Opinion
H046812
05-19-2020
GOLDEN STATE BANK, Plaintiff and Respondent, v. MONTEREY COUNTY BANK, Defendant and Appellant.
(Monterey County Super. Ct. No. 18CV004801) ORDER MODIFYING OPINION AND DENYING REHEARING
[NO CHANGE IN JUDGMENT]
THE COURT:
The court orders that the opinion filed May 19, 2020, be modified as follows:
On page 3, first partial paragraph, delete the last sentence and replace it with the following:
(We will hereafter refer to the real property that was provided as security for the Loan as Ranch Lot 1.)
On page 3, second full paragraph to page 4, second line, delete the third sentence and replace it with the following:
There were recitals in the trustee's deed that the amount paid for Ranch Lot 1 by Golden State, Sacramento, and Monterey at the trustee's sale was $100,000, and that the outstanding indebtedness at the time was $2,371,723.69. The three banks, "[a]s a result of the foreclosure of the Property, . . . became, and remain, tenants in common of Ranch Lot 1, each owning a proportionate interest in the Property."
On page 17, first full paragraph, last sentence, delete the word "investment."
On page 19, first partial paragraph, first line, delete the word "investment."
On page 25, first full paragraph, delete fourth sentence, and replace it with the following:
The Agreement does not discuss or otherwise address the secured property, Ranch Lot 1, that was furnished as security for the Loan, by referring to it as property; rather, it uses the terms "Collateral" and "security."
On pages 25-26, delete the text from "Once the" to the end of the paragraph "security or collateral" and replace it with the following: Had the parties intended that the Loan Participation Agreement would continue to govern their relationship after foreclosure and their acquisition, as co-owners through credit bid, of Ranch Lot 1 (the property provided as security for the Loan), it is reasonable to expect they would have used broader language to refer to the property as unencumbered real property, not as security or collateral.
We thus conclude that the language of the Agreement, namely, the use of the terms "Collateral" and "security," and the absence of references to the property itself (Ranch Lot 1), does not support Monterey's position. This conclusion is confirmed by application of legal principles concerning deeds of trust and the foreclosure of loans secured by such instruments. The beneficiary (in the case of a deed of trust) or the mortgagee (in the case of a mortgage), " 'is said to have a lien on the property given as security, which is also referred to as collateral.' [Citation.]" (Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226, 1235, fn. omitted (Alliance Mortgage).) As the California Supreme Court has explained: "A security interest cannot exist without an underlying obligation, and therefore a mortgage or deed of trust is generally extinguished by either payment or sale of the property in an amount which satisfies the lien. [Citations.] In addition, merger of the lien and ownership of the property in one person or entity extinguishes the lien, unless it is necessary for the protection of the buyer's rights that the lien be sustained. [Citations.]" (Ibid., fn. omitted; see also First Commercial Mortgage Co. v. Reece (2001) 89 Cal.App.4th 731, 740, fn. 3 [lender's credit bid at foreclosure "extinguishes the loan"]; Civ. Code, § 2910 ["[t]he sale of any property on which there is a lien, in satisfaction of the claim secured thereby . . . extinguishes the lien thereon"].) Thus, here, when Monterey, Golden State, and Sacramento acquired title to Ranch Lot 1 through a credit bid at the trustee's sale, the banks' security interest in that property ceased to exist and their lien thereon was extinguished. (See Alliance Mortgage, supra, at p. 1235.)
Monterey cites Karl v. Commonwealth Land Title Ins. Co. (1997) 60 Cal.App.4th 858, 861 (Karl) in support of its position that the term "acquired security" used in the Loan Participation Agreement meant the "real property purchased at foreclosure, which . . . [here was] the Collateral." In Karl, junior lienors, who were required to pay off a senior tax lien to protect their interest, filed an action for bad faith after their insurer refused to indemnify them for this payment that had not been disclosed in the plaintiffs' title insurance policy. (Id. at p. 860.) The issue there was a determination of the method of calculating the value of the security in connection with that insurance claim. (Id. at pp. 860-861.) The appellate court noted at the outset in its opinion that in a prior published opinion, it had held that "when an insured secured lender claims injury from an undisclosed senior lien, and has foreclosed upon and acquired title to the security by means of a credit bid, the lender's 'loss' (if any) occurs on the date of the foreclosure . . . that in determining whether the foreclosing lender has sustained a 'loss' under the policy, the value of the acquired security is its fair market value as of the date of foreclosure, not the price realized at a later sale. [Citation.]" (Id. at p. 861, italics added.) It was thus in that context—describing the security at the time of foreclosure—where immediately prior to the creditor making a successful credit bid the property is in fact held as security for the loan—that the Karl court used the italicized phrase in several parts of its opinion. (See id. at pp. 861, 866, 871.) There was no finding by the court in Karl that the security upon which the plaintiffs foreclosed survived after they took title to the property or that there was no merger of title that occurred upon their acquiring such title. Either such finding would run contrary to established law. (See Alliance Mortgage, supra, 10 Cal.4th at p. 1235.) Karl is thus distinguishable on its facts and does not support Monterey's position here.
See Karl v. Commonwealth Land Title Ins. Co. (1993) 20 Cal.App.4th 972.
It is noteworthy that in Karl—the three references to "acquired security" notwithstanding—the court also noted on seven occasions in the opinion, in varied specific language, that the plaintiffs had "acquired" or had "acquired title" to the property or the apartment complex. (See Karl, supra, 60 Cal.App.4th at pp. 860, 861, 863, 863-864, 865, 866, 871, fn. 9.) This fact lends support for the conclusion that the Karl court did not conclude that the security on which the plaintiffs foreclosed continued to exist after they took title to the property.
On page 27, after first partial paragraph, add the following:
Furthermore, our interpretation of the Agreement—and specifically our conclusion that the clause "administration and disposition of acquired security" does not provide for Monterey's postforeclosure administration of the unencumbered Ranch Lot 1 property co-owned by Monterey, Golden State, and Sacramento—does not run afoul of the rule of contract interpretation, that "[c]ourts must interpret contractual language in a manner which gives force and effect to every provision, and not in a way which renders some clauses nugatory, inoperative or meaningless. [Citations.]" (City of Atascadero v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1998) 68 Cal.App.4th 445, 473.) Our interpretation of the clause does not render it "nugatory, inoperative or meaningless." (Ibid.) Rather, by interpreting the clause in the context of the entire paragraph, we simply disagree with Monterey's premise that the "administration and disposition of acquired security" provides for Monterey's postforeclosure administration of Ranch Lot 1.
The petition for rehearing filed on behalf of appellant Monterey County Bank is denied.
There is no change in the judgment.
/s/_________
BAMATTRE-MANOUKIAN, J.
/s/_________
ELIA, ACTING P.J.
/s/_________
DANNER, J.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Monterey County Super. Ct. No. 18-CV004801)
In 2008, appellant Monterey County Bank (Monterey), respondent Golden State Bank (Golden State), and a third institution, Bank of Sacramento (Sacramento), entered into a loan participation agreement relating to undeveloped property in Monterey County provided as security for the loan. (Hereafter, this contract is referred to as the Loan Participation Agreement or the Agreement.) After the borrower's default and foreclosure of the security, the three institutions took title to the property in December 2009 through a trustee's deed. Nine years later, Golden State sued Monterey, contending that it had taken various actions relative to the property that were detrimental to Golden State and were to Monterey's personal benefit.
