Unpublished Disposition, 902 F.2d 1578 (9th Cir. 1989)

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US Court of Appeals for the Ninth Circuit - 902 F.2d 1578 (9th Cir. 1989)

In re CINEMA CITY CAR WASH, INC., Debtor.GARFIELD BANK, Plaintiff-Appellee,v.CINEMA CITY CAR WASH, INC.; American Southwest, Inc.;Agnes D. Chohon; Alexander T. Chohon,Defendants-Appellants.

No. 87-6577.

United States Court of Appeals, Ninth Circuit.

Submitted April 9, 1990.* Decided May 23, 1990.



Chapter 11 debtor Cinema City Car Wash ("Cinema City"), American Southwest Inc., Agnes Chohon, and Alexander Chohon (collectively "the plaintiffs") appeal the district court's affirmance of the bankruptcy court's termination of the automatic stay on Garfield Bank's ("Garfield") foreclosure on property owned by Agnes Chohon and leased to and ultimately purchased by Cinema City.


On January 20, 1981, the plaintiffs entered into a loan agreement with Garfield. The loan agreement consolidated two pre-existing principal debts--one by Agnes Chohon and American Southwest, Inc. to Garfield in the sum of $580,559.43, the other by Agnes Chohon to Rose Miller in a sum not to exceed $284,539.00. The agreement provided for the execution of a note by Agnes Chohon to Garfield in the sum of $865,000.00. The new note was guaranteed by both American Southwest, Inc. and Alexander Chohon, and secured by a deed of trust on the Cinema City property.

In the agreement, the plaintiffs also jointly promised to make all outstanding interest payments owed on the prior loan agreement between Agnes Chohon, American Southwest Inc. and Garfield by closing. In addition, the plaintiffs agreed to pay two points at closing on the money advanced by Garfield to discharge Agnes Chohon's debt to Rose Miller.

Agnes Chohon failed to pay the outstanding interest payments and the additional two points by closing and subsequently defaulted on her payments under the terms of the new promissory note.

On October 5, 1982, Garfield Bank filed a cross complaint1  in the Superior Court of the State of California against the plaintiffs. The cross complaint alleged that the plaintiffs had breached the loan agreement by failing to pay monies owed on both the old and the new agreement.

On August 4, 1983, a jury trial was held which resulted in a September 13, 1983 Judgment on Special Verdict in favor of Garfield. Garfield was awarded $19,964.31 on the breach of contract action, $1,129,005.05 on its action against the guarantors, and attorneys fees and costs.

Garfield then obtained a writ of execution for $24,161.30 which it levied against Agnes Chohon's bank account.2 

Garfield was also pursuing foreclosure on the deed of trust from the plaintiffs concurrent with the state court action. On May 5, 1981, Agnes Chohon leased the property that was the subject of the deed of trust. The lessee was Cinema City.3  On October 19, 1983, Cinema City filed a voluntary Chapter 11 reorganization petition. After the filing of the petition, Cinema City operated the car wash as a debtor-in-possession.

On November 8, 1983, Garfield filed a motion for relief from the stay based on a lack of adequate protection and requested leave to foreclose on the property secured by the deed of trust.

Over the next six months, the bankruptcy court conducted numerous hearings. As a result of those hearings, the bankruptcy court held that the "one action" rule did not bar Garfield's foreclosure action. The court also continued the stay conditioned upon Cinema City's payment of monthly adequate protection payments on the principal debt at a rate equal to Garfield's rate of interest plus two percent.

Cinema City was unable to make the periodic payments as required by the court's order, and the stay was terminated. Cinema City appealed the bankruptcy court's judgment and asserted that the court had failed to consider Cinema City's objections to the court's findings of fact and conclusions of law.

The district court remanded the case to the bankruptcy court to determine whether Cinema City's objections had previously been reviewed and whether the objections would have made a difference to the bankruptcy court's decision if they had not previously been reviewed. The bankruptcy court on remand explained that it had not reviewed Cinema City's objections, and that the objections might have affected the amount of interest owed to Garfield, but that a change in the amount of interest owed would not have affected the court's judgment.

