Unpublished Disposition, 899 F.2d 18 (9th Cir. 1986)

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US Court of Appeals for the Ninth Circuit - 899 F.2d 18 (9th Cir. 1986)

In re James S. McINERNEY and Clara I. McInerney, Debtors.James S. McINERNEY, Clara I. McInerney, and Mario Perez, Appellantsv.Suchai TANG, Malee Tang, Connie Tang, Gordon Tang, and EddieTang, Appellees

No. 88-15840.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted March 12, 1990.Decided April 5, 1990.

Before SNEED, FARRIS and FERNANDEZ, Circuit Judges.


MEMORANDUM* 

Suchai, Gordon, Connie, Eddie and Malee Tang ("the Tangs") appeal the district court's affirmance of the bankruptcy court's order setting aside the Tangs' purchase at a 1982 foreclosure sale of the single family residence ("Sea Cliff Property") owned by James and Clara McInerney ("the McInerneys"). The Tangs contend that they were bonafide purchasers who had no constructive notice of the foreclosure dispute between the McInerneys and Stephen Goodman, John Major, the House of Money and the San Francisco House of Money ("the Goodman defendants"). They also claim that there were no material irregularities in the sale. The district court held that the Tangs were not bonafide purchasers. We need not decide that issue because the district court's judgment must be affirmed regardless of the Tangs' status.

BACKGROUND FACTS

A. The Loan Agreement between the Goodman defendants and the McInerneys

In June 1981, the McInerneys made a successful bid to buy the Sea Cliff Property for $318,000. They made a nonrefundable downpayment with the probate court, and sought a loan from the Goodman defendants. The Goodman defendants agreed to loan the McInerneys a total of $105,000 for a forty-five day period at an interest rate of 23% per annum, together with the payment of $15,000 to the lender. This loan was secured by a purchase money second deed of trust on the Sea Cliff Property and two other parcels of real property known as "the Pecks Lane Property" and "the Maddux Drive Property." The agreement also provided that at the end of the 45-day term, the Goodman defendants would provide a replacement financing agreement of one to three years at an interest rate of 18%-20% per annum without payment of additional points.

The escrow on the Sea Cliff Property was set to close on June 15, 1981. On the Friday before escrow was to close, the Goodman defendants informed the McInerneys that the proper loan documentation had been prepared. The Goodman defendants then required that the McInerneys sign a waiver of their three-day right of rescission guaranteed by the Federal Truth-In-Lending Act as a condition of the granting of the loan. The McInerneys begrudgingly signed the waiver in order to prevent the loss of their deposit with the probate court. The disclosure statements subsequently prepared by the Goodman defendants failed to include the agreement regarding replacement financing.

Throughout the following 45-day period, the McInerneys substantially renovated both the interior and the exterior of the Sea Cliff Property. These renovations included relandscaping the entire exterior, repairing $39,000 of termite damage, replacing the roof, and repainting both the interior and the exterior walls.

On July 15, the Goodman defendants informed the McInerneys that the Goodman defendants had been unable to obtain the agreed upon replacement financing and instead proposed a one year term of replacement financing at an interest rate of 30% per annum with an additional loan point. The McInerneys refused to accept replacement financing on the new terms. The Goodman defendants then published notices of default against the Sea Cliff and the Pecks Lane Properties.

On December 8, 1981, the Goodman defendants and the McInerneys entered into a second agreement. This agreement provided that the Pecks Lane property was to be sold between December 30, 1981 and February 1, 1982 and that the Maddux Drive and the Sea Cliff Properties would not be noticed for sale prior to February 1 in consideration for $60,000 which would be applied to the amount of the McInerneys' outstanding indebtedness. The agreement also provided that the Goodman defendants were to notify T.D. Service Company ("the trustee") of the McInerneys' compliance with the agreement.

On December 30, 1981, the trustee noticed the sale of the Sea Cliff Property for February 4, indicating that the sum of $114,861.77 was owed under the contract. The trustee was apparently never advised of the terms of the December 8 contract or the McInerneys' compliance therewith.

On January 29, 1982, the McInerneys filed a complaint in the San Francisco Superior Court seeking a temporary restraining order and a preliminary injunction to prevent the sale of the Sea Cliff and Pecks Lane Properties. The McInerneys' request for a temporary restraining order was granted but was later terminated.

On February 3, 1982, the trustee postponed the sale of the Sea Cliff Property to February 18. The Pecks Lane Property was set for sale on February 17.

The Pecks Lane Property was sold pursuant to the trustee's full credit bid on behalf of the Goodman defendants on February 17. The McInerneys did not attend this sale. The full credit bid extinguished all of the indebtedness owed to the Goodman defendants.

Nevertheless, on February 18, the trustee sold the Sea Cliff Property to the Tangs for $62,500 subject to a $200,000 first deed of trust. The actual value of the Sea Cliff Property at the time of the sale was $450,000. The McInerneys learned of the sale of the Sea Cliff Property on February 19.