Sacramento was acquired in 2014 by American West Bank, which was later acquired by Banner Bank. Banner Bank is not a party to this litigation.
Monterey filed a petition to compel arbitration of the dispute pursuant to section 1292.4 of the Code of Civil Procedure, contending that the 2008 Agreement contained a provision requiring that the claims asserted by Golden State in the lawsuit were subject to mandatory arbitration. Golden State opposed the petition, arguing that the Loan Participation Agreement terminated when the foreclosure occurred in 2009, and that its terms therefore did not govern the instant controversy. The trial court denied the petition to compel arbitration.
Monterey captioned its pleading as a motion to compel arbitration. As provided in Code of Civil Procedure section 1292.4, "If a controversy referable to arbitration under an alleged agreement is involved in an action or proceeding pending in a superior court, a petition for an order to arbitrate shall be filed in such action or proceeding." We will hereinafter refer to Monterey's request below to compel arbitration as a petition to compel arbitration.
On appeal from that order, Monterey makes two contentions. First, it asserts that under the terms of the Agreement, whether the dispute was arbitrable was a matter to be decided by the arbitrator, not the court. Second, and in the alternative, Monterey contends that the controversy was subject to arbitration because the dispute involving Monterey's handling of the property after foreclosure had its roots in the Loan Participation Agreement We conclude that (1) Monterey is precluded from asserting the first argument because Monterey did not preserve it below, and (2) the second argument lacks merit because the controversy is not subject to arbitration under the Agreement. Accordingly, we will affirm the order.
I. PROCEDURAL BACKGROUND
A. Complaint
On September 4, 2018, Golden State filed a complaint alleging four causes of action in the Superior Court of California, County of Los Angeles. The complaint alleged claims against Monterey for breach of fiduciary duty, fraud, negligence, and negligent misrepresentation. It was alleged in the complaint that in or about May 2008, Monterey made a loan (the Loan) to Monterra Ranch Properties LLC (hereafter, Monterra or the Borrower), in the principal sum of $2,170,000, which was secured by a deed of trust against undeveloped property. The secured property is referred to in the complaint as "the Property." The subject Agreement refers to the secured property as "Monterra Ranch, Ranch Lot 1, Monterey, California." (We will hereafter refer to the secured real property as Ranch Lot 1.)
The allegations contained in the complaint are stated in this and the succeeding three paragraphs. In the interest of avoiding redundancy, we will not use the phrase "alleged in the complaint" to describe those allegations here.
Prior to making the Loan, and on or about December 5, 2007, Monterey approached Golden State and a third institution, Sacramento, requesting that they enter into a business relationship under which they would purchase proportionate interests in the Loan Monterey ultimately made to Monterra. (Hereafter, Golden State and Sacramento are sometimes collectively referred to as the Participants.) At that time, the three institutions entered into a written Loan Participation Agreement, under which it was agreed, inter alia, that Monterey, designated as "Lead Bank," would assign proportionate shares of the Loan and collateral received from the Loan (i.e., the deed of trust encumbering Ranch Lot 1) as follows: a 64.52 percent ownership interest to Golden State in exchange for $1,414,000; and a 26.27 percent ownership interest to Sacramento in exchange for $575,700. Monterey thus retained a 9.21 percent interest in the Loan and the deed of trust encumbering Ranch Lot 1. As "Lead Bank," Monterey was empowered to "administer the Loan, the Collateral, and any related guaranties as though it were the sole owner and holder thereof." As alleged by Golden State in its complaint, the Agreement "effectively ended in late 2009."
The Loan secured by deed of trust was foreclosed upon in December 2009. On December 21, 2009, a trustee's deed upon sale was executed by the trustee, transferring Ranch Lot 1 to Golden State (64.52 % interest), Sacramento (26.27 % interest), and Monterey (9.21 % interest), as tenants in common. Golden State, Sacramento, and Monterey, "[a]s a result of the foreclosure of the Property, . . . became, and remain, tenants in common of Ranch Lot 1, each owning a proportionate interest in the Property."
Subsequent to the foreclosure, Monterey breached its fiduciary duties to Golden State "by engaging in many unauthorized actions to [Golden State's] detriment and for [Monterey's] own personal gain." These alleged unauthorized actions in which Monterey enriched itself included its (1) using Ranch Lot 1 "to negotiate improvements to neighboring lots in which [Golden State held] . . . no interest," including "using [Ranch Lot 1] as a necessary means of facilitating the reconfiguration of [Monterey's] other adjacent lots"; (2) entering into transactions that resulted in loss of express access rights for Ranch Lot 1, replacing them with an unnecessary water easement that benefited Monterey's other interests as well as third parties; (3) authorizing a lien against Ranch Lot 1 in May 2012 without authorization from Golden State or Sacramento; and (4) signing without Golden State's knowledge or consent a number of legal documents that negatively impacted Ranch Lot 1 and Golden State's rights thereunder.
B. Petition to Compel Arbitration
In response to the filing of the complaint by Golden State in the Los Angeles County Superior Court, Monterey filed a motion to change venue and a petition to compel arbitration. After a hearing in October 2018, the Los Angeles County Superior Court granted the motion to change venue, transferring the case to Monterey County Superior Court. The court declined to rule on Monterey's petition to compel arbitration, concluding that the petition was moot.
Monterey subsequently, on January 15, 2019, filed an amended petition to compel arbitration in the Monterey County Superior Court. It contended that, as shown from the face of the complaint, the dispute was "grounded on a loan participation agreement," and that the parties had agreed under the Agreement that " '[a]ny and all disputes, controversies and claims arising out of or relating to this Agreement shall be settled and determined by arbitration . . . before a panel of three (3) arbitrators pursuant to the Commercial Rules then existing of the American Arbitration Association.' " Monterey argued that the dispute in fact related to the Agreement and therefore was subject to arbitration.
Golden State filed opposition to the petition. It argued that its claims were not subject to arbitration, because they arose out of the relationship between the parties as tenants in common "and not [out of] the long[-]expired [Agreement]." After hearing argument on February 15, 2019, the court denied the petition to compel arbitration. A formal order was filed on March 14, 2019.
Appellant filed a timely notice of appeal from the order denying the petition to compel arbitration. (See Code Civ. Proc., § 1294, subd. (a).) [order denying or dismissing petition to compel arbitration appealable].)
II. DISCUSSION
A. Standard of Review
The principal issue in this case is whether the dispute presented in the complaint is governed by the arbitration clause in the Agreement. No conflicting extrinsic evidence was presented in the court below concerning the interpretation of the Agreement. Accordingly, we review the trial court's denial of the petition to compel arbitration here de novo. "Whether an arbitration agreement applies to a controversy is a question of law to which the appellate court applies its independent judgment where no conflicting extrinsic evidence in aid of interpretation was introduced in the trial court. [Citation.]" (Brookwood v. Bank of America (1996) 45 Cal.App.4th 1667, 1670; see also NORCAL Mutual Ins. Co. v. Newton (2000) 84 Cal.App.4th 64, 71-72 [where trial court's decision concerning arbitrability rested on issue of law concerning whether arbitration provision governed, de novo review applied].)
