Birman v. Loeb

Decision Date03 June 1998
Docket NumberNo. B111945,B111945
Citation64 Cal.App.4th 502,75 Cal.Rptr.2d 294
CourtCalifornia Court of Appeals Court of Appeals
Parties, 98 Cal. Daily Op. Serv. 4265, 98 Daily Journal D.A.R. 5843 Ben Zion BIRMAN et al., Plaintiffs and Appellants, v. Stanley I. LOEB et al., Defendants and Respondents.

Matthew H. Tambor, Beverly Hills, for Plaintiffs and Appellants.

Emil W. Herich, Los Angeles, and Cheryl D. Chadwick, for Defendants and Respondents.

TURNER, Presiding Justice.

I. INTRODUCTION

This case presents the question whether a creditor can set off a debt owed to the debtor against a deficiency remaining after nonjudicial foreclosure under a purchase money trust deed. Plaintiffs, Ben Zion Birman, Israel Birman, and Switch Construction Co., Inc., appeal from an order granting an equitable set-off to defendants, Stanley I. Loeb and Jerri Loeb. The Loebs had been sued individually and as trustees of the Stanley I. Loeb and Jerri Loeb Revocable Trust. Plaintiffs had purchased real property from defendants who took back a promissory note secured by a trust deed. Plaintiffs brought an action against defendants for fraud or negligent misrepresentation and failure to disclose in connection with the purchase and sale of the property. Plaintiffs prevailed, and a judgment including an attorney's fees and costs award was entered in their favor. Defendants subsequently reacquired the real property from plaintiffs at a nonjudicial foreclosure sale by way of a $2 million credit bid. The unsecured debt remaining after foreclosure was for more than $2 million. The trial court granted defendants an equitable set-off against the unsecured deficiency in the amount of the attorney's fees and costs award in plaintiffs' favor. We conclude that granting the equitable set-off contravened the economic policy considerations underlying antideficiency legislation, specifically Code of Civil Procedure section 580b. That statute precludes a deficiency judgment following foreclosure, judicial or nonjudicial, under a purchase money trust deed given to the seller. Accordingly, we reverse the order. Further, on appeal plaintiffs and their attorney have engaged in unreasonable violations of court rules and we therefore impose monetary sanctions against them and their counsel.

II. BACKGROUND

Plaintiffs purchased a warehouse from defendants in 1990. In connection with the sale, plaintiffs executed a promissory note secured by a deed of trust in favor of defendants. The promissory note was for $4.450 million.

Plaintiffs sued defendants in 1992, alleging fraudulent or negligent misrepresentation and failure to disclose in connection with the purchase and sale of the real property. The court, in a nonjury trial, found in plaintiffs' favor. Judgment was entered in 1995. The court: reduced the principal amount of the promissory note by $1 million (from $4 million to $3 million); ordered the accrued interest in the amount of $665,000 added to the principal, bringing the balance to $3.665 million; and awarded plaintiffs their attorney's fees and costs in the sum of $306,820.57. This court affirmed that judgment on appeal. (Birman v. Loeb, B093378, Aug. 19, 1997 [nonpub. opn.].)

Plaintiffs never made a single payment under the reformed note and failed to pay outstanding real property taxes. Defendants commenced nonjudicial foreclosure proceedings. Those efforts were delayed when plaintiffs transferred the property to another entity which then sought the protection of bankruptcy courts. Defendants obtained relief from the bankruptcy stay and recommenced the foreclosure process. In February 1996, defendants foreclosed under the power of sale in the trust deed. They reacquired the property by way of a $2 million credit bid. According to defendants, the $2 million credit bid reflected at least, if not more than, the fair market value of the property at the time of the foreclosure. Seven months earlier, plaintiffs had represented the fair market value of the property to be $1.5 million. Following foreclosure, the unsecured balance remaining on the promissory note was $2,162,242.96.

Defendants filed a motion for "an equitable set-off and satisfaction in full of the judgment entered by this Court on March 3, 1995, in favor of Plaintiffs and against the Loebs for attorney's fees and costs in the amount of $306,820.57." They argued the attorney's fees and costs award in favor of plaintiffs should be set off against the unsecured balance remaining due to defendants on the promissory note. Plaintiffs opposed the motion on the grounds defendants were improperly seeking a deficiency judgment subsequent to a nonjudicial foreclosure under a purchase money trust deed. The trial court granted defendants' motion. This appeal followed.

III. DISCUSSION
A. Contentions on Appeal and Standard of Review

Plaintiffs contend: the equitable set-off was an "action" within the meaning of the one-action rule, Code of Civil Procedure, section 726; 1 defendants elected their "one action" to be nonjudicial foreclosure and a second action for equitable set-off was barred under section 726; and the antideficiency statutes, sections 580b and 580d, barred defendants from obtaining a deficiency judgment in the form of an equitable set-off. Defendants assert: plaintiffs' debt was not extinguished by the nonjudicial foreclosure sale; section 726 did not bar the equitable setoff because the nonjudicial foreclosure was not an "action" within the meaning of that section; neither the nonjudicial sale nor the subsequent equitable setoff violated the "one action" rule; and neither the language of sections 580b and 580d, barring deficiency judgments, nor the policies they were intended to serve, have any application here. The application of sections 726 and 580b to undisputed facts presents a question of law for our independent review. (Ghirardo v. Antonioli (1994) 8 Cal.4th 791, 799, 35 Cal.Rptr.2d 418, 883 P.2d 960; Hodges v. Mark (1996) 49 Cal.App.4th 651, 655, 56 Cal.Rptr.2d 700.)

