Tahoe National Bank v. Phillips

• Decision Date: 05 February 1971
• Citation: 480 P.2d 320,92 Cal.Rptr. 704,4 Cal.3d 11
• Parties: , 480 P.2d 320 TAHOE NATIONAL BANK, Plaintiff and Respondent, v. Beulah F. PHILLIPS, Defendant and Appellant. Sac. 7857.
• Court: California Supreme Court

Page 704

92 Cal.Rptr. 704

4 Cal.3d 11, 480 P.2d 320

TAHOE NATIONAL BANK, Plaintiff and Respondent, v. Beulah F. PHILLIPS, Defendant and Appellant.

Sac. 7857.

Supreme Court of California.

Feb. 5, 1971.

Paul E. Gerbais, South Lake Tahoe, for defendant and appellant.

Beverly & Riley, and Melvin E. Beverly, Placerville, for plaintiff and respondent.

TOBRINER, Justice.

Defendant Beulah F. Phillips appeals from a judgment of the El Dorado County Superior Court that holds that an instrument entitled, 'Assignment of Rents and Agreement Not to Sell or Encumber Real Property' (hereinafter referred to as 'the assignment') was intended to be an equitable mortgage, and decrees its foreclosure.

We conclude that this judgment must be reversed. Plaintiff bank, which occupied the more powerful bargaining position and deliberately chose to use a standardized form providing for the assignment of rents and a covenant against conveyances, cannot be permitted to transform this assignment into a mortgage contrary to the reasonable expectation of its borrower. On examining the terms and purpose of the assignment, we conclude that it is not reasonably susceptible of construction as a mortgage at the instance of the bank, and thus that the trial court erred in invoking extrinsic evidence offered by the bank to prove it to be a mortgage.

Defendant and three co-venturers embarked on a real estate development in the Lake Tahoe area. About April 20, 1965, the venturers not only needed further capital but also owed plaintiff sums due on overdrafts on their accounts. Plaintiff agreed to lend $34,000 to defendant, who transferred the funds to the venture's account. In return, defendant gave plaintiff a single-payment promissory note, payable on demand or on May 20, 1965. ¹ At the same time plaintiff executed and delivered to defendant an instrument entitled: 'Assignment of Rents and Agreement Not to Sell or Encumber Real Property.' ² This document provided that as security for the loan defendant assigned to plaintiff all rent due from the realty described therein and agreed not to encumber or convey that property. The bank was authorized to record the instrument and did so on May 27, 1965.

The real property described in the document was not the venture's apartment development, but defendant's residence, which she owned one-half in fee and one-half as trustee under the testamentary trust of her deceased husband. This property was unencumbered as of April 20, 1965. On December 6 of that year defendant recorded a declaration of homestead on the property.

Mr. Ross, president of plaintiff bank, testified that the venturers first requested an unsecured loan but that he refused to issue the loan without security and requested collateral; that defendant then offered her residence as collateral and showed him an FHA appraisal at $34,400. The venturers required the money within two hours, and, for reasons which are not entirely clear, ³ Mr. Ross determined that the bank could not conveniently prepare a trust deed within that time limit; consequently he selected instead a form for an assignment of rents and agreement against conveyances. The document was prepared by his secretary and executed by the parties.

Mr. Ross acknowledged that his bank and other banks make unsecured loans upon agreements by the debtor to maintain unencumbered assets of sufficient value in the county. He denied, however, that his purpose in having defendant sign the document in issue was merely to insure that she would have unencumbered assets reachable by the bank; ⁴ he maintained that he took the document 'knowing it was in actuality a mortgage instrument against that house in lieu of a deed of trust.'

Mrs. Phillips testified that she did not intend to sign or believe that she was signing any security interest 'like a mortgage or deed of trust.' She added that since she owned half her interest as trustee she believed that she lacked authority to execute a mortgage or trust deed on the property.

Plaintiff brought suit against the venture on various notes and overdrafts and, in its fifth cause of action, asked foreclosure of the assignment as an equitable mortgage. The court entered judgment against the venturers, jointly and severally, for $92,386 plus costs, interest, and attorney's fees. It further found that the assignment was an equitable mortgage securing $34,000 of the debt, and decreed its foreclosure.

Mrs. Phillips alone appealed; her appeal challenges only that portion of the judgment finding the assignment to be an equitable mortgage and ordering foreclosure.

1. The language of the assignment is not reasonably susceptible of interpretation as a mortgage at the instance of plaintiff bank.

