Court Opinion

ID: 2669320
Source: CourtListenerOpinion
Date Created: 2014-04-09 18:01:38.229359+00
Date Added: 2024-06-11T13:03:05.965252
License: Public Domain

Filed 4/9/14
                            CERTIFIED FOR PUBLICATION

                COURT OF APPEAL, FOURTH APPELLATE DISTRICT

                                      DIVISION ONE

                                   STATE OF CALIFORNIA

PAUL THORYK,                                     D062680

        Plaintiff and Appellant,

        v.                                       (Super. Ct. Nos. 37-2008-00093080-
                                                 CU-NP-CTL; 37-2009-00098662-
SAN DIEGO GAS & ELECTRIC                         CU-NP-CTL)
COMPANY et al.

        Defendants,

HIGHLAND VALLEY INVESTORS, LLC,

        Intervener and Respondent.

        APPEAL from a judgment of the Superior Court of San Diego County,

Richard E. L. Strauss, Judge. Reversed with directions to enter a different judgment

denying the lien application.

        Chapin Fitzgerald, Douglas J. Brown and Edward D. Chapin for Plaintiff and

Appellant.

        Freeland McKinley & McKinley, Steven A. McKinley and Karen G. McKinley for

Intervener and Respondent.
       This intervention action arises out of a former debtor-creditor relationship

concerning real property that was damaged by the San Diego County wildfires of 2007.

The main action is a master complaint by damaged property owners, including a

defaulting borrower, plaintiff, defendant-in-intervention and appellant Paul Thoryk

(Appellant), who owned the property at the time of the fires. A year later, plaintiff-in-

intervention and respondent Highland Valley Investors, LLC (Highland) nonjudicially

foreclosed under the junior trust deed it held and took the real property security, subject

to a senior lien held by a party that is no longer involved in this action.1

       In the main action, Appellant sued the wildfire defendants, San Diego Gas &

Electric Company; Cox, Inc.; and Sempra Energy (the third party tortfeasors), for

damages for inverse condemnation, negligence, trespass, nuisance, and violation of the

Public Utilities Code. Highland also filed its complaint in intervention against those

same defendants-in-intervention. (Cornelison v. Kornbluth (1975) 15 Cal.3d 590, 598,

fn. 3, 599, 604, fn. 9 (Cornelison) ["actions by mortgagees against nonpossessing third

parties for tortious impairment of security are not affected by the antideficiency

legislation"].) Also, Highland sued Appellant, seeking declaratory relief that it is entitled

to a judicially imposed lien under the terms of its deed of trust and related note, and/or

under the doctrine of equitable conversion, upon any recovery that Appellant might

eventually obtain from the third party tortfeasors.

1      After foreclosing under the power of sale as junior lienholder on the real property
security, Highland held the property for two years after the fires, then lost it when the
senior lienholder, PFI Realty III, LP (PFI), foreclosed. We describe PFI's limited
participation in this litigation, post.
                                              2
       To evaluate the granting of declaratory relief in favor of Highland, we must

interpret the antideficiency body of law in terms of any applicability of well-established

exceptions to antideficiency protections and the one action rule. (Code Civ. Proc.,

§§ 580d, 726; all further statutory references are to this code unless noted.) Specifically,

Appellant argues the trial court erred in determining that there was no bar in the

antideficiency statutes for Highland presently to obtain a lien on Appellant's future

property damage recovery under the master complaint, for any damage inflicted on his

real property in the nature of inverse condemnation, etc. In its ruling, the trial court set

the amount secured by Highland's lien at the unpaid principal amount of Appellant's

mortgage debt ($837,385.29), along with postforeclosure interest and prejudgment

interest, plus attorney fees and costs pursuant to the terms of the note.

       Case law establishes various exceptions to statutory antideficiency protections for

a borrower, such as the "mixed collateral" rule. Where there are liens established upon

both personal and real property in the subject transaction, a foreclosing lienholder using

the power of sale may continue to pursue remedies against the former property

owner/borrower. (Hatch v. Security-First National Bank (1942) 19 Cal.2d 254, 261

(Hatch) [no violation of section 580a where creditor does not seek a personal judgment

for the unpaid balance of a loan, but instead seeks to enforce additional security

secondarily liable for the principal loan, such as selling a pledge or other trust deeds

given as additional security for the otherwise secured loan]; Mortgage Guarantee Co. v.

Sampsell (1942) 51 Cal.App.2d 180, 186 (Sampsell) [sale of real property under the

power of sale in the deed of trust does not wipe out the indebtedness and the creditor may

                                              3
proceed against "any other security"]; see 4 Miller & Starr, Cal. Real Estate (3d ed. 2011)

§ 10:218, pp. 10-803 to 10-806 (Miller & Starr).)

       Highland claims the trial court correctly recognized that the debt represented by

Appellant's default on the promissory note, which was secured by the nonjudicially

foreclosed trust deed, survived the foreclosure, and that security other than the lost land

was expressly or impliedly created in the trust deed and may be pursued (e.g., money

related to the real property or substitutes for the land, such as inverse condemnation

awards). (See Los Angeles Trust & Savings Bank v. Bortenstein (1920) 47 Cal.App. 421,

423-424 (Bortenstein) [a mortgagee had the right in a judicial foreclosure action, over

objections of the mortgagor, to obtain a lien for an amount representing its security

interest, upon an award of eminent domain damages that the mortgagor had recovered

from a municipality in another action, for partial destruction of the mortgaged property;

equity required allocation and no impermissible deficiency judgment resulted].) The trial

court imposed a lien against Appellant's future recovery against the third party

tortfeasors, to permit Highland to recover the interest and attorney fees that were

provided for in the promissory note, as well as obtaining the unpaid balance on the note.

