Garfinkle v. Superior Court

• Decision Date: 16 May 1978
• Citation: 21 Cal.3d 268,146 Cal.Rptr. 208
• Court: California Supreme Court
• Parties: , 578 P.2d 925 Susan GARFINKLE et al., Petitioners, v. The SUPERIOR COURT OF CONTRA COSTA COUNTY, Respondent; WELLS FARGO BANK et al., Real Parties in Interest. S. F. 23658.

Page 208

146 Cal.Rptr. 208

21 Cal.3d 268, 578 P.2d 925

Susan GARFINKLE et al., Petitioners, v. The SUPERIOR COURT OF CONTRA COSTA COUNTY, Respondent;

WELLS FARGO BANK et al., Real Parties in Interest.

S. F. 23658.

Supreme Court of California,In Bank.

May 16, 1978.

Rehearing Denied June 15, 1978.

Kipperman, Shawn, Keker & Brockett, Steven M. Kipperman, Friedman & Sloan, Stanley J. Friedman and Gary Garfinkle, San Francisco, for petitioners.

Victor Harris, David Schuricht, Downey, John Le Veck, San Francisco, and Charles Wolfinger, Jr., San Diego, as amici curiae on behalf of petitioners.

No appearance for respondent.

Howard N. Ellman, David W. Lennihan, David J. Brown, and Brobeck, Phleger & Harrison, San Francisco, for real parties in interest.

Severson, Werson, Berke & Melchior, James B. Werson, Dennis M. Talbott, Lawrence A. Hobel, Edgar B. Washburn, Mary Beth Uitti, Carol Sanger, Landels, Ripley & Diamond, San Francisco, Harry D. Miller, Miller, Starr & Regalia, Oakland, McKenna & Fitting, Aaron M. Peck, Alan H. Holmberg, Edmond M. Connor, and Mona D. Miller, Los Angeles, as amici curiae on behalf of real parties in interest.

MANUEL, Justice.

This petition for writ of mandate challenges the constitutionality of California's procedure for the nonjudicial foreclosure of deeds of trust on real property. Petitioners contend that this procedure permits the deprivation of the trustor's property without adequate notice or hearing in violation of the due process guarantees of the Fourteenth Amendment to the United States Constitution and of article I, section 7 of the California Constitution. We conclude, in agreement with the decisions which have considered this question in relation to California's nonjudicial foreclosure procedure (Strutt v. Ontario Sav. & Loan Ass'n (1972) 28 Cal.App.3d 866, 105 Cal.Rptr. 395; U. S. Hertz, Inc. v. Niobrara Farms (1974) 41 Cal.App.3d 68, 116 Cal.Rptr. 44; Davidow v. Corporation of America (1936) 16 Cal.App.2d 6, 60 P.2d 132; Davidow v. Lachman Bros. Inv. Co. (9th Cir. 1935) 76 F.2d 186; Lawson v. Smith (N.D.Cal.1975) 402 F.Supp. 851) and in accord with the overwhelming majority of decisions which have considered this question in relation to similar nonjudicial foreclosure procedures of other jurisdictions, ¹ that California's procedure constitutes private, not state action and is therefore exempt from the due process constraints of the federal Constitution. We also conclude that the private action herein involved does not satisfy the state action requirement of the due process clause of the state Constitution.

In January 1970, petitioners Susan and Gary Garfinkle (the Garfinkles) purchased a family residence from the Lannings, whose loan on the property was secured by a deed of trust in favor of Wells Fargo Bank (Bank). This deed of trust contained a standard due-on-sale clause which provided that the Bank could accelerate the balance due on the loan if the Lannings sold the property without the written consent of the Bank. The deed of trust also contained a power of sale clause which provided in part as follows: "If default be made in the payment of said promissory note . . . or in case any change is made in the title to all or any part of the said property . . . all sums hereby secured shall, at the election of the Bank, forthwith become due and payable, without notice, and the Bank may cause the said property to be sold in order to accomplish the object of these trusts, and upon demand of the Bank the Trustee shall sell the whole, or such portion of the said property as the Trustee shall deem necessary to accomplish the purposes of these trusts, and such sale may be made in any manner provided by law, and if none is provided, then by first giving notice of the time and place of sale in the manner and for a time not less than that now required by law for the sale of real property on execution . . . ."

