199 Cal.App.3d 1099G, Palm v. Schilling

• Decision Date: 29 February 1988
• Docket Number: No. G003590,G003590
• Citation: 244 Cal.Rptr. 600
• Court: California Court of Appeals Court of Appeals
• Parties: G, 199 Cal.App.3d 63 James T. PALM et al., Plaintiffs and Respondents, v. John R. SCHILLING, Defendant and Appellant.

Page 600

244 Cal.Rptr. 600

199 Cal.App.3d 1099G, 199 Cal.App.3d 63

James T. PALM et al., Plaintiffs and Respondents, v. John R. SCHILLING, Defendant and Appellant.

No. G003590.

Court of Appeal, Fourth District, Division 3, California.

Feb. 29, 1988.

As Modified March 25, 1988.

Wenke, Evans & Ikola, Richard A. Derevan, Newport Beach, for defendant and appellant

Douglas K. Wallace, Newport Beach, for plaintiffs and respondents.

OPINION

CROSBY, Associate Justice.

The antideficiency provisions of Code of Civil Procedure section 580b may not be contractually waived as a condition of the encumbrance of real property with a purchase money mortgage or deed of trust or the renegotiation of an obligation, so long as it continues to be secured with the original real estate. The superior court erred in upholding a waiver of the latter variety here. We reverse accordingly.

I

This litigation to collect a deficiency judgment on a secured promissory note had its genesis in John and Caroline Schilling's October 1980 purchase of James and Frances Palm's home for $725,000. The Schillings made a $210,050 cash down payment and executed two promissory notes for the balance. The first, in the face amount of $514,750--but endorsed down to $389,750--was due on January 15, 1981. The second, in the sum of $125,000, was to be paid October 28, 1982. The notes were secured by second and third deeds of trust on the acquired property.

The Schillings intended to satisfy the short-term obligation with the cash down payment received for the sale of their previous home and proceeds from an institutional loan secured by a new first trust deed on the property. They did obtain the bank financing, but escrow on their former residence did not close as planned. They lacked the funds to pay the first Palm note when it fell due.

The Schillings attempted to sell their newly acquired home and to arrange additional financing, but buyers and funding were apparently in short supply. In June 1981, the Schillings obtained a twelve-month loan from an institutional lender to pay the now overdue Palm obligation. The lender insisted its note have priority over the Palms' remaining trust deed, however. The Palms agreed, but only if the interest rate on their remaining note was increased retroactive to the date of purchase.

In June 1982, when the institutional loan was due and payment on the renegotiated Palm note was only months away, the Schillings again attempted to refinance. They found a willing lender; but it, too, was only amenable to accepting a position senior to the Palms' deed of trust.

The Palms agreed once again to subordinate their note, provided the Schillings immediately made a $25,000 payment to reduce the principal to $100,000; paid all accrued, but not yet due, interest; personally guaranteed the note; and waived their rights under Code of Civil Procedure section 580b. ¹ Schilling, but not his wife, the co-owner of the property, signed the guaranty and waiver. After this farrago of financial furor, the home was left encumbered with two trust deeds securing the institutional loans and a third deed of trust in favor of the Palms on their remaining $100,000 note.

The following year one of the institutional lenders foreclosed on the property and acquired it on a credit bid at a trustee's sale. As junior lienholders, the Palms lost their security. They sued Schilling only for the deficiency based on his purported personal guaranty and waiver of section 580b.

In a brief trial, the court determined the purported personal guaranty by Schilling was "contrary to public policy, void and ineffectual." Under the compulsion of Russell v. Roberts (1974) 39 Cal.App.3d 390, 395, 114 Cal.Rptr. 305, however, the court ruled waiver of the antideficiency provision was valid and granted judgment for the Palms.

II

Schilling first seeks reversal on a procedural point, i.e., the failure of the trial court to issue a statement of decision, and a philosophical one, i.e., the definition of a "day" for purposes of Code of Civil Procedure section 632. There is no reason to reenter these once festering legal backwaters. ²

The only issue for the trial court to resolve was one of law, and we are not bound by that court's interpretation. We agree with our colleagues in the Third District: Reversal for failure to issue a statement of decision is unnecessary where the only question decided was one of law. (Enterprise Insurance Co. v. Mulleague (1987) 196 Cal.App.3d 528, 538-540, mod. 197 Cal.App.3d 182d, 241 Cal.Rptr. 846.) Accordingly, we proceed to the merits of the dispute.

