CMR Mortgage Fund, LLC v. Canpartners Realty Holding Company IV LLC et al

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UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re
CMR MORTGAGE FUND, LLC, a
California limited liability
company,
Debtor.
CMR MORTGAGE FUND, LLC, a
California limited liability
company,
Plaintiff,
vs.
CANPARTNERS REALTY HOLDING
COMPANY IV LLC, a Delaware
limited liability company; SCD
KUNIA, LLC, a Hawaii limited
liability company; and STANFORD
CARR, an individual, and DOES 1
through 20, inclusive,
Defendants.
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Case No. 08-32220 TEC
Chapter 11
Adv. Proc. No. 08-3148-TC
MEMORANDUM DECISION RE CANPARTNERS REALTY HOLDING CO. IV LLC’S
MOTION TO DISMISS
Upon due consideration, and for the reasons stated below, the
motion to dismiss filed by Canpartners Realty Holding Co. IV LLC is
Signed and Filed: May 08, 2009
________________________________________
THOMAS E. CARLSON
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
May 08, 2009
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
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1 Defined as CMR or Canyon. Credit Agmt., § 1.1.
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granted with leave to amend as to all claims except the claim for
declaratory relief, which is dismissed without leave to amend.
FACTS
This dispute arises out of a $97,000,000 loan to Halekua
Development Corporation (“HDC”). 	Defendant Canpartners Realty
Holding Co. IV LLC (“Canyon”) and Plaintiff CMR Mortgage Fund, LLC
(“CMR”) funded HDC’s acquisition and development of Hawaiian real
property. 	Compl., ¶ 12. 	This transaction was memorialized by,
inter alia, the following agreements.
A. 	The Credit Agreement
On March 12, 2007, Canyon, CMR, and HDC executed the Credit
Agreement, pursuant to which CMR loaned HDC $42,900,000 and Canyon
loaned HDC $55,000,000 (collectively, the “Loan”). 	The Property was
immediately transferred to a subsidiary of HDC, Halekua-Kunia, LLC
(HK LLC), which assumed the Loan. 	(HK LLC and HDC are collectively
referred to herein as “HDC”). 	HDC used the Loan to acquire 161
acres of real property in Hawaii (the “Property”). 	Compl., ¶ 12.
Canyon holds the “A Note”; CMR holds the “B Note”. 	The A Note and
the B Note (collectively, the Notes) are secured by the Property,
all of the membership interests of HK LLC, and other personal
property, including funds held in certain reserve accounts. 	Credit
Agmt., §§ 6, 7.
Under the terms of the Credit Agreement, a portion of the Loan
funds were used to set up reserve accounts, including a $6,000,000
account established to pay a third party to provide fill material.
Compl., ¶¶ 13, 25. 	If an Event of Default occurred under the Credit
Agreement, Lender 1 “in its sole and absolute discretion, may use the
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Reserves . . . for any purpose”, including application of the
reserve in connection with the exercise of Lender’s remedies under
the Credit Agreement. 	Credit Agmt., §§ 6.1.2; 12.2.4.
The Credit Agreement required HDC to repay Canyon the full
principal and outstanding interest on the A Note on March 12, 2008.
Id., § 3.1. 	HDC did not make that payment.
B. 	The Co-Lender Agreement
On March 12, 2007, CMR and Canyon entered into a co-lender
agreement (the “Co-Lender Agreement” or “CLA”). 	CMR’s rights under
its B Note are expressly subordinate to Canyon’s rights under the A
Note. 	CLA, §§ 6, 7, 9. 	The Co-Lender Agreement provides that CMR
is responsible for funding future advances, and that Canyon is to
administer the Loan. 	Id., §§ 4, 5.
Section 4(a) of the Co-Lender Agreement provides that Canyon
shall administer the Loan as agent for CMR and Canyon, subject to
“Accepted Servicing Practices”, defined as
the servicing and administration of the Loan in accordance
with applicable law, the terms of this Agreement and the
Loan Documents, and, to the extent consistent with the
foregoing, further as follows: (1) with the same care,
skill, and diligence as is normal and usual in A Note
Holder’s general commercial mortgage servicing with
respect to mortgage loans that are comparable to the Loan;
(ii) with a view toward preserving and protecting the Loan
and the Collateral; and (iii) without regard to any other
relationship that A Note Holder or any Affiliate thereof
may have with Borrower.
CLA, § 1(a)(xii).
The Co-Lender Agreement provides as follows regarding CMR’s
exercise of remedies upon HDC.
Subject to section 9(d) below, if a Continuing Event
of Default occurs under the Loan which has not been timely
cured. . . including . . . any Event of Default arising
from the maturity of the A Loan, A Note Holder and B Note
Holder hereby agree to use reasonable efforts to reach an
agreement with each other on an appropriate manner for
responding to such Continuing Event of Default. . . . If A
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Note Holder and B Note Holder cannot reach an agreement
within ten (10) days following the expiration of the
applicable cure period . . . A Note Holder may initiate
foreclosure proceedings or any other Enforcement Action. .
. 	Notwithstanding anything contained herein to the
contrary . . . [and subject to B Note Holder’s cure
rights], A Note Holder shall be entitled to commence an
Enforcement Action at any time without the consent of B
Note Holder if A Note Holder reasonably determines that
the commencement of an Enforcement Action is necessary to
preserve the Collateral after consultation with B Note
Holder.
Id., § 9(a)(emphasis added). 	In addition, Canyon has the right to
initiate an enforcement action when an Event of Default exists at
any time during which there is an “Equity Control Condition.” 	Id.,
§ 9(d).
