Case Information
*1 Filed 8/16/13
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA FOURTH APPELLATE DISTRICT DIVISION THREE
CALIFORNIA BANK & TRUST,
Plaintiff and Appellant, G047122
v. (Super. Ct. No. 30-2010-00385744) PIEDMONT OPERATING O P I N I O N PARTNERSHIP et al.,
Defendants and Respondents. Appeal from a judgment of the Superior Court of Orange County, Gregory Munoz, Judge. Reversed and remanded.
McKenna Long & Aldridge, Jeffrey L. Fillerup, John T. Brooks and Andrew S. Azarmi for Plaintiff and Appellant.
Hanson Bridgett, Nancy J. Newman, Joseph M. Quinn and Emily M.
Charley for Defendants and Respondents.
* * *
“In 1989, Congress enacted the Financial Institutions Reform, Recovery,
and Enforcement Act of 1989, which is often referred to by the acronym FIRREA, and is
codified at title 12 United States Code section 1821(d) . . . .” (
Neman v. Commercial
Capital Bank
(2009)
FIRREA gives the FDIC broad powers in resolving the affairs of a failed
bank. This includes the express power to repudiate, or “disaffirm,” contracts to which the
failed bank is a party, including the lease pursuant to which the failed bank occupies its
premises. FIRREA also expressly provides that, once the lease is disaffirmed, the
landlord has no claim against the FDIC for future rent, even if the lease contains an
acceleration clause. (12 U.S.C. § 1821(e)(4)(B);
Qi v. FDIC
(D.D.C. 2010) 755
F.Supp.2d 195, 200, 203-204; accord,
Resolution Trust Corp. v. Ford Motor Credit
Corp.
Boiled to its essence, this case presents two questions: (1) If the FDIC has
transferred assets and liabilities of the failed bank to another bank, can the landlord then
seize the pledged asset because the FDIC no longer holds it? (2) Is the answer any
different if the asset in question is a bank deposit serving as collateral for a letter of
credit, which in turn secures the performance of the lease? Here, we answer each of these
questions in the negative. To permit a landlord to effectively seize the collateral
underlying a letter of credit after the FDIC has disaffirmed the lease and transferred the
collateral to a successor bank would be to hamstring the FDIC in its efforts to wind up
the affairs of a failed bank and promote stability in the banking system. (See
Resolution
Trust Corp. v. Ford Motor Credit Corp.
In the matter before us, after the lease was disaffirmed, landlord Piedmont Operating Partnership, L.P. (Piedmont) 1 had no right to effectively seize a $500,000 deposit belonging to California Bank & Trust (California Bank), the transferee of the assets of the failed bank, by drawing down on the letter of credit which was secured by that deposit. Piedmont had no claim against California Bank, which had not assumed the lease, and it had no claim for future rent against the FDIC as receiver. We reverse the judgment in favor of Piedmont.
In addition, we hold that, based on the undisputed facts, California Bank was entitled to a judgment in its favor on its California Uniform Commercial Code section 5110, subdivision (a)(2) breach of warranty claim against Piedmont, as a matter of law. Therefore, pursuant to California Uniform Commercial Code section 5111, 1 Piedmont Office Realty Trust, Inc., also a defendant and respondent herein, is the general partner of Piedmont Operating Partnership, L.P.
subdivision (e), California Bank is entitled to an award of reasonable attorney fees and other expenses of litigation. The trial court shall determine the amount of the award on remand.
I
FACTS Piedmont leased certain office space to Alliance Bank. Alliance Bank provided Piedmont with a $500,000 standby letter of credit as security for the lease. Union Bank of California, N.A. (Union Bank) was the issuer of the letter of credit and Alliance Bank put $500,000 on deposit at Union Bank as collateral for the letter of credit.
In February 2009, the Commissioner of Financial Institutions of the State of California closed Alliance Bank and appointed the FDIC as receiver. Pursuant to a purchase and asset assumption agreement, the FDIC sold the assets of Alliance Bank, as is, to California Bank. Alliance Bank‟s $500,000 deposit at Union Bank was among the assets sold to California Bank.
By letter of May 12, 2009, the FDIC as receiver of Alliance Bank notified Union Bank that, pursuant to title 12 United States Code section 1821(e), it was disaffirming the agreement between Union Bank and Alliance bank concerning the letter of credit. The FDIC demanded that the collateral for the letter of credit be released to it immediately. However, Union Bank did not deliver the funds to the FDIC.
On May 29, 2009, the FDIC disaffirmed the lease. At the time the lease was disaffirmed, the monthly rent of $73,754.44 was current. Nonetheless, the FDIC informed Piedmont of its right to submit a proof of claim with respect to any damages suffered due to the disaffirmance. Piedmont thereafter filed a claim for $901,065 for future rent for the one-year period following the lease disaffirmance.
In addition to filing the claim, Piedmont presented a $500,000 sight draft to Union Bank, to draw down the letter of credit. Union Bank paid the proceeds of the letter of credit to Piedmont and debited California Bank‟s $500,000 account accordingly.
California Bank later commenced litigation against both Piedmont and Union Bank, alleging that Piedmont did not have the right to draw upon the letter of credit after the FDIC had disaffirmed the lease and that Union Bank did not have the right to honor presentation of the sight draft after it had received a disaffirmance notice from the FDIC. California Bank represents that it settled with Union Bank before trial. Union Bank was dismissed from the case.
The court entered judgment in favor of Piedmont and awarded Piedmont nearly $395,000 in attorney fees and costs. California Bank appeals.