B. No Error in Concluding Complaint Was Not Arbitrable
Monterey makes alternative arguments on appeal. First, it asserts that a panel of arbitrators, instead of the court, should have decided whether the dispute was subject to arbitration. Monterey contends in the alternative that because Golden State's claims "have their roots in the contract, [they are] subject to arbitration." We address these alternative arguments below.
1. Claim that Arbitrator Should Decide Arbitrability
Monterey contends that the arbitrator should have decided whether the controversy was arbitrable here. It observes—quoting Aanderud v. Superior Court (2017) 13 Cal.App.5th 880, 891-892—that the parties may contract to delegate the question of arbitrability to the arbitrator, rather than the court, so long as the language in the agreement is " 'clear and unmistakable.' " Monterey argues that the parties, by incorporating by reference the Commercial Rules of the American Arbitration Association (AAA) into the Agreement, made a clear and unmistakable delegation of the issue of arbitrability to the arbitrator. (See, e.g., Dream Theater, Inc. v. Dream Theater (2004) 124 Cal.App.4th 547, 557 [agreement incorporating by reference AAA rules, under which questions of scope of arbitration agreement would be decided by arbitrator, evidenced parties' intent to delegate arbitrability to arbitrator].) In support of this position, Monterey quotes from Rule R-7 of the AAA's Commercial Arbitration Rules and Mediation Procedures—a matter of which Monterey has requested that this court take judicial notice—providing that " '[t]he arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to existence, scope, or validity of the arbitration agreement.' "
Under the Agreement, assuming the question of whether the dispute was arbitrable was delegated to the arbitrator, it would be determined by "a panel of three (3) arbitrators." For simplicity here, we will refer to the issue of delegation as whether the arbitrator was empowered under the Agreement to decide arbitrability.
In making this argument, Monterey acknowledges that it did not assert it below. But Monterey contends that because the matter is an issue of law, and because of the strong public policy favoring arbitration, its claim should be addressed by this court.
Golden State responds that Monterey is procedurally barred from asserting the argument (1) under the doctrine of invited error, and (2) because its failure to raise the argument results in the matter being forfeited on appeal. Golden State contends further that, if this court were to consider the merits of Monterey's claim, it nonetheless would fail because there was no clear and unmistakable agreement between the parties to delegate this issue of arbitrability to the arbitrator.
The doctrine of invited error is based upon principles of estoppel. It has been explained as follows: " 'Where a party by his [or her] conduct induces the commission of error, he [or she] is estopped from asserting it as a ground for reversal' on appeal. [Citation.] . . . At bottom, the doctrine rests on the purpose of the principle, which prevents a party from misleading the trial court and then profiting therefrom in the appellate court. [Citations.]" (Norgart v. Upjohn Co. (1999) 21 Cal.4th 383, 403; see also Bains v. Dept. of Industrial Relations (2016) 244 Cal.App.4th 1120, 1126-1127 [appellants who submitted issue of applicability of wage orders for judicial determination estopped under invited error doctrine from challenging court's jurisdiction based upon failure to exhaust administrative remedies].)
Here, Monterey did not contend below that under the Agreement, the parties delegated to the arbitrator the responsibility of determining whether the dispute was arbitrable. To the contrary, Monterey asked the trial court to decide that question. As presented below in its petition, Monterey asserted that "[t]he sole question in connection with the pending motion is whether the present dispute 'relates to' the [Agreement]. If it does, then the Court should order the parties to resolve their disputes via arbitration." At the hearing on the petition, Monterey's counsel reiterated that Monterey sought a determination from the court that the dispute was subject to arbitration. The invited error doctrine—assuming arguendo that the court erred by not deferring to the arbitrator on the question of arbitrability (see People v. Bollaert (2016) 248 Cal.App.4th 699, 731 [challenge to assumed instructional error barred under invited error doctrine])—precludes Monterey's argument here. To hold otherwise would encourage litigants to seek two bites of the apple by initially submitting an issue for decision by the court, and then later, if dissatisfied with that decision, contending that the court was unauthorized to usurp the arbitrator's authority to make such decision. (Cf. Kemper v. Schardt (1983) 143 Cal.App.3d 557, 559-561 [party who submitted dispute to arbitrator precluded from challenging decision in court based upon arbitrator lacking authority to decide validity of arbitration agreement and substantive dispute].) "[I]t is inappropriate to allow any party to 'trifle with the courts by standing silently by, thus permitting the proceedings to reach a conclusion in which the party could acquiesce if favorable and avoid if unfavorable.' [Citation.]" (In re S.C. (2006) 138 Cal.App.4th 396, 406.)
Even were we to conclude that Monterey is not estopped from arguing that the arbitrability issue should have been decided by the arbitrator, the contention is nonetheless forfeited. Monterey admits that it did not raise the argument below. But it asserts that the issue is one of law and therefore may be decided here. We disagree.
" 'An appellate court will ordinarily not consider procedural defects or erroneous rulings, in connection with relief sought or defenses asserted, where an objection could have been but was not presented to the lower court by some appropriate method . . . . The circumstances may involve such intentional acts or acquiescence as to be appropriately classified under the headings of estoppel or waiver . . . . Often, however, the explanation is simply that it is unfair to the trial judge and to the adverse party to take advantage of an error on appeal when it could easily have been corrected at the trial.' [Citation.]" (Doers v. Golden Gate Bridge etc. Dist. (1979) 23 Cal.3d 180, 184-185, fn. 1, original italics (Doers).) Under such circumstances, the litigant has forfeited the argument. (In re S.B. (2004) 32 Cal.4th 1287, 1293, fn. 2 [although often referred to as waiver, a party's failure to object in trial court results in " 'forfeiture' " of claim], superseded on other grounds by statute as stated in In re S.J. (2008) 167 Cal.App.4th 953, 962.) The forfeiture doctrine has been applied under a variety of circumstances in which the litigant failed to preserve an argument or objection in the trial court. Cases include instances in which the appellant failed to raise specific challenges to arbitration at the trial level. (See, e.g., Pearson Dental Supplies, Inc. v. Superior Court (2010) 48 Cal.4th 665, 681 (Pearson Dental) [plaintiff's failure to assert that agreement was unconscionable, instead opposing petition to compel on ground that defendant had waived arbitration, resulted in forfeiture of unconscionability argument]; Cummings v. Future Nissan (2005) 128 Cal.App.4th 321, 329 [where employee failed to assert at time she initially opposed arbitration the claim that bilateral provision in an arbitration agreement for a second level of review of award was unconscionable on its face, such challenge was forfeited].)
Monterey did not raise the argument below that, pursuant to the terms of the Agreement, the question of arbitrability should be decided by the arbitrator. Under the circumstances, assuming without deciding that the Agreement provided for the arbitrator to decide arbitrability, it would " 'simply . . . [be] unfair to the trial judge and to the adverse party to take advantage of an error on appeal when it could easily have been corrected at the trial.' [Citation.]" (Doers, supra, 23 Cal.3d at pp. 184-185, fn. 1, original italics.) Monterey therefore forfeited this contention. (Pearson Dental, supra, 48 Cal.4th at p. 681.)