In the event of an uncured Continuing Event of Default, Canyon
may: (1) take possession of any of the reserves, including the Fill
Reserve; and (2) institute foreclosure proceedings as an
“Enforcement Action”. 	Credit Agmt., §§ 6.1.2, 6.8, 12.2.4.
Before the completion of a foreclosure sale, CMR has the
option: (a) to take title to the Property; or (b) to purchase the A
Note. 	CLA, § 9(b). 	If CMR does not exercise either of these
options, and Canyon is the winning bidder at any foreclosure sale,
then transfer of title to Premises or the Pledged
Interests shall be in the name of [Canyon] . . . and [CMR]
shall have no further rights or interests in the Loan,
(ii) all subsequent Loan Recoveries shall belong to A Note
Holder; and (iii) except for the indemnification
obligations of [CMR] and [Canyon], this Agreement shall
terminate.
Id., § 9(b)(emphasis added).
The Co-Lender Agreement contains the following choice of law
provision.
In all respects, including, without limitation, matters of
construction and performance of this Agreement and the
obligations arising hereunder, this Agreement shall be
governed by, and construed in accordance with, the
internal laws of the State of New York.
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CLA, § 23.
C. 	The Pre-Negotiation Agreement
On May 1, 2008, approximately six weeks after HDC failed to pay
the A Note upon its due date, Canyon, CMR, and HDC executed the Pre-
Negotiation Agreement. 	The Pre-Negotiation Agreement recites that
the Loan maturity date under the Credit Agreement occurred on March
12, 2008, and that the conditions to exercise the option to extend
the maturity date were not satisfied. 	Recital D. 	The Pre-
Negotiation Agreement recites that Canyon received $1,375,000 from
CMR, and requires Canyon to apply this sum in accordance with the
Loan Documents and the Co-Lender Agreement. 	Recital G.
The Pre-Negotiation Agreement defines CMR as both a “Lender”
and a “Borrower Party.” 	Preamble.
Section 4 of the Pre-Negotiation Agreement preserves Canyon’s
right to take enforcement action by providing that Canyon’s
participation in the negotiations “shall not constitute or evidence
any waiver, estoppel, release, modification, limitation or
forbearance, or any agreement by either Lender to delay the exercise
of either Lender’s rights or remedies. . . .”
Section 6 of the Pre-Negotiation Agreement provides that the
Borrower Parties “irrevocably release” any existing claims or
defenses
arising out of the Loan, the Loan Documents, the Co-Lender
Agreement, the Collateral or the Property, or any past
relationship between or among Borrower Parties [or] Canyon
. . . that can be asserted . . . either to reduce or
eliminate . . . Borrower Party’s liability, if any, for
the Loan or to seek affirmative relief or damages of any
kind or nature from either Lender . . . [except that]
Borrower Parties have the right . . . to have the . . .
Collateral . . . applied in accordance with the Loan
Documents; and (2) CMR has the right . . . to application
by Canyon of the Deposit in accordance with the Loan
Documents and the Co-Lender Agreement.
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Section 7 of the Pre-Negotiation Agreement provides that “the
Borrower Parties” (including CMR) release the Lenders (including
Canyon) from
any and all claims, . . . arising, directly or indirectly,
in any manner from and/or out of (i) the Loan, the Loan
Documents, the Co-Lender Agreement, the Collateral and/or
the Property, (ii) either Lender’s acts. . . in connection
therewith, including, . . . the terms and conditions of
this [Pre-Negotiation] Agreement, or (iii) any . . .
transaction or event relating thereto, whether known or
unknown, . . . whether now existing or hereafter arising.
. . provided, however, that the foregoing release shall
not apply to the Excluded Claims, any obligations . . . of
any of the Lender Releasees which arise under this
Agreement, or arise on or after the date hereof under the
Loan, the Loan Documents or the Co-Lender Agreement.
D. 	The Complaint
On November 30, 2009, CMR filed the complaint initiating this
action. 	CMR alleges that, as the Loan approached its maturity date
in March 2008 and in the months thereafter, Canyon engaged in a
course of commercially unreasonable conduct designed to frustrate
CMR’s efforts to negotiate a work-out that would preserve the
interests of both Canyon and CMR. 	Compl., ¶ 20. 	CMR alleges that
Canyon engaged in this conduct in an effort to eliminate all of
CMR’s rights in the Loan, the security, the Property, and the
project, and to seize for itself CMR’s equity in the Property, plus
any potential profits from the project. 	Id.
CMR asserts the following causes of action against Canyon:
(1) breach of contract; (2) breach of the covenant of good faith and
fair dealing; (3) breach of fiduciary duty; (4) bad faith waste;
(5) gross negligence; (6) declaratory relief; (7) equitable
subordination; (8) equitable reformation; (9) equitable estoppel;
and (10) aiding and abetting breach of fiduciary duty.
All of the alleged claims rely upon a common set of underlying
allegations: failure to service the loan in a commercially
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reasonable manner, failure to protect CMR’s interests, improper
seizure of the Fill Reserve, failure to negotiate a work out,
improper institution of enforcement actions, acceptance of the
$1,375,000 paid by CMR without extending the Loan, and differing
interpretations regarding the effect of Canyon purchasing the
collateral at a foreclosure sale.
On January 5, 2009, Canyon filed a motion to dismiss the
complaint for failure to state a claim upon which relief may be
granted.