B. There was no Violation of the One Action Rule of Section 726

Plaintiffs contend defendants violated the one action rule of section 726 by nonjudicially foreclosing on the trust deed and then seeking an equitable set-off. Plaintiffs argue defendants chose nonjudicial foreclosure as their one action. Plaintiffs further argue defendants violated section 726 by their "second action," for equitable set-off. We conclude defendants brought only one "action" against plaintiffs within the meaning of section 726. Hence, defendants did not violate the one action rule. 2

Section 726, subdivision (a) provides in pertinent part: "There can be but one form of action for the recovery of any debt or the enforcement of any right secured by mortgage upon real property or an estate for years therein, which action shall be in accordance with the provisions of this chapter." Although the statute refers only to mortgages, it applies equally to trust deeds. (Security Pacific National Bank v. Wozab, supra, 51 Cal.3d at p. 997, fn. 4, 275 Cal.Rptr. 201, 800 P.2d 557; Walker v. Community Bank, supra, 10 Cal.3d at pp. 732-733, fn. 1, 111 Cal.Rptr. 897, 518 P.2d 329; Bank of Italy Etc. Assn. v. Bentley (1933) 217 Cal. 644, 653, 20 P.2d 940.) Section 726 was enacted in response to concerns that mortgagors would be harassed by repeated litigation. (Security Pacific National Bank v. Wozab, supra, 51 Cal.3d at p. 1002, 275 Cal.Rptr. 201, 800 P.2d 557; Salter v. Ulrich (1943) 22 Cal.2d 263, 266, 138 P.2d 7; Felton v. West (1894) 102 Cal. 266, 269, 36 P. 676; Ould v. Stoddard (1880) 54 Cal. 613, 615; Passanisi v. Merit-McBride Realtors, Inc. (1987) 190 Cal.App.3d 1496, 1506, 236 Cal.Rptr. 59.) As the Supreme Court explained in Felton v. West, supra, 102 Cal. at page 269, 36 P. 676: "Formerly the law allowed an action upon a promissory note, and also a suit in equity to foreclose the mortgage.... The mischief in such a practice lay in the multiplicity of suits, and the harassing of the debtor by two actions...." Section 726 was intended "to protect the debtor from having to defend against a multiplicity of actions." (Security Pacific National Bank v. Wozab, supra, 51 Cal.3d at p. 1002, 275 Cal.Rptr. 201, 800 P.2d 557; Shin v. Superior Court (1994) 26 Cal.App.4th 542, 547, 31 Cal.Rptr.2d 587.) The meaning of "action" as used in section 726 is defined by section 22. (Security Pacific National Bank v. Wozab, supra, 51 Cal.3d at p. 998, 275 Cal.Rptr. 201, 800 P.2d 557; Shin v. Superior Court, supra, 26 Cal.App.4th at pp. 545-546, 31 Cal.Rptr.2d 587.) Section 22 provides: "An action is an ordinary proceeding in a court of justice by which one party prosecutes another for the declaration, enforcement, or protection of a right, the redress or prevention of a wrong, or the punishment of a public offense."

A nonjudicial foreclosure is not an "action" within the meaning of sections 22 and 726; hence, a nonjudicial foreclosure does not violate section 726. (Walker v. Community Bank, supra, 10 Cal.3d at p. 736, 111 Cal.Rptr. 897, 518 P.2d 329; Hatch v. Security-First Nat. Bank (1942) 19 Cal.2d 254, 258, 120 P.2d 869 [absent a judicial foreclosure, section 726 has no direct application]; Passanisi v. Merit-McBride Realtors, Inc., supra, 190 Cal.App.3d at pp. 1506-1507, 236 Cal.Rptr. 59; Mortgage Guarantee Co. v. Sampsell (1942) 51 Cal.App.2d 180, 186, 124 P.2d 353; cf. Security Pacific National Bank v. Wozab, supra, 51 Cal.3d at p. 998, 275 Cal.Rptr. 201, 800 P.2d 557 [extrajudicial set-off not an action]; see 3 Witkin, Summary of Cal. Law (9th ed. 1987) Security Transactions in Real Property, § 115, p. 617, & 1997 pocket pt. § 115, p. 345; 4 Miller & Starr (2d ed. 1989) Deeds of Trust and Mortgages, § 9:105, p. 348, § 9:113, p. 374; 5 Matthew Bender, Cal. Real Estate Law & Practice (1997) Remedies in Secured Transactions, § 122.23, p. 122-22; 27 Cal.Jur.3d, Deeds of Trust, §...

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