We agree with defendant's contention that the assignment cannot reasonably be construed as a mortgage and thus that extrinsic evidence, offered by plaintiff to prove the document a mortgage, is legally irrelevant and cannot support the judgment. ⁵ We shall examine the purpose and terms of the assignment, and explain that it is a type of agreement commonly used with unsecured loans, that it contains no words of hypothecation, and that it includes language inconsistent with a mortgage. We shall point out that if, as the bank contends, the word 'security' in the assignment renders it ambiguous, the bank bears the responsibility for that ambiguity. Having on hand instruments which unambiguously impose liens on realty, the bank cannot select an ambiguous instrument and then, by extrinsic evidence, give it the effect of the unambiguous form it eschewed.

Assignments similar to the present one are 'used by many banks in conjunction with small, nominally unsecured loans such as home improvement loans.' (California Real Estate Secured Transactions (Cont.Ed.Bar 1970) § 2.37 (hereinafter cited as 'CEB').) ⁶ They provide the lender with a measure of security unavailable in a totally unsecured loan; the creditor holds an assignment of rents and a contractual guarantee that property in which the debtor has an equity will remain unencumbered and unconveyed, and thus available for levy and execution should the creditor reduce his debt to judgment. Indeed, the plaintiff bank commonly makes loans upon the 'security' of a promise by the debtor not to convey or hypothecate property, using for that purpose forms similar to that at issue here. (See fn. 4, supra.)

Thus we are not dealing with homemade security instruments in which the parties labor to produce a mortgage but fall short of the legal requirements and must be rescued by a court of equity. ⁷ The form used was carefully drafted to produce a security interest with incidents differing from that of a mortgage. ⁸ As Justice Friedman pointed out in his dissenting opinion in the Court of Appeal: 'Here is a bank which prepared its own printed form, selected a particular one from its array of forms and handed it to the customer for signature. Doubtless the bank had printed forms of trust deed, perhaps even a few dusty, yellowed mortgages. Now the bank claims that by the printed form it selected, it intended to create the legal effect of a form it did not select.' We conclude that the plaintiff, having selected a form for 'assignment of rents and agreement not to sell or encumber real property,' is bound by the terms of that agreement.

We turn now to the language of the assignment. Its title gives no hint of a power of foreclosure. It contains no language of hypothecation, no provisions imposing a lien or creating a mortgage, no discussion of foreclosure. (See cases cited in fn. 6, supra.) The substance of the document comprises six covenants by the borrower, none of which purport to give the bank a lien on real property. The covenants respecting recordation and duration of the agreement, and persons bound by its terms, are consistent with a mortgage, but they are equally consistent with an instrument designed to afford the bank the security that the borrower retains unencumbered assets. The third covenant, however, is inconsistent with an instrument creating a lien on real property. It provides in part that 'borrower will not create or permit any lien or any encumbrance (other than those presently existing) to exist on said real property * * * without the prior written consent of bank.' This language apparently assumes that the assignment itself is not an encumbrance; its absolute prohibition on what would be junior encumbrances is inappropriate in a mortgage, ⁹ and if in fact such a prohibition appeared in a mortgage it might be unlawful as an unreasonable restraint upon alienation. (See Coast Bank v. Minderhout (1964) 61 Cal.2d 311, 317, 38 Cal.Rptr. 505, 392 P.2d 265.) On the other hand, as unsecured creditor the bank would benefit greatly from an assurance that defendant would not encumber her assets.

Plaintiff points out that the assignment specifies that it was given 'as security for a loan,' and that the word 'security' may signify a right of foreclosure (see Civ.Code, § 2924; Coast Bank v. Minderhout, supra, 61 Cal.2d 311, 314, 38 Cal.Rptr. 505, 392 P.2d 265). That phrase, however, appears in the preamble which, read as a whole, states that 'as security for a loan * * * the undersigned * * * hereby covenant and agree with Bank as follows.' The natural interpretation of this language is that it is the six covenants of the borrower that 'secures' that loan; ¹⁰ that the word 'security' in the preamble does not create additional rights and duties not specified in the covenants.

Plaintiff further contends that the term 'security,' and the provisions of the assignment describing the real property and permitting recordation, render the assignment ambiguous, thus requiring extrinsic evidence to determine whether it places a lien on defendant's property. (See Coast Bank v. Minderhout, supra, 61 Cal.2d at p. 315, 38 Cal.Rptr. 505, 392 P.2d 265.) ¹¹ If ambiguity there is, that ambiguity may be deliberate. Professor...