LAW
A. 	Standard of Review
A court should dismiss a complaint if it does not set forth
factual allegations permitting a plausible conclusion that the
plaintiff would be entitled to relief if allowed to proceed beyond
the motion to dismiss. 	Bell Atlantic v. Twombly, 127 S.Ct. 1955,
1965 (2007). 	Allegations based upon mere possibility, suspicion, or
speculation are insufficient. 	Rather, the plaintiff must plead
specific facts providing a plausible basis to conclude that the
essential elements of the asserted claim are met. 	Id.
In ruling upon a motion to dismiss, the court may consider the
contents of documents referred to the complaint and central to the
complaint, if the authenticity of the documents is not contested.
Parrino v. FHP, Inc., 146 F.3d 699, 705-06 (9th Cir. 1998); Branch
v. Tunnell, 14 F.3d 449, 454 (9th Cir. 1994) (overruled on other
grounds in Galbraith v. County of Santa Clara, 307 F.3d 1119, 1127
(9th Cir. 2002)). 	The court may consider such documents without
converting the motion to dismiss into a motion for summary judgment.
Knievel v. ESPN, 393 F.3d 1068, 1076-66 (9th Cir. 2005). 	Any
ambiguity in the documents, however, must be resolved in the
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28 	2 California state courts also apply the principles set forth
in Restatement (Second) of Conflicts section 187. 	Nedlloyd Lines
B.V. v. Sup. Ct., 3 Cal. 4th 459, 464-65 (1992).
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plaintiff’s favor. 	Int’l Audiotext Network, Inc. v. AT&T Co., 62
F.3d 69, 72 (2d Cir. 1995); Hearn v. R.J. Reynolds Tobacoo Co., 279
F.Supp. 2d 1096, 1102 (D. Ariz. 2003).
If a court dismisses a complaint, leave to amend should be
freely given. 	Leave to amend should not be granted if amendment
would be futile. 	Theme Promotions, Inc. v. News Am. Mkting. FSI,
546 F.3d 991, 1010 (9th Cir. 2008).
B. 	Validity and Scope of Choice-of-Law Clause
A bankruptcy court applies federal common law choice-of-law
rules to determine the enforceability of a contractual choice-of-law
provision, even when resolution of the underlying dispute turns on
state law. 	Mandalay Resort Group v. Miller, 292 B.R. 409, 413 (9th
Cir. BAP 2003). 	Federal common law applies section 187 of the
Restatement (Second) Conflicts of Law to determine the
enforceability of contractual choice-of-law provisions. 2
Subdivision (1) of the Restatement (Second) of Conflicts
provides:
The law of the state chosen by the parties to govern
their contractual rights and duties will be applied if the
particular issue is one which the parties could have
resolved by an explicit provision in their agreement
directed to that issue.
The comments to section 187 provide that parties may agree to
apply the law of a forum to decide all questions regarding the
construction and performance of an agreement, but not questions
regarding capacity to contract, or other contract-formation issues.
Id. cmts. c, d.
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3 I decline to follow Nedlloyd’s contrary reading of
Restatement section 187(1). 	First, the court’s comments regarding
section 187(1) were not necessary to the court’s decision and are
dictum. 	Second, it is apparent that the Nedlloyd court did not
read carefully comments c and d to section 187, indicating why
dictum is not binding. 	Third, state-court decisions regarding
Restatement section 187 are not binding, because federal common law
governs the enforceability of choice-of-law provisions, even though
the underlying claims arise under state law.
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In this action, sophisticated, well-represented parties
expressly contracted to apply New York law to all “matters of
construction and performance of this Agreement and the obligations
arising hereunder.” 	The complaint alleges claims involving matters
of construction and performance of the Co-Lender Agreement. 	The
complaint does not allege that any party lacked capacity to
contract, or that a binding contract was not formed. 	Accordingly,
the choice-of-law clause is valid under section 187(1). 	Swanson v.
Image Bank, Inc., 206 Ariz. 264, 267 (2003) (interpreting Rstmt.
§ 187(1)) (enforcing contractual choice of law is particularly
appropriate where parties had relatively equal bargaining power, and
were both represented by counsel).
Where, as here, the making of a contract is not in dispute, the
law chosen by the parties need not have any reasonable relationship
to the place of creation or performance of the contract. 	Such a
relationship is necessary under section 187 of the Restatement only
where the parties seek to specify choice of law governing issues
concerning formation or validity of the contract. 3
The law to be applied to tort claims is the law of the forum
state. 	Investors Equity Life Ins. Co. of Hawaii, Ltd. v. ADM
Investors Svs., Inc., 1 Fed. Appx. 709, 711 (9th Cir. 2001) (citing
Sutter Home); Sutter Home Winery, Inc. v. Vintage Selections, Ltd.,
971 F.2d 401 (9th Cir. 1992)(“Claims arising in tort are not
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ordinarily controlled by a contractual choice of law provision.”);
accord Superior Leasing, LLC v. Kaman Aerospace Corp., 2006 WL
3756950 at *8-9 (D. Or. 2006).
C. 	Analysis of Claims for Relief
1. 	First and Second Claims for Relief: Breach of Contract and
Breach of the Implied Covenant of Good Faith and Fair
Dealing
CMR alleges that Canyon breached both the Co-Lender Agreement
and the Credit Agreement by: (i) failing to service and administer
the Loan with the care, skill and diligence; (ii) failing to
preserve and protect Plaintiff’s interest in the Loan and the
collateral; (iii) seizing the funds held in the Fill Reserve and
applying them to Canyon’s Note; (iv) failing to negotiate a work-out
of the Loan in good faith; and (v) releasing security and taking
enforcement actions without CMR’s consent. 	CMR alleges that Canyon
further breached the Co-Lender Agreement and the Credit Agreement by
accepting the $1,375,000 fee paid by CMR to extend the Loan, but
then contending the maturity date of the Loan was not extended and
refusing to return the fee.