We acknowledge the legal principle, as argued by Monterey, that notwithstanding that unpreserved claims are forfeited, "a litigant may raise for the first time on appeal a pure question of law which is presented by undisputed facts. [Citations.]" (Hale v. Morgan (1978) 22 Cal.3d 388, 394 (Hale).) This principle is tempered by the following admonition from our high court: "But the appellate court's discretion to excuse forfeiture should be exercised rarely and only in cases presenting an important legal issue. [Citations.]" (In re S.B., supra, 32 Cal.4th at p. 1293.)
Monterey cites Dudley v. Department of Transp. (2001) 90 Cal.App.4th 255, 259 (Dudley), in support of this proposition. While the proposition is properly stated in that case, the principle was applied in Dudley to an entirely different circumstance involving the purely legal issue of whether a complaint for which a demurrer was sustained stated a cause of action based upon a legal theory not advanced in the trial court. (Ibid.) As explained by the Dudley court, "Because the rules governing general demurrers apply here, the question before us is whether Dudley 'has stated a cause of action under any possible legal theory.' [Citation.]" (Id. At p. 260.) Dudley is distinguishable.
Here, we cannot say that the issue posed by Monterey—whether the parties under the Agreement made a clear and unmistakable delegation to the arbitrator to decide arbitrability—was "a pure question of law . . . presented by undisputed facts. [Citations.]" (Hale, supra, 22 Cal.3d at p. 394.) By reason of Monterey's failure to raise the issue below, Golden State was precluded from presenting any issues of fact bearing on whether the parties had, in fact, agreed to delegate arbitrability to the arbitrator. As noted by Golden State, extrinsic evidence may be considered by the court in determining whether the parties have agreed to have arbitrability questions decided by the arbitrator. (See, e.g., Ajamian v. CantorCO2e (2012) 203 Cal.App.4th 771, 782 [court deciding whether parties clearly and unmistakable delegated to arbitrator decisions concerning threshold issues from language of agreement, since no extrinsic evidence of parties' intent introduced].) It is thus conceivable that had the delegation of arbitrability been raised by Monterey below, extrinsic evidence would have been presented by Golden State below to address this issue. Moreover, we do not view this to be an exceptional case "presenting an important legal issue" (In re S.B., supra, 32 Cal.4th at p. 1293) that would justify our disregarding Monterey's failure to assert the argument below.
We therefore conclude that Monterey is estopped from asserting, and has forfeited, the argument that the parties clearly and unmistakably agreed to delegate to the arbitrator questions of arbitrability.
Monterey filed a request for judicial notice of the Commercial Arbitration Rules and Mediation Procedures of the AAA, effective September 1, 2007 (collectively, the AAA rules), and two recorded documents (quitclaim deed and declaration of annexation) that were attached to the pleadings below and are part of the appellate record. It is apparent from Monterey's appellate briefs that it seeks judicial notice of the AAA rules to support its argument that the parties agreed to delegate arbitrability to the arbitrator. Monterey admittedly did not seek judicial notice from the trial court of the AAA rules. Appellate courts ordinarily do not take judicial notice of records not presented to the lower court. (Vons Companies, Inc. v. Seabest Foods, Inc. (1996) 14 Cal.4th 434, 444, fn. 3 (Vons).) We deny the request for judicial notice of the AAA rules on this basis. Additionally, since we have concluded that we will not consider the merits of Monterey's unpreserved argument that the parties delegated the question of arbitrability to the arbitrator, we deny the request for judicial notice of the AAA rules because our consideration of them is unnecessary for our determination of this appeal. (See Jordache v. Brobeck, Phleger & Harrison (1998) 18 Cal.4th 739, 748, fn. 6.) Also, since the quitclaim deed and declaration of annexation were attached to pleadings, we deny the request for judicial notice of these documents as well, because it is unnecessary to take judicial notice of documents that are already part of the appellate record. (Ibid.)
2. Whether Dispute Was Subject to Arbitration
a. Applicable Law
In California, there is a "strong public policy in favor of arbitration as a speedy and relatively inexpensive means of dispute resolution. [Citations.]" (Ericksen, Arbuthnot, McCarthy, Kearney & Walsh, Inc. v. 100 Oak Street (1983) 35 Cal.3d 312, 322 (Ericksen).) " '[T]he scope of arbitration is . . . a matter of agreement between the parties [citation]." (Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 8.)
The critical issue in this appeal is the scope of arbitration to which the parties agreed. As explained by a panel of this court, " 'A party can be compelled to arbitrate only those issues it has agreed to arbitrate.' [Citation.] Thus, 'the terms of the specific arbitration clause under consideration must reasonably cover the dispute as to which arbitration is requested.' [Citation.] For that reason, 'the contractual terms themselves must be carefully examined before the parties to the contract can be ordered to arbitration' by the court. [Citation.]" (Molecular Analytical Systems v. Ciphergen Biosystems, Inc. (2010) 186 Cal.App.4th 696, 705 (Molecular Analytical).) A matter will not be ordered to arbitration unless it is within the scope of the arbitration agreement. In light of the policy favoring arbitration, "doubts concerning the scope of arbitrable issues are to be resolved in favor of arbitration. [Citations.]" (Ericksen, supra, 35 Cal.3d at p. 323.) But because " '[t]here is no public policy favoring arbitration of disputes which the parties have not agreed to arbitrate[]' [citation], . . . no dispute may be ordered to arbitration unless it is within the scope of the arbitration agreement." (Titolo v. Cano (2007) 157 Cal.App.4th 310, 317.)
" 'In determining the scope of an arbitration clause, "[t]he court should attempt to give effect to the parties' intentions, in light of the usual and ordinary meaning of the contractual language and the circumstances under which the agreement was made [citation]." [Citation.]' [Citation.] [¶] Following on from this, . . . the terms of the specific arbitration clause under consideration must reasonably cover the dispute as to which arbitration is requested." (Bono v. David (2007) 147 Cal.App.4th 1055, 1063 (Bono).)
A party seeking to compel arbitration bears the burden of proving by competent evidence the existence of a valid agreement to arbitrate. (Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 972.) Once that burden has been satisfied, "the party opposing arbitration [must] demonstrate that an arbitration clause cannot be interpreted to require arbitration of the dispute." (Coast Plaza Doctors Hosp. v. Blue Cross of California (2000) 83 Cal.App.4th 677, 686-687, original italics (Coast Plaza).) In other words, "an order to arbitrate a particular grievance should not be denied unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute." (Dryer v. Los Angeles Rams (1985) 40 Cal.3d 406, 414.)
b. Parties' Contentions
Monterey argues that the trial court erred in denying the petition because the dispute set forth in Golden State's complaint was arbitrable. Monterey contends that, based upon the broad language of the arbitration provision contained in the Agreement, the tort claims alleged by Golden State had "[their] 'roots' in the [Agreement], and thus [the claims were] arbitrable." In support of its position, Monterey relies upon case law holding, inter alia, that in construing agreements containing arbitration clauses, all doubts are to be resolved in favor of finding that the dispute is arbitrable.