II
DISCUSSION
A. Trial and Judgment:
In its first amended complaint, California Bank asserted four causes of action. It sought declaratory relief in the form of an order stating that, after the disaffirmance of the lease and the letter of credit, Piedmont did not have a right to draw down the letter of credit and Union Bank did not have a right to honor the presentation of the sight draft, and that California Bank was entitled to recover the $500,000. California Bank also asserted a cause of action for violation of Business & Professions Code section 17200, contending that the draw upon the letter of credit despite the disaffirmance of the lease was an unlawful, fraudulent and/or unfair business practice, and a cause of action for violation of Commercial Code sections 5108, subdivision (e) and 5110, subdivision (a). Finally California Bank asserted a cause of action for unjust enrichment.
The matter was tried without a jury. The court observed that each of California Bank‟s causes of action was predicated on the assertion that title 12 United *6 States Code section 1821(e)(4)(B) applied to the facts of the case so as to limit Piedmont‟s damages. It quoted from title 12 United States Code section 1821(e)(4), pertaining to leases under which the failed bank was the lessee.
Title 12 United States Code section 1821(e)(4)(A) provides in pertinent part: “If the . . . receiver disaffirms or repudiates a lease under which the insured depository institution was the lessee, the . . . receiver shall not be liable for any damages (other than damages determined pursuant to subparagraph (B)) for the disaffirmance or repudiation of such lease.” Section 1821(e)(4)(B) provides in pertinent part: “Notwithstanding subparagraph (A), the lessor under a lease to which such subparagraph applies shall—[¶] (i) be entitled to the contractual rent accruing before the later of the date—[¶] (I) the notice of disaffirmance or repudiation is mailed; or [¶] (II) the disaffirmance or repudiation becomes effective . . . ; [¶] (ii) have no claim for damages under any acceleration clause or other penalty provision in the lease; and [¶] (iii) have a claim for any unpaid rent, subject to all appropriate offsets and defenses, due as of the date of the appointment . . . .”
The court held that title 12 United States Code section 1821(e)(4)(B) was not designed to protect third parties such as California Bank and that California Bank could not use the statute “to claim the proceeds of the [letter of credit] for itself.” It further held that Piedmont had been within its rights in making a call on the letter of credit. Consequently, the court held, each of California Bank‟s causes of action failed. B. Preliminary matter:
The trial court was correct that the cornerstone of California Bank‟s case, upon which all causes of action are built, is the assertion that Piedmont was precluded by title 12 United States Code section 1821(e)(4) from collecting the $500,000 after the FDIC disaffirmed the lease. As noted above, California Bank sought declaratory relief in *7 the form of a determination that after the FDIC sent out disaffirmance notices with respect to the lease and the letter of credit, Piedmont had no right to draw down the letter of credit and Union Bank had no right to honor the presentation of the sight draft, and that California Bank was entitled to recover the $500,000. In the parties‟ joint list of controverted issues, California Bank identified the effect of title 12 United States Code section 1821(e)(4) upon various rights of Piedmont as among the central issues at trial. In addition, California Bank addressed the effects of title 12 United States Code section 1821(e)(4) extensively in its trial brief. Piedmont did the same. And, as we have observed, the trial court ruled upon the effects of title 12 United States Code section 1821(e)(4).
On appeal, Piedmont says California Bank has failed to present argument about the declaratory relief cause of action in its opening brief and thus has waived the right to argue the court erred in its ruling on that cause of action. However, we observe that California Bank‟s first substantive argument, comprising 14 pages, falls under the topic heading “PIEDMONT HAS NO RIGHT TO THE PROCEEDS OF THE LETTER OF CREDIT BECAUSE IT WAS NOT ENTITLED TO ANY DAMAGES AFTER THE FDIC DISAFFIRMED THE LEASE.” Its second substantive argument, comprising seven pages, is found under the topic heading “THE TRIAL COURT INCORRECTLY FOUND THAT [CALIFORNIA BANK] COULD NOT RECOVER THE $500,000 BECAUSE IT IS NOT THE FDIC.” The arguments are based on title 12 United States Code section 1821(e)(4) and cases interpreting the statute. California Bank clearly attacked the court‟s interpretation of that statute and the related cases, even though it did not choose to utilize a topic heading stating “THE COURT ERRED IN DENYING CALIFORNIA BANK‟S REQUEST FOR DECLARATORY RELIEF IN ITS FAVOR.” California Bank has not failed to challenge to the court‟s ruling on the issues framed by declaratory relief cause of action.
Furthermore, Piedmont has had every opportunity to respond to California Bank‟s arguments about title 12 United States Code section 1821(e)(4) and related case law, and indeed has done so. There is no reason to conclude either that California Bank has waived a challenge to the ruling on the issues framed by the declaratory relief cause of action or that Piedmont has been prejudiced by the manner in which California Bank presented its argument in its opening brief. ( Reichardt v. Hoffman (1997) 52 Cal.App.4th 754, 764.) In short, the court determined the issues of law framed by the declaratory relief cause of action adversely to California Bank and those determinations of law are properly challenged on appeal.
C. Title 12 United States Code Section 1821(e)(4):
(1) Introduction—
FIRREA “grants the FDIC as receiver the discretion and power to dispose
of assets and liabilities of failed financial institutions. [Citations.] Specifically, the
FIRREA grants the FDIC-receiver the authority to „disaffirm or repudiate any contract or
lease‟ to which the failed institution on whose behalf it acts is a party if it determines, in
its discretion, that performance of the lease would be burdensome and that such a
disaffirmance or repudiation would „promote the orderly administration of the
institution‟s affairs.‟ [Citations.]” (
Qi v. FDIC
,
supra
,
Title 12 United States Code section 1821(e)(4) notwithstanding, Piedmont claims it is entitled to damages for future rent. Piedmont further contends it was entitled to draw down the letter of credit (and effectively seize California Bank‟s $500,000 deposit at Union Bank), because it had a right to the collateral securing the performance of the lease. In assessing these claims, we first look to cases addressing the effect of lease disaffirmance upon pledged assets.