(a) 	Failure to administer the Loan in a commercially
reasonable manner
The complaint contains wholly conclusory allegations regarding
Canyon’s alleged failure to service the Loan in a commercially
reasonable manner. 	It alleges no facts other than a recitation that
Canyon failed to adhere to accepted servicing practices and breached
the implied covenant of good faith and faith and fair dealing.
Conclusory allegations that merely recite the elements of a claim
are insufficient to state a claim upon which relief may be granted.
Twombly, 127 S.Ct. at 1965.
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(b) 	Releasing security and taking enforcement action without
CMR’s consent; failure to preserve CMR’s interest in the
Loan and in collateral.
The complaint asserts that Canyon seized the Fill Reserve and
commenced foreclosure proceedings without CMR’s consent.
Specifically, CMR alleges that on August 11, 2008, Canyon, without
prior notice to or consent from CMR, seized $6,101,529 from the Fill
Reserve and applied it to the A Loan. 	CMR alleges that this act
released collateral that had been given to secure both the A Note
and the B Note, and thereby stripped funds that could have been used
to keep the monthly Loan payments current until 2009 Id., ¶¶ 27, 28.
CMR also alleges that on October 16, 2008, Canyon unilaterally
issued a notice of default, and gave notice that it was going to
conduct a UCC public foreclosure sale of 100 percent of HK LLC’s
membership interests. 	Compl., ¶ 30. 	As explained below, these
alleged acts were expressly permitted by the Co-Lender Agreement,
and cannot be the basis for a claim upon which relief may be
granted. 	Twombly, 127 S.Ct. at 1965.
(i) Fill Reserve. 	Canyon had the right to initiate the
foreclosure proceedings and to seize the Fill Reserve and apply it
to the A Note without CMR’s consent, if Canyon used reasonable
efforts to reach an agreement with CMR and could not reach such an
agreement within ten days. 	The complaint acknowledges that Canyon
negotiated for more than ten days, and alleges only in the vaguest
of terms that Canyon did not use reasonable efforts to reach an
agreement. 	The complaint does not allege that Canyon refused to
meet during the 10-day negotiation period. 	Nor does the complaint
allege that CMR proposed a solution during the 10-day period that
would have fully protected Canyon’s interest, and that Canyon
refused to consider the proposal. 	Absent such allegations, the
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complaint does not allege a breach of section 9(a) of the Co-Lender
Agreement.
(ii) Foreclosure proceedings. 	CMR contends that the last
sentence of 9(a) of the Co-Lender Agreement permits Canyon to
commence an Enforcement Action, only if such action conforms with
Accepted Servicing Practices, and only if consultation with B Note
Holder suggests that such action is necessary to preserve the
collateral CLA, § 9(d). 	This interpretation is unreasonable,
because it would render other provisions of the Co-Lender Agreement
meaningless.
In the event of default, CMR has the right to cure within a
specified period. 	CLA, § 10. 	Canyon has the right to commence
foreclosure proceedings if the parties are unable, after a ten-day
period of negotiation, to agree upon an alternative response to the
Event of Default. 	Id., § 9(a). 	Canyon has the right to commence an
Enforcement Action, without negotiating for ten days, at any time
Canyon reasonably determines that such action is necessary to
preserve the collateral. 	Id.
The complaint alleges that negotiations continued beyond ten
days, and does not allege that the Enforcement Action was brought
under the “emergency clause” affording Canyon rights to bring an
enforcement action without any negotiations. 	Compl. ¶¶ 20, 23.
Only if Canyon is acting under the “emergency clause” of section
9(a), must Canyon “reasonably determine” that enforcement action is
necessary to preserve the collateral. 	Applying the “reasonably
determines” language to enforcement actions taken by Canyon after
ten days of negotiations with CMR conflicts with the first sentence
of section 9(a), which entitles CMR to bring an enforcement action
whether or not the collateral is at risk.
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Nor does section (4)(a) (accepted servicing practices) limit
Canyon’s rights to initiate foreclosure proceedings under sections
9(a) or 9(d), because “accepted servicing practices” is defined to
mean “the servicing and administration of the Loan, in accordance
with . . . the terms of this Agreement, . . . and to the extent
consistent with the foregoing. . . .” 	CLA, § 1(a)(xii). 	Construing
“accepted servicing practices” to require that Canyon obtain CMR’s
consent to foreclosure conflicts with section (9)(a), which
expressly authorizes Canyon to foreclose after ten days of
negotiations, and section 9(d), which authorizes Canyon to foreclose
any time an Event of Default exists concurrently with an Equity
Control Condition.
Because the complaint alleges that Canyon engaged only in
conduct that was expressly permitted by the Co-Lender Agreement, the
complaint fails to state a claim for breach of section (9), or a
claim for breach of the covenant of good faith and fair dealing.
Warner Theatre Assoc. L.P. v. Met. Life Ins. Co., 1997 WL 685334 at
6 (S.D.N.Y. 1997); Hartford Fire Ins. Co. v. Federated Dep’t Stores,
Inc., 723 F.Supp. 976, 991 (S.D.N.Y. 1989); Collard v. Inc. Village
of Flower Hill, 427 N.Y.S.2d 391, 301 (2d Dep’t 1980), aff’d, 52
N.Y. 2d 594 (1981).
