The appellant, Joseph Bishay, is the beneficiary of a trust deed recorded against the debtor's real property. He appeals from the bankruptcy court's judgment after trial determining that his trust deed was junior to another subsequently recorded trust deed. The bankruptcy court based its decision first on the finding that there was a contractual agreement to subordinate. The bankruptcy court reached this determination notwithstanding that a written subordination agreement was never introduced into evidence. The bankruptcy court, alternatively, based its ruling on an oral determination that equitable subrogation applied.
After a careful consideration of the parties' briefs and oral argument, review of the record provided, and independent analysis and application of the law, we hold that the appellant waived his right to dispute that equitable subrogation applied when he failed to raise this issue at any point on appeal prior to his reply, and, thus, we affirm on this basis. We further affirm on the grounds that the bankruptcy court correctly found that an actual agreement to subordinate existed, that it bound appellant, and that it was unnecessary for the bankruptcy court to determine the complete terms of the subordination agreement in connection with its ruling.
On February 10, 2006, debtor James F. Bishay (the "Debtor") purchased a house in Huntington Beach, California (the "Property") and acquired title as his sole and separate property. On February 14, 2006, his wife, Deborah Westfield, also known as Deborah Bishay, quitclaimed her interest in the Property to the Debtor. On this same date, Citimortgage recorded a trust deed against the Property securing an obligation in the original principal amount of $1,000,000. Thereafter, on April 5, 2006, Citibank recorded a second trust deed securing an obligation in the original principal amount of $169,990.
On December 27, 2006, for no consideration, the Debtor transferred the Property to the Bishay Irrevocable Trust, James F. Bishay as Trustee (the "Bishay Trust"). On February 15, 2007, the Debtor, in his capacity as trustee of the Bishay Trust, executed and delivered a note in the original principal amount of $320,000 in favor of his brother and appellant, Joseph Bishay ("Joseph"
On November 6, 2007, and again for no consideration, the Bishay Trust transferred the Property to the Alpha and Omega Irrevocable Trust, Deborah Westfield as Trustee. On February 4, 2008, the Debtor's mother, Marsil Bishay, now acting as trustee of the Alpha and Omega Irrevocable Trust ("Alpha & Omega Trust"), borrowed $1,260,000 from Washington Mutual Bank ("WaMu") and used the proceeds in significant part to repay the Citibank and Citimortgage loans. On April 1, 2008, WaMu recorded a deed of trust (the "WaMu Trust Deed") securing the note evidencing this loan. There is no dispute that the parties to this transaction intended that the WaMu Trust Deed create a first priority lien against the Property.
On March 22, 2008, the Debtor filed his petition and initiated this chapter 7 bankruptcy.
On September 1, 2008, Richard A. Marshack, the chapter 7 trustee ("Trustee"), filed adversary proceeding 8:08-ap-01338 ES seeking to avoid the transfers of the Property to the Bishay Trust and to the Alpha & Omega Trust as fraudulent conveyances. The Trustee obtained a judgment avoiding these transfers and preserving the transferred asset for the benefit of the estate on April 19, 2010.
The Trustee initiated the subject adversary proceeding on March 19, 2010. The original complaint is not part of the record on appeal, but we have taken judicial notice of the bankruptcy court docket and various documents filed through the electronic docketing system.
The bankruptcy court eventually entered a summary judgment order adverse to Marsil Bishay as Trustee of the Alpha & Omega Trust and determined that she had no interest in the Property. The Trustee obtained a default judgment resolving the claims against The Rock of Ages and entered into a settlement agreement with Chase. The resolution of the Chase claims also resolved all claims against Cal Recon, as Cal Recon was sued only as the trustee under the WaMu Trust Deed.
Thus, as of the trial date, the only unresolved issues pertained to Joseph's claim based on the alleged priority of the Bishay Trust Deed.
Prior to the trial, the Trustee and Joseph entered into a Pre-Trial Order and agreed, among other things, on the following facts:
Pre-Trial Order, Dkt. 62, at 4.
The Pre-Trial Order also included a judicial requirement that the parties provide direct testimony (exclusive of adverse or rebuttal testimony) only by declaration. Finally, the Pre-Trial Order established the witnesses to be called at trial and the exhibits to be introduced at trial. Joseph's exhibits were the Bishay Trust Deed, the WaMu Trust Deed, and an equity purchase agreement dated March 8, 2007. The Trustee submitted a trial brief; Joseph did not. Neither party submitted declaratory evidence.
The bankruptcy court held the trial on February 21, 2012. At trial, the Trustee rested after introducing the Bishay Trust Deed and the WaMu Trust Deed into evidence. Joseph's counsel, after attempting to call Joseph as a witness, acknowledged that he was bound by the Pre-Trial Order and could not introduce testimonial evidence at trial. Consequently, Joseph never testified. Joseph's counsel also did not seek to admit any documentary evidence. The Trustee then relied on the agreed facts of the Pre-Trial Order and requested judgment in his favor.
