Case Number: GC049212 Hearing Date: June 13, 2014 Dept: NCD

TENTATIVE RULING
#23
GC 049212
EAST WEST BANK v. THE OFLYE TRUST

1.) Defendant Michael Augustine, as Trustee of the Jojazak Irrevocable Trust Dated May 22, 1984’s Motion for Summary Judgment or, in the Alternative, Summary Adjudication of Issues

2.) Plaintiff East West Bank’s Motion for Summary Judgment Against Defendants Zachary M. Schneiderman, Creative Environments of Hollywood, Inc. and Michael Augustine as Trustee of the Jojazak Irrevocable Trust, Dated May 22, 1984, or, in the Alternative, for Summary Adjudication

TENTATIVE:
1.) Defendant Michael Augustine, as Trustee of the Jojazak Irrevocable Trust Dated May 22, 1984’s Motion for Summary Judgment or, in the Alternative, Summary Adjudication of Issues is DENIED.

Triable issues of material fact have been raised with respect to whether the persons and entities which executed the subject guarantees were acting with authority to bind the trust, as there are facts submitted which would suggest that there was no actual knowledge on the part of plaintiff that the signators were allegedly not authorized, the guarantee includes an express waiver of a defense based on lack of authority, and facts appear which would support a reasonable inference that the trust should be equitably estopped to deny the authority of the signators to bind the trust. [See Response to UMF No. 22, and evidence cited, Additional Fact No. 55, Ex. B. para. 2.3.9]. The evidence submitted with the moving papers supports a reasonable inference that the persons executing the subject agreement themselves believed that they were acting with authority from the trust, and engaged in other activities which would lead a reasonable person to believe they acted with authority. [See Exhibits T, V]. Although the court is inclined to disregard the Certificate of Trust as a document not previously provided in response to discovery, this document is not currently necessary to support a finding that triable issues of fact remain, and this matter cannot properly be resolved summarily.

2.) Plaintiff East West Bank’s Motion for Summary Judgment Against Defendants Zachary M. Schneiderman, Creative Environments of Hollywood, Inc. and Michael Augustine as Trustee of the Jojazak Irrevocable Trust, Dated May 22, 1984, or, in the Alternative, for Summary Adjudication is DENIED.

Plaintiff East West Bank has failed to meet its initial burden of establishing based on admissible and sufficient evidence, the amount of damages due. In addition, even if the burden had shifted to defendants to raise triable issues of material fact, there are facts presented which create triable issues in connection with the amount of damages due, including evidence concerning the amount due and the amount paid for the security at the trustee’s sale, the involvement of plaintiff in an FDIC program which could reduce damages covered, and facts establishing a dispute concerning whether plaintiff acted reasonably to mitigate its damages. [See Wong Decl., para. 7, Ex. A; Schneiderman Decl, paras. 7-9].

Causes of Action: from Complaint
1. Breach of Loan Agreements—The Oflye Trust Dated October 2, 2005
2. Breach of Written Guaranty—Zachary Schneiderman
3. Breach of Written Guaranty—Creative Environments of Hollywood, Inc.
4. Breach of Written Guaranty—The Jojazak Irrevocable Trust
5. Recovery of Deficiency [UCC § 9504(2)]
6. Common Counts—Account Stated
7. Accounting

FACTUAL BACKGROUND:
Plaintiff East West Bank brings this action to collect sums allegedly due under agreements between plaintiff’s assignor and borrower White Knoll and defendant Oflye Trust, specifically, a series of Extension and Modification Agreements pertaining to a Promissory Note, which Agreements were allegedly guaranteed by defendants Zachary Schneiderman, Creative Environments, and Capital Assets as Trustee of the Jojazak Trust.

The file shows that on October 9, 2013, plaintiff filed an Amendment to Complaint, amending the complaint to substitute for Doe 1 the true name of moving defendant Michael Augustine, an individual, as trustee for the Jojazak Trust.

ANALYSIS:
Defendant Augustine’s Motion
Defendant Michael Augustine, as Trustee for the Jojazak Trust, argues that East West Bank cannot establish the causes of action asserted against the Jojazak Trust, as it cannot establish that an authorized Trustee of the Trust entered into the subject Guaranty.

