Court Opinion

ID: 156689
Source: CourtListenerOpinion
Date Created: 2010-08-14 04:44:24+00
Date Added: 2024-06-11T09:13:39.115330
License: Public Domain

F I L E D
                                                                  United States Court of Appeals
                                                                          Tenth Circuit
                       UNITED STATES COURT OF APPEALS
                                                                         JUL 30 1998
                                     TENTH CIRCUIT
                                                                    PATRICK FISHER
                                                                              Clerk

 SBKC SERVICE CORPORATION,

           Plaintiff - Appellant,
 vs.                                                    No. 97-3193
                                                  (D.C. No. 95-2540-JWL)
 1111 PROSPECT PARTNERS, L.P., a                         (D. Kan.)
 California Limited Partnership;
 WILLIAM JEFFERY, III, and
 KRISTEN L. JEFFERY, individuals,

           Defendants - Appellees.

                              ORDER AND JUDGMENT *

Before TACHA, MCWILLIAMS, and KELLY, Circuit Judges.

       Plaintiff-Appellant SBKC Service Corporation (SBKC) appeals from the

dismissal of its action seeking a deficiency judgment against Defendants-

Appellees William Jeffery III (Jeffery) and Kristen L. Jeffery for lack of personal

jurisdiction. SBKC also appeals from the grant of summary judgment in favor of

1111 Prospect Partners, L.P. (Prospect Partners), based on preclusion of SBKC’s

claim by California’s anti-deficiency statute. We have jurisdiction pursuant to 28

       *
        This order and judgment is not binding precedent, except under the
doctrines of law of the case, res judicata, and collateral estoppel. This court
generally disfavors the citation of orders and judgments; nevertheless, an order
and judgment may be cited under the terms and conditions of 10th Cir. R. 36.3.
U.S.C. § 1291 and affirm in part and vacate in part.

                                       Background

      In early 1991, Jeffery, as limited partner, and three others, as general

partners, formed Prospect Partners to purchase and renovate real property. In

May 1991, Prospect Partners borrowed approximately $8.3 million from Security

Bank of Kansas City   1
                          to buy a property at 1111 Prospect, La Jolla, California

(Property). The loan is evidenced by a promissory note (Note) and secured by a

Construction Deed of Trust and Security Agreement on the Property (Deed of

Trust) and a letter of credit issued by a California bank for approximately $1.7

million (LOC).

      In late 1992, Prospect Partners defaulted on the Note, and SBKC drew on

the entire LOC. SBKC and Prospect Partners then negotiated a refinancing of the

remaining balance on the Note. The refinancing is evidenced by an Extension to

Loan Agreement and Promissory Note (Extension Agreement), which contained

an explicit waiver of California’s anti-deficiency legislation. By late 1993,

Prospect Partners was again in default on the Note, and SBKC exercised its

power of private sale pursuant to the Deed of Trust and purchased the Property.

In October 1993, the Jefferys and Prospect Partners commenced litigation against

      1
        For simplification, Plaintiff-Appellant SBKC Service Corporation and its
parent Security Bank of Kansas City are both referred to as SBKC.

                                           -2-
SBKC in the California state courts for drawing on the LOC prior to the private

sale, allegedly in violation of Cal. Civ. Proc. Code § 726, a component of

California’s anti-deficiency legislation which embodies the “security-first”

principle. See Cal. Civ. Proc. Code § 726 (West 1980).

      SBKC then filed this suit seeking a deficiency judgment in Kansas state

court, and Defendants removed to federal district court. The Jefferys moved for

dismissal based on lack of personal jurisdiction and all Defendants moved for

summary judgment based on the preclusion of SBKC’s claim for deficiency. The

district court granted the Jefferys’ motion to dismiss and the motion for summary

judgment, holding California law applies to the deficiency claim, which (1)

precludes such a claim after private sale and (2) bars waiver in advance of this

debtor protection. On appeal, SBKC argues the district court erred in dismissing

Jeffery for lack of personal jurisdiction and in applying California law to the

deficiency claim.

                                     Discussion

      As an initial matter, SBKC has not argued that the district court erred in

dismissing SBKC’s claims against Kristen Jeffery for lack of personal

jurisdiction. SBKC has consequently waived any such argument and we affirm

the district court’s dismissal of SBKC’s claim against her.

