Westminster House, LLC v. Jao et al

Filing 72

ORDER GRANTING IN PART (49) PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AND DENYING (52) DEFENDANT'S MOTION FOR SUMMARY JUDGMENT by Judge Alsup in case 3:12-cv-02026-WHA. (whalc2, COURT STAFF) (Filed on 10/16/2013)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA
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For the Northern District of California

United States District Court

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WESTMINSTER HOUSE, LLC, a
Delaware limited liability company,
Plaintiff,

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ORDER GRANTING IN PART
PLAINTIFF’S MOTION FOR
SUMMARY JUDGMENT AND
DENYING DEFENDANT’S MOTION
FOR SUMMARY JUDGMENT

v.
FRANK JAO, an individual, and HAI
NGOC DINH, an individual,
Defendants.
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No. C 12-02026 WHA

STATEMENT
The background appears in the order dated September 6, 2012 (Dkt. No. 32). In brief,

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this action concerns plaintiff Westminster House, LLC and its claim for breach of a loan

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guarantee. Defendant guarantors are Frank Jao and Hai Ngoc Dinh. Only Westminster and Dinh

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have moved for summary judgment, against each other. Jao has signed a settlement term sheet

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with Westminster.

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Jao and Dinh were the sole officers and directors of Moran Property GP, Inc. (“Moran

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G.P.”). The corporation, in turn, was the only general partner of Moran Property Limited

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Partnership (“Moran L.P.”). Moran G.P. possibly was a shell corporation because it conducted

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no business activity and had no assets (Dinh Decl. ¶¶ 3, 4, 7, 9).

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In February 2006, HSBC Realty Credit Corporation (USA) agreed to loan Moran L.P.
$29,635,000 to finance a condominium project in Westminster, California. This loan agreement,
along with the accompanying loan documents, was negotiated between Moran L.P. and HSBC

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and drafted by their respective counsel (Balombin Decl. ¶ 3). To evidence HSBC’s loan, Moran

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L.P. executed a written promissory note. A trust deed then secured Moran L.P.’s obligation. Jao

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and Dinh also signed a guarantee to induce HSBC to fund the loan, such that they

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unconditionally guaranteed an amount not to exceed 30% of the original loan amount or, upon

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completion of construction, 15% of the original loan amount.

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The loan went into default. HSBC then entered into a series of forbearance agreements

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with Moran G.P., Jao, and Dinh, such that HSBC agreed to forbear from exercising its rights and

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remedies under the guarantee and other loan documents. Later, in January 2011, the trustee

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under the trust deed recorded a notice of default. A nonjudicial foreclosure sale then followed.
As the purported assignee of HSBC’s rights, Westminster seeks to recover on the large

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For the Northern District of California

United States District Court

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deficiency resulting from the sale.

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Both sides now seek summary judgment. Evidently, because Westminster has a separate

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settlement with Jao, Westminster’s motion for summary judgment is only directed at Dinh and

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his guarantee obligation of $9,357,600.

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ANALYSIS
On the summary judgment record, a genuine issue of material fact exists over whether or

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not the deed of trust was meant to secure the guarantee. This order need not lay out the

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competing evidence. Suffice it to say that the interlocking definitions in the loan documents

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leave room for doubt over the parties’ intent.

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Regardless of the outcome of that issue, however, the lender in this case has a strong

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argument that the guarantor waived any direct or indirect protection of Section 580d when he

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agreed to the following (Shanley Exh. 9 at 5):

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The Lender may collect from the Guarantors even if the
Lender, by foreclosing on the real property collateral, has
destroyed any right the Guarantors may have to collect
from the Borrower. This is an unconditional and
irrevocable waiver of any rights and defenses the
Guarantors may have because the Borrower’s debt is
secured by real property. These rights and defenses
include, but are not limited to, any rights or defenses based
upon Section 580a, 580b, 580d, or 726 of the Code of Civil
Procedure.

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The Guarantors waive all rights and defenses arising out of
an election of remedies by Lender, even though the election
of remedies, such as nonjudicial foreclosure with respect to
security for a guaranteed obligation, has destroyed the
Guarantors’ rights of subrogation and reimbursement
against the principal by the operation of Section 580d of
the Code of Civil Procedure or otherwise.

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It is true that an intermediate state appellate decision once held that special, clear-cut

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language was needed to effect such a waiver. Cathay Bank v. Lee, 14 Cal. App. 4th 1533, 1539

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(1993). Thereafter in 1996, however, the California Legislature overruled this with a new

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Section 2856 of the California Civil Code. Under new Section 2856(a)(2) and (3), at all times

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material to our case, “any guarantor” may waive:
Any rights or defenses the guarantor or other surety may
have in respect of his or her obligations as a guarantor or
other surety by reason of any election of remedies by the
creditor.

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For the Northern District of California

United States District Court

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Any rights or defenses the guarantor or other surety may
have because the principal’s note or other obligation is
secured by real property or an estate for years. These rights
or defenses include, but are not limited to, any rights or
defenses that are based upon, directly or indirectly, the
application of Section 580a, 580b, 580d, or 726 of the Code
of Civil Procedure to the principal’s note or other
obligation.

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Under this express language quoted above, Dinh waived any and all protection of Section

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580d, direct or indirect. This order now so holds, subject only to the caveat in the next

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paragraph.

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The caveat is that under California law, if the guarantor is deemed to be the principal

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obligor (via the sham-guarantee defense), then the guarantor-obligor has all of the protection of

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Section 580d and that protection is unwaivable at the time of the original loan transaction. River

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Bank America v. Diller, 38 Cal. App. 4th 1400, 1420 (1995). On this summary judgment record,

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a genuine issue of material fact exists as to whether or not the guarantor here was the intended

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obligor under the sham-guarantee defense. If Dinh is ultimately held to have been the primary

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obligor, then we must reach the further issue of whether Dinh subsequently waived the

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protection of Section 580d in the forbearance agreements. If Dinh ultimately is held not to so

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qualify as the primary obligor, then this order holds that Dinh loses and must pay on the

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guarantee.

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This order recognizes one other possible scenario wherein Section 2856 might not apply,

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namely where the guarantor pledges his own separate property as security and thus becomes a

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principal obligor. That scenario has no relevance here. Dinh pledged no property of his own.

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As both parties conceded at hearing, post-default waiver of Section 580d can occur if

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there is “separate consideration” in a subsequent agreement. Torrey Pines Bank v. Hoffman, 231

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Cal. App. 3d 308, 323–24 (1991). Westminster has, as yet, provided no evidence of such

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consideration. Nor has Westminster pointed to any case law providing that forbearance alone
could constitute separate consideration. In fact, a California Court of Appeal in the Torrey Pines

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For the Northern District of California

United States District Court

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decision found no consideration where guarantors signed a forbearance agreement with a bank,

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in part because the agreement did not modify the note or trust deed and because the agreement

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made no specific mention of antideficiency protections. So too here. At trial, and on better

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briefing, the Court may yet hold that the waiver in the forbearance agreements was sufficient but

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this record and this briefing are inadequate.

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In the Court’s view, in summary, a pivotal issue is the sham-guarantee defense as is the

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post-default waiver issue. The case will go to trial on all issues, however, save and except the

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ruling above on Section 2856, for which partial summary judgment is now granted in the

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lender’s favor. Please do not ask to submit yet more briefing. The Court has already allowed

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that. It is now time to try the case.

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Unless soon dismissed, Jao remains a defendant and the trial will have to include him as
well. Plan accordingly, please.

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IT IS SO ORDERED.

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Dated: October 16, 2013.

WILLIAM ALSUP
UNITED STATES DISTRICT JUDGE

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