To establish its causes of action against the Trust based on alleged breach of the guaranty, East West Bank must prove the following elements: Contract formed and terms alleged verbatim or according to legal effect; plaintiff’s performance or excuse for nonperformance; defendant’s breach; and damage to plaintiff. Walsh v. Standart (1917) 174 Cal. 807; 4 Witkin, California Procedure (4th Ed.) Pleading, §476; Judicial Council Forms 982.1(20) and (21)

Defendant argues that plaintiff cannot establish that a valid contract to guaranty the debt was formed because the person executing the guaranty, Manuel C. Meza, was not authorized as a trustee for the Trust, and the person who executed the Extension and Modification Agreement confirming the Trust’s obligations under the Guaranty, the president of Capital Asset Management Associates (“CAMA”), was also not authorized as trustee for the Trust. Defendant presents evidence showing that the trust instrument shows that Sheila Newton is the initial named trustee, and Gary Schneiderman a named successor. [UMF Nos. 4-6, and evidence cited]. There is also evidence that the trustees who entered the subject guarantees, Mozer and Meza, were not named as successor in the trust instruments, and no court approval was obtained to allow those successors to serve as trustee until Michael Augustine was appointed as trustee. [UMF Nos. 7-10, 12, and evidence cited].

Defendant also argues that plaintiff and its predecessor had actual knowledge of the lack of authority because they each had copies of the trust instruments, under which the trustees were not named as trustees. Defendant also argues that CAMA’s articles of incorporation state that CAMA will not engage in trust business. [See UMF Nos. 20, 21, 22, and evidence cited, Ex E].

Plaintiff argues that regardless of the actual status of these parties with respect to the Trust, the Guaranty remains enforceable, as plaintiff was under no duty to confirm that the signatories for the Trust had actual authority. See Probate Code § 18100.

Plaintiff argues that there are triable issues of fact with respect to whether plaintiff’s predecessor at the time the Guaranty and Extension and Modification Agreement were entered, was acting without actual knowledge that the trustee was exceeding the trustee’s powers. [See Response to UMF No. 22, and evidence cited]. Specifically, the Bank’s witness Larry Wong testified that he was not in a position to determine if CAMA was authorized to bind the trust and did not understand that it was not authorized. [Response to UMF No. 22, and evidence cited].

Plaintiff also argues that any claims that the trustee was without authority were waived in the agreements themselves, as the Guarantors expressly waived “any defense arising by reason of the incapacity, lack of authority” with respect to the validity or enforceability of the Guaranteed Obligations. [Additional Fact No. 55, See Ex. B, para. 2.3.9]. See Civil Code § 2856

Plaintiff also indicates that its predecessor and East West Bank both obtained Certifications of Trust pursuant to Probate Code section 18100.5, and that plaintiff is accordingly entitled to rely on those Certifications without further obligation of inquiry. Probate Code § 18100.5(f).

The Certification of Trust is submitted by the Bank as Exhibit D. Defendant has objected to the submission of this document on the ground that it has never been turned over in discovery, despite numerous requests to which it would have been responsive. While the Court might properly sustain this objection and decline to consider the Certification of Trust, that would not change the outcome on this motion for summary determination. The Court will therefore defer the objection to another day.

With or without the Certification of Trust, based on the testimony of Bank witnesses, and the waivers in the guarantees themselves, there are raised triable issues of material fact, and the issue of actual notice is not resolved based only on evidence that the Bank and its predecessor had in their possession copies of the trust instruments, or of CAMA’s articles of incorporation. The motion is therefore denied.

Plaintiff also argues that there are triable issues with respect to whether the trustees in fact did not have authority, as each of the trust instruments provided a method for appointing a trustee, which was followed, so that both Meza and CAMA were appropriate trustees, regardless of any failure of the trust to have obtained court approval of the appointment.

Here, the trust instrument at issue provides
“If, at any time for any reason, there shall not be a Trustee duly appointed and qualified, as provided herein, the beneficiaries of this Trust, or if minors, their guardian(s) or personal representatives, shall have the power to appoint as successor Trustee any individual adult or qualified corporation or national banking association…”
[See Ex. I, para. 5.01(e); response to UMF No. 7].

