Jones v. Sacramento Sav. & Loan Ass'n

Decision Date14 February 1967
Citation248 Cal.App.2d 522,56 Cal.Rptr. 741
CourtCalifornia Court of Appeals Court of Appeals
PartiesM. H. JONES, Plaintiff and Respondent, v. SACRAMENTO SAVINGS AND LOAN ASSOCIATION, a corporation, Defendant and Appellant. Civ. 11011.

Tobin & Tobin, by John J. Ford, III, San Francisco, Diepenbrock, Wulff & Plant, by V. L. Diepenbrock, Sacramento, for appellant.

James G. Changaris, Yuba City, for respondent.

FRIEDMAN, Associate Justice.

The 13 lots involved in this quiet title action are part of a residential subdivision in Yuba County. These lots were successively the subject of a set of purchase money trust deeds and a set of construction money trust deeds. Sacramento Savings and Loan Association was the lender of construction funds. The suit represents a title contest between plaintiff Jones, who had bought the purchase money notes and did in the properties at his trustee's sales, and Sacramento Savings, which purchased at sales held by its own trustee. Neither party bid at the other's sales.

The trial court sustained Jones' claim of title and denied that of Sacramento Savings. The latter appeals from the judgment. Its purported appeal from an order denying a new trial is dismissed, the order being nonappealable.

The earlier group of trust deeds secured purchase money loans of $806.45 per lot. All were recorded August 21, 1959. All contained subordination provisions, the effect of which is now in dispute. 1 Yuba County Title Company was designated as trustee.

Somewhat over a year later the owners took out construction loans aggregating $143,900 and approximating $11,000 to $12,000 a lot. The owners gave Sacramento Savings instalment notes with principal and interest payable at the rate of $86 per month. These notes included a due-on-sale clause, giving the holder an option to accelerate maturity upon any sale by the borrower. 2

Before making the construction loans Sacramento Savings issued escrow instructions to Yuba County Title Company, stating: 'Please secure subordination.' The title company refused to issue insurance covering the Sacramento Savings trust deeds unless it received additional subordination agreements from the trustee of the purchase money trust deeds. Sacramento Savings then withdrew the escrow from Yuba County Title Company and another title company became the escrow depositary. Sacramento Savings then made the construction loans and its deeds of trust were recorded. No subordination agreements were executed, other than those contained in the purchase money trust deeds.

Homes were built on the 13 lots. Both the purchasse money loans and the construction loans became delinquent. Jones bought up the defaulted purchase money notes and commenced the sale of individual parcels. The parties have effectually stipulated that Jones' proceedings complied with Civil Code, section 2924, in that notices of default were properly recorded and notices of the trustee's sales given. At sales held in August and September 1961, Jones bid in three of the lots. At trustee's sales held in February and April 1962 he bid in three more lots.

In the meantime Sacramento Savings' trustee commenced sale proceedings under the construction money trust deeds. In November 1961 it caused notices of default to be recorded against 11 of the lots. In May 1962 Sacramento Savings bid in these 11 lots at a sale held by its own trustee. Six of these were the lots which had already been sold to Jones at sales held by his own trustee. The other five had not yet been foreclosed by Jones, and as to these the sales to Sacramento Savings preceded the sales to Jones under the purchase money trust deeds. The remaining two lots were the subject of sales to Jones in April 1962 and to Sacramento Savings in November 1962. Not only did the timing of the various trustee's sales overlap; so did recordation of notices of default and notices of sale. Neither party chose to bid at any of the other's sales. Neither chose to exercise a junior lienor's right to reinstate the senior loan after the latter had become delinquent. (See Civ.Code, § 2924c.) Each, apparently, relied upon the assumption that its own trust deeds had superiority.

Sacramento Savings asserts priority of its construction money trust deeds on the theory that the subordination provision of the earlier trust deeds (fn. 1, supra) operated automatically for the benefit of the construction lender, requiring no separate subordination document. It also claims equitable seniority, urging that equity will impose a subordinating lien to carry out the parties' intent, although their contract language may fall short, citing Coast Bank v. Minderhout, 61 Cal.2d 311, 313--314, 38 Cal.Rptr. 505, 392 P.2d 265.

