Citibank, N.A. v. Oxford Properties & Finance Limited, James S. Lee and James S. Lee & Co., (Guam), Ltd. v. Citibank, N.A.

Citations: 688 F.2d 1259; 1982 U.S. App. LEXIS 25254Docket: 80-4449, 80-4450

Court: Court of Appeals for the Ninth Circuit; September 28, 1982; Federal Appellate Court

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In the case of Citibank, N.A. v. Oxford Properties, Finance Limited and James S. Lee, the appeals involve a dispute among three parties: Citibank, James S. Lee, and Oxford Properties. Lee, a businessman with interests in James S. Lee Co. Guam, Ltd. and Coca-Cola Bottling Company of Guam, borrowed money from Citibank, which also had a creditor relationship with Oxford. Lee filed a complaint against Citibank on April 14, 1976, seeking rescission of the "Tokyo agreements," which Citibank used to require Lee as a personal guarantor for his businesses. Lee claimed Citibank misapplied his funds to Coca-Cola's debts instead of Leeco's, while Citibank counterclaimed for debt acceleration and sought foreclosure on Lee's real property.

The superior court of Guam ruled in favor of Citibank on all claims and counterclaims, leading to a judgment on April 11, 1978. Citibank then initiated a foreclosure against Oxford and other junior lienholders, achieving summary judgment against Oxford on January 26, 1979. Both the Lee-Citibank case and the foreclosure action were appealed to a district court panel, which overturned the superior court's decisions on August 18, 1980. 

The district court determined that the superior court incorrectly dismissed Lee's rescission claim, which will proceed to trial. It also found that Citibank misapplied funds based on a misinterpretation of the relevant document. Furthermore, the district court ruled the foreclosures against Lee and Oxford void due to Citibank's failure to join Oxford as a third-party defendant as required by Guam law.

Both judgments of the district court are vacated. The district court's ruling on Citibank's application of Lee's funds was premature, as it relies on factual determinations pertinent to the rescission action, which must be retried. Citibank did not appeal the dismissal of the rescission claim, and the trial court is required to make comprehensive findings regarding Lee's entitlement to rescind the Tokyo agreements. The appellate court is not willing to adjudicate the related matter of Citibank's fund application without a full factual resolution, adhering to the policy against piecemeal appeals.

The district court also incorrectly addressed the foreclosure validity issue, as Citibank's counterclaim was based on the Tokyo agreements Lee seeks to rescind. Citibank's earlier guarantees do not support the foreclosure claim, and without the rescission grounds, no legal issue regarding the validity of the foreclosure would arise. Citibank may seek to include Oxford as a third-party defendant in the foreclosure claim upon remand, which could render the issue moot.

Consequently, the appellate court vacates the district court's judgment on the necessity of joining the junior lienholder per Guam Code of Civil Procedure § 726(a) and also vacates the judgment favoring Oxford. Delaying the resolution of Oxford's rights until the rescission of the Tokyo agreements is settled does not present unfairness, as the rights of the junior lienholder cannot be clarified prior to determining Citibank's rights.

While vacating the foreclosure judgment, the appellate court expresses concerns regarding the district court’s interpretation of § 726(a), which suggested that a foreclosure judgment could be void or voidable due to imperfect joinder. Such a ruling could destabilize established property rights and create uncertainties in real property law. If the issue arises again, the district court's interpretation should be evaluated against principles of finality and res judicata, as relitigation is typically unwarranted. The appellate court views the result reached by the district court as an unwarranted advantage for the debtor.

The district court may have misjudged the prejudice to the absent junior lienholder. Generally, a junior mortgagee retains the same remedies post-foreclosure as if they had been involved in the action. Legal precedent supports that a junior mortgagee not included in a foreclosure is unaffected by it, allowing them to pursue new foreclosure actions if necessary parties were omitted. The district court's interpretation diverges from established American legal principles, as the omission of necessary parties does not invalidate the foreclosure. In this case, Oxford did not claim prejudice from not being included in the foreclosure. The reviewing authority acknowledges limited but existent oversight over district court decisions. It signals the need for the district court to reconsider certain legal principles upon remand. The relevant statute, 1 Guam Code of Civil Procedure § 726(a), mandates that all parties with subordinate interests must be included in foreclosure complaints, yet allows for the exclusion of unrecorded interests. The district court noted that including all junior lienholders in the action could enhance judicial efficiency, ensure adequate notice, potentially increase bid amounts, and allow for the resolution of priority and debt questions. The judgments have been vacated, indicating the case requires further review and consideration of these legal standards.

Under New York law, as cited by Oxford, junior lienholders are considered necessary parties in litigation (N.Y. Real Prop. Acts Law § 1311). However, this requirement can be waived if the mortgagor does not raise the objection at the start of the litigation (N.Y. Civ. Prac. Law §§ 1001, 1003), as demonstrated in *In re Elwyn's Estate*. In federal procedure, the failure to join necessary parties is similarly waived if not objected to in the defendant's first responsive pleading, with only indispensable parties' absence potentially raised later (Fed. R. Civ. P. 12(h)). This principle is supported by case law, including *Provident Tradesmens Bank & Trust Co. v. Patterson* and *Sierra Club v. Hathaway*. Furthermore, many lienholders may not meet the criteria for indispensable parties as outlined in the cases referenced, including *Eldredge v. Carpenters 46 Northern California Committee* and *Kaplan v. International Alliance of Theatrical and Stage Employees*.