Opinion
Case No.: 90-04997-A11, Add. Pro. No. 91-90102-A11
December 15, 1998
MEMORANDUM DECISION
North Coast Village, Ltd., ("NCV, Ltd." and "Debtor") is back before this Court after reversal by the Ninth Circuit Court of Appeals in May 1997 of this Court's 1991 grant of NCV, Ltd.'s motion for partial summary judgment. The Court of Appeals found that genuine issues of material fact existed concerning the Debtor's dispute with John R. Prewitt ("Prewitt"), requiring that the matter be tried.
The trial of the complaint to avoid the Prewitt deed of trust under Section 544 and objection to the Prewitt claim came on for hearing on October 27, 1997 and continued thereafter on November 4, 1997, November 17-18, 1997, November 20-21, 1997 and January 21, 1998. Theodore W. Graham, Maria K. Pum and Jason D. Schauer of Brobeck, Phleger Harrison, LLP, appeared on behalf of NCV, Ltd., Plaintiff; Peter W. James and Andrew Durkovic of Baker Hostetler, LLP, appeared on behalf of John R. Prewitt, et al., Defendants.
Having heard the testimony, examined the evidence, considered the arguments advanced by the parties and review of the trial briefs submitted by each party, the Court makes the following findings of fact and conclusions of law:
FINDINGS OF FACT Procedural History
1. Plaintiff NCV, Ltd., was the developer of 550 stock cooperative units in Northern San Diego County. The Debtor filed a petition for Chapter 11 relief on June 15, 1990.
2. On February 22, 1991, NCV, Ltd., filed this complaint objecting to the secured claim of John R. Prewitt. The complaint seeks declaratory relief that the trust deed securing Prewitt's claim against NCV is unenforceable pursuant to Bankruptcy Code section 544(a), requiring reconveyance of the deed of trust. The complaint also seeks a determination that Prewitt has breached his fiduciary duties to the partnership and has breached a contract between himself and the Debtor regarding 11 units transferred to Prewitt.
3. Prewitt's answer and counterclaim filed March 15, 1991 denies the allegations of NCV, Ltd.'s, complaint and requests a declaration that Prewitt has the claims against the Debtor which are asserted in his proof of claim (collectively the "Action").
4. NCV, Ltd., brought a motion for partial summary judgment solely on the issue of avoidability under Section 544 of the Bankruptcy Code of Prewitt's deed of trust. The Court determined that the Modified Land Note which was supposed to be secured by the deed of trust was never executed by the obligor(s) and for that reason, the deed of trust was avoidable. The summary judgment motion was granted in December 1991. Prewitt filed a motion seeking to appeal the interlocutory order to which NCV, Ltd., did not object (Appeal No. 1). The balance of the matters remaining to be tried was deferred at the parties' request until July 1994.
5. Sometime in 1993, the adversary proceeding Metropolitan Service Corporation vs. NCV, Ltd., Prewitt, et al. was removed to this Court becoming adversary proceeding number 93-90838. Metropolitan's complaint was an interpleader action requesting judicial resolution of a dispute between NCV, Ltd., and Prewitt over the Pool C AITD proceeds. Prewitt contended that the Pool C AITD proceeds had been assigned to him absolutely; NCV, Ltd., contended that the proceeds were assigned as security for the contemplated Modified Land Note which was never signed by the obligor(s).
On cross-motions for summary judgment by NCV, Ltd. and Prewitt, the Court granted summary judgment in favor of NCV, Ltd., and against Prewitt, making certain findings of fact and conclusions of law which were entered on June 15, 1994 ("Metropolitan Findings"). Prewitt made an untimely appeal of the order and his appeal was dismissed by the Bankruptcy Appellate Panel on January 17, 1995. The orders and judgments in the Metropolitan case are now final.
6. In July 1994 the Court held a trial on the allowability of Prewitt's proof of claim. Prewitt had filed a secured claim (Ex. 1) against the estate based on four documents attached to that claim. At the conclusion of Prewitt's evidence, NCV, Ltd. moved for judgment under FRCP 52(c) (FRBP 7052) which was granted. A judgment in the action was entered on November 16, 1994. It was appealed by Prewitt. (Appeal No. 2.)
7. The Ninth Circuit Court of Appeals reversed the U.S. District Court's order affirming the grant of partial summary judgment. In its opinion, the Court of Appeals determined that partial summary judgment should not have been granted because genuine issues of material fact existed as to (1) whether there was an agreement on the terms of the Modified Land Note which was either deposited in escrow or not, and (2) whether the Modified Land Note represented the Debtor's preexisting obligation or established a new obligation.
