Thoryk v. San Diego Gas & Electric Co.

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
18502, 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
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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
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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
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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
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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. 421dealt 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
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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
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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.
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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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