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QUINCE ASSOCIATES v. PROSPECT PLAZA

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 ...


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