8. Trial was held to address those matters remanded to this Court by the Ninth Circuit. A pre-trial order setting forth the judicially determined facts, the admitted facts and the remaining contested facts and issues was entered October 31, 1997. The facts denominated as judicially determined or admitted are incorporated by reference in these findings of facts.
History Of Dispute
9. A. Thomas Murphy ("Murphy") and John R. Prewitt are brothers-in-law and were for some considerable time business partners in many business ventures. Carol Prewitt Murphy, Murphy's wife and Prewitt's sister, and Prewitt, were trustees under a trust established by the will of Ray C. Prewitt. In approximately December 1969 Prewitt individually and the Ray C. Prewitt Trust trustees acquired a 55-acre parcel partially along the beach front in Oceanside, California for approximately $1,200,000.00. (R.T. 11/21/97 at 17-19.)
10. Century Southwest Corporation ("CSW") was formed in approximately 1970. Prewitt and Murphy were 50/50 shareholders of the corporation which appears to have been involved in various real property transactions. (R.T. 01/21/98 at 6-8.)
Sometime in the early 1970's Prewitt and the Trustees leased 13-acres of the Oceanside parcel to CSW under the terms of a lease which is now lost. (R.T. 11/21/97 at 19-21.) NCV, Ltd. was formed to develop a condominium project on the property. CSW became the general partner and 75% owner of NCV, Ltd.; Prewitt individually and Murphy individually each owned 12=% as limited partners. (R.T. 10/27/97 at 18-19; Ex. 16.)
11. The development of the beach front property ran into difficulties when California voters passed restrictions on coastline development and established the Coastal Commission in 1972. To avoid restrictions on coastal development, NCV, Ltd. was required to change from a condominium development to a stock cooperative project. Construction was commenced after the entity obtained a construction loan from General Electric Credit Corporation ("GECC"). (R.T. 11/21/97 at 107-120.)
12. Patrick J. Kilfoil ("Kilfoil") was a CPA with Kenneth Leventhal Company. Leventhal Company had been performing accounting for CSW in the mid-'70's. CSW hired Kilfoil as vice-president in 1977. (R.T. 11/21/97 at 122.) Kilfoil was never an owner of any shares of CSW nor a holder of a partnership interest in NCV, Ltd. There is no evidence presented that Kilfoil has any economic stake in this dispute. His testimony is highly credible.
13. The GECC construction loan of approximately $14 million went into default in 1977. Unable to pay or refinance the defaulted loan, NCV, Ltd. filed a Chapter 11 bankruptcy. (R.T. 11/21/97 at 23-24.)
The bankruptcy judge set a December 31, 1979 "drop dead" date by which NCV, Ltd. was to resolve its problems or he would permit GECC to foreclose. (R.T. 10/27/97 at 16-18; 11/21/97 at 24.)
14. In order to solve its financial crisis and preserve substantial equity in the project, NCV, Ltd. simultaneously pursued two sources of new capital: taking additional partners and refinancing the GECC debt. Murphy and Prewitt located a group of investors headed by Robert Ferrante (collectively "Ferrante") who agreed to buy into NCV, Ltd. for approximately $3 million in exchange for which they would get a 50% interest in the partnership. (R.T. 10/27/97 at 22-24.)
Ferrante arranged for a loan with Imperial Bank of $17 million to pay off the GECC debt. (R.T. 10/27/97 at 27-28.) Imperial Bank insisted as a condition of making the loan to NCV, Ltd. that the title to the real property be in the Debtor. (R.T. 11/21/97 at 25-26.)
15. As the bankruptcy court's deadline approached, the Ferrante interests dragged their feet on making their $3 million contribution. When NCV, Ltd. threatened to terminate their agreement to take Ferrante as a partner, Ferrante threatened litigation. (R.T. 10/27/97 at 24-27.)
16. Since Imperial Bank was requiring NCV, Ltd. to hold a fee interest in the property, Prewitt proposed "selling" the property to the newly-constituted partnership at a very high price to avoid realizing ordinary income taxes on future condominium unit sales. There had been no appraisal of the property.