Golden State disagrees. It argues that the "dispute has nothing to do with the subject . . . Agreement. Golden State asserts that the Loan in which it, Monterey, and Sacramento participated was the subject matter of the Loan Participation Agreement, and the Agreement did not involve or address the management of Ranch Lot 1 after the 2009 foreclosure in which Golden State, Sacramento, and Monterey became co-owners of the property as tenants in common.
c. The Dispute Is Not Arbitrable
(1) Language of Agreement
We begin our analysis with the language in the Loan Participation Agreement. (See Molecular Analytical, supra, 186 Cal.App.4th at p. 705 [" 'the contractual terms themselves must be carefully examined before the parties to the contract can be ordered to arbitration' by the court"].) The arbitration provision at issue reads in relevant part as follows: "Any and all disputes, controversies and claims arising out of or relating to this Agreement or its performance shall be settled and determined by arbitration in the City and County of Monterey, California under or before a panel of three (3) arbitrators pursuant to the Commercial Rules then existing of the American Arbitration Association. . . . The arbitration award shall be binding upon the parties, and judgment on the arbitration award may be entered in the court of appropriate jurisdiction in California." We therefore must consider the nature of the Agreement and the rights and obligations specified thereunder in assessing whether the claims alleged in Golden State's complaint are ones "arising out of or relating to this Agreement or its performance."
The Agreement is entitled "Loan Participation Agreement." In the introductory section with the heading "recitals" (capitalization and emphasis omitted), it is stated that Monterey, the Lead Bank, had agreed to make a loan of $2,170,000 to a borrower identified as Monterra; the note was dated November 8, 2007, having a maturity date of November 8, 2008; the Participants signing the Agreement had "agreed to purchase all or a portion of the Loan from the Lead Bank"; and "[t]he Lead Bank wishes to sell to the Participants and the Participants wish to buy portions of the Loan." While the title of the Agreement and recitals contained therein are certainly not persuasive by themselves on the ultimate issue of whether the underlying dispute had its roots in the Agreement, it is noteworthy that (1) the Agreement's title describes participation in a loan (and does not embrace specifically the potential future co-ownership in the property provided as security for the Loan); and (2) the Agreement's recitals do not suggest such potential future co-ownership.
We acknowledge of course that it is generally what the parties state as the terms of their agreement that control, and that recitals may be of limited utility in construing a contract. (See, e.g., In re Marriage of Lund (2009) 174 Cal.App.4th 40, 52 [questioning trial court's reliance on contractual recitals in interpreting agreement based upon parties' motivations].)
The Agreement proceeds to address, under 20 separate headings, the following topics: (1) the sale of the interest in the Loan to the Participants; (2) the making of multiple advances to the Borrower; (3) funding of the Loan; (4) the making of expense advances necessary to support the Loan; (5) a participant's failure to pay its shared portion of such expense advances to support the Loan; (6) the collateral for the Loan; (7) the handling of documentation for the Loan; (8) administration of the Loan; (9) administrative fees charged by the Lead Bank for the Loan; (10) Loan fees paid by the Borrower; (11) payments made by the Borrower and collected by Monterey, as Lead Bank, in connection with the Loan; (12) the consequences of Monterey's failure to remit payments to the Participants; (13) Monterey's extension of other credit to the Borrower; (14) Monterey's representations regarding the Loan; (15) the Participants' independent investigation of the circumstances surrounding the Loan and the absence of warranties by Monterey; (16) the Participants' right to remove Monterey, the Lead Bank, as administrator in the event of its default; (17) other terms, such as governing law and the construction of the Agreement; (18) binding arbitration of disputes; (19) recovery of attorney fees and costs; and (20) notification by Monterey to the Participants, or by the Participants to Monterey, in the event one side were to become aware of material negative information concerning the Borrower or the collateral for the Loan. The Agreement contains three exhibits, namely, the identification of the Participants and their respective shares (Exhibit A), the signatures and addresses of the Participants (Exhibit B), and the identification of the collateral (Exhibit C). As provided in the body of the Agreement, the Loan was "secured by the collateral described in Exhibit 'C' attached hereto (the 'Collateral')." In Exhibit C, the only identified Collateral is "Real Property Collateral" (emphasis omitted) described as "Monterra Ranch, Ranch Lot 1; Monterey, CA 93940."
We observe after reviewing the text of the Loan Participation Agreement, as delineated by the 20 headings, that the Agreement does not address or concern the manner in which the secured property (the "Collateral") will be managed in the event the Loan in the future were to become nonperforming, resulting in a nonjudicial foreclosure and the purchase of Ranch Lot 1 at the trustee's sale by the Lead Bank and the Participants. As discussed immediately below, while the Agreement provides detail concerning the administration of the Loan itself, it does not address the administration of Ranch Lot 1 if it were to become co-owned by the contracting parties.
We observe that the Agreement provides that "[t]he captions and headings of the paragraphs of this Agreement are for convenience only and are not to be used to interpret or define the Agreement provisions." This provision is inapplicable here, as our description of the subjects covered by the agreement relies on the text following each of the headings, not on the headings themselves.
The obligations of Monterey, as Lead Bank, delineated under the Agreement consist exclusively of duties that may be characterized as relating to the funding and administration of the Loan, including communications with the Participants relative to the Loan and remittance of payments to them. These duties include (1) funding additional advances to the borrower as provided in the Loan documents; (2) delivery to Participants of a statement of the total amount advanced to the Borrower and the respective portions advanced by the Lead Bank and the Participants; (3) determining the necessity of additional expense advances to preserve or protect the contracting parties' interests in the Loan and/or the Collateral; (4) providing timely notice to the Participants of additional expense advances and a request for payment of their pro rata shares of the expenses; (5) payment of a participant's pro rata share of an additional expense advance in the event of a participant's nonpayment; (6) making "final disposition of the Collateral" after payment of all amounts due to the Lead Bank and Participants; (7) maintaining and preserving all loan documents; (8) providing Participants with current information regarding the status of the Loan; (9) administering "the Loan, the Collateral, and any related guaranties as though it were the sole owner and holder thereof"; (10) paying Participants a specified portion of the loan fees paid by the Borrower; (11) collecting all payments made by the Borrower or on the Borrower's account, and distributing those Loan payments in pro rata shares to the Participants; (12) after the Borrower's default, and upon written consent of the Participants, taking action on such default with respect to the Loan or related obligations; and (13) notifying the Participants in the event Monterey obtained "actual notice or knowledge of any loss or dramatic decline in value of the Collateral or adverse change in the financial condition of the Borrower, co-maker, guarantor or endorser under the Loan."
The information to be provided by the Lead Bank to Participants was "all credit information received or created by the Lead Bank from time to time regarding the following: Loan accrual status; status of Payments; Borrower financial statements; Collateral values and lien status; and any factual information bearing on the creditworthiness of the Borrower."
The various duties of Monterey as Lead Bank specified in the Agreement as described above all relate to the funding and administration of the Loan. Indeed, in the section authorizing the removal of Monterey as Lead Bank, there is a recital concerning the duties of the Lead Bank: "This Agreement obligates the Lead Bank to perform certain administrative functions relating to the Loan in the same fashion in which the Lead Bank would administer a loan in its own portfolio." Neither that paragraph nor any other portion of the Agreement describes Monterey's authorized duties as including administration and management of Ranch Lot 1, the property provided as security for the Loan, in the event there is a default under the Loan, a foreclosure, and the acquisition of title by the Lead Bank and the Participants. Further, the Loan Participation Agreement does not identify the rights and duties of Monterey or the Participants regarding their potential co-ownership of Ranch Lot 1 in the event of default and foreclosure. Specifically, the Agreement does not address such matters as the administration, financing, maintenance, rental, development, marketing, or sale of co-owned property. Recognizing the myriad potential decisions, tasks, and responsibilities associated with the management of co-owned investment real estate, had the parties contemplated that the Agreement would embrace their potential co-ownership of Ranch Lot 1, it would have been natural for them to have included specific provisions for the co-owned property's administration and management, just as the Agreement so provided for the administration of the Loan.