(2) Effect on Pledged Assets—
Resolution Trust Corp. v. Ford Motor Credit Corp.
,
supra
,
The Eleventh Circuit affirmed. (
Resolution Trust Corp. v. Ford Motor
Credit Corp.
The court acknowledged that the lease disaffirmance had caused an
economic impact on Ford. (
Resolution Trust Corp. v. Ford Motor Credit Corp.
,
supra
,
According to California Bank,
Resolution Trust Corp. v. Ford Motor Credit
Corp.
California Bank also cites
Unisys Finance Corp. v. Resolution Trust Corp.
(7th Cir. 1992)
Well put. Here, Piedmont‟s real gripe isn‟t the fuss over whether it was proper to proceed against the letter of credit, but the fact that the FDIC disaffirmed the lease and Piedmont thereupon lost its right either to collect future rents or to make a claim for the same. But this is a point of law set forth in a federal statutory scheme that “adjusts the benefits and burdens of economic life to promote the common good. [Citations.]” ( Resolution Trust Corp. v. Ford Motor Credit Corp. , supra , 30 F.3d at p. 1389.) It is not a matter we could control even if our view of the equities were different from that of Congress.
As we see it, Unisys Finance Corp. v. Resolution Trust Corp. 979 F.2d 609, just as Resolution Trust Corp. v. Ford Motor Credit Corp. 30 F.3d 1384, makes clear that a lessor whose lease is disaffirmed does not have the right to proceed against the collateral securing the performance of the lease, in order to satisfy a claim for future rents. But Piedmont insists that Unisys is distinguishable.
Piedmont emphasizes that in
Unisys Finance Corp. v. Resolution Trust
Corp.
Piedmont cites no authority supporting either the proposition that the
taxpayers are the owners of failed bank assets or the proposition that they are responsible
for paying off creditor‟s claims if the assets of the failed bank are insufficient to cover
them. Rather, a failed bank receivership is akin to a bankruptcy proceeding and the
receiver functions much like a trustee in bankruptcy. (
Unisys Finance Corp. v.
Resolution Trust Corp.
(3) Effect on Letters of Credit—
Piedmont also says there is a fundamental difference between what it calls
“ordinary security” and letters of credit. It contends that the “independence principle”
applicable to letters of credit compels a different outcome in this case than in
Unisys
*13
Finance Corp. v. Resolution Trust Corp.
,
supra
,
As explained in San Diego Gas & Electric Co. v. Bank Leumi 42 Cal.App.4th 928, “„Three contractual relationships exist in a letter of credit transaction. [Citations.] Underlying the letter of credit transaction is the contract between the bank‟s customer and the beneficiary of the letter of credit, which consists of the business agreement between these parties. Then there is the contractual arrangement between the bank and its customer whereby the bank agrees to issue the letter of credit, and the customer agrees to repay the bank for the amounts paid under the letter of credit. . . . Finally, there is the contractual relationship between the bank and the beneficiary of the letter of credit created by the letter of credit itself. The bank agrees to honor the beneficiary‟s drafts or demands for payment which conform to the terms of the letter of credit. [Citations.]‟ [Citation.] [¶] Although the relationship between the issuer and beneficiary of a letter of credit is often loosely described as „contractual,‟ . . . this is an inaccurate characterization.” ( at p. 933.) It is better to characterize the letter of credit as “„an “undertaking” and so avoid the implication that contract principles might apply to it.‟ [Citations.]” ( Ibid. )
Under the “independence principle,” the letter of credit is independent from the underlying contract between the issuing bank‟s customer (here Alliance Bank) and the beneficiary of the letter of credit (here Piedmont). ( San Diego Gas & Electric Co. v. Bank Leumi 42 Cal.App.4th at pp. 933-934.) “Absent fraud, the issuer must pay upon proper presentment regardless of any defenses the applicant for the letter of credit may have against the beneficiary arising from the underlying transaction. [Citation.] Thus, the issuer of a letter of credit is never entitled to defend against payment based on *14 extraneous defenses which might have been available to the primary obligor.” ( at p. 934.) “„The rule of independence . . . is based on two policy considerations. First, the issuing bank can assume no liability for the performance of the underlying contract because it has no control over making the underlying contract or over selection of the beneficiary [citation]. Second, the letter of credit would lose its commercial vitality if, before honoring drafts, the issuing bank were obliged to look beyond the terms of the letter of credit to the underlying contractual controversy between its customer and the beneficiary [citation].‟ [Citation.]” ( Ibid. )
Piedmont says the principles enunciated in
Unisys Finance Corp. v.
Resolution Trust Corp.
,
supra
,
So, we turn to Piedmont‟s next authority,
Federal Deposit Ins. Corp. v.
United States Trust Co.
The court addressed the “independence principle” in the receivership context by analogy to bankruptcy proceedings. It stated: “„If . . . the customer goes into bankruptcy after the letter has been issued, but before it has been drawn upon, the issuer must pay despite the fact that the customer will not be able to pay the issuer. The same would be true if the customer had repudiated the contract of reimbursement. Since these are the very risks (customer‟s insolvency or unwillingness to pay) which the beneficiary sought to avoid by demanding the issuance of the letter of credit, it should not be surprising that the issuer cannot assert them as defenses against the beneficiary.‟ [Citations.]” ( Federal Deposit Ins. Corp. v. United States Trust Co. , supra , 793 F.Supp. at p. 371.) The court continued: “Given these considerations, courts have consistently recognized that, in the absence of fraud, a court should not enjoin payment of a letter of credit. [Citations.]” ( Id. at pp. 371-372, fn. omitted.)