17. Initially Prewitt proposed a price of $10 million which Kilfoil and Murphy strongly believed would wreck the deal with Ferrante. Kilfoil expressed his belief that there was no economic justification for the "price" Prewitt wanted for the sale of the land to NCV, Ltd. He was very concerned that the transaction was clearly a "sham" and would never pass muster with the IRS. Prewitt was adamant in his tax avoidance scheme but after considerable discussion with Kilfoil and Murphy, agreed to reduce his demand to a $5 million note executed by NCV, Ltd. (R.T. 10/27/97 at 30-39; 11/21/97 at 27-33 and 47-48.)
During the trial of this Action, Prewitt did not offer testimony contraverting Kilfoil's characterization of the note as a tax avoidance scheme.
18. Because of Prewitt's insistence of the $5 million note as a means of transmuting ordinary income into capital gains, the profit structure of the new partnership had to be drastically altered. Rather than a 50/50 division between Ferrante and the other partners of NCV, Ltd., the partnership was restructured. The new Ferrante-NCV, Ltd. (the "restated partnership") partnership provided:
a. Prewitt and Murphy would withdraw as partners in NCV, Ltd.;
b. CSW's interest was reduced from 75% to 5%;
c. Ferrante-NCV, Ltd. became a 5% general partner; and,
d. Robert Ferrante Enterprises became a 90% limited partner.
(R.T. 10/27/97 at 50-60.) As well, the restated partnership agreement reflected an unusual profit division to compensate Ferrante for the lopsided distribution of future partnership "profits" to the Prewitt/Murphy interests. (See, 6 4.1 of Ex. 28.)
Finally, in the continuing quest to avoid ordinary income taxes on subsequent sales, it appears from the restated partnership agreement that Ferrante is deemed to have purchased the general and limited partnership interest from CSW, Murphy and Prewitt for an aggregate of $13,602,500.00 (See, Ex. 28 at 62.4(a) and R.T. 10/27/97 at 61-64; R.T. 11/21/97 at 44-46.)
The restated partnership transaction with Ferrante closed on or about December 31, 1979.
19. Ferrante had failed to make the full amount of the original $3 million capital contribution in cash by the time the restated partnership agreement of NCV, Ltd. was set to close. Instead Ferrante substituted various promissory notes payable to CSW which, under the restated partnership agreement, would cause a reallocation of the partnership interests upon default in payment. (Ex. 28 at 62.4.)
20. Concurrent with the closure of the restated partnership, NCV, Ltd. executed its option to purchase the land from Prewitt, Carol Prewitt Murphy and the Prewitt trustees, giving a promissory note to the sellers in the amount of $5,355,000.00 (the "Original Land Note"). The note was subordinate to the Imperial Bank $17 million bridge loan and $4 million second trust deed loan, had no due date and had no date for the commencement of interest. (Ex. B) The note was nonrecourse and provided that the makers would not be personally liable on the debt or subject to a deficiency judgment. (R.T. 10/27/97 at 68-69.) It was secured by a deed of trust on the leasehold interest of NCV, Ltd. in the stock cooperative units which was recorded on or about July 3, 1980. (Ex. C) There is no evidence that payments were ever made on this note by NCV, Ltd.
21. As a means of circumventing restrictions on condominium developments along the coastline, NCV, Ltd. created a stock cooperative project called NCV, Inc. NCV, Inc. was incorporated on February 15, 1979 with Prewitt, Murphy and Carol Prewitt Murphy as directors of this non-stock membership corporation. After the bankruptcy was dismissed and the restated partnership formed, NCV, Ltd. and NCV, Inc. entered into a master proprietary lease agreement (Ex. 22) by which NCV, Inc. became the owner of the property and improvements and NCV, Ltd. leased the units which were to be sold to the public. (R.T. 10/27/97 at 79-80; 11/21/97 at 95-101.) The agreement transferring the property to NCV, Inc. was recorded on or about July 3, 1980.
22. Sometime early in the new partnership relationship, Ferrante defaulted and CSW exercised the reallocation option which started the "Ferrante wars" (R.T. 10/27/97 at 71-74.) As well the relationship between Prewitt and Murphy began to deteriorate and Prewitt filed an action to dissolve CSW. Finally the two brothers-in-law and Carol Prewitt Murphy decided to divide all their business interests and assets held in common. (R.T. 10/27/97 at 81-89.)
23. Sometime in June 1983, Prewitt, Murphy and Carol Prewitt Murphy entered into a massive Settlement Agreement (Ex. A) (the "1983 Agreement") for the purpose of severing their business relationships. NCV, Ltd. was not a party to this agreement. The 1983 Agreement provided, inter alia, for division of the various Prewitt/Murphy business interests and appraisal of the CSW shares.