The Trustee argued two alternative theories — first, that the Bishay Trust Deed was subordinate to the WaMu Trust Deed because Joseph contractually agreed to subordinate the Bishay Trust Deed, and, second, that the doctrine of equitable subrogation operated to grant seniority to the WaMu Trust Deed. In opposition, counsel for Joseph offered a limited argument that the terms of the subordination agreement were unknown and that WaMu was negligent.
The bankruptcy court recited the admitted facts in the Pre-Trial Order and made an oral finding that the admitted facts provided adequate evidence of intent to subordinate and that, as Joseph advanced no new evidence, a judgment finding that the WaMu Trust Deed had priority over the Bishay Trust Deed was appropriate. The bankruptcy court stated that:
Trial Tr. (Feb. 21, 2012) at 10:14-21.
The bankruptcy court also made an alternative oral finding that:
Finally, the bankruptcy court stated its ultimate finding that, "under either theory, the Court finds in favor of the Plaintiff, Richard Marshack that there was a subordination agreement."
On March 2, 2012, the bankruptcy court entered a separate written Judgment After Trial which stated:
Judgment After Trial, Dkt. 86, at 2:2-14.
Joseph timely appealed the bankruptcy court's Judgment After Trial and identified only one issue: "Did the bankruptcy court err in deciding that the [Bishay Trust Deed] was fully subordinate to the [WaMu Trust Deed] based on a Subordination Agreement that has not been found, without making a finding as to the wording or contents of that subordination agreement?" Appellant's Statement of Issue on Appeal (April 2, 2012) at 2. As the Trustee points out in his opening brief, Joseph failed to raise, as an issue on appeal, the bankruptcy court's alternative finding that the Bishay Trust Deed was subordinate to the WaMu Trust Deed based on the doctrine of equitable subrogation. Joseph first addressed the equitable subrogation issue in his reply brief.
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and 157(b)(2)(K). Judgment was entered on the issue of the full subordination of the Bishay Trust Deed to the WaMu Trust Deed. The judgment is final because the judgment fully and finally disposed of the priority dispute, the only dispute then remaining in this adversary proceeding.
A. Whether Joseph waived his right to appeal the bankruptcy court's application of equitable subrogation.
B. Whether the bankruptcy court erred, as a matter of law, by finding subordination without first determining all the terms and conditions of subordination.
C. Whether the bankruptcy court erred, as a matter of fact, by finding the Bishay Trust Deed fully subordinate to the WaMu Trust Deed.
We review "the bankruptcy court's conclusions of law de novo and factual findings for clear error."
We review a bankruptcy court's interpretation of California law de novo in order to determine if it correctly applied the substantive law.
Joseph argues that he was not obligated to appeal from the bankruptcy court's determination that the theory of equitable subrogation resulted in a loss of the priority of his trust deed. He argues, thus, that he did not waive his right to appeal this determination. He bases his argument on the fact that the post trial judgment "does not mention equitable subrogation." Appellant's Reply Brief (June 21, 2012) at 1. He apparently claims that because the written Judgment After Trial did not expressly state that subordination was granted alternatively on the theory of equitable subrogation, that a judgment was not rendered on that theory.
In the absence of an order allowing an interlocutory appeal, an appellant may only appeal to a Bankruptcy Appellate Panel from final judgments, orders, or decrees of a bankruptcy judge. 28 U.S.C. § 158(a). To become final, the decision, order, or decree must end the litigation or dispose of complete claims of relief.
Here, the bankruptcy court's written Judgment After Trial does not specifically delineate the individual legal theories on which it is based. However, the judgment does incorporate by express reference, the "reasons set forth in the Court's oral findings." Judgment After Trial at 2:2-3. The use of the plural "reasons" indicates more than one basis for the judgment. The trial transcript evidences that those reasons specifically included the bankruptcy court's oral finding that "the doctrine of equitable subordination should apply as well." Trial Tr. at 13:5. Indeed, the bankruptcy court made this particular alternative finding "to make a complete record in the event there is an appeal."
Joseph's anti-finality argument is not only inconsistent with the record, it is also inconsistent with his position on appeal. The Judgment After Trial did not delineate any specific theory on which relief was granted. Notwithstanding this silence, Joseph chose to appeal based on the assumption that the judgment involved a contractual determination. Nothing in the express language of the Judgment After Trial itself, however, supports the assertion that this basis for relief was the sole basis for relief or even a basis for relief. The Judgment After Trial was equally non-specific and silent as to the contract based subordination claim.
For these reasons, we conclude that the bankruptcy court granted a final judgment in favor of the Trustee on the alternative theory of equitable subrogation.
