Caito v. United California Bank

• Decision Date: 03 March 1978
• Citation: 20 Cal.3d 694,576 P.2d 466,144 Cal.Rptr. 751
• Court: California Supreme Court
• Parties: , 576 P.2d 466 Philip J. CAITO et al., Plaintiffs and Respondents, v. UNITED CALIFORNIA BANK, Defendant and Appellant. L.A. 30811.

Page 751

144 Cal.Rptr. 751

20 Cal.3d 694, 576 P.2d 466

Philip J. CAITO et al., Plaintiffs and Respondents, v. UNITED CALIFORNIA BANK, Defendant and Appellant.

L.A. 30811.

Supreme Court of California, In Bank.

March 3, 1978.

Lillick, McHose & Charles, John F. Kimberling, Nancy R. Schauer, Los Angeles, John M. Mann, Stockton, and Marc S. Homme, Rancho Mirage, for defendant and appellant.

Horton, Knox, Carter & Foote, R. L. Knox, Jr., and Frank A. Oswalt, III, El Centro, for plaintiffs and respondents.

CLARK, Justice.

United California Bank appeals from judgment declaring the interests of Philip and Theodora Caito in proceeds of a nonjudicial foreclosure of real property to be senior to those of the bank.

From 1952 to 1973, Mr. and Mrs. Caito and A. P. and Marie Caponi were cotenants in a 130-acre farm near Calexico. The Caitos resided in Indiana and the Caponis managed the property until Mr. Caponi was disabled in 1967.

In 1959, to enable the Caponis to borrow $30,000, both Caitos and Caponis executed a $30,000 note in favor of Bank of America, secured by a deed of trust on the farm. The Caitos, who received no part of the loan proceeds, purported to sign the note and deed of trust only as an accommodation to the Caponis, not intending to encumber their interest in the farm. However, the Caitos appear as principals on both the note and recorded deed of trust.

In 1965 to enable the Caponis to again borrow money the Caitos and Caponis executed a $40,000 note secured by new deed of trust in favor of Bank of America. The Caponis used a portion of the loan proceeds to pay the balance then owing on the $30,000 note, retaining the remainder of the proceeds. Again, the Caitos signed intending only to accommodate the Caponis, but the documents again fail to limit them to an accommodation status. In 1967 the Caitos loaned $6,000 to the Caponis, enabling them to keep the Bank of America loan in a current status. ¹

During the period of their indebtedness to Bank of America, the Caponis also were indebted to United California Bank (UCB), approximating $140,000 in February 1967. The UCB loan was then secured by deeds of trust on Caponi property other than the Calexico farm. In December 1967 UCB made demand on the Caponis for payment. The Caponis, unable to satisfy the demand, agreed to further secure the notes by a second deed of trust on their interest in the Calexico farm in exchange for UCB's promise to forebear taking immediate legal action. Signed only by the Caponis, this deed of trust was both executed and recorded without the knowledge or consent of the Caitos.

After Mr. Caponi became disabled, the Caitos assumed management of the Calexico farm in July 1968. Collecting $17,500 in rentals, the Caitos paid that sum to Bank of America to be applied on the $40,000 note pursuant to an assignment of rents, issues and profits.

In 1971 Bank of America refused to waive its right to accelerated payment of the Caponis' then delinquent note. In the same year the Caitos commenced the instant action seeking partition, accounting, and declaration of rights and priorities of all parties claiming an interest in the Calexico farm. Named as defendants were the Caponis, Bank of America as beneficiary and a corporate trustee of the first deed of trust, and UCB as beneficiary and trustee of the second deed of trust. While the action was pending, Bank of America caused the farm to be sold for $130,000 pursuant to nonjudicial foreclosure of the first deed of trust. Retaining $44,552.34 pursuant to its note and deed of trust, Bank of America deposited the remaining $85,447.66 in court and it and its trustee were dismissed as defendants. No challenge is made to either the propriety of the foreclosure or the amount of the funds deposited by the bank.

The trial court found the Caitos acted only as accommodation makers on the Bank of America note, concluding that because the $44,552.34 indebtedness to the bank was satisfied out of the Caponis' $65,000 (one-half interest in the $130,000 sale proceeds), the Caitos' one-half interest was not to be charged with any part of the amount due Bank of America. The Caitos were thus declared entitled to $65,000 from the $85,447.66 surplus following foreclosure sale. The trial court further concluded the Caitos were entitled to prior reimbursement of $6,000, the sum advanced to the Caponis in 1967, and $17,500 representing rental collections paid over to Bank of America in 1968. ² Because the priority claims of the Caitos were found to exceed the balance of the surplus fund, UCB was awarded no part of it.

