Source: https://law.justia.com/cases/california/supreme-court/2d/59/35.html
Timestamp: 2019-09-19 17:06:26
Document Index: 338993496

Matched Legal Cases: ['§ 140', '§ 580', '§ 156', '§ 692', '§ 443', '§ 580', '§ 725', '§ 700', '§ 701']

Roseleaf Corp. v. Chierighino :: :: Supreme Court of California Decisions :: California Case Law :: California Law :: US Law :: Justia
Justia › US Law › Case Law › California Case Law › Cal. 2d › Volume 59 › Roseleaf Corp. v. Chierighino
Brown & Altshuler, Leo Altshuler and James J. Brown for Plaintiff and Respondent. [59 Cal. 2d 38]
[1] In the absence of a statute to the contrary, a creditor secured by a trust deed or mortgage on real property may recover the full amount of the debt upon default. He may realize the security or sue on the obligation or both; the obligation is an independent undertaking by the debtor to pay. (See 2 Glenn, Mortgages (1943) § 140, p. 811.) In most states now, however, the creditor's right to enforce such a debt is restricted by statute. [2] Thus, in California the creditor must rely upon his security before enforcing the debt. (Code Civ. Proc., §§ 580a, 725a, 726.) If the security is insufficient, his right to a judgment against the debtor for [59 Cal. 2d 39] the deficiency may be limited or barred by sections 580a, 580b, 580d, or 726 of the Code of Civil Procedure.
Under sections 580a and 726, proceedings for a deficiency must be initiated within three months after either a private sale under a power of sale or a judicial sale, and the recovery may not exceed the difference between the amount of the indebtedness and the fair market value of the property at the time of the sale. fn. 3 [3] The "one form of action" rule of section 726 does not apply to a sold-out junior lienor (Savings Bank v. Central Market Co., 122 Cal. 28, 33-36 [54 P. 273]; see Brown v. Jensen, 41 Cal. 2d 193, 196 [259 P.2d 425]), nor does the three-months limitation of section 580a. (Hillen v. Soule, 7 Cal. App. 2d 45, 47 [45 P.2d 349] [holding that section 580b did not apply disapproved in Brown v. Jensen, 41 Cal. 2d 193, 198 [259 P.2d 425]].) There is no reason to compel a junior lienor to go through foreclosure and sale when there is nothing left to sell. Moreover, to compel a junior lienor to sue for a deficiency within three months of the senior's sale would unnecessarily compel acceleration of the junior obligation, to the detriment of the debtor.
[4] The fair-value limitations of sections 580a and 726 likewise do not apply to a junior lienor, such as Roseleaf, whose security has been rendered valueless by a senior sale. Section 726 provides that the decree of foreclosure "shall [59 Cal. 2d 40] determine the personal liability of any defendant for the payment of the debt secured by such mortgage or deed of trust," (italics added) referring to the mortgage or deed of trust foreclosed by the same decree. Section 580a refers to a suit for the balance due on an obligation secured by a mortgage or deed of trust "following the exercise of the power of sale in such deed of trust or mortgage." (Italics added.) (See Riesenfeld, California Legislation Curbing Deficiency Judgments (1960) 48 Cal. L. Rev. 705, 726.)
The purpose of the fair-value limitations in sections 580a and 726 does not extend to sold-out junior lienors. Many states enacted fair-value statutes similar to sections 580a and 726 during the 1930's when it was felt that real property could not be sold for its "true" value. (See Glenn, Mortgages (1943) § 156, pp. 857-861; Poteat, State Legislative Relief for the Mortgage Debtor During the Depression (1938) 5 Law & Contemp. Prob. 517, 529-544.) [5] Fair value provisions are designed to prevent creditors from buying in at their own sales at deflated prices and realizing double recoveries by holding debtors for large deficiencies. (See Hatch v. Security-First Nat. Bank, 19 Cal. 2d 254, 259 [120 P.2d 869]; Sivade v. Smith, 104 N.J. Eq. 528 [146 A. 364]; Wheeler v. Ellis, 56 N.J.L. 28 [27 A. 911]; Culliford v. Weingrad, 196 Misc. 86 [91 N.Y.S.2d 333, 335-336]; Continental Bank & Trust Co. v. Gedex Realty Corp., 60 N.Y.S.2d 710, 712; Northwestern Loan & Trust Co. v. Bidinger, 226 Wis. 239, 245 [276 N.W. 645]; 22 Cal.L.Rev. 180, 181.) Thus some fair-value statutes apply only if the creditor purchases at the sale. Mich. Laws Comp. § 692.51; Mo. Stat. Ann. (Vernon's) § 443.410; N.C. Gen. Stats. 45-21.36 (Supp. 1961).)
