Pas v. Hill

• Decision Date: 19 December 1978
• Court: California Court of Appeals Court of Appeals
• Parties: Doris PAS et al., Plaintiffs and Respondents, v. Thomas Kirk HILL et al., Defendants and Appellants. Civ. 19930.

Page 98

151 Cal.Rptr. 98

87 Cal.App.3d 521

Doris PAS et al., Plaintiffs and Respondents, v. Thomas Kirk HILL et al., Defendants and Appellants.

Civ. 19930.

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

Dec. 19, 1978.

Phillip R. Kimes, Orange, for defendants and appellants

Smaltz & Neelley, Allen L. Neelley and Gregory A. Wedner, Los Angeles, for plaintiffs and respondents.

OPINION

KAUFMAN, Acting Presiding Justice.

Defendants sought to exercise the due-on-sale clause in a deed of trust encumbering improved real property in Brea. Plaintiffs instituted this action to enjoin defendants from attempting to accelerate the due date of the unpaid balance of the trust deed loan and from taking steps to sell the property at trustee's sale and for declaratory relief. The trial court found that the transfer of title on account of which defendants were attempting to exercise the due-on-sale clause did not diminish or threaten to diminish defendants' security and that, therefore, defendants' attempt to enforce the due-on-sale clause constituted an unreasonable restraint on alienation. Accordingly, judgment was rendered enjoining defendants from giving any notice of sale or attempting to sell the trust property by exercise of the due-on-sale clause on account of the transfer of ownership of the trust property from Johnson House, a partnership, to Doris Pas. ¹ The judgment also awards plaintiffs attorney fees of $3,500 and $413.60 costs.

Defendants appeal from the judgment contending that the court erred in enjoining exercise of the due-on-sale clause; that, although the promissory note contains a provision for the recovery of attorney fees, plaintiffs are not parties to the note and are not personally bound by the note's provisions and, therefore, are not entitled to recover attorney fees under Civil Code section 1717; and that the award of costs to plaintiffs was erroneous because plaintiffs did not file a cost bill as required by Code of Civil Procedure section 1033. ² Defendants' contention that plaintiffs were not entitled to attorney fees is well taken. Their other contentions are not meritorious.

The trust property was originally owned by defendant Hill. In January 1974, he sold the property to Johnson House, a partnership in which Robert Cory and Norman Kort were the partners. Johnson House paid Hill $5,000 on the purchase price and for the balance of $30,000 executed a promissory note secured by a deed of trust on the property. Both the promissory note and deed of trust contained identically worded due-on-sale clauses. ³ The note provided that if action were instituted thereon, the debtor would pay "such sum as the Court may fix as attorney's fees." Both the note and deed of trust were executed on behalf of Johnson House by Kort and Cory in their capacity as partners.

Johnson House was having difficulty making the payments due on the note; its payments were almost invariably late. On September 26, 1974, Johnson House executed a quitclaim deed to the property to Doris Pas. Subsequently, the deed was delivered and it was recorded on October 7, 1974. The court found on substantial evidence that both Johnson House and Pas intended the transfer of title to Pas only as security for repayment of a $6,000 loan from Pas to Johnson House. However, defendants knew nothing about the deed or the loan transaction at this point. Although the findings are far from clear as to this fact, it is asserted by defendants and apparently conceded by plaintiffs that at some point in time the quitclaim deed was treated by both Johnson House and Pas as an absolute conveyance, presumably because Johnson House was unable to repay the $6,000 loan. ⁴

Prior to January 20, 1975, defendant Phillip R. Kimes, an attorney, became successor trustee under the deed of trust. On January 20, defendants issued a notice of breach and default and election to sell because of a default by Johnson House in the payment of principal and interest in the amount of $300 due December 28, 1974, and the failure to pay real property taxes in the amount of $290.85 due December 10, 1974, and a resulting tax penalty of $17.45.

On January 23, plaintiff Robert N. Gold, also an attorney, on behalf of plaintiff Doris Pas, transmitted to defendants a cashier's check in the amount of $768.22, in payment of the delinquent principal and interest, late charges, the delinquent real property taxes and tax penalty, a trustee's fee and a recording fee. Thereupon, the pending foreclosure proceedings were cancelled.

Either in connection with the foregoing payment or a few days later defendants learned of the quitclaim deed from Johnson House to Pas. A letter from plaintiff Gold's secretary to defendant Kimes on January 23, 1975, and a letter from plaintiff Gold to defendant Kimes dated March 12, 1975, would appear to indicate that by January 23 the quitclaim deed had become absolute for they refer to a transfer of "ownership" and Pas having "succeeded to title after Johnson House defaulted on a loan made by Pas to Johnson House." In any event, on March 7 and March 10, 1975, respectively, defendants issued a notice of breach and default and election to sell based on the conveyance of title to Pas by the quitclaim deed, and a demand for payment of the full unpaid balance of the promissory note in the amount of $29,304.38 together with accrued interest, purporting to exercise the due-on-sale clause.