      SBKC argues that the district court erred in applying California rather than

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Kansas law on the issue of the availability of a deficiency claim. California law

precludes the right to a deficiency judgment after exercising the power of sale in

a deed of trust. Cal. Civ. Proc. Code § 580d provides:

       No judgment shall be rendered for any deficiency upon a note secured
       by a deed of trust or mortgage upon real property . . . in any case in
       which the real property . . . has been sold by the mortgagee or trustee
       under power of sale contained in the mortgage or deed of trust.

Cal. Civ. Proc. Code § 580d (West 1976). In its argument to avoid this

California statute, SBKC relies upon a Kansas choice of law clause in the Note.

We, however, construe the Extension Agreement and Note together, and consider

the waiver of California’s anti-deficiency legislation in the Extension Agreement

to more specifically address the issue and sufficiently evidence the parties’

understanding that California law applied. Otherwise, SBKC would successfully

avoid any debtor redemption rights by electing private sale in California, and

then avoid California’s consequent preclusion of any deficiency judgment by

suing in Kansas.

       We review choice of law determinations de novo.         See Shearson Lehman

Bros., Inc. v. M & L Investments      , 10 F.3d 1510, 1514 (10th Cir. 1993). A

district court exercising diversity jurisdiction applies the choice of law rules of

the state in which it is sitting.   See Klaxon Co. v. Stentor Elec. Mfg. Co.   , 313

U.S. 487, 496 (1941); Shearson , 10 F.3d at 1514. The Kansas choice of law

rules honor an effective choice of law made by contracting parties.       See Equifax

                                             -4-
Servs., Inc. v. Hitz , 905 F.2d 1355, 1360 (10th Cir. 1990); Restatement (Second)

of Conflict of Laws § 187 (1969). Notes and deeds of trust are contracts between

parties and the rules of contract construction therefore apply.           See Metropolitan

Life Ins. Co. v. Strnad , 876 P.2d 1362, 1365 (Kan. 1994). “A cardinal rule in the

interpretation of contracts is to ascertain the intention of the parties and to give

effect to that intention if it can be done consistent with legal principles.”        See

Garvey Ctr., Inc. v. Food Specialties, Inc.     , 519 P.2d 646, 650 (Kan. 1974)

(internal quotation marks and citation omitted). Thus, our initial task is to

determine whether the parties expressed their intention on the issue, and if so,

what that intention was.

       Various documents were involved in the transaction that forms the basis of

this suit. The choice of law and forum selection clause in the Note provides:

“This is a Note payable in and according to the laws of the state of Kansas, and

an action may be maintained in the state of Kansas and the county and venue of

Wyandotte for the purpose of collecting any amounts payable hereunder or in any

action for a deficiency.” II Aplt. App. at 390. The Deed of Trust choice of law

clause provides: “The Note shall be governed and construed according to the

laws of the State of Kansas, and the District Court of Wyandotte County, Kansas,

shall have jurisdiction over any action for a deficiency, provided that the laws of

the State of California shall apply to the foreclosure of real estate.”         Id. at 417.

                                              -5-
The Extension Agreement provides that

       [e]ach of the parties or individuals executing this Extension waives the
       benefit of any ‘antideficiency legislation’ which might otherwise bar
       any recovery against any of them because of [SBKC’s] election of
       remedies, including but not limited to an exercise of power of sale
       under any deed of trust, mortgage or other security agreement. Each
       hereby expressly waives any and all benefits under California Civil
       Code sections 2809, 2810, 2819, 2825, 2839, 2845, 2847, 2848, 2849
       and 2950 and California Code of Civil Procedure Sections 580b, 580d,
       and 726.

Id. at 426.

       Predictably, SBKC argues based on the clause in the Note that Kansas law

applies to the issue of the availability of a deficiency claim, while Prospect

Partners argues based on the clause in the Deed of Trust that California law

applies. Aside from the dispute over which of these two documents controls,

Prospect Partners argues that the Extension Agreement sufficiently evidences the

parties’ intent that California law apply on the issue of the availability of any

claim for deficiency, and we agree.

       Where we have several documents executed at different times, but in the

course of the same transaction concerning the same subject matter, we construe

them together to determine the intent of the parties.     See Hollenbeck v.

