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QUINCE ASSOCIATES v. PROSPECT PLAZA

United States District Court, S.D. California


September 28, 2005.

QUINCE ASSOCIATES, Plaintiff,
v.
PROSPECT PLAZA, L.L.C., Defendant.

The opinion of the court was delivered by: WILLIAM HAYES, District Judge

ORDER

Defendant and Counterclaimant Prospect Plaza, LLC, (hereinafter "Prospect") filed a Motion for a Temporary Restraining Order and Preliminary Injunction. Prospect seeks to enjoin Plaintiff, Quince Associates Ltd. (hereinafter "Quince") from pursuing foreclosure proceedings on a deed of trust offered as security for a leasehold contract between the parties. Quince opposes.

The foreclosure is scheduled for October 5, 2005 at 10:00 a.m. On September 28, 2005, counsel for the parties appeared before the Honorable William Q. Hayes, United States District Judge, for oral argument on the motions. Having considered the arguments made in the briefing and during oral argument, the Court now issues the following rulings. BACKGROUND

  On May 27, 2005, Quince filed a Verified Complaint for Foreclosure of Deed of Trust, Specific Performance of Deed of Trust, and Injunctive Relief in the Superior Court of the State of California. On June 20, 2005, Prospect removed the matter to this Court based on diversity jurisdiction, and filed an Answer and Counterclaim shortly thereafter. The Verified Complaint alleges that Quince seeks to exercise its rights under a Deed of Trust to foreclose on property assigned to Prospect. The Counterclaim alleges fraud by Quince to the detriment of Prospect.

  The subject property is located in San Diego County at 1010-1012 Prospect Street, La Jolla, CA, 92037. Prospect is the lessee under a long-term ground lease and owner of the improvements thereon which include two commercial buildings with office and retail space. On or about February 16, 2005, in connection with an assignment of the Leasehold and a sale of the improvements from Quince to Prospect, Prospect executed and delivered to Quince a written Note secured by Deed of Trust (hereinafter "Note"). Among other things, the Note set forth the manner in which interest was to be calculated thereunder. Pursuant to the Note, Prospect was to pay Quince its first monthly interest payment on March 28, 2005, and every month thereafter, until July 28, 2005 at which time, the principal amount was due. The principal sum listed on the Note is $3,875,000.00. In addition, the Note states that interest payments shall be made from the date of disbursement of funds under the Note, at the initial rate of 7% per annum.

  The Note reads,

I/we promise to pay to Quince Associates, Ltd., a Maryland Limited Partnership or order, at San Diego, California, the principal sum of THREE MILLION EIGHT HUNDRED SEVENTY FIVE AND NO/100TH Dollars ($3,875,000.00), with interest on the unpaid principal amount from February 18, 2005 (close of escrow), at the rate of seven (7.000%) PER ANNUM, interest payable as follows: Interest payable in monthly installments of TWENTY TWO THOUSAND THREE HUNDRED TWELVE AND 50/100THS ($22,312.50) OR MORE, commencing on March 18, 2005 (one month from the close of escrow) and continuing on the same day of each and every month thereafter until July 28, 2005, at which time the then unpaid principal balance and any accrued interest shall be immediately all due and payable.
  See Exhibit B to Declaration of Kent Andrews. Prospect made its March 18, 2005 payment. However, it is undisputed that Prospect did not make its April 18, 2005 payment, or any payment since. In addition, Prospect did not make the "balloon" payment due on July 28, 2005. At this time, Quince is owed payments of at least $3.9 million dollars.

  In footnote one on page two of its Verified Complaint, Quince stated that the Note contained an error as the principal amount due was supposed to read $3,825,000.00, but instead reads $3,875,00.00. Quince argued that the true loan amount was inadvertently overstated, and had escaped notice by Quince, Prospect, and the escrow agent. In footnote one on page two of the Verified Complaint, Quince further set forth that the purchase price for the property was $5,050,000 and that Prospect paid, and Quince received through escrow, deposits totaling $1,225,000, leaving a balance due of $3,825,000.

  However, in its Response to the Motion currently before the Court, Quince states that after a review of the closing documents, it now appears that the footnote in the Verified Complaint was wrong, that the Note properly reflected an amount due $3,875,000.00, but that the interest calculation was wrong as it was calculated using $3,825,000.00 as the principal amount due.