Whatever their merit in an appropriate case, these claims are not dispositive here. A lender may agree to subordinate his lien to a later encumbrance upon specified conditions; in order to achieve priority, the later encumbrance must substantially respond to these conditions. (Collins v. Home Savings & Loan Assn., 205 Cal.App.2d 86, 95, 22 Cal.Rptr. 817; Comment, 52 Cal.L.Rev. 157, 166--167; California Land Security and Development (Cont.Ed.Bar) pp. 132--138; see also Bank of America Nat. Trust & Savings Ass'n v. Hirsch-Mercantile Co., 64 Cal.App.2d 175, 183, 148 P.2d 110.) The construction loans of Sacramento Savings departed substantially from the subordination conditions of the purchase money trust deeds. As printed, the latter permitted subordination either to a construction or permanent loan. The typewritten addendum qualified these alternatives, requiring that the construction loan be accompanied by a 'permanent take-out' commitment and that any 'permanent' loan have a maturity of not less than 15 years.

Although the term 'take-out' does not seem to have received judicial definition, the transaction of that name is a common feature of residential subdivision financing. The term refers to the permanent secured loan which the ultimate home buyer floats to finance his purchase of the dwelling and which supersedes or 'takes out' the interim construction loan secured by the subdivision developer. (California Land Security and Development (Const.Ed.Bar), supra, pp. 552--553; see, e.g., Magna Development Co. v. Reed, 228 Cal.App.2d 230, 236, 39 Cal.Rptr. 284.) The commitment in turn is a statement from a lending institution (or, in the case of Federal National Mortgage Association, a loan buyer) that financing to a specified amount will be available to qualified home buyers. No permanent take-out commitment was supplied here.

The notes taken by Sacramento Savings were payable at the rate of $86 per month, including interest, but could be called, at the holder's option, upon the developer's sale of the property. 3 Thus the very objective of the subdivider's borrowing, construction of a house and sale to a home buyer, would permit acceleration of the note. The due-on-sale clause gave the construction lender a wide range of options. It might elect to continue the subdivider as its primary obligor; or, if a home buyer of satisfactory credit appeared, permit the latter to assume the 'construction' loan; or choose to exercise the power of sale conferred by its deed of trust, putting the subordinate lienholder under economic pressure to bid in the property. A construction loan accompanied by such options fell far short of supplying the 'permanent' or 15-year financing demanded by the purchase-money lienholder as a condition of subordination.

There is no reason why priority of a later lienholder should not be made to depend upon compliance with these conditions. 4 They represent a means by which the purchase money lienholder protects himself against the subdivider's default after the construction loan is made. A take-out commitment or, in the alternative, a long-term loan will assure the availability of consumer financing despite the property developer's insolvency. Either device tends to enhance the property's value, promote its marketability and avoid distress sale if the subdivider encounters financial trouble. The interim financing supplied by Sacramento Savings and Loan Association did not supply this protection. Consequently it failed to achieve superiority over the earlier lien of the purchase money trust deeds.

There is no claim that any of the trustees' sales produced bids exceeding the secured debt. The sales to Jones in enforcement of the senior liens wiped out the junior liens of Sacramento Savings. (Call v. Thunderbird Mortgage Co., 58 Cal.2d 542, 548, 25 Cal.Rptr. 265, 375 P.2d 169; Sohn v. California Pac. Title Ins. Co., 124 Cal.App.2d 757, 767, 269 P.2d 223; Barr Lumber Co. v. Shaffer, 108 Cal.App.2d 14, 16-23, 238 P.2d 99.) In those cases where Jones' trustee was the first to give notices and hold sales, the subsequent sales conveyed no title to Sacramento Savings and succeeded only in clouding Jones' title. (Metropolis etc. Sav. Bank v. Barnet, 165 Cal. 449, 455, 132 P. 833.) Where Sacramento Savings' trustee was the first to give notices and hold sales, Sacramento Savings purchased title subordinate to the senior liens of the purchase money trust deeds. (Penziner v. West American Finance Co., 10 Cal.2d 160, 180, 74 P.2d 252; Streiff v. Darlington, 9 Cal.2d 42, 45, 68 P.2d 728.) It is immaterial that in some cases the junior lienholder was the first to give notice and hold sales. (Martin v. Hildebrand, 190 Cal. 369, 372, 212 P. 618; Woods v. Kellerman, 3 Cal.App. 422, 425, 89 P. 358; see also Carpenter v. Smallpage, 220 Cal. 129, 132, 29 P.2d 841; 34 Cal.Jur.2d, Mortgages, § 463, p. 141.)

Sacramento Savings charges Jones with unclean hannds. It points out that equity's denial of relief extends not only to outright fraud, but to any kind of unconscionable conduct on a plaintiff's part. The evidence indicates that Jones bought up the purchase money notes (of the face amount of $806.45...

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