Court Opinion

ID: 8994209
Source: CourtListenerOpinion
Date Created: 2022-11-27 12:28:01.569464+00
Date Added: 2024-06-11T17:11:00.456882
License: Public Domain

CYNTHIA HOLCOMB HALL, Circuit Judge,
dissenting.
The majority holds that summary judgment against Plastino/Brown on its claims for declaratory relief and fraudulent misrepresentation was improper because of the existence of material questions of fact as to Eureka’s actual knowledge of the terms of the subordination agreement between Plastino/Brown and Sunset Bay Associates. Because I do not believe the record supports that conclusion, I respectfully dissent. I also write separately to express my disagreement with the majority’s alternate holding that under Middlebrook-Anderson Co. v. Southwest Sav. & Loan Ass’n, 18 Cal.App.3d 1023, 96 Cal.Rptr. 338 (1971), a construction lender acquiring priority through a subordination by subsequent recording is obligated to investigate the terms of the borrower-seller subordination agreement and will lose its priority if the terms of that agreement are violated.
I
To survive Eureka’s cross-motion for summary judgment, Plastino/Brown was required to set forth “specific facts showing that there is a genuine issue for trial.” Fed.R.Civ.P. 56(e) (emphasis added). Our duty is “to determine whether the ‘specific facts’ set forth by the nonmoving party, coupled with undisputed background or *1521contextual facts, are such that a rational or reasonable jury might return a verdict in its favor based on that evidence.” T.W. Elec. Serv., Inc. v. Pacific Elec. Contractors Ass’n, 809 F.2d 626, 631 (9th Cir.1987) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 257, 106 S.Ct. 2505, 2514-15, 91 L.Ed.2d 202 (1986)). “Inferences from the nonmoving party’s ‘specific facts’ as to other material facts, however, may be drawn only if they are reasonable in view of other undisputed background or contextual facts....” Id.
We must also review the grant of summary judgment in light of the parties’ burdens of persuasion. If a party “fails to make a showing sufficient to establish the existence of an element essential to that party’s case, on which that party will bear the burden of proof at trial,” summary judgment should be entered against him. Celotex v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986). Plastino/Brown, as the party seeking equitable subordination, bears the burden of persuasion that it has been harmed by the inequitable conduct of another creditor. In re Westgate-California Corp., 642 F.2d 1174, 1177-78 (9th Cir.1981). Similarly, to prevail on its cause of action for fraudulent misrepresentation, Plastino/Brown is required to establish that at the time of subordination, Eureka had actual knowledge both of the terms of the Plastino/Brown promissory note and of Sunset Bay Associates’ alleged intent not to abide by those terms. See Cully v. Bianca, 186 Cal.App.3d 1174, 1176, 231 Cal.Rptr. 279, 281 (1986). The burden is thus on Plasti-no/Brown affirmatively to establish material questions of fact as to Eureka’s actual knowledge. This is true even though evidence of actual knowledge is likely to be within Eureka’s possession, since Plasti-no/Brown has had a full opportunity to conduct discovery. Anderson, 477 U.S. at 257, 106 S.Ct. at 2514-15.
A
In finding that summary judgment against Plastino/Brown was improper, the majority identifies three “specific facts” tending to establish that Eureka had actual knowledge of the terms of the subordination agreement: (1) Jamieson’s testimony that Eureka required a “specific” subordination agreement; (2) Ginella’s testimony about the timing of his delivery of a copy of the Plastino/Brown promissory note to Eureka; and (3) Pearlson’s testimony that during discovery an undated copy of the note was found in Eureka’s files.
What the majority fails to identify are the “undisputed background or contextual facts” against which this evidence is to be viewed. T.W. Elec., 809 F.2d at 631. There is no direct evidence that Eureka received a copy of the terms of the subordination agreement prior to the recording of the Eureka and Plastino/Brown deeds. In fact, Plastino/Brown, their attorneys, and the attorneys for Sunset Bay Associates all testified that they had no substantive communication with Eureka before Eureka’s trust deed was recorded. Moreover, no documents relating to the conditions in the Plastino/Brown deed dated prior to recording were found in Eureka’s files.
Turning to the “specific facts” at issue, the majority concludes that Jamieson’s reference “to a specific subordination agreement could imply that Eureka required the particular subordination agreement that ended up in the Plastino/Brown deed rider and note.” Majority at 1509. Such an inference is proper only if reasonable in light of undisputed background or contextual facts. T.W. Elec., 809 F.2d at 631. Here, the context and undisputed background facts provide no basis for the inference drawn by the majority. Jamieson’s deposition is devoid of any further reference to a “specific” subordination agreement; in fact, it is clear from reading the entire transcript that he was referring to Eureka’s general policy that a first deed of trust be protected by a subordination agreement, rather than to a particular subordination agreement.1 Moreover, since *1522there is absolutely no evidence in the record that either of the parties to the subordination agreement had any substantive contact with Eureka, the majority’s inference that “someone” at Eureka had actual knowledge of the terms of that agreement is unfounded.
The majority candidly states that the Gi-nella deposition is “hardly a model of clarity.” Majority at 1510. I would describe it as unintelligible. Ginella stated that he physically delivered the Plastino/Brown promissory note and deed of trust to Eureka
Sometime prior. Three months prior to the time that we closed the construction loan. A month or two after we closed.
Acknowledging that this statement may be interpreted to mean different things, the majority nevertheless concludes that “for purposes of summary judgment, we must conclude that it supports Plastino/Brown’s contention that a note was delivered to Eureka before Eureka’s deed was recorded.” Majority at 1510.
The majority’s efforts to turn Ginella’s doublespeak into a “specific fact” precluding summary judgment fail for two reasons. First, the statement itself is so inherently inconsistent that it cannot reasonably be contorted to support the meaning given it by the majority. As we stated in T. W. Electrical, “Clearly, there must be some limit on the extent of the inferences that may be drawn in the nonmoving party’s favor from whatever 'specific facts’ it sets forth; if not, Rule 56(e)’s requirement of ‘specific facts’ would be entirely gutted.” 809 F.2d at 631. Second, the majority’s “spin” on Ginella’s true meaning is wholly contradicted by the context in which he made the statement quoted above. Gi-nella twice stated during his deposition that he could not recall whether he delivered the promissory note and deed of trust before or after the closing of the construction loan. His garbled assertion came only after prodding by Plastino/Brown's attorney.2 In the context of the entire deposi*1523tion, the majority’s reconstruction of Ginel-la’s internal thought processes is wholly unreasonable and cannot be construed as a “specific fact” precluding summary judgment.