  Further complicating matters is the fact that the Response again contains an error, in both the Memorandum of Points and Authorities, and the supporting Declaration of Kent Andrews. The Declaration states that "at closing, with closing costs and other fees, the total amount due and owing from Prospect totaled $5,138,442.07. Prospect was credited with escrow deposits and other credits totaling $1,263,661.63, leaving a balance due of $3,875,000.00." See Declaration of Kent Andrews at page 2. However, by the Court's calculation, a total amount due of $5,138,442.07 minus credits of $1,263,661.63 does not leave a balance due of $3,875,000.00. Thus, it appears that Quince has again made a mistake in its calculations.

  Prospect agrees that the Note contains an error and argues that "[t]his material defect in the Note is fatal and, in and of itself, vitiates Quince's ability to conduct a Trustee's Sale to enforce the terms of a patently defective Note." See Motion at 2:3-5. It appears, however, that Prospect relies on the mistaken footnote in the Verified Complaint as its proof that a defect in the Note exists. In short, it appears that neither party has yet established the correct principal amount due on the Note. From the Note itself, it appears that the principal amount due is $3,875,000.00. At this time, there is not evidence before the Court which shows otherwise.

  Prospect failed to make its second monthly interest payment on April 18, 2005, as required by the terms and conditions of the parties agreement. On April 26, 2005, Quince sent Prospect a letter demanding payment of the overdue interest payment. Quince reserved its "rights to accelerate the Note and declare the entire unpaid amount of the Note immediately due and payable, and to pursue all other remedies available thereunder, under that certain Deed of Trust with Assignment of Rents executed on February 10, 2005 (the Deed of Trust), by which payment of the Note is secured, any related instrument, or applicable law." See Exhibit E to Declaration of Kent Andrews at page 1.

  To date, there is no evidence to suggest that the payment was ever made, nor that any other payment due under the Note has been made. While the exact amount due has not been conclusively established in these pleadings, it is undisputed that Prospect owes in excess of $3.9 million dollars at this time.

  Prospect argues that in connection with the sale of Quince's real property interest, the brokers negotiating the purchase and escrow process made several material misrepresentations. As a result, Prospect has filed a Counterclaim alleging fraud. Last, Prospect argues that the Court must issue a temporary restraining order to enjoin the foreclosure proceedings because the foreclosure will ". . . quickly extinguish Prospect's real property interest prior to Prospect being given an opportunity to be heard on its fraud [C]ounterclaim filed before this Court." See Motion at 5:4.

  STANDARD OF REVIEW

  Under Rule 65 of the Federal Rules of Civil Procedure, a district court has the authority to issue temporary injunctive relief in the exercise of its equitable powers. Fed.R.Civ.P. 65. Because the district court is acting in equity, the decision to issue a temporary restraining order is largely left to the court's discretion. See Big Country Foods, Inc. v. Board of Educ. of Anchorage Sch. Dist., 868 F.2d 1085, 1087 (9th Cir. 1989).

  In order to prevail, the moving party must show that a legal remedy is inadequate, meaning that the moving party is faced with an immediate and irreparable injury for which it cannot be compensated with money damages. See Dymo Indus., Inc. v. Tapeprinter, Inc., 326 F.2d 141, 143 (9th Cir. 1964). "[A] preliminary injunction should issue . . . upon a clear showing of either (1) probable success on the merits and possible irreparable injury, or (2) sufficiently serious questions going to the merits to make them fair grounds for litigation and a balance of hardships tipping decidedly toward the party requesting the preliminary relief." Walczak v. EPL Prolong, Inc., 198 F.3d 725, 731 (9th Cir. 1999). This standard thus weighs the moving party's likelihood of success against the relative hardship to the parties. See Sun Microsystems, Inc. v. Microsoft Corp., 188 F.3d 1115, 1118 (9th Cir. 1999). "These two formulations represent two points on a sliding scale in which the required degree of irreparable harm increases as the probability of success decreases." A&M Records, Inc. v. Napster, Inc., 239 F.3d 1004, 1013 (9th Cir. 2001) (citations omitted). "If the harm that may occur to the moving party is sufficiently serious, it is only necessary that there be a fair chance of success on the merits." William Inglis & Sons Baking Co. v. ITT Continental Baking Co., Inc., 526 F.2d 86, 88 (9th Cir. 1975).