Household Bank , 829 P.2d 903, 906 (Kan. 1992);         Parsons v. Biscayne Valley

Investors Ltd., L.P. , 935 P.2d 218, 222 (Kan. Ct. App. 1997) (construing together

various mortgages, a loan agreement, and a later executed loan modification

                                            -6-
agreement). In the instant case, the Note and Extension Agreement concern the

same loan, with the Extension Agreement explicitly referring to the Note, Deed

of Trust, and loan agreement.   2
                                    Thus, we may properly construe the Extension

Agreement with the Note to determine the parties’ intention on the issue of the

applicable law.

      The Restatement (Second) of Conflict of Laws explains that “even when

the contract does not refer to any state, the forum may nevertheless be able to

conclude from [the contract’s] provisions that the parties did wish to have the

law of a particular state applied.” Restatement (Second) of Conflict of Laws §

187, cmt. a. The drafters explain further that “the fact that the contract contains

legal expressions, or makes reference to legal doctrines, that are peculiar to the

local law of a particular state may provide persuasive evidence that the parties

wished to have this law applied.”      Id. The drafters provided an illustration of

this rule as follows:

      A contract, by its terms to be performed in state Y, is entered into in
      state X between A, a domiciliary of X, and B, a domiciliary of Y. The
      contract recites that the parties “waive restitution in integrum in case

      2
        The Extension Agreement provides: “ NOTICE OF ENTIRE
AGREEMENT . THIS AGREEMENT AND THE LOAN DOCUMENTS [i.e., the
note, deed of trust, and loan agreement] EXPRESS THE ENTIRE FINAL
AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE LOAN
TRANSACTION CONTEMPLATED HEREIN AND SUPERSEDE ALL PRIOR
AGREEMENTS OR UNDERSTANDINGS BETWEEN THE PARTIES
RELATING TO THEIR SUBJECT MATTER.” II Aplt. App. at 427.

                                           -7-
       of laesio enormis .” These notions are foreign to X local law. They
       exist, on the other hand, in Y local law which furthermore empowers
       the parties to waive such right of restitution. A court could properly
       find on these facts that the parties wished to have Y local law applied.

Id. § 187, cmt. a, illus. 1.

       As in the Restatement illustration, even provisions here intended to act as a

waiver can indicate the parties’ understanding that California law is to govern the

issue. Unlike the illustration, however, no inference is necessary that the

references to legal notions foreign to one state indicate a choice of the laws of a

state where such notions are not foreign. The contract in this case explicitly cites

to California statutes. In addition to these explicit citations, it also happens that

the referenced power of sale is foreign to Kansas law, but permitted by

California, and that the referenced anti-deficiency legislation is nonexistent in

Kansas, but of long standing in California.

       We recognize that the illustration arguably places some weight on the

circumstance that the implicitly referenced state empowers the intended waiver.

This is not troubling, however, because California only bars waiver in advance,

see Freedland v. Greco , 289 P.2d 463, 465-66 (Cal. 1955) (en banc), and SBKC

enjoyed some benefit of Prospect Partners’ arguable ex post facto waiver.

Prospect Partners made a claim in the California litigation that SBKC’s draw on

the LOC violated California’s “security-first” statute, a component of

California’s anti-deficiency legislation.   See Cal. Civ. Proc. Code § 726. SBKC

                                            -8-
argued in those litigations, even in the California Supreme Court, that the

subsequent waiver in the Extension Agreement operated against Prospect

Partner’s claim.   See II Aplt. App. at 500 (noting SBKC argued waiver as an

alternative ground for a favorable decision by the California Supreme Court);        cf.

17A Am. Jur. 2d Contracts § 160 (1991) (summarizing law holding forbearance

to enforce even a doubtful right may be sufficient consideration to support a

promise). Moreover, California does permit waiver of the host of other

protections Prospect Partners waived in the Extension Agreement which are

analogous to the anti-deficiency “security-first” principle.      See, e.g. , Union Bank

v. Ross , 54 Cal. App. 3d 290, 294-95 (Cal. Ct. App. 1976) (allowing waiver of

the protections of Cal. Civ. Code §§ 2819 & 2845);        Bloom v. Bender , 313 P.2d

568, 572-575 (Cal. 1957) (en banc) (§§ 2809 & 2819);           Guild Wineries and

Distilleries v. Land Dynamics , 103 Cal. App. 3d 966, 972 (Cal. Ct. App. 1980)

(§§ 2845 & 2849).     Thus, the entire agreement, construed as a whole, evidences

the parties’ own understanding that California law applies to the particular issue

of the availability of an action for deficiency after private sale.