In the meantime, on March 6, 1975, plaintiff Pas conveyed title to the trust property to herself and plaintiff Gold as tenants in common.

Pas refused to pay the accelerated balance of the loan and instituted this action. Also named as plaintiffs were Gold and Kort and Cory doing business as Johnson House, a partnership. Hill was named defendant as beneficiary under the deed of trust and holder of the promissory note. Kimes was named as defendant in his capacity as successor trustee under the deed of trust. Prior to trial, Kort and Cory, doing business as Johnson House, filed a request for dismissal of the action without prejudice and were dismissed. Pas and Gold are the remaining plaintiffs and have been and will continue to be referred to as the plaintiffs.

All payments due under the promissory note and deed of trust after January 23, 1975, have been made by plaintiffs and accepted by defendants without prejudice to their right, if any, to enforce the due-on-sale clause as a result of the conveyance from Johnson House to Pas.

Exercise of Due-on Clause

Having found that the quitclaim deed from Johnson House to Pas was intended as a security interest rather than an absolute conveyance at inception, the trial court apparently treated the transaction as the creation of a junior encumbrance. It concluded, nevertheless, that the transfer of title was sufficient to trigger the due-on-sale clause. It found, however, that defendants' security was neither impaired nor threatened with impairment by the transaction, and, relying on La Sala v. American Sav. & Loan Assn., 5 Cal.3d 864, 97 Cal.Rptr. 849, 489 P.2d 1113, dealing with a due-on-encumbrance clause, it concluded that defendants' attempt to exercise the due-on-sale clause constituted an unlawful restraint on alienation.

In view of the fact that the quitclaim deed was subsequently treated by the parties as an absolute conveyance, apparently prior to January 23, 1975, and well before defendants attempted to exercise the due-on-sale clause, the transaction is more appropriately viewed as an absolute conveyance in satisfaction of a junior encumbrance in lieu of foreclosure. ⁵ Arguably, this would bring the case within the ambit of Hellbaum v. Lytton Sav. & Loan Assn., 274 Cal.App.2d 456, 458-459, 79 Cal.Rptr. 9, and Cherry v. Home Sav. & Loan Assn., 276 Cal.App.2d 574, 580, 81 Cal.Rptr. 135, holding, and Coast Bank v. Minderhout, 61 Cal.2d 311, 315-317, 38 Cal.Rptr. 505, 392 P.2d 265, indicating that, in the event of an outright sale involving both change of ownership and possession, a due-on-sale clause could be lawfully exercised even in the absence of a showing of impairment or threat of impairment to the security. Of course, the recent decision of the California Supreme Court in Wellenkamp v. Bank of America, 21 Cal.3d 943, 953, 148 Cal.Rptr. 379, 582 P.2d 970, expressly disapproved Hellbaum and Cherry ⁶ and overruled Minderhout to the extent inconsistent with Wellenkamp. However, in Wellenkamp the court expressly limited its holding to the exercise of a due-on clause by an institutional lender. (21 Cal.3d at p. 952, fn. 9, 148 Cal.Rptr. 379, 582 P.2d 970.) In the case at bench the holder of the note and deed of trust is an individual, not an institutional lender. Moreover, the note and deed of trust came into being not as a result of a loan transaction in the usual sense but as a result of the sale of the property by Hill to Johnson House, and the note represents the balance of the purchase price for the property. A decision that the holding in Wellenkamp applies to the case at bench would require serious consideration of these differences. The problem need not be resolved in this case, however, for we have concluded that even though the transaction between Johnson House and Pas involved a change in both ownership and possession, inasmuch as the transfer was made in enforcement of the rights of a junior encumbrancer, the holding in La Sala v. American Sav. & Loan Assn., supra, 5 Cal.3d 864, 97 Cal.Rptr. 849, 489 P.2d 1113, viewed in light of Tucker v. Lassen Sav. & Loan Assn., supra, 12 Cal.3d 629, 116 Cal.Rptr. 633, 526 P.2d 1169, is controlling and the trial court's reliance on La Sala was sound.

The holding in La Sala was that the exercise of a due-on-encumbrance clause because of the creation of a junior encumbrance in the absence of a showing of impairment or threat of impairment to the security constituted an unlawful restraint on alienation. (5 Cal.3d at pp. 881-882, 97 Cal.Rptr. 849, 489 P.2d 1113.) W...