Some courts have limited deficiency judgments to prevent double recoveries in the absence of statute (see Investors Mortgage & Realty Co. v. Preakness Hills Realty Co., 133 N.J. Eq. 258 [31 A.2d 830]; Suring State Bank v. Giese, 210 Wis. 489 [246 N.W. 556, 85 A.L.R. 1477]), but they have not limited such judgments when sought by nonselling junior lienors. (Hillside Nat. Bank v. Silverman, 116 N.J.Eq. 463 [173 A. 326].) Fair-value statutes no more precisely worded than sections 580a and 726 have been held inapplicable to the nonselling junior lienor (Alabama Mortgage & Securities Corp. v. Chinery, 237 Ala. 198 [186 So. 136]; Realty Associates Securities Corp. v. Hoblin, 288 N.Y.S. 875; Weisel v. Hagdahl Realty Co., 241 App.Div. 314 [271 N.Y.S. 629, 633-635]), as have other similar deficiency judgment restrictions. (Cronin v. [59 Cal. 2d 41] Gager- Crawford Co., 128 Conn. 688 [25 A.2d 652]; Smith v. Mangin, 161 Misc. 288 [292 N.Y.S. 265, 271]; Sivade v. Smith, 104 N.J.Eq. 528 [146 A. 364]; Wheeler v. Ellis, 56 N.J.L. 28 [27 A. 911]; Carr v. Home Owners Loan Corp., 148 Ohio St. 533 [76 N.E.2d 389].)
Dobias v. White, 239 N.C. 409, 412 [80 S.E.2d 23], held that a trust deed on land owned by the purchaser, given to [59 Cal. 2d 42] secure payment of part of the purchase price of real property, is not a purchase money trust deed within the meaning of an antideficiency statute like section 580b. In that case, however, there was no analysis of the purpose of the applicable statute. Various purposes have been ascribed to section 580b. It has been said that it was designed to prevent creditors from buying in property for a nominal sum, after a debtor has defaulted, and then holding the debtor for the deficiency. (See Kerrigan v. Maloof, 98 Cal. App. 2d 605, 616 [221 P.2d 153]; Brown v. Jensen, 41 Cal. 2d 193, 201 [259 P.2d 425] [dissent].) This purpose, however, is accomplished by the fair-value sections, and does not explain for what purpose purchase money mortgages were singled out for special treatment. It has also been said that the purpose of section 580b is to make certain that in the case of "a purchase money mortgage or deed of trust the security alone can be looked to for recovery of the debt." (Brown v. Jensen, 41 Cal. 2d 193, 198 [259 P.2d 425], quoting from Mortgage Guarantee Co. v. Sampsell, 51 Cal. App. 2d 180, 185 [124 P.2d 353].) This conclusion states the effect of the statute after assuming that it applies, but offers no rationale for deciding whether or not it applies. In Brown v. Jensen, 41 Cal. 2d 193, 197 [259 P.2d 425], it was stated that one reason for section 580b is that the one taking a purchase money trust deed knows the value of his security and assumes the risk that it may become inadequate. Perhaps the average vendor or financier in real estate transactions is more astute as to the value of his land than the average vendee, but it is doubtful whether that was the reason for barring deficiency judgments in purchase-money security transactions.
