Shahani v. East West Bank et al

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re ) Bankruptcy Case
) No. 09-33549DM
RAY K. SHAHANI, )
)
Debtor. ) Chapter 11
___________________________________)
RAY K. SHAHANI, individually and as) Adversary Proceeding
TRUSTEE OF THE 888 TRUST DATED ) No. 10-3022DM
AUGUST 10, 2006, )
)
Plaintiff, )
)
v. )
)
UNITED COMMERCIAL BANK, et al., )
)
Defendants. )
___________________________________)
MEMORANDUM DECISION FOLLOWING TRIAL
I. INTRODUCTION.
Plaintiffs Ray K. Shahani and the 888 Trust (together
“Shahani”) brought this action for breach of a construction loan
agreement, wrongful foreclosure, damages and other relief in the
San Francisco Superior Court against East West Bank as assignee
from the FDIC as Receiver for United Commercial Bank (both
referred to herein interchangeably as “Bank”) and other
defendants. After Ray K. Shahani filed Chapter 11 on November 11,
2009, he removed it to this court on February 24, 2010.
The court issued a Temporary Restraining Order and later on
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Signed and Filed: December 27, 2010
________________________________________
DENNIS MONTALI
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
December 27, 2010
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 10-03022 Doc# 56 Filed: 12/27/10 Entered: 12/27/10 11:19:14 Page 1 of 6

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May 10, 2010, a Preliminary Injunction (the “Injunction”)
prohibiting Bank from disposing of the real property at 888
Airport Blvd. in Burlingame, CA (the “Property”).
The matter was tried to the court on September 20 & 21, 2010,
and thereafter the parties submitted simultaneous post-trial
written arguments. The court took the matter under submission and
on November 8, 2010, issued its Preliminary Ruling Following
Trial. In that ruling the court noted that pivotal to the
resolution here is the issue of whether Shahani or Bank first
breached the March 16, 2007, Construction Loan Agreement between
United Commercial Bank and the 888 Trust (the “CLA”). If Shahani
did, the Bank’s non-performance thereafter is excused; if Bank
did, Shahani might well be entitled to set aside the foreclosure
sale or recover damages.
Shahani thereafter asked to submit further argument and the
court afforded both sides an opportunity to do so. Having
considered those additional arguments, the court adheres to its
preliminary ruling and will enter judgment in favor of Bank.
II. DISCUSSION.1
Under the CLA, Bank loaned $2,025,000 to pay off an existing
loan on the Property and finance the construction of an office
building on it. Bank’s commitment under the CLA was to finance
the completion of what the parties have described as the warm
shell of the building, not the final improvements.
The loan was evidenced by a promissory note and secured by a
deed of trust with the usual terms for enforcement in the event of
The following discussion constitutes the court's findings of	1
fact and conclusions of law. Fed. R. Bankr. P. 7052(a).
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a default. The original due date of the note was April 5, 2008.
During the course of construction Shahani chose to develop
and construct more improvements on the Property than were
contemplated by the CLA. He advanced $533,000 for those
additional improvements. Shahani selected Scott General, Inc.
(“Scott”) as the general contractor on the project. Bank selected
an independent third party inspection company, Cardinal
Consulting, Inc. (“Cardinal”) to monitor progress on the project,
including verifying percentages of completion in response to
periodic draw requests.
By May, 2008, Scott became concerned about Shahani’s ability
to pay for the additional improvements he was adding beyond those
covered by the CLA. When Shahani was unable to supply Scott with
evidence of an ability to pay for those improvements, Scott
abandoned the project on May 22, 2008, asserting that it was owed
approximately $196,000 in unpaid fees and costs.
When presented with Draw Request No. 10, Cardinal reviewed
the progress of the project, including the difficulties with Scott
that included a mechanic’s lien Scott recorded against the
Property on June 5, 2008. Cardinal recommended responding to Draw
Request No. 10 by having Bank release an amount limited to
approximately $118,600, or roughly 60% of that claimed by Scott in
its mechanic’s lien. Shahani contends that Bank breached the CLA	2
by denying payment of Draw Request No. 10 and that had it honored
that request he could have satisfied Scott and saved the project.