The Bank offered to let the Garfinkles assume the Lanning loan at an increased rate of interest in return for the Bank's agreement not to accelerate the balance due on that loan pursuant to the due-on-sale clause. The Garfinkles refused to assume the Lanning loan on these terms. Thereafter, the Bank notified both the Lannings and the Garfinkles that it had accelerated the Lanning loan and that the balance owing thereon was due and payable in its entirety. In June 1970 when the balance due had not been paid, the Bank recorded its notice of default as required by section 2924 of the Civil Code. The Lannings and Garfinkles received actual notice of the Bank's notice of default. The Garfinkles then brought a series of legal actions ² challenging both the constitutionality of California's nonjudicial foreclosure procedure and the validity of the automatic enforcement of the due-on-sale clause; and culminating in the present action seeking declaratory relief on both of these issues in respondent Contra Costa County Superior Court. The Bank filed a general demurrer to the Garfinkles' complaint. Respondent sustained the demurrer without leave to amend as to the constitutional challenge to the nonjudicial foreclosure procedure on the ground that no state action was involved. ³

After decision by this court in Connolly Development, Inc. v. Superior Court (1976) 17 Cal.3d 803, 132 Cal.Rptr. 477, 553 P.2d 637, in which we held that California's mechanic's lien and stop notice laws constituted state action, respondent, at the Garfinkles' request reconsidered its previous ruling on the state action question. Respondent then entered a new order, again sustaining the demurrer without leave to amend. ⁴ By this petition for mandate the Garfinkles seek review of the trial court's order. ⁵

The statutory provisions regulating the nonjudicial foreclosure of deeds of trust on real property are contained in Civil Code sections 2924-2924h. ⁶ Basically, these provisions require that before the trustee, acting under a power of sale contained in the deed of trust, can sell the subject trust property, the trustee must first record a notice of default setting forth the nature of the default and the election to exercise the power of sale. (§ 2924.) ⁷ If the trustor (borrower) has recorded a request for notice or if the deed of trust contains a request for notice, ⁸ the trustee is required to mail a copy of the notice of default to the trustor at the address specified in the recorded request or in the deed of trust. (§ 2924, subd. (b).) ⁹

After the notice of default has been recorded, the trustee must allow three months to elapse, during which time, the trustor may "cure" the default and reinstate the deed of trust, where reinstatement is possible. (§ 2924c.) ¹⁰

Upon expiration of this 90-day period, the trustee must then post a written notice of sale in a conspicuous place on the property at least 20 days prior to the date of sale (§ 2924f), and must mail a copy of this notice of sale to the trustor if notice has been requested. ¹¹ The trustee can then proceed to sell the property. There is no statutory provision for a judicial determination, prior to the sale, of the validity of the alleged default.

The property must be sold by public auction to the highest bidder (§ 2924h) ¹² to whom title is transferred by a trustee's deed. Thereafter, upon recording of this deed, the purchaser is entitled to bring an unlawful detainer action against the trustor in order to get possession of the property. (Code Civ.Proc., § 1161a.)

Petitioners contend that this nonjudicial procedure violates procedural due process under both the federal and state Constitutions because it deprives real property owners of their property without adequate notice and without a judicial hearing, thus coming within the scope of the decisions in Sniadach v. Family Finance Corp. (1969) 395 U.S. 337, 89 S.Ct. 1820, 23 L.Ed.2d 349 and its progeny. ¹³

We first turn to petitioner's federal constitutional claim. The Fourteenth Amendment to the United States Constitution provides in part: "No state shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any state deprive any person of life, liberty, or property without due process of law; . . ."

] The Fourteenth Amendment prohibits the state from depriving any person of life, liberty, or property, without due process of law; but it adds nothing to the rights of one citizen as against another." (United States v. Cruikshank (1875) 92 U.S. 542, 554, 23 L.Ed. 588.) The Fourteenth Amendment "erects no shield against merely private conduct, however discriminatory or wrongful." (Shelley v. Kraemer (1948) 334 U.S. 1, 13, 68 S.Ct. 836, 842, 92 L.Ed. 1161.) The question presented here, as in all actions challenged under the Fourteenth Amendment, is whether "there is a sufficiently close nexus between the state and the challenged action . . . so that the action . . . may be fairly treated as that of the State itself." (Jackson v. Metropolitan Edison Co. (1974) 419 U.S. 345, 351, 95 S.Ct. 449, 453, 42 L.Ed.2d 477.) Thus, the threshold question which we must determine is whether the state is significantly involved in the nonjudicial foreclosure procedure so as to bring that procedure within the reach of the due process clause.

Petitioners first contend that there is significant involvement by the state in nonjudicial foreclosures because these foreclosures are pervasively regulated by detailed statutory provisions. It is also argued that the nonjudicial foreclosure procedure when viewed as a whole, requires participation by a state official, the county recorder, and by the state courts. Petitioners rely primarily on our decision in Connolly Development Inc. v. Superior Court, supra, 17 Cal.3d 803, 132 Cal.Rptr. 477, 553 P.2d 637, in support of this contention.

In Connolly, we held that the mechanics' lien constitutes state action because that lien not only is governed by detailed statutory provisions but also only...