Paragraph 2.02(a) of the 1983 Agreement provides that Murphy or CSW was to purchase Prewitt's shares at a price to be determined after the appraisal and adjustment for the value of other assets being assigned to the respective parties. Murphy and Prewitt agreed to divide the $5,355,000.00 Original Land Note and assign percentages of that note to each of them in partial satisfaction of their debts to each other. (Ex. A, § 3 at 14-19.) A new promissory note of $3,012,187.50 payable to Prewitt was to be created (Ex. 1 to Ex. A) which would be secured by a deed of trust (Ex. 3 to Ex. A) encumbering the leasehold interest now owned by NCV, Ltd.
24. The 1983 Settlement Agreement went through a number of modifications. In the April 15, 1985 modification (Ex. CC) ("the 1985 Agreement") the parties changed the 1983 Agreement by dropping the requirement of an appraisal of the CSW shares, providing Murphy or CSW an option to purchase Prewitt's shares in CSW for $1,300,000.00 and modifying the terms of that note to be created under the 1983 Agreement. The 1985 Agreement spelled out different payment terms for what became described as the "Prewitt Land Note," providing for interest payments on a fixed schedule and a maturity date of March 1, 1987. Ex. CC offered by Prewitt is incomplete and missing exhibits (R.T. 11/20/97 at 31-36). Because of this the Court is unable to determine whether the security to be given for the "Prewitt Land Note" discussed in paragraph B.3 at page 5 of the 1985 Agreement is the same as that contemplated by the 1983 Agreement.
25. As set forth in the now-final Metropolitan Findings, the severance of Prewitt and Murphy's business ties with the Debtor and CSW was conditional upon the Debtor obtaining a resolution with Ferrante no less favorable to the Debtor than contemplated by Prewitt, Murphy and Carol Prewitt Murphy in the 1983 agreement. The 1983 Agreement was not to become operative as to those parties unless and until an agreement with Ferrante as described in the 1983 Agreement was achieved.
26. Sometime in mid-1986 CSW, Prewitt, Murphy, NCV, Ltd. and Ferrante entered into a Settlement Agreement (the "1986 Agreement") (Ex. G). Although the 1986 Agreement recites that it was made and executed as of May 16, 1986 and there is some conflicting testimony, the Court finds that the 1986 Agreement was not signed by all parties until sometime in July 1986. (R.T. 11/04/97 at 18-20; 11/21/97 at 60; 01/21/98 at 30-34.)
27. As set forth in the Metropolitan Findings, the terms of the 1986 Agreement were not as beneficial to NCV, Ltd. as those contemplated by the 1983 Agreement. (See also, R.T. 11/04/97 at 15-16.)
28. As the dispute with Ferrante approached resolution, various escrows were opened for the purpose of concluding agreements between the various parties. Initially these escrows were opened with the escrow department of Commonwealth Land Title but were transferred to Escrow World because of their complicated nature. (R.T. 11/04/97 at 17-18.) Four separate escrows were opened as Escrow Nos. 1872-75. Each escrow contained the provision that closure of the escrow was subject to and contingent upon concurrent closure of the other escrows.
29. Escrow No. 1874 was between NCV, Ltd. and Prewitt. (Ex. J) Escrow No. 1874 provided that another contingency to closing the escrow was:
Delivery into escrow of an original Modified Land Note and Deed of Trust securing same, in the original principal amount of $3,012,187.50 executed by North Coast Village, Ltd. in favor of John R. Prewitt . . . . Said Trust Deed to be a First Deed of Trust encumbering those ten units listed on Exhibit "A". . . .
The instructions further provided that:
Escrow holder is not to be concerned with the terms or contents of the Modified Land Note and Land Note Deed of Trust. Said documents have been drawn outside of escrow by counsel for John R. Prewitt, and execution of same by North Coast Village, Ltd. shall be deemed as their approval of all the terms and conditions contained therein.
30. Amended escrow instructions to Escrow No. 1874 dated July 24, 1986 added paragraph 21 and deleted original paragraph 21. (Exhibit J) New paragraph 21 recited:
As a matter with which Escrow holder is not to be concerned Prewitt and Murphy agree that promptly following the closing of this Escrow, they shall enter into an agreement memorializing the transaction herein and which shall constitute a further amendment to the settlement agreement stated June 8, 1983.