  DISCUSSION

  As a preliminary matter, there is no dispute that Prospect failed to make the payments required under the Note. Quince alleges in the Verified Complaint that Prospect defaulted on the Note in April 2005. Prospect admitted in its Answer to the Verified Complaint that it was "untimely in the payment of one or more interest payments pursuant to the terms of the Note." See Answer at 3:2. During oral argument, counsel for Prospect conceded that Prospect has failed to make its payments due. The first interest payment was due on March 18, 2005, which Prospect paid. The next payment was due April 18, 2005. Prospect did not make that payment. Additional payments were due on May, June and July 18, 2005. None of those payments were made. Additionally, a "balloon" payment of $3,875,000.00 was due on July 28, 2005. That payment was also not made. Thus, it appears that Prospect is in default under the Note.

  Prospect argues that it will suffer irreparable injury if the foreclosure is allowed to proceed as scheduled. Prospect offers several reasons for this. First, Prospect argues that it will suffer irreparable injury because it has a fraud claim pending in this Court, and implies that the Fraud claim will not go forward if foreclosure takes place. Specifically, Prospect argues that "[b]y virtue of this Notice of Trustee's Sale, it is apparent that Quince desires to quickly extinguish Prospect's real property interest prior to Prospect being given an opportunity to be heard on its fraud counterclaim filed before this Court." See Motion at 5:3-5. However, Prospect does not provide any argument or case law to suggest that the fraud counterclaim will fail if the property right is extinguished. In order to prevail, the moving party must show that a legal remedy is inadequate, meaning that the moving party is faced with an immediate and irreparable injury for which it cannot be compensated with money damages. See Dymo Indus., Inc. v. Tapeprinter, Inc., 326 F.2d 141, 143 (9th Cir. 1964). Accordingly, the Court finds that at this time, it is unclear from the pleadings as to what effect foreclosure will have on the pending counterclaim, and what injury Prospect will suffer other than money damages. The Court finds that Prospect has failed to show how it will suffer irreparable injury absent the issuance of a Temporary restraining order.

  Prospect makes several additional arguments in its pleadings. First, Prospect argues that Quince is seeking $244,544.18 in excess of the monies purportedly owed to Quince pursuant to the purchase transaction. However, Prospect fails to show how the foreclosure sale price relates to the issue of whether the foreclosure should go forward. Again, Prospect does not cite to any case law nor offer any argument regarding the allegedly excessive amount sought by Quince, and its impact on the pending Motion.

  Next, Prospect argues that it was not represented by counsel during the purchase negotiations. However, Prospect again fails to set forth any argument or case law related to this fact. Furthermore, a review of the contract indicates that Prospect signed an agreement stating that it was a sophisticated investor or in the alternative, had sought the advice of counsel in both the investigations of the property, and negotiations for the purchase of the property. See Exhibit A to Declaration of Kent Andrews at page 13. The language of the Purchase and Sale Agreement expressly states, "[p]urchaser represents and warrants to seller that purchaser is a sophisticated investor in all aspects of commercial real estate, or, if purchaser is not a sophisticated investor, purchaser further represents and warrants to seller that purchaser has obtained the advice of counsel, accountants, and other consultants of its own choosing in (I) the negotiations for and the preparation of this agreement; and (II) investigation and inspection of the property and all relevant data relayed thereto, that purchaser has read this agreement or has had the same read to it by its counsel, that purchaser has had this agreement fully explained by such counsel, and that the purchaser is fully aware of its content and legal effect." Id.

  In addition, it is worth noting on this point that Quince has set forth evidence that Prospect was represented by commercial real estate broker David Schmidt during negotiations and the sale. See Exhibit D to Declaration of Kent Andrews at page 1.

  As stated above, Prospect argues that the Note is invalid, and that the error in the Note "vitiates Quince's ability to conduct a Trustee's Sale to enforce the terms of a patently defective Note." See Motion at 2:2-3. However, Prospect relies on the footnote in the Verified Complaint as its proof that the Note is invalid.

  From the face of the Note, it appears that the principal amount due is $3,875,000.00. During oral argument, Prospect conceded that it was relying on the mistake in footnote one of the Verified Complaint as its evidence that the Note is invalid. Because the footnote has been withdrawn, and Prospect has not set forth any other evidence in support of its argument that the amount reflected in the Note is invalid, the Court finds that Prospect has not shown at this time that the Note is patently defective.

  Likelihood of Success on the Merits

  "[A] preliminary injunction should issue . . . upon a clear showing of either (1) probable success on the merits and possible irreparable injury, or (2) sufficiently serious questions going to the merits to make them fair grounds for litigation and a balance of hardships tipping decidedly toward the party requesting the preliminary relief." Walczak v. EPL Prolong, Inc., 198 F.3d 725, 731 (9th Cir. 1999).

