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Citizens Business Bank v. Gevorgian

California Court of Appeals, Second District, Fourth Division

August 1, 2013

CITIZENS BUSINESS BANK, Plaintiff, Cross-Defendant and Appellant,
ALEXIS M. GEVORGIAN, as Trustee, etc., Defendant, Cross-Complainant and Respondent.

APPEAL from a judgment of the Superior Court of Los Angeles County, No. EC049983 Donna Fields Goldstein, Judge.

Frandzel Robins Bloom & Csato, Thomas M. Robins, Tricia L. Legittino, and Alan H. Fairley for Plaintiff, Cross-Defendant and Appellant Citizens Business Bank.

Julie A. Herzon, for Defendant, Cross-Complainant and Respondent Alexis Gevorgian, as Trustee, etc.


This case involves competing claims of lien priority between the seller of real property, which took back a security interest on property sold to a developer, and the bank which financed development of the project through a construction loan. The issue is whether the seller’s agreement to subordinate its security interest to that of the bank is enforceable where the developer and the bank entered into a side agreement between themselves, to which the seller did not consent, about which it knew nothing, and which substantially impaired its security. We conclude that it is not. (Gluskin v. Atlantic Savings and Loan Assn. (1973) 32 Cal.App.3d 307, 314 (Gluskin).) The trial court so held. We shall affirm.


We take our factual summary from the evidence presented at trial and the trial court’s final statement of decision

A. Background

Alex M. Gevorgian is trustee of the AMG & Associates Retirement Trust (AMG). In April 2005, AMG entered into purchase agreements to buy three contiguous lots in the San Fernando Valley, each of which was improved with a detached single family house. AMG planned to obtain the necessary approvals to subdivide the lots and build 20 single family residential units. The transaction was not completed until April 2007, when AMG closed on two of the three properties. Gevorgian purchased the third lot himself the same month, using a $600, 000 loan.

Before purchase of the lots closed, and with the consent of the sellers, AMG began securing entitlements to develop all three properties together as a “‘small lot’” single family home division, under the City of Los Angeles Small Lot Subdivision ordinance. It eventually sought approval for high density development of 15 residences.[1] None of the documents submitted to the City demonstrated an intent to construct the project in phases.

In August 2006, even though it had not closed on its purchase of the lots, AMG entered into a purchase agreement to sell them, with entitlements, to Haig Engineering and Construction, Inc. (HEC) for $5, 089, 177. At that time, HEC was owned by defendant Hank Ghazarian. The HEC vice president was John Tatoulian. Under this purchase agreement, HEC was to make deposits toward the purchase price according to a specified schedule. AMG was to carry back a seller’s note and deed of trust in the amount of $600, 000. Eventually, HEC was no longer able to make the scheduled payments. In the meantime, AMG closed on its purchase of two lots.

In April 2007, AMG and HEC modified their agreement so that Tatoulian and Ghazarian would each purchase one lot individually. Gevorgian retained ownership of the third lot (4605 Riverton) until November 2007, when he transferred it to AMG.

In order to develop the project, HEC and Mike Ismail formed Riverton Villas, LLC (Riverton), which ultimately became the purchaser of all three lots. Gevorgian asked for, and reviewed, the operating agreement for Riverton, focusing on the capital contribution provisions. The operating agreement he was given provided that Ismail would invest $4.4 million in equity capital in Riverton. Tatoulian told Gevorgian that Ismail would provide the capital for the project, to be used to pay off existing liens on the property. Tatoulian also told Gevorgian that AMG would have to carry back $600, 000 in the transaction. According to testimony by Ghazarian and Tatoulian, this was the plan until the “‘last minute.’”

B. Construction Loan Agreement (CLA)

HEC sought construction financing from Citizens Business Bank (the Bank) through a construction loan agreement. After negotiations, a $6, 315, 000 loan to Riverton was approved. Ghazarian, Ismail and Tatoulian personally guaranteed the loan. During the negotiations, the Bank told Riverton that it wanted the project constructed in three phases of five homes each, rather than the original plan to construct all 15 homes at once. The construction loan agreement between the Bank and Riverton is dated December 21, 2007, and the loan was payable in full on June 21, 2009.

