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January 16, 2002


The opinion of the court was delivered by: McMAHON, District Judge.


Municipal Capital Appreciation Partners I, L.P. and Municipal Capital Appreciation Partners II, L.P. (collectively, "plaintiffs" or "MCAP"), bring this diversity action under 28 U.S.C. § 1332 against J. David Page, Southport Financial Services, Inc., and Vaughn Bay Construction, Inc. (collectively, the "Page defendants"). MCAP alleges that the Page defendants are liable for breaching various contracts that required them to purchase municipal bonds issued in connection with several housing projects from MCAP at specified prices. MCAP alleges that the Page Defendants failed to purchase such bonds on the timetable or at the price agreed by the parties, and are jointly and severally liable to MCAP for these breaches.

MCAP moves for summary judgment pursuant to Fed.R.Civ.P. 56(c). MCAP also requests that the case be referred to a Magistrate or special master for a determination of damages.

For the reasons stated below, MCAP's motion for summary judgment is granted in part and denied in part. As not all issues have been determined on motion, reference to a Magistrate is denied as premature.


MCAP is a limited partnership that invests the contributions of its partners. MCAP invests primarily in securities. It focuses its investments on unrated municipal bonds issued in connection with real estate projects and related financial instruments. Defendant J. David Page is President of Southport Financial Services, Inc., and is in the business of developing and managing real estate projects throughout the United States. Paul Garcia, who passed away on May 27, 2000, was one of Page's partners. Garcia managed the day-to-day operations of the Page defendants' California-based projects, including those at issue in this case.*fn1

Between 1998 and the present, MCAP and the Page defendants entered into several agreements involving unrated municipal bonds issued to finance low-income housing projects. Four sets of these bonds are at issue here: the Stockton Terrace Bonds, the Stockton Gardens Bonds, the Susanville Bonds and the Sampson Bonds.*fn2

A. The Stockton Terrace and Stockton Gardens Bonds

(1) Issue and Purchase of the Stockton Bonds

The initial Stockton Bonds transactions generated two sets of documents: (1) the Indentures of Trust between the issuer of the Stockton Bonds, the California Statewide Communities Development Authority (the "Issuer"), and the trustees of the Bonds, U.S. Bank Trust National Association (the "Trustee") (the "Indentures"); and (2) separate but parallel Loan Agreements among the Issuer, the Trustee and a limited partnership formed by Page, Paul Garcia and Sue Garcia (GP Stockton Terrace L.P. or GP Stockton Gardens L.P., respectively) (the "Borrowers") (the "Loan Agreements"). MCAP was not a party to either the Indentures of Trust or the Loan Agreements.

Several provisions of these documents are invoked by the parties in this litigation, and warrant discussion herein.

a. The Indentures

Section 7.01 of the Indentures describe what constitutes an event of default, as follows:

(a) failure to pay the principal and Accreted Value of or premium (if any) on any Bond when and as the same shall become due and payable, whether at maturity as therein expressed, by proceedings for redemption, by declaration or otherwise;
(b) failure to pay any installment of interest on any Bond when such interest installment shall become due and payable; and
(C) failure by the Issuer or the Borrower to perform or observe any other of the covenants, agreements or conditions on its part in this Indenture, the Loan Agreement or in the Bonds contained, and the continuation of such failure for a period of thirty (30) days after written notice thereof, specifying such default and requiring the same to be remedied, shall have been given to the Issuer and the Borrower by the Trustee, or to the Issuer and the Trustee by the holders of a majority in aggregate principal amount of the Bonds at the time outstanding.

Section 7.01 gives the Trustee the authority to declare an acceleration. If such a declaration is to be made, the Trustee "shall, by notice in writing to the Issuer and the Borrower declare the principal or Accreted Value of all the Bonds then outstanding, and the interest accrued thereon, to be due and payable immediately, and upon any such declaration the same shall become and shall be immediately due and payable, anything in this Indenture or in the Bonds contained to the contrary notwithstanding. Upon any such declaration of acceleration, the Trustee shall fix a date for payment of the Bonds, which date shall be as soon as practicable after such declaration." Id.

b. The Loan Agreements

The Loan Agreements also provide conditions under which an Event of Default may occur, as follows:

(b) failure by the Borrower to pay any amounts required to be paid under Section 4.2 hereof at the times specified therein and such failure continues for a period of sixty (60) days from the first date on which such failure occurred;
(d) failure by the Borrower to observe and perform the covenants, conditions and agreements on its part required to be observed or performed contained in Sections 2.4 and the first paragraph of Section 5.4 of this Agreement, unless the Issuer and the Majority Holder shall agree in writing to provide an extension of such time prior to its expiration.

Loan Agreements, Section 7.1(a) and (d). Section 7.2 of the Loan Agreements provides for the remedies available after a default has occurred. One of the possible remedies provides:

Whenever any Event of Default shall have occurred and shall continue, the Issuer and the Trustee may take any one or more of the following remedial steps:
(a) Notwithstanding any other provisions of this Indenture, the Trustee shall upon the occurrence of an Event of Default hereunder, unless the Trustee's obligation to commence foreclosure proceedings under the Deed of Trust is properly waived pursuant to the provisions of Section 7.1 hereof, declare to be due and payable immediately the unpaid balance of the Loan; and in the event of such occurrence shall commence foreclosure proceedings under the Deed of Trust.

