Secured Equities v. Westmark Communities

Filed 4/6/06 Secured Equities v. Westmark Communities CA4/3

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 977(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 977(b). This opinion has not been certified for publication or ordered published for purposes of rule 977.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FOURTH APPELLATE DISTRICT

DIVISION THREE

Appeal from a judgment of the Superior Court of Orange County, Andrew P. Banks, Judge. Reversed and remanded.

Law Offices of Dennis P. Zentil, Dennis P. Zentil; Snell & Wilmer and Richard A. Derevan for Defendants and Appellants.

Coontz & Matthews and M. Stephen Coontz for Plaintiff and Respondent.

* * *

A residential developer obtained construction financing from an investment pool. The project was unsuccessful and it took years longer than expected to sell the homes. Due to the poor sales, the developer went into default on its construction loan. The servicing agent for the investment pool filed suit against the developer and the guarantors of the loan. A $3,487,260.50 judgment was entered in favor of the servicing agent. The guarantors appeal, contending the amount owing was more like $361,261.09.

We reject the guarantors' argument that interest should have been calculated from the dates disbursements were made to the developer rather than from the dates that investment funds were placed in the development funds security account, since the loan documents clearly provide for the latter. We also reject the guarantors' argument that the accounting they themselves provided was correct. However, we agree with the guarantors that the accounting provided by the servicing agent was also deficient in several respects, such as its failure to note the receipt of payments from property sales and whether those payments were applied to costs, interest, principal or contingent interest amounts. Finally, we reject the guarantors' arguments pertaining to standing, unclean hands and unconscionability.

We reverse the judgment and remand for additional proceedings to determine the proper amount owing to the servicing agent under the loan documents.

I

FACTS

Developer The Southland Group (Southland) sought construction financing from Secured Equities Corporation (Secured Equities) for the development of a residential project located in Palm Springs. On October 15, 1996, Southland, as the borrower, and Secured Equities, as the lender, entered into a Building Loan Agreement pertaining to the financing for the project. That same date, Southland executed a promissory note, in a principal sum not to exceed $2,225,000, payable to Secured Equities. The note bore interest at the rate of 14 percent per annum, or, in the event of default, 19 percent per annum. In addition, Southland agreed to pay a late charge equal to 5 percent of any delinquent payment. The note was secured by a Construction Deed of Trust, Security Agreement, Assignment of Rents and Fixture Filing, recorded December 12, 1996, as Instrument No. 468475 of the official records of the Riverside County, California Recorder. The note was due and payable in full 24 months after this recording date.

In addition, Southland and Secured Equities entered into a Contingent Interest Agreement dated October 15, 1996, pursuant to which Southland agreed to pay Secured Equities, under the circumstances stated therein and in addition to the interest payable under the note, contingent interest equal to 3 percent of the sale proceeds of each property sold at the development. The parties also entered into a Development Funds Security Agreement on that same date.

Also on October 15, 1996, Westmark Communities, Inc. and B.J. Bird, as guarantors (the Guarantors), executed a guaranty in favor of Secured Equities. Pursuant thereto, the Guarantors guaranteed the performance of the obligations under the various loan documents. B.J. Bird and his wife Vicki owned Southland. Westmark Communities, Inc., also owned by B.J. Bird, was the contractor for the development.

The project was performing poorly and Southland went into default under the loan documents. In fact, Southland never made a single payment directly to Secured Equities. The only payments Secured Equities ever received were from the sales of the properties. When properties were sold, Secured Equities received payments directly from the escrow holder. However, it took approximately seven years from the date of the loan documents to sell all of the properties, so even with the payments from escrow, the loan remained in default after the project was sold out.

On June 20, 2003 Secured Equities filed a lawsuit against Southland and the Guarantors. It asserted causes of action for breach of guaranty, open book account, and money had and received. It sought damages in the amount of $2,093,057 plus interest, costs, and attorney fees. In its second amended complaint, Secured Equities clarified that it brought suit on behalf of itself and all of its investors.

A default was taken against Southland. The court found that Secured Equities had met its burden of proof on each of its causes of action. Judgment was entered in favor of Secured Equities and against each of the defendants in the amount of $3,487,260.50, which included the sum of $83,623 in late fees. Interest at the rate of 14 percent per annum, or $1,305.50 per day, accrued on $3,403,637.50 of the judgment amount.

The Guarantors filed a notice of appeal from the judgment.

II

DISCUSSION

A. Introduction:

The Guarantors raise four issues on appeal: (1) whether there is substantial evidence to support the damages award; (2) whether Secured Equities lacked standing to enforce the guaranty; (3) whether the doctrine of unclean hands barred Secured Equities from recovery; and (4) whether the method employed to compute interest was unconscionable. We address these issues in turn.

However, we note preliminarily that the parties have addressed surprisingly few of the potentially applicable provisions of the loan documents and related materials and have provided no citations to legal authority concerning the interpretation of those documents. We will address only the issues the parties have framed, without prejudice to their argument of the application of additional contract provisions on remand.

B. Substantial Evidence:

(1) Interest accrual dates

The Guarantors say that no substantial evidence exists to support the damages award. In particular, they insist that Secured Equities's manner of calculating interest accruals is fundamentally flawed. The accounting that Secured Equities provided applied interest on monies obtained from the investors, from the date that those monies were received into the development funds security account. The Guarantors claim it is axiomatic that interest can accrue only on amounts actually loaned to the borrower. They thus imply that interest can be applied only from the dates disbursements to the borrower are made. Simply put, the Guarantors wish the loan documents they guaranteed said something other than what they did.

The Building Loan Agreement specifically stated that Secured Equities did not have any funds available to make the loan, but also provided that Secured Equities would use its good faith efforts to raise the specified monies from investors. As those monies were obtained, they were placed in a development funds security account. Secured Equities paid the investors 12 percent interest from the time their monies were received.

As it happened, however, the monies were raised more quickly than they were needed for Southland's construction purposes. The monies raised remained in the development funds security account until needed. Interest was paid to the investors on all their investment monies irrespective of whether those monies had, in turn, been fully disbursed to Southland at the time and even if Secured Equities or its major shareholders had to advance their own funds to cover the payments.

The manner in which interest would be calculated was set forth in the Building Loan Agreement. Section 3.1 of the Building Loan Agreement provided as follows: â€