Case Name: Hartford Fire Insurance Company v. Keith W. Walker, et al.

Case No.: 1-14-CV-261482

Motion for Summary Judgment by Defendant/ Cross-Complainant Comerica Bank, successor by merger with Comerica Bank-California

COMPLAINT

On or about January 31, 1992, defendant Keith W. Walker (“Walker”), individually and as officer/ director/ owner of Rollie French, Inc. (“Rollie French”), executed a General Indemnity Agreement in favor of plaintiff Hartford Fire Insurance Company (“Hartford”) agreeing to indemnify Hartford in the event Hartford incurs loss or expense as a result of bonds issued on Rollie French’s behalf. (First Amended Complaint (“FAC”), ¶15.) Hartford incurred loss and expense in excess of $1,467,419.63 on the bonds issued on Rollie French’s behalf. (FAC, ¶18.)

On or about June 16, 2005, Walker and Hartford entered into a Collateral Agreement whereby Walker pledged and assigned property commonly known as 1813 South Tenth Street, San Jose, California (“Property 1 and Property 2”) as collateral security to Hartford pursuant to a deed of trust (“First Deed of Trust”). (FAC, ¶20.)

On or about October 18, 2005, Walker and Hartford executed an amendment to the Collateral Agreement adding, among other things, two additional parcels of land located at 1810 South Seventh Street, San Jose, California (“Property 3”) as additional collateral in favor of Hartford. (FAC, ¶23.) In addition, Walker, as trustee of the Keith W. Walker Trust dated March 19, 1999, executed a deed of trust on or about October 19, 2005 (“Second Deed of Trust”), as collateral security in favor of Hartford for Property 2. (Id.)

Walker has failed to make payment to Hartford in satisfaction of his underlying obligations. (FAC, ¶¶25 – 27.)

On February 28, 2014, Hartford filed a complaint against Walker, individually and as trustees of the Keith W. Walker Personal Trust and Keith W. Walker Trust dated March 17, 1999 (collectively, “Walker”). On May 1, 2014, Hartford filed a FAC against Walker, Comerica Bank, San Jose Ice Company, Laurean Rojas, Millbrook Stone, Inc., Plywood and Lumber Sales, Inc., Vina International Trading, Inc., Borel Private Bank & Trust Company and June Wisecarver, co-trustees of the Patrick L. Wisecarver Trust dated February 8, 2001 asserting causes of action for:

(1) Foreclosure of First Deed of Trust
(2) Foreclosure of Second Deed of Trust
(3) Breach of Contract (Settlement Agreement)
(4) Breach of Contract (Express Indemnity)
(5) Specific Performance of Collateral Agreement
(6) Quia Timet

CROSS-COMPLAINT

On June 27, 2014, Comerica Bank (“Comerica”) filed an answer to the FAC and also filed a cross-complaint. In the cross-complaint, Comerica alleges that on or about November 26, 2001, Comerica loaned $3,640,000 (“Loan No. 1”) to Mark Allen and Walker, co-trustees of the Walker-Allen Business Trust, dated November 30, 1999 (“Trustees”). (Cross-Complaint, ¶7.) To secure repayment of Loan No. 1, on or about November 26, 2001, the Trustees executed a deed of trust recorded on January 29, 2002 (“Comerica Deed of Trust #1”) in the Official Records of the Santa Clara County Recorder’s Office encumbering property commonly known as Assessor’s Parcel Number 477-27-021 (“Property 1”) and 477-27-022 (“Property 2”). (Cross-Complaint, ¶8.)

On or about November 26, 2001, Comerica made a second loan in the amount of $609,469.38 to the Trustees (“Loan No. 2”). (Cross-Complaint, ¶10.) To secure repayment of Loan No. 2, on or about November 26, 2001, the Trustees executed a deed of trust recorded on January 29, 2002 (“Comerica Deed of Trust #2”) in the Official Records of the Santa Clara County Recorder’s Office encumbering property commonly known as Assessor’s Parcel Number 477-26-047 (“Property 3”). (Cross-Complaint, ¶11.)

The Trustees subsequently conveyed all interests in Property 1, Property 2, and Property 3 to Keith W. Walker, trustee of the Keith W. Walker Trust dated March 17, 1999. (Cross-Complaint, ¶12.)

On or about July 17, 2006, Comerica consolidated Loan No. 1 and Loan No. 2 into an Amended and Restated Note, dated July 17, 2006, in the amount of $3,682,098.31 (“Note”). (Cross-Complaint, ¶13.) The Note states that it replaces, amends, and restates the previous two notes. (Id.) On or about July 17, 2006, Keith W. Walker, trustee of the Keith W. Walker Trust dated March 17, 1999, executed an Agreement Supplementing Deed of Trust (“Supplemental Agreement”) stating that it secures, in addition to and not in limitation of all other obligations secured by Comerica Deed of Trust #1, the Note in the amount of $3,682,098.31. (Cross-Complaint, ¶14.) The Supplemental Agreement also states its intent to correct the description of the property on Comerica Deed of Trust #1 so that in encumbers Property 1, Property 2, and Property 3. The Supplemental Agreement was recorded on September 27, 2006. (Id.)

By a document dated January 4, 2007 and recorded May 1, 2007, Comerica reconveyed Comerica Deed of Trust #2.

In the complaint, Hartford contends its deed of trust recorded June 20, 2005 encumbers Property 1 and Property 2 and that its deed of trust recorded October 19, 2005 encumbers Property 3. Comerica contends its deed of trust, Comerica Deed of Trust #1, has priority over Hartford with regard to Property 1 and Property 2. Comerica further contends the Comerica Deed of Trust #1, as supplemented by the Supplemental Agreement, has priority over Hartford with regard to Property 3. Comerica’s cross-complaint seeks declaratory relief with regard to its priority.

