Shepherd v. Robinson

Decision Date30 December 1981
Citation180 Cal.Rptr. 342,128 Cal.App.3d 615
CourtCalifornia Court of Appeals Court of Appeals
PartiesHarry R. SHEPHERD, et al., Plaintiffs, Respondents, and Appellants, v. Cecil R. ROBINSON, et al., Defendants, Appellants, and Respondents, William M. Jenkins, Jr., Henry Edington, Jr., et al., Defendants, Respondents, and Appellants. Civ. 47974.

Donahue, Gallagher, Thomas & Woods, Oakland, for plaintiffs, respondents, and appellants.

Frederic L. Harvey, Berkeley, for defendants, appellants, and respondents Robinson, et al.

Wm. Edward Baugher, San Jose, for defendants, respondents, and appellants.

ANELLO *, Associate Justice.

This is an appeal from a summary judgment granting a sold out junior trust deed holder a deficiency judgment as to a portion of the amount due on the underlying note. All parties appeal. We reverse in part and affirm in part.

This action was commenced by the holders of a second deed of trust, Harry R. Shepherd and Elinor Shepherd, hereinafter "Shepherd." Shepherd was the original owner of the property in question and sold the property to the first purchasers, Dr. Henry Edington, Jr., Rosemary Edington, and Dr. William M. Jenkins, Jr., hereinafter collectively referred to as "Edington." Edington then transferred the property to the second purchasers, Cecil R. Robinson and Shirley J. Robinson, hereinafter "Robinson."

In 1969, Shepherd owned a certain piece of real estate commonly known as 2505, 2515, and 2525 10th Avenue, Oakland, California, consisting of 35 apartments in three buildings. In that year, Shepherd sold the buildings to Edington, taking a wrap-around deed of trust to secure payment of a note in the amount of $336,000. This deed of trust was subordinate to two existing deeds of trust on the property. The two senior liens were paid off in 1972, leaving Shepherd with a first deed of trust.

By this time, however, Edington was having trouble with the property, which did not generate enough income to cover loan payments, taxes, and maintenance. Edington regarded the property as a "monkey" on his back and commenced a search for someone to take over the property. If Edington was unable to find someone to take over the property, he intended to walk away from it and allow Shepherd to take back the property under the deed of trust.

In May or June of 1973, Edington began talking with Robinson regarding his possible purchase of the property. Robinson expected to be able to finance the property for about $250,000, and towards this end Edington approached Shepherd about the possibility of discounting the deed of trust, which at this point had an outstanding balance of $286,600.92. Shepherd indicated that he would accept $249,000 cash in full settlement of the note.

Edington then struck a deal with Robinson whereby Robinson would be immediately granted a one-third interest in the property. The property would then be refinanced. Following refinancing, Edington would grant his remaining interest to Robinson, leaving Robinson as sole owner of the property. Edington was to receive no cash in this transaction. While Shepherd was aware that Robinson was being brought in as a co-owner, there is a dispute among the parties as to whether Shepherd knew that Edington did not intend to remain a co-owner of the property after refinancing was completed.

In September 1973 Robinson and Edington secured a financing commitment from Fidelity Savings and Loan Association (Fidelity) in the amount of $225,000. Shepherd agreed to accept $225,000 cash and a promissory note for $24,000 as full settlement of the 1969 deed of trust.

Edington, Robinson, and Shepherd continued negotiations. Cash was necessary to pay closing costs ($5,378.40) and to perform the termite work and roof repair ($4,436) that were conditions of the refinancing by Fidelity. Edington was delinquent in payments on the 1969 note ($9,800) and owed Shepherd $198.46 for tax payments.

Shepherd wanted to be paid for the delinquent note payments and the tax payment and added this amount ($9,998.46) to the previously negotiated price of $249,000, raising the price to $258,998.46. Edington and Robinson agreed to the higher price, and Shepherd agreed to accept less cash. While the evidence is unclear on this point, it appears that both Shepherd and Robinson deposited additional funds into escrow (a total of $15,167.74).

On October 9, 1973, Shepherd received $215,185.60 in cash and a promissory note secured by a second deed of trust on the subject property in the amount of $43,812.86 executed by Edington and Robinson.

In November 1973 Edington conveyed his interest to Robinson, in accordance with the original agreement between them. Shepherd expressed no concern about this conveyance at the time and made no effort to enforce the due-on-sale clause in the deed of trust.

On August 15, 1975, Fidelity caused its trustee to hold a trustee's sale under the power of sale contained in the deed of trust held by Fidelity. The property was sold for the amount then due on the note. The security for Shepherd's 1973 note was thus eliminated.