       We agree with Appellant that Highland, the junior lienholder foreclosing under

power of sale, has failed to show the applicable exceptions cover its situation, either

under the terms of the note or through the equitable conversion doctrine, to allow it to

obtain a lien against Appellant. The lien ruling on the deed of trust was the functional

equivalent of a deficiency money judgment. It does not properly account for any ultimate

allocation that may become necessary of any recovery from the third party tortfeasors, for

                                              4
property damage for the respective ownership periods, or for Highland's impairment of

security. (See Birman v. Loeb (1998) 64 Cal.App.4th 502, 511 (Birman).) We reverse

the declaratory relief judgment in favor of Highland, with directions to enter a different

judgment denying the lien application.

                     FACTUAL AND PROCEDURAL BACKGROUND

                         A. Property and Junior Lien: Litigation

       From 2001 to 2008, Appellant owned a large parcel of real property that was

planted with avocado and other trees, and he built infrastructure improvements toward

the development of multiple two-acre homesites. The seller, PFI, held a first trust deed

on the property, securing its 2001 loan.2

       In 2005, Highland loaned Appellant $1.5 million in return for his promissory note,

taking a second trust deed on the property as security.

       Appellant pursued development efforts until October 2007, when the property was

extensively damaged by wildfire. He subsequently defaulted on Highland's loan.

       In July 2008, Highland foreclosed on its second trust deed under its power of sale,

on a partial credit bid of $1 million, and held the property until 2010. Appellant's

remaining indebtedness on the note was $837,385.29, including preforeclosure interest

and attorney fees.

2      The seller and first trust deed holder was PFI, which nonjudicially foreclosed in
2010, wiping out Highland's security. PFI also sued the third party tortfeasors in the
master litigation, but its complaint in intervention was dismissed after a demurrer was
sustained without leave to amend, and we upheld that ruling in a prior opinion issued in
the same trial court case, Thoryk v. San Diego Gas & Electric Company (Aug. 20, 2012,
D060399) [nonpub. opn.] (our prior opinion).
                                             5
       In 2009, Appellant sued the third party tortfeasors for damages on theories

including inverse condemnation and negligence, pursuant to a second amended master

complaint. Appellant alleged the fires had damaged and destroyed the real property,

trees, improvements and personal property, during his ownership.

       Highland's complaint in intervention is modeled on the master complaint against

the third party tortfeasors, and alleges that it had acquired an interest in the subject

property through nonjudicial foreclosure. Additionally, against Appellant, Highland

added a 17th cause of action for declaratory relief that sought to impose a lien on any

eventual recovery Appellant might obtain against the third party tortfeasors, for physical

damage to the property. Highland asserted that Appellant's note and debt survived the

nonjudicial foreclosures and it was entitled to recover damages or a lien up to the

remaining indebtedness on the note, $837,385.29, plus attorney fees and postforeclosure/

prejudgment interest.

                        B. Status of Senior Trust Deed; Prior Opinion

       In June 2010, Highland defaulted on the loan secured by the first trust deed, and

the senior lender, PFI, nonjudicially foreclosed and recovered the property by making a

full credit bid of $1,613,926.42 at the trustee's sale.3

3       Highland weakly objects on appeal that this record does not clearly establish the
fact of the 2010 nonjudicial foreclosure by the senior lienholder (which postdated
Highland's own 2008 foreclosure of its junior trust deed). However, Highland's own
pleadings and exhibits disclose that this occurred. Moreover, that circumstance was
clearly placed before the trial court, and it is not reasonably subject to dispute now.
                                               6
       PFI also sued the third party tortfeasors in the master litigation, but its complaint

in intervention was dismissed after a demurrer was sustained without leave to amend,

based upon lack of standing to seek further damages, in light of its possession of the real

property. We upheld that ruling in our prior opinion issued in the same trial court case.

In our analysis, we noted that Appellant "owned the real property at the time of the fires.

It was then that his cause of action against Defendants accrued. PFI acquired title to the

property after it had been damaged by the fires. The transfer of title did not include a

transfer of Thoryk's cause of action as the property owner. That cause of action remained

with Thoryk as his personal property. (Vaughn v. Dame Construction Co. (1990) 223

Cal.App.3d 144, 148-149.) PFI's status as the current owner of the property does not give

it standing to sue for damage to the property."

       With respect to the status of Appellant's debt to the first lender, PFI, we stated in

our prior opinion that its "acquisition of the property by full credit bid extinguished

Thoryk's debt, and thus extinguished PFI's security. [Citation.] Furthermore, no

exception to the full credit bid rule applied. [Citations.] PFI lacks standing as the holder

of a security interest in the property. The court properly sustained the demurrer without

leave to amend."

