Roseleaf Corp. v. Chierighino

• Decision Date: 22 January 1963
• Parties: , 378 P.2d 97 ROSELEAF CORPORATION, Plaintiff and Respondent, v. Willy F. CHIERIGHINO, Defendant and Appellant. L.A. 27021.
• Court: California Supreme Court

Page 873

27 Cal.Rptr. 873

59 Cal.2d 35, 378 P.2d 97

ROSELEAF CORPORATION, Plaintiff and Respondent, v. Willy F. CHIERIGHINO, Defendant and Appellant.

L.A. 27021.

Supreme Court of California, In Bank.

Jan. 22, 1963.

Ernest M. Silver, Los Angeles, and Louis C. Hoyt, Beverly Hills, for defendant and appellant.

Brown & Altshuler, Leo Altshuler and James J. Brown, Beverly Hills, for plaintiff and respondent.

John R. Hetland, Berkley, Murry Luftig, San Diego, Landels, Weigel & Ripley and Edward D. Landels, San Francisco, amici curiae on behalf of plaintiff and respondent.

TRAYNOR, Justice.

Roseleaf Corporation sold its hotel to Willy Chierighino and his family. The consideration given by the Chierighinos included a note (not involved in this action) secured by a first trust deed and chattel mortgage on the hotel and its furnishings and three notes each secured by a second trust deed on real property owned by Willy. ¹ The first trust deeds on these three parcels were owned by strangers to this action. ² After the sale of the hotel, those owners caused the three parcels to be sold under powers of sale contained in the first trust deeds. The second trust deeds held by Roseleaf were not protected at the sales and were rendered valueless thereby. Thereafter Roseleaf brought this action to recover the full amount unpaid on the three notes secured by the second trust deeds. The trial court entered judgment for Roseleaf. Defendant Willy Chierighino appeals, contending that Roseleaf's action is limited by section 580a and barred by sections 580b and 580d of the Code of Civil Procedure.

In the absence of a statute to the contrary, a creditor secured by a trust deed or mortgage on real property may recover the full amount of the debt upon default. He may realize the security or sue on the obligation or both; the obligation is an independent undertaking by the debtor to pay. (See 2 Glenn, Mortgages (1943) § 140, p. 811.) In most states now, however, the creditor's right to enforce such a debt is restricted by statute. Thus, in California the creditor must rely upon his security before enforcing the debt. (Code Civ.Proc. §§ 580a, 725a, 726.) 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. Under sections 580a and 726, proceedings for a deficiency must be initiated within three months after either a private sale under a power of sale or a judicial sale, and the recovery may not exceed the difference between the amount of the indebtedness and the fair market value of the property at the time of sale. ³ The 'one form of action' rule of section 726 does not apply to a sold-out junior lienor (Savings Bank of San Diego County v. Central Market Co., 122 Cal. 28, 33-36, 54 P. 273; see Brown v. Jensen, 41 Cal.2d 193, 196, 259 P.2d 425), nor does the three-months limitation of section 580a. (Hillen v. Soule, 7 Cal.App.2d 45, 47, 45 P.2d 349 (holding that section 580b did not apply disapproved in Brown v. Jensen, 41 Cal.2d 193, 198, 259 P.2d 425).) There is no reason to compel a junior lienor to go through foreclosure and sale when there is nothing left to sell. Moreover, to compel a junior lienor to sue for a deficiency within three months of the senior's sale would unnecessarily compel acceleration of the junior obligation, to the detriment of the debtor.

The fair-value limitations of sections 580a and 726 likewise do not apply to a junior lienor, such as Roseleaf, whose security has been rendered valueless by a senior sale. Section 726 provides that the decree of foreclosure 'shall determine the personal liability of any defendant for the payment of the debt secured by such mortgage or deed of trust,' (italics added) referring to the mortgage or deed of trust foreclosed by the same decree. Section 580a refers to a suit for the balance due on an obligation secured by a mortgage or deed of trust 'following the exercise of the power of sale in such deed of trust or mortgage.' (Italics added.) (See Riesenfeld, California Legislation Curbing Deficiency Judgments (1960) 48 Cal.L.Rev. 705, 726.)

The purpose of the fair-value limitations in sections 580a and 726 does not extend to sold-out junior lienors. Many states enacted fair-value statutes similar to sections 580a and 726 during the 1930's when it was felt that real property could not be sold for its 'true' value. (See Glenn, Mortgages (1943) § 156, pp. 857-861; Poteat, State Legislative Relief for the Mortgage Debtor During the Depression (1938) 5 Law & Contemp.Prob. 517, 529-544.) Fair-value provisions are designed to prevent creditors from buying in at their own sales at deflated prices and realizing double recoveries by holding debtors for large deficiencies. (See Hatch v. Security-First Nat. Bank of Los Angeles, 19 Cal.2d 254, 259, 120 P.2d 869; Sivade v. Smith, 104 N.J.Eq. 528, 146 A. 364; Wheeler v Ellis, 56 N.J.Law 28, 27 A. 911; Culliford v. Weingrad, 196 Misc. 86, 91 N.Y.S.2d 333, 335-336; Continental Bank & Trust Co. v. Gedex Realty Corp., Sup., 60 N.Y.S.2d 710, 712; Northwestern Loan & Trust Co. v. Bidinger, 226 Wis. 239, 245, 276 N.W. 645; 22 Cal.L.Rev. 180, 181.) Thus some fair-value statutes apply only if the creditor purchases at the sale. (Mich.Laws Comp. § 692.51; Mo.Stat.Ann. (Vernon's) § 443.410; N.C.Gen.Stats. § 45-21.36 (Supp.1961).)