NCV, Ltd. by CSW and Prewitt executed this amendment on or about July 24, 1986. It appears to have been delivered to escrow the following day.
31. The Deed of Trust (Ex. M) referenced in Escrow No. 1874 was signed by CSW as general partner of NCV, Ltd. on July 25, 1986 and delivered to escrow sometime before July 31, 1986. The Deed of Trust purports to create a lien in favor of Prewitt on the fee interest of NCV, Ltd. in the land underlying the stock cooperative units. Because of the transactions set forth in paragraph 19 and 20 above, NCV, Ltd. did not own a fee interest in the land in 1986. A trust deed rider recorded at the same time appears to amend to legal description to create a lien on NCV Ltd.'s leasehold interest in various units.
32. The simultaneous closure of the four escrows was chaotic. (R.T. 11/04/97 at 21-22.) Negotiating Ferrante's withdrawal from NCV, Ltd. was complicated by Ferrante's internecine dispute among his investors and his ex-wife (R.T. 10/27/97 at 96-97) and the changing demands of Ferrante's "price" for releasing his interest in NCV, Ltd. (R.T. 01/21/98 at 30-34). The Unified Capital Corporation which was brokering the financing for the Ferrante buy-out (R.T. 11/04/97 at 79-81) was threatening to recall loan monies if escrow did not close; Ferrante was threatening to file an involuntary bankruptcy petition against the partnership and Prewitt was threatening to join Ferrante if the escrows did not close by July 31, 1986. To compound matters, Escrow World was extremely concerned about the complexity of the transactions and the glacial pace of progress. (R.T. 11/04/97 at 28-30.)
33. Since the relationship between Murphy and Prewitt was strained, Kilfoil acted as a go-between for the two. On July 30, 1986 Murphy and Prewitt were still negotiating the terms of a note which would become effective once Ferrante was out of the partnership and Murphy owned all of CSW's shares. On that day at the escrow office Kilfoil had lengthy discussions with Prewitt about the terms of the Modified Land Note which Prewitt would receive when the transactions closed. He discussed with him why many of the provisions of the 1983 Agreement were unworkable from the Debtor's viewpoint based on changes in the transaction caused by Ferrante's demands and the reduced amount of capital available to NCV, Ltd. Kilfoil had the impression that Prewitt understood his objections and was willing to modify his demands. (R.T. 11/04/97 at 31-43; 51-67.)
34. While at the escrow company, Kilfoil retired to a small office to make changes or comments to the proposed Modified Land Note (Ex. L). Murphy took over from Kilfoil the negotiations with Prewitt over the terms of the Modified Land Note. He made numerous changes based on his and Kilfoil's concerns over NCV, Ltd.'s ability to perform under the note once escrow closed. Those changes are for the most part embodied in Exhibit XXXX. Murphy negotiated with Prewitt over many points (R.T. 11/21/97 at 65-91) but Prewitt was unwilling to agree to most of them. (R.T. 11/21/97 at 92.) Murphy told Prewitt he was unwilling to agree to the note in an unmodified form.
Prewitt left the office where the two were speaking, obtained another copy of Exhibit L, changed the due date to November 1, 1987 and stated,
If you want to deal, I'm going along with these changes, made the changes, initialed them and said, `This is the deal. If you want to close, this is the note. Execute it, we'll close this escrow'.
(R.T. 11/18/97 at 82.) Prewitt did not see Murphy execute the note and Murphy did not verbally agree to Prewitt's changes in Prewitt's presence (R.T. 11/18/97 at 79; 82-85.) Prewitt agrees he has never seen Murphy's signature on Prewitt's version of the Modified Land Note. (R.T. 11/18/97 at 85.)
35. After Prewitt left Escrow World, Murphy continued to make changes to the Modified Land Note which he believes are reflected for the most part in Exhibit XXXX. Murphy's many alterations to the note included a postponement of the interest rate start date from September 21, 1979 to July 30, 1986; a reduction in the interest rate from 12% compounded to 10% simple interest; a reduction in the installments from $17,000 or 80% of Net AITD Income to $12,500.00, and substantial revisions to the default provisions and release clauses. Murphy signed a version of the note similar to Exhibit XXXX. There is conflicting testimony whether Murphy left the revised note with Escrow World which subsequently lost it or the note was never delivered. Murphy testified that it was delivered to Escrow World. (R.T. 11/21/97 at 90-92.) The Court finds it unnecessary to resolve whether delivery occurred to determine the legal effect of Murphy's failure to agree with Prewitt on the provisions of the Modified Land Note.