               C. Declaratory Relief Trial; Appellate Briefing on Effect of
                          Ongoing Master Complaint Action

       In the coordinated wildfire litigation, the trial court bifurcated for trial Highland's

declaratory relief claim against Appellant. At a court trial, offers of proof of the trust

deed and the note were submitted. Highland contended that the note was secured not

                                               7
only by the real property security, but also by mixed collateral and additional security,

within the definitions set forth in the trust deed. Thus, Appellant had granted Highland a

security interest in the real property by parcel number, including "all money held on

deposit . . . related to the Real Property," and "all other rights, royalties and profits

relating" to it.

        Highland also relied on the form deed's definitions of "Property," as including

both real property and personal property. Generally, "personal property" includes money

related to the real property, as well as all substitutions or replacements for such property.

Also, the trust deed grants the lender a security interest in the property under the

Commercial Code, to the extent any of the property constitutes fixtures or other personal

property.

        The matter was argued and submitted, and the trial court granted Highland's

request for a declaration that it was entitled to a lien, both under the deed of trust and

pursuant to the equitable conversion theory. (Bortenstein, supra, 47 Cal.App. 421, 423-

424.) This appeal followed.

        In their briefs, the parties discuss how the remaining master complaint litigation

will potentially allocate any recovery against the third party tortfeasors for property

damage, in terms of measures of damages. Appellant's brief states on this topic, "[t]he

measure of the property's values immediately before and after the wildfires will

ultimately be the subject of dispute at trial with the defendants. If the property retained

                                               8
sufficient value after the wildfires to satisfy both liens against it, then Highland Valley's

security interest was not impaired at all."4

       Highland takes several different positions on this topic, mainly arguing that

Appellant's rights to recover fall within the category of personal property security created

by the trust deed and note. Highland alternatively argues that all of Appellant's rights to

recover for injury to the real property under tort and inverse condemnation theories,

against the third party tortfeasors, were already foreclosed upon under the power of sale

and are thus owned by Highland. It states, "While it may be true that amounts recovered

by Highland from [third party tortfeasors] will become credits against the amount of the

lien, that issue was not and is not before the Court, as there is no evidence of any such

recovery, nor has there been one as of the date of this writing. [¶] [Appellant does] not

purport to address the question of the amount secured by the lien after a partial credit bid

at foreclosure, the accrual of interest on the amount remaining unpaid, or the effect of

4       Appellant contradictorily argues that even if Highland did, at the moment of
nonjudicial foreclosure, have a lien against Appellant's own claims against the third party
tortfeasors, "that lien interest was emphatically extinguished when [PFI] foreclosed in
July 2010. This is because [PFI] was a senior lienholder and, under California law,
foreclosure of a prior mortgage or deed of trust extinguishes any inferior mortgage lien."
For our purposes, we accept Appellant's main concession that Highland can and will
continue to pursue its own claims for impairment of security against the third party
tortfeasors in the master complaint proceedings. This may include the period that
Highland held title, 2008 to 2010, as well as impairment of security. (See American
Savings & Loan Association v. Leeds (1968) 68 Cal.2d 611, 614, fn. 2 [stating that
"[w]hen a third person tortiously damages the property, both the mortgagor and
mortgagee may sue the third party tortfeasor. If the mortgagor sues first, he may recover
the total amount of damage to the property, but the fund recovered is subject to the lien of
the mortgagee to the amount that his security has been damaged"].)
                                               9
foreclosure on a portion of the collateral on the ability to enforce the lien on the

remainder."

       Those particular disputes need not now be resolved. At this time, only the

declaratory relief issued concerning Highland's lien against any future recovery by

Appellant is before this court.

                                       DISCUSSION

       Generally, the parties agree that the historical facts are undisputed and that on

appeal, the trial court's resolution of the legal issues presented by the documents in the

record and application of statutes is subject to de novo review. (Dreyfuss v. Union Bank

of California (2000) 24 Cal.4th 400, 406 (Dreyfuss); Trujillo v. North County Transit

District (1998) 63 Cal.App.4th 280, 284.)

       We interpret the trust deed, an executed contract, under the rules of interpretation

applicable to contracts in general. "The prime rule for interpreting deeds is to determine

the objective (and not the subjective) intent of the parties by an examination of the

deed. . . . [¶] Since the language of each instrument is sui generis, no bright-line rules of

construction exist for determining the parties' actual intent, which is the ultimate

interpretive touchstone. Accordingly, despite the technical rules of construction, the

court must review the entire instrument to ascertain the actual intent of the parties so far

as can be determined." (3 Miller & Starr, supra, § 8:2, pp. 8-8 to 8-10, fns. omitted;

Parsons v. Bristol Development Co. (1965) 62 Cal.2d 861, 865-866; City of Manhattan

Beach v. Superior Court (1996) 13 Cal.4th 232, 238.)

                                              10
                                              I

                         DEFICIENCY JUDGMENT DOCTRINE

                      A. Nonjudicial Foreclosure Statutory Scheme

       In pertinent part, section 580d provides: "No judgment shall be rendered for any

deficiency upon a note secured by a deed of trust or mortgage upon real property or an

estate for years therein hereafter executed in any case in which the real property or estate

for years therein has been sold by the mortgagee or trustee under power of sale contained

in the mortgage or deed of trust."5

       " 'A "deficiency judgment" is a personal judgment against a debtor for a recovery

of the secured debt measured by the difference between the debt and the net proceeds

received from the foreclosure sale.' " (Dreyfuss, supra, 24 Cal.4th at p. 407, citing, e.g.,

Hatch, supra, 19 Cal.2d 254, 261 [defining a deficiency judgment as "a personal

judgment for the unpaid balance due upon an obligation after unsuccessful resort to the

security"].) Under the one form of action rule, section 726, subdivision (a), "a secured

creditor is generally required to pursue its security, not the underlying obligation."