While the judgment properly resolves issues between the Caitos and Caponis, UCB claims the court failed to take into consideration the bank's security position as a bona fide encumbrancer for value. UCB contends it acquired a security interest in the property without notice of the Caitos' accommodation status or of reimbursement claims asserted by the Caitos against the Caponis. Insofar as UCB is concerned, both the Caitos' and Caponis' interests in the Calexico farm must be equally subject to satisfying the security for the Bank of America note. The indebtedness should therefore be deducted from the net sale proceeds and the surplus ($85,447.66) allocated equally between the cotenants, subject to whatever further claims may be individually asserted against a cotenant. The Caponis' share of the surplus ($42,723.83) would thus be subject to UCB's claim pursuant to the note secured by the second deed of trust.

UCB further argues that because it had no notice of moneys advanced by the Caitos to or on behalf of the Caponis, its secured position in the Caponis' share of the surplus cannot be subordinated to the Caitos' claims.

SCOPE OF LIEN OF BANK OF AMERICA NOTE AND DEED OF TRUST

An accommodation party is one who signs an instrument in any capacity for the purpose of lending his name for the benefit of another. (Cal.U.Com.Code, § 3415, subd. (1); see generally, 2 Anderson, Uniform Commercial Code (2d ed. 1971) § 3-415.) An accommodation party is a surety and the accommodated party a principal; if the accommodation party is forced to pay the instrument, he has a right of recourse against the accommodated party. (Cal.U.Com.Code, § 3415, subd. (5).)

If, as in the instant case, one who is in fact an accommodation party nevertheless signs as maker of the note and security instruments, he is bound on the instruments to the same extent as his comaker. "One who appears to be a principal, whether by the terms of a written instrument or otherwise, may show that he is in fact a surety, except as against persons who have acted on the faith of his apparent character of principal." (Civ.Code, § 2832; italics added; see also Beverly Hills National Bank v. Glynn (1968) 267 Cal.App.2d 859, 868-869, 73 Cal.Rptr. 808.)

It is undisputed Bank of America was a bona fide encumbrancer for value in its acquisition of the beneficial right evidenced by the first deed of trust. The Caitos, as well as the Caponis were liable as principal obligors and the entire value of the farm was thus subject to the satisfaction of the note. If, for instance, the foreclosure sale had yielded only enough to satisfy the bank's obligation, then the full interests of both the Caponis and Caitos would have been forfeited. Because the Bank of America note was thus satisfied equally out of the Caponis' and the Caitos' individual interests, the surplus remaining ($85,447.66) represented the combined interests equally allocable to the Caponis and Caitos, or to lien claims against their respective shares.

PRIORITY OF LIENS AGAINST SURPLUS FUND ALLOCABLE TO CAPONIS

Following a foreclosure sale and satisfaction of the obligation of the creditor who forecloses, subordinate liens against the foreclosed property attach to the surplus proceeds in order of their priority. (Nomellini Constr. Co. v. Modesto S. & L Ass'n (1969) 275 Cal.App.2d 114, 118, 79 Cal.Rptr. 717.) When a cotenant has separately encumbered his interest in the property and, as here, such encumbrance is one of the subordinate liens, it attaches only to such cotenant's interest. (See Schoenfeld v. Norberg (1970) 11 Cal.App.3d 755, 765, 90 Cal.Rptr. 47; Haster v. Blair (1940) 41 Cal.App.2d 896, 898, 107 P.2d 933.) Thus, the UCB lien, represented by its second deed of trust, attached to only the Caponis' one-half interest in the surplus fund. The more difficult question is whether the Caitos inter se claims against the Caponis can be asserted against the Caponis' share of the surplus fund as an equitable lien with priority over UCB's lien. The trial court so held.

A recorded instrument, as in this case the Bank of America deed of trust, is constructive notice only of its own contents and of other documents referred to by it. (Civ.Code, § 1312; Davis v. Ward (1895) 109 Cal. 186, 189, 41 P. 1010; Duncan v. Ledig (1949) 90 Cal.App.2d 7, 12, 202 P.2d 107; Hamilton v. Consolidated Water Co. (1921) 56 Cal.App. 7, 11, 204 P. 416.) Joint ownership is not in itself a circumstance sufficient to impose a duty on an encumbrancer to inquire whether there are unrecorded agreements between joint owners. (Kirby Lumber Co. v. Temple Lumber Co. (1935) 125 Tex. 284, 83 S.W.2d 638, 643.) Policy runs against upholding secret liens and charges to the injury of subsequent innocent encumbrancers. (Schut v. Doyle (1959) 168 Cal.App.2d 698, 702, 336 P.2d 567.) Inquiry does not become a duty when apparent possession is consistent with title appearing of record. (Smith v. Yule (1866) 31 Cal. 180, 184; Three Sixty Five Club v. Shostak (1951) 104 Cal.App.2d 735, 738, 232 P.2d 546; Pacific Fruit Exchange v. Schropfer (1929) 99 Cal.App. 692, 694, 279 P. 170.)

At the time it bargained for the security of the second deed of trust, UCB had neither actual nor constructive notice that the Caitos had signed the Bank of America note and first deed of trust as an accommodation only. While it is manifest...