Loan Agreements, Section 7.2(a) (emphasis added). After an Event of Default has been declared, and remedies under the default sought, the Trustee or the Issuer may discontinue or abandon the default proceedings. If this occurs, Section 7.2 provides:

In case the Trustee or Issuer shall have proceeded to enforce its rights under this Agreement and such proceedings shall have been discontinued or abandoned for any reason or shall have been determined adversely to the Trustee or the Issuer, then, and in every such case, the Borrower, the Trustee and the Issuer shall be restored respectively to their several positions and rights hereunder, and all rights, remedies and powers of the Borrower, the Trustee and the Issuer shall continue as though no such action had been taken.

Loan Agreements, Section 7.2 (emphasis added). The Loan Agreements contain no provisions for 10% default premiums on the Stockton Bonds.

(2) MCAP's Purchase of the Stockton Bonds and the Put Agreements

In the Spring of 1998, MCAP purchased the Stockton Bonds from the Page defendants. On July 20, 1998, following MCAP's purchase of the Stockton Bonds, MCAP and the Page defendants entered into two virtually identical put agreements relating to the Stockton Terrace and Stockton Gardens Bonds. These agreements (the "Put Agreements"), gave MCAP the right to require the Page parties to purchase the Stockton Bonds under specific terms and conditions. Paragraph 2.1 of each Put Agreement provides as follows:

From and after the Closing Date of the Bonds and until the thirty-fifth (35th) day following the second anniversary of the Closing Date on the Bonds, MCAP shall have the right, in its sole and absolute discretion to sell, upon thirty (30) days prior written demand, to the Guarantors, the Bonds, at a purchase price equal to the Principal Amount thereof then outstanding and all interest (if any) then due and payable on the bonds (the "Put") unless prior to such Put Date a "Conversion" (hereinafter defined) shall have occurred. MCAP's Put rights shall be unconditional and shall exist even if the Conversion failed to occur by reason of any of the conditions to Conversion set forth in the Forward Commitment. By their execution of this Agreement, the Guarantors hereby unconditionally, jointly and severally agree to accept the Put, to pay the purchase price thereof upon proper demand hereunder, and waive all notice, demand, protest, notice of acceptance and any and all similar notices and demands given or required now or hereafter by statute or rule of law, including discharge by reason of any modification by act, omission, or agreement of the terms of the Bonds, Borrower Loan Documents or Forward Commitment. The Guarantors further waive any exemptions of real or personal property from execution or inquisition under any existing or future law in connection with any enforcement of the Put. (Emphasis added.)

The Put Agreements provide for a purchase price "equal to the Principal Amount thereof then outstanding and all interest (if any) then due and payable on the bonds." There is no provision in the Put Agreements concerning payment of a 10% premium or penalty. There is also no provision in the Put Agreement that expressly incorporates the terms of the Indentures or the Loan Agreements.

(3) The Put

On June 16, 2000, within the timetable provided for in the Put Agreements, MCAP gave the Page defendants one month's notice of its intent to exercise its rights under the Stockton Bonds Put Agreements. At this time, the Stockton Bonds were in default for failure to pay principal and interest previously due to MCAP.

(4) The Event of Default

On June 30, 2000, the Trustee under the Indentures sent a Notice of Event of Default letter on each of the Stockton Bonds to GP Stockton Gardens L.P. and GP Stockton Terrace L.P. (the "Borrowers") These letters were copied to various other persons and companies, including MCAP. In these Notices of Events of Default, the Trustee notified the Borrowers that they had failed to perform covenants under both the Loan Agreements and the Indentures, that these failures constituted "Events of Default" under these documents, and that payments would be accelerated. The letter notices did not invoke Section 7.12 of the Indentures that provides for a mandatory redemption in the event of a default. The letter notices cited specific defaults under both the Loan Agreements and the Indentures.

a. Defaults under the Loan Agreements

The Trustee notified the Borrowers that they (i) failed to make monthly payments on the Bonds to the Trustee as required by Section 4.2(a) of the Loan Agreements, and by Section 5.02(b) of the Indentures, and that such failure had continued for over sixty (60) days; and (ii) failed to "provide evidence of insurance required by the first paragraph of Section 5.4". These failures constituted the occurrence of an "Event of Default" under Sections 7.1(b) and 7.1(d) of the Loan Agreement. Pursuant to Section 7.2(a), the Trustee declared "the unpaid balance of the Loan to be due and payable immediately." The Trustee also notified Borrower of its failure to perform covenants with respect to providing financial statements, budgets and other information. The Trustee demanded that the above failures and defaults be cured and corrected immediately.

b. Defaults under the Indentures

The Trustee also noted that "the interest payment due on June 15, 2000, on the Bonds was not made timely," and that "constitute[d] an "event of Default" under Section 7.01(b) of the Indenture[s]." Pursuant to Section 7.01 of the Indentures, the Trustee declared the "principal or Accreted Value (as defined in the Indenture) of all outstanding Bonds, and the interest accrued and unpaid thereon, to ...

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