(Cadlerock Joint Venture, L.P. v. Lobel (2012) 206 Cal.App.4th 1531, 1549

(Cadlerock).)

       " 'The antideficiency statutes are to be construed liberally to effectuate the

legislative purposes underlying them, including the policies " '(1) to prevent a multiplicity

5     In 2013, section 580d was amended to add a new subdivision (b), but the
amendment does not implicate any of the issues raised in this appeal. The operative
language remained the same. (Stats. 2013, ch. 65, § 3.)
                                             11
of actions, (2) to prevent an overvaluation of the security, (3) to prevent the aggravation

of an economic recession which would result if [debtors] lost their property and were also

burdened with personal liability, and (4) to prevent the creditor from making an

unreasonably low bid at the foreclosure sale, acquire the asset below its value, and also

recover a personal judgment against the debtor.' " ' " (Cadlerock, supra, 206 Cal.App.4th

at p. 1541.) "[S]ection 580d should be interpreted to avoid the thwarting of its purposes

'by a subterfuge . . . .' " (Cadlerock, supra, at p. 1541, quoting Freedland v. Greco

(1955) 45 Cal.2d 462, 468.)

       "There is a relationship between the 'security first' aspect of the one-action rule

and the prohibition against a deficiency judgment after a nonjudicial foreclosure sale, and

the issues often arise in the same case. [¶] The security-first aspect of the one-action rule

requires that all of the security be exhausted prior to the recovery of personal liability

against the trustor. When the beneficiary forecloses a deed of trust by the private power

of sale, there is a prohibition against the recovery of a personal judgment against the

trustor. However, in both instances, the beneficiary is entitled to pursue all of the

security for the debt and, after a nonjudicial foreclosure of a mortgage or deed of trust,

the beneficiary may also foreclose any other security for the same debt. The same rule

applies under the antideficiency limitations that allow the beneficiary to foreclose liens

on other assets that are security for the debt after a nonjudicial foreclosure on one of the

assets." (4 Miller & Starr, supra, § 10:260, pp. 10-1033 to 10-1034; fns. omitted, italics

added.)

                                              12
                  B. Exceptions to Prohibition on Deficiency Judgments

       In the underlying master complaint proceedings, Highland's complaint in

intervention is an appropriate means to pursue its own remedies against the third party

tortfeasors, and those fall outside the scope of antideficiency law. (Cornelison, supra,

15 Cal.3d 590, 604, fn. 9; cf. Romo v. Stewart Title of California (1995) 35 Cal.App.4th

1609, 1618-1619 (Romo) [lender's claims for fraud or negligence damages against a third

party tortfeasor (escrow agent), arising during real estate transactions, were unrelated to

any claims of impairment of real property security for the loan].)6 As against the third

party tortfeasors, Highland seeks recovery of inverse condemnation damages on its own

behalf from the time that the fires occurred (Oct. 2007). It additionally seeks damages

from them for the impairment of its security interest, measured by the unpaid

indebtedness together with interest accrued after the foreclosure date (July 2008), plus

attorney fees.

       "As to section 580d, its text does not explicitly contemplate the existence of

multiple liens on a single real property or the possibility of a sold-out junior lienor."

(Cadlerock, supra, 206 Cal.App.4th 1531, 1542.) The current set of facts involves

multiple liens on a single real property, held by different lenders. These facts do not

6       In Romo, the lender had made a full credit bid and taken the security, but it was
not precluded from seeking unrelated items of tort damages from others. (Romo, supra,
35 Cal.App.4th at pp. 1618-1619; see Sumitomo Bank v. Taurus Developers, Inc. (1986)
185 Cal.App.3d 211, 225 [additional negligence damages against the borrower allowed,
in a different capacity]; Brown v. Critchfield (1980) 100 Cal.App.3d 858, 870-871
[lender's full credit bid did not bar breach of fiduciary duty action against attorney and
real estate broker involved in the deal].)
                                              13
involve the usual definition of a "sold-out" junior lien, where the junior lender's security

has been rendered valueless by a nonjudicial foreclosure sale of the property under a

senior encumbrance, and the junior lender is not prohibited from obtaining a deficiency

judgment. (Roseleaf Corp. v. Chierighino (1963) 59 Cal.2d 35, 41-43.) The reason is

that the security has been lost by the foreclosure sale of the senior lien, and thus "the

junior lienor can sue the debtor directly on the promissory note, which is then considered

unsecured." (4 Miller & Starr, supra, § 10:261, pp. 10-1041 to 10-1042; italics added.)

