Source: https://caselaw.findlaw.com/ca-court-of-appeal/1760217.html
Timestamp: 2019-04-25 04:58:13+00:00

Document:
Francis Ford COPPOLA, et al., Petitioners, v. The SUPERIOR COURT of the State of California, for the County of Los Angeles, Respondent. Jack SINGER, et al., Real Parties In Interest.
Chrystie & Berle, Elihu M. Berle and William H. Jennings, Los Angeles, for petitioners. Hetland & Hansen, John R. Hetland, Charles A. Hansen and Steven M. Morger, Berkeley, as amici curiae on behalf of petitioners. No appearance for respondent. Greenberg, Glusker, Fields, Claman & Machtinger, Robert S. Chapman and Roger L. Funk, Los Angeles, for real parties in interest.
By their initial petition for a writ of mandate or other extraordinary relief (B038583), Francis Ford Coppola (Francis), Eleanor Coppola (Eleanor), Zoetrope Productions (Zoetrope), and Hollywood General Studios, Inc. (HGS; collectively, defendants) 1 seek to overturn respondent court's order dated November 21, 1988, granting summary adjudication of certain issues. By a second and a supplemental (or third) petition for such relief (B039704), defendants seek, inter alia, to overturn or modify the court's orders dated January 20 and 30, 1989, in which the court barred discovery sought by defendants by reason of the November 21 order.
We grant the initial petition as to Eleanor. The second and supplemental petitions are dismissed as to Eleanor on the ground of mootness. We deny all of the petitions as unmeritorious with respect to the remaining defendants. The alternative writs issued by this court in conjunction with those petitions are discharged.
At certain intervals prior to the closing date, however, Atlas made four advances to Zoetrope in the sums of $1 million, $1 million, $500,000, and $500,000, respectively, for a total of $3 million. Each of these advances was evidenced by a separate promissory note executed by Zoetrope as the borrower and guaranteed by Esquire Holding Company (Esquire) and Francis. Esquire's guarantee was secured by a deed of trust on the subject real property (the Studio Property). At all relevant times prior to February 10, 1984, either HGS or Esquire owned the Studio Property. Darion Development Corporation (Darion), as agent for Atlas, was “the lender, payee and beneficiary, respectively,” of the advances, notes, and deed of trust.
Pursuant to the March 6 Agreement the notes were to be cancelled upon closing under that agreement and the advanced $3 million would be considered part of the $8 million loan. If no closing occurred, then Atlas had no duty to loan Zoetrope the $8 million, and Zoetrope's obligation to repay the $3 million remained payable pursuant to the promissory notes.
“Closing” would occur “at a mutually agreeable place and time upon satisfaction of the Conditions of Closing ․, but in no event later than [‘․ the expiration of six (6) days after the day of the Fourth Advance.’]” The “Fourth Advance” was made on March 26, 1981.
As a condition to closing, Zoetrope, HGS, and Esquire agreed to deliver to Atlas the consent of Chase Manhattan Bank (Chase) to the terms of the March 6 Agreement. Chase had loaned approximately $10.6 million as of that date for the production of the picture. Pursuant to the March 6 Agreement, Chase would agree, inter alia, that Atlas would be in first position, pari passu with Chase, with respect to the right to recoupment.
It is undisputed that Chase's consent to the terms of the March 6 Agreement was never obtained and that there was no “closing” under the March 6 Agreement. It is also undisputed that the remaining $5 million of the proposed loan was never delivered to Zoetrope and that none of the $3 million advanced to Zoetrope pursuant to the subject four notes has been repaid.
In July, 1983, HGS, owner of the Studio Property, was the debtor in an involuntary Chapter 11 bankruptcy proceeding. Pursuant to an order dated December 22, 1983,3 the bankruptcy court granted the request of HGS, as debtor-in-possession, to sell its assets free and clear of all liens and to set a minimum bid of $12,200,000 for the Studio Property.
On January 31, 1985, the bankruptcy proceeding against HGS was dismissed on HGS' motion. There has been no adjudication that any debt HGS owed to Darion has been discharged.
