Case Number: BC610411 Hearing Date: March 21, 2018 Dept: 53

CROSSROADS GREENVILLE PROPERTIES, LTD. vs. CATHAY BANK , et al.; BC610411, February 21, 2018

[Tentative] Order RE: DEFENDANT CATHAY BANK’S MOTION FOR SUMMARY JUDGMENT OR, IN THE ALTERNATIVE, SUMMARY ADJUDICATION

Defendant CATHAY BANK’s Motion for Summary Judgment or, in the Alternative, Summary Adjudication, is DENIED.

BACKGROUND

Plaintiff Crossroads Greenville Properties, Ltd. (“Crossroads”) filed this action on February 16, 2016 against Defendant Cathay Bank (“Cathay Bank”). Crossroads alleges that it entered into a written construction loan agreement (the “Agreement”) with Cathay Bank on June 18, 2014, whereby Cathay Bank agreed to lend Crossroads $12,950,000 for the rehabilitation and repair of a shopping mall in Greenville, Texas, and for the construction of tenant improvements on the property (the “Project”). Crossroads alleges that, over a year into the Project, and at a point when it was approximately 70% complete, Cathay Bank unjustifiably stopped funding the loan, causing Crossroads damages. Crossroads asserts causes of action for (1) breach of contract; (2) breach of the duty of good faith and fair dealing; and (3) negligence.

Defendant now moves for summary judgment or summary adjudication on all causes of action.

EVIDENCE

The Court makes the following rulings on Crossroads’ evidentiary objections to the Declaration of Eddie Chang:

· Paragraph 9, lines 18-22: sustained

· Paragraph 13, lines 11-14: sustained

· Paragraph 18, lines 2-9: sustained

· Paragraph 23, lines 25-27: overruled

The Court makes the following rulings on Crossroads’ evidentiary objections to the Declaration of Paul A. Rigali:

· Paragraph 3, lines 16-17: sustained

· Paragraph 7, lines 1-2: sustained

The Court makes the following rulings on Cathay Bank’s evidentiary objections:

· No. 1-7: overruled

· No. 8: overruled

· No. 9: overruled

· No. 10: overruled

· No. 11: overruled

· No. 12: overruled

· No. 13: overruled

· No. 14: sustained as to “The inclusion of such a provision is also not required under the CLA”; overruled as to remainder

· No. 15: overruled

· No. 16: overruled

· No. 17: sustained

· No. 18: sustained

· No. 19: sustained as to “Cathay Bank was well aware that Crossroads was in the process of retaining a replacement entity”; overruled as to remainder

· No. 20: overruled

· No. 21: overruled

· No. 22: sustained

· No. 23: overruled

· No. 24: overruled

· No. 25: overruled

DISCUSSION

“[A] motion for summary judgment shall be granted if all the papers submitted show that there is no triable issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” (Code Civ. Proc., § 437c (c).) The moving party bears the initial burden of production to make a prima facie showing that there are no triable issues of material fact. (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 850.) If the moving party carries this burden, the burden shifts to the opposing party to make a prima facie showing that a triable issue of material fact exists. (Ibid.) Courts “liberally construe the evidence in support of the party opposing summary judgment and resolve doubts concerning the evidence in favor of that party.” (Dore v. Arnold Worldwide, Inc. (2006) 39 Cal.4th 384, 389.) “A motion for summary adjudication shall be granted only if it completely disposes of a cause of action, an affirmative defense, a claim for damages, or an issue of duty.” (Code Civ. Proc., § 437c(f)(1).)

A. Breach of Contract

“The essential elements of a claim of breach of contract, whether express or implied, are the contract, the plaintiff’s performance or excuse for nonperformance, the defendant’s breach, and the resulting damages to the plaintiff.” (San Mateo Union High School Dist. v. County of San Mateo (2013) 213 Cal.App.4th 418, 439.)

The parties’ dispute concerns the third prong – whether or not Cathay Bank breached the Agreement. Crossroads contends that Cathay Bank breached the Agreement by wrongfully refusing to make disbursements to Crossroads when warranted. Cathay Bank contends that its cessation of disbursements was not wrongful, and was, in fact, expressly permitted by the terms of the Agreement.

1. Defining Events of Default

Crossroads contends that certain ambiguities exist regarding the provisions of the Agreement relating to liens, creating a triable issue of fact as to breach.

The pertinent provisions of the Agreement are as follows:

Section 5.5 [Covenants of Borrower and Guarantor: Other Liens and Encumbrances]: “Borrower shall not incur or permit to exist any encumbrance, pledge, security interest or lien upon or against the Property . . .”

Section 6: “The following shall constitute Events of Default hereunder: . . .

