Opinion ID: 780673
Heading Depth: 2
Heading Rank: 1

Heading: Conversion of the Settlement Proceeds

Text: 18 Assuming that Paragraph Eighteen created the type of property interest to which the tort of conversion applies, 1 we conclude that Kasdan did not convert World Savings' interest in the settlement proceeds. Kasdan's actions did not injure World Savings and so Kasdan did not convert World Savings' property. 19 Paragraph Eighteen did not vest World Savings with exclusive rights to the settlement proceeds. Rather, Paragraph Eighteen entitled World Savings to demand only the amount which the Emerys owe[d] to Lender. At oral argument, World Savings recognized that, even if Kasdan had disbursed the settlement funds directly to World Savings — as World Savings alleges Kasdan was required to do — World Savings would have been obliged to reimburse the Emerys for any settlement proceeds over and above the amount owe[d] ... under the Note. 20 At the time that Kasdan distributed the settlement proceeds to the Emerys, the Emerys were not in default. Because the amount owe[d] to Lender was therefore zero, Kasdan did not injure World Savings by disbursing settlement funds directly to the Emerys. 21 World Savings would have us interpret the amount owe[d] to Lender as including the entire outstanding balance of the underlying loan, regardless of the Emerys' default status. That is, World Savings urges us to interpret Paragraph Eighteen as an acceleration clause triggered by a recovery by the borrower of damages for injury to the property. 22 The deed of trust reveals, however, that when World Savings meant to draft an acceleration clause, it explicitly did so. For example, Paragraph Twenty-Eight of the same deed of trust states: 23 Acceleration of Payment of Sums Secured. Lender may, at its option, require immediate payment in full of all Sums Secured by this Security Instrument if all or any part of the Property, or any right in the Property, is sold or transferred without Lender's prior written permission. 24 (emphasis added). 25 Paragraph Nine, which discusses the Lender's rights in the event of a government taking, and Paragraph Five, which discusses the Lender's rights to insurance proceeds, both deal with situations similar to the situation covered by Paragraph Eighteen: All three paragraphs discuss the Lender's rights to proceeds relating to the property and recovered from an outside source. Unlike Paragraph Eighteen, Paragraphs Five and Nine use the term Sums Secured to indicate that the Lender has the right to apply proceeds to the underlying debt as opposed to the right to apply proceeds only to amounts currently due and payable. Had World Savings intended for Paragraph Eighteen to operate as an acceleration clause, it could have so stated by using such explicit terms as Acceleration, immediate payment and Sums Secured, as it did elsewhere in the agreement. 26 The reference to sums owe[d], in contrast, is at least ambiguous, and, under California law, must be construed against World Savings. Sun Microsystems, Inc. v. Microsoft Corp., 188 F.3d 1115, 1122 (9th Cir.1999) (stating that ambiguous contract language must be construed against the drafter); Milstein v. Sec. Pac. Nat'l Bank, 27 Cal.App.3d 482, 486, 103 Cal.Rptr. 16 (1972) (refusing to find an acceleration clause where contract language is ambiguous). We therefore conclude that the phrase owe[d] to Lender describes amounts currently due and payable. 27 Our interpretation does not deprive Paragraph Eighteen of any independent meaning. Absent Paragraph Eighteen, the deed of trust would have granted World Savings rights in the settlement proceeds in the event of default, but World Savings could not have enforced those rights unless and until it took possession of the Emerys' property through foreclosure proceedings. Cal. Civ.Code § 2888; Kinnison v. Guaranty Liquidating Corp., 18 Cal.2d 256, 261, 115 P.2d 450 (1941). Although a mortgagee out of possession has certain equitable rights to litigation proceeds related to the secured property, even in the absence of a provision such as Paragraph Eighteen, those rights do not extend to situations, such as the present one, where the litigation concerns property damage that occurred before the mortgagee extended the loan. Am. Sav. & Loan Ass'n v. Leeds, 68 Cal.2d 611, 616, 68 Cal.Rptr. 453, 440 P.2d 933 (1968). Paragraph Eighteen therefore gave World Savings the valuable right to obtain settlement proceeds and to retain those proceeds, up to the amount owe[d], without the expense of initiating foreclosure proceedings. 2 28 In summary, because the Emerys were not in default on their loan, World Savings was not entitled to retain any of the settlement proceeds and therefore suffered no injury when Kasdan disbursed those proceeds directly to the Emerys. If World Savings were asserting its conversion claim against a party not in privity with the Emerys, World Savings might be entitled to recover the entire value of the settlement proceeds on the assumption that World Savings would then be liable to the owner of the remaining interest for any amount the former received in the conversion action that exceeds the amount of his claim or indebtedness. Hartford Fin. Corp. v. Burns, 96 Cal.App.3d 591, 605, 158 Cal.Rptr. 169 (1979). But because World Savings asserts its conversion claim against a party in privity with the Emerys, World Savings can only recover the settlement proceeds to the extent that it was entitled to keep those proceeds, rather than return them to the Emerys. Id. at 605-6, 158 Cal.Rptr. 169; Watson v. Stockton Morris Plan Co., 34 Cal.App.2d 393, 400, 93 P.2d 855 (1939). 29 World Savings, therefore, can only recover the amounts owe[d] by the Emerys at the time of the alleged conversion. We have concluded that that amount is zero. Having suffered no injury, World Savings has failed to satisfy the third element necessary for a conversion claim.