Some courts have limited deficiency judgments to prevent double recoveries in the absence of statute (see Investors Mortgage & Realty Co. v. Preakness Hills Realty Co., 133 N.J.Eq. 258, 31 A.2d 830; Suring State Bank v. Giese, 210 Wis. 489, 246 N.W. 556, 85 A.L.R. 1477), but they have not limited such judgments when sought by nonselling junior lienors. (Hillside Nat. Bank v. Silverman, 116 N.J.Eq. 463, 173 A. 326.) Fair-value statutes no more precisely worded than sections 580a and 726 have been held inapplicable to the nonselling junior lienor (Alabama Mortgage & Securities Corp. v. Chinery, 237 Ala. 198, 186 So. 136; Realty Associates Securities Corp. v. Hoblin, App.Div., 288 N.Y.S. 875; Weisel v. Hagdahl Realty Co., 241 App.Div. 314, 271 N.Y.S. 629, 633-635), as have other similar deficiency judgment restrictions. (Cronin v. Gager-Crawford Co., 128 Conn. 688, 25 A.2d 652; Smith v. Mangin, 161 Misc. 288, 292 N.Y.S. 265, 271; Sivade v. Smith, 104 N.J.Eq. 528, 146 A. 364; Wheeler v. Ellis, 56 N.J.Law 28, 27 A. 911; Carr v. Home Owners Loan Corp., 148 Ohio St. 533, 76 N.E.2d 389.)

The position of a junior lienor whose security is lost through a senior sale is different from that of a selling senior lienor. A selling senior can make certain that the security brings an amount equal to his claim against the debtor or the fair market value, which ever is less, simply by bidding in for that amount. He need not invest any additional funds. The junior lienor, however, is in no better position to protect himself than is the debtor. Either would have to invest additional funds to redeem or buy in at the sale. Equitable considerations favor placing this burden on the debtor, not only because it is his default that provokes the senior sale, but also because he has the benefit of his bargain with the junior lienor who, unlike the selling senior, might otherwise end up with nothing.

Nor is Roseleaf's action barred by section 580b. That section bars any deficiency judgment after sale under a purchase money mortgage or trust deed. ⁴ Roseleaf would clearly be barred by section 580b from suing on the note secured by the first trust deed and chattel mortgage on the hotel and its furnishings. That note, however, is not involved in this case, and the record discloses no default under it. The issue here is whether the three second trust deeds on land other than that purchased are purchase money trust deeds because they were 'given to secure payment of the balance of the purchase price of real property.'

Section 580b was apparently drafted in contemplation of the standard purchase money mortgage transaction, in which the vendor of real property retains an interest in the land sold to secure payment of part of the purchase price. Variations on the standard are subject to section 580b only if they come within the purpose of that section.

Dobias v. White, 239 N.C. 409, 412, 80 S.E.2d 23, held that a trust deed on land owned by the purchaser, given to secure payment of part of the purchase price of real property, is not a purchase money trust deed within the meaning of an anti-deficiency statute like section 580b. In that case, however, there was no analysis of the purpose of the applicable statute. Various purposes have been ascribed to section 580b. It has been said that it was designed to prevent creditors from buying in property for a nominal sum, after a debtor has defaulted, and then holding the debtor for the deficiency. (See Kerrigan v. Maloof, 98 Cal.App.2d 605, 616, 221 P.2d 153; Brown v. Jensen, 41 Cal.2d 193, 201, 259 P.2d 425 (dissent).) This purpose, however, is accomplished by the fair-value sections, and does not explain for what purpose purchase money mortgages were singled out for special treatment. It has also been said that the purpose of section 580b is to make certain that in the case of 'a purchase money mortgage or deed of trust the security alone can be looked to for recovery of the debt.' (Brown v. Jensen, 41 Cal.2d 193, 198, 259 P.2d 425, 427, quoting from Mortgage Guarantee Co. v. Sampsell, 51 Cal.App.2d 180, 185, 124 P.2d 353.) This conclusion states the effect of the statute after assuming that it applies, but offers no rationale for deciding whether or not it applies. In Brown v. Jensen, 41 Cal.2d 193, 197, 259 P.2d 425, it was stated that one reason for section 580b is that the one taking a purchase money trust deed knows the value of his security and assumes the risk that it may become inadequate. Perhaps the average vendor or financier in real estate...