Bank countered by arguing that Scott’s abandonment on May 22,
Scott recorded a second mechanic’s lien a few weeks	2
thereafter.
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constituted an event of default under section 25.18 of the CLA,
namely if its borrower ceases construction on the Property.
Further, section 25.16 of the CLA provides the an event of default
occurs if any default continues beyond any applicable cure period.
Bank also contends that Scott’s recording of the mechanic’s liens
against the Property constituted two independent defaults under
section 25.10 of the CLA. Shahani contends that had Scott been
paid the $118,600, it would not have pursued its mechanic’s liens
remedies. The court rejects this argument as unfounded and pure	3
speculation.
Shahani also contends notwithstanding the problems with Scott
and the recorded mechanic’s liens, that Bank extended the maturity
date of the note from October 5, 2008, until January, 2009, and
thus its recording of a notice of default on January 29, 2009, was
premature. Shahani relies on a December 10, 2008, e-mail from
Bank officer Leonard Woolfolk (“Woolfolk”) stating, “the loan is
being extended through January, 2009.” The court agrees with Bank
that at the time of the Woolfolk e-mail, the loan was already in
default and there was nothing to extend. Further, there were no
contractual agreements or discussions about any definitive terms
of such an extension. In any event, a few days after the Woolfolk
e-mail Bank informed Shahani in writing that the amounts due under
the loan were due and payable and Shahani expressed no concern
about any purported extension of the loan.
Bank recorded its notice of default on January 29, 2009, just
two days prior to the date Shahani contends was an extended
Shahani ultimately settled with Scott in August, 2009.	3
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maturity of the Note. Because the sale did not occur until
October 1, 2009, Shahani had ample time to pay off the entire
amount due under the loan as permitted by California Civil Code §
2924(f).
Following trial the Bank appears to have abandoned its
contentions about Shahani’s abandonment of the project, and with
good reason. Woolfolk was crystal clear in his belief that
Section 25.18 applied, and repeatedly stressed that Scott’s
walking off the project was a breach by Shahani. It is crystal
clear that he was incorrect. Had Shahani terminated Scott,
Woolfolk would have been correct, but that is not what happened.
For section 25.18 to apply, Shahani would have had to abandon the
project. He did not. Thus there were not two extant breaches oof
the CLA as of June 5, 2008; there was one, the recorded mechanic’s
lien, but it was material enough to excuse Bank from funding Draw
Request No. 10. The second mechanic’s lien added another breach
of the CLA.
Shahani cannot avoid or defend those breaches. As
persuasively argued by Bank in its post-trial brief, it would
require too much speculation for the court to conclude that had
Bank paid approximately $118,000 on June 6 (or June 10,
recognizing that Bank was entitled to a response to a June 3 e-
mail asking for more details regarding how Shahani was dealing
with Scott) that Scott would have removed its first lien and not
recorded its second one. While perhaps not Shahani’s fault
(except to the extent he could not provide Scott with financial
assurances), Scott’s conduct led to the conditions described in
Exhibits A and F (see Bank’s post-trial brief at 5:9-19) excusing
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Bank’s further performance.
On other issues presented, the court agrees with Bank. The
January 29, 2009, Notice of Default was not premature. Bank did
not violate a duty of good faith and fair dealing. Bank’s offer
to accept a discount in full satisfaction of its note upon
Shanhan’s refinancing of the project through Private Funding
Solutions, Inc., by a deadline expired before the refinancing
could be accomplished, and Bank was under no legal obligation to
extend that deadline. The exchange of e-mails and voicemail
messages in the final hours before the sale did not invalidate the
foreclosure sale and had no effect on the outcome.
Because the court is ruling in favor of Bank it does not need
to address whether Debtor, Ray K. Shahani, has standing to
prosecute this action when the Property was owned by the 888
Trust.
Bank is entitled to a dissolution of the Injunction and entry
of a judgment in its favor for the reasons set forth in this
memorandum decision. Each side should bear their own costs.
Bank’s counsel should serve and upload such a judgment, and comply
with B.L.R. 9021-1.
* * * END OF MEMORANDUM DECISION * * *
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