Guild Mortgage Co. v. Heller

• Court: California Court of Appeals
• Writing for the Court: COMPTON; GATES
• Citation: Guild Mortgage Co. v. Heller, 193 Cal.App.3d 1505, 239 Cal.Rptr. 59 (Cal. App. 1987)
• Decision Date: 05 August 1987
• Parties: GUILD MORTGAGE COMPANY, Plaintiff and Appellant, v. Jack H. HELLER and Kathleen Heller, Defendants and Respondents. B022174.

Page 59

239 Cal.Rptr. 59

193 Cal.App.3d 1505

GUILD MORTGAGE COMPANY, Plaintiff and Appellant, v. Jack H. HELLER and Kathleen Heller, Defendants and Respondents.

B022174.

Court of Appeal, Second District, Division 2, California.

Aug. 5, 1987.

Dorazio, Barnhorst & Bonar, Joel L. Incorvaia and Martha O. Anderson, San Diego, for plaintiff and appellant.

Landels, Ripley & Diamond, Bruce W. Hyman, Harvey L. Leiderman and Susan T. Taylor, San Francisco, as amicus curiae in support of plaintiff and appellant, and on behalf of California Mortg. Bankers.

Nordman, Cormany, Hair & Compton and Glen M. Reiser, Oxnard, for defendants and respondents.

COMPTON, Associate Justice.

Plaintiff Guild Mortgage Company appeals from a judgment dismissing its complaint for breach of contract, fraud, and conspiracy after the trial court sustained without leave to amend the demurrer of defendants Jack and Kathleen Heller. We reverse.

On appeal from a judgment entered after the sustaining of a general demurrer, this court must assume the truth of all properly pleaded allegations of the complaint. (Loehr v. Ventura County Community College Dist. (1983) 147 Cal.App.3d 1071, 1076-1077, 195 Cal.Rptr. 576.) Moreover, the allegations must be liberally construed with a view to attaining substantial justice among the parties. (Code Civ.Proc., § 452; King v. Central Bank (1977) 18 Cal.3d 840, 843, 135 Cal.Rptr. 771, 558 P.2d 857.) Our primary task is to determine whether the facts alleged provide the basis for a cause of action against defendants under any theory. (Katona v. County of Los Angeles (1985) 172 Cal.App.3d 53, 56, 218 Cal.Rptr. 19; Surina v. Lucey (1985) 168 Cal.App.3d 539, 541, 214 Cal.Rptr. 509.)

For purposes of this appeal, a brief recital of the facts is all that is required. In September 1983, defendants agreed to purchase a single family residence in Agoura Hills from Arthur and Francene Johnson for $129,500. The parties opened escrow and defendants applied to Guild Mortgage for a $108,300 loan to be secured by a first trust deed on the property. Although the escrow instructions were amended on several different occasions, they essentially provided that defendants would make a cash down payment of $21,200 and pay the usual closing costs and charges. Defendants further represented to Guild that the property would be retained as an investment and that they alone would be responsible for making the monthly mortgage payments. Based upon these various representations, the loan was made in December 1983. Escrow closed shortly thereafter without defendants being required to make a down payment or paying closing costs. Unaware that defendants had assumed ownership without complying with the escrow instructions, Guild Mortgage sold the note on the secondary mortgage market to the Federal Home Loan Mortgage Corporation. (FHLMC). ¹

Immediately following the close of escrow defendants transferred title to Ray and Marianne Lake, both of whom were then renting or leasing the property from the Johnsons. Defendants subsequently received a payment in excess of $8,000 from the broker, one Frederic Burton, who had arranged the sale of the home. ² Neither defendants nor the Lakes made payment on the loan and the FHLMC initiated nonjudicial foreclosure proceedings under the first trust deed and acquired title to the property. Subsequently, the FHLMC compelled plaintiff to repurchase the property. ³ In reselling the property on the open market plaintiff suffered a loss in excess of $50,000. Guild Mortgage later brought this action, seeking both general and punitive damages, against the Hellers, the Johnsons, the Lakes, Burton, and Townsgate Escrow, among others. ⁴

In urging us to affirm the trial court's order sustaining their demurrer without leave to amend, defendants make the same contention they made below, that is, that the cause of action plaintiff attempted to set forth is barred by the provisions of Code of Civil Procedure section 580d providing, in pertinent part, that "No judgment shall be rendered for any deficiency upon a note secured by a deed of trust ... upon real property ... in any case in which the real property has been sold by the ... trustee under power of sale contained in such ... deed of trust." ⁵ Plaintiff, on the other hand, argues that the action against defendant is not upon a promissory note but is a common law action for fraud, and section 580d does not bar its recovery in this action.