       Here, Highland foreclosed on its junior lien under the power of sale and obtained

its security, but only held it for a limited time period. Normally, where a junior

lienholder has made an election to proceed against the real property securing the debt

under the power of sale, section 580d precludes a deficiency judgment. (In re Marriage

of Oropallo (1998) 68 Cal.App.4th 997, 1005 [the senior lienholder had taken part of the

junior's security, and the junior nonjudicially foreclosed on the remainder, and thus could

not also attempt to collect a deficiency judgment].) In Freedland v. Greco, supra,

45 Cal.2d 462, 466-468, the court ruled that a judicial action on a separate note based on

the same debt, following nonjudicial foreclosure on real property security for the debt,

was barred by antideficiency legislation.

       Through the lien, Highland effectively seeks to appropriate to itself Appellant's

future recovery for tortious conduct of others, if he obtains any on his own behalf.

Appellant claims this declaration that Highland is entitled to such recovery against him

improperly exceeded the extent to which its own security interest was impaired, for the

2005 to 2008 lending period. It thus appears that the master complaint proceedings will

                                              14
involve some resolution of the respective rights of the parties to keep any recovery they

may obtain from the third party tortfeasors, under some kind of allocation for the

different periods of ownership of the property, subject to the periods in which Highland

still held a security interest.

       For now, we are required to consider only Appellant's claims that this lien on any

recovery he may receive for property damage or inverse condemnation damages, or to

secure an ongoing obligation for interest and attorney fees, is not supported by any

separate collateral identified in an ongoing debtor-creditor relationship with Highland.

                                              II

                              ADDITIONAL SECURITY THEORY

                                    A. Issues Presented

       Where, as here, the creditor sues a third party tortfeasor for impairment of

security, that claim is based on a cause of action separate and apart from any attempt to

recover on the note or the debt. (Birman, supra, 64 Cal.App.4th 502, 516.)

       As against Appellant, Highland seeks to avoid the operation of the antideficiency

law, by showing that the language of the trust deed and note created additional collateral,

beyond the real property security that it took under power of sale. Its lien theory against

Appellant requires Highland to justify its argument that deficiency principles and the one

action rule of section 726 allow "seriatim foreclosure of mixed collateral" in this case.

(Comm. Code, § 9604, subd. (a)(2)(A); Walker v. Community Bank (1974) 10 Cal.3d

729, 736; see pt. III, post, for discussion of Highland's alternative claim that any potential

                                             15
eminent domain recovery by Appellant amounts to a substitute for the real property itself,

under the equitable conversion doctrine; Bortenstein, supra, 47 Cal.App. at pp. 423-424.)

       Where additional collateral was created for an obligation, a debtor-creditor

relationship may survive a nonjudicial foreclosure, if the proceeds of the sale were

insufficient to pay the debt. (See Redingler v. Imperial Savings & Loan Assn. (1975) 47

Cal.App.3d 48, 50-51 (Redingler) [creditor could collect on insurance policy named as

additional security for mortgage, up to the amount of the indebtedness remaining after the

foreclosure sale].) In Sampsell, supra, 51 Cal.App.2d 180, 186, the foreclosing creditor

could collect on the debtor's assignment of rental income, because "the sale of the real

property under the deed of trust does not wipe out the indebtedness nor prevent the

creditor from proceeding to recover upon any other security." (Ibid.)

       Highland likewise claims that antideficiency law does not prohibit this lien,

because these loan documents created additional, unrealized personal property collateral

that remained after the nonjudicial foreclosure, to be applied to the unpaid loan balance.

Commercial Code section 9601 allows a lender to proceed in any sequence to realize on

the security, including foreclosing on the real property first and the personal property

thereafter. Highland argues that since Appellant's indebtedness was not fully paid by the

proceeds of the foreclosure, the debt continued to exist and should bear post-foreclosure

interest according to its terms, and the attorney fees provisions of the note and deed

would also survive, postforeclosure.

                                             16
                        B. Terms of Trust Deed and Note: Security

        The trust deed appears to be a standard form document, referring, for example, to

keeping the property in tenantable condition, although this was basically raw land with

some infrastructure improvements. The "CONVEYANCE AND GRANT" in this deed

of trust, with a power of sale, identifies the "real property" it secures by assessor's parcel

numbers, further defining the "real property" as including all fixtures, easements, water

rights, plans or engineering reports, permits, entitlements, "and all money held on deposit

for any of the foregoing or otherwise related to the Real Property; and all other rights,

royalties, and profits relating to the real property, including without limitation all

minerals . . . ."

        Next, the trust deed entitles the beneficiary to require that all or any part of an

inverse condemnation award be applied to the unpaid indebtedness. (See pt. III, post;

such contract rights are limited by statute, § 1265.225, subd. (a).)

        The trust deed's "property" definitions include both real and personal property.

"Personal property" includes "money related to the real property," or money held on

deposit. "Personal property" also includes "all substitutions for, any of such property;

and together with all proceeds (including without limitation all insurance proceeds and

refunds of premiums) from any sale or other disposition of the Property." (No issues are

raised about insurance proceeds here.)

        The trust deed provides that it "shall constitute a Security Agreement to the extent

any of the Property constitutes fixtures or other personal property, and Lender shall have

all of the rights of a secured party under the Uniform Commercial Code as amended from

                                               17
time to time." With regard to the personal property, such as fixtures, the lender is given

all the rights of a secured party, "including without limitation the right to recover any

deficiency in the manner and to the full extent provided by California law."