(c) 	Failure to negotiate a work-out in good faith
CMR fails to state a claim for breach of contract as to loan
work-out negotiations occurring on or after May 1, 2008, because
Canyon had no contractual or other obligation to enter into a new
contract with CMR. 	Furthermore, the only allegations in the
complaint regarding work-out negotiations involve conduct that
occurred after May 1, 2008. 	CMR released all claims regarding the
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4 For this reason, the complaint also fails to state a claim
for breach of the implied covenant of good faith and fair dealing
upon which relief may be granted with respect to Canyon’s conduct
in the work-out negotiations. 	Warner Theatre, 1997 WL 685334 at 6;
Hartford Fire Ins., 723 F.Supp. at 991; Collard, 427 N.Y.S.2d at
301.
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work-out negotiations arising after that date. 	Pre-Negotiation
Agmt., § 5. 4
(d) 	$1,375,000 extension fee
The complaint fails to state a claim for breach of contract
upon which relief may be granted with respect to CMR’s acceptance of
the extension fee and refusal to extend the Loan. 	The complaint
does not allege that the specific conditions to extend the maturity
date were satisfied. 	Credit Agmt. § 3.2. 	Nor do the Co-Lender
Agreement or Credit Agreement condition acceptance of the fee upon
extension of the Loan, or require Canyon to return the fee if it
elects not to extend the Loan. 	More important, the Pre-Negotiation
Agreement expressly permitted Canyon to accept the fee without
extending the Loan. 	Recital G. 	Because Canyon’s conduct regarding
the extension fee and refusal to extend the Loan maturity date was
expressly permitted by the Co-Lender Agreement, the Credit
Agreement, and the Pre-Negotiation Agreement, the complaint fails to
state a claim upon which relief may be granted for breach of
contract or breach of the implied covenant of good faith and fair
dealing. 	Twombley, 127 S.Ct. at 1965; Warner Theatre, 1997 WL
685334 at 6; New Bank of New England, 768 F. Supp. at 1021.
2. 	Third Claim for Relief: Breach of Fiduciary Duty
The complaint alleges that Canyon owed CMR a fiduciary duty in
servicing and enforcing the Loan. 	CMR alleges that Canyon owed CMR
a separate fiduciary duty to work out an approach satisfactory to
both lenders as the A Loan approached maturity in March 2008.
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Compl., ¶ 44. 	For the following reasons, the complaint fails to
state a claim for breach of fiduciary duty.
First, the parties contractually agreed to eliminate liability
for breach of fiduciary duty for actions taken in connection with
the Co-Lender Agreement and in connection with the administration of
the Loan. 	The Co-Lender Agreement provides as follows:
Neither A Note Holder nor B Note Holder shall: (i) be
liable for any action taken or omitted by it under or in
connection with this Agreement or any other Loan Document
or the transactions contemplated hereby (except for its
own gross negligence or willful misconduct).
CLA, § 4(h).
The Co-Lender Agreement also provides:
B Note Holder Agrees that A Note Holder owes no
fiduciary duty to B Note Holder in connection with the
administration of the Loan and the Loan Documents and B
Note Holder agrees not to assert any such claim. 	A Note
Holder shall abide by the Loan Documents and the Accepted
Servicing Practices. 	A Note Holder agrees that B Note
Holder owes no fiduciary duty or standard of care to A
Note Holder in connection with the administration of the
Loan and the Loan Documents and A Note Holder agrees not
to assert any such claim.
CLA, § 8(a). 	Unambiguous provisions in commercial agreements that
limit the liability of one party to the other are enforceable. 	New
Bank of New England, 768 F.Supp. at 1022; Laclede Inv. Corp. v.
Kaiser, 596 S.W.2d 36, 39 (Mo. App. E.D. 1980).
Second, CMR does not allege that Canyon failed to apply the
Fill Reserve proceeds in accordance with the Loan Documents or that
Canyon absconded with those funds. 	The complaint alleges the
elements of a claim for breach of fiduciary duty only in the most
general sense. 	Such conclusory allegations are insufficient to
state a claim upon which relief may be granted.
Third, courts will not impose a fiduciary duty on Canyon to
negotiate a workout with CMR, because senior lender Canyon has very
different interests from junior lender CMR upon HDC’s failure to pay
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the Loan when due. 	First Citizens Fed. Savings & Loan Ass’n v.
Worthen Bank & Trust Co., N.A., 919 F.2d 510, 514 (9th Cir. 1990);
New Bank of New England, N.A. v. Toronto-Dominion Bank, 768 F.Supp.
1017, 1021 (S.D.N.Y. 1991) (applying California law).
In its opposition brief, CMR contends that: (1) Canyon was
CMR’s agent and agency is a fiduciary relationship; (2) California
law suggests that fiduciary duties cannot be waived; (3) waiver is a
question of fact; and (4) the subsequent relationship between CMR
and Canyon gave rise to a separate fiduciary duty to negotiate a
Loan work out. 	These arguments are unpersuasive.
First, even if Canyon was acting as CMR’s agent, CMR
contractually waived its claims for breach of fiduciary duty against
Canyon. 	See supra, p. 15.