[7b] There is no indication in the present case that the hotel was overvalued. The purchaser will not lose the property [59 Cal. 2d 43] he purchased yet remain liable for the purchase price. To apply section 580b here would mean that the Chierighinos would acquire the hotel at less than the agreed price. Furthermore, if there is any merit in the theory that "the vendor knows the value of his security and assumes the risk of its inadequacy," that theory does not apply here. There is no reason to assume that Roseleaf had any greater knowledge of the value of the Chierighinos' land than did the Chierighinos.
The purpose of section 580d is apparent from the fact that it applies if the property is sold under a power of sale, but not if the property is foreclosed and sold by judicial action. Before the section was enacted in 1939 (Stats. 1939, ch. 586, p. 1991), it was to the creditor's advantage to exercise a power of sale rather than to foreclose by judicial action. His right to a deficiency judgment after either was the same (Code Civ. Proc., §§ 580a, 726), but judicial foreclosure was subject to the debtor's statutory right of redemption (Code Civ. Proc., § 725a), whereas the debtor had no right to redeem from a sale under the power. (Code Civ. Proc., §§ 700a, 701; Roberts v. True, 7 Cal. App. 379, 381 [94 P. 392].) [12] It seems clear, as Professor Hetland, amicus curiae herein, contends, that section 580d was enacted to put judicial enforcement on a parity with private enforcement. This result could be accomplished by giving the debtor a right to redeem after a sale under the power. The right to redeem, like proscription of a deficiency judgment, has the effect of making the security satisfy a realistic share of the debt. (See Salsbery v. Ritter, 48 Cal. 2d 1, 11 [306 P.2d 897].) By choosing instead to bar a deficiency judgment after private sale, the Legislature achieved its purpose without denying the creditor his election of remedies. If the creditor wishes a deficiency judgment, his sale is subject to statutory redemption rights. If he wishes a sale resulting in nonredeemable title, he must forego the right [59 Cal. 2d 44] to a deficiency judgment. In either case the debtor is protected.
The purpose of achieving a parity of remedies would not be served by applying section 580d against a nonselling junior lienor. Even without the section the junior has fewer rights after a senior private sale than after a senior judicial sale. He may redeem from a senior judicial sale (Code Civ. Proc., § 701), or he may obtain a deficiency judgment. (Savings Bank v. Central Market Co., 122 Cal. 28 [54 P. 273]; Giandeini v. Ramirez, 11 Cal. App. 2d 469 [54 P.2d 91]; see Brown v. Jensen, 41 Cal. 2d 193, 196 [259 P.2d 425].) After a senior private sale, the junior has no right to redeem. This disparity of rights would be aggravated were he also denied a right to a deficiency judgment by section 580d. There is no purpose in denying the junior his single remedy after a senior private sale while leaving him with two alternative remedies after a senior judicial sale. The junior's right to recover should not be controlled by the whim of the senior, and there is no reason to extend the language of section 580d to reach that result.
FN 1. Two of the trust deeds were on property originally owned by Willy's relatives, the third was on property owned by Willy. Under the escrow instructions the three parcels were conveyed to Roseleaf, then reconveyed to Willy. The trial court found on substantial evidence that these conveyances were not intended to be bona fide sales to Roseleaf. There is no merit in defendant's contention that extrinsic evidence was improperly admitted to show the facts and circumstances surrounding the transaction. (Barham v. Barham, 33 Cal. 2d 416, 423 [202 P.2d 289]; see Imbach v. Schultz, 58 Cal. 2d 858 [27 Cal. Rptr. 160, 377 P.2d 272.]
FN 2. Two of the trust deeds were apparently executed to the owners thereof by Willy. The third was executed by Willy to Roseleaf, which in turn assigned it to the ultimate owner. These transactions took place while the hotel was in escrow, the purpose being to raise the cash that Roseleaf demanded as a condition to the sale.
FN 3. Section 580a provides in part: "Whenever a money judgment is sought for the balance due upon an obligation for the payment of which a deed of trust or mortgage with power of sale upon real property or any interest therein was given as security, following the exercise of the power of sale in such deed of trust or mortgage. ...
FN 4. Section 580b provides: "No deficiency judgment shall lie in any event after any sale of real property for failure of the purchaser to complete his contract of sale, or under a deed of trust, or mortgage, given to secure payment of the balance of the purchase price of real property.