III

The Supreme Court has held the provisions of section 580b may not be contractually waived by the debtor in advance of or at the time a purchase money obligation is incurred. (See, e.g., Freedland v. Greco (1955) 45 Cal.2d 462, 467, 289 P.2d 463.) The court has not yet determined whether the provisions of section 580b may be waived after the obligation is incurred. ³

In Russell v. Roberts, supra, 39 Cal.App.3d 390, 395, 114 Cal.Rptr. 305, however, another panel of the Court of Appeal held the "rule [prohibiting waiver of the protective provisions of Code of Civil Procedure section 580b] does not apply after the sale and deed of trust transaction are completed." The Russell conclusion has been mechanically cited, in dicta and without discussion, by two other divisions, including our own. (Goodyear v. Mack (1984) 159 Cal.App.3d 654, 660, 205 Cal.Rptr. 702; Shepherd v. Robinson (1981) 128 Cal.App.3d 615, 626, 180 Cal.Rptr. 342.) As will be discussed anon, we disagree with Russell and conclude a purported contractual waiver of section 580b is inconsistent with its explicit language and unenforceable as contrary to public policy.

IV

California's deficiency judgment legislation was thoroughly revamped during the 1930's to protect debtors who lost real property through private sale or judicial foreclosure. Section 580a limits deficiency judgments after a power of sale in a deed of trust or mortgage has been exercised to "the difference between the fair value of the property at the time of the sale (irrespective of the amount actually realized at the sale) and the outstanding debt for which the property was security." (Cornelison v. Kornbluth (1975) 15 Cal.3d 590, 601, 125 Cal.Rptr. 557, 542 P.2d 981.) Section 726 applies the same rule in the case of judicial foreclosure.

Deficiency judgments are prohibited, however, where a purchase money mortgage is involved, i.e., where the vendor received a deed of trust or mortgage to secure the purchase price of real property. (Code Civ.Proc., § 580b.) ⁴ Similarly, Code of Civil Procedure section 580d, added in 1940, bars a deficiency judgment where property is lost not through judicial foreclosure, with its concomitant right of redemption, but under a power of sale authorized by the mortgage or deed of trust itself. ⁵

A wrinkle on the standard scenario develops when property is encumbered by several deeds of trust, a senior secured creditor forecloses, and the security of the junior lienholder is extinguished. Under those circumstances, the sold-out junior creditor is not restricted by the single action rule of section 726, the 90-day limitation period for initiation of an action as required by section 580a, or the fair-value provisions of either section. (Roseleaf Corp. v. Chierighino (1963) 59 Cal.2d 35, 39, 27 Cal.Rptr. 873, 378 P.2d 97.)

In Roseleaf the court observed that a senior lienholder who forecloses on his security places a junior secured creditor in the same position as the debtor; i.e., "[e]ither would have to invest additional funds to redeem or buy in at the sale." ( Id., at p. 41, 27 Cal.Rptr. 873, 378 P.2d 97.) The court reasoned that the junior lienholder is deserving of more protection in this situation than the debtor, who was responsible for the foreclosure by defaulting on a note, yet still retains the benefit of the bargain against the junior creditor, i.e., the funds loaned.

Section 580b is viewed differently, however. Its ban against deficiency judgments does apply to sold-out junior creditors. (Brown v. Jensen (1953) 41 Cal.2d 193, 197-198, 259 P.2d 425, cert. den. (1954) 347 U.S. 905, 74 S.Ct. 430, 98 L.Ed. 1064; see also Spangler v. Memel, supra, 7 Cal.3d 603, 610-611, 102 Cal.Rptr. 807, 498 P.2d 1055, reaffirming the rule.) The unique status of section 580b, as contrasted with sections 580a and 726, was discussed in Roseleaf as well. Musing at length on the origins of section 580b, the court finally settled on two explanations. First, forcing a seller to bear the risk of insufficient security on a purchase money mortgage discourages the overpricing of real property. ( Roseleaf Corp. v. Chierighino, supra, 59 Cal.2d at p. 42, 27 Cal.Rptr. 873, 378 P.2d 97.) Second, the section fosters a broader social purpose: In the event of a market decline and drop in property values, relieving the defaulting debtor from personal liability will benefit a sagging economy. (Ibid.; see also Goodyear v. Mack, supra, 159 Cal.App.3d at p. 659, 205 Cal.Rptr. 702.) More recently, a third rationale was noted: "In certain situations ... the Legislature deemed even [the] partial deficiency [permitted under section 580a and 726] too oppressive. Accordingly, ... it enacted section 580b [ ] which barred deficiency judgments altogether on purchase money mortgages." ( Cornelison v. Kornbluth, supra, 15 Cal.3d at p. 601, 125 Cal.Rptr. 557, 542 P.2d 981.)

Perhaps in recognition of the prohibition against deficiency judgments, or perhaps because of the potential unfairness to junior lienholders powerless to prevent the destruction of their security by a senior secured creditor, the Supreme Court has taken a narrow view of purchase money mortgages. Accordingly, there are circumstances where a mortgage which appears to be of the purchase money variety is not treated as one. The rule is this: A mortgage securing the purchase price of property...