In sustaining the demurrer the trial court relied in great part on First Federal Sav. & Loan Assn. v. Lehman (1984) 159 Cal.App.3d 537, 205 [193 Cal.App.3d 1510] Cal.Rptr. 600. In that case, the defendant borrowers secured a purchase money loan from plaintiff savings and loan after misrepresenting their intent to occupy the premises, the amount of a cash down payment, and the extent of secondary financing. The defendants treated the residence as investment property and, although they made payments on the loan for a period of time, eventually sold the property to a third party who defaulted on the loan. Following a nonjudicial foreclosure, the lender sought damages for fraud against the original purchaser. The court of appeal held that the action was, in effect, an attempt to recover a deficiency since the plaintiff sought to recover the unpaid balance of the loan less the amount bid at the foreclosure sale. In so holding, the court refused to follow those cases which permit actions for fraud relating to the value of the real property security, and found that under the circumstances there was no causal connection between the alleged fraud and the lender's damages. The court thus concluded that the action was barred by Code of Civil Procedure section 580d.

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.) ⁶ 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." (Roseleaf Corp. v. Chierighino (1963) 59 Cal.2d 35, 38-39, 27 Cal.Rptr. 873, 378 P.2d 97.) Prior to the enactment of section 580d in 1939, however, a creditor, except in purchase money transactions, ^{7 7} could obtain a deficiency judgment against his debtor after private sale of real property given to secure an obligation. (Code Civ.Proc., § 580a.) The deficiency judgment, whether after private or judicial sale, was limited to the difference between the amount of the indebtedness and the fair market value at the time of the sale. (Code Civ.Proc., §§ 580a, 725a, et seq.)

The purpose of the antideficiency legislation was to protect debtors in certain situations from personal liability for large deficiency judgments after their property had been taken by the creditor through foreclosure proceedings, thereby preventing the aggravation of the economic downturn which would result if defaulting purchasers lost their land and in addition were burdened with personal liability. (Bargioni v. Hill (1963) 59 Cal.2d 121, 123, 28 Cal.Rptr. 321, 378 P.2d 593.) The antideficiency statutes further served to prevent creditors in private sales from buying in at deflated prices and realizing double recoveries by holding debtors for large deficiencies. (Cornelison v. Kornbluth (1975) 15 Cal.3d 590, 601, 125 Cal.Rptr. 557, 542 P.2d 981; Spangler v. Memel (1972) 7 Cal.3d 603, 612, 102 Cal.Rptr. 807, 498 P.2d 1055; see also Hetland, Secured Real Estate Transactions (Cont. Ed.Bar 1974) § 9.3, pp. 183-184.) 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." (Roseleaf Corp. v. Chierighino, supra, 59 Cal.2d at pp. 43-44, 27 Cal.Rptr. 873, 378 P.2d 97.)

As can be seen, the antideficiency statutes embrace a complete legislative scheme for foreclosure for defaulted debts. It has long been recognized, however, that those statutes do not preclude a suit for fraud. (Glendale Fed. Sav. & Loan Assn. v. Marina View Heights Dev. Co. (1977) 66 Cal.App.3d 101, 135 Cal.Rptr. 802; Kass v. Weber (1968) 261 Cal.App.2d 417, 67 Cal.Rptr. 876; Baumrucker v. American Mortgage Exchange, Inc. (1967) 250 Cal.App.2d 451, 58 Cal.Rptr. 677; Joanaco Projects, Inc. v. Nixon & Tierney Constr. Co. (1967) 248 Cal.App.2d 821, 57 Cal.Rptr. 48; Pastor v. Younis (1965) 238 Cal.App.2d 259, 47 Cal.Rptr. 684.)

Section 725a specifically refers to recovery on a "debt" while section 580d specifically refers to judgments on a deficiency on a "note." There is, therefore, nothing in the express language of the statutes which precludes an action not involving recovery on a debt or note. (See Kass v. Weber, supra, 261 Cal.App.2d at pp. 422-423, 67 Cal.Rptr. 876; see also Manson v. Reed (1986) 186 Cal.App.3d 1493, 1500-1502, 231 Cal.Rptr. 446.) A suit for fraud obviously does not involve an attempt to recover on a debt or note. As such, it stands separate and apart from any action which the antideficiency legislation seeks to preclude.

Neither the purpose nor intent of the antideficiency statutes is frustrated by allowing a creditor to recover...