  "Under California law, the indispensable elements of a fraud claim include a false representation, knowledge of its falsity, intent to defraud, justifiable reliance, and damages." Fanucchi & Limi Farms v. United Agri Prods., 414 F.3d 1075, 1088 (9th Cir. 2005) (internal quotation and citation omitted). Prospect alleges fraud but fails to set forth any evidence that it will be successful on its Counterclaim. Prospect cites to Daniels v. Williams, 125 Cal. App.2d 310 (1954), for the proposition that the Court should prevent a foreclosure during litigation. However, in Daniels, the Court conclusively found that there was a likelihood of success on the merits. The Court stated, "[i]n this case there is no conflict in the evidence that the note was obtained by fraud, a fraud which infected the title of the payee . . ." Daniels v. Williams, 125 Cal. App. 2d 310, 313 (Cal.Ct.App. 1954). Here, however, as discussed below, it is not clear that the note was obtained by fraud, but just the opposite. Instead, there is a lack of evidence establishing fraud. The Court will discuss each of Prospect's bases for fraud, in turn.

  First, Prospect alleges that Quince made misrepresentations regarding the "competency" of the contractors performing work on the premises. However, from the parties' agreement, it is clear that Prospect was obligated to do its own investigation on the condition of the property, the condition of the title to the property, including but not limited to the status of all leases, and the status of all building condition. See Exhibit A to Declaration of Kent Andrews at page 11. Furthermore, Prospect has not provided the Court with any information as to what the misrepresentations regarding the contractors were, or how they support its claim for fraud.

  Next, Prospect alleges that Quince made material misrepresentations regarding the leaseholders on the property. However, as noted above, from the parties' agreement, it is clear that Prospect was obligated to do its own investigation on the condition of the property, the condition of the title to the property, including but not limited to the status of all leases, and the status of all building condition. See Exhibit A to Declaration of Kent Andrews at page 11. Furthermore, Prospect has not provided the Court with any information as to what the misrepresentations regarding the leases were, or how they support its claim for fraud.

  Here, Prospect has failed to set forth any evidence of fraud beyond mere allegations. Furthermore, Quince has come forward with evidence to indicate that even Prospect's allegations are without merit.

  Next, Prospect alleges that Quince made misrepresentations regarding the property being contaminated with "environmental and/or biological contaminants." See Motion at page 6. Prospect has not provided the Court with any specific information as to what environmental and/or biological contaminants purportedly exist, what misrepresentations were made regarding any environmental and/or biological contaminants, nor any information, case law or argument whatsoever to show that the existence of environmental and/or biological contaminants on the property is in any way related to the default. To the contrary, Quince has submitted evidence to the Court suggesting that some environmental and/or biological contaminants (specifically, mold in one of the units) were disclosed to Prospect by letter dated January 7, 2005. See Exhibit D to Declaration of Kent Andrews at page 1.

  Irreparable Injury

  Additionally, the Court finds that Prospect cannot show that it will suffer irreparable injury absent a Court Order for a Temporary Restraining Order. Prospect admitted in its Answer to the Verified Complaint that it was "untimely in the payment of one or more interest payments pursuant to the terms of the Note." See Answer at 3:2. Thus, it appears that Prospect concedes that it is in default under the Note. Prospect fails to show that despite its default, the Court should not allow the foreclosure to go forward.

  The burden is on the moving party to show irreparable injury. See Dymo Indus., Inc. v. Tapeprinter, Inc., 326 F.2d 141, 143 (9th Cir. 1964). Moreover, in order to prevail, the moving party must show that a legal remedy is inadequate, meaning that the moving party is faced with an immediate and irreparable injury for which it cannot be compensated with money damages. See Dymo Indus., Inc. v. Tapeprinter, Inc., 326 F.2d 141, 143 (9th Cir. 1964). Here, Prospect has failed to show, based on the current pleadings, that it will suffer irreparable injury if the sale is to go forward. In addition, Prospect has failed to show why it could not be compensated with money damages as required. See Dymo Indus., Inc. v. Tapeprinter, Inc., 326 F.2d 141, 143 (9th Cir. 1964) (holding that in order to prevail, the moving party must show that a legal remedy is inadequate, meaning that the moving party is faced with an immediate and irreparable injury for which it cannot be compensated with money damages).

