Connor v. Great Western Sav. & Loan Ass'n

• Decision Date: 12 December 1968
• Court: California Supreme Court
• Parties: , 447 P.2d 609, 39 A.L.R.3d 224 Raymond E. CONNOR et al., Plaintiffs, Cross-Defendants and Appellants, v. GREAT WESTERN SAVINGS AND LOAN ASSOCIATION, Defendant, Cross-Defendant and Respondent; Meyer Pritkin et al., Defendants, Cross-Complainants and Appellants. James L. BURGESS et al., Plaintiffs, Cross-Defendants and Appellants, v. GREAT WESTERN SAVINGS AND LOAN ASSOCIATION, Defendant, Cross-Defendant and Respondent; Meyer Pritkin et al., Defendants, Cross-Complainants and Appellants. * L.A. 28698, L.A. 28699

Page 369

73 Cal.Rptr. 369

69 Cal.2d 850, 447 P.2d 609, 39 A.L.R.3d 224

Raymond E. CONNOR et al., Plaintiffs, Cross-Defendants and Appellants, v. GREAT WESTERN SAVINGS AND LOAN ASSOCIATION, Defendant, Cross-Defendant and Respondent;

Meyer Pritkin et al., Defendants, Cross-Complainants and Appellants.

James L. BURGESS et al., Plaintiffs, Cross-Defendants and Appellants, v. GREAT WESTERN SAVINGS AND LOAN ASSOCIATION, Defendant, Cross-Defendant and Respondent;

Meyer Pritkin et al., Defendants, Cross-Complainants and Appellants.^*

L.A. 28698, L.A. 28699.

Supreme Court of California

Dec. 12, 1968.

Rehearing Denied Jan. 8, 1969.

Harris K. Lyle, Van Nuys, Edward L. Lascher, Ventura, Lyle & Di Giuseppe, Van Nuys, and James Di Giuseppe for plaintiffs, cross-defendants and appellants.

Overton, Lyman & Prince, Ernest E. Johnson, Phyllis M. Hix, John McClure and Lynn O. Poulson, Los Angeles, for defendants cross-complainants and appellants.

Thomas L. Fike, Oakland, Thomas Schneider, Berkeley, Cherie A. Gaines, Mark C. Perry, Oakland, Fadem & Kanner, Jerrold A Fadem, Ernest L. Graves and Gideon Kanner, Los Angeles as amici curiae on behalf of plaintiffs, cross-defendants and appellants and defendants, cross-complainants and appellants.

Swerdlow, Glikbarg & Shimer, Irving A. Shimer, Michael H. Shapiro, Beverly Hills, and William D. Moore, Los Angeles, for defendant, cross-defendant and respondent.

Thomas C. Lynch, Atty. Gen., Herbert E. Wenig, Asst. Atty. Gen., Anthony C. Joseph, Deputy Atty. Gen., Kaplan, Livingston, Goodwin, Berkowitz & Selvin, Herman F. Selvin, Charles E. Jones, Beverly Hills, Landels, Ripley, Gregory & Diamond, Edward D. Landels, Morrison, Foerster, Holloway, Clinton & Clark, Paul E. Homrighausen, and Melvin R. Goldman, San Francisco, as amici curiae on behalf of defendant, cross-defendant and respondent.

TRAYNOR, Chief Justice.

These consolidated appeals are from a judgment of nonsuit in favor of defendant Great Western Savings and Loan Association in two actions consolidated for trial.

Plaintiffs in each action purchased singlefamily homes in a residential tract development known as Weathersfield, located on tracts 1158, 1159, and 1160 in Ventura County. Thereafter their homes suffered serious damage from cracking caused by ill-designed foundations that could not withstand the expansion and contraction of adobe soil. Plaintiffs accordingly sought rescission or damages from the various parties involved in the tract development.

Holders of promissory notes secured by second deeds of trust on the homes filed cross-complaints, alleging that their security had been impaired by the damage to the homes. They sought to impose liens on any recovery plaintiffs might obtain from other defendants.

There was abundant evidence that defendant Conejo Valley Development Company, which built and sold the homes, negligently constructed them without regard to soil conditions prevalent at the site. Specifically, it laid slab foundations on adobe soil without taking proper precautions recommended to it by soil engineers. When the adobe soil expanded during rainstorms two years later, the foundations cracked and their movement generated further damage.

In addition to seeking damages from Conejo, plaintiffs sought to hold Great Western liable, either on the ground that its participation in the tract development brought it into a joint venture or a joint enterprise with Conejo, which served to make it vicariously liable, or on the ground that it breached an independent duty of care to plaintiffs.