Five examples drawn from the terms of the Loan Participation Agreement demonstrate the point. First, the Agreement includes a section concerning the Lead Bank's duties to collect all Loan payments made by or on behalf of the Borrower and to distribute to the Participants such payments "in pro rata shares" for the respective Participants' benefit. The Agreement elsewhere requires that Monterey as Lead Bank provide information to the Participants that includes "Loan accrual status" and "status of Payments." It would be reasonable to conclude that if it had been intended that the Loan Participation Agreement were to embrace the potential future relationship of the parties as co-owners of Ranch Lot 1, the parties would have included language addressing the collection and distribution of, and accounting for, any income received from such co-ownership.
Second, the Loan Participation Agreement provides that Monterey, as Lead Bank, might determine it necessary to commit additional expense advances to preserve and protect the parties' interests in the Loan and/or any collateral securing the Loan, including expenditures for accountants, attorneys, investigators, or appraisers. Under this section, Monterey is required to notify promptly the Participants of the expense advance, with the Participants being obligated "immediately" thereafter to pay their respective pro rata shares of such expense advance. In contrast, the Agreement contains no terms regarding any accruing obligations that might arise out of the parties' potential future co-ownership of Ranch Lot 1. It would be reasonable to conclude that if the parties had contemplated that their potential future co-ownership of Ranch Lot 1 would be covered under the Agreement, they would have included language addressing the payment administration of, accounting of, and the responsibility for, any expenses incurred in connection with such co-ownership of real property.
Third, the Agreement requires Monterey to provide the Participants with current information relevant to the Loan, such as payment information, the Borrower's financial statements, and the value of Collateral. In contrast, there are no terms in the Agreement requiring that Monterey provide information to the Participants concerning the status of Ranch Lot 1, as real property co-owned by the parties as a result of foreclosure, such as appraisals of the property, the status of its development, and the existence of any liens and encumbrances against the property. Given the variety of potential issues posed by the co-ownership of undeveloped investment property, it would be reasonable to conclude that these duties would have been spelled out if the parties had contemplated that the Loan Participation Agreement would cover that potential co-ownership of real property.
Fourth, under the Loan Participation Agreement, Monterey is obligated to advise the Participants in the event it learns of "any loss or dramatic decline in value of the Collateral or adverse change in the financial condition of [the] Borrower." If the parties had intended that the Agreement cover their potential future relationship as co-owners of the property, Ranch Lot 1, it would be reasonable to conclude that the Participants—lending institutions based in Upland and Sacramento, respectively—would have wanted to be kept informed of any material circumstances concerning the real property (and especially concerning any substantial decline in its value) by the Lead Bank, as an institution based in the city where the real property is located.
The Agreement includes a reciprocal obligation of the Participants to advise Monterey if they become aware of adverse information concerning the Borrower or the Collateral.
Fifth, under the Loan Participation Agreement, the Participants are granted the power to terminate Monterey's role as Lead Bank in the event of its default, such as insolvency, the breach of its duty to remit pro rata portions of payments on the Loan, or the lead Bank's "granting [of] any material concession to the Borrower without the written consent of Participants." Under that provision, the Participants by written notice upon such breach "may . . . terminate the administrative role of the Lead Bank and take over all administrative duties with respect to the Loan and the Collateral. . . . Such successor shall have the right to notify and communicate with the Borrower or any other person in connection with the Loan, including, but not limited to, any co-makers or guarantors, and to direct Payments and communications to said successor." (Italics added.) It is reasonable to conclude that had the parties intended the Agreement to apply to the administration of Ranch Lot 1 as co-owned property, they would have provided in the Agreement a much broader term under which the Participants could remove Monterey as Lead Bank for default in connection with its management of such co-owned property.
Monterey, after submission of its opening brief and Golden State's submission of its respondent's brief, filed a supplemental request for judicial notice of a letter by the Federal Deposit Insurance Exchange dated July 1, 2008 (the FDIC letter). Monterey argued that the FDIC letter was "relevant because it represent[ed] guidance for banks on the managing, holding, and disposing of other real estate owned, also known as O.R.E.O.'s, which is what [Monterey], as Lead Bank under the Loan Participation Agreement . . . owns." Monterey argues that this letter responds to Golden State's "assert[ion] that because there are no specifics in the [Agreement] about managing, holding, and disposing of other real estate, the [Agreement] thus must not anticipate it." Golden State opposed the supplemental request. Monterey admits that the FDIC letter was not presented to the court below. As noted, ante, as a general rule, appellate courts do not take judicial notice of records not presented to the lower court. (Vons, supra, 14 Cal.4th at p. 444, fn. 3.) And "[o]bvious reasons of fairness militate against consideration of an issue raised initially in the reply brief of an appellant." (Varjabedian v. City of Madera (1977) 20 Cal.3d 285, 295, fn. 11.) Therefore, because the FDIC letter was not presented to the court below and because Monterey attempts to raise the issue for the first time in its reply, Monterey's supplemental request for judicial notice is denied.
(2) Broad Arbitration Clause Language
Monterey argues that the broad language of the arbitration clause contained in the Agreement supports the conclusion that the dispute is arbitrable. Specifically, Monterey contends that the fact that the Agreement renders arbitrable "[a]ny and all disputes, controversies and claims arising out of or relating to this Agreement or its performance" (emphasis omitted) compels reversal of the trial court's order. In so arguing, Monterey relies on Khalatian v. Prime Time Shuttle, Inc. (2015) 237 Cal.App.4th 651, 659 (Khalatian), where the court held: "The language 'arising out of or relating to' as used in the parties' arbitration provision is generally considered a broad provision. [Citations.]" The Khalatian court observed further that "[b]road arbitration clauses such as this one are consistently interpreted as applying to extracontractual disputes between the contracting parties. [Citations.]" (Id. at p. 660.)
We acknowledge that the language in the arbitration clause here is broad and that it may be construed as applying to extracontractual disputes between the parties. (Khalatian, supra, 237 Cal.App.4th at p. 660.) But while the breadth of the language here may render arbitrable tort claims arising out of actions taken to administer the Loan—such as claims for conversion or misrepresentation (see, e.g., Coast Plaza, supra, 83 Cal.App.4th at pp. 684-685 [tort claims, including discriminatory treatment and interference with prospective economic advantage, arising out of disputed reimbursement rates in subject managed health care service agreement and defendant's refusal to renegotiate those rates arose out of contract and were arbitrable])—it cannot reasonably be construed as embracing claims by Golden State against Monterey arising out of the latter's management of the co-owned property, Ranch Lot 1, allegedly occurring years after the Loan was extinguished through foreclosure in 2009.
