Citizens Business Bank v. Gevorgian
160 Cal. Rptr. 3d 49
Cal. Ct. App.2013Background
- AMG (seller) agreed to carry back a $1.4M seller note secured by a deed of trust when Riverton (buyer/developer) purchased three lots to build 15 homes; AMG subordinated its deed to a $6.315M construction loan from Citizens Business Bank (the Bank).
- AMG’s trustee (Gevorgian) reviewed an unsigned copy of the Construction Loan Agreement (CLA), note, and deed of trust and signed a Subordination Agreement; AMG was never shown a separate Letter of Understanding (LOU) between Riverton and the Bank.
- The LOU (not disclosed to AMG) materially differed from the CLA: it allowed a $2.2M immediate land draw (paying existing liens), required phasing the project into three phases of five units, and contained different disbursement conditions and extension rights.
- The project stalled after advances; Riverton defaulted, Bank sought foreclosure, and AMG cross‑complained seeking declaratory relief and judicial foreclosure asserting its deed of trust should be senior because the Subordination Agreement was unenforceable.
- Trial court found (1) AMG did not know of the LOU, (2) the LOU materially modified and increased risk to AMG’s subordinated security, and (3) the Bank (which drafted both documents and required the subordination) had a duty under Gluskin/Middlebrook/Handy principles — court declared the Subordination Agreement unenforceable and awarded AMG priority and damages.
Issues
| Issue | Plaintiff's Argument (AMG) | Defendant's Argument (Bank) | Held |
|---|---|---|---|
| Whether a lender and borrower may enter a side agreement materially modifying loan terms without seller’s knowledge and still enforce seller’s prior subordination | LOU materially changed loan (land draw, phasing, cash equity) without AMG's knowledge/consent; public policy (Gluskin/Middlebrook/Handy) bars enforcing subordination | Bank: LOU was part of loan before subordination; seller waived duties by contract; seller’s consent recitals are conclusive; Bank was third‑party beneficiary relying on subordination | Court: Seller did not consent or know; Gluskin line controls — unenforceable subordination when lender/borrower bilaterally materially modify loan to seller’s detriment without consent; AMG’s lien given priority |
| Whether express waiver language in the Subordination Agreement bars AMG’s rescission/resort to equitable relief | Waivers cannot shield lender when lender and borrower make unconsented material modifications that impair seller’s security; public policy overrides | Bank: Subordination unambiguous and unconditional; waiver/recitals preclude AMG’s claims | Court: Waiver ineffective because Subordination Agreement is unenforceable under Gluskin; equitable relief denied to Bank based on its culpable conduct |
| Whether Evidence Code §622 (recitals) prevents AMG from proving it didn’t know or consent to LOU | AMG may offer extrinsic evidence and show lack of consent; §622 doesn’t bind non‑parties or bar rescission for fraud/misleading conduct | Bank: AMG expressly consented and approved all loan/escrow agreements; recitals are conclusive | Court: §622 inapplicable to defeat AMG’s claim; recitals don’t preclude rescission where public policy and unconsented material modification exist |
| Whether Bank is entitled to equitable subrogation or an equitable lien despite its conduct | AMG: Bank’s conduct (drafting contradictory docs, not disclosing LOU, requiring subordination) makes equitable relief inappropriate | Bank: Denial of equitable lien is punitive and would unjustly enrich AMG; Bank acted without knowledge of fraud by Riverton principals | Court: Equitable subrogation denied — Bank was chargeable with culpable/negligent conduct and AMG’s equities prevail |
Key Cases Cited
- Handy v. Gordon, 65 Cal.2d 578 (supreme court) (establishes public policy protecting sellers who subordinate purchase‑money deeds)
- Middlebrook‑Anderson Co. v. Southwest Sav. & Loan Assn., 18 Cal.App.3d 1023 (Cal. Ct. App.) (lender’s duties to seller where subordination relied on construction loan; lender better positioned to control/disbursements)
- Gluskin v. Atlantic Savings & Loan Assn., 32 Cal.App.3d 307 (Cal. Ct. App.) (lender/borrower cannot bilaterally make material, unconsented modifications that materially increase seller’s risk; subordination unenforceable)
- Protective Equity Trust #83, Ltd. v. Bybee, 2 Cal.App.4th 139 (Cal. Ct. App.) (lender cannot enforce subordination when buyer breached its obligations to seller; public‑policy allocation of risk to lender)
- Swiss Property Management Co. v. Southern Cal. IBEW‑NECA Pension Plan, 60 Cal.App.4th 839 (Cal. Ct. App.) (distinguishable: post‑subordination modification was immaterial; court considered limits of Gluskin)