Consistent with this general rule, the court declined to enjoin payment
under the letter of credit. (
Federal Deposit Ins. Corp. v. United States Trust Co.
However, in the matter before us, neither the obligations of Union Bank as
the issuer of the letter of credit nor the rights of Piedmont against Union Bank are at
issue. The question is not whether the “independence principle” would preclude the
issuance of an injunction to stop Union Bank from making payment under the letter of
credit. The only question before us is whether Piedmont is entitled to keep the $500,000
it effectively seized already.
Federal Deposit Ins. Corp. v. United States Trust Co. supra
We look instead at
Resolution Trust Corp. v. United Trust Fund, Inc.
(11th
Cir. 1995)
The RTC was appointed receiver of Old Pioneer and substantially all of the
assets and liabilities of Old Pioneer were transferred to a newly created financial
institution also called Pioneer Federal Savings Bank (New Pioneer). The RTC, as
conservator of New Pioneer, did not disaffirm the lease. About a year after Old Pioneer
was placed into receivership, New Pioneer also was placed into receivership. The RTC
then entered into a purchase and assumption agreement whereby Great Western Bank
purchased some of the assets and assumed some of the liabilities of New Pioneer.
However, Great Western Bank did not assume the lease. The RTC, as receiver of New
Pioneer, ultimately disaffirmed the lease. (
Resolution Trust Corp. v. United Trust Fund,
Inc.
The district court denied the RTC‟s request to enjoin a draw upon the letter
of credit. However, the proceeds of the letter of credit were deposited into an escrow
account pending court proceedings. (
Resolution Trust Corp. v. United Trust Fund, Inc.
,
supra
,
The Eleventh Circuit did not resolve which party was entitled to the proceeds of the letter of credit, inasmuch as the proper interpretation of the contractual obligations underlying the letter of credit had to be determined by the district court in the first instance. ( Resolution Trust Corp. v. United Trust Fund, Inc. , 57 F.3d at p. 1035.) It stated that one significant issue for determination on remand was whether the letter of credit only served as security for the performance of the lease obligations or whether it also served as security for repayment of the Financial Federal loan, “ independent of any default in the lease ?” 2 ( Ibid. at fn. 15.)
However, the Eleventh Circuit was specific as to one thing. There was no claim to the proceeds of the letter of credit to the extent that the letter of credit served as security for the performance of lease obligations. The court concluded that because the RTC had the statutory right to disaffirm the lease, the disaffirmance did not constitute a breach of the lease. It also observed that the RTC had paid all rent through the date of 2 One wonders whether concern for this issue explains why the RTC apparently did not disaffirm the agreement(s) between Old Pioneer and the issuer with respect to the letter of credit. ( Resolution Trust Corp. v. United Trust Fund Inc. 57 F.3d at p. 1036.)
disaffirmance. (
Resolution Trust Corp. v. United Trust Fund, Inc.
,
supra
, 57 F.3d at p.
1034.) It further stated: “„[A] secured creditor only has rights in the collateral equal to
the amount of the creditor‟s claim. Once that claim is satisfied, the lien is of no further
consequence.‟ [Citation.] Section 1821(e)(4) limits damages under the lease to rents
accrued before a valid repudiation. [Citation.] Thus, [Liberty Bell and Financial Federal]
have no remaining claim pursuant to the lease. [Citation.] The district court on remand
will have to construe the underlying contractual obligations to determine whether either
[Liberty Bell or Financial Federal] has a claim to the proceeds of the letter of credit
independent of and absent a default under the lease.” (
Resolution Trust Corp. v. United
Trust Fund, Inc.
,
supra
,
Important to the resolution of the matters before us, the court in
Resolution
Trust Corp. v. United Trust Fund, Inc.
,
supra
,
Applying Resolution Trust Corp. v. United Trust Fund, Inc. 57 F.3d 1025 to the facts before us, we see that the disaffirmance of the Alliance Bank lease did not constitute a breach of the lease and did not give rise to a claim of damages for future rent, and that Piedmont did not have a claim to the proceeds of the letter of credit. That being the case, Piedmont is wrongfully in possession of the $500,000 that lawfully belongs to California Bank, which acquired the deposit from the FDIC.
Piedmont heartily disagrees with this analysis. It focuses on the portion of
Resolution Trust Corp. v. United Trust Fund, Inc.
(4) Effect of Transfer of Assets—
Piedmont also emphasizes that in the matter before us it is California Bank,
not the FDIC, that is challenging Piedmont‟s rights under the letter of credit. It notes that
neither
Resolution Trust Corp. v. United Trust Fund, Inc.
Piedmont, however, maintains that those principles and goals do not apply
where the security in question has been transferred to a bank other than the lessee. It
relies on
City & Suburban Mgmt. Corp. v. First Bank
(1997)
In
City & Suburban Mgmt. Corp. v. First Bank
The parties stipulated that California law governed the contract claims and the court determined that the loan sale agreement unambiguously required First Richmond to perform the loan servicing obligations in question. It further held that City and Suburban, as a third party beneficiary of the loan sale agreement, had the right to enforce the agreement against First Richmond. ( City & Suburban Mgmt. Corp. v. First Bank 959 F.Supp. at pp. 664-666.)
First Richmond argued that its contractual obligation was preempted by
title 12 United States Code section 1821(i)(2), which provides in pertinent part: “The
*21
maximum liability of the [FDIC], acting as a receiver . . . , to any person having a claim
against the receiver or the insured depository institution for which such receiver is
appointed shall equal the amount such claimant would have received if the [FDIC] had
liquidated the assets and liabilities of such institution . . . .” (
City & Suburban Mgmt.