       SBKC cites the language in the Note’s choice of law clause which selects

Kansas as a forum for any deficiency action to support its view that Kansas law

applies. This forum selection clause, however, does not compel a conclusion that

Kansas law applies to the particular issue of the availability of a deficiency claim

                                            -9-
after a private sale. First, the issue is more specifically addressed in the

Extension Agreement. Second, the forum selection clause is not superfluous

because if SBKC had elected judicial foreclosure, as opposed to private sale, then

California’s anti-deficiency statute would not have applied and the forum

selection would have been operative for the then available deficiency claim.

       SBKC argues that a deficiency action is collateral to foreclosure and based

on the underlying debt so that choice of law determinations should be based on

the Note as opposed to the Deed of Trust. SBKC relies upon Restatement

(Second) of Conflict of Laws § 229, cmt. e, and cases applying that section.          See,

e.g. , Cardon v. Cotton Lane Holdings, Inc.     , 841 P.2d 198, 201 (Ariz. 1992)   . The

Extension Agreement we base our holding on, however, is not language from the

Deed of Trust, but an extension and modification of the terms of the Note. Thus,

to the extent the Restatement section applies at all, our holding is not inconsistent

with it or the relevant case law.

       Regardless, we question whether Kansas would apply the Restatement’s

general rule of collaterality to a foreclosure of California property. The Kansas

Supreme Court recently held that under Kansas choice of law rules, although

deed of trust transactions involve underlying contractual obligations subject to

traditional contractual choice of law rules, both the procedural and substantive

law of the situs applies to foreclosures.     See Resolution Trust Corp. v. Atchity    ,

                                            - 10 -
913 P.2d 162, 171-72 (Kan. 1996). In so holding, the court quoted one

commentator’s explanation that in our federal system, based as it is on territorial

sovereignty, the choice of law rules appropriate to one aspect of mortgage

transactions should not be applied to another.     See id. at 172 (quoting David B.

Young, Mortgages & Party Autonomy In Choice of Law          , 45 Ark. L. Rev. 345,

352 (1992)). Ultimately, the court held the allegedly Kansan issues in the case

were “so intertwined” with a Missouri mortgage that Missouri procedural and

substantive foreclosure law applied.    See id.

      Similarly, the allegedly Kansan issue of the availability of a deficiency

claim to SBKC in this case is so intertwined with the California foreclosure that

all of California’s foreclosure law applies, including § 580d. Under California

law, a creditor that elects to exercise a power of sale, free of the involved and

time-consuming procedures of judicial foreclosure, forgoes any deficiency claim

in exchange for the immediacy of private sale and the extinguishment of the

debtor’s right of redemption.    See Roseleaf Corp. v. Chierighino , 378 P.2d 97,

102 (Cal. 1963) (en banc). In judicial foreclosure, the threat of redemption and

elaborate judicial procedures protect debtors from harsh foreclosures by

encouraging a bid approximating the fair market value of the security.     See

Cornelison v. Kornbluth , 542 P.2d 981, 989 (Cal. 1975) (en banc). If a claim for

deficiency were not precluded after private sale, a creditor could gain

                                          - 11 -
irredeemable title by an under-market bid and still collect the difference between

the market value and the outstanding indebtedness, resulting in a windfall to the

creditor. See id. Section 580d places both creditor remedies on parity; in either

case the debtor is protected.    See Roseleaf , 378 P.2d at 102. The California

legislature, of course, could have granted redemption rights after private sale, but

§ 580d achieved the same result without denying creditors their election of

remedies. See id.

       Thus, California’s preclusion of a claim for deficiency serves the same

policy purpose as a right of redemption. It is well settled that the law of the situs

applies to the issue of the availability of a right of redemption, as such

availability is an effect of foreclosure.   See Restatement (Second) of Conflict of

Laws § 229, cmts. c & d. (providing the law of the situs applies to issues of the

effect of foreclosure, including redemption rights)     . These rules, together with

Kansas’s application of all situs foreclosure law, dictate our conclusion that

California’s purposeful substitution of anti-deficiency provisions for a grant of

redemption rights to protect debtors from harsh foreclosures applies.      See

Atchity , 913 P.2d at 171-72; Cardon , 841 P.2d at 201-04 (holding § 580d is

substantive provision of California foreclosure law);     California Fed. Sav. and

Loan Ass’n v. Bell , 735 P.2d 499, 504-06 (Haw. Ct. App. 1987) (rejecting

Restatement view that deficiency actions are collateral to foreclosure, noting that

                                            - 12 -
situs state has most significant relationship to land);      cf. Citibank v. Errico , 597

A.2d 1091, 1094-95 (N.J. Super. Ct. App. Div. 1991) (holding New York anti-

deficiency judgment provision is a matter of substantive law);         Catchpole v.