36. Escrow closed on July 31, 1986. It is undisputed that the Original Land Note was canceled and the deed of trust securing it (Ex. C) was reconveyed.
37. Prewitt discovered the Modified Land Note was missing approximately two weeks after escrow closed. (R.T. 11/20/97 at 9.) He claims he discussed the fact that the Note was missing with Murphy; Murphy denies recollection of that discussion. (R.T. 11/21/97 at 135.) After the closing, Kilfoil had a number of meetings with Prewitt and Murphy but was unsuccessful with resolving the differences between the two over the terms of the Note which would sever the business interests of the two men. (R.T. 11/04/97 at 75-82.) Prewitt filed suit against NCV, Ltd.'s lender which caused numerous problems for the project and ultimately precipitated this Chapter 11 filing.
CONCLUSIONS OF LAW
The Court having made the foregoing findings of fact, adopts the following conclusions of law:
1. The Action involves the Debtor's "Complaint Objecting to Secured Claim of John R. Prewitt," seeking a declaration that the Modified Land Note is unenforceable and avoidance of the Prewitt Trust Deed pursuant to 11 U.S.C. § 544(a); and Prewitt's "First Amended Complaint for Specific Performance and Declaratory Relief," seeking delivery of the Modified Land Note, or delivery of a duplicate into Escrow No. 1874f. The Court has jurisdiction over the subject matter of the Action pursuant to 28 U.S.C. § 1334 and 157(b)(1) and General Order No. 312-D of the United States District Court for the Southern District of California.
2. The Action is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A)(B) (K) and (O) in which the Court is empowered to enter final judgment pursuant to 28 U.S.C. § 157(b)(1).
The Modified Land Note Is Unenforceable
3. This Action turns on Prewitt's ability to enforce the Modified Land Note. To create an enforceable contract, the parties must mutually consent to the essential terms of the contract. Civil Code §§ 1550 and 1565. The parties' consent must be mutual and communicated to the other side. Ellis v. Klaff, 96 Cal.App.2d 471, 478 (1950).
4. Mutual consent requires a precise and unequivocal acceptance of the offer. A qualified acceptance, or an acceptance that adds new terms, terminates the offer and creates a new counteroffer. Civil Code § 1585; Howard v. Chow, 27 Cal.App.2d 755, 757 (1938). Moreover, although an acceptance can be "grumbling," it must be precise and unequivocable. Chicago Bridge Iron Co. v. Industrial Accident Com'n, 226 Cal.App.2d 309, 316 (1964).
5. Prewitt and Murphy did not mutually consent to the essential terms of the Modified Land Note. That is, Prewitt left his proposed version of the Modified Land Note with Murphy on a "take it or leave it" basis without obtaining Murphy's acceptance. [FF 34] Murphy did not sign this proposed version and instead continued to make substantial interlineations. He signed this substantially interlineated version and may have left it with Escrow World. Kilfoil's testimony confirms Prewitt and Murphy never agreed upon the essential terms of the Modified Land Note. [FF 66 33, 34 and 37; see also Pre-Trial Order at 66 3(b)(5)-(11)] Their failure to agree renders the Modified Land Note unenforceable.
6. An issue also exists concerning delivery of the Modified Land Note in that it was never located. Failure to deliver the Modified Land Note provides alternate grounds to invalidate the note. Western Loan Bldg. Co. v. Scheib, 218 Cal. 386, 390 (1933). Because the Court finds no mutual consent, the Court makes no ruling concerning delivery.
7. Additionally, the failure to achieve mutual consent precludes specific performance. This Court cannot specifically enforce a contract lacking mutual consent; nor can it enforce a contract where the essential terms are uncertain. Civil Code § 3390; In Magna Dev. Co. v. Reed, 228 Cal.App.2d 230, 235-36 (1964).
8. Prewitt requests reasonable attorneys' fees based upon the Modified Land Note. Prewitt is not entitled to recover attorneys' fees in the absence of a statute or enforceable contract. In re Fobian, 951 F.2d 1149, 1153 (9th Cir. 1991). Moreover, Prewitt presented no evidence concerning his attorneys' fees incurred in this Action.
Prewitt Has No Enforceable Secured Claim
9. A mortgage, or deed of trust, serves to secure the "performance of a debt." Civil Code §§ 2872 and 2920. A deed of trust purporting to secure an unenforceable debt has no legal effect. Western Loan Bldg. Co. v. Scheib, 218 Cal. 386, 393 (1933) ("A mortgage is merely security for a debt, and if there is no debt there is no mortgage").