           C. Terms of Trust and Note: Attorney Fees and Interest Provisions

       The terms of the promissory note acknowledge that it is secured by the second

trust deed, "in addition to any other collateral." It states that any unpaid balance bears

interest at the nondefault rate of 11.99 percent per annum, and upon default at the rate of

16.99 percent per annum.

       The note and trust deed each contain an attorney fees clause for fees incurred in

enforcing the terms of the note and/or trust deed. Also, the terms of the trust deed allow

to Lender "all reasonable expenses Lender incurs that in Lender's opinion are necessary at

any time for the protection of its interest or the enforcement of its rights," as part of the

indebtedness.

                    D. Mixed, Additional or Substitute Collateral Cases

       Here, as in Birman, supra, 64 Cal.App.4th 502, 518, the nonjudicial foreclosure, at

which Highland acquired the property for less than the full amount of the outstanding

indebtedness, did not extinguish all of the debt on the note. (Id. at p. 518; Cornelison,

supra, 15 Cal.3d at pp. 607-608.) The question is what further recourse Highland should

have, that does not contravene the purpose of the antideficiency statutes.

       In other situations, creditors have been allowed additional recovery against a

debtor following foreclosure under a power of sale, because the particular claims did not

conflict with the policy behind the antideficiency laws. (Birman, supra, 64 Cal.App.4th

                                              18
502, 514.) Thus, "[t]he courts have repeatedly held that resort to additional security

following a nonjudicial foreclosure is not an attempt to secure a deficiency judgment."

(Ibid.)

          These cases that allow a nonjudicially foreclosing lender to resort to "additional

security" involve certain types of valuable property that were mentioned or incorporated

into the mortgage documents. In Dreyfuss, supra, 24 Cal.4th 400, 406, 411-412, serial

enforcement of security was allowed, through separate nonjudicial foreclosure

proceedings, because the borrowers had separately granted security interests in several

different parcels of real property. In Redingler, supra, 47 Cal.App.3d at pages 50 to 51,

the borrower had specifically agreed to allow insurance policy proceeds to be paid to the

lender. In Sampsell, supra, 51 Cal.App.2d 180, 186, the borrower had assigned certain

rental income to the lender, which could be reached despite a nonjudicial foreclosure.

          With regard to the attorney fees now being sought, the court in Passanisi v. Merit-

McBride Realtors, Inc. (1987) 190 Cal.App.3d 1496, 1509 (Passanisi), held the purposes

of section 580d do not prevent a creditor-beneficiary from recovering attorney fees and

costs it had expended to defend a separate action brought by the debtor-trustor to restrain

foreclosure of the security under the power of sale. In that situation, even though the

security property was later sold at a trustee's sale, the judgment for attorney fees and

costs was separate and enforceable. In Passanisi, when the creditor foreclosed, there was

a surplus of funds, so the creditor's bid exceeded the debt. (Id. at p. 1504.) There were

mutual debts, allowing offsets. "The creditor owed the debtors the surplus from the

                                               19
foreclosure sale. The debtors were liable to the creditor on the judgment for attorney's

fees and costs." (Birman, supra, 64 Cal.App.4th 502, 520.)

       In Passanisi, the court observed, "Section 580d does not by its express terms apply

in such a case, nor does the policy behind section 580d dictate such a result.

Enforcement of the judgment for attorney's fees and costs is not simply a subterfuge for

the collection of a deficiency on the secured note. The award for attorney's fees and costs

is neither measured by, nor interrelated to, a deficiency on the note." (Passanisi, supra,

190 Cal.App.3d 1496, 1509.) The reasoning of such cases examines whether any

enforceable mutual obligations existed between the parties, after the remedy of

nonjudicial foreclosure on a trust deed is elected.

                                         E. Analysis

       From a plain reading of the trust deed, we think that the general references to

personal property, money held on deposit related to the real property, or rights relating to

the real property, are too general to amount to sufficiently specific designations of

existing "additional" security. The personal property rights relating to the property are

not sufficiently described as separate and distinct, to have survived the nonjudicial

foreclosure or to have created remaining mixed or additional collateral, to support a lien

that effectively creates a money judgment. The items listed in the deed as amounting to

"other rights . . . relating to the real property," such as mineral rights, do not include

future tort recovery by Appellant, under a reasonable reading of the trust deed.

       Rather, Highland's foreclosure on the junior deed of trust under its power of sale

merged and extinguished Highland's security rights in the real property, and the personal

                                              20
property security interests identified in the trust deed were likewise extinguished. Next,

its junior mortgage lien was discharged when the nonjudicial foreclosure of the senior

deed of trust occurred. (4 Witkin, Summary of Cal. Law (10th ed. 2005) Security

Transactions in Real Property, § 116, p. 907.) The debtor-creditor relationship was not

preserved, and thus Highland's claim for attorney fees and interest, based on the note, is

not now enforceable, without a stronger showing of the availability of additional or

mixed collateral, beyond the real property security. (See Rosenbaum v. Funcannon (9th

Cir. 1962) 308 F.2d 680, 684 [even where a trust deed is extinguished through sale of the

property, the debt itself may not be extinguished but may be unenforceable].) Highland

has not shown current entitlement to any continuing interest and attorney fees that would

be recoverable and consistent with antideficiency protections.

       The general rule is that a lien may be created in a mortgage on " 'property not yet

acquired,' " and the lien will attach at the time it is acquired. (4 Witkin, Summary of Cal.