On February 23, 1982, the McInerneys recorded a lis pendens against the Pecks Lane and the Sea Cliff Properties. On that same date the Tangs recorded the deed to the Sea Cliff Property.

Between 1980 and 1982, the Tangs inspected numerous homes in the Sea Cliff Area in anticipation of purchasing a home. The Tangs were therefore very familiar with the prices of homes in the area.1  In late 1980 or early 1981, the Tangs inspected the title records applicable to the Sea Cliff Property, and the property itself. The Tangs testified at the trial that when they inspected the Sea Cliff Property, it was in extremely poor condition and had been vacant for five years. They also made an unsuccessful offer to purchase the Property "as is" for $290,000; the Property was listed for $400,000.

In January, 1982, the Tangs learned that a foreclosure sale of the Sea Cliff Property was set for February 4, 1982. The Tangs then called both the trustee and the Goodman defendants to determine what the projected opening bid would be. The Tangs were informed that the opening bid would be slightly over $60,000. They also learned of the postponement of the sale from these same parties. The Tangs did not inspect the property again before the sale. The condition of the property had significantly improved between June and November 1981, because of the McInerneys' renovation work.

In March 1982, the McInerneys filed a supplemental complaint in their Superior Court action and joined the Tangs. On October 18, 1982, the McInerneys filed for reorganization under Chapter 11. The Superior Court action was then removed to the bankruptcy court.

In February 1986, the bankruptcy court conducted a bench trial, the result of which was an order to set aside the trustee's sale as against the Tangs. The Tangs appealed the bankruptcy court's decision on the ground that the court had applied the wrong legal standard. On December 17, 1986, the district court entered an order remanding the case for a determination of whether the Tangs had actual or constructive notice of irregularities in the trustee's sale. The bankruptcy court then conducted another bench trial. It found that the Tangs had inquiry notice of irregularities in the sale. The Tangs appealed the bankruptcy court's decision. The district court affirmed the bankruptcy court's judgment. The Tangs filed a timely appeal to this court.

JURISDICTION AND STANDARD OF REVIEW

The district court had jurisdiction pursuant to 28 U.S.C. § 158(a). We have jurisdiction pursuant to 28 U.S.C. § 158(d).

We apply the same standard as the district court in reviewing a bankruptcy court decision. In re Herbert, 806 F.2d 889, 891 (9th Cir. 1986). The bankruptcy court's findings of fact are reviewed for clear error, and its conclusions of law are reviewed de novo. Id. We can affirm the trial court's ruling on any ground presented on the record. Covert v. Harrington, 876 F.2d 751, 755 (9th Cir. 1989).

DISCUSSION

The parties have spilled a great deal of ink mooting the question of the Tangs' good faith. As we have noted, the district court found that the Tangs were not bonafide purchasers. However, as we will point out below, the ultimate result in this case does not turn on the Tangs' status. Even if the Tangs had no actual or constructive knowledge of the Goodman defendants' manipulations, a serious substantive flaw in the trustee's sale of the Pecks Lane Property dooms the Tangs' attempt to hold onto their windfall.

A trustee's sale can be set aside if there is a gross disparity in price and an irregularity in the sale. Whitman v. Transtate Title Co. 165 Cal. App. 3d 312, 323, 211 Cal. Rptr. 582 (1985). As the California Supreme Court said over 60 years ago: "It is well settled in [California] that mere inadequacy of price, however gross, is not in itself a sufficient ground for setting aside a sale legally made. There must in addition be proof of some element of fraud, unfairness, or oppression before the court will be justified in depriving the purchaser of his legal advantage." Sargeant v. Shumaker, 193 Cal. 122, 131, 223 P. 464 (1924). The bankruptcy court found that the Tangs paid a grossly inadequate price for the Sea Cliff Property, and that the Tangs knew or should have known that it had a higher value. Those findings were not clearly erroneous. However, as we have just noted, they, by themselves, do not constitute grounds for setting aside the sale. See Baldwin v. Brown, 193 Cal. 345, 350, 224 P. 462 (1924).

The McInerneys claim that there are also material irregularities in the trustee's conduct of the sale. We review the materiality of the complained of irregularities de novo. In re Worcester, 811 F.2d 1224, 1229 (9th Cir. 1987). The McInerneys bear the burden of proving both the existence and the materiality of the alleged irregularities. Anderson v. Heart Fed. Sav., 208 Cal. App. 3d 202, 210, 256 Cal. Rptr. 180 (1989).

The McInerneys allege that the following irregularities in the sale justified setting the sale aside: 1) the inaccurate listing of the amount on the trustee's notice of sale; 2) the trustee's failure to allow the McInerneys to choose the order of the sale of the properties; 3) the trustee's failure to renotice the sale; and 4) the trustee's sale of the Sea Cliff Property after it had received a full credit bid on the Pecks Lane Property that secured the same debt.

The first three claimed irregularities are procedural. None of them appears to have prejudiced the sale. They are immaterial.