An appellant is required to serve and file a statement of issues on appeal. Fed. R. Bankr. P. 8006. Issues not included in the statement of issues may be deemed waived.
Here, Joseph's statement of issues does not mention equitable subrogation. The only issue raised is, "Did the bankruptcy court err in deciding that the [Bishay Trust Deed] was fully subordinate to the [WaMu Trust Deed] based on a Subordination Agreement that has not been found, without making a finding as to the wording or contents of that subordination agreement?" Appellant's Statement of Issue on Appeal at 2. Correspondingly, Joseph's opening brief discusses the same single issue, slightly re-phrased as, "The Subordination Agreement has not been found. Was it error to make that decision without determining the wording of that subordination agreement?" Appellant's Opening Brief (May 21, 2012) at 1. Again, no mention is made of equitable subrogation.
The Trustee raised this omission in his brief. Thus, Joseph, in his reply brief, eventually contended that the bankruptcy court erred in granting judgment on a theory of equitable subrogation because the elements of equitable subrogation were not met. Because Joseph raises this issue for the first time in his reply brief, he waived his right to appeal the bankruptcy court's judgment based on this alternative theory. For this reason alone, the trial court's judgment must stand.
Joseph contends that the subordination agreement at issue cannot be located and, therefore, that its terms are unknown. Joseph then argues that when the terms of a subordination agreement are not known, the subordination agreement is void.
In support of this position, Joseph briefly identifies cases that he alleges require contractual certainty in the subordination agreement context. This case law, however, is either distinguishable or declarative of a non-controversial rule of law that is consistent with the bankruptcy court's legal determinations.
Joseph cites to
Similarly, Joseph cites to
Lastly, Joseph relies on
In summary, Joseph's cases all concern the contractual requirement of certainty, in some cases in the subordination agreement setting. These rules generally apply to deny enforcement of a subordination agreement where a party agreed to subordinate in the future to an unknown amount of additional security and where material deal terms of that future loan are unknown. The certainty requirements then operate to limit the scope of an otherwise open ended agreement to only the amount that was within the subordinating parties' objective intent at the time of contracting. Here, Joseph never states that his objective intent was anything other than full subordination.
Under California law, contract formation requires mutual consent of the parties. Cal. Civ. Code § 1561; 1 Witkin Summary of California Law (10th ed. 2005) Contracts, § 116 p. 155. Such mutual consent may be determined based on the reasonable meaning of the words and actions of the parties.
Courts are cautious when asked to enforce agreements to subordinate to uncertain and future financing of unknown terms.
Joseph's situation is not analogous to the
And, perhaps more importantly, Joseph never specifies any unknown feature of this subordination. Having conceded that he subordinated his trust deed, the burden shifted to Joseph to specify any area where he did not agree to subordination and where, as a result, subordination cannot be required. He could not remain silent and prevail.
Therefore, the bankruptcy court did not err in finding that Joseph subordinated the Bishay Trust Deed to the WaMu Trust Deed even though he alleges that unspecified terms of the subordination agreement remain unclear. Enough is known to make clear that subordination occurred, and there is no evidence of a material term in dispute.
The Pre-Trial Order describes the relevant trial issues of fact as:
Pre-Trial Order at 6.
It also contained stipulated facts that evidence an agreement to subordinate. Admitted facts which are agreed upon in a pre-trial order give rise to an inference that must be rebutted by opposing evidence.
On appeal, Joseph does not directly contest any of the bankruptcy court's findings of fact. Indeed, as they are based on his stipulations in the Pre-Trial Order, it is difficult to see how he could do so. As the Trustee correctly points out, however, Joseph's statement of the issue on appeal can be interpreted in a number of ways, and Joseph may argue that the bankruptcy court erred in finding that he fully rather than partially subordinated.
In particular situations, where a subordination agreement relates to an unknown future indebtedness, the subordinating party may be held to have only partially subordinated to the amount that was within its objective intent at the time of contracting.
This ultimate fact is evidenced by Joseph's admitted testimony that: ". . . he subordinated his trust deed to the Washington Mutual Deed of trust," (Pre-Trial Order at 4:11-12) and that: "he understood that his deed of trust was in second position behind the new deed of trust obtained by Marsil Bishay in favor of Washington Mutual." Pre-Trial Order at 4:18-20. Thus, the bankruptcy court correctly found that subordination occurred.
It is also clear on this record that Joseph knew in connection with this general agreement to subordinate that his mother would use the WaMu Loan proceeds to pay off existing senior liens and that WaMu would, thus, enjoy the same priority over his lien that was enjoyed by the prior senior lenders. Joseph offers no counter evidence. Therefore, the record supports the bankruptcy court's determination that Joseph objectively intended to fully subordinate. Again, Joseph advances no evidence to the contrary.
For the reasons stated above, we AFFIRM the judgment of the bankruptcy court.