Cinema City appealed the bankruptcy court's decision after remand, still claiming that the bankruptcy court had failed to properly consider the objections. Cinema City also contended that the "one action" rule applied. On September 30, 1987, the district court affirmed the bankruptcy court's decision. Cinema City filed a timely appeal of the district court's affirmance of the bankruptcy court's decision.

On September 11, 1989, Cinema City filed an emergency motion for a stay pending appeal pursuant to Rule 8. On September 20, 1989, this court denied that motion finding that "appellants ha [d] not demonstrated a likelihood of success on the merits of this appeal."


The district court had jurisdiction pursuant to 28 U.S.C. §§ 158(a) and 1334. We have jurisdiction pursuant to 28 U.S.C. §§ 158(d) and 1291.

The court of appeals applies the same standard as the district court in reviewing a bankruptcy court's 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. Wein Air Alaska v. Bachner, 865 F.2d 1106, 1108 (9th Cir. 1989).


Cinema City contends that Garfield's levy against Mrs. Chohon's account was an action on the same debt as that secured by the deed of trust upon which Garfield is now seeking to foreclose. Cinema City therefore asserts that Cal.Civ.Proc.Code Sec. 726 controls, and that Garfield has elected its remedy by levying upon Agnes Chohon's bank account.

Cinema City relies upon Bank of America v. Daily, 152 Cal. App. 3d 767, 199 Cal. Rptr. 557 (1984), in asserting that Garfield has waived its right to foreclose on the deed of trust property and any claim to the balance of the unpaid debt. See also Walker v. Community Bank, 10 Cal. 3d 729, 740, 111 Cal. Rptr. 897 (1974). Daily is distinguishable from the instant case. In Daily, the bank set-off the amount of the accrued interest on a delinquent loan against the debtors' checking account. It subsequently sought to foreclose a deed of trust upon property that secured that same loan. The court held that the bank had elected its remedy on the debt by pursuing its right to set-off and that the bank could not bring a second action to foreclose on the property. Id. at 772.

In this case, the debts for the outstanding interest and the points upon which Garfield exercised its right to levy were not included within the promissory note secured by the deed of trust dated January 20, 1981. They were instead simply unsecured debts owing pursuant to the loan agreement itself. Thus, Garfield could not have foreclosed on the deed of trust in an effort to recover on these debts. Garfield, however, had the right to levy on its writ of execution without triggering the application of section 726.

Cinema City repeatedly asserts that the loan agreement, promissory note, deed of trust and state court action show that there is in reality only one debt. To the contrary, these documents reveal that the outstanding interest and the additional points owed are distinct from debt on the consolidated principals.

First, Cinema City contends that Paragraph E of the loan agreement consolidates "all of the indebtedness" of the Chohons to the Bank and to Rose Miller. It therefore claims that the outstanding interest and the additional points owed were a part of the consolidated debt. That contention is without merit. Agnes Chohon's promissory note in favor of Garfield in the sum of $865,000.004 , secured the repayment of those principals, and the deed of trust on the car wash property secured the repayment of Agnes Chohon's note.

Agnes Chohon's, Alexander Chohon's, and American Southwest, Inc.'s promise to pay off the pre-existing interest owed on the first debt prior to closing, and the two points owed for the satisfaction of the Rose Miller debt, constituted a separate and distinct promise that was to be fulfilled on or before closing. Since these two debts were to be paid by closing, they were not included in "all of the indebtedness" owed.

Second, Cinema City alleges that the "dragnet clause" contained in the promissory note executed by Agnes Chohon encompasses the interest and point payments. The "dragnet clause" provides: "The undersigned hereby deposit(s) with said Bank as collateral security for the ... liabilities of the undersigned to said Bank, due or to become due, that may be hereafter contracted, the following property...." (emphasis added). Cinema City asserts that since the interest and the points were not to be paid until February 20, 1981, the payments were, under the clause, "due or to become due" on January 20, 1981, the date that the loan agreement was executed, and therefore, were included within the note.

