Commonwealth Mortgage Assurance Co. v. Superior Court

• Decision Date: 13 June 1989
• Docket Number: No. B038960,B038960
• Citation: 211 Cal.App.3d 508,259 Cal.Rptr. 425
• Court: California Court of Appeals Court of Appeals
• Parties: COMMONWEALTH MORTGAGE ASSURANCE COMPANY, etc., Petitioner, v. The SUPERIOR COURT of Los Angeles County, Respondent. Ronald SAMPSON, et al., Real Parties in Interest.

Page 425

259 Cal.Rptr. 425

211 Cal.App.3d 508

COMMONWEALTH MORTGAGE ASSURANCE COMPANY, etc., Petitioner, v. The SUPERIOR COURT of Los Angeles County, Respondent Ronald SAMPSON, et al., Real Parties in Interest.

No. B038960.

Court of Appeal, Second District, Division 7, California.

June 13, 1989.

Review Denied Aug. 31, 1989.

MacCarley, Phelps & Rosen and Mark MacCarley, for petitioner.

No appearance, for respondent.

Feinberg, Gottlieb & Grossman and Marshall W. Waller, for real parties in interest.

LILLIE, Presiding Justice.

By way of petition for writ of mandate, petitioner Commonwealth Mortgage Assurance Company (CMAC) challenges rulings of the superior court granting the motion of real parties Ronald and Elizabeth Sampson (Sampsons) for summary adjudication of issues, and barring CMAC's cause of action against Sampsons for breach of contract, and from recovering punitive damages on its first cause of action for fraud.

The primary issue herein, and one which appears to be of first impression, is whether the indemnity agreements which form the basis of CMAC's third cause of action for breach of contract are unenforceable because they attempt to wrongfully circumvent antideficiency legislation. (Code Civ.Proc., § 580d.)

FACTUAL AND PROCEDURAL BACKGROUND

According to Sampsons' separate statement of undisputed material facts, and CMAC's response thereto, the following facts are without dispute: On or about December 21, 1982, Sampsons purchased three condominium units. Sampsons obtained purchase money loans totaling about $612,000 from Commonwealth Bank, not a party herein. For security on the three loans to Sampsons, Commonwealth Bank demanded policies of mortgage guaranty insurance, which were issued by CMAC and which insured Sampsons' performance on the promissory notes evidencing the purchase money loans on the properties. ¹ On or about December 7, 1982, and concurrent with the providing of the mortgage guaranty insurance, CMAC obtained the signatures of Sampsons on Agreements of Indemnity, pursuant to which Sampsons agreed to protect CMAC from all loss which CMAC may be required to incur arising from its obligations under the mortgage guaranty insurance policies. Several months later Sampsons defaulted on the loans, and Commonwealth Bank, through its assignee, Western Empire Savings & Loan Association, declared a default and sold the properties at a nonjudicial trustee's sale; Western Empire purchased the properties for the total amount of the unpaid mortgage debt plus costs. ² Western Empire then submitted a claim to CMAC under the policies of mortgage guaranty insurance and CMAC paid approximately $175,000 to Western Empire pursuant to the policies. ³ CMAC then demanded that Sampsons perform under the indemnity agreements. Sampsons refused. CMAC subsequently filed first amended complaint against Sampsons for fraud, negligent misrepresentation, and breach of contract. The gravamen of the first two causes of action was allegedly false statements made by Sampsons in their loan applications pertaining to their gross monthly income, that no portion of the down payment for the properties was borrowed and that they had never had property sold through foreclosure. CMAC alleged that the false representations were made by Sampsons to induce CMAC to provide mortgage guaranty insurance for the loans taken out by Sampsons.

Sampsons moved for summary judgment or alternatively for summary adjudication that the following two issues were without dispute: (1) the indemnity agreements which form the basis for the third cause of action for breach of contract are void and unenforceable by operation of the antideficiency legislation of Code of Civil Procedure section 580d, and (2) CMAC is not entitled to recover punitive damages pursuant to its fraud cause of action because Civil Code section 2848 limits recovery of a surety to that necessary to reimburse what has been expended. After hearing, the court denied summary judgment, but granted summary adjudication of the foregoing two issues. CMAC filed timely petition for writ of mandate (Code Civ. Proc., § 437c, subd. (l )) seeking to reverse the trial court's rulings on the motion for summary adjudication of issues. On March 22, 1989, we issued order to show cause to the Superior Court to show cause why it should not be compelled to vacate that part of its order adjudicating that the indemnity agreements are void and unenforceable. Oral argument has been had thereon.

