Opinion
A128615
12-09-2011
SERIES AGI MINDEN OF APPIAN GROUP INVESTORS DE, LLC, Plaintiff and Respondent, v. DIANE KEITH, Defendant and Appellant.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.
(Marin County Super. Ct. No. CIV 085634)
Defendant Diane Keith appeals from an amended judgment entered following denial of her motion for a new trial. Plaintiff Series AGI Minden of Appian Group of Investors DE, LLC (Appian) was awarded in excess of $3 million in this action to enforce Keith's continuing guaranty of a loan made to finance a real estate venture in which she had a 45% interest. Keith says the guaranty is unenforceable because she was wrongfully induced into signing it by Appian's statements that the loan would be secured by a second deed of trust on the project property when, in fact, it could only be secured by a pledge of the owners' interests. Keith claims Appian had a duty to disclose its inability to secure its loan through a deed of trust before she signed the guaranty. We disagree. Keith's situation does not fall within the limited circumstances described in either California or Nevada law that impose upon a creditor a duty of disclosure to a guarantor. Thus, we affirm.
Keith's appeal from an earlier February 18, 2010 judgment is dismissed. The judgment was superseded by the amended judgment entered on May 6, 2010. We will consider the issues relating to the denial of Keith's motion for a new trial in this appeal from the amended judgment. (Code Civ. Proc., § 906.)
FACTS
A. Background
Diane Keith and Jeffry Lowden are the sole members of Minden Gateway LLC. (Minden), a Nevada limited liability corporation. Keith owns 45 percent and Lowden owns 55 percent. Lowden is Minden's sole managing member.
In 2007, Lowden on behalf of Minden sought financing to purchase a 13-acre parcel of real property for the development of the Minden Gateway Center in Minden, Nevada. California National Bank provided Minden a loan of $10.515 million secured by a first deed of trust. An additional "mezzanine loan" of $3.55 million was given by Appian, a "single series of a Delaware series limited liability company," with its principal place of business in California. The mezzanine loan provided funds needed to finance the difference between the California National Bank loan and Minden's cash equity in the project. It was personally guaranteed by Keith and Lowden. Keith had no involvement in procuring any of the loans, and this appeal involves only the Appian loan.
" 'In the real estate capital markets, the term "mezzanine financing" . . . refers to debt that sits between senior debt and the borrower's equity. In this case, mezzanine debt is junior to the mortgage loan but senior to the borrower's equity. A mezzanine loan in the real estate industry typically refers to debt that is secured solely by the mezzanine borrower's indirect ownership of the mortgage borrower - the entity that actually owns the income producing real property. This same underlying real property also serves as collateral for the senior mortgage lender. [¶] In a mezzanine loan, neither the mezzanine borrower nor lender actually holds any direct real property interest in the underlying land serving as collateral. Rather, their respective interests are derived solely from the mezzanine borrower's (direct or indirect) ownership of the equity in the underlying mortgage borrower. The mezzanine borrower grants to the mezzanine lender a lien on its equity in the mortgage borrower pursuant to a written instrument (typically a security agreement), and thereafter the mezzanine lender holds an effective lien on the collateral at least vis-a-vis the mezzanine borrower. [¶] . . . [¶] Since the mezzanine lender's collateral is equity in another entity, the collateral is technically personal property; therefore Article 9 of the Uniform Commercial Code (UCC) applies rather than local mortgage law.' (Berman, 'Once a Mortgage, Always a Mortgage' - The Use (and Misuse of) Mezzanine Loans and Preferred Equity Investments (2004) 11 Stan. J.L. Bus. & Fin. 76, 105-107, fns. omitted, italics added (Berman).)" (Greenlake Capital, LLC v. Bingo Investments, LLC (2010) 185 Cal.App.4th 731, 741-742 (Greenlake Capital):)
On June 26, 2007, Appian issued its conditional commitment letter describing the terms of its intended loan. The security for the loan was to be Minden's 13-acre property in Minden, Nevada without additional collateral. It would be subject to the senior mortgage in favor of California National Bank, and was to be guaranteed by Lowden and Keith. Lowden and Keith countersigned the commitment letter to provide assurance to Appian that they would not pursue alternate financing.
When it issued the commitment letter, Appian intended to secure the loan by a second deed of trust. However, in July a loan broker working with Minden informed Appian that it could not do so. Appian never told Keith that it could not secure its position with a second deed of trust.