(a) If Borrower or Guarantor fails to comply with any of the covenants made by it in [the] Agreement, and such default is not cured within thirty (30) days after receipt of written notice from Lender[.]

(q) Any lien or encumbrance (including, without limitation, mechanics’ liens, materialmens’ liens, stop notices and liens of a similar nature under applicable law), other than a Permitted Encumbrance, is entered against the Land or Improvements and such Lien or encumbrance is not discharged, vacated or bonded within thirty (30) days after the filing thereof; provided, however, that during such thirty (30) day period, Lender is not obligated to make any advances to Borrower[.]”

Section 7.1: “[u]pon the occurrence of an Event of Default and during the continuance thereof, the commitment to further fund the Loan shall immediately and automatically terminate, the Lender shall be under no further obligation to make disbursements of the Loan hereunder.”

Crossroads argues that the Court should receive its proffered extrinsic evidence of industry custom and practice relating to construction loan agreements and cites to Wolf v. Superior Court (2004) 114 Cal.App.4th 1343, 1351 in support of the proposition that it is “reversible error for a trial court to refuse to consider such extrinsic evidence on the basis of the trial court’s own conclusion that the language of the contract appears to be clear and unambiguous on its face”

Per Wolf, the interpretation of a contract involves a “two-step process: First the court provisionally receives (without actually admitting) all credible evidence concerning the parties’ intentions to determine “ambiguity,” i.e., whether the language is “reasonably susceptible” to the interpretation urged by the party. If in light of the extrinsic evidence the court decides the language is “reasonably susceptible” to the interpretation urged, the extrinsic evidence is then admitted to aid in the second step – interpreting the contract. (Ibid.)

As noted by Cathay Bank, the problem with Crossroads’ argument is that its dispute does not appear to be about the meaning of any particular term in the Agreement. Rather, Crossroads’ characterization of the dispute is of one over whether Section 6(q) of the Agreement should be in the Agreement at all. According to Crossroads, industry custom and practice militates against Cathay Bank’s position that a single mechanic’s lien recorded against the subject property allows Cathay Bank to withhold funding for up to 30 days, and that a single mechanic’s lien recorded against the subject property for more than 30 days allows Cathay Bank to completely terminate its funding obligations to the Project. However, Crossroads does not proffer a different interpretation of Section 6(q). Instead, Crossroads argues that Sections 5, 6(a), and 7.1 of the Agreement work together to override Section 6(q). According to Crossroads, if a single mechanic’s lien is recorded against the subject property for 30 days, an Event of Default only occurs after Crossroads receives written notice from Cathay Bank of such default or breach. Because Section 6(q) does not contain a written notice provision, Crossroads’ interpretation of the Agreement would render Section 6(q) meaningless. “Courts will not rewrite contracts to relieve parties from bad deals nor make better deals for parties than they negotiated for themselves.” (Series AGI West Linn of Appian Group Investors DE, LLC v. Eves (2013) 217 Cal.App.4th 156, 164.) For the same reasons, even if the Court accepts Crossroads’ evidence of industry custom and practice, the Court is unconvinced that the above sections of the Agreement, read together, are reasonably susceptible to the interpretation urged by Crossroads. The Court finds that an interpretation of the Agreement that would in effect eliminate Section 6(q) from the Agreement is not a reasonable one.

Crossroads further argues that Section 6(q) is internally ambiguous; that the provision allowing Cathay Bank to withhold funding upon the recordation of a lien and prior to the occurrence of an Event of Default creates ambiguity as to whether Cathay Bank may withhold funding when liens do not remain of record long enough to constitute an Event of Default. Again, even if the Court accepts Crossroads’ extrinsic evidence of industry custom and practice, the Court is unconvinced that the pertinent sections of the Agreement are reasonably susceptible to Crossroads’ interpretation – that the existence of a single mechanic’s lien does not permit Cathay Bank to suspend funding. If the Agreement were interpreted in the way urged by Crossroads, Section 6(q) would be mere surplusage, and contracts are construed to avoid rendering terms surplusage. (See AIU Ins. Co. v. Superior Court (1990) 51 Cal.3d 807, 827.)

2. The Gomez Stucco “Liens”

Crossroads also contends that a triable issue of fact exists as to whether or not Cathay Bank breached the Agreement by issuing the Notice of Default (and ceasing disbursements) before the actual occurrence of an Event of Default.