Second, the case cited by CMR to support its argument that
fiduciary duties cannot be waived is easily distinguishable. 	In BT-
I v. Equitable Life Ass. Society, 75 Cal. App. 4th 1406 (1999), the
court held that a limited partnership agreement cannot relieve the
general partner of its fiduciary duties in matters fundamentally
related to the partnership business. 	Id. at 1412. 	The court stated
that a “partnership is a fiduciary relationship, and partners are
held to the standards and duties of a trustee in their dealings with
each other.” 	Id. 	A partnership involves two or more people who
contribute capital or labor with an understanding that they will
proportionately share profits and losses. 	(Black’s Law Dict., 6th
Ed.) 	Canyon and CMR were not partners. 	CLA, § 25 (“Nothing
provided hererin is intended to create a joint venture, partnership,
tenancy-in-common or joint tenancy relationship between or among any
of the parties hereto”). 	Rather, they were a senior lender and a
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junior lender. 	As set forth above, courts do not imply a fiduciary
relationship between sophisticated commercial co-lenders.
Third, interpretation of an unambiguous contract is a question
of law. 	Coremetrics, Inc. v. Atomic Park.com, LLC, 2005 WL 3310093
at *3 (N.D. Cal. 2005). 	The case cited by CMR to support its
argument that waiver is a question of fact is distinguishable.
Bickel v. City of Piedmont, 16 Cal.4th 1040, 1052 (1997) did not
involve interpretation of a contractual waiver provision, but
whether a party may waive the protections of a California statute
establishing time limits for government approval of development
project applications.
Fourth, even if a separate fiduciary duty did arise during the
attempted work-out, CMR and Canyon expressly waived all claims
against each other that might arise during those work-out
negotiations. 	See supra, p. 14. 	This waiver is broad, and
encompasses CMR’s claim for breach of fiduciary duty arising during
the work-out negotiations after May 1, 2008.
3. 	Fourth Claim for Relief: Bad Faith Waste
The complaint alleges that by seizing the Fill Reserve and
applying it to pay down the A Note, Canyon committed waste and
impaired CMR’s security for repayment of the B Note. 	Compl., ¶ 50.
The complaint further alleges that Canyon deprived CMR of a source
of funds that could have been used to keep monthly payments on the
Loan current. 	Id.
Under California law, “waste” is defined as the destruction,
misuse, alteration, or neglect of real property by a person who is
in lawful possession to the injury of the interest (or estate) of
another in the property. 	4 Miller & Starr, Cal. Real Estate, Deeds
of Trust, § 10.53 (citing Cal. Civ. Code §§ 1714(a), 2929). 	“Bad
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faith” waste must be caused by the reckless, intentional or
malicious injury to the property. 	Id. at § 10:216; Cornelison v.
Kornbluth, 15 Cal.3d 590, 604-05 (1975).
Citing Nippon Credit Bank v. 1333 North Cal. Blvd., 86 Cal.
App. 4th 486 (2001), CMR contends that when conduct impairs security
held for repayment of a loan, a claim for bad faith waste will lie.
Nippon held that a trustor’s intentional non-payment of property
taxes can constitute bad faith waste. 	Id. at 493-99. 	The theory
underlying such claim is that a mortgagee is entitled to have his
mortgage security unimpaired by acts of the mortgagor. 	Id. at 494;
Syracuse Sav. Bank v. Onondaga Silk Co., 14 N.Y.S.2d 356, 359
(1939).
The seizure of the Fill Reserve did not constitute actionable
waste for two reasons. 	First, it did not impair the collateral in
any meaningful way. 	Both A Note and B Note were secured by the Fill
Reserve, by the Property, and by HDC’s interest in HK LLC. 	When
Canyon applied the Fill Reserve to pay down the balance due on the A
Note, the real value of CMR’s security interest in the land and the
LLC was increased by a like amount. 	Second, Canyon’s seizure and
application of the Fill Reserve was expressly permitted under
section 9 of the Co-Lender Agreement. 	Canyon’s seizure of the Fill
Reserve represented a contractually permitted application of
collateral to pay senior debt, not an actionable waste of
collateral.
4. 	Fifth Claim for Relief: Gross Negligence
The complaint alleges that Canyon, as the agent for CMR in
servicing and administering the Loan, had a duty not to take any
action that would unreasonably harm CMR’s interest in the Loan and
security for the Loan. 	Compl., ¶ 54. 	The complaint alleges that
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Canyon’s acts were grossly negligent, causing CMR to expend time and
money attempting to negotiate a work-out and putting CMR’s interest
in the Loan and the security for the Loan at unreasonable risk of
loss. 	Id., ¶ 55. 	The complaint alleges that Canyon’s servicing of
the Loan fell significantly below any reasonable standard of care
for prudent loan servicing. 	Id.
The complaint fails to state a gross negligence claim under
California law because it does not allege that Canyon’s conduct
exhibited an extreme departure from a duty of care. 	Carter v.
Baldwin, 2009 WL 143691 (unreported); City of Santa Barbara v. Sup.
Ct., 41 Cal. 4th 747, 754 (Cal. 2007). 	More important, the
complaint does not allege a breach that is distinct from or in
addition to the breach of contract. 	A breach of contract is not
considered a tort unless a legal duty independent of the contract
itself has been violated. 	Freeman & Mills, Inc. v. Belcher Oil Co.,
11 Cal. 4th 85, 1092 (1995). 	The allegations that Canyon caused CMR
to expend time and money to negotiate a work-out, and put CMR’s
interest in the Loan and related security therefor at unreasonable
risk of loss spring directly from the “accepted servicing practices”
provision in the Co-Lender Agreement, and thus do not allege breach
of an independent duty sufficient to support a tort claim for gross
negligence. 	Compl. ¶¶ 15, 54.
