Hoskins v. Profit Recovery Center LLC

• Court: United States Bankruptcy Court, N.D. California
• Decided: September 5, 2019
• Docket: 19-03012
• Status: Unknown

Opinion

EDWARD J. EMMONS, CLERK 13 □□ \o. U.S. BANKRUPTCY COURT □□ NORTHERN DISTRICT OF CALIFORNIA a. a Sal □□ 1 ISLE Signed and Filed: September 5, 2019 □□□□□□□ 2 ek 4 DENNIS MONTALI 5 U.S. Bankruptcy Judge 6 7 8 UNITED STATES BANKRUPTCY COURT 9 NORTHERN DISTRICT OF CALIFORNIA 10 In re ) Bankruptcy Case No. 17-30326-DM 11 ) 12 MAYACAMAS HOLDINGS LLC, ) CHAPTER 7 ) 13 ) Debtor. ) 14 ) 15 ) E. LYNN SCHOENMANN, Chapter 7 ) Adversary Case No. 19-03012-DM 16 ||Trustee, ) Plaintiff, ) 17 ) Vv. ) 18 ) 19 CARMEL FINANCING, LLC, et al., ) ) 20 Defendants. da..— 22 MEMORANDUM DECISION ON MOTION TO DISMISS CLAIMS AGAINST 23 DEFENDANT CARMEL FINANCING LLC 24 On April 7, 2019, plaintiff E. Lynn Schoenmann, chapter 7 25 |jtrustee (“Trustee”) of the chapter 7 estate of Mayacamas 26 |}Holdings LLC (“Debtor”), filed a Complaint to Determine 27 ||Validity, Priority, and Extent of Liens; to Avoid Unperfected 28 ||Security Interests and Fraudulent and Preferential Transfers; -1-

1 and to Object to Claims Relating to Sonoma County Assessor’s 2 Parcel 120-190-033 (the “Complaint”) against 23 named 3 defendants, including defendant Carmel Financing, LLC 4 (“Carmel”). See Complaint at dkt. 1. On April 22, 2019, Carmel 5 filed a motion to dismiss (“MTD”) (dkt. 5) the adversary 6 proceeding for failure to state a claim upon which relief can be 7 granted. Trustee filed an opposition (dkt. 10), to which 8 Carmel replied (dkt. 12). Following a hearing on June 3, 2019, 9 the court took the MTD under advisement. For the reasons set 10 forth below, the court is denying the MTD in part and granting 11 it in part. 12 13 I. INTRODUCTION 14 On April 10, 2014, Debtor executed a promissory note in 15 the principal amount of $2,000,000 to the order of Carmel (the 16 “Note”). The Note was secured by a first priority deed of trust 17 (the “DOT”) encumbering property located in eastern Sonoma 18 County (the “Ranch Parcel”). On April 7, 2017, Debtor filed a 19 chapter 11 petition and listed the Ranch Parcel as its principal 20 asset. Trustee was appointed as the chapter 11 trustee on 21 October 4, 2017, and the case was converted to chapter 7 on 22 December 5, 2017. 23 On October 8, 2017 -- four days after the appointment of 24 Trustee -- the Tubbs Fire erupted and caused significant damage 25 to the Ranch Parcel. To date, Trustee has received more than $2 26 million from Debtor’s insurance carrier for claims arising out 27 of the Tubbs Fire (the “Insurance Proceeds”). Carmel contends 28 that under the Note and DOT, the remaining Insurance Proceeds 1 should be turned over to it. Trustee commenced this adversary 2 proceeding seeking, among other things, an adjudication that 3 Carmel has no secured interest in the insurance policy and the 4 Insurance Proceeds. Trustee additionally seeks a judicial 5 determination that certain provisions of the Note are 6 unenforceable, including those imposing an 18% default interest 7 rate, monthly late charges of four percent, and a $75,000 “Exit 8 Fee.” 9 10 II. ISSUES AND CONTENTIONS 11 A. Who is Entitled to the Insurance Proceeds? 12 Trustee alleges that Debtor was the only named insured on a 13 “commercial lines policy” covering the Ranch Parcel (the 14 “Policy”). As of April 7, 2019, Philadelphia Indemnity 15 Insurance Company (“Insurer”) had remitted to Trustee 16 $2,114,268.76 in Insurance Proceeds for damages to the Ranch 17 Parcel caused by Tubbs Fire. See Complaint at dkt. 1, 3:11-20, 18 ¶ 9. Except for a court-approved expenditure of $418.541.50 for 19 post-fire clean-up required by law, Trustee continues to hold 20 the Insurance Proceeds, which equalled $1,695,727.26 as of the 21 commencement of this adversary proceeding. Id. 22 In paragraph 11 of the Complaint, Trustee asserts that the 23 chapter 7 estate, and not Carmel, is entitled to the Insurance 24 Proceeds. In support of this claim, Trustee alleges that the 25 Policy does not mention Carmel or identify it as an additional 26 loss payee. She also alleges that Carmel did not notify Insurer 27 that it should be added as a loss payee on the Policy in 28 accordance with California’s law (Cal. Comm. Code § 9312(b)(4)) 1 governing the creation and perfection of security interests in 2 insurance policies; she further contends that Colorado law 3 excludes insurance policies from property in which a creditor 4 can claim a security interest. Carmel does not dispute either 5 allegation, but instead contends that it has a security interest 6 in the Insurance Proceeds, not the policy itself. 7 Exercising the strong-arm avoidance powers conferred upon 8 her by 11 U.S.C. § 544(a)(1), Trustee seeks to avoid any 9 security interest that Carmel may have had in the Insurance 10 Proceeds prior to and as of the petition date. “The avoided 11 lien may be preserved under 11 U.S.C. § 551 for the benefit of 12 the estate, thereby providing a possibility of payment to 13 estate’s general unsecured creditors.” See Complaint, ¶ 11, dkt. 14 1, p.3. See also id. at ¶¶ 23-26, 57, 60(a), and 62.