It is undisputed that on August 14, 2015, Gomez Stucco, Inc. (“Gomez Stucco”) recorded two mechanic’s and materialmen’s affidavits claiming liens on the subject property, each in the amount of $51,187.00. (SUF 9.)[1] The affidavits in support of liens were subsequently released on October 21, 2015, which fact was communicated to Cathay Bank also on October 21, 2015. (SUF 13; AUF 23, 25.)[2] Another subcontractor, Martin Marietta Materials, Inc. (“MMM”) recorded an affidavit of lien on September 24, 2015. (AUF 24.) On October 15, 2015, two additional liens were recorded by two other subcontractors, APAC-Texas, Inc. (“APAC-Texas”) and Brundage-Bone Concrete Plumbing, Inc. (“Brundage-Bone”). (AUF 28.) On October 21, 2015, Crossroads informed Cathay Bank that payment had been made to release the MMM lien, and the lien was subsequently released on October 23, 2015. (AUF 24, 26.) On October 23, 2015, counsel for Cathay Bank sent a Notice of Default to counsel for Crossroads, notifying Crossroads of Cathay Bank’s position that multiple defaults existed under the Agreement, including the existence of liens filed against the subject property that had not been resolved within 30 days of the filing as required by the Agreement. (SUF 15.) Cathay Bank has refused to make any disbursements since the Notice of Default and has not made any disbursements since September 11, 2015. (AUF 33.)

Crossroads argues that the Gomez Stucco “liens” were not, in fact, “liens” such that Section 6(q) of the Agreement was triggered, allowing Cathay Bank to effectively pause further funding of the Project. In response, Cathay Bank argues that based on Texas law, which applies because the Property is in Texas, filing affidavits claiming liens is required in order to perfect a lien. (See Tex. Prop. Code Ann. § 53.052 et seq.) Moreover, Section 6(q) expressly brings within its ambit encumbrances and “liens of a similar nature under applicable law.” The Court finds that Cathay Bank has established that the Gomez Stucco liens were liens as defined by the Agreement. As such, the filing of the Gomez Stucco liens triggered Section 6(q), and pursuant to Section 6(q), Cathay Bank was not obligated to make any advances to Crossroads unless and until the liens were released within 30 days of their filing.

The undisputed evidence demonstrates that the Gomez Stucco liens were of record for more than 30 days. However, Crossroads contends that the Gomez Stucco liens had ceased to be an Event of Default at the time of the issuance of the Notice of Default. Per Section 7.1, Cathay Bank was permitted to withhold funding only upon the occurrence of an Event of Default “and during the continuance thereof” (emphasis added). Because, the MMM, APAC-Texas, and Brundage-Bone liens had not been of record for 30 days at the time of the issuance of the Notice of Default, those liens could not have been a permitted basis for Cathay Bank to withhold funds. Although Cathay Bank is correct in noting that the sending of a premature notice of default does not technically breach any provision of the Agreement, the issue is not with the mere sending of the Notice of Default but rather, the refusal to disburse funds upon the issuance of the Notice of Default. Therefore, the Court finds that Crossroads has raised a triable issue of fact as to whether or not Cathay Bank’s withholding of funds pursuant to the Notice of Default was warranted in light of the fact that the Gomez Stucco liens had been released by the time of the issuance Notice of Default. For this reason, summary adjudication as to the breach of contract cause of action is denied.

B. Breach of Duty of Good Faith and Fair Dealing

Crossroads contends that Cathay Bank breached its duty of good faith and fair dealing by refusing to make loan disbursements as required by Section 2.1 of the Agreement, by refusing to commit to fulfilling its obligations under the Agreement, and by engaging in bad faith demands with respect to a modification of the Agreement. (Complaint, ¶ 34.)

The elements for breach of the implied covenant of good faith and fair dealing are: (1) existence of a contract between plaintiff and defendant; (2) plaintiff performed his contractual obligations or was excused from performing them; (3) the conditions requiring defendant’s performance had occurred; (4) the defendant unfairly interfered with the plaintiff’s right to receive the benefits of the contract; and (5) the plaintiff was harmed by the defendant’s conduct. (Merced Irr. Dist. V. County of Mariposa (E.D.Cal. 2013) 941 F.Supp.2d 1237, 1280 [discussing California law].) Allegations must demonstrate defendant’s conduct for failure or refusal to discharge contractual responsibilities was a conscious and deliberate act, not an honest mistake, bad judgment or negligence. (Ibid.)