Corp. v. First Bank
,
supra
,
The court observed that the FDIC could have disaffirmed the participation
agreements, but chose not to do so. Having chosen to transfer rights and obligations to
First Richmond under the loan sale agreement, the only question was the scope of the
rights and obligations transferred. The court reiterated that the language of the loan sale
agreement was unambiguous and that all servicing obligations were transferred to First
Richmond. Consequently, partial summary judgment in favor of City and Suburban was
appropriate and only the question of damages remained for trial. (
City & Suburban
Mgmt. Corp. v. First Bank
City & Suburban Mgmt. Corp. v. First Bank
We turn now to
Tsemetzin v. Coast Federal Savings & Loan Assn.
The landlord commenced an action against Coast Federal, seeking unpaid rent as far back as 1982. ( Tsemetzin v. Coast Federal Savings & Loan Assn. 57 Cal.App.4th at p. 1338.) Coast Federal argued, inter alia, that the landlord‟s claim was barred by the lease disaffirmance. ( at p. 1340.) The court rejected this argument. ( Id. at p. 1345.)
It stated: “First, it is clear that under the provisions of FIRREA . . . , which
authorize the RTC to terminate the obligation of a failed institution, the only
governmental interest is in concluding the obligation of
that
institution. The goal of
FIRREA was to stem the „financial hemorrhaging‟ from the large number of failures in
the savings and loan or thrift industry. [Citation.] To reach that goal, Congress required
that RTC conduct its operations in a manner „“which [] maximizes the net present value
return from the sale or disposition of” thrift assets that come into its hands.‟ [Citation.]
In order to discharge this critical function, „Congress armed [RTC] with the power to
disaffirm or repudiate contracts or leases that RTC in its discretion determines to be
burdensome.‟ [Citations.] As another court emphasized, FIRREA grants authority to
alter contracts in order to serve three critical public policy goals: (1) „to stem the
disruption of banking services within communities, [(2)] lessen the costs of bank
liquidation, and [(3)] restore public confidence in the nation‟s banking system.‟
*23
[Citation.] In addition to such public policy considerations, the statutory rationale under
FIRREA for permitting the termination of a contractual obligation is that (1) performance
under the lease, has become
burdensome to the failed institution
and (2) termination of
the lease will promote the orderly administration of
the failed institution’s
affairs.
Neither the public policy concerns underlying FIRREA nor either of these goals is
advanced by extending the effect of the Home Federal lease termination to Coast
Federal‟s obligation under that lease.” (
Tsemetzin v. Coast Federal Savings & Loan
Assn.
,
supra
,
The court also stated that under the lease Coast Federal expressly promised
that it would remain
primarily liable
under the lease even if it assigned its interests
therein to another financial institution. (
Tsemetzin v. Coast Federal Savings & Loan
Assn.
Piedmont says Tsemetzin v. Coast Federal Savings & Loan Assn. 57 Cal.App.4th 1334 shows that FIRREA only protects the failed bank that was placed in receivership, not any other financial institution. It says that just as the lease disaffirmance in Tsemetzin did not cut off claims against Coast Federal, the lease disaffirmance in the matter before us does not cut off the claims against California Bank. We disagree. In Tsemetzin , Coast Federal was not the transferee of the receiver. Rather, it was the assignor of a lease and specifically agreed to remain primarily liable under the lease even after the assignment took place. In the matter before us, however, California *24 Bank was the FDIC‟s transferee and did not assume the lease. Tsemetzin is plainly inapplicable.
Piedmont contends the broad policy considerations expressed in
Tsemetzin
v. Coast Federal Savings & Loan Assn.
, ,
Simply put, once the Alliance Bank lease was disaffirmed, leaving no unpaid rent, Piedmont had no claim for breach of lease and no claim for damages. It therefore was not entitled to claim the proceeds of the letter of credit, which served as *25 security in case of breach of the lease. The $500,000 securing the letter of credit belonged to California Bank and Piedmont, in essence, wrongfully acquired it. 3
(5) Effect of Financial Code Former Section 3111— There is one final point for consideration, a point Piedmont argued in the trial court but has omitted to address on appeal. It has to do with the effect on this matter of Financial Code former section 3111. (Repealed by Stats. 2010, ch. 532, § 44.)
The FDIC, as we recall, was appointed receiver by the Commissioner of Financial Institutions of the State of California. Financial Code former section 3221 (repealed by Stats. 2010, ch. 532, § 44) empowered the Commissioner to tender the appointment to the FDIC. Financial Code former section 3222 (repealed by Stats. 2010, ch. 532, § 44) provided: “If the [FDIC] accepts the appointment as such receiver, the rights of depositors and other creditors of the insured bank shall be determined in accordance with the applicable provisions of the laws of this State.”
In the trial court, Piedmont argued that Financial Code former section 3111 permitted it to claim one year‟s future rent as damages and that, inasmuch as the $500,000 at issue was far less than the amount of one year‟s future rent, it was entitled to keep the $500,000. Financial Code former section 3111 provided in pertinent part: “Within six months after taking possession of the property and business of any bank the commissioner may terminate or adopt any executory contract to which the bank may be a party including leases of real or personal property. Claims for damages resulting from 3 To be precise, Piedmont represents that when it drew upon the letter of credit, Union Bank first paid Piedmont $500,000 out of its own funds and then reimbursed itself out of the $500,000 deposit. Although that is not clear from the parties‟ joint stipulated facts, it matters not. The net result is the same: Piedmont drew upon the letter of credit that was secured by California Bank‟s deposit, such that Piedmont acquired $500,000 and California Bank lost the same.
the termination of any such contract or lease may be filed and allowed, but no claim of a landlord for damages resulting from the rejection of an unexpired lease of real property . . . shall be allowed in an amount exceeding the rent reserved by the lease, without acceleration, for the year succeeding the date of the surrender of the premises plus the amount of any unpaid accrued rent without acceleration. . . .” (Fin. Code, former § 3111, italics added.)