  Balance of Hardships

  Last, the Court finds that Prospect has not shown that balance of hardships weighs in its favor. Prospect cites to Baypoint Mortgage Corp. v. Crest Premium Real Estate etc. Trust in support of its argument that preventing foreclosure pending litigation on the fraud claim is appropriate. 168 Cal. App. 3d 818, 825 (Cal.Ct.App. 1985). However, in Baypoint, the Court found that the moving party would likely prevail on the merits. See id. at 825. As discussed at length above, Prospect has not made such a showing here.

  Moreover, in Baypoint, the party accused of default had continued to pay the amounts due, and the issue was whether the payments were untimely, and whether such even constituted default. Here, Prospect has not shown that it is not in default, that it has continued to pay, nor that it is likely to succeed on the merits. Thus, the Court finds that Baypoint is easily distinguished from the case at hand.

  From the current record, it is not clear that the balance of hardships weighs in favor of Prospect. The Court acknowledges that on one hand, preventing foreclosure pending the outcome of ongoing litigation in an effort to preserve the status quo is a frequent remedy. See Baypoint Mortgage Corp. v. Crest Premium Real Estate etc. Trust, 168 Cal. App. 3d 818, 825 (Cal.Ct.App. 1985). However, as Quince has set forth in its papers, by granting a Temporary Restraining Order, the Court will in effect delay the foreclosure and allow Prospect to continue collecting rents on the property, despite its continuous default.

  Notably, Prospect has not alleged that it has made any payment due under the note, nor that it plans to make any future payments. Additionally, Prospect sets forth only conclusory allegations of the hardship it will suffer. Prospect states "Prospect, on the other hand, has its very financial existence at stake in this matter. If Quince is allowed to proceed with conducting a trustee's sale, commencing judicial foreclosure proceedings, appointing a receiver, or permitting a notice of default to remain in place, then the damage Prospect will suffer will be immeasurable. No amount of money damages imposed upon Quince could repair the financial harm Prospect will incur, as well as the significant loss of rental income and business goodwill to be suffered, if Quince is allowed to proceed with these harsh actions." See Motion at 7:8-14.

  During oral argument, Prospect argued that it will suffer irreparable injury for two reasons. First, Prospect argues the fraud counterclaim will not go forward. However, when questioned by the Court during oral argument, Prospect clarified that its argument is that allowing foreclosure before the fraud claim can be litigated will make the damages calculation more difficult. Prospect also agreed that it did not have any legal authority that would suggest that there would be any legal bar to the fraud counterclaim going forward despite a foreclosure sale.

  Next, Prospect argues that it will suffer irreparable harm because foreclosure would deny it of its property right. However, as noted by the Court during oral argument, loss of property after foreclosure is a natural consequence of failing to make payments on the Note. Thus, loss of property, alone, cannot satisfy the irreparable injury prong of the test.

  Prospect has failed to show that the balance of hardships tips decidedly in its favor. Quince, on the other hand, can show hardship if foreclosure is delayed. To date, Quince has not been able to recover payments owed by Prospect, payments totaling at least $3.9 million dollars. Prospect has not attempted to make any payment nor has it promised to do so anytime in the future. Instead, Prospect continues to occupy the property, and to collect rent monies each month, despite the fact that it has not made any payment to Quince since March of 2005. Thus, it is clear that Quince will suffer hardship if the foreclosure does not go forward. Accordingly, the Court finds that Prospect has failed to show that the balance of hardships weighs decidedly in its favor, and will not grant the Motion for a Temporary Restraining Order based on the current record.

  CONCLUSION & ORDER

  The Court finds that on the present record, Prospect has failed to show a likelihood of success on the merits. Furthermore, the Court finds that Prospect has failed to show that it will suffer irreparable injury absent the issuance of a Temporary restraining order. Here, the burden is on Prospect to show that it will suffer irreparable injury should the foreclosure go forward. See Dymo Indus., Inc. v. Tapeprinter, Inc., 326 F.2d 141, 143 (9th Cir. 1964). Prospect admits that it has failed to make payments in excess of $3.9 million dollars. Moreover, Prospect has failed to show how foreclosure will affect its pending counterclaim other than by complicating the damages calculation at a later date.

  Last, the Court finds that Prospect has failed to show that the balance of hardships weighs decidedly in its favor. To the contrary, the evidence shows that Quince will suffer harm if the foreclosure is cancelled or delayed. Accordingly, the Court finds that based on the present record, Prospect has failed to meet its burden. Prospect's Motion will be denied. For the foregoing reasons,

  IT IS ORDERED the Motion for a Temporary Restraining Order and Preliminary Injunction is DENIED without prejudice.

  IT IS SO ORDERED.

20050928

© 1992-2005 VersusLaw Inc.



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