As of August 1, 1975, the balance due by Robinson on the 1973 Shepherd note totalled $43,599.11.

In May 1977 Shepherd filed this action to recover the balance due on the 1973 promissory note, naming Edington and Robinson as defendants. Robinson filed a cross-complaint for indemnity against Edington and other parties not involved in this appeal.

Following discovery, Shepherd, Edington, and Robinson each filed a motion for summary judgment. The three motions were argued in December 1978, and the trial court granted judgment in favor of Shepherd against defendants in the sum of $19,599.11 plus interest from July 15, 1974, and granted judgment in favor of Edington and Robinson against Shepherd as to the remaining $24,000 due on the note. The court refused to award attorney's fees to either party, although the note sued upon provides that the prevailing party shall be entitled to attorney's fees.

Following the denial of each party's motion to set aside summary judgment, each party filed a notice of appeal in February 1979.

The parties agree that a deficiency judgment in this action is barred, if at all, by that portion of Code of Civil Procedure section 580b which reads as follows: "No deficiency judgment shall lie in any event after any sale of real property ... under a deed of trust, or mortgage, given to the vendor to secure payment of the balance of the purchase price of real property ...." 1

The operation of this clause has been held to be that under a purchase money debt owed to the vendor and secured by the property purchased, the security alone can be looked to for the recovery of the debt in the event of a default in payment. (Brown v. Jensen (1953) 41 Cal.2d 193, 198, 259 P.2d 425.) This rule holds true when the debt in question is a second deed of trust and the property has been foreclosed upon by the senior lienholder, leaving the security exhausted. (Ibid.; Jackson v. Taylor (1969) 272 Cal.App.2d 1, 6-7, 76 Cal.Rptr. 891.)

The purpose of section 580b is twofold: to discourage vendors from overvaluing the security, and, in the event of a depression in land values, to prevent the aggravation of the downturn that would result if defaulting purchasers lost the land and were burdened with personal liability. (Roseleaf Corp. v. Chierighino (1963) 59 Cal.2d 35, 42, 27 Cal.Rptr. 873, 378 P.2d 97; Spangler v. Memel (1972) 7 Cal.3d 603, 610-611, 102 Cal.Rptr. 807, 498 P.2d 1055; United States v. Haddon Haciendas Co. (1976) 541 F.2d 777.)

Shepherd contends initially that he was not a "vendor" with respect to the 1973 transaction, having sold his interest in the property to Edington in 1969, and that section 580b therefore does not apply. (See Kistler v. Vasi (1969) 71 Cal.2d 261, 262, 78 Cal.Rptr. 170, 455 P.2d 106.) "Vendor" has been liberally construed by the courts. Thus, even though Shepherd was not the legal owner of the property, Shepherd was a necessary party to the transfer of the property, and by "consenting to, and participating in the sale of the property to defendants, [the Shepherds] were vendors of their interest as beneficiaries under the original trust deed." (Jackson v. Taylor, supra, 272 Cal.App.2d at p. 6, 76 Cal.Rptr. 891.) The note and trust deed was given to Shepherd as a necessary part of the purchase price of the property, making Shepherd a vendor with respect to the 1973 transaction.

Shepherd argues that since he agreed to cancel a first deed of trust and accept in its place a second deed of trust, section 508b should not apply. However, the fact that Shepherd was able to renegotiate the terms of the sale and secure a substantial amount of cash serves to support a conclusion that Shepherd was an active and necessary participant in the 1973 transaction and thus a vendor for purposes of section 580b. 2

The debt secured by the 1973 Shepherd deed was a purchase money debt within the meaning of section 580b. The credit extended was "necessary to the consummation of the sale." (Bargioni v. Hill (1963) 59 Cal.2d 121, 123, 28 Cal.Rptr. 321, 378 P.2d 593.) Shepherd argues, however, that not all the sums represented by the note were "purchase money." This argument was accepted by the trial court, which held that the closing costs, the money for termite and roof repairs, and the back payments on the 1969 note and trust deed were not purchase money and thus not within the scope of section 580b. However, these costs were a necessary part of the purchase price and therefore were purchase money obligations. (Ibid.; Prunty v. Bank of America (1974) 37 Cal.App.3d 430, 112 Cal.Rptr. 370; Union Bank v. Wendland (1976) 54 Cal.App.3d 393, 126 Cal.Rptr. 549.)

We note that the contract of sale does not allocate the consideration, and the debt is secured by a single note. "The contract provided solely for a note secured by a trust deed on certain real property. The real...

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