Court Opinion

ID: 8305685
Source: CourtListenerOpinion
Date Created: 2022-10-17 12:24:35.355491+00
Date Added: 2024-06-11T16:44:31.801325
License: Public Domain

ORDER DENYING PETITION FOR REHEARING
Appellant Wells Fargo Bank, N.A. (“Wells Fargo”) brought this appeal from the bankruptcy court’s decision in an adversary proceeding initiated by Appellee Ed Silva. The adversary proceeding relates to the bankruptcy of GVF Cannery, Inc. (“GVF”). On September 11, 1996, this Court affirmed in part, reversed in part and remanded the case to the bankruptcy court. Now, Silva has filed a petition for rehearing, claiming that this Court failed to address one of his grounds for appeal: whether the subordination agreement that he signed could be rescinded based on GVF’s fraud. For the following reasons, Silva’s petition for rehearing is DENIED.
DISCUSSION
In its September 11,1996 Order, the Court found that the subordination agreement signed by Silva was properly subject to waiver analysis, but determined that the bankruptcy court incorrectly applied California’s law of waiver. Consequently, the Court remanded the case to the bankruptcy court to make further factual findings on the waiver issue. The Court did not address the bankruptcy court’s additional determination that the subordination agreement was subject to rescission on the basis of fraud by GVF.1
After carefully considering the petition for rehearing, the Court finds that Silva is incorrect that it is necessary to analyze fraud as an independent ground for rescission of the subordination agreement. To the contrary, any alleged fraud used to obtain Silva’s waiver of his producer’s lien would impact upon the bankruptcy court’s determination of whether the waiver was knowing and voluntary. After all, it is difficult to imagine a valid waiver that is obtained through the use of fraud.
Moreover, even if the fraud issue did warrant independent consideration, it is not sufficient to justify rescission of the subordination agreement under the circumstances here. This is the case because Wells Fargo, as a third-party beneficiary, relied on the subordination agreement to its detriment. 1 Witkin, Sum. of Cal. Law, Contracts § 671(c) (1987) (a change in position by a third-party beneficiary of a contract protects that beneficiary against rescission of the contract); Angle v. U.S. Fidelity & Guaranty Co., 201 Cal.App.2d 758, 763, 20 Cal.Rptr. 391, 394 (1962) (same). Instead of rescission, parties *147to the contract are limited to suing each other for damages.
Silva’s reliance on the case of Protective Equity Trust No. 83 Ltd. v. Bybee, 2 Cal.App.4th 139, 2 Cal.Rptr.2d 864 (1991), to carve out an exception to the foregoing rule is misplaced. In Bybee, a seller agreed to sell real property to a buyer for $40,000 down and a purchase money trust deed of $170,000. The escrow instructions provided that the buyer would obtain a new construction loan of up to $95,000 and that the seller would subordinate the purchase money trust to this loan. The buyer subsequently obtained the loan and the seller signed a subordination agreement. However, the buyer did not use the loan for construction purposes and eventually defaulted on both the construction loan and the purchase money trust owed to the seller. The court held that the lender who gave the construction loan to the buyer could not enforce the subordination agreement because the lender could not assert greater rights than the buyer could himself. Id. at 151, 2 Cal.Rptr.2d at 870. The buyer was prevented from enforcing the subordination agreement because he did not comply with its terms by using the loan for construction purposes. Id.
Bybee is inapplicable here because the lender of the construction loan in that case was not even aware of the subordination agreement between the seller and buyer. Id. at 143, 2 Cal.Rptr.2d at 865. Therefore, the court in Bybee did not have the occasion to consider the issue before the Court in this ease, since the lender, as a third party beneficiary, could not have relied upon an agreement which it did not even know existed.
CONCLUSION
Based on the foregoing, Silva’s petition for rehearing is DENIED. The ease is REMANDED to the bankruptcy court for further proceedings consistent with this Court’s September 11,1996 Order.
IT IS SO ORDERED.

. The bankruptcy court made findings that GVF knowingly concealed information about its financial condition from Silva with the intent to deceive him, and that Silva justifiably relied on GVF's representations. In re GVF Cannery, 188 B.R. 651, 667-68 (N.D.Cal.1995).