C. Subordination Agreement

In December 2007, Tatoulian told Gevorgian that AMG would have to carry back a note of $1.4 million, rather than the original amount of $600, 000, to enable the construction loan to close. Tatoulian also told Gevorgian that the Bank required AMG to subordinate its note and deed of trust to the note and deed of trust securing the CLA. Gevorgian asked Tatoulian for the construction loan documents to determine the safety of subordinating AMG’s security. He testified that he wanted to be sure AMG was not subordinating to an unacceptable loan that would harm its position in the transaction. Gevorgian did not ask the Bank or the escrow company for any other documents.

Tatoulian provided Gevorgian unsigned copies of the CLA, the note and the deed of trust. These were obtained from First Decision Escrow, which was handling the escrow on the transaction. The sale of the land by AMG and the construction loan were structured to close together, all through an escrow on the lot at 4605 Riverton, which was the last lot retained by AMG. Tatoulian told Gevorgian that the transaction had to be structured to place the entire escrow on one piece of property so that the construction deed of trust and Gevorgian’s deed of trust would be recorded at the same time. Gevorgian eventually agreed to this transaction, including the subordination of AMG’s security. The trial court found the use of a subordination agreement to be commonplace for construction financing.

Verona Chion, the loan officer who handled this transaction for the Bank, testified that the Bank would not have made the loan to Riverton unless AMG agreed to the Subordination Agreement because that agreement ensured the Bank’s first and prior lien. She testified that the Bank would not have given AMG copies of any of the loan documents unless Riverton authorized it to do so. Chion reviewed the Subordination Agreement for accuracy and to ensure that no terms, conditions, or restrictions were included in it. Riverton did not ask the Bank to provide any loan documents to AMG before close of escrow. The construction loan was approved by the Bank on December 18, 2007.

D. Letter of Understanding

Gevorgian was not told that the Bank simultaneously had entered into a side agreement, letter of understanding (LOU), with Ghazarian, Tatoulian and Ismail. The Bank prepared the LOU, which was reviewed by Chion. Although dated December 21, 2007, the trial court found it was not executed until December 26, 2007. Tatoulian had a copy of the LOU, as did the Bank. Gevorgian and AMG were not informed about the LOU and had no knowledge of its existence. Chion testified that the Bank did not give the LOU to AMG.

The trial court noted that Emily Ralles, the First Decision Escrow escrow officer for this transaction, testified that she had no recollection of having received the LOU, although two unsigned copies were found in the escrow file during discovery. While Ralles notarized signatures by Ghazarian and Ismail on the note and deed of trust, the LOU signatures were not notarized.[2] She did not recall being present when the LOU was signed.

The trial court found that the terms of the LOU contradict the terms of the CLA in several respects. The CLA provides that loan funds shall be used only for constructing and equipping the project. In contrast, the LOU provides for an immediate disbursement of $2.2 million to be used to repay existing liens (termed the “land draw” by the parties and court). The CLA defines the project as “the construction and completion of all improvements contemplated by this Agreement, including the construction of 15 single family residences.” The LOU defined the project as: “The project will consist of three Phases with 5 units in each Phase.” (We refer to this requirement as the “phasing” requirement.) The LOU states that the release of funds for Phase 2 would be contingent upon the closed sale of 3 units from Phase 1. The release of funds for Phase 3 would be contingent on the closed sale of 3 units from Phase 2 and the remaining 2 units of Phase 1. The LOU also allows two 90-day extensions of the construction loan, a term not found in the CLA.

Disbursement provisions of the LOU conflict with the provisions of the CLA. The CLA enumerated 21 conditions precedent to each advance of loan funds. These included acceptance of a complete set of written plans and specifications, with copies of all permits and requisite approvals necessary for the project, including evidence of valid zoning. The CLA states that “Borrower [Riverton] shall apply only for disbursement with respect to work actually done by the General Contractor and for materials and equipment actually incorporated into the Project.” Paragraph 19 of the LOU provides: “Funding to be limited to 50% of land value until the final map is recorded.”