Howard v. Goldbloom (2018) 30 Cal.App.5th 659 (Howard) is instructive. There, the plaintiff (Howard), several years after the separation of his employment as president of a corporation, Kaggle, Inc. (Kaggle), brought suit against its chief executive officer (Goldbloom), other members of its board of directors, and others, alleging abuse of corporate power and breach of fiduciary duty by diluting Howard's stock in the company. (Id. at pp. 661-662.) The defendants petitioned unsuccessfully to compel arbitration, relying on four agreements signed by Howard that contained arbitration clauses. (Id. at p. 663.) The four agreements were (1) a 2011 employment agreement, providing that Howard agreed to arbitrate " 'any and all controversies, claims or disputes with anyone (including the Company and any employee, officer, director, shareholder or benefit plan of the Company, in their capacity as such or otherwise), arising out of, relating to, or resulting from [Howard's] employment with the Company or the termination of [Howard's] employment with the Company, including any breach of this agreement' " (id. at p. 665); (2) a 2011 " 'At-Will Employment, Confidential Information, Invention Assignment, and Arbitration Agreement' " that "contained an arbitration clause that was almost identical to that in the 2011 employment agreement" (ibid.); (3) a 2011 "Common Stock Repurchase Agreement' (the CIAA)" providing that " '[a]ny and all controversies, claims, or disputes arising out of, relating to, or resulting from this Agreement shall be subject to the arbitration provisions set forth in the Employment Agreement' " (id. at p. 666); and (4) a 2013 " 'Separation Agreement and Release' " providing " 'that any and all disputes arising out of the terms of this agreement, their interpretation, and any of the matters herein released, shall be subject to arbitration . . . .' " (Ibid.)
The chronology, which has some relevance in understanding the appellate court's conclusion that the dispute was not arbitrable, was that Howard became employed by the company in 2011 (Howard, supra, 30 Cal.App.5th at p. 661); Howard left that employment in August 2013 (id. at p. 662); the alleged misconduct by the defendants occurred in 2015 (id. at p. 667), and the merger of the company with Google arranged by the defendants that allegedly resulted in their enrichment occurred in 2017 (id. at p. 662).
The appellate court concluded that the 2011 employment agreement was inapplicable because it was superseded and replaced by the 2013 separation agreement, and the "relatively narrow" arbitration provision in the separation agreement did not apply because "Howard's claims ar[o]se from the terms or interpretation of the separation agreement." (Howard, supra, 30 Cal.App.5th at p. 667.) It held further that the arbitration clauses in the remaining two agreements were broader, requiring that the court decide whether the "dispute [arose] out of, relate[d] to, or result[ed] from either the stock [repurchase] agreement—under which Howard agreed to sell a steadily-decreasing amount of stock to the Company if he left within three years—or his employment with [the Company]." (Ibid.) As a parallel to the argument made by Monterey here, the defendants contended that "Howard's claims [were] rooted in his employment relationship with Kaggle because he possesse[d] the majority of his shares as a result of his employment with, and separation from, the company. That is, he received many of the shares as compensation, and his right to retain possession of some of them was '[a]ccelerat[ed]' by the separation agreement." (Ibid.)
The Howard court, in concluding the dispute was not arbitrable under either the CIAA or the stock repurchase agreement, rejected the defendants' argument that Howard's claims were rooted in his employment relationship with the company. (Howard, supra, 30 Cal.App.5th at pp. 667-671.) The appellate court held that Howard was "not seeking to enforce any contractual provision, the breaches he alleges occurred well after his employment ended, and the wrongs he allege[d had] nothing to do with his former employment relationship." (Id. at p. 669.) It reasoned further that his alleged damages were "not measured by nor dependent on the terms of his employment. [¶] Howard's claim [was] instead rooted in, and any harm he suffered [was] measured by, his rights as a company stockholder. The dispute [was] whether defendants wrongfully diluted the value of his shares, breached their fiduciary duties to Howard as a minority stockholder, and unjustly enriched themselves at his expense. Defendants' fiduciary duties to minority shareholders and alleged wrongs exist independently of any employment relationship between Howard and Kaggle. [Citations.]" (Id. at p. 670.) Moreover, the appellate court found unpersuasive the defendants' argument that the claims were arbitrable because a good portion of Howard's stock was obtained as compensation for, and the separation from, his employment with Kaggle: "Howard's former employment status, and the circumstances under which he received his shares or gained the right to retain them, do not affect defendants' independent obligations not to breach their fiduciary duties to him or to aid and abet such a breach. Defendants would have owed Howard the same duty if he had acquired the stock in a completely different manner, for example by purchasing it from a third party, or if the only shares he owned were those he acquired before he began working for the Company." (Ibid.)
While the factual circumstances of the two cases differ, Howard nonetheless offers strong support for our conclusion that the arbitration clause in the Loan Participation Agreement, while broad, does not support the conclusion that the present dispute has its roots in the relationship created under the Agreement. As was the case in Howard, the obligations owed by the defendant (Monterey) to the plaintiff (Golden State) arose out of an entirely different relationship—co-ownership of real property—than the loan participation arrangement created under the Agreement. And like Howard, the circumstances giving rise to the claims in the complaint occurred years after the relationship created by the Agreement—the participation in the Loan to Monterra—ceased.
In short, the fact that there was a causal connection between the creation of the parties' business relationship in the Loan Participation Agreement and their later co-ownership of the property that had served as security for the Loan is an insufficient ground upon which to conclude that such co-ownership was rooted in the loan participation relationship. Such connection between the formation of the parties' loan participation relationship and their subsequent co-ownership of the property pledged by the Borrower as security for the loan does not persuade us that the parties intended that the Agreement's arbitration clause would cover disputes related to that subsequent property ownership. "[T]he terms of the specific arbitration clause under consideration must reasonably cover the dispute as to which arbitration is requested." (Bono, supra, 147 Cal.App.4th at p. 1063.) In this instance, based upon our discussion, ante, interpreting the Agreement, we conclude that the arbitration clause, notwithstanding the breadth of its language, does not reasonably cover the dispute alleged in Golden State's complaint. (See Howard, supra, 30 Cal.App.5th at pp. 667-671.)
(3) "Administration and Disposition of Acquired Security"
Monterey, in asserting that the dispute presented in Golden State's complaint is arbitrable, relies extensively on one sentence of the Loan Participation Agreement in the paragraph containing the heading "Administration" (capitalization, emphasis, and underscoring omitted). That sentence of the Agreement reads: "Except as provided below, the Lead [B]ank shall make all decisions concerning the servicing of the Loan and any related securities and guaranties, acceleration, foreclosures, acquisitions of other security or guaranties, deficiency judgments, purchase at foreclosure sales and administration and disposition of acquired security." (Italics added.) Monterey contends that the parties, through the emphasized language, "expressly contemplate[d Monterey], as Lead Bank, administrating [sic] the Collateral after acquiring it at foreclosure sale through its disposition." Monterey argues that the alleged wrongdoing of which Golden State complains therefore " 'aris[es] out of or relat[es] to' the [Agreement] and has its 'roots' in the [Agreement], and thus is arbitrable." Monterey contends further that, even if the Agreement were considered ambiguous on the question of the scope of its administration of the Collateral, such ambiguity should be resolved in favor of its interpretation that it includes Monterey's postforeclosure administration of the Collateral.