On July 3, 2014, defendant Boston Private Bank & Trust Company, trustee of the Patrick L. Wisecarver Trust dated February 8, 2002 (“Boston”) filed an answer to the FAC. On November 26, 2014, Boston filed an answer to Comerica’s cross-complaint.

On August 1, 2014, Hartford filed its answer to Comerica’s cross-complaint.

On October 23, 2014, Hartford obtained entry of default against Walker.

On November 7, 2014, Comerica filed the motion now before the court, a motion for summary adjudication of its cross-complaint.

On January 13, 2015, Hartford and Boston filed opposition.

Discussion

I. Defendant/ cross-complainant Comerica’s request for judicial notice and plaintiff/ cross-defendant Hartford’s request for judicial notice is GRANTED.

“[A] court may take judicial notice of the fact of a document’s recordation, the date the document was recorded and executed, the parties to the transaction reflected in a recorded document, and the document’s legally operative language, assuming there is no genuine dispute regarding the document’s authenticity. From this, the court may deduce and rely upon the legal effect of the recorded document, when that effect is clear from its face.” (Fontenot v. Wells Fargo Bank, N.A. (2011) 198 Cal.App.4th 256, 265.)

Evidence Code section 452, subdivision (d) states that the court may take judicial notice of “[r]ecords of any court of this state.” This section of the statute has been interpreted to mean that the trial court may take judicial notice of the existence of the court’s own records. Evidence Code section 452 and 453 permit the trial court to “take judicial notice of the existence of judicial opinions and court documents, along with the truth of the results reached—in the documents such as orders, statements of decision, and judgments—but [the court] cannot take judicial notice of the truth of hearsay statements in decisions or court files, including pleadings, affidavits, testimony, or statements of fact.” (People v. Woodell (1998) 17 Cal.4th 448, 455.)

Comerica’s request for judicial notice is GRANTED.

Hartford’s request for judicial notice is GRANTED.

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II. Defendant/ cross-complainant Comerica’s motion for summary adjudication is DENIED.

In support of its motion for summary adjudication, Comerica cites the following principle from Lennar Northeast Partners v. Buice (1996) 49 Cal.App.4th 1576, 1589 (Lennar): “It is well established that while a senior mortgagee can enter into an agreement with the mortgagor modifying the terms of the underlying note or mortgage without first having to notify any junior lienors or to obtain their consent, if the modification is such that it prejudices the rights of the junior lienors or impairs the security, their consent is required [citations].” Although not cited by Comerica, the passage in Lennar continues by stating, “Failure to obtain the consent in these cases results in the modification being ineffective as to the junior lienors [citation] and the senior lienor relinquishing to the junior lienors its priority with respect to the modified terms [citations].” (Lennar, supra, 49 Cal.App.4th at p. 1589.)

Based on the above language, Comerica takes the position on this motion for summary adjudication that when it consolidated Loan No. 1 and Loan No. 2 on July 17, 2006 and entered into the Supplemental Agreement with Walker, it maintained priority over the deeds of trust recorded by Hartford or any other party subsequent to the Comerica Deed of Trust #1 recorded January 29, 2002.

However, by Comerica’s own acknowledgment, the principle in Lennar makes clear that consent by junior lienholders is required “if the modification is such that it prejudices the rights of the junior lienors or impairs the security.” (Id.; see also 5 Miller & Starr, California Real Estate (3rd ed. 2000) Recording and Priorities, §11:102, p. 11-320—“If modifications in the senior lien have a material adverse effect on the junior lien either by increasing the risk of default or making protection of the junior lienor’s position potentially more burdensome, then the senior may lose priority to the junior lien.”) Comerica asserts there is no prejudice to Hartford or impairment of the security because (1) the cumulative principal decreased; (2) the interest rate decreased; and (3) the maturity date was extended. (See Comerica Bank’s Separate Statement of Undisputed Material Facts in Support of Motion for Summary Adjudication of its Cross-Complaint for Declaratory Relief (“Comerica’s UMF”), Fact Nos. 11 – 13.)

The court does not agree with Comerica’s conclusion that each of these modifications results in no prejudice to Hartford or impairment of the security. At minimum, a triable issue of material fact exists with regard to whether a cumulative decrease in the principal results in any prejudice to Hartford or impairment of the security. Although not highlighted by Comerica, the cumulative principal of $3,682,098.31 is actually an increase in the principal amount ($3,640,000) which originally secured Comerica Deed of Trust #1. While the cumulative principal is now purportedly secured by an additional property (Property 3), nothing in the record before this court addresses whether there is any equity in Property 3 to provide additional security. As to Property 3, the cumulative principal reflects a significant increase in the principal amount ($609,469.38) which originally secured Comerica Deed of Trust #2. (See 5 Miller & Starr, California Real Estate (3rd ed. 2000) Recording and Priorities, §11:102, p. 11-322 citing Gluskin v. Atlantic Savings & Loan Assn. (1973) 32 Cal.App.3d 307, 315 and Lennar, supra, 49 Cal.App.4th at pp. 1586 – 1588—“Usually, whether a modification has a material adverse impact on a junior lienor is a question of fact, but when reasonable minds cannot differ, the conclusion that the modification resulted in a material adverse effect can be decided as a matter of law.”)

Accordingly, defendant/ cross-complainant Comerica’s motion for summary adjudication is DENIED.