Consolidated Capital Income Trust v. Khaloghli

Decision Date07 July 1986
Citation183 Cal.App.3d 107,227 Cal.Rptr. 879
CourtCalifornia Court of Appeals Court of Appeals
PartiesCONSOLIDATED CAPITAL INCOME TRUST, Plaintiff and Appellant, v. Khosro KHALOGHLI, Defendant and Respondent. G002012.

CROSBY, Associate Justice.

On cross motions for summary judgment, the superior court ruled for Khosro Khaloghli, an individual guarantor of a multi-million dollar note and deed of trust on an apartment complex located in Texas, and against Consolidated Capital Income Trust, the lender, who brought this action on the note after it acquired the subject property in a nonjudicial foreclosure. Khaloghli successfully argued that Consolidated is not entitled to what amounts to a deficiency judgment because it destroyed his subrogation rights against the debtor by electing a nonjudicial foreclosure and, under the law of California, which is expressly made applicable to the note, Consolidated is estopped to pursue any deficiency by its election. Consolidated, however, produced evidence that Khaloghli had released any rights he might have had against the debtor before the foreclosure. There is a triable issue of fact on that question, and we must reverse accordingly.


Consolidated, a California business trust, loaned in excess of two million dollars to 707 Corporation in August 1980. 707, a Nevada corporation, was solely owned by Khaloghli at the time; and the corporation's only asset was Bordeaux Estates, a large apartment complex in Houston, Texas. 707 secured the loan with two deeds of trust, one on property in California and another on Bordeaux Estates. The security on the latter was junior to other trust deeds totaling some nine and one-half million dollars. As part of the arrangement, Khaloghli, claiming a net worth of about thirty-five million dollars, was required to personally guarantee the note. Both the guaranty and the note were explicitly to be construed under the laws of California, the trust deed under the laws of Texas.

The guaranty "waives any defense, right, privilege, or entitlement ... to require any action to be commenced or remedy to be exhausted as against the maker of said Promissory Note, or subsequent endorsers of said Promissory Note, and ... to require foreclosure of said Deeds of Trust or enforcement of any other instruments securing the Promissory Note." The guaranty also provides, "Notwithstanding anything contained in this agreement to the contrary, no acts or omission either by this undersigned or by the holder shall excuse the obligations of the undersigned other than payment in full of the loan obligations guaranteed hereby."

Khaloghli sold all the stock of 707 Corporation in 1981 to Tajico of Texas, Inc. In the spring of 1983, Tajico was in default on Consolidated's note; and the latter filed notices of election to sell in Texas with copies to 707 and Khaloghli. Tajico sought the protection of the bankruptcy court, and Consolidated moved to lift the automatic stay and brought this action against Khaloghli on the guaranty.

Meanwhile, in the fall of 1983, Khaloghli and Tajico agreed to sell Bordeaux Estates and arranged to divide potential proceeds. The agreement also provided that Tajico released Khaloghli from any claims arising from its acquisition of the stock in 707 Corporation and Khaloghli waived payment of the balance due him under the purchase agreement. In addition, Khaloghli released any claims he might have with respect to the note and deed of trust. The release included claims known and unknown per California Civil Code section 1542. The parties here do not agree as to who was released by Khaloghli concerning any claims under the note and deed of trust, however. Was it only Tajico? Or, as the language of the release appears to provide, was 707 meant to be included also? A critical--and triable--factual issue arises from this ambiguity in the release and, as we shall explain, will require reversal of the grant of summary judgment.

Eventually the bankruptcy stay was lifted, and in December 1983 a nonjudicial foreclosure sale of Bordeaux Estates took place. Khaloghli's attorney attended the sale but did not bid. Consolidated was the high bidder and purchased the property for the amount of the senior liens plus $1,700,000.


Consolidated first raises a question of semantics. It claims, "This is not a lawsuit for a deficiency judgment. The borrower, 707, is not a party to this case, but is under the protection of the [b]ankruptcy [c]ourt in Texas. Respondent, Khaloghli, is not, and has not claimed to be, a borrower entitled to the protection of California's anti-deficiency statutes. This is, purely and simply, an action brought on a contract of guaranty." True, but Consolidated's claim cannot exceed the amount of the note plus interest and other proper charges discounted by $1,700,000, payments against the note which may have been made before the default along with any other appropriate credits, and the value of its California security; and under certain circumstances a guarantor of a California note can obtain the protection of our anti-deficiency statutes. (Union Bank v. Gradsky (1968) 265 Cal.App.2d 40, 71 Cal.Rptr. 64.) Thus, although Consolidated is technically correct, the case is, in essence, one brought to obtain a deficiency judgment.