The Bank and AMG recorded their deeds of trust on January 2, 2008, and escrow closed on January 3, 2008.

E. Events after Escrow Closed

AMG argued at trial, and on appeal, that the Bank funded the construction loan with a $2.2 million wire transfer on December 31, 2007, although the conditions precedent to such a disbursement had not been fulfilled at that time. Although the CLA conditioned disbursement of loan funds on final governmental approvals, the $2.2 million was disbursed before these were obtained. The City issued a letter of correction requiring changes to the tract map on May 29, 2008. The final subdivision map was recorded in July 2008. Riverton paid for permits for construction of three houses on September 4, 2008.

In December 2008, the Bank had another appraisal of the project conducted. Chion met with the Riverton principals in January 2009 about her concern that Riverton was still submitting requests to draw from the loan despite a lack of construction progress after several months. The Bank wanted to get a better idea of how Riverton intended to finish the project, or whether the project would be completed. Chion discussed shoring up the loan with additional cash infusions or collateral, but it was decided that it was unnecessary at that time. The Bank asked for a specific breakdown of the phases because it was concerned that there were not enough loan funds remaining to finish the first phase of constructoin. Ghazarian created a budget to complete phase 1 and continue on with phases 2 and 3.

On February 10, 2009, Chion sent an email to Riverton stating that she would not fund any more draw requests until construction progressed at an acceptable pace and financials were updated. But Exhibit 265 shows that the Bank funded disbursements after February 10, 2009. Chion said this was to pay subcontractors and third party suppliers for work which the Bank had verified had been done, to avoid liens on the property.

In February 2009, Tatoulian called Chion to let her know that HEC had filed for bankruptcy because of trouble on other projects. Construction on the project stopped at this point. At a meeting of Chion, Tatoulian, Ghazarian, Ismail and others, Ghazarian said he wanted to finish the project and thought he could finish the first three homes in the first phase within a couple of months and the remaining two homes in phase one in another few months. Ismail expressed concern to Chion about allowing Ghazarian to finish the project and solicited contractors to finish it himself.

The Bank did not continue with construction of the project. It obtained a receiver to secure the site and inventory and moved forward with collection efforts. It declared the construction loan in default because construction had stopped and Riverton did not continue with construction.

F. Procedural Summary

On May 15, 2009, the Bank sued Riverton, Ghazarian, Ismail, Tatoulian, and Gevorgian, as trustee of AMG.[3] Ghazarian was granted a discharge in his personal Chapter 7 bankruptcy and the Bank filed a request for dismissal without prejudice as to him. The trial court granted the Bank’s motion for summary judgment against Ismail and Tatoulian and judgment was entered against them on the Bank’s complaint. The Bank dismissed its first cause of action against Riverton without prejudice. The parties agreed to a stipulated judgment against Riverton and in favor of the Bank on the second cause of action for appointment of the receiver. This resolved the Bank’s only cause of action against Riverton.[4] AMG answered the Bank’s complaint.

Gevorgian, as trustee for AMG, cross-complained against the Bank and Riverton seeking a declaration of the relative priorities of the Bank’s and AMG’s deeds of trust, and to enjoin the Bank from foreclosing on the property.[5] A first amended cross-complaint by AMG added a cause of action for judicial foreclosure of AMG’s deed of trust against the Bank and Riverton. The Bank unsuccessfully sought summary judgment on the cross-complaint.

A bench trial on AMG’s cross-complaint was held between January 4 and January 27, 2011. Counsel for Ismail appeared on behalf of Riverton and agreed that Riverton would not put on a defense, but was not defaulting. It did not contest any factual allegations sworn to by any of the witnesses.

The parties filed post-trial briefs and the trial court issued a tentative statement of decision. The Bank requested a statement of decision on additional issues and objected to portions of the tentative statement of decision. AMG filed a written response to each objection. After a hearing on the ...

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