It appears this was due to a requirement of the first lender, California National Bank.
In August 2007, Appian and Minden closed on a loan for $3.55 million. The collateral for the loan was Keith and Lowden's membership interest in the Minden LLC that was memorialized in an Assignment of Membership Interest, and Pledge and Security Agreement for the benefit of Appian as the secured party. Keith and Lowden also executed continuing personal guarantees in which they promised to pay the loan in the event of Minden's default.
When Minden defaulted on Appian's loan by failing to pay on the maturity date, and Keith and Lowden did not pay as guarantors, Appian filed this lawsuit solely against Keith as guarantor. Appian's first amended complaint alleged a single cause of action for breach of the guaranty agreement. Appian sought damages of $3.55 million (the principal sum), plus interest, attorney fees, and costs.
At the time this lawsuit was filed, Keith was a resident of California. She is now a resident of Nevada.
Keith answered the first amended complaint, admitted the existence and amount of the loan underlying the guaranty and the nonpayment by the guarantors, but otherwise denied that she breached the terms of the guaranty. Keith alleged as affirmative defenses that: (a) the guaranty was governed by Nevada law, (b) Appian was not entitled to any recovery under either Nevada or California law, and (c) Appian failed to mitigate its damages or losses.
B. Summary Judgment Proceeding
After discovery, Appian moved for summary judgment on its claim that Keith had breached the guaranty by failing to pay the amounts owed. Appian sought the principal sum of $3.55 million, plus $2,377,633.47, representing unpaid interest, fees, and penalties incurred through September 8, 2009.
Keith opposed the motion. In a separate statement of disputed facts, she contended that she had been wrongfully induced to sign the guaranty after Appian failed to disclose that it would not be recording a second deed of trust as collateral for its loan. According to Keith, Appian's June 2007 Commitment Letter represented that its loan would be secured by a recorded second deed of trust on the real property, and based on that written representation, Keith signed the commitment letter. Although Appian was later informed in July 2007 that California National Bank would not permit a second deed of trust to be recorded, Appian never disclosed this "material change in the security for the loan" to Keith. When Keith later signed the Appian loan documents and guaranty in August 2007, she was unaware the loan would not be secured by a second deed of trust. Keith further alleged that before signing the loan documents she had not read them and that until this litigation began she had not spoken with or met any person from Appian. Thus, she argued Appian's guaranty was unenforceable.
Appian argued Keith's nondisclosure defense was insufficient to defeat summary judgment for three reasons. One, there was no documentary evidence supporting Keith's allegation that the Appian loan would be secured by a second deed of trust. Two, Keith could not avoid her liability under the guaranty on the ground that she had not read the loan documents. And three, Appian's failure to record a second deed of trust was not material because a second deed of trust would have no effect on Keith's risk as a guarantor or otherwise protect her in the event of Minden's default on the loan.
The trial court granted Appian's motion for summary judgment, finding that the undisputed evidence established Appian had satisfied its initial burden to prove each element of its breach of contract cause of action, and that Keith had failed to raise a triable issue of fact supporting her nondisclosure defense. In the original judgment filed on February 18, 2010, the trial court awarded Appian "the principal amount of $3,550,000.00, plus interest, fees and penalties in the amount of $2,377,633.47, plus costs and reasonable attorneys' fees according to proof."
Keith moved for a new trial, arguing, among other things, that the judgment included excessive damages of $2,377,633.47 for which there was no supporting evidence. The trial court denied the motion for a new trial, but modified the amount of damages after finding that Appian "may have miscalculated the late fee owed by [Keith]." The trial court filed an amended judgment to reflect the modified damages award. Keith timely appealed from the May 6, 2010, amended judgment, which, in pertinent part, awarded Appian the principal sum of $3.55 million, "plus interest, fees and penalties in the amount of $2,274,911.82."