It is useful at the outset to ponder the factual setting from the point of view of the debtor, 707 Corporation. Would it be entitled to assert the protection of the anti-deficiency statute, Code of Civil Procedure section 580d, if Consolidated could proceed against it? The answer, as the trial court must have found, is clearly yes. If a creditor elects to foreclose by means of a private sale which, unlike a judicial foreclosure, does not provide the equity of redemption, the creditor thereby waives any deficiency on the sale in this state.

Consolidated nonetheless reminds us that the deed of trust contains a Texas choice of law clause and Texas has no anti-deficiency law. Thus, Texas creditors may pursue a deficiency even after a private sale. The argument is unpersuasive. Both the note and the guaranty contain a California choice of law clause, and a suit on the deficiency is a suit on the note without regard to the deed or the location of the property. (Kerivan v. Title Ins. & Trust Co. (1983) 147 Cal.App.3d 225, 230, 195 Cal.Rptr. 53.) Kerivan specifically held that a deficiency action brought on a Colorado note secured by California property was subject to its Colorado choice of law provision and Code of Civil Procedure section 580d was not applicable. (See also Younker v. Reseda Manor (1967) 255 Cal.App.2d 431, 63 Cal.Rptr. 197 and Hersch and Co. v. C and W Manhattan Associates (9th Cir.1982) 700 F.2d 476.)

Kerivan explained its analysis by quoting from the Restatement Second of Conflict of Laws section 229, comment e: " 'Issues which do not affect any interest in the land, although they do relate to the foreclosure, are determined ... by the law which governs the debt for which the mortgage was given. Examples of such latter issues are the mortgagee's rights to hold the mortgagor liable for any deficiency remaining after foreclosure or to bring suit upon the underlying debt without having first proceeded against the mortgaged land.' " (Kerivan v. Title Ins. & Trust Co., supra, 147 Cal.App.3d at p. 231, 195 Cal.Rptr. 53; see also Kish v. Bay Counties Title Guaranty Co. (1967) 254 Cal.App.2d 725, 733, 62 Cal.Rptr. 494.)

Somewhat ironically, Texas law appears to be in accord. (First Commerce Realty Investors v. K-F Land Co. (Tex.Civ.App.1981) 617 S.W.2d 806.) Thus, the rule is clear and solidly grounded: The law of the situs of the debt controls when the suit is brought against the debt (or a guaranty) and not the land.

Consolidated has taken its action against the Houston property under Texas law. The guaranty, however, as well as the underlying note, was negotiated and executed in California expressly to be governed by California law. It is unnecessary to consider Consolidated's other arguments to the effect that Code of Civil Procedure 580d is merely procedural and not substantive and the purpose of the statute is not served by its application in this case. We are persuaded California law applies and that Consolidated would not be entitled to a deficiency judgment against 707.


Are a creditor's rights any greater against a guarantor than they are against the underlying debtor? Yes. Guarantors are not specifically protected by the terms of Code of Civil Procedure sections 580b and 580d which "shield only the principal debtor and not the guarantors ... who [are] separately and independently liable to plaintiff. [Citations.]" (Bauman v. Castle (1971) 15 Cal.App.3d 990, 994-995, 93 Cal.Rptr. 565.) The guarantor of a purchase money mortgage was held not to be shielded from a deficiency judgment in Bauman; and exactly because debtors with purchase money mortgages are specifically subject to anti-deficiency protection, that decision makes perfect sense. A guaranty of a purchase money mortgage would be rendered nugatory at the outset if it were so protected because an effective guaranty would become a legal impossibility.

But guarantors have been held to be entitled to anti-deficiency protection in one circumstance. Where the creditor has elected to destroy the guarantor's recourse against the debtor, i.e., where, as here, it has elected to pursue a nonjudicial foreclosure, it may be estopped to assert the deficiency. (Union Bank v. Gradsky...

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