On February 1, 1985, Singer, Darion, and Atlas (collectively, plaintiffs) filed the underlying action for a money judgment based on the debt evidenced by the four promissory notes, not on the March 6 Agreement, and on February 19, 1985, filed a first amended complaint. On October 18, 1985, Francis, Eleanor, and Zoetrope filed a joint answer. Also on that date Zoetrope and HGS filed a cross-complaint against plaintiffs for breach of the covenant of good faith and fair dealing, fraud, negligent misrepresentation, and interference with prospective economic advantage.
By court order HGS was added as a Doe defendant in the second amended complaint filed January 27, 1986.
On December 1, 1988, defendants filed their first petition for a writ of mandate or other extraordinary relief (B038583), which challenged the November 21, 1988 order with respect to all the issues as to Eleanor but only issues 7, 9, 10, 11, and 15 as to the remaining defendants. We issued an alternative writ.
On January 20, 1989, the respondent court granted the motion of plaintiffs to stay discovery regarding the fraud and economic duress issues on the ground that those issues were disposed of by the November 21, 1988 order.
On January 31, 1989, defendants filed a supplemental petition for a writ of mandate or other extraordinary relief (B039704) in which they sought to have the January 30 order vacated or modified.
By order filed February 14, 1989, this court consolidated the petitions for extraordinary relief in B038583 and B039704 and issued a second alternative writ of mandate regarding the order dated January 20, 1989.
In their first petition 5 defendants contend that the court's order dated November 21, 1988, was erroneous in all respects as to Eleanor and erroneous as to the remaining defendants only with respect to issues 7, 9, 10, 11, and 15.
Mindful of the foregoing principles, we first address the propriety of granting summary adjudication of the 16 issues against Eleanor and then address the propriety of granting issues 7, 9, 10, 11, and 15 against the remaining defendants.
It is clear from the record and applicable law that the order granting summary adjudication of issues is erroneous as to Eleanor. Eleanor was not a party to the March 16 Agreement, nor did she execute or guarantee any of the notes. Moreover, she did not own the subject property. Plaintiffs conceded in their answers to interrogatories that her sole connection with the subject of this action 6 is her community property interest in the defendant corporations, which is insufficient, as a matter of law, to charge her with the 16 adjudicated issues.
The challenge of HGS to this finding is based in part on its claim that HGS was not added as a defendant until after the four-year limitation period had expired. Specifically, it contends that such limitation period “expired on May 26, 1985, at the latest” while HGS was not added as a new defendant until January 23, 1986.
We find no statute of limitations bar under the four-year period of section 337 as to HGS. The fallacy of its position lies in its premise that HGS was added as a “new” defendant in the second amended complaint filed in 1986. That premise is incorrect. HGS was substituted in as a Doe defendant, and thus, its presence in the action related back to the filing of the original complaint on February 1, 1985. (See, e.g., Barrington v. A.H. Robins Co. (1985) 39 Cal.3d 146, 150, 216 Cal.Rptr. 405, 702 P.2d 563.) The propriety of the order adding HGS as a Doe is not before this court.
Defendants argue that the underlying action was untimely filed for the reason that the sale of the Studio Property to Darion occurred on February 10, 1984, and this action was not filed until February 1, 1985, more than three months later.
We reject defendants' contentions. Based on our analysis, post, we point out that the subject property was sold at auction pursuant to a bankruptcy court order based on the Bankruptcy Code, not pursuant to California law governing nonjudicial and judicial foreclosure sales of real property. Accordingly, we find defendants' reliance on the three-month limitation periods of sections 337, paragraph 1, 580a and 726, subdivision (b), to be patently misplaced.
In challenging the finding on issue 15 defendants' threshold premise is that the sale of the Studio Property to Darion “free and clear of liens” under authority of section 363, subsection (f) of Title 11 of the United States Code (11 U.S.C. § 363(f)), is the equivalent of a foreclosure sale pursuant to the most senior lien under California law. In support they cite Gantt v. Jones (4th Cir.1921) 272 F. 117, 118; Federal Land Bank of Baltimore v. Kurtz (4th Cir.1934) 70 F.2d 46, 47 and In re Cook (D.Mass.1924) 7 F.2d 888, 889. Based on this premise they assert that the “fair value” limitation provisions of sections 580a and 726,10 which apply to foreclosure sales under California law, must therefore apply to the subject sale.