DISCUSSION
"A trial court properly grants summary judgment where no triable issue of material fact exists and the moving party is entitled to judgment as a matter of law. (Code Civ. Proc., § 437c, subd. (c).) We review the trial court's decision de novo, considering all of the evidence the parties offered in connection with the motion (except that which the court properly excluded) and the uncontradicted inferences the evidence reasonably supports. [Citation.]" (Merrill v. Navegar, Inc. (2001) 26 Cal.4th 465, 476.) "In performing an independent review of the granting of summary judgment, we conduct the same procedure employed by the trial court. We examine (1) the pleadings to determine the elements of the claim, (2) the motion to determine if it establishes facts justifying judgment in the moving party's favor, and (3) the opposition—assuming movant has met its initial burden—to 'decide whether the opposing party has demonstrated the existence of a triable, material fact issue. [Citation.]' [Citations.] We need not defer to the trial court and are not bound by the reasons in its summary judgment ruling; we review the ruling of the trial court, not its rationale." (Oakland Raiders v. National Football League (2005) 131 Cal.App.4th 621, 630.)
Consequently, we do not separately address Keith's arguments challenging some of the trial court's statements in its written decisions.
We agree with the trial court that Appian proved each element of its breach of contract cause of action. The following facts were undisputed: "As consideration for a loan from Appian to [Minden], [Keith] executed a Continuing Personal Guaranty ('Guaranty') in favor of Appian, under which she agreed to pay Appian $3,550,000, plus interest, fees and penalties, if Minden defaulted on its obligations under the loan from Appian." "Appian performed by fully funding the loan to Minden." "Minden defaulted on the loan from Appian." "Keith made no payments under the Guaranty."
Here, Keith renews her argument that she raised a triable issue of fact supporting a defense based on Appian's nondisclosure as it is specified in Restatement First of Security, section 124 (Nondisclosure By Creditor), and Restatement Third of Suretyship and Guaranty, section 12 (When Secondary Obligation Is Voidable Due to Misrepresentation). She asks us to consider the applicability of this defense under pertinent Nevada and California case law. (In re Agribiotech, Inc. (D.Nev. 2003) 291 F.Supp.2d 1186 (Agribiotech); Sumitomo Bank of Cal. v. Iwasaki (1968) 70 Cal.2d 81 (Sumitomo).) We have, and conclude Keith's arguments are unavailing.
In Agribiotech, supra, 291 F.Supp. 1186, the district court considered whether Nevada law recognized a cause of action for negligent misrepresentation based upon omission or nondisclosure. The Nevada courts had not spoken on the precise issue, but the federal court observed that they generally follow the Restatement Second of Torts in shaping the state's common law governing deceit based torts. (Id. at p. 1191.) The district court determined that under the Restatement, silence about facts material to a business transaction can be the functional equivalent of misrepresentation when a party has a duty to speak. (Id. at p. 1192.) The court also recognized that fraud by nondisclosure is actionable under Nevada law when a special relationship between the parties imposes a duty to speak. (Ibid.) Thus, it concluded that "Nevada, if given the opportunity, also would extend tort liability to those who negligently fail to disclose material facts where a special relationship imposes a duty to disclose." (Ibid.)
Here we are assessing the possible tort liability of Appian, as creditor, for its negligent omission or nondisclosure under Nevada law to Keith, a guarantor. But the Nevada Supreme Court has not yet recognized the existence of a special relationship arising between a creditor and guarantor. "In the absence of controlling precedent from the Nevada Supreme Court," we conclude that the Nevada Supreme Court would adopt the "general rule" that "no fiduciary relationship exists between a guarantor and a creditor as a matter of law. [Citations.] . . . [¶] Normally, the relationship between a creditor and a guarantor is inherently antagonistic. [Citation.] The creditor requires a guarantee because it feels that the debtor's assets, standing alone, may not support the loan. [Citation.] In this type of relationship, the creditor has not voluntarily assumed any responsibility to protect the guarantor. [Citation.] Indeed, the purpose of a guaranty is to protect the interests of the creditor, not those of the guarantor." (Yerington Ford, Inc. v. General Motors Acceptance Corp. (D.Nev. 2004) 359 F.Supp.2d 1075, 1091-1092, affirmed in relevant part by Giles v. General Motors Acceptance Corp. (9th Cir. 2007) 494 F.3d 865, 872-884, 886.)