The fact that the purported trustees actually held themselves out as having authority then supports an argument that they were appointed according to the trust procedures. Plaintiffs point to evidence that these parties also held themselves out as being authorized trustees by writing checks and controlling trust property. [See Response to UMF No. 7, and evidence cited]. The excerpts from depositions of Mozer and Meza suggest that they believed they were the authorized trustees. [See Exs. T, V].

Plaintiff also argues that even if there was no authority of the trustees to bind the Trust, the de son tort doctrine applies to equitably estop defendant from asserting lack of authority.
““‘It is a well settled rule in the law of trusts that if a person not being in fact a trustee acts as such by mistake or intentionally, he thereby becomes a trustee de son tort. The rule is thus laid down by a recent writer: “A person may become a trustee by construction, by intermeddling with and assuming the management of property without authority. Such persons are trustees de son tort [just] as persons who assume to deal with a deceased person’s estate without authority are administrators de son tort … [.] During the possession and management by such constructive trustees they are subject to the same rules and remedies as other trustees.” [Citations.] … It is plain that this branch of the law does not rest on the strict ground of estoppel as usually expounded in the law books. It rather depends upon a principle of public policy connected with the right administration of justice. [Citation.] The principle to be extracted from the cases is that the party acting as trustee shall not be allowed, in a court of justice, to set up, as against parties interested in the administration of the trust, a state of things inconsistent with his assumed character.’” (England, supra, 196 Cal. at pp. 267–268.)”
King v. Johnston (2009) 178 Cal.App.4th 1488, 1506.

Here, there are triable issues of material fact with respect to whether the purported trustees here assumed to deal on the part of the trust, specifically executing critical documents on its behalf, such that the trust should not now be permitted in equity to argue as to parties interested in the trust administration a state of things inconsistent with the purported trustees’ actions. [See Response to UMF Nos. 7-9, and evidence cited].

Plaintiff also argues that to the extent there are arguments that plaintiff and its predecessor failed to comply with their obligations under the Customer Identification Program, this is irrelevant given the applicability of the actual knowledge standard in the probate code, and even if the procedures could be invoked to establish lack of good faith, plaintiff complied with the requirements.

Accordingly, there are several areas of dispute involving triable issues of fact and the motion is denied.

Plaintiff East West Bank’s Motion
In this case, plaintiff treats the matter as a straightforward collections case as to each of the breach of guarantee causes of action, where there can be no dispute with respect to the obligation to pay and the amount due.

“A lender is entitled to judgment on a breach of guaranty claim based upon undisputed evidence that (1) there is a valid guaranty, (2) the borrower has defaulted, and (3) the guarantor failed to perform under the guaranty.
Gray1 CPB, LLC v. Kolokotronis (2011) 202 Cal.App.4th 480, 486.

Plaintiff argues that it can establish by undisputed facts that each of the defendants breached their written guaranties executed in favor of plaintiff and plaintiff’s predecessor, by failing to repay the subject Loan. Plaintiff also argues that, in general, defendants who each guaranteed payment of the subject Loan have no defense as a matter of law to the causes of action to collect payment under the doctrine of D’Oench, Duhme & Co. v. FDIC (1942) 315 U.S. 447, and its statutory counterparts, 12 U.S.C. § 1821(d)(9)(A) and 12 U.S.C. 1823(e). Plaintiff also argues that defendants contractually waived their rights and defenses to plaintiff’s enforcement of the Loan as set forth in the Guaranties.

Here, plaintiff argues that since the debt and guarantees were transferred to East West Bank through assignment from the FDIC, the sum due may be collected against defendants. [See UMF No. 31, and evidence cited].

Plaintiff also argues that each guarantor has expressly waived any defenses, in reliance on Civil Code § -2856. Here, each of the Guaranties provide fairly broad express waivers. [See UMF Nos. 14-17 and evidence cited, Guaranties, Exhibits B-D, paras. 2.1 et seq.].

The oppositions argue that the moving papers fail to meet the initial burden of establishing entitlement to summary adjudication because there is insufficient evidentiary support concerning the damages claimed. The moving papers seek judgment as against each guarantor in the sum of $483,184.97, based on a declaration by Larry Wong, East West’s assistant vice president, that this sum “is the outstanding amount on the loan.” [UMF No. 30, Wong Decl., para. 8]. He also indicates that the daily interest accrual amount is $80.25. [Id].