15 B. Are Carmel’s Claims for Default Interest and Other Charges Viable under Governing Law? 16 The Note provides for a 6% per annum interest rate. 17 Complaint, ¶ 21. In addition, an “Event of Default” provision 18 allows Carmel to recover an 18% “Default Rate;” monthly late 19 charges of 4%; and a $75,000 “Exit Fee.” Id. Trustee contends 20 that California law governs the enforceability of these 21 provisions. She further alleges that the default interest and 22 interest charges do not bear a reasonable relationship to the 23 actual damages that the parties could have anticipated from a 24 breach of the Note and thus are unenforceable under California 25 law, particularly under California Civil Code section 1671 (“CC 26 § 1671”). Id. at ¶ 23. 27 28 1 In response, Carmel asserts that the loan documents 2 executed by Debtor explicitly provide that Colorado law governs 3 the matters pertaining to the Note’s construction, validity and 4 performance, and that the amounts owed by Debtor as of the 5 petition date for default interest, late charges and the exit 6 fee are permissible under Colorado law. MTD at dkt. 5, ECF pg. 7 15-17. Carmel also contends even if California law does govern 8 the Trustee’s claims, CC § 1671 is inapplicable when the loan 9 has matured and the entire Note is due and payable. 10 11 III. STANDARDS GOVERNING MOTIONS TO DISMISS 12 To overcome a Rule 12(b)(6) motion to dismiss, a plaintiff 13 must plead “enough facts to state a claim to relief that is 14 plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 15 544, 570 (2007). “A claim has facial plausibility when the 16 plaintiff pleads factual content that allows the court to draw 17 the reasonable inference that the defendant is liable for the 18 misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 19 (2009). “The plausibility standard is not akin to a probability 20 requirement, but it asks for more than a sheer possibility that 21 a defendant has acted unlawfully.” Id. (internal quotation marks 22 omitted). In considering a Rule 12(b)(6) motion, this court 23 must “accept factual allegations in the complaint as true and 24 construe the pleadings in the light most favorable to the 25 nonmoving party.” Manzarek v. St. Paul Fire & Marine Ins. Co., 26 519 F.3d 1025, 1031 (9th Cir. 2008). 27 // 28 // 1 IV. DISCUSSION 2 A. Does California or Colorado Law Apply? 1. Governing Law 3 4 Before addressing the merits of the substantive issues 5 raised by the MTD, the court must determine which state law 6 applies. Bankruptcy courts apply federal common law choice-of- 7 law rules to determine the enforceability of a contractual 8 choice-of-law provision, even when resolution of the underlying 9 dispute turns on state law. Mandalay Resort Group v. Miller, 292 10 B.R. 409, 413 (9th Cir. BAP 2003); In re CMR Mortg. Fund, LLC, 11 416 B.R. 720, 728–29 (Bankr. N.D. Cal. 2009). 12 Federal common law applies section 187 of the Restatement 13 (Second) Conflicts of Law to determine the enforceability of 14 contractual choice-of-law provisions. Id. Subdivision (1) of 15 the Restatement (Second) of Conflicts provides:

16 The law of the state chosen by the parties to govern their contractual rights and duties will be applied 17 if the particular issue is one which the parties 18 could have resolved by an explicit provision in their agreement directed to that issue. 19 20 In other words, parties to a contract “may agree to apply 21 the law of a forum to decide all questions regarding the 22 construction and performance of an agreement, but not questions 23 regarding capacity to contract, or other contract-formation 24 issues.” CMR, 416 B.R. at 729. Where the making of a contract 25 is not in dispute, “the law chosen by the parties need not have 26 any reasonable relationship to the place of creation or 27 performance of the contract.” Id. 28 // 2. The Contractual Terms 1 2 Paragraph 10 of the Note provides that in “matters of 3 construction, validity and performance, this note and the 4 obligations arising hereunder shall be governed by, and 5 construed in accordance with, the laws of the State of 6 Colorado . . .[.] See Carmel’s Request for Judicial Notice 7 (“RJN”) at dkt. 6 at ECF pgs. 7-8. In contrast, the DOT 8 provides that “at all times the provisions for the creation, 9 perfection, and enforcement of the lien and security interest 10 created pursuant hereto and pursuant to any other document 11 entered into between [Carmel and Debtor] shall be governed by 12 and construed in which the property is located[.]1 RJN at dkt. 13 6, ECF pg. 18. 3. Analysis 14 15 Given the federal choice-of-law principles that place great 16 weight on choice-of-law provisions executed by contracting 17 parties with respect to the interpretation and enforcement of 18 19 20 1 The DOT also indicates that to the extent the law of the state where the property is located permits (i.e., California), 21 the obligor (i.e., Debtor) waives any right to contest the applicability of Colorado law as to the “construction, validity, 22 and enforceability” of the Note and DOT. Such a waiver would 23 not be enforceable under California law, given that California courts will not enforce express choice of law provisions where 24 the chosen state does not have a substantial relationship to the parties or their transaction or if the chosen state’s law “is 25 contrary to a fundamental policy of California” and “California 26 has a materially greater interest than the chosen state in the determination of the particular issue. Rincon EV Realty LLC v. 27 CP III Rincon Towers, Inc., 8 Cal. App. 5th 1, 10 (2017) (internal citations omitted). 28 1 their contracts, and given California’s interest in governing 2 security interests granted in real property and fixtures located 3 within its borders, this court will apply California law to 4 issues pertaining to the DOT, the Property, and the Insurance 5 Proceeds, which Carmel contends are proceeds of the Property. 6 Applying the same principles, the court will honor the 7 contracting parties’ agreement to apply Colorado law when 8 interpreting, enforcing, or resolving a challenge to terms of 9 the Note.