Similarly, in Sumitomo, supra, 70 Cal.2d 81, our Supreme Court recognized that in "cases involving guaranties of credit," "[a] creditor, such as a bank, does not . . . owe an absolute duty to the surety to disclose, without request by the surety, all facts within its knowledge which may materially affect the surety's risk. [Citations.]" (Id. at p. 87.) However, "circumstances . . . may give the creditor reason to believe that the surety will rely on it, rather than the debtor, to receive information material to his risk." (Id. at pp. 89-90.) In that case, California follows the law as "accurately synthesize[d]" in section 124, subdivision (1), of the Restatement of Security: " 'Where before the surety has undertaken his obligation the creditor knows facts unknown to the surety that materially increase the risk beyond that which the creditor has reason to believe the surety intends to assume, and the creditor also has reason to believe that these facts are unknown to the surety and has a reasonable opportunity to communicate them to the surety, failure of the creditor to notify the surety of such facts is a defense to the surety.' " (Id. at p. 90.) As explained by the court, "[t]he rule of the Restatement recognizes that whether a creditor owes a duty to volunteer disclosure to a surety depends upon the nature of the risk guaranteed and the relationship of the parties involved. This rule places no undue burden on the creditor because it does not require the creditor 'to investigate for the surety's benefit . . . [or] to take any unusual steps to assure himself that the surety is acquainted with facts which he may assume are known to both of them.' (Rest., Security, § 124, com. b, at p. 328.)." (Id. at p. 91, fn. omitted.)
"If the intended surety inquires of the creditor about any fact materially affecting the proposed risk, the creditor acquires a duty to disclose all material facts within its knowledge. [Citations.]" (Sumitomo, supra, 70 Cal.2d at p. 90, fn. 6.)
The latest Restatement of Law on Suretyship & Guaranty reads, in pertinent part: "(1) If the secondary obligor's assent to the secondary obligation is induced by a fraudulent or material misrepresentation by the obligee upon which the secondary obligor is justified in relying, the secondary obligation is voidable by the secondary obligor. . . . (3) Subject to subsection[] (4) . . . if, before the secondary obligation becomes binding, the obligee: (a) knows facts unknown to the secondary obligor that materially increase the risk beyond that which the obligee has reason to believe the secondary obligor intends to assume; and (b) has reason to believe that these facts are unknown to the secondary obligor; and (c) has a reasonable opportunity to communicate them to the secondary obligor; the obligee's nondisclosure of these facts to a secondary obligor constitutes a material misrepresentation. (4) For purposes of subsection (3), whether the obligee has reason to believe that (i) facts unknown to the secondary obligor materially increase the risk beyond that which the secondary obligor intends to assume and (ii) such facts are unknown to the secondary obligor, shall be determined in light of the obligee's reasonable beliefs as to: (a) the nature of the secondary obligor's relationship to the principal obligor; (b) the nature of the secondary obligor's business; and (c) the secondary obligor's ability to obtain knowledge of such facts independently in the exercise of ordinary care." (Rest.3d Suretyship & Guaranty (1996) § 12.)
"Section 124, subdivision (1), of the Restatement of Security prescribes three conditions prerequisite to imposition of a duty on a creditor to disclose facts it knows about the debtor to the surety. Those conditions are: (a) 'the creditor has reason to believe' that those facts materially increase the risk 'beyond that which the surety intends to assume'; (b) the creditor 'has reason to believe that the facts are unknown to the surety'; and (c) the creditor 'has a reasonable opportunity to communicate' the facts to the surety. [Citation.] . . . If the evidence fails to establish any one of the three factors, a judgment discharging a surety from liability because of a breach of a duty of disclosure governed by section 124, subdivision (1), cannot stand." (Sumitomo, supra, 70 Cal.2d at pp. 93-94, fn. omitted.)
We conclude that the trial court correctly held in substance that a trial was not required on Keith's nondisclosure defense because she failed to meet the three-prong test as set forth in Sumitomo. Specifically, she did not present evidence from which a trier of fact could find either that Appian had " ' reason to believe' " that the failure to record a second deed of trust would "materially increase the risk 'beyond that which [Keith] intend[ed] to assume' " as a guarantor, or that Appian had " 'reason to believe that' " Keith was unaware that Appian would not be recording a second deed of trust to secure its loan. (Sumitomo, supra, 70 Cal.2d at p. 93.)
Keith attempts to raise an issue of material fact by pointing to her declaration that states it was important to her that the Appian loan be secured by a second deed of trust and that she would not guarantee the loan if it was not. She also relies on the deposition testimony of an Appian employee who testified that "it is important at the time of making the loan that you know what your security is." Accepting the truth of both Keith's intention as stated in her declaration and the Appian employee's statement, they still do not create an issue of fact. There is no evidence that Keith ever told Appian of her intention to refuse the guaranty unless the property was secured by a deed of trust. In fact, her declaration also states that she never spoke with an Appian employee until after this litigation began.