We disagree with Monterey's assertion that, based upon the language, "and administration and disposition of acquired security," the Agreement clearly embraced Monterey's postforeclosure administration of Ranch Lot 1 as property co-owned by the parties. The Agreement contemplates that the Loan would be secured by collateral as specifically described in an attached Exhibit C, which it collectively describes as " 'the Collateral.' " The exhibit identifies Ranch Lot 1 as the sole Collateral for the loan. The Agreement does not discuss or otherwise address the secured property, Ranch Lot 1, by referring to it as property; rather, it uses the terms "Collateral" and "security." Use of the terms "Collateral" and "security" in the Agreement—and the absence of references to "real property" pledged—is significant. The term "Collateral," as relevant here, generally means "[p]roperty that is pledged as security against a debt; the property subject to a security interest or agricultural lien." (See Black's Law Dictionary (10th ed. 2014), p. 318, col.1.) The term "security," as relevant here, generally means "[c]ollateral given or pledged to guarantee the fulfillment of an obligation." (Id. at p. 1559, col. 2.) Thus, both terms have meaning only in connection with the making of a loan. Once the loan ceases to exist as a result of the foreclosure of the security, the collateral or security likewise ceases to exist. (See First Commercial Mortgage Co. v. Reece (2001) 89 Cal.App.4th 731, 740, fn. 3 [lender's credit bid at foreclosure "extinguishes the loan"].) Had the parties intended that the Loan Participation Agreement would continue to govern their relationship after foreclosure and their acquisition of the secured property as co-owners through credit bid, it is reasonable to expect they would have used broader language to refer to the property as unencumbered real property, not as security or collateral.
Further, Monterey's interpretation of the clause in the second sentence, "administration and disposition of acquired security," ignores the other three sentences of that paragraph. (See Iqbal v. Ziadeh (2017) 10 Cal.App.5th 1, 10 [" ' "character of a contract is not to be determined by isolating any single clause or group of clauses" ' "].) The first sentence, which may be viewed as establishing the framework of the second sentence in question, reads: "The Lead Bank may administer the Loan, the Collateral, and any related guaranties as though it were the sole owner and holder thereof." This sentence establishes as the scope of Monterey's administration duties the Loan, the Collateral, and any related guarantees; the language does not include administration of co-owned property that is pledged as security for the Loan, which property ownership would potentially arise out of Monterra's subsequent default and Monterey's foreclosure under the Loan. The second sentence, relied on by Monterey, must be read in that context. In addition, the third and fourth sentences of the paragraph underscore that the scope of Monterey's duties under the Agreement is limited to Loan administration. Those sentences provide for certain limits upon the Lead Bank's administration of the Loan, such as the prohibition, without the Participants' written consent, of the modification of Loan terms, the release of Collateral, or renewing or extending for more than one year the term of the Loan.
The paragraph, bearing the heading " ADMINISTRATION ," reads in its entirety as follows: "The Lead Bank may administer the Loan, the Collateral, and any related guaranties as though it were the sole owner and holder thereof. Except as provided below, the Lead [B]ank shall make all decisions concerning the servicing of the Loan and any related securities and guaranties, acceleration, foreclosures, acquisitions of other security or guaranties, deficiency judgments, purchase at foreclosure sales and administration and disposition of acquired security. The Lead Bank shall not. without the Participants' written consent, agree to change the terms of the Loan to the Borrower, such as waiving a penalty for the prepayment of principal, reducing the interest rate with respect tot [sic] the Loan, releasing or allowing the substitution of any Collateral (outside the normal course of dealing with Collateral such as rolling inventory). The Lead [B]ank shall not, without the written consent of the Participants, such that the combined portions of ownership of the Loan of the Lead Bank, and the Participants is more than half of the then outstanding balance of the Loan, renew or extend the term of the Loan more than once or for longer than one year or consent to any material revision of the Loan Documents, or waive any claim the Lead Bank may have against the Borrower or guarantor(s)."
We also disagree with Monterey's alternative contention that "[e]ven if the [Agreement] were ambiguous as to the scope of administering the Collateral, such ambiguity should be resolved in favor of [Monterey's] interpretation." The argument by Monterey is unclear, since it immediately follows its assertion that the language "administration and disposition of acquired" assets means that Monterey is empowered under the Agreement to administer Ranch Lot 1 as co-owned property. We nonetheless address Monterey's argument in that context. As we have discussed in detail, ante, the subject matter of the Agreement, including the specification of the obligations of Monterey, as Lead Bank, make clear that the scope of Monterey's administrative duties is to "the Loan, the Collateral, and any [Loan-]related guarantees." The Agreement includes no language concerning the potential co-ownership of Ranch Lot 1 resulting from Monterra's default, foreclosure of the security, and the credit bid of Monterey and the Participants at the trustee's sale. Further, the phrase "acquired security," relied on by Monterey in the "administration" section, is not defined in the Agreement. The term suggests a secured interest in property acquired by the lender (Monterey and the Participants) in connection with the Loan. As such, the "acquired security" could include the original Collateral, substituted collateral to which the Participants gave their written consent, and/or any additional security provided by the Borrower during the life of the Loan. The term is not suggestive of the meaning proposed by Monterey, i.e., the unencumbered real property, Ranch Lot 1, acquired in fee by Monterey and the Participants, as a result of the foreclosure of the Collateral provided by the Borrower in connection with the Loan.
As Monterey acknowledges, in order for the court to find contractual language ambiguous, it must be "reasonably susceptible to more than one interpretation." (Scheenstra v. California Dairies, Inc. (2013) 213 Cal.App.4th 370, 389.) We do not find the language of the Loan Participation Agreement to be reasonably susceptible to the interpretation urged by Monterey, i.e., that the Agreement includes the postforeclosure co-ownership and administration of the Ranch Lot 1 property. The Agreement is not ambiguous, and we therefore need not address further Monterey's argument based upon this premise.
In interpreting the Loan Participation Agreement, " '[w]e consider the contract as a whole and interpret its language in context so as to give effect to each provision, rather than interpret contractual language in isolation. [Citation.]' [Citation.]" (Wind Dancer Production Group v. Walt Disney Pictures (2017) 10 Cal.App.5th 56, 69.) Based upon these fundamental rules of construction, we conclude that the dispute alleged in Golden State's complaint—arising out of the alleged postforeclosure conduct of Monterey with respect to the Ranch Lot 1 real property co-owned by Monterey and the Participants—was not arbitrable under the Agreement. Accordingly, the trial court did not err in denying the petition to compel arbitration.
Because we have concluded that the dispute alleged in the complaint was not arbitrable under the plain language of the Agreement, it is unnecessary for us to address Golden State's further contention that the Agreement terminated prior to the alleged acts of Monterey that serve as a basis for the claims alleged in the complaint. (See Hiser v. Bell Helicopter Textron Inc. (2003) 111 Cal.App.4th 640, 655 [in general, appellate courts "decline to decide questions not necessary to the decision"].)
III. DISPOSITION
The order of March 14, 2019, denying the petition to compel arbitration is affirmed.
/s/_________
BAMATTRE-MANOUKIAN, J. WE CONCUR: /s/_________
ELIA, ACTING P.J. /s/_________
DANNER, J.