According to California Bank, case law makes clear that federal law, not
state statute, governs the issue of whether a landlord can claim any future rent after lease
disaffirmance. It says
Bayshore Executive Plaza Partnership v. FDIC
(11th Cir. 1991)
The Eleventh Circuit observed: “[The landlord] misconstrues the role of the FDIC as liquidator of a state-chartered bank. As we have stated before, when the FDIC is appointed receiver by a state banking authority, that agency acts in two separate capacities: as receiver and as corporate insurer of deposits in the failed bank. [Citation.] In neither role does the FDIC act as an agent of the state comptroller responsible for its appointment as liquidator. [¶] Most importantly, „it is settled beyond question that Federal law governs cases involving the rights of the FDIC‟ when that agency acts as liquidator for a failed bank. [Citations.] In addition, when a federal statute addresses the issue of law in contention, the federal statute governs the dispute, despite any federal or *27 state common law that might suggest another result. [Citation.]” ( Bayshore Executive Plaza Partnership v. FDIC, supra, 943 F.2d at pp. 1291-1292.)
As California Bank points out,
Bayshore Executive Plaza Partnership v.
FDIC
,
supra
,
Although this language is nearly dispositive, we observe that the court in
Bayshore Executive Plaza Partnership v. FDIC
Although neither California Bank nor Piedmont makes the observation, it appears that the question whether federal statute governs, even when the state statutory body of law pursuant to which the FDIC accepted the appointment as receiver provides a contrary result, is a matter resolved by the state statutes themselves. Financial Code former section 3223 provided: “The [FDIC] as such receiver shall possess with respect to such closed insured bank all the powers, rights, and privileges given the commissioner under Article 1 of this chapter with respect to the liquidation of a bank the property and assets of which he or she has taken possession, except insofar as the same may be in *28 conflict with the provisions of the Federal Deposit Insurance Act, as amended. ” (Fin. Code, former § 3223, italics added.) The Federal Deposit Insurance Act is found in title 12 United States Code section 1811 et seq.
Here, we have title 12 United States Code section 1281(e)(4), which
provides that the landlord under a disaffirmed lease has no claim for future rent, versus
Financial Code former section 3111, permitting a landlord to make a claim for one year‟s
future rent. Given the statutory conflict, section 3111 must yield. This result is dictated
by both Financial Code former section 3223 and federal preemption. (See
Parks v.
MBNA America Bank, N.A.
(2012)
California Bank says that Financial Code former section 3111 is
inapplicable to banks that have federal deposit insurance. In support of this assertion, it
cites current Financial Code section 673, which is substantially similar to Financial Code
former section 3111, but applies only when the commissioner takes over an uninsured
financial institution. California Bank cites no legislative history or other authority to
show that Financial Code section 673 is intended to be a continuation of Financial Code
former section 3111, without change. Moreover, we note that at least one case has
applied Financial Code former section 3111 to constrain the actions of the FDIC as
receiver, although not in the context of a dispute over the entitlement to future rent after
lease disaffirmance. (See
In re Valley State Bank
(1990)
In any event, we need not resolve whether Financial Code former section 3111 was intended to apply in the context of federally insured failed banks in order to answer the question before us. Pursuant to the terms of Financial Code former section 3223, the claims limitation of title 12 United States Code section 1821(e)(4) governs over the claims limitation of Financial Code former section 3111, such that Piedmont did not have a claim for future rents as damages following lease disaffirmance. That being the *29 case, it also had no claim to the collateral that was available in the event of damages arising under the lease.
The trial court erred in concluding otherwise and in entering judgment in favor of Piedmont. 4
D. California Uniform Commercial Code Section 5111, Subdivision (e) Attorney Fees:
(1) Award in Favor of Piedmont—
California Uniform Commercial Code section 5111, subdivision (e) 5 provides: “Reasonable attorney‟s fees and other expenses of litigation must be awarded
to the prevailing party in an action in which a remedy is sought under this article.” Here,
California Bank based one of its causes of action against Piedmont on section 5110,
subdivision (a). After the judgment awarded Piedmont costs as the prevailing party,
Piedmont filed a motion for attorney fees pursuant to section 5111, subdivision (e). The
court granted the motion and awarded Piedmont $394,958.21 in attorney fees and costs.
Inasmuch as we reverse the judgment, the award of attorney fees and costs in favor of
Piedmont must also fall. (
Center for Biological Diversity v. County of San Bernardino
(2010)
4 Because this case turns on the interpretation of title 12 United States Code section
1821(e)(4) and related authorities, we need not address California Bank‟s causes of
action for unfair competition or unjust enrichment. Although it is unnecessary for the
resolution of this case, we nonetheless grant Piedmont‟s unopposed request, made in
connection with its unfair competition claim, that we take judicial notice of the
Proposition 64 ballot materials attached to Piedmont‟s January 4, 2013 request for
judicial notice. (
Strong v. State Bd. of Equalization
(2007)
(2) California Bank’s Request for Attorney Fees— (a) Introduction
Section 5110, subdivision (a) provides as follows: “If its presentation is honored, the beneficiary warrants: [¶] (1) to . . . the applicant that there is no fraud . . . of the kind described in subdivision (a) of Section 5109; and [¶] (2) to the applicant that the drawing does not violate any agreement between the applicant and beneficiary or any other agreement intended by them to be augmented by the letter of credit.”