5. 	Sixth Claim for Relief: Declaratory Relief
Canyon contends that, under section 9(b) of the Co-Lender
Agreement, CMR will lose all of its rights in the Loan and recover
nothing in payment of the B Note if Canyon is the winning bidder at
a foreclosure sale. 	Compl., ¶ 58. 	CMR disputes this contention,
and contends that the Co-Lender Agreement should not be read to
divest CMR of any rights to collect the sums due on the Loan and the
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rights to security provided for the Loan if Canyon is the winning
bidder at a foreclosure sale. 	Id. 	CMR seeks a judicial
determination of the parties’ rights under section 9(b) of the Co-
Lender Agreement. 	Id.
The most straightforward, natural reading of the language of
section 9 of the Co-Lender Agreement is as follows. 	If HDC defaults
on the A Note, and that default is not cured, CMR has three possible
remedies to secure repayment of the B Note. 	First, CMR can take
title to the Property. 	CLA, § 9(b)(i). 	Second, CMR can purchase
the A Note from Canyon. 	Id., § 9(b)(ii). 	Third, CMR is entitled to
its share of the proceeds of any foreclosure sale. 	Id., § 9(b)(last
sentence). 	Canyon is required to credit bid the full balance of the
A Note at any foreclosure sale, but it not required to make a bid in
excess of that amount. 	Id., § 9(a). 	CMR is entitled to the amount
paid by any bidder in excess of the amount necessary to pay the A
Note. 	Id., § 9(b)(last sentence). 	CMR has no right to conduct a
foreclosure sale itself. 	Id., § 9(a).
CMR’s argument that it retains an interest in the collateral
after a foreclosure sale conducted by Canyon is foreclosed by the
plain language of the contract. 	Section 9(b) provides:
If . . . A Note Holder is the winning bidder at any
foreclosure sale, then transfer of title to Premises or
the Pledged Interests shall be in the name of A Note
Holder or its designee and (i) B Note Holder shall have no
further rights or interests in the Loan; (ii) all
subsequent Loan Recoveries shall belong to A Note Holder;
and (iii) except for the indemnification obligations of B
Note Holder and A Note Holder, this Agreement shall
terminate. 	The foregoing shall not affect B Note Holder’s
share . . . of any net proceeds received in connection
with any foreclosure sale of the Premises or Pledged
Interests in which a third party is the winning bidder.
CMR does not allege any discussions in which the parties agreed
either in writing or orally that the contractual language cited
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above would be interpreted to mean that CMR did retain an interest
in the Loan and collateral after a foreclosure sale. 	Nor would such
evidence be effective, as the contractual language quoted above is
not reasonably susceptible to the reading urged by CMR. 	Ntl.
Abatement Corp. v. Ntl. Union Fire Ins. Co. of Pittsburgh, 824
N.Y.S. 2d 230, 232 (2006); Am. Home Assur. Co. v. McDonald, 698
N.Y.S.2d 436 (1999).
Nor does the language of section 9(b) work some legally
disfavored forfeiture. 	CMR does not dispute that it agreed to take
a position junior to that of Canyon. 	CMR’s rights under the Co-
Lender Agreement are very much like those of any junior secured
lender, except that CMR expressly gave up the right to conduct its
own foreclosure sale. 	A junior secured creditor always runs the
risk that a foreclosure sale will not yield a bid sufficient to pay
the junior creditor as well as the senior, and the junior lender
loses all rights in the collateral if the senior lender purchases
with a bid that does not exceed the amount of its note. 	CMR is at
some disadvantage versus the typical junior secured lender in that
it cannot take title through its own foreclosure sale, and then file
bankruptcy to hold off a foreclosure by the senior lender while it
tries to arrange a consensual sale. 	But where Canyon is required to
put the collateral up for public sale, this marginal disadvantage is
not a forfeiture that renders section 9(b) unenforceable.
6. 	Seventh Claim for Relief: Equitable Subordination
CMR alleges that Canyon undertook actions during the life the
Loan that were designed to give Canyon an unfair advantage, and
prevented CMR from negotiating a work-out that would protect the
rights of both CMR and Canyon. 	Compl., ¶ 63. 	CMR vaguely asserts
that Canyon has engaged in a course of inequitable conduct designed
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to confer a benefit on Canyon and to eliminate CMR’s interest in the
Loan and the collateral used to secure the Loan. 	Id., ¶ 64.
The equitable subordination of a claim generally requires three
findings:
that the claimant engaged in some type of inequitable
conduct, (2) that the misconduct injured creditors or
conferred an unfair advantage on the claimant, and (3)
that subordination would not be inconsistent with the
Bankruptcy Code.
In re First Alliance Mortg. Co., 471 F.3d 977, 1006 (9th Cir. 2006).
If the claim is against a non-insider, non-fiduciary, “the level of
pleading and proof is elevated: gross and egregious conduct will be
required before a court will equitably subordinate a claim.” 	Id.
The allegations in this claim for relief are inadequate for
three reasons. 	First, they rely upon Canyon’s conduct in proceeding
with foreclosure, seizing and applying the Fill Reserve, and
contending that a foreclosure sale will wipe out CMR’s interest in
the collateral. 	As explained above, these acts cannot be
inequitable because they are expressly authorized by the Credit
Agreement and the Co-Lender Agreement. 	Second, CMR’s allegations
regarding the work-out would require this court in substance to
determine that Canyon unreasonably refused to make a contract.
CMR’s own version of the facts indicates that Canyon negotiated with
CMR over a nine-week period. 	Compl., ¶¶ 21, 23. 	There was no
failure to negotiate; there was a failure to agree. 	Third, the
remaining allegations are wholly conclusory and do no more than
recite the elements of equitable subordination.