Finally, the majority relies on the fact that Eureka’s files contained a dated copy of the Plastino/Brown deed of trust and an undated copy of the promissory note. From this fact it draws the inference that Eureka received the note before the deed was recorded and that it therefore had actual notice of its terms. Again, this inference must be viewed against the backdrop of undisputed facts. In the absence of any credible evidence that Eureka received direct notice of the terms of the subordination, the mere presence of an undated note in Eureka’s files cannot, in itself, create a material question of fact.
B
Because Plastino/Brown have failed to put forth sufficient “specific facts” such that a rational jury or trier of fact would conclude that Eureka had actual knowledge of the terms of the subordination agreement, I would affirm the district court’s grant of summary judgment against them on their action for declaratory relief.
I would also affirm the entry of summary judgment against Plastino/Brown on their claim that Eureka acted in concert with Sunset Bay Associates to fraudulently induce them into subordinating their lien to Eureka’s. To state a cause of action for civil conspiracy, a plaintiff must establish, at a minimum, a tacit understanding among those alleged to have acted in concert. Cully, 186 Cal.App.3d at 1176, 231 Cal.Rptr. at 281. The majority claims that the “specific facts” cited above are sufficient evidence of such an understanding. I disagree. Liability as a joint tort-feasor may be imposed only upon
“those who, in pursuance of a common plan or design to commit a tortious act, actively take part in it, or further it by cooperation or request, or who lend aid or encouragement to the wrongdoer, or ratify and adopt his acts done for their benefit.”
Id. (quoting Sindell v. Abbott Laboratories, 26 Cal.3d 588, 604, 163 Cal.Rptr. 132, 140, 607 P.2d 924, 932 (1980) (internal citations omitted)). Not only is there no evidence that Eureka knew of the terms of the Plastino/Brown promissory note, there is simply no evidence that Eureka or Jamie-son aided or encouraged Sunset Bay in inducing Plastino/Brown to subordinate their deed of trust to Eureka’s.
II
I do not share the majority’s view that under Middlebrook-Anderson Co. v. Southwest Sav. & Loan Ass’n, 18 Cal.App.3d 1023, 96 Cal.Rptr. 338 (1971), a construction lender that has acquired priority over a seller’s purchase money security interest through subordination by subsequent recording is obligated to investigate the terms of the borrower-seller subordination agreement, and will lose its priority if the terms of that agreement are violated, even if the lender lacks actual knowledge of the terms of the agreement.
The majority relies on only two California cases in declaring this rule: Middlebrook-Anderson and Radunich v. Basso, 235 Cal.App.2d 826, 45 Cal.Rptr. 824 (1965). Neither case supports its holding.
Middlebrook-Anderson holds that if a construction lender has actual knowledge of the terms of a subordination agreement and knows of the seller’s reliance, an agreement by the lender to abide by the terms of that agreement will be implied. Because it was departing from prior California case law, see Grenada Ready-Mix Concrete, Inc. v. Watkins, 453 F.Supp. 1298, 1313 (N.D.Miss.1978); United States Cold Storage of California v. Great Western Sav. & Loan Ass’n, 165 Cal.App.3d 1214, 1231, 212 Cal.Rptr. 232, 242 (1985), the Middlebrook-Anderson court was careful to limit the scope of it holding to the facts before it.
*1524An implied agreement in the instant case can, and in equity, should be spelled out from the lender’s alleged actual knowledge of the provisions of the seller’s lien in general, and of the subordination therein in particular.... Its loan under the circumstances cannot be viewed other than as subject to the fair application of the construction funds-
Here, it is alleged the lender, with full knowledge of the subordinated lien of the seller, disbursed the funds without limitation....
We hold the actions of the parties here, if proved as alleged, did create a subordination agreement, and the lender’s failure to protect seller’s security interest gives seller a cause of action; ....
18 Cal.App.3d at 1037-38, 96 Cal.Rptr. at 347 (emphasis added).
Subsequent California cases have consistently noted the limited nature of a lender’s obligations under Middlebrook-Anderson. See Gluskin v. Atlantic Sav. & Loan Ass’n, 32 Cal.App.3d 307, 314, 108 Cal.Rptr. 318, 322 (1973) (“Middlebrook imposed on the lender the obligations of an implied agreement that the lender’s priority extended only to loan amounts properly expended for construction purposes ... [when] the lender voluntarily assumed control of the disbursements, knew of the seller’s security interests and knew that the seller’s lien was subordinated only on condition that loan funds were to be used just for construction purposes.”) (emphasis added); Woodworth v. Redwood Empire Savings & Loan Ass’n, 22 Cal.App.3d 347, 363, 99 Cal.Rptr. 373, 384 (1972) (“Mid-dlebrook ... impos[es] on the lender an implied agreement to protect the seller’s interest because of the lender’s actual knowledge of the provisions of the seller’s lien and subordination provision....”) (emphasis added).
Contrary to the majority’s assertion, neither Middlebrook-Anderson nor any other California case has ever suggested that, absent actual knowledge of the terms of a subordination agreement, a lender is bound by the terms of that agreement. Nor has a California court imposed a duty on a lender, who is otherwise unaware of the provisions of a subordination agreement, to investigate its terms and be bound by them. The majority’s reliance on Radunich v. Basso, 235 Cal.App.2d 826, 835, 45 Cal.Rptr. 824, 830 (1965), as support for such a duty is misplaced. There, as in Middle-brook-Anderson, the lender had actual knowledge of the terms of the subordination agreement. As the Middlebrook-Anderson court observed
[T]he lender knew of the variance between the actual intended use for the loan proceeds and the use restriction in the subordination clause. The lender was thus on notice of a possible violation of the agreement and under a duty to ascertain the true facts from the seller.
18 Cal.App.3d at 1032, 96 Cal.Rptr. at 343 (emphasis added); see also Radunich, 235 Cal.App.2d at 835, 45 Cal.Rptr. at 830.
Reduced to its essentials, the majority seeks, without any support under California law, to shift the risk of loss to a construction lender when the lender and the seller have jointly financed a construction project. Whatever the merits of that policy choice, cf. 3 H. Miller & M. Starr, Current Law of California Real Estate •§ 8:167 at 655 n. 78,3 it should be made by the California courts, not by this court.