A brief review of the negotiations leading to Great Western's role in the development of the Weathersfield tract is essential to a clear perspective of the issues. Since the appeals are from a judgment of nonsuit, such a review must give to plaintiffs' evidence all the value to which it is legally entitled, must recognize every legitimate inference that may be drawn from that evidence, and must disregard conflicting evidence. (Raber v. Tumin (1951), 36 Cal.2d 654, 656, 226 P.2d 574; Blumberg v. M. & T., Inc. (1949), 34 Cal.2d 226, 229, 209 P.2d 1.) If there is evidence that would support a recovery against Great Western on either of the grounds set forth by plaintiffs, the judgment of nonsuit must be reversed.

The Weathersfield project originated in December 1958, when Harris Goldberg, president of South Gate Development Company, undertook negotiations to purchase for South Gate 547 acres of the McRea ranch, a parcel of approximately 1,600 acres of undeveloped real property in the Conejo Valley, which was then undergoing the beginnings of large-scale development. Goldberg and Keith Brown together owned and controlled South Gate Development Company. They planned to develop the property with the goal of creating a community of approximately 2,000 homes.

Neither Goldberg nor Brown had any significant experience in large-scale construction of tract housing. Goldberg had left the men's apparel business in 1955 to begin a career in real estate. He subsequently established a number of companies that engaged principally in subdividing raw acreage. In 1958 he undertook the construction of a 31-home development called Waverly Manor; when 15 or 20 homes had been partially completed under the supervision of a South Gate employee, he engaged Brown to supervise completion of the job. This task was Brown's first experience with tract construction, although he had been licensed as a general contractor in 1950 and had built approximately 50 single-family dwellings on an individual custom basis before 1958.

In January 1959 South Gate signed an agreement to purchase 100 acres of the McRea ranch for $340,000 within 120 days, and a conditional sales agreement to purchase 447 adjoining acres for $2,500 per acre over a 10-year period. Neither South Gate nor Goldberg had the financial resources to perform these agreements, and in March Goldberg approached Great Western for the necessary funds to purchase the 100-acre parcel on which Weathersfield was to be constructed.

Great Western processed between 8,000 and 9,000 loans each year, amounting to more than $100,000,000, but had not previously made loans in Ventura County. It expressed an interest to Goldberg in developing a volume of new construction loan business and in providing long-term financing in the form of first trust deeds to the buyers of the homes to be built. By the end of April, the general outlines of an agreement with Goldberg had been developed, and they were recorded in the minutes of Great Western's Loan Committee.

During the ensuing four months the parties and their lawyers worked out the details of a transaction whereby Great Western would supply the funds necessary to enable Goldberg to purchase the 100-acre parcel and construct homes thereon. In return, Great Western was given the right to make construction loans on the homes to be built and the right of first refusal to make long-term loans to the buyers of the homes. Before agreeing to provide money for the purchase of the land, Great Western also demanded and received a 'gentleman's agreement' that it would have the right of first refusal to make construction loans on the homes to be built on the adjoining 477-acre parcel. ¹

Great Western employed a geologist to determine whether an adequate quantity and quality of water would be available in the area. As a result of the geologist's report and its own investigations, Great Western further demanded and received a guarantee from South Gate, Goldberg, and Mr. and Mrs. Brown that if Great Western held title to the 100-acre parcel in September 1960, adequate water service lines from a new or existing public utility would be available at the property line for consumer use.

In July, Great Western provided the necessary funds for the purchase of the Weathersfield tract. Goldberg had deposited $190,000 of the $340,000 purchase price with the escrow agent on behalf of South Gate. He apparently obtained the money by draining assets from his corporations, leaving a combined net worth in those enterprises of $36,000 as of July 31.

Goldberg, by amended escrow instructions, substituted Conejo Development Company in place of South Gate as purchaser of the land from the McReas, and all funds deposited theretofore by South Gate were credited to Conejo. Conejo had been incorporated several months earlier, though with only $5,000 capital to handle the tract development.

Great Western deposited the remaining $150,000 of the purchase price in a second escrow opened between Conejo as seller and Great Western as buyer, took title to the land from Conejo, and granted South Gate a one-year option to repurchase the land in three parcels for a total of $180,000. South Gate, Goldberg, and Mr. and Mrs. Brown agreed to repurchase the property from Great Western on demand for $200,000 if the option were not exercised and adequate water facilities were not available by September 1960.

The arrangement for the purchase of the land by Great Western was an early example of what has come to be known as 'land warehousing.' Under such an arrangement, a financial institution holds land for a developer until he is ready to use it. Unlike a normal bailee of personal property, however, the institution retains title to the property as well as the right to possession.

At the outset Great Western confronted the problem that it could not lend Goldberg $150,000 outright and still retain the land as security, for section 7155 of the Financial Code prohibited it from lending more than 33 1/3 percent of the appraised value of unimproved property. ² It therefore sought to circumvent the specific statutory prohibition by disguising what was in substance admittedly a loan as the kind of investment in real property that was sanctioned by section 6705 of the Financial Code. ³

Great Western agreed to make the necessary construction loans to Conejo only after assuring itself that the homes could be...