Defendants, however, “concede that there does not appear to be any state or federal authority on the question of whether ․ Sections 580a and 726 apply following a ‘sale free and clear of liens' pursuant to [11 U.S.C. § 363(f) ].” Instead, they invite 11 this court, for the first time, to construe a sale of real property, which is subject to a deed of trust or mortgage, “free and clear of liens” pursuant to 11 U.S.C. § 363(f) to be the equivalent of a nonjudicial or a judicial foreclosure sale, under California law.
After careful scrutiny of the applicable law, we find the contrary conclusion to be correct.
The sale of a debtor's real property “free and clear of liens” under the Bankruptcy Code cannot be equated with either a nonjudicial or judicial foreclosure sale under California law. The material attributes and procedures of such a sale “free and clear of liens” and a foreclosure sale under California law are substantially different. We therefore hold that a sale of real property, which is subject to a deed of trust or mortgage, “free and clear of lien” under authority of 11 U.S.C. § 363(f) is not a foreclosure sale under California law.
The method of sale is through the execution of a writ of sale. (§§ 716.010 et seq; 726, subd. (e); 729.010–729.090; Civ.Code, § 2931.) The sale is at auction to the highest bidder (§ 701.570, subd. (b)) and terminates upon acceptance of the last and highest bid or when the sale proceeds are sufficient to satisfy the money judgment (i.e., the debt). (§ 701.570, subd. (e)).
If the sale proceeds are insufficient to satisfy the amount of indebtedness, then the creditor may apply to the court within three months of the date of the sale for a deficiency judgment subject to the “fair value” limitation of section 726.
From the foregoing it is clear that a sale “free and clear of liens” under the former 1898 Bankruptcy Act was in the nature of a “judicial sale,” i.e., conducted under authority and supervision of the bankruptcy court.
The creditor has an election of remedies in the case of a judicial or nonjudicial foreclosure sale. The creditor, however, cannot elect a sale “free and clear of liens” under the Bankruptcy Code. Only the trustee in bankruptcy or debtor-in-possession has that right. The motivating factor in a judicial or nonjudicial foreclosure sale is to ensure that the sale produces enough proceeds to satisfy the creditor seeking the sale. On the other hand, the motivating factor in a sale “free and clear of liens” is to realize as much money as possible for the benefit of all creditors and the debtor.
We further hold that the “fair value” limitation provisions of sections 580a and 726 do not apply to a sale “free and clear of liens” under the Bankruptcy Code since such a sale is neither a judicial nor a nonjudicial foreclosure sale under California law.
The “fair value” limitations, by statute, apply only to a judicial foreclosure sale (§ 726) or a nonjudicial foreclosure sale (§ 580a) under California law. A sale “free and clear of liens” under the Bankruptcy Code is neither a judicial foreclosure sale nor a nonjudicial foreclosure sale.
Defendants' alternative premise is that the “fair value” limitations (§§ 580a, 726) must be deemed to apply to a sale “free and clear of liens” under 11 U.S.C. § 363(f) in order to equalize the protection of their rights under bankruptcy law and state law. As authority, they rely primarily on Butner v. United States, supra, 440 U.S. 48, 99 S.Ct. 914.
We have no quarrel with defendants' citation of authority. The fallacy of defendants' premise is their claim that their right under California law to be protected against a double recovery by the creditor suffers from unequal protection if a sale “free and clear of liens” under the Bankruptcy Code is not subject to the “fair value” limitation provisions of sections 580a or 726.
The protection of defendants' rights under the Bankruptcy Code is equivalent to that under California law. The issue is simply one of an election of remedies, i.e., a sale “free and clear of liens” by the trustee in bankruptcy or debtor-in-possession, on the one hand, or a foreclosure sale, judicial or nonjudicial, by the creditor, on the other. The incentive to obtain a sale price which is approximately the fair market value of the property exists under a sale “free and clear of liens” as well as under a nonjudicial foreclosure sale, or a judicial foreclosure sale, albeit the incentives differ.
