Meruelo v. Meruelo Maddux Properties, Inc. (In re Meruelo Maddux Properties, Inc.)

Summarized by Hilda Montes de Oca , U.S. Bankruptcy Court, Central District of California
12 years 10 months ago

Citation:

Merulo v. Merulo Maddux Properties, Inc., et al. (In re Merulo Maddux Properties, Inc., et al.) BAP No. CC-12-1303-TaMoMk (Not for Publication) (9th Cir. BAP 2013.

Tag(s):

Ruling:

Affirming the bankruptcy court’s disallowance of appellant Belinda Merulo’s (“Belinda”) claim under 11 U.S.C. § 502(b)(1), the Ninth Circuit Bankruptcy Appellate Panel (the “BAP”) held that California Code of Civil Procedure 580d (“CCP Section 580d”) prevents both the creditor and the guarantor from obtaining any deficiency any deficiency judgment against the debtor after nonjudicial sale of property. The BAP also upheld the bankruptcy court’s ruling that Belinda did not meet her burden of proving third party beneficiary status for the purposes of California Civil Code § 1559 (“CC Section 1559”), and thus Belinda could not compel specific performance of a contract between Merco Group and the secured lender to whom Belinda previously gave a written guaranty.

Procedural context:

Appeal from the bankruptcy court for the Central District of California disallowing the amended claim of Belinda; legal conclusions reviewed de novo, findings of fact reviewed for clear error.

Facts:

Prepetition, Merco Group, as buyer, entered into a contract with Meruelo Pomona, LLC, as seller, to purchase improved real property located in Pomona, California (the “Property”) for $20,000,000. Belinda and her late husband, managed and owned the selling entity (“Seller”). Their son, Richard Meruelo, managed Merco Group. When Seller and Merco Group executed the purchase agreement (“Purchase Agreement”), a deed of trust securing debt owed by Seller to PNL Pomona, L.P. (“PNL”) encumbered the Property. PNL also held a written guaranty from Belinda (“Guaranty”) guaranteeing repayment of its loan to Seller. On closing of the sale, Merco Group paid the sales price, in part, by assuming the obligation to repay the PNL loan which had a then outstanding balance of $8,763,304.85. The Purchase Agreement did not require a release of the Guaranty, and Belinda remained bound by the Guaranty after assumption. On or about March 27, 2009, Merco Group and 53 related entities filed voluntary petitions under chapter 11. The Property became an asset of a bankruptcy estate. On September 24, 2009, Belinda filed the original proof of claim (“Original Claim")as an indemnification claim. Thereafter, PNL sued Belinda in an action seeking recovery on the Guaranty(“Guaranty Action”). As a result, Belinda filed an amendment to the Original Claim (“Amended Claim”) and asserted a specific claim for $3,306,941.05 based on a proposed judgment in the Guaranty Action (the “PNL judgment”). In the Amended Claim, Belinda alleged that: (1) as a third party beneficiary to the Purchase Agreement, she may enforce the Purchase Agreement against Merco Group pursuant to California Civil Code section 1559 (“CC Section 1559");6 and (2) she holds rights to reimbursement and indemnification under California law, including California Civil Code section 2847 (“CC Section 2847"). Merco Group then filed a Motion for Order Disallowing Claim of [Belinda] (“Motion”) and sought disallowance on two grounds. First, Merco Group argued that section 502(e)8 of the Bankruptcy Code bars recovery under the Amended Claim as Belinda had not yet paid the PNL judgment. Second, Merco Group asserted that section 580d of the California Code of Civil Procedure (“CCP Section 580d”) barred recovery. Merco Group argued that just as this anti-deficiency statute protects a borrower from a lender’s deficiency claim after a non-judicial foreclosure, it also protects a borrower from the guarantor’s reimbursement claim. Belinda filed an opposition to the Motion (“Opposition”). The confirmed plan allowed PNL to non-judicially foreclose. The foreclosure eradicated PNL’s deficiency rights against Merco Group by operation of California law, and that this left only Belinda liable to PNL. The Opposition did not address Merco Group’s second basis for disallowance, CCP Section 580d. Instead, Belinda argued that Merco Group breached the Purchase Agreement when, having agreed to assume the PNL debt, it failed to satisfy the PNL debt in full and thereby release Belinda from obligations under the Guaranty. Belinda alleged that Seller contracted with Merco Group for the “express purpose of relieving [Belinda’s] mortgage debt through the assumption of the loan by [Merco Group].” Belinda asserted, therefore, that as the third party beneficiary of the Purchase Agreement, she had the right to compel Merco Group to perform its obligations under the Purchase Agreement. Belinda, thus, requested that the bankruptcy court infer that such contractual obligations included payment of all the alleged damages incurred, or to be incurred, as a result of the Guaranty Action and Merco Group’s failure to pay PNL in full. After hearing brief argument on the Motion and Opposition, the bankruptcy court granted the Motion, finding that Belinda was not a third-party beneficiary because the contracting parties’ intentions were not to relieve her of the debt. Instead it was the intention of the contracting parties to acquire the property.

Judge(s):

Taylor, Montali and Markell

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