10 B. Trustee Has Not Asserted a Cognizable Claim under Colorado Law to Invalidate the Default Interest Rate and 11 Other Charges Imposed on Debtor 12 13 Trustee objects to the 18% default interest rate and the 14 other charges imposed by the Note and DOT, alleging that they 15 constitute impermissible and unenforceable penalties under 16 California law. See Complaint at dkt. 1, ¶ 60(a). Having 17 determined that Colorado law governs the enforceability of the 18 default interest rate and other charges and terms of the Note, 19 the court must decide whether these Note provisions run afoul of 20 that governing law. For the reasons set forth below, the court 21 concludes that default interest rate and other charges are 22 permissible under Colorado law. 23 Under Colorado law, miscellaneous charges such as default 24 charges and exit fees are permissible as long as the total 25 amount of the interest and fees and charges to be paid is less 26 than Colorado’s usury rate of 45 percent. In Dikeou v. Dikeou, 27 928 P.2d 1286 (Co. Sup. Ct. 1996) (en banc), the Colorado 28 Supreme Court held that late payment charges provided in a non- 1 consumer loan agreement as a condition of credit being extended 2 constituted “interest” within the meaning of the non-consumer 3 usury statute as the numerical late charges were easily 4 convertible to a percentage of the unpaid balance of the loan. 5 Id. at 1293-94. In Colorado, usury occurs when the interest on 6 a loan exceeds 45%. West’s C.R.S.A. § 5-12-103(2). 7 Carmel contends that the total amount being charged under 8 the Note (the 6% per annum interest rate, the 18% default rate, 9 the monthly late charges of 4% and the $75,000 exit fee) result 10 in an interest rate that is enforceable under Colorado’s 11 governing law. Assuming the factual accuracy of that 12 representation, the court agrees that Trustee’s efforts to 13 strike those charges would not succeed under Colorado law. 14 Consequently, the court will grant the MTD as to the First Claim 15 for Relief. 16 C. Carmel’s Claim Is Not Secured by the Insurance Proceeds 17 Carmel alleges that its “status as a secured creditor on 18 the Property” means that it “holds a perfected security interest 19 in the Insurance Proceeds since it cannot be disputed that the 20 Insurance Proceeds are the identifiable cash proceeds of that 21 real estate collateral.” MTD at 4:25-5:1. In support of its 22 position, Carmel notes that paragraph (f) of the DOT granted it 23 a security interest in both real and personal property pursuant 24 to the Uniform Commercial Code (“UCC”), including all 25 “[i]ntangibles in which a security interest may be created under 26 the UCC.” MTD, dkt. 5 at 22-26. According to Carmel, that 27 security interest extended to all insurance policies, insurance 28 payments and unearned insurance premiums as well as claims, 1 demands, awards, settlements and other payments arising or 2 resulting from or otherwise relating to any insurance (whether 3 or not Carmel was named as a loss payee). 4 Carmel’s argument overlooks several salient points. First, 5 the UCC defines a “security interest” as “an interest in 6 personal property or fixtures that secures payment or 7 performance of an obligation.” See Cal. Comm. Code § 1201(35) 8 (emphasis added). Carmel has not provided any evidence that, 9 prior to the petition date, it perfected a security interest in 10 any personal property or fixtures of Debtor, either by filing a 11 financing statement or taking possession of such property as 12 required by the UCC. See Cal. Comm. Code § 9310(a) and (b)(6). 13 See also Cal. Comm. Code § and 9315(c) (providing that a 14 security interest in proceeds is perfected only if the security 15 interest in the original collateral was perfected). 16 Second, the UCC does not govern the “creation or transfer 17 of an interest in or lien on real property, including a lease or 18 rents thereunder” with certain exceptions that are inapplicable 19 here. Cal. Comm. Code § 9109(c)(11). In arguing that it is 20 entitled to the Insurance Proceeds, Carmel notes that the multi- 21 state UCC generally defines “proceeds” as “[w]hatever is 22 acquired upon the sale, lease, license, exchange or other 23 disposition of collateral.” Carmel further observes that 24 “proceeds” include “insurance payable by reason of the 25 loss . . . or damage from the collateral,” citing U.C.C. § 26 9102(a)(64). But real property is not “collateral” that is 27 governed by the UCC, as indicated in Cal. Comm. Code § 28 9109(c)(11). See also In re Ehrle, 189 B.R. 771, 775 (9th Cir. 1 1995) (“Under California’s Uniform Commercial Code, security 2 interests in personal property extend to the cash proceeds 3 thereof. However, [the UCC] excepts the ‘transfer of an interest 4 in or lien on real estate[,]’ from coverage under California's 5 Article 9.”). 6 Third, Carmel did not provide written notification to 7 Insurer that it should be added as a loss payee to the policy, 8 even though California’s version of the UCC allows a creditor to 9 acquire a security interest in an insurance policy procured by a 10 debtor for its own benefit if, and only if, written notification 11 is provided to the insurer. Section 9312 of the California 12 Commercial Code governs the perfection of security interests in 13 insurance. In particular, section 9312(b)(4) provides that a 14 “security interest in, or claim in or under, any policy of 15 insurance, including unearned premiums, may be perfected only by 16 giving written notice of the security interest or claim to the 17 insurer.” Cal. Comm. Code § 9312(a)(4) (emphasis added). 18 Absent that written notice, Carmel cannot assert a security 19 interest in the claim filed with and paid by Insurer. 20 Fourth and finally, California law does not permit a 21 mortgagee who has not been named as an insured (or who has not 22 provided written notification of its security interest in the 23 policy) to recover insurance proceeds relating to claims of 24 damage to the mortgaged property. Zaghi v. State Farm Gen. Ins. 25 Co., 77 F.Supp.3d 974 (N.D. Cal. 2015). As the Zahgi court 26 stated:

27 In California, recovery of proceeds under an insurance contract is generally limited to the named 28 insureds. Bonaparte v. Allstate Ins. Co., 49 F.3d 1 486, 488 (9th Cir. 1994); see also Russell v. Williams, 58 Cal.2d 487, 24 Cal.Rptr. 859, 374 P.2d 2 827 (1962) (per curiam). This is because “insurance 3 does not insure the property covered thereby, but is a personal contract indemnifying the insured against 4 loss resulting from the destruction of or damage to his interest in that property.” Russell, 58 Cal.2d 5 at 490, 24 Cal.Rptr. 859, 374 P.2d 827. 6 7 Id. at 977. 8 9 V. CONCLUSION 10 For the reasons stated above, the court will GRANT Carmel’s 11 MTD as to Trustee’s claims relating to the enforceability of the 12 18% default interest rate, the monthly late charges of 4%, and 13 the $75,000 “Exit Fee.” It will DENY Carmel’s MTD as to 14 Trustee’s claims relating to the Insurance Proceeds. Counsel 15 for Carmel should prepare and upload an order granting the MTD 16 in part and denying it in part, for “the reasons set forth in 17 the court’s memorandum decision filed on September -, 2019, at 18 dkt. –.” The order should also reflect that the next A.P. 19 scheduling conference will occur on October 25, 2019, at 1:30 20 p.m. Counsel for Carmel must comply with B.L.R. 9021-1(c) before 21 uploading the order. 22 *** END OF MEMORANDUM DECISION *** 23 24 25 26 27 28