Cathay Bank contends that the allegation that it refused to make loan disbursements is duplicative of Crossroads’ breach of contract claim, and in any case, that it had no obligation to continue to fund the loan because of the filing of the Gomez Stucco liens. Crossroads argues that even if Cathay Bank did not “technically” breach the Agreement by refusing to make disbursements after issuing the Notice of Default, such refusal was in bad faith. In support, Crossroads argues that Cathay Bank refused to make disbursements despite knowing that refusal handicapped Crossroads in performing its contractual obligations and that Cathay Bank based its refusal on “hyper-technical ‘breaches’ that, in the context of a $12,950,000 loan, were immaterial.” (Opp’n, p. 17: 20-23; AUF 67-71, 74-80.) The covenant of good faith and fair dealing “cannot be used to imply an obligation which would completely obliterate a right expressly provided by a written contract.” (Slivinsky v. Watkins-Johnson Co. (1990) 221 Cal.App.3d 799, 805, citing Gerdlund v. Elec. Dispensers Int’l (1987) 190 Cal.App.3d 263, 270.) As the Court has already discussed, Section 6(q) of the Agreement is not reasonably susceptible to the meaning Crossroads ascribes to it. However, Crossroads has presented sufficient evidence to raise a triable issue of fact as to Cathay Bank’s refusal to fund the loan based on the recordation of one mechanic’s lien that had already been released by the time the Notice of Default was sent, knowing that such refusal caused Crossroads to not pay subcontractors. (See AUF 79-80.) “Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.” (Hicks v. E.T. Legg & Assocs. (2001) 89 Cal.App.4th 496, 508.) “[T]he scope of conduct prohibited by the covenant of good faith is circumscribed by the purposes and express terms of the contract.” (Id. at p. 509.) The Court finds that there is a triable issue of fact as to whether Cathay Bank engaged in bad faith conduct prohibited by the purposes and express terms of the Agreement, and for this reason, summary adjudication on the breach of good faith and fair dealing cause of action is denied.

C. Negligence

Finally, Cathay Bank contends that it is entitled to summary adjudication on the negligence cause of action because there is no duty of care of a lender to a borrower separate and apart from its obligations that arise under the lending agreement. Crossroads cites to Jolley v. Chase Home Finance, LLC (2013) 213 Cal.App.4th 872, 901, in support of its position that a duty of care can arise under the circumstances that exist here. In Jolley, the Court of Appeal found that a duty of care can exist in the context of a construction loan to make viable a negligence cause of action for failure to fund a construction loan. (Ibid.) The Jolley court proceeded to invoke a series of non-exhaustive factors articulated by the California Supreme Court in Biakanja v. Irving (1958) 49 Cal.2d 647, 650, to determine the existence of such a duty. In response, Cathay Bank argues that the Jolley court was incorrect to apply the Biakanja factors because the Biakanja factors were intended to be used when there is no privity of contract between the parties. Cathay Bank cites to subsequent California Supreme Court cases where the Biakanja factors were considered and argues that none of the cases involve a direct lender-borrower relationship. The Court finds that Cathay Bank’s argument is not well-taken. Cathay Bank has proffered no argument for why the Court should disregard Jolley and the clear precedent it established. (See, e.g., Rossetta v. CitiMortgage, Inc. (2017) 18 Cal.App.5th 628, 837-838 [collecting cases where California Courts of Appeal applied the Biakanja factors in cases involving a direct lender-borrower relationship].) Since the Jolley court deemed the Biakanja factors “appropriate for consideration” in the context of a construction loan and a direct lender-borrower relationship, this Court, too, considers the Biakanja factors to determine if Cathay Bank owed a duty of care to Crossroads. (Jolley v. Jolley v. Chase Home Finance, LLC, supra, at p. 899.)

The Biakanja factors are six nonexhaustive factors: (1) the extent to which the transaction was intended to affect the plaintiff, (2) the foreseeability of harm to the plaintiff, (3) the degree of certainty that the plaintiff suffered injury, (4) the closeness of the connection between the defendant’s conduct and the injury suffered, (5) the moral blame attached to the defendant’s conduct, and (6) the policy of preventing future harm. (Biakanja v. Irving, supra, 49 Cal.2d at p. 650.) The Court finds that Crossroads has raised a triable issue of fact as to the existence of a duty of care based on consideration of these factors. In particular, the Court finds that the loan certainly was intended to affect Crossroads; that harm to Crossroads was foreseeable if the lender ceased loan disbursements; that Crossroads suffered financial harm as a proximate result of Cathay Bank’s refusal to continue to fund the loan; and that moral blame attaches to Cathay Bank’s refusal to fund the loan and then making unreasonable demands during the negotiation of a loan modification. For this reason, summary adjudication on the negligence cause of action is denied.

CONCLUSION

For the foregoing reasons, Cathay Bank’s Motion for Summary Judgment or, in the Alternative, Summary Adjudication, is DENIED.

Crossroads is ordered to provide notice of this ruling.

DATED: February 21, 2018

_____________________________

Howard L. Halm

Judge of the Superior Court

[1] SUF to refer to Cathay Bank’s Statement of Undisputed Facts and Supporting Evidence.

[2] AUF to refer to Crossroads’ Statement of Additional Undisputed Material Facts and Supporting Evidence.