. Q. Do you remember any discussion that you had with Mr. Ginella about the subordination?
*1522A. Other than the fact that there would be a subordination, no.
Q. Do you know whether or not anyone at Eureka ever approved that subordinate financing?
MR. FURNISS: I object to the question as vague and ambiguous. What do you mean by "approved that subordinate financing”?
MR. PEARLSON: Acknowledged, agreed to it.
MR. FURNISS: Still vague. Eureka didn't agree to subordinate financing.
A. We at Eureka were all aware of it. We required a specific subordination agreement as a condition of closing.
MR. PEARLSON: Q. How do you know that?
A. Because we required a first deed of trust. If there was an interest, it took priority over our interest in the property, it would either have had to be paid off or subordinated.
Q. Did you talk to anyone in the loan closing department about that subordination agreement prior to the funding of the construction loan?
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A. ... I don't recall any specific conversations with any of my subordinates about this matter. Only that the overly [sic] charge to the various departments was to ensure that we had a first deed of trust. From my perspective anybody who was behind us did not concern me that much.

. Q. Mr. Ginella, did you cause at any point in time a copy of Exhibit 70 [the promissory note and deed of trust] to be delivered to Eureka?
Why don’t we broaden the question to Exhibit 70 or any draft of that exhibit.
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THE WITNESS: I recall that Eureka required the form and consent of the subordination agreement and note to be part of their file at some point in time. I don’t know whether it was before we signed this or after, but they required it.
MR. MARCUS: I move to strike that as not being responsive to the question.
THE WITNESS: They required it at one point in time, and when it was as far as historically or chronologically as to when we gave it to them, as before or after we signed the construction loan agreement, I don’t recall
MR. PEARLSON: Q. By "it” what are you referring to?
A. The Plastino promissory note and deed of trust. Your question was whether or not I had ever caused to be delivered this promissory note and deed of trust.
Q. Exhibit 70?
A. Yes, Exhibit 70, to Eureka. And I’m saying, yes, we had cause to deliver it to them, Sunset Bay Associates, at some point in time.
Q. You're saying you did deliver it to them at some point in time?
A. Yes.
*1523Q. I know you can't give me an exact date, but can you give me an outside date of when that occurred?
A. Sometime prior. Three months prior to the time that we closed the construction loan. A month or two after we closed.

. “The result of making a lender responsible to third parties who do not have privity for off-record agreements is to make it an insurer of the seller's profits. In all likelihood he has received more than fair market value for his property to assume some risk, and the lender should not be burdened with insuring that risk.”