7. 	Eighth Claim for Relief: Equitable Reformation
CMR asserts that the Co-Lender Agreement should be reformed due
to CMR’s unilateral mistake. 	The complaint alleges in substance
that CMR and Canyon orally agreed that CMR would have priority over
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Canyon in the distribution of proceeds from any consensual sale or
foreclosure sale to a third party, but did not orally agree that if
Canyon were the successful bidder at a foreclosure sale, CMR would
lose all interest in the Loan and collateral. 	Compl., ¶ 67. 	CMR
alleges that the Co-Lender Agreement diverges from the parties’ oral
agreement by providing that CMR’s interest in the Loan and
collateral terminates if Canyon is the successful bidder at a
foreclosure sale. 	Id. 	CMR alleges that it mistakenly believed that
section 9(b) correctly expressed the terms of the oral agreement,
and that Canyon knew of CMR’s mistake at the time execution of the
Co-Lender Agreement. 	Id., ¶¶ 68-69. 	To reflect the true intent of
the parties, CMR asserts that the Co-Lender Agreement should be
reformed to provide that if Canyon is the successful bidder at a
foreclosure sale, CMR’s rights in the Loan, Note, and any remaining
security for the Loan are not terminated. 	Id.
When one party to a contract is mistaken as to a contractual
provision, and the party’s mistake is known or suspected by the
other, the contract may be reformed to express the single intention
entertained by both parties.
The complaint does not allege facts sufficient to state a claim
for reformation of section 9(b). 	The complaint alleges that the
parties orally agreed that Canyon would be entitled to priority of
payment, and that the parties did not expressly agree that CMR’s
interest in the Loan would be eliminated if Canyon purchased at a
foreclosure sale. 	The complaint does not allege that the parties
specifically agreed that CMR’s interest would not be eliminated if
Canyon purchased at a foreclosure sale. 	These allegations are
inadequate to state a claim that CMR was the victim of a “mistake”
regarding section 9(b). 	First, the provisions of section 9(b) are
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not inconsistent with the alleged oral agreement. 	Section 9(b)
merely specifies in detail how Canyon’s payment priority will be
implemented. 	Second, and more important, CMR claims to be the
victim of mistake regarding a very clear term in a written contract
that CMR signed. 	CMR does not dispute that it is a sophisticated
lender, and that it was represented by counsel in this very large
and very carefully documented business deal. 	There may be
circumstances in which a party of this sophistication could be the
victim of mistake with respect to a written contract that is so
clear, but the complaint does not a plausible scenario of such
mistake.
8. 	Ninth Claim for Relief: Equitable Estoppel
The essential elements of equitable estoppel are: (1) the party
to be estopped must know the facts; (2) the party must intend that
its conduct shall be acted upon, or must so act that the party
asserting the estoppel had the right to believe that it was so
intended; (3) the party asserting the estoppel must be ignorant of
the true state of facts; and (4) the party must rely upon the
other’s conduct to its injury. 	Grodensky v. Artichoke Joe’s Casino,
171 Cal. App. 4th 1399 (2009).
The complaint alleges that Canyon should be estopped from
claiming that CMR’s rights and interest in the Loan and the security
will be terminated as a result of any foreclosure sale of security
held by Canyon. 	Compl., ¶ 72. 	CMR alleges that Canyon knew it was
not going to service the Loan to preserve the collateral for the
benefit of CMR; that Canyon knew it would not engage in reasonable
negotiations for a Loan work-out; that Canyon intended that CMR rely
on Canyon’s promises; that CMR did rely relied upon Canyon’s
promises; and that CMR was ignorant of the true facts. 	Id., ¶ 71.
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Taken as true for purposes of the motion to dismiss, the
allegations fail to state a claim for equitable estoppel upon which
relief may be granted. 	The Co-Lender Agreement specifically
provides that CMR’s interest in the Loan terminates under certain
conditions. 	§ 9(b). 	Canyon had no duty to execute a new contract
with CMR following the work-out negotiations. 	In addition, the
complaint is devoid of a single specific allegation regarding how
Canyon failed to service the Loan in a commercially unreasonable
manner, other than actions expressly permitted by the Co-Lender
Agreement.
9. 	Twelfth Claim for Relief: Aiding and Abetting Breach of
Fiduciary Duty
In a separate memorandum decision entered concurrently
herewith, the court has determined that CMR failed to state a claim
against SCD Kunia and Stanford Carr for breach of fiduciary duty.
Accordingly, CMR’s claim for aiding and abetting Canyon’s breach of
fiduciary necessarily fails to state a claim upon which relief may
be granted. 	Richard B. LeVine, Inc. v. Higashi, 131 Cal. App. 4th
566, 574-75 (2005).
**END OF MEMORANDUM DECISION**
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Court Service List
Michael D. Cooper, Esq.
Wendel, Rosen, Black and Dean
1111 Broadway, 24th Floor
P.O. Box 2047
Oakland, CA 94604-2047
Richard J. Grad, Esq.
Jeremy Rosenthal, Esq.
Sidley, Austin, Brown and Wood
555 W 5th St.
Los Angeles, CA 90013-1010
Ryan Sandrock, Esq.
Robert B. Martin III, Esq.
Sidley Austin LLP
555 California St. #2000
San Francisco, CA 94104
Douglas R. Young, Esq.
Richard Van Duzer, Esq.
Rachael Turner, Esq.
Tyler Gerking, Esq.
Farella, Braun and Martel
235 Montgomery St.
San Francisco, CA 94104
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