Narramore , 428 P.2d 105, 107-08 (Ariz. 1967) (en banc) (holding companion

Cal. Civ. Proc. Code § 580b is substantive law of foreclosure);         Ross Realty Co.

v. First Citizens Bank & Trust Co.     , 250 S.E.2d 271, 273 (N.C. 1979) (holding

similar statute is substantive law of foreclosure);       Gate City Fed. Sav. & Loan

Ass’n v. O’Connor , 410 N.W.2d 448, 450-51 (Minn. Ct. App. 1987) (holding

deficiency judgment issue is a matter of substantive law).

       Even if we were to consider the various choice of law clauses to be

ambiguous, the relevant extrinsic evidence confirms our conclusion that the

parties understood California law to apply to the issue.        See Stauth v. Brown , 734

P.2d 1063, 1069 (Kan. 1987) (holding extrinsic evidence is admissible to resolve

any contract ambiguity). First, SBKC required a legal opinion of Prospect

Partners before origination of the loan, which stated that the opinion was subject

to and limited by California anti-deficiency laws.        See I Aplt. App. at 231.

SBKC voiced no objection. Second, SBKC required the LOC as a credit

enhancement for the very reason that it understood California’s anti-deficiency

legislation to apply.   See VI Aplt. App. at 1516, ¶ 5. Finally, SBKC drafted the

waiver in the Extension Agreement, and insisted on its inclusion after Prospect

                                            - 13 -
Partners initially crossed it out and signed.         See Wood River Pipeline Co. v.

Willbros Energy Servs. Co. , 738 P.2d 866, 871 (Kan. 1987) (stating rule that

contract ambiguities are construed against the drafter). A jury could not

reasonably conclude on the evidence that the parties nevertheless understood

Kansas law to apply to the issue.

       Lastly, SBKC argues that even if § 580d applies, the district court erred in

applying California case law construing § 580d. SBKC relies upon            Kerivan v.

Title Ins. & Trust Co. , 147 Cal. App. 3d 225, 231 (Cal. Ct. App. 1983), for its

argument that § 580d extinguishes only the remedy of a deficiency in California,

and not the right to and remedy of a deficiency in another state.        Kerivan does

state that “[t]he ‘judgment’ referred to in [§ 580d] refers only to a judgment

rendered in this state and not to a judgment pursued in a state allowing

deficiencies following foreclosure sales.”       Kerivan , 147 Cal. App. 3d at 231.

Kerivan , however, is inapposite. That case involved a note choosing Colorado

law, and the Colorado courts granted a deficiency judgment arguably pursuant to

Colorado law. See id. at 228 n.1, 230-31. The            court held only that § 580d

would not prevent the giving of full faith and credit to, and collection of, a

deficiency judgment if it were obtained pursuant to Colorado law.           See id. at 230-

31. The court specified that no deficiency judgment would have been appropriate

“if the trial court ascertained that [the] note and the deed of trust were to be

                                             - 14 -
construed under the laws of this state . . . .”        Id. at 230. In our case, no

deficiency judgment may be obtained pursuant to another state’s laws because

California law applies, based on the Extension Agreement’s implicit choice, and

Kansas’s rule that both the procedural and substantive law of the situs applies to

foreclosures. SBKC’s deficiency claim is therefore precluded.              See Cardon , 841

P.2d at 201-04 (holding § 580d, as substantive provision of contractually chosen

California law, precluded deficiency action).

       Given our determination that Cal. Civ. Proc. Code § 580d precludes any

claim for deficiency, and the fact that liability of Jeffery could only be vicarious,

the issue of personal jurisdiction over him is moot. We accordingly vacate in

part the district court’s dismissal of SBKC’s claims against him for lack of

personal jurisdiction. SBKC’s additional arguments predicated on the

application of Kansas law to the deficiency issue are also moot.

       AFFIRMED IN PART and VACATED IN PART.

                                             Entered for the Court

                                             Paul J. Kelly, Jr.
                                             Circuit Judge

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