"California courts [in interpreting dragnet clauses] have rather consistently tended to prefer a construction that is more faithful to the parties' actual expectations than to the literal wording of the clause." Wong v. Beneficial Sav. & Loan Ass'n, 56 Cal. App. 3d 286, 293, 128 Cal. Rptr. 338 (1976). See also H. Miller & M. Starr, California Real Estate 2d, Sec. 9:11 P. 39 (" [w]hether ... an unspecified obligation is secured by the lien of the deed of trust depends on the intentions of the parties").

While the dragnet clause may be arguably ambiguous, the bankruptcy court construed the document as excluding the interest and point payments. As there is substantial factual support for that interpretation of the parties' intent, the court's conclusion was not clearly erroneous.

Third, Cinema City claims that the deed of trust incorporates by reference all agreements between the two parties. It contends that since the interest and point debts were a part of the loan agreement, the payments were incorporated into the deed of trust. We disagree. We interpret the deed to "reference" only the consolidation of the principal debts, not the monies to be paid by Cinema City prior to closing.

Fourth, Cinema City claims that the judgment of $16,546.48 representing the sum of the outstanding points and interest was entered against Agnes Chohon only. It argues that since the only debt that Agnes Chohon was solely responsible for was the promissory note that secured the consolidated debt, the outstanding interest and points were included in the consolidated amount.

Cinema City is in error. The judgment very clearly states that the $16,546.48 award was against Agnes Chohon, Alexander Chohon, American Southwest, Inc. and Cinema City Car Wash, Inc.--the plaintiffs that promised to pay the outstanding interest and two points.

We find that the documentary evidence does not support Cinema City's "one action" claim. We therefore hold that Garfield's right to foreclose is not restricted by the "one action" rule.

Cinema City contends that even if we find that there were two separate debts, we must nevertheless reverse the bankruptcy court's decision to lift the stay to enable Garfield to foreclose, since there is now evidence that it was not necessary to terminate the stay in order to provide Garfield with adequate protection.

Cinema City must raise the issue of changed circumstances in the bankruptcy court and give that court an opportunity to rule on the question before we can entertain the issue.

However, on the record before us, the bankruptcy court did not err in finding that Garfield was entitled to termination of the stay for lack of adequate protection. The bankruptcy court relied upon Cinema City's expert witnesses in finding that Garfield was an oversecured creditor. The court then concluded that the "equity cushion" that Garfield enjoyed was decreasing rapidly and, therefore, that the deed of trust property did not afford Garfield "adequate protection" of its security. The bankruptcy court ordered Cinema City to make monthly interest payments on the consolidated principal to assure that Garfield was adequately protected. The court further provided that if the payments were not made, that the stay would automatically terminate.

Section 362(d) (1) allows the court to condition the imposition of the stay on the provision of adequate protection of a secured creditor's interest. See United Sav. Ass'n v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 108 S. Ct. 626, 631, 98 L. Ed. 2d 740 (1988). Thus, the court did not err in conditioning Cinema City's right to the stay on its ability to make adequate protection payments to Garfield. When Cinema City was unable to make those payments, the court properly determined that Cinema City was no longer entitled to the protection of the stay.

Cinema City contends that it did not receive a fair hearing because the bankruptcy court initially failed to consider Cinema City's objections to the court's findings of fact, and the bankruptcy court merely "rubberstamped" its previous findings on remand. This claim is without merit. The record reveals that the bankruptcy court, on reconsideration, thoroughly reviewed the objections and even recognized that one objection might result in a change of the amount of interest said to be owed to Garfield. The court, though, found that this change did not result in any substantive changes in the judgment itself. Thus, any error that the bankruptcy court may have made in not reviewing the objections was corrected when the court reviewed them on remand.


We hold that the debt for the consolidated principals and the debt for the pre-existing interest and points are separate debts. Therefore, Garfield is not barred from foreclosing on the property by the "one action" rule. The district court properly affirmed the order of the bankruptcy court.



The panel finds this case appropriate for submission without oral argument pursuant to 9th Cir.R. 34-4 and Fed. R. App. P. 34(a)


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


Cinema City filed the complaint in that case alleging that Garfield had agreed to certain oral modifications in the consolidated loan agreement. The jury did not find that to be the case


Garfield recovered $2,806.08 from Agnes Chohon's account


The property was ultimately transferred to Cinema City


We note that the sum of the consolidated principals exceeded $865,000