10. Prewitt's secured proof of claim indicates the Prewitt Trust Deed is founded upon a debt memorialized by three instruments: (i) the 1983 Settlement Agreement; (ii) the 1986 Settlement Agreement; and (iii) the Modified Land Note. [Pre-Trial Order at 6 3(a)(1)] None of these instruments creates a debt enforceable against the Debtor. The Debtor was not a party to the 1983 Agreement. [FF 6 23] Additionally, the 1983 Agreement is unenforceable because the terms of the 1986 agreement "were not as beneficial to NCV, Ltd. as those contemplated by the 1983 Agreement." [FF 66 25 and 27]
Similarly, the 1986 Agreement does not create a debt enforceable against the Debtor. This Agreement distributes nothing to Mr. Prewitt and nowhere obligates the Debtor to Prewitt. [Pre-Trial Order at 6 3(a)(8)] The remaining agreement — the Modified Land Note — is unenforceable for the reasons above.
11. Alternatively, Prewitt contends the Prewitt Trust Deed secures pre-existing obligations under the Original Land Note. A deed of trust given to secure a pre-existing debt is valid between the parties even though there is no additional consideration. Smitton v. McCullough, 182 Cal. 530, 537-38 (1920). However, the deed of trust may not bind third parties. A deed of trust securing pre-existing obligations must sufficiently reference the obligations so that third parties, upon inspection of the record and reasonable diligence, can ascertain the full extent of the obligation. D'Oyly v. Capp, 99 Cal. 153, 157 (1893).
12. The Court concludes the parties intended the Prewitt Trust Deed to secure only the obligations described on its face. Specifically, the Prewitt Trust Deed secures: "[p]ayment of indebtedness evidenced by one promissory note of even date herewith . . . in the principal sum of $3,012,187.50" and future advances. [Pre-Trial Order, Ex. D] Prewitt himself told this Court NCV, Ltd.'s secured debt to him arose out of the 1983 Agreement. (See, Ex. 10, p. 21 at 62) He now contends the debt arose out of the Original Land Note. The Prewitt Trust Deed nowhere describes these debts; nor does it state that its purpose is to secure pre-existing debts.
13. As between third parties, the Prewitt Trust Deed provides no constructive notice of the intent to secure pre-existing debts. Moreover, a reasonable investigation would not reveal the intent to secure pre-existing debts because: (i) the Original Land Note and Modified Land Note have different payees; (ii) the Original Land Note was canceled and the deed of trust securing this note was reconveyed; and (iii) Prewitt received significant and substantial distributions arguably on account of the Original Land Note. [FF 6 36; Pre-Trial Order at 6 3(a)(14)] Accordingly, an agreement between Prewitt and Murphy to secure the Original Land Note would not bind third parties.
The Parties Intended A Novation
14. Additionally, the Court rejects Prewitt's contention he did not intend a novation. A novation occurs where the parties agree to substitute a new agreement in place of an existing agreement. Civil Code § 1530.
15. A novation is accomplished by substitution of: (i) a new obligation between the same parties with the intent to extinguish the old obligation; (ii) a new debtor in place of the old debtor with the intent to release the old debtor; or (iii) a new creditor in place of the old one. Civil Code § 1531. Additionally, because a novation creates a new contract, there must be new consideration and mutual assent by all the parties concerned. California C.P. Growers v. Downey, 76 Cal.App. 1, 17-18 (1925).
16. Whether a novation has occurred is a question of fact established by written agreement, implication or parol evidence. Alexander v. Angel, 37 Cal.2d 856, 860-63 (1951). The parties must clearly intend to extinguish rather than merely modify or renew the original contract. Howard v. County of Amador, 220 Cal.App.3d 962, 978 (1990).
17. Further, a novation requires that both the original contract and new contract are valid and enforceable. California C.P., 76 Cal.App. at 18. If there is no novation, the original note is enforceable. Columbia Casualty Co. v. Lewis, 14 Cal.App.2d 64, 71-72 (1936).