Law, supra, Security Transactions in Real Property, § 34, p. 829; Civ. Code, § 2883,

subd. (a).) However, the mortgage must contain an express provision to that effect.

(Hosford v. Henry (1951) 107 Cal.App.2d 765, 774-775; cf. Duarte v. Lake Gregory

Land & Water Co. (1974) 39 Cal.App.3d 101, 103-105 [holding that even though the

lender had been assigned "any award of damages" for injury to property, the lender's full

credit bid in exercise of its power of sale served to extinguish the mortgage and security

interest, including the assignment clause, and no additional security rights remained].)

       There is no express language in this trust deed that assigns any tort claims for

injury to the real property as "additional security" for the mortgage debt, as falling within

                                             21
the category of "all other rights, royalties and profits relating to the real property. . . ."

When the loan was made in 2005, the 2007 wildfires had not occurred, to give rise to

Appellant's cause of action against the third party tortfeasors. That cause of action for

tort damages accrued when the fires occurred and was his personal property that would

be assignable as a chose in action. (1 Witkin, Summary of Cal. Law, supra, Contracts,

§ 720, pp. 805-806; see Vaughn v. Dame Construction Co., supra, 223 Cal.App.3d 144,

148-149; Keru Investments, Inc. v. Cube Co. (1998) 63 Cal.App.4th 1412, 1424.) A

transfer of title, through nonjudicial foreclosure, would not ordinarily include a transfer

of a right of action as a property owner, which is viewed as personal property. No such

assignment was made clear here.

       Under Commercial Code section 9204, Appellant's claim against the third party

tortfeasors amounts to a "commercial tort claim" (it arose in the course of his business

and did not include personal injury damages). (Comm. Code, § 9102, subd. (13); § 9108,

subd. (e).) As an after-acquired property asset, this tort claim does not constitute a

security interest, without more specific assigning language. We cannot see how

Appellant's chose in action against the third party tortfeasors was expressly or impliedly

included in the "personal property" defined by the trust deed, as money "related to the

Real Property."

       In conclusion, the lien imposed was impermissibly measured by, and interrelated

to, the remaining deficiency on the note, but these loan documents did not create

additional available security for the same obligation. (Passanisi, supra, 190 Cal.App.3d

1496, 1504.) This plain reading of the loan documents leaves some additional questions

                                               22
remaining about the equitable conversion doctrine based on the inverse condemnation

claims being asserted, respectively, by Highland and Appellant.

                                             III

                               EQUITABLE CONVERSION

                                          A. Law

       Equitable conversion theory will permit a lender to recover from the borrower's

tort damages fund, to the amount that its security was damaged. (American Savings &

Loan Association v. Leeds, supra, 68 Cal.2d 611, 614, fn. 2.) The theory is that

condemnation of an entire mortgaged property "in effect substitutes a money award for

the security of the land mortgaged, and the mortgagee is ordinarily entitled to as much of

the award as is necessary to satisfy the debt." (4 Witkin, Summary of Cal. Law, supra,

Security Transactions in Real Property, § 81, p. 870.) This rule presupposes that the

lender still has a security interest in the real property, based on a debt, when entitlement

to the money award arises and is made. (See 4 Miller & Starr, supra, § 10:75, p. 10-292

["On condemnation of property that is security for a debt, the lender loses its lien on the

real property, but the condemnation award is substituted for the property and the lender

obtains a lien on the condemnation proceeds."], fn. omitted.)

       In Bortenstein, supra, 47 Cal.App. at pages 423 to 424, the court stated, "It is a

well-recognized rule of equity, based upon the doctrine of equitable conversion, that

when land is taken for public use, the money awarded for such land remains, and is to be

considered, as land in respect to all rights and interests relating thereto. The money, in

such cases, is deemed to represent the land, and is applied in equity to discharge the liens

                                             23
upon it, precisely in accordance with the legal or equitable rights of creditors or

encumbrancers in respect to such land."

        In Bortenstein, the mortgagee was permitted in a judicial foreclosure action to

"impress with his mortgage lien a fund that has taken the place of so much of the

mortgaged realty as was destroyed by the flood. [¶] The foreclosure decree makes no

attempt to fasten upon appellant [Bortenstein, the mortgagor] a personal liability for a

deficiency judgment. The 'deficiency' referred to in the decree is a deficiency that may

remain after the sheriff's sale of the partially destroyed mortgaged premises. And that

'deficiency,' if any there may be, is to be made good out of so much of a fund as, in

equity, is deemed to represent that part of the mortgaged property that was destroyed by

the flood." (Bortenstein, supra, 47 Cal.App. at p. 425.) Thus, the damages awarded in

the action against the condemnor had not been limited to Bortenstein's interest (as owner

of land subject to a mortgage), but covered all the damage done by the flood to all of the

property, including the security interest: "Therefore, the money so awarded by the court

as damages to the realty must be treated, in equity, as the land itself. It takes the place of

the reduced value of the land," and the mortgagee could recover its portion. (Id. at p.

424.)

        Rose v. Conlin (1921) 52 Cal.App. 225, 231-232, also allowed a lender to bring a

postforeclosure action against the foreclosed borrower's inverse condemnation recovery.