The “fair value provisions are designed to prevent creditors from buying in at their own sales at deflated prices and realizing double recoveries by holding debtors for large deficiencies. [Citations.]” (Roseleaf Corp. v. Chierighino, supra, 59 Cal.2d 35, 40, 27 Cal.Rptr. 873, 378 P.2d 97.) The “fair value” provisions of both sections 580a and 726 operate as an incentive for the creditor to ensure the accepted bid approximates the fair market value of the property, because he would be barred from recovering any amount in excess of the difference between the amount of the indebtedness and the fair market value of the property. In other words, the creditor would be unable to collect the unpaid balance of the indebtedness to the extent that the fair market value exceeded the sale price.
In a sale “free and clear of liens” on the other hand, the incentive to obtain the highest possible price is to protect the equity of the debtor and to obtain as much money as possible to pay all creditors.
The purpose of the “fair value” limitations of sections 580a and 726, moreover, would not be furthered by applying such a limitation to a sale “free and clear of liens” under the Bankruptcy Code. The election of such a sale is at the option of the trustee in bankruptcy or debtor-in-possession, not the creditor. The minimum amount of the bid and incremental bids thereafter are matters determined either by the trustee in bankruptcy or debtor-in-possession or the bankruptcy court, not the creditor. Moreover, the bankruptcy court has jurisdiction to refuse to confirm the sale or set aside the sale if the accepted bid is too much less than the fair market value of the property.
Whether the protection of the Bankruptcy Code or state law is to be invoked rests with the debtor-in-possession or trustee in bankruptcy not the creditor. If the debtor-in-possession elects a sale “free and clear of liens,” then the burden rests with him to ensure that the accepted bid approximates the fair market value of the property. On the other hand, if he allows the creditor to proceed with a judicial or nonjudicial foreclosure sale, then the burden rests with the creditor to ensure that the accepted bid approximates the fair market value of the property. In either case, the debtor is protected against a double recovery by the creditor.
Based on the foregoing we hold that equity does not compel the application of the “fair value” limitations (§§ 580a, 726) to a sale “free and clear of liens” under the Bankruptcy Code.
Equity does not compel the application of the “fair value” limitations to a sale “free and clear of liens” where the property is bought by a junior lienholder. Again, in such a sale the minimum bid is set by either the debtor-in-possession, bankruptcy trustee, or bankruptcy court, not by a creditor. It is in the best interests of the debtor's estate for the minimum bid to approximate the fair market value of the property. If the accepted bid did not approximate the fair market value, the bankruptcy court has jurisdiction not to confirm the sale or to vacate the sale. The junior lienholder therefore would not be gaining the property “for a bargain price” due to “his own underbidding,” unlike the situation in a nonjudicial foreclosure sale.
In the present case the sale “free and clear of liens” was held at the instance of HGS, the debtor-in-possession. The bankruptcy court by order filed December 22, 1983,23 approved the election by HGS to sell the Studio Property free and clear of liens, set the minimum bid at $12,200,000, and required each subsequent bid to be at least $100,000 above the prior bid. The subject real property and specified personal property was required to be sold as a unit rather than separately.
Darion purchased the Studio Property “free and clear of liens and encumbrances” at the auction sale for $12,300,000. Darion was authorized, both by the December 22, 1983, order and under 11 United States Code section 363, subdivision (k) to “credit bid” the amount of its security interest in the Studio Property. At oral argument Darion represented that it did not do so. Instead, it paid cash. That representation was not contested by defendants. Accordingly, Darion acquired the Studio Property in the posture of a stranger who had no security interest in the property.
After such a sale the secured creditors cannot assert any claim of lien against the real property. Instead, their respective rights thereto are transferred to the proceeds of the sale. It is then incumbent on the bankruptcy court to determine the rank of all claims with respect to the proceeds and to supervise the distribution and payment accordingly. (Drybrough v. Ware, supra, 111 F.2d 548, 550.) Darion made the further representation at oral argument that it received nothing from the sale proceeds. That representation was also not contested by defendants.