At trial, California Bank asserted that Piedmont breached both of the section 5110, subdivision (a) warranties. California Bank adheres to this position on appeal. In addition, California Bank contends that it is entitled to attorney fees, under section 5111, subdivision (e), as the prevailing party in this action.
Piedmont, however, argues that California Bank has no standing to maintain a cause of action under section 5110, subdivision (a) because it is not the “applicant” within the meaning of that section. Piedmont also argues that any section 5110, subdivision (a) cause of action is time-barred in any event. Finally, it contends that California Bank‟s substantive claims under section 5110, subdivision (a) have no merit. We look at these arguments in turn.
(b) Standing As we have seen, the warranties at issue under section 5110, subdivision (a) run in favor of the “applicant.” Section 5102, subdivision (a)(2) defines an “applicant” as “a person at whose request or for whose account a letter of credit is issued[,]” including “a person who requests an issuer to issue a letter of credit on behalf of another if the person making the request undertakes an obligation to reimburse the issuer.” Piedmont emphasizes that inasmuch as Alliance Bank was the one who requested Union Bank to issue the letter of credit, Alliance Bank was the “applicant” within the meaning of sections 5102, subdivision (a)(2) and 5110, subdivision (a). It also points out that just as *31 California Bank was not a party to the applicant-issuer relationship, it also was not a party to the applicant-beneficiary relationship, inasmuch as it did not assume the lease, and was not a party to the issuer-beneficiary relationship. Consequently, Piedmont contends, California Bank cannot be characterized as the “applicant” for the purposes of the section 5110, subdivision (a) warranties. We disagree.
Pursuant to title 12 United States Code section 1821(d)(2)(A), the FDIC as receiver succeeded to “all rights, titles, powers, and privileges” of Alliance Bank. By definition, then, upon appointment as receiver of Alliance Bank, the FDIC was endowed with the same powers as Alliance Bank with respect to the $500,000 deposit and the contracts bearing upon that deposit and the letter of credit arrangement. In other words, it stepped into the shoes of the applicant, within the meaning of sections 5102, subdivision (a)(2) and 5110, subdivision (a).
The FDIC thereafter assigned the deposit to California Bank pursuant to the Purchase and Assumption Agreement between those two entities. On appeal, California Bank and Piedmont present a most modest discussion of the relevant provisions of the 106-page Purchase and Assumption Agreement. However, California Bank does observe that, under section 3.1 of the Purchase and Assumption Agreement, it acquired all of the FDIC‟s “right, title, and interest” in and to the $500,000 deposit. We also observe that under section 3.1, California Bank generally acquired assets from the FDIC “subject to all liabilities for indebtedness collateralized by Liens affecting such Assets . . . .” In the context before us, we interpret this to mean that California Bank acquired all of the FDIC‟s right, title, and interest in and to the $500,000 deposit subject to any claims, valid or otherwise, arising out of the letter of credit arrangement. This is consistent with Piedmont‟s view, albeit based on different reasoning, that California Bank acquired what Piedmont calls an “encumbered” asset.
Given the nature of the assignment from the FDIC to California Bank, we
further conclude, as California Bank urges, that California Bank stepped into the shoes of
Alliance Bank as the applicant within the meaning of sections 5102, subdivision (a)(2)
and 5110, subdivision (a). An “„“assignment merely transfers the interest of the assignor.
The assignee „stands in the shoes‟ of the assignor, taking his rights and remedies, subject
to any defenses which the obligor has against the assignor prior to notice of the
assignment.” [Citation.] Once a claim has been assigned, the assignee is the owner and
has the right to sue on it. [Citations.] In fact, once the transfer has been made, the
assignor lacks standing to sue on the claim. [Citation.]‟” (
Searles Valley Minerals
Operations Inc. v. Ralph M. Parsons Service Co.
(2011)
Piedmont challenges this conclusion, saying California Bank has cited no
authority that applies these general assignment principles to elevate an assignee to the
status of an “applicant” for the purposes of section 5110, subdivision (a). True enough.
Indeed, neither party cites a case on point. However, California Bank does cite cases
showing that general assignment principles are applied in the context of letter of credit
issues, including those arising under the California Uniform Commercial Code. (See
Bd.
of Trade of San Francisco v. Swiss Credit Bank
(9th Cir. 1984)
(c) Statute of limitations Section 5115 provides: “An action to enforce a right or obligation arising under this article must be commenced within one year after the expiration date of the relevant letter of credit or one year after the cause of action accrues, whichever occurs later. A cause of action accrues when the breach occurs . . . .”
According to Piedmont, any breach of warranty under section 5110, subdivision (a) occurred no later than June 26, 2009, when Union Bank received Piedmont‟s sight draft. However, California Bank did not file its lawsuit until June 29, 2010. So, Piedmont says, California Bank‟s lawsuit was untimely, as having been filed more than one year after any breach occurred.
This argument ignores the language of both section 5110, subdivision (a) itself and the official comments thereto. The first clause of section 5110, subdivision (a) states that the beneficiary makes certain warranties “[i]f its presentation is honored.” It does not state, as Piedmont would have it, that the warranties are made when the beneficiary presents its draw. Rather, as official comment No. 1 to section 5110 expressly states, “the warranties in subsection (a) are not given unless a letter of credit has been honored . . . .” (Official Comments on U. Com. Code, 23B Pt. 1 West‟s Ann. Cal. U. Com. Code (2002 ed.) foll. § 5110, p. 241.) Furthermore, official comment No. 2 states that if a “beneficiary drew in violation of its authorization, then upon honor of its draw the warranty would be breached.” (Official Comments on U. Com. Code, 23B Pt. 1 West‟s Ann. Cal. U. Com. Code (2002 ed.) foll. § 5110, p. 242, italics added.) If the first clause of section 5110, subdivision (a) were not sufficiently clear, the comments certainly are. The section 5110, subdivision (a) warranties are not breached until honor of the draw.
