Fox & Carskadon Financial Corp. v. San Francisco Fed. Sav. & Loan Assn.

• Decision Date: 08 October 1975
• Citation: 125 Cal.Rptr. 549,52 Cal.App.3d 484
• Parties: FOX & CARSKADON FINANCIAL CORPORATION, a California Corporation, et al., Plaintiffs, Cross-Defendants and Appellants, v. SAN FRANCISCO FEDERAL SAVINGS & LOAN ASSOCIATION, etc., Defendant, Cross-Complainant and Respondent. Civ. 35998.
• Court: California Court of Appeals Court of Appeals

Page 549

125 Cal.Rptr. 549

52 Cal.App.3d 484

FOX & CARSKADON FINANCIAL CORPORATION, a California Corporation, et al., Plaintiffs, Cross-Defendants and Appellants, v. SAN FRANCISCO FEDERAL SAVINGS & LOAN ASSOCIATION, etc., Defendant, Cross-Complainant and Respondent.

Civ. 35998.

Court of Appeal, First District, Division 4, California.

Oct. 8, 1975.

Howard N. Ellman, Susan J. Passovoy, Brobeck, Phleger & Harrison, San Francisco, for plaintiffs, cross-defendants and appellants.

Charles D. Sooy and C. Darrell Sooy, San Francisco, for defendant, cross-complainant and respondent.

CALDECOTT, Presiding Justice.

This is an appeal from a summary judgment in favor of defendant-respondent San Francisco Federal Savings & Loan Association and against plaintiffs-appellants Fox & Carskadon Financial Corporation and El Camino Real Associates.

Fox & Carskadon Financial Corporation entered into an agreement with one Hyman Weisel (not a party to this action) in which Weisel agreed to sell to El Camino Real Associates, a limited partnership to be formed by Fox & Carskadon, an apartment project to be constructed by Weisel. The total purchase price for the project was $2,375,000. Weisel applied to San Francisco Federal for a construction loan of $1,800,000. In June 1969, the Directors' Loan Committee Meeting of San Francisco Federal approved the loan. At the time the respondent approved the loan it knew of the agreement between Weisel and Fox & Carskadon. In making the loan, San Francisco Federal relied on information it possessed with regards to Weisel's financial condition from prior business dealings together.

In late December 1969, it became apparent to San Francisco Federal from information obtained from Weisel that he was experiencing financial difficulty and lack of cash to carry on his operations. In January 1970, Weisel notified San Francisco Federal, Fox and El Camino that he was preparing to file petitions to have himself and a number of his wholly owned corporations adjudicated bankrupt. Such petitions were filed in January 1970. San Francisco Federal proceeded to foreclose under its deed of trust and at the trustees' sale San Francisco Federal purchased the property for $1,700,000. At the time of the sale, the total loan demand, including principal, interest, foreclosure fees and costs was substantially in excess of $1,700,000. Thus, as a result of the sale, Fox and El Camino Real Associates lost their equity in the apartments.

Both parties agreed that the basic issue of law--whether San Francisco Federal owed any duty of care to Fox and El Camino in making the construction loan to Weisel--should be submitted for decision and determination based on the agreed statement of facts and relevant exhibits. ¹

In support of their contention that San Francisco Federal owed a duty of care, appellants rely on several cases. Upon examining them, we find that they are all distinguishable from the case at hand. The first case relied on by Fox & Carskadon is Connon v. Great Western Sav. & Loan Assn., 69 Cal.2d 850, 73 Cal.Rptr. 369, 447 P.2d 609. In that case, plaintiffs, individual homeowners, purchased single family homes in a residential development. As the homes were erected on adobe soil, they suffered severe cracking when the earth expanded and contracted. The plaintiffs sued both the developer and construction lender for damages. The Supreme Court held that bank liable on grounds of negligence as it had become an 'active participant in a home construction enterprise . . . beyond the domain on the usual money lender.' (Id., at p. 864, 73 Cal.Rptr. at p. 376, 447 P.2d at p. 616.) In Connor, pledgees of promissory notes secured by second deeds of trust also sought to hold Great Western liable for the impairment to their security. The court rejected this contention by stating that 'the balance of the factors set forth in the Biakanja ² case is significantly different when an investor in or pledgee of notes secured by second deeds of trust is substituted for a member of the home-buying public . . ..' (Id., at p. 870, 73 Cal.Rptr. at p. 380, 447 P.2d at p. 620.)

Appellants argue that their situation is analogous to the plaintiff homeowners in Connor 'who were powerless to protect their equities from obliteration as a result of improper loan administration.'

The argument is without merit. Fox & Carskadon is a 'large public syndication,' which has enjoyed a 'reputation as an experienced and reputable real estate brokerage firm in the San Francisco Bay Area.' Appellants have done prior business with developer Weisel on a project called Buckingham Apartments. Based on these facts, we find that appellants' position is synonymous to that of the cross-complainants in Connor, who, the Supreme Court stated, were able to protect themselves.

This position is supported by the fact that immediately after the Connor decision, the Legislature enacted Civil Code section 3434. ³ This statute delineates when a construction lender may be held liable for the failure of the borrower.

Appellants argue that Civil Code section 3434 was to control a lender's liability for physical defects only. It is the intent of the statute as we read it to define when a duty of care is placed on a financial institution for failures on the part of borrowers. To grant plaintiffs relief on a negligence theory would be to expand lender liability beyond the Legislature's implied limit.

The second case relied on by appellants is Middlebrook-Anderson Co. v. Southwest Sav. & Loan Assn., 18 Cal.App.3d 1023, 96 Cal.Rptr. 338. In this case, the seller of real property subordinated his land sale contract to a construction loan by recording his contract after the loan. The seller only agreed to this subordination after the buyer stated that funds from the construction loan would only be used for construction. The lender...