Moreover, even if security for a loan is an important consideration, as the Appian employee testified in deposition, the Appian loan was secured by the Minden project. Even though it did not record a deed of trust, the loan documents describe, and the parties do not dispute, that Appian received a pledge and had a security interest in Keith and Lowden's membership interests in the Minden LLC. Keith assigned her interest in the project to Appian, and the equity in the project was the collateral for the Appian loan even though the property was not secured by a second deed of trust. It is difficult to see just how Keith was assuming a risk different as a guarantor than she intended with the property secured as it was. In fact, one commentator has observed that mezzanine financing as provided here should be treated as a second mortgage in order to eliminate confusion, simplify the documentation involved in such loans and to protect the borrower by affording it the right of redemption. (Greenlake Capital, supra, 185 Cal.App.4th at p. 742, fn. 8, citing Berman, supra, 11 Stan. J.L. Bus. & Fin. at pp. 112-126.)
Even though Appian may have intended to secure its loan with a second deed of trust, there is no reason to conclude that Appian should have known Keith was unaware of the nature of the security provided for the loan as it was structured. The Appian commitment letter nowhere states the loan would be secured by deed of trust. While Keith may not have read it, all the loan documentation states that Appian's loan was secured by the pledge and assignment of the membership interest in the Minden LLC. Because Appian never told Keith that its loan would be secured by a recorded second deed of trust, it follows that no trier of fact could find that Appian had reason to know that Keith was unaware of that fact.
We also see no merit to Keith's challenge to the award of damages. The computation of damages was based on the express provisions of the guaranty, which provided for Keith's payment of all of Minden's financial obligations, including "that certain Three Million Five Hundred Fifty Thousand Dollars ($3,550, 000) loan" evidenced by "that certain Promissory Note." In its initial motion papers, Appian requested an award of $2,377,663.47, representing "unpaid interest, fees, and penalties incurred through September 8, 2009," supported by the amended declaration of an Appian employee and a spreadsheet, prepared by the employee, showing the amount due under the guaranty, including outstanding interest, fees, and penalties. In its reply, Appian noted Keith did not challenge the amounts claimed for unpaid interest, fees, and penalties, which were "not in issue because they c[ould] be determined with certainty through simple mathematical computations." When it opposed Keith's motion for a new trial, Appian submitted an affidavit from another employee who explained the actual mathematical computations performed in arriving at the previously requested award for outstanding interest, fees, and penalties. On appeal Keith argues that the requirements of Code of Civil Procedure, section 658, prohibited the trial court from considering this new affidavit. However, "[n]o judgment shall be set aside, or new trial granted, in any cause, . . . for any error as to any matter of procedure, unless after an examination of the entire cause, including the evidence, the court shall be of the opinion that the error complained of has resulted in a miscarriage of justice." (Cal. Const., art. VI, § 13; see Code Civ. Proc., § 906 [court may review any decision for prejudicial error].) Because Keith presents no substantive argument challenging the measure of the sums awarded in the amended judgment, we see no reason to remand the matter for a new trial on the issue of damages.
In a footnote in its reply, Appian commented that "[i]f the court finds that the portions of damages constituting interest, fees and penalties are not sufficiently definite for summary judgment, Appian - for the purpose of this motion only - will limit relief sought to only the outstanding principal: $3,550,000."
Code of Civil Procedure section 658, reads: "When the application [for a new trial] is made for a cause mentioned in the first, second, third and fourth subdivisions of Section 657, it must be made upon affidavits; otherwise it must be made on the minutes of the court." In this case, Keith's motion for a new trial was based solely on Code of Civil Procedure section 658, subdivisions five (excessive or inadequate damages); six (insufficiency of evidence to justify decision, or decision is against the law), and seven (error in law, occurring at trial and excepted to by party making application).
DISPOSITION
The appeal from the judgment entered on February 18, 2010, is dismissed. The amended judgment, entered on May 6, 2010, is affirmed. Plaintiff is awarded costs on appeal.
Siggins, J. We concur: McGuiness, P.J. Pollak, J.