Opinion ID: 683215
Heading Depth: 2
Heading Rank: 2

Heading: Extraordinary Expenses

Text: 30 Valley National contends that attorneys' fees and settlements in the investors' suits were not extraordinary expenses under paragraph 6 of the participation agreement. The issue here is whether Bank of the West was entitled to charge Valley National $3 million. That was half of what it spent, net, on lawyers' fees and settlements in the lawsuits by Technical Equities investors against the bank. It spent about $5 million on settlements and almost $6 million on attorneys' fees to defend against the investors' suits, and collected $5 million in settlements from Technical Equities' accountants and others, leaving it with a net expense of about $6 million. 31 The $6 million was extraordinary expenses under the language of the contract. The money was paid by Bank of the West in connection with any liability or expense arising out of a claim relating to the Loan. Attorneys' fees are expressly included in the contractual definition. 32 Paragraph 6 separates expenses into two classes. One class was the cost of servicing the loan. On a big loan like this, ordinary loan service would probably involve substantial expenses for staff salaries, as well as long distance telephone, express mail, fax, computer runs, and so forth, and possibly even some travel. The second class was extraordinary expenses. Those were, basically, the kind of collection expenses involved when a loan goes sour. The purpose of the clause appears to be to have the lead bank bear the ordinary expenses, but to split the extraordinary expenses. Any multi-million dollar loss will naturally generate attempts to resist collection and redistribute losses to others through lawsuits. Victims of losses sometimes try to shift them to lenders through lenders' liability tort claims, especially where millions of dollars are at stake. Where there is enough money at stake to make it worthwhile for the people who have lost it to hire lawyers, it has to be expected that they may sue to shift the loss to someone else. The risk of such lawsuits appears to have been contemplated by the two banks when they agreed upon paragraph 6. 33 We cannot accept Valley National's argument that the investors' suits were not related to the loan. The investors' suits claimed that Bank of the West kept Technical Equities afloat by its loans, enabling it to look more solvent than it was, while they sunk their money into it. (Supp.Ex 70). The extraordinary expenses were largely the amounts paid to lawyers to fight these lawsuits, and to the investors to settle them. Those expenses are related to the loan. 34 Valley National argues that we should not construe the paragraph so literally, but should instead consider custom in the industry. But it produced no evidence of a relevant custom. If banks had been shown by the evidence to have a customary understanding that extraordinary expenses, in clauses like this, did not include fighting and settling third party lenders' liability lawsuits, that might have some bearing on the outcome. But the evidence was not there. 35 Valley National also argues that holding it to its promise would violate California public policy. California statute bars exemption of anyone from responsibility for his own fraud ... to the person or property of another. Cal.Civ.Code Sec. 1668. This policy does not apply to the facts proved. The fraud upon which Valley National relies for this argument is the alleged fraud Bank of the West committed against the investors in Technical Equities. The Technical Equity investors claimed that Bank of the West had contributed to a fraud against them, but they never proved it. Nor did Valley National. 36 Valley National argues that because it carried only 40% of the loan until October before the collapse, and got only 40% of the interest, it should be liable for, at most, 40% of the extraordinary expenses. We conclude that the district court's determination, 50%, was compelled by the contract. Valley National agreed in paragraph 6 that it would share Extraordinary Expenses in accordance with its respective Participation Percentage. (Ex 427, 477). Valley National's Participation Percentage is specified in paragraph 1 as 50%. 37 In October 1985, Valley National became a 50% participant. It got the benefit of its increased share of interest for three months until the loan went bad. It would have made more money with its 50% share than with its previous lower share had Technical Equities paid off its loan. The benefit it obtained from bringing its share up to 50% was nowhere near the cost which equal shares imposed on it. Although it worked out badly for Valley National, that was the deal.