In the matter before us, Union Bank honored Piedmont‟s draw on July 1, 2009. This being the case, California Bank‟s lawsuit filed on June 29, 2010 was timely filed.
Piedmont would like us to conclude that, the language of the statute and the official comments thereto notwithstanding, the one-year limitations period with respect to California Bank‟s claim was triggered on the date of presentation because California Bank is bound by certain wording used in its first amended complaint. In its first amended complaint, California Bank alleged that “Piedmont wrongfully presented the letter of credit to Union Bank in violation of . . .” section 5110, subdivision (a). In its trial brief, California Bank clarified that Piedmont breached the section 5110, subdivision (a) warranties.
Piedmont acknowledges that California Bank argued before the trial court that the breach occurred when Union Bank honored the draw. However, Piedmont focuses on the language of the first amended complaint, and argues California Bank is bound by its statement indicating that the wrong occurred on presentation. However, Piedmont‟s authorities (see, e.g., Valerio v. Andrew Youngquist Construction (2002) 103 Cal.App.4th 1264, 1271 [party bound by factual admissions]) do not support this argument. California Bank did not make factual admissions to which it must be bound. Rather, it simply used some inartful wording in presenting its legal argument—argument that was not directed at the statute of limitations in any event. California Bank did not concede that section 5115 should be construed as meaning the statute of limitations began to run on the date of presentation, rather than the date of honor.
(d) Section 5110, subdivision (a) warranties Finally, we turn to the substantive question of whether Piedmont breached either of the warranties under section 5110, subdivision (a). As it turns out, we need only address the warranty under section 5110, subdivision (a)(2).
In doing so, we ask whether Piedmont breached a warranty “to the applicant that the drawing [did] not violate any agreement between the applicant and beneficiary or any other agreement intended by them to be augmented by the letter of credit.” (§ 5110, subd. (a)(2).) In other words, our inquiry is whether Piedmont‟s draw violated any agreement between itself and Alliance Bank or any other agreement intended by Piedmont and Alliance Bank “to be augmented by the letter of credit.” (§ 5110, subd. (a)(2).)
That being the case, a review of the lease between Piedmont and Alliance Bank is in order. Pursuant to the second amendment to the lease, Alliance Bank was required to increase its security deposit by $500,000. Alliance Bank had the choice of providing the additional security deposit either in the form of cash or in the form of a $500,000 unconditional letter of credit. 6 As we know, Alliance Bank chose to provide the letter of credit.
Paragraph 7 of the lease provided that upon the default of Alliance Bank under the lease, Piedmont had the right to “use, apply or retain all or any part of the Security Deposit for the payment of any rent or any other sum in default, . . . or to compensate [Piedmont] for any loss or damage which [Piedmont might] suffer by reason of [Alliance Bank‟s] default.” 7 So, paragraph 7 permitted Piedmont to make use of the 6 Section 5, subsection (b)(ii) of the second amendment to the lease required the letter of credit to be “payable at sight upon presentment to a . . . branch of the issuer of a simple sight draft stating only that [Piedmont was] permitted to draw on the Letter of Credit under the terms of the Lease and setting forth the amount that [Piedmont was] drawing[.]”
7 According to paragraph 22, subparagraph (a) of the lease, defaults included, without limitation, Alliance Bank‟s abandonment of the premises, the failure of Alliance Bank to pay rent when due, or the appointment of a receiver to take possession of Alliance Bank‟s assets at the premises or interest in the lease, where possession is not reinstated within 30 days.
security as compensation for any damage it suffered due to the default of Alliance Bank. Piedmont claimed the damage suffered was for future rents, and indeed there appears to be no other viable ground for making a claim to the security.
However, as we have already addressed at length, and notwithstanding the protestations of Piedmont, title 12 United States Code section 1821(e)(4)(B) provides that the landlord under a disaffirmed lease shall “have no claim for damages under any acceleration clause or other penalty provision in the lease . . . .” That being the case, Piedmont had no right to claim future rents as damages owing under the lease. Consequently, Piedmont had no right under the lease to draw upon the letter of credit. In short, Piedmont violated the terms of the lease between itself and Alliance Bank when it made its draw in a manner not authorized by paragraph 7 of the lease, as construed in accordance with the law. Piedmont thus breached its warranty to the applicant under section 5110, subdivision (a)(2).
(e) Conclusion California Bank, as the assignee of the FDIC as receiver of Alliance Bank, had standing to maintain a cause of action against Piedmont for breach of warranty under section 5110, subdivision (a). The undisputed facts demonstrate that, as a matter of law, Piedmont violated the terms of the lease between itself and Alliance Bank when it drew upon the letter of credit based on a claim for future rents that was not permitted under the law. Thus, California Bank is the prevailing party on its section 5110, subdivision (a)(2) cause of action and is entitled to an award of reasonable attorney‟s fees and other expenses of litigation under section 5111, subdivision (e).
III
DISPOSITION The request for judicial notice is granted. The judgment is reversed and the matter is remanded for further proceedings consistent with this opinion. California Bank is entitled to its costs on appeal.
MOORE, J.
WE CONCUR:
BEDSWORTH, ACTING P. J.
THOMPSON, J.