We therefore conclude that defendants' complaint as to the unfairness, if any, of the purchase price of the real property at the sale “free and clear of liens” must be addressed in the bankruptcy proceeding before the bankruptcy court and not in this state court. HGS has in fact, filed an action on February 10, 1989 in the United States District Court, for a declaration that the Bankruptcy Court Order dated February 10, 1984 is a nullity and that HGS owns the Studio Property.
This disposition renders it unnecessary to address defendants' remaining contentions.
In B038583 let a peremptory writ of mandate issue, commanding respondent court to vacate its order of November 21, 1988 as to Eleanor. The petitions in B039704 are dismissed as to Eleanor. In all other respects, the petitions are denied. The alternative writs, having served their purpose, are discharged. Each party is to bear its own costs.
1. Francis and Eleanor were the sole owners of Zoetrope Studios Inc., which was the sole owner of Zoetrope and HGS. As the result of a merger on November 3, 1981, HGS became the successor to Esquire Holding Company, which had been previously wholly owned by HGS.
2. All further section references are to the Code of Civil Procedure unless otherwise indicated.
3. That order was affirmed by the United States District Court on December 23, 1983.
5. A petition for a peremptory writ of review of an order granting summary adjudication of issues must be filed “within 10 days after service upon [petitioner] of a written notice of entry of the order, or within such further time not exceeding 20 days as the trial court may for good cause allow”. (Code Civ.Proc., § 437c, subd. (l ).) These time constraints are mandatory. (See, e.g., Sturm, Ruger & Co. v. Superior Court (1985) 164 Cal.App.3d 579, 581–582, 210 Cal.Rptr. 573; accord, Barth–Wittmore Ins. v. H.R. Murphy Enterprises, Inc. (1985) 169 Cal.App.3d 124, 136–137, 214 Cal.Rptr. 894.)We find the petition to have been timely filed. The proof of service affidavit reflects that a copy of the order granting summary adjudication of issues was personally served on November 18, 1988. Such service was physically impossible and that “proof” is a nullity since the order was not entered until November 22, 1988. The record contains no other evidence of service of the order. The subject petition was filed on December 1, 1988, which is less than ten days after the date the order was filed. Accordingly, the petition must be deemed to have been timely filed.
6. Although the March 6 agreement contemplated an inducement agreement letter to be executed by Eleanor, the record contains no evidence that Eleanor ever executed such a letter.
8. The three-month limitation period for bringing such an action following a nonjudicial foreclosure sale is set forth in section 580a and the second provision of section 337, paragraph 1. The equivalent time bar regarding a judicial foreclosure sale is set forth in section 726, subdivision (b).
11. This request is joined by amici curiae in their brief filed March 6, 1989.
13. In the present case the deed of trust secured promissory notes. Accordingly, the bar of section 580d to any deficiency judgment precludes the application of the fair value limitation of section 580a even if the sale “free and clear of liens” could be construed to be a nonjudicial foreclosure sale.
14. For example, if the amount of the indebtedness were $80,000 and the fair market value of the property were $75,000, then the creditor has a right to a deficiency judgment in the sum of $5,000. If the sale price were $60,000, this would mean the creditor would be short $15,000 (i.e., the difference between the amount of indebtedness and the amount of the sale price ($20,000) less the difference between the amount of indebtedness and the amount of the fair market value of the property ($5,000). On the other hand, if the amount of the indebtedness were $80,000 and the fair market value of the property were $85,000, then the creditor would be barred from a deficiency judgment in any amount.
20. Since the bankruptcy court is not expressly empowered to compel a sale free and clear of liens, a presumption arises that under the Bankruptcy Code, as contrasted with the former Bankruptcy Act, the court has no authority to require such a sale where the trustee in bankruptcy or debtor-in-possession resists.
23. It should be noted that Security Pacific National Bank, the senior lien holder under a deed of trust on the Studio Property, was authorized by the December 22, 1983, order to foreclose, either pursuant to a judicial or nonjudicial sale, if no sale of the Studio Property “free and clear of liens and encumbrances” under that order took place.
KLEIN, P.J., and ARABIAN, J., concur.

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