A commentator summarizes this holding: "When the condemnor takes less than a fee

title interest and the indebtedness is overdue or in default, the beneficiary can foreclose

on the land. If the proceeds of the foreclosure sale are inadequate, the beneficiary can

                                              24
resort to the condemnation award for the recovery of any shortage." (4 Miller & Starr,

supra, § 10:75, p. 10-296; fn. omitted.) Rose and Bortenstein, supra, 47 Cal.App. 421

dealt with purchase-money mortgages, and their analysis that condemnation proceedings

are "substituted security" for the debt may logically apply when a lender has

nonjudicially foreclosed but seeks to proceed against "additional security." (4 Miller &

Starr, supra, § 10:75, pp. 10-297, fn. 25.)

          "The theory upon which all these remedies rest is one of equitable conversion or

substituted property: '[T]he money so awarded by the court as damages to the realty must

be treated, in equity, as the land itself. It takes the place of the reduced value of the land.

The mortgaged land, in its present damaged condition, together with such portion of all

the moneys awarded for the total injury as represents the damage to the mortgaged

premises, stand now in the place and stead of the original uninjured mortgaged

premises.' " (American Savings & Loan Association v. Leeds, supra, 68 Cal.2d 611, 615,

fn. 2.)

          The terms of this trust deed granted Highland, the lender, the right to obtain the

borrower's eminent domain or inverse condemnation damages. Such contract rights are

limited by statute, as set forth in section 1265.225, subdivision (a): "Where there is a

partial taking of property encumbered by a lien, the lienholder may share in the award

only to the extent determined by the court to be necessary to prevent an impairment of the

security, and the lien shall continue upon the part of the property not taken as security for

the unpaid portion of the indebtedness." A commentator explains the need for this

provision: "A typical form deed of trust provides that upon any condemnation of the

                                                25
property that is security for the lien, all of the proceeds must be paid to the lender

whether the amount of property taken is all of the security or only a portion of it.

However, the statutory provision for the allocation of the condemnation award based on

the impairment of the security is controlling and supersedes the provisions in the deed of

trust." (4 Miller & Starr, supra, § 10:75, pp. 10-293 to 10-294, fns. omitted.)

                                         B. Application

       We determined above that Highland is not attempting to reach "additional"

security or property, as specifically defined in the trust deed. To show entitlement to this

"substitute" form of security, the lender must retain a proportional security interest in the

real property, that is still in force at the relevant times. The judgment for a lien gave

credit to Highland, by operation of law though equitable conversion, for any future

eminent domain damages that Appellant may obtain.

       However, to allow such an equitable setoff to apply, there must remain mutual

debts between the parties, exclusive of the security remedy. (Passanisi, supra, 190

Cal.App.3d at p. 1512; Birman, supra, 64 Cal.App.4th 502, 520 [creditor in Passanisi

owed the debtors the surplus from the foreclosure sale, while the debtors were liable to

the creditor on the judgment for attorney fees and costs, so an offset was allowed].)

Here, Highland opted to take the security through foreclosure under a power of sale. It

has no basis to seek proportional equitable conversion damages against Appellant, since

the land itself is no longer at issue.

       Since Rose and Bortenstein were decided, section 580d was enacted, and it

strengthens antideficiency protections. Those cases still remain good law, but each case

                                              26
must be evaluated on its own facts. In Rose, the mortgagee had not been made a party to

the mortgagor's eminent domain action, pending judicial proceedings to foreclose the

mortgage, and the mortgagee was therefore entitled to assert equitable rights to the

benefits obtained by such mortgagor against the condemnor. (Rose v. Conlin, supra, 52

Cal.App. 225, 227-232.) In Bortenstein, supra, 47 Cal.App. 421, it was not fair for the

mortgagor to retain all of the separately awarded eminent domain damages, because he

had received not only an amount for his own property damage, but also for the

mortgagee's security interest in the property as a whole. (Id. at pp. 424-425.)

       The current lien effectively amounts to a deficiency judgment, "a personal

judgment against the debtor-mortgagor for the difference between the fair market value

of the property held as security and the outstanding indebtedness." (Cornelison, supra,

15 Cal.3d at p. 603.) Highland's requested lien would improperly grant it "a personal

judgment for the unpaid balance due upon an obligation after unsuccessful resort to the

security." (Hatch, supra, 19 Cal.2d at p. 261.) Here as in Birman, "Following

foreclosure, defendants were left with an unsecured, unenforceable claim for the balance

due on the promissory note. They had no recourse beyond the security." (Birman, supra,

64 Cal.App.4th 502, 520; Hatch, supra, at p. 261.) Following foreclosure, no further

mutual obligations remain between the parties on the unpaid balance of the note. (In re

Marriage of Oropallo, supra, 68 Cal.App.4th at pp. 1005-1008.)

       We cannot foresee whether any independent equitable offset or allocation issues

may arise, based on the appropriate measure of damages for the different claims being

asserted in the master complaint, by each real party in interest for its period of ownership.

                                             27
We decide only that the lien was incorrectly imposed and equitable issues may remain for

the trial court, to be resolved on a fuller record to be developed.

                                       DISPOSITION

       Reversed, with directions to enter a different judgment denying the lien

application. Costs are awarded to Appellant.

                                                                      HUFFMAN, Acting P. J.

WE CONCUR:

                  McDONALD, J.

                    McINTYRE, J.

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