Defendants have filed evidentiary objections to the Wong Declaration, as the declaration seeks to authenticate documents which did not originate with East West, so that an appropriate chain of custody is not established, and because the underlying accounting documents supporting the alleged sum due are not submitted with the moving papers. Defendants rely on Remington Investments, Inc. v. Hamendani (1997) 55 Cal.App.4th 1033, in which the Second District affirmed the trial court’s denial of a motion for summary judgment brought by plaintiff, an investment company which had acquired a failed bank assets and brought action as assignee of the FDIC against an individual on an amount allegedly owed on a revolving line of credit.

In Remington, in support of its motion for summary judgment, plaintiff presented the declaration of its own vice president, declaring that he found the Note Ledger reflecting the amount alleged to have been due from defendant in the records of the FDIC.

Defendant had objected to the admissibility of the Note Ledger on the grounds of hearsay and lack of foundation for any exception to the hearsay rule. The trial court sustained the objection and found there were accordingly triable issues as to what defendant owed. Remington, at 1036-1037.

The Second District rejected plaintiff’s argument that the D’oench Duhme doctrine applied to the analysis, noting that cases applying the doctrine relied on it to prevent defendant debtors from raising “side agreement,” or fraud claims as a defense in FDIC assignee cases, and the doctrine did not concern “the question of admissibility of documents to prove the content of bank records.” Remington, at 1038.

The Second District concluded:
“There is no defense of side agreement, misrepresentation or omission involved here. The question for the trial court simply was what amount defendant owed. Plaintiff bore the burden of proof on that issue. Plaintiff attempted to meet that burden by attempting to prove the content of the bank’s records through an offer of the Note Ledger. The Note Ledger was hearsay, and its offer into evidence raised the question of its admissibility to [*1039] prove the truth of its contents. Nothing in the authorities cited above suggests that any document found in a bank’s records is admissible to impose liability on a defendant even if the document fails to meet normal standards of reliability. The D’Oench Duhme cases and statutes do not provide, as plaintiff urges, that the “records speak for themselves as to enforceability of the debt.” A rule allowing or requiring admissibility of any document found in a bank’s records without evidence of reliability would be a sharp break with past practice, could raise grave implications for the continued maintenance of reliable bank records over the long term, and is far beyond the scope of the D’Oench, Duhme doctrine.”
Remington, at 1038-1039.

This case also concerns the admissibility of evidence to prove damages, and the objections are sustained, as East West’s declarant does not establish a business exception to the hearsay rule as to transactions occurring before East West took over the documenting concerning the guarantees, and has also in this case failed to submit to the court the documents or accounting evidence, such as a Note Ledger, upon which the declarant relies to prove the sum due.

In Department of Industrial Relations v. UI Video Stores (1997) 55 Cal.App.4th 1084, 1097, the court specifically held that where issues of the calculation of damages remain to be determined, it is not appropriate to grant summary judgment.

The motion is therefore denied for failure to establish by appropriate evidence the amount of damages owed.

In addition, as argued in the Schneiderman opposition, even if this sum is found to be sufficiently supported by evidence, there remain triable issues of fact with respect to the amount of damages based on evidence submitted by the parties which call into question the figure presented by plaintiff.

Specifically, there is evidence that the difference between face amount of underlying note and sale price at trustee’s sale is only $92,000. The evidence shows that the underlying loan was for $1,002,000. [Wong Decl., para. 7, Ex. A]. The property was sold at trustee’s sale for $910,000. [Schneiderman Decl, para. 9].

In addition, there is evidence that East West was a participant in an FDIC’s loss share program, which may have reduced East Wests damages which have not already been reimbursed, and should be part of any accounting concerning the sum now due. [See Schneiderman Decl., para. 8].

Finally, the Wong Declaration states:
“As a result of Defendants Schneiderman, Creative Environments and Jojazak Trust’s failure to repay the Loan, Plaintiff EWB has suffered damages in excess of $483,184.97. Plaintiff has acted in good faith and made every reasonable effort to mitigate its damages.”
[Wong Decl, para. 24].

Defendants argue that there are triable issues with respect to this statement that plaintiff mitigated its damages, as there was an offer made to purchase the collateral for $200,000 higher than the price paid after the foreclosure sale. [Schneiderman Decl., paras. 7, 9].

Triable issues of fact remain with respect to the amount actually due as damages from each guarantor, and the motion is denied.