I CAUSE OF ACTION FOR BREACH OF INDEMNITY CONTRACTS

In reviewing an order declaring an issue to be without substantial controversy pursuant to Code of Civil Procedure section 437c, we are bound by the rules generally applicable to review of summary judgments. (Tauber-Arons Auctioneers Co. v. Superior Court (1980) 101 Cal.App.3d 268, 273, 161 Cal.Rptr. 789.) Summary judgment is properly granted only if no triable issue exists or where the record establishes as a matter of law a cause of action asserted against a party cannot prevail. (Rare Coin Galleries, Inc. v. A-Mark Coin Co., Inc. (1988) 202 Cal.App.3d 330, 334, 248 Cal.Rptr. 341.)

Sampsons claimed below and contend here that the cause of action for breach of contract must fail because the indemnity agreements are nothing more than an "antideficiency circumvention scam," and are tantamount to an attempt to collect a deficiency judgment which is barred by Code of Civil Procedure section 580d. CMAC, on the other hand, argues that it seeks recovery of its contractual losses, not a "deficiency," and its suit involves an obligation separate and distinct from that of the underlying notes secured by the deeds of trust, and is thus not barred by antideficiency legislation.

"In California, as in most states, a creditor's right to enforce a debt secured by a mortgage or deed of trust on real property is restricted by statute. Under California law 'the creditor must rely upon his security before enforcing the debt. (Code Civ. Proc., §§ 580a, 725a, 726.) If the security is insufficient, his right to a judgment against the debtor for the deficiency may be limited or barred by sections 580a, 580b, 580d, or 726 of the Code of Civil Procedure.' [Citation.]" (Guild Mortgage Co. v. Heller (1987) 193 Cal.App.3d 1505, 1510, 239 Cal.Rptr. 59, fns. omitted.)

Section 580d provides in part: "No judgment shall be rendered for any deficiency upon a note secured by a deed of trust or mortgage upon real property hereafter executed in any case in which the real property has been sold by the mortgagee or trustee under power of sale contained in such mortgage or deed of trust." The purpose of this section is to discourage the overvaluing of the security; the risk of inadequate security because of overvaluation is placed on the lender. (Union Bank v. Wendland (1976) 54 Cal.App.3d 393, 406-407, 126 Cal.Rptr. 549.) The antideficiency statutes further serve to prevent creditors in private sales from buying in at deflated prices and realizing double recoveries by holding debtors for large deficiencies. (Guild Mortgage Co. v. Heller, supra, 193 Cal.App.3d 1505, 1511, 239 Cal.Rptr. 59.) "The Supreme Court also has observed that 'section 580d was enacted to put judicial enforcement on a parity with private enforcement. This result could be accomplished by giving the debtor a right to redeem after a sale under the power. The right to redeem, like proscription of a deficiency judgment, has the effect of making the security satisfy a realistic share of the debt. [Citation.] By choosing instead to bar a deficiency judgment after private sale, the Legislature achieved its purpose without denying the creditor his election of remedies. If the creditor wishes a deficiency judgment, his sale is subject to statutory redemption rights. If he wishes a sale resulting in nonredeemable title, he must forego the right to a deficiency judgment. In either case the debtor is protected.' [Citation.]" (Id.)

Although section 580d applies by its specific terms only to actions for "any deficiency upon a note secured by a deed of trust" and not to actions based upon other obligations, the proscriptions of section 580d cannot be avoided through artifice (Passanisi v. Merit-McBride Realtors, Inc. (1987) 190 Cal.App.3d 1496, 1508, 236 Cal.Rptr. 59), and the debtor cannot be compelled to waive its provisions in advance (Freedland v. Greco (1955) 45 Cal.2d 462, 467-468, 289 P.2d 463), because the antideficiency legislation was established for a public reason and cannot be contravened by a private agreement. (See Valinda Builders, Inc. v. Bissner (1964) 230 Cal.App.2d 106, 112, 40 Cal.Rptr. 735.) In determining whether a particular recovery is precluded, we must consider whether the policy behind section 580d would be violated by such a recovery. (Passanisi v. Merit-McBride Realtors, Inc., supra, 190 Cal.App.3d at p. 1508, 236 Cal.Rptr. 59.)

It is unnecessary to decide the issue of whether deficiencies in fact remained after the foreclosure sales herein (ante, fn. 3). Rather, in addressing the issue of whether the indemnity contracts herein are unenforceable we look to their purpose and effect in order to determine whether they are attempts to recover deficiencies in violation of section 580d.

Although the parties have not brought to our attention a California case dealing with a mortgage guaranty insurer who, having paid the claim of the lender after a nonjudicial foreclosure, seeks to obtain reimbursement for such payment from the debtor, we find the facts herein substantially similar in effect to those in Union Bank v. Gradsky (1968) 265 Cal.App.2d 40, 71 Cal.Rptr. 64, and conclude that the indemnity agreements herein are nothing more than attempts to recover a deficiency in violation of the antideficiency statute.

In Gradsky, Bess Gradsky executed a note in favor of Union Bank and a first deed of trust securing the note. Max Gradsky executed a written guarantee of Bess's obligations. The issue was...