The inaccurate listing of the McInerneys' outstanding indebtedness did not affect the price received at the sale. It was entirely foreseeable that the amount listed on the trustee's notice of sale would be decreased prior to the sale. The notice of the sale even listed a phone number that potential bidders could call, as the Tangs did, to determine the opening bid.

Also, the trustee had no duty to allow the McInerneys to dictate the order in which the property would be sold. California law only entitles the trustor to direct the order of the sales if the trustor is present at the sales or the mortgage otherwise provides. See Cal.Civ.Code Sec. 2924g(b) (West Supp.1990). Here, the McInerneys did not attend either sale and the McInerneys and the Goodman defendants agreed that the Pecks Lane Property would be sold first.

In addition, the trustee was not required to renotice the sale of the Sea Cliff Property. The McInerneys' failure to attend either sale was due to their own misunderstanding, not the trustee's error.

In any event, if the deed contained recitals of regularity,2  then Little v. CFS Service Corp., 188 Cal. App. 3d 1354, 1359, 233 Cal. Rptr. 923 (1987), suggests that these recitals are conclusive proof of the regularity of the sale. Thus, the McInerneys may have had serious difficulties asserting the notice problem even if those particular irregularities were material.3 

The fourth irregularity is the fatal flaw in this sale. It is not a procedural notice problem, but instead goes to the very substance of the trustee's right to conduct the sale. When coupled with the gross disparity, it is quite sufficient to require that the sale be set aside.

The bankruptcy court found that the Sea Cliff Property was sold after the trustee made a full credit bid on behalf of the Goodman defendants at the sale of the Pecks Lane Property. That was a material irregularity in the Sea Cliff Property sale. The Pecks Lane Property bid extinguished the McInerneys' debt. There is no evidence to the contrary.

It is true that the irregularity did not actually prevent the McInerneys from attending the sale of the Sea Cliff Property, since they did not even attend the sale of the Pecks Lane Property. Of course, there would be little reason to attend the second sale, since it should not have taken place at all. In addition, the first sale certainly would have discouraged other potential bidders, who had knowledge of the full credit bid, from attending the Sea Cliff Property sale. In any event, the trustee's subsequent sale of the Sea Cliff Property, after the McInerneys' debt to the Goodman defendants had been extinguished, was grossly unfair.

The Tangs contend that the bankruptcy court improperly decided this issue on remand when the only question before the court was whether the Tangs were bonafide purchasers. The Tangs claim that they did not have an adequate opportunity to prepare a defense to the issue. They also assert that even if the issue is properly before this court, they would be entitled to the property as bonafide purchasers under Karrell v. First Thrift of Los Angeles, 104 Cal. App. 2d 536, 539, 232 P.2d 1 (1951). Neither claim has merit.

The fact that a credit bid was made at the sale of the Pecks Lane Property was an issue before and was decided by the bankruptcy court in the initial trial. That finding was later clarified by the court in its findings of fact following the second trial. It was based on direct testimony to that effect.4  Thus, the Tangs had notice of and an adequate opportunity to prepare a defense on the question. In any event, the extent and nature of the irregularities did have a bearing on the issue which the court was considering in the second trial, that is, whether the Tangs were bonafide purchasers.

Also, the Tangs reliance on Karrell is misplaced. Karrell only governs cases involving fraud by the beneficiary, not errors by the trustee. Under Whitman, 165 Cal. App. 3d at 323, the Tangs' claim that they were bonafide purchasers is irrelevant.

We hold that the most the McInerneys were required to show was that there was a gross inadequacy in the price and a material irregularity in the trustee's conduct of the sale. The McInerneys met their burden.5  The sale must be set aside.

CONCLUSION

We AFFIRM the district court's affirmance of the bankruptcy court's decision to set aside the sale of the Sea Cliff Property. We do so on the alternative ground that there was a gross inadequacy in the price and a material irregularity in the sale.

 *

This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by 9th Cir.R. 36-3

 1

The Sea Cliff Area is one of the most expensive areas in San Francisco. The homes range in price from $500,000 to $700,000 and higher

 2

While a copy of the Pecks Lane Property deed was made a part of the record, a copy of the Sea Cliff Property deed was not included in the record. If the Sea Cliff Property deed contains the same recitals as the Pecks Lane Property deed, then Little may apply

 3

Little also indicates that the deed of trust would have to authorize the conclusive presumption language in the deed by directing the trustee to include those recitals in the deed to the property. The parties failed to make the deed of trust provisions a part of the record, so it is impossible for this court to determine what, if anything, the deed of trust directed the trustee to do

 4

The Tangs never objected to the testimony

 5

The Tangs claim that the McInerneys failed to make a proper tender of the monies paid for the Sea Cliff Property is without merit. The McInerneys offered to return the money paid by the Tangs for the Sea Cliff Property, made a proper tender in their Second Amended Complaint, and have already placed $30,000 in escrow pursuant to the Superior Court's Judgment of October 31, 1984, incorporated into the Bankruptcy Court's judgment of April 7, 1986

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