff,

Related to:

v.

No. C 12-02027 WHA

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FRANK JAO, an individual, HAI NGOC
DINH, an individual, and DOES 1 through
10, inclusive,

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Defendants.

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ORDER DENYING
DEFENDANTS’
MOTION TO DISMISS
/

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INTRODUCTION

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In this loan-guarantee dispute, defendants move to dismiss the action pursuant to

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FRCP 12(b)(6). For the reasons stated below, the motion is DENIED.

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STATEMENT

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In February 2006, HSBC Realty Credit Corporation (USA) (“HSBC”) entered into

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separate loan agreements with Asian Garden Limited II and Moran Property Limited Partnership

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(collectively, the “borrowers”). Under the terms of the loan agreement, HSBC advanced

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$26,309,000 to Asian Garden and $29,635,000 to Moran in order to finance the construction of a

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condominium project in Westminister, California. The principal loan advanced by HSBC to the

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borrowers was evidenced by a written promissory note. Their obligations were secured by a

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trust deed. In order to induce HSBC to fund the loans, defendants — the guarantors — executed

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a guarantee. Defendants agreed to unconditionally guarantee the indebtedness of both borrowers

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to HSBC in an amount not to exceed 30% of the original loan amounts, or upon completion of

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construction, 15% of the original loan amounts (Exh. 7 at 3).

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After the loan matured, a series of forbearance agreements was entered into; however, in

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January 2011, the trustee under the trust deed recorded notice of default. Foreclosure followed,

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leaving a large deficiency. Westminister House, as the purported assignee of HSBC’s rights,

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made demand on the guarantors for full payment of their obligations under the Moran and Asian

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Garden guarantees for $9,357,600 and $8,208,5000, respectively. The guarantors refused to

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make payment and Westminister House filed complaints for breach of guarantee. Although the

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Moran and Asian Garden loan transactions resulted in two separate civil actions, the issues

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For the Northern District of California

United States District Court

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raised are identical and the actions have been related under our local rules.
In their motion to dismiss, defendant guarantors set forth two arguments. First, they

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argue that the guarantee was expressly secured by the trust deed on the foreclosed property and

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therefore California Code of Civil Procedure Section 580d bars a deficiency judgment against

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them. Second, they argue that the loan agreement wholly incorporated the guarantee by

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reference into the note and deed of trust, and, for that reason, Section 580d bars any deficiency

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against the guarantors.

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ANALYSIS

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On a motion to dismiss, a court may consider materials “submitted with and attached to”

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the complaint. U.S. v. Corinthian Colleges, 655 F.3d 984, 998-999 (9th Cir. 2011). As exhibits

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attached to the complaint at issue, the various loan instruments are subject to the principles of

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contract interpretation. Under California law, the intention of the parties is to be ascertained

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from the writing alone, so long as its language is clear and explicit and does not involve an

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absurdity. CAL. CIV. CODE §§ 1638, 1639.

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1.

WHETHER DEFENDANTS’ GUARANTEE
AS SECURED IS A QUESTION OF FACT.

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Defendants’ motion to dismiss relies upon the premise that their guarantee was secured
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by the trust deed encumbering the borrower’s property. On this record, such a determination
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cannot be made as a matter of law, based exclusively on the pleadings, even considering the
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appended exhibits. A more complete record is needed.
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Collateral can only secure a guarantee (or any other obligation) if the grantor of the

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collateral so authorizes. In order to trace rights into supposed collateral, we must look at the

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documents signed by the owners of the collateral and any such documents or definitions

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incorporated therein.

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Based on cross-referenced and incorporated terms within the trust deed, defendants argue

deed’s second recital: “WHEREAS, Trustor desires to secure the payment of the Debt . . . .”

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(Exh. 3 at 1). The term “Debt,” however, was undefined by the trust deed. According to

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Section 14.1 of the trust deed, “[a]ll capitalized terms not defined herein shall have the

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respective meanings set forth in the [] Loan Agreement.” Because the loan agreement’s

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For the Northern District of California

that the guarantee was secured by the trust deed. For example, defendants point to the trust

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United States District Court

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definition of “Debt” explicitly included “Loan Document” (Exh. 1 at 10), which, in turn

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explicitly included “Guaranty” (ibid.), the guarantee was arguably to be considered part of the

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debt. As part of the debt, the guarantee was secured by the trust deed, or so the argument goes.

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In contrast, plaintiff argues that in viewing the trust deed as a whole, defendants’

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interpretation is wrong. For example, plaintiff highlights the trust deed’s first recital which

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stated that its purpose was “to secure a construction loan (the “Loan”) . . . between the Trustor

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and Beneficiary . . .” (Exh. 3 at 1). Here, the term “Loan,” which was clarified as the principal

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sum of the construction loan, was used as opposed to the term “Debt” (ibid.) Additionally, as

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guarantors, defendants were not among those defined as “Trustor” within the trust deed, which

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defined the term as “each Trustor and any subsequent owner or owners of the Property or any

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part thereof or any interest therein” (id. at 25). Notably absent from the trust deed was any

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indication that any party other than the “Trustor” conveyed property to secure the debt.

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This order recognizes that the usual purpose of a guarantee is to stand as independent

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of any collateral. This usual concept favors plaintiff. Still, based on the actual instruments in

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question and their interlocking definitions, there is an argument to be made that the guarantee

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was secured after all. This would favor defendants. On the instant Rule 12 record, it cannot be

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said that one view or the other is wrong as a matter of law. With respect to the line of argument

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based upon the note, the same response applies, namely that the custom and practice of a
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guarantee being independent of collateral prevents a ruling for defendants on this record.

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Accordingly, discovery is to proceed and the general issue will be decided at trial or on summary

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judgment.

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2.

THE APPLICABILITY OF CALIFORNIA’S
ANTI-DEFICIENCY STATUTE REMAINS UNDECIDED.

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Because it cannot be determined as a matter of law that defendants’ guarantee
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was secured, whether or not they are entitled to protection under the relevant California
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anti-deficiency statute — Section 580d — remains unanswered. Assuming arguendo that the
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guarantee is found to have been unsecured, plaintiff’s complaint is not defective for failing to
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plead the fair market value of the property in accordance with California Code of Civil
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CONCLUSION
For the Northern District of California

United States District Court

Procedure Section 580a.
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For the foregoing reasons, defendants’ motion to dismiss is DENIED.
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IT IS SO ORDERED.
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Dated: September 6, 2012.

WILLIAM ALSUP
UNITED STATES DISTRICT JUDGE

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