18. The Court concludes the parties intended to accomplish a novation. The parties changed the amount of the principal obligation, the identity of the "payor," and reduced the number of potential "payees" as Prewitt and Ferrante were no longer indirectly liable on behalf of NCV, Ltd. The parties also changed the type of debt. The Original Land Note was designed to protect Prewitt's projected profits on condominium sales from taxes [FF 16 and 17]; whereas Prewitt intended the Modified Land Note to evidence a true debt adjusting the obligations between himself and Murphy. [FF 23] Indeed, the Original Land Note is curiously undated and contains no express provisions for payment or commencement of interest; nor is there any evidence of any payment ever being made. [FF 20; Pre-Trial Order at 6 3(a)(10)]. Additionally, the escrow instructions and simultaneous closing of escrow severing the parties' business dealings evidence the parties' intent to accomplish a novation. [FF 28 and 29]
19. The Court rejects Prewitt's argument that the novation lacks consideration. The Modified Land Note's designation of Prewitt as the sole payee and elimination of Prewitt's involvement in NCV, Ltd. provide consideration for Prewitt to agree to a novation.
20. Despite the parties' intent, the novation fails in that the Modified Land Note is unenforceable for the reasons set forth above. Although, Prewitt may seek to enforce the Original Land Note pursuant to its original terms, his claim, if any, is a general unsecured claim because the original trust deed securing the Original Land Note was reconveyed.
21. The Court deems it premature to rule on the enforceability of the Original Land Note. Prewitt did not assert his entitlement to a general unsecured claim in his secured proof of claim or the first amended complaint, and the bar date for filing general unsecured claims has passed. Notwithstanding, Prewitt receives an extension of the bar date to establish his unsecured claim if it arises as a result of the Debtor avoiding his interest in property. Fed.R.Bankr.P. 3003(c)(3).
The Debtor Can Avoid The Prewitt Trust Deed
22. Pursuant to section 544(a)(1), a trustee may avoid any security interest that would have been voidable by a judicial lien creditor as of the petition date, whether or not such a creditor exists. In re Wind Power Systems, 841 F.2d 288, 291-92 (9th Cir. 1988). Accordingly, the trustee can avoid any transfer unperfected under state law as of the petition date. In re Pacific Express, Inc., 780 F.2d 1482, 1486 (9th Cir. 1986).
23. Additionally, pursuant to section 544(a)(3), a trustee may avoid any security interest that would have been voidable by a bona fide purchaser of real property as of the petition date, whether or not such purchaser actually exists. In re Kim, 161 B.R. 831, 837 (9th Cir. BAP 1993). The trustee's status as hypothetical bona fide purchaser is measured by state law. Kim, 161 B.R. at 834. However, actual knowledge must be disregarded; only constructive or inquiry notice will defeat the trustee's avoiding powers. Id. at 838.
24. Section 1107(a) affords a debtor in possession the same rights as a trustee. Accordingly, in applying section 544(a) the Court must disregard the debtor in possession's actual knowledge of a prior unperfected lien. Id. at 838.
25. Because the Prewitt Trust Deed secures an unenforceable debt, it provides no constructive notice to a bona fide purchaser or judicial lien creditor. See, Western Loan, 218 Cal. at 393 (holding that mechanics liens take priority over an earlier recorded mortgage securing an unenforceable debt). The recorded Prewitt Trust Deed is comparable to recording a blank piece of paper. City of Los Angeles v. Morgan, 105 Cal.App.2d 726, 733-34 (1951).
26. Alternatively, constructive notice arises from the duty to make a reasonable inquiry. The duty arises where the person has actual knowledge of circumstances sufficient to cause a reasonably prudent person to inquire into a possible competing interest. Civil Code § 19. As set forth in paragraph 13 above, the Court finds the contents of the Prewitt Trust Deed insufficient to trigger the duty to inquire, and a reasonable person would likely conclude the debt was paid.
27. The Court also considered its equitable power to reinstate the reconveyed trust deed securing the Original Land Note in its corresponding priority where the reconveyance was purportedly mistaken. The filing of bankruptcy precludes this remedy because the Debtor occupies the status of a hypothetical bona fide purchaser under Section 544(a)(3). See, First Nationwide Savings v. Perry, 11 Cal.App.4th 1657, 1669 (1992) (recognizing a reconveyed trust deed cannot be reinstated to the detriment of a bona fide purchaser).
28. In the absence of evidence concerning the Debtor's claims of offset against Prewitt or the Debtor's attorneys' fees incurred in the Action, the Court declines to make an award on account of these claims.
29. Any findings of facts which may be considered a conclusion of law shall be deemed a conclusion of law. Any conclusions of law which may considered a findings of fact shall be deemed a finding of facts. A separate judgment is filed concurrently with these findings.