Union Bank v. Gradsky

• Decision Date: 19 August 1968
• Court: California Court of Appeals Court of Appeals
• Parties: UNION BANK, Plaintiff and Appellant, v. Max GRADSKY, aka Max M. Gradsky, Doe I, Doe II, and Doe III, Defendants and Respondents. Civ. 31681.

Page 64

71 Cal.Rptr. 64

265 Cal.App.2d 40

UNION BANK, Plaintiff and Appellant, v. Max GRADSKY, aka Max M. Gradsky, Doe I, Doe II, and Doe III, Defendants and Respondents.

Civ. 31681.

Court of Appeal, Second District, Division 5, California.

Aug. 19, 1968.

Rehearing Denied Sept. 10, 1968.

Hearing Denied Oct. 17, 1968.

Myron W. Curzon, Los Angeles, for plaintiff and appellant.

Josef J. Klein, Encino, for defendant and respondent Max Gradsky.

HUFSTEDLER, Associate Justice.

Plaintiff, Union Bank ('Bank'), appeals from a judgment of dismissal, entered after the demurrer of defendant Max Gradsky ('Max') to the complaint was sustained without leave to amend. The trial court dismissed the action on the ground that section 580d of the Code of Civil Procedure shielded a guarantor of a note secured by a first deed of trust from liability for the deficiency remaining after a nonjudicial sale of the security.

The appeal presents a question of first impression in California. We hold that the creditor cannot recover from the guarantor the unpaid balance upon the note following the creditor's nonjudicial sale of the security.

The creditor's recovery is not directly barred by section 580d of the Code of Civil Procedure. It is barred by applying the principles of estoppel. The estoppel is raised as a matter of law to prevent the creditor from recovering from the guarantor after the creditor has exercised an election of remedies which destroys the guarantor's subrogation rights against the principal debtor. The destruction of the guarantor's subrogation rights against the principal bination of the creditor's election to subject the security to nonjudicial sale and the operation of section 580d, which prevents both the creditor and the guarantor from obtaining any deficiency judgment against the debtor after nonjudicial sale of the security.

Summary of the Complaint

Bess Gradsky ('Bess') on May 20, 1964, executed in favor of the Bank a note for $112,500, a first deed of trust securing the note, and a 'building loan agreement' providing for the disbursement of the loan funds for construction upon Bess's land. ¹ The building loan agreement was signed by Max as the general contractor. At the same time Max executed a written guarantee of Bess's obligations. Among the provisions of Max's guarantee agreement was a clause stating, 'I waive * * * any right to require the holder of this within instrument to proceed against the maker or against any other person or to apply any security it may hold or to pursue any other remedy.' The funds were disbursed as agreed, and the construction work was completed. The time for payment of the principal note was twice extended, with the written consent of Max. When the note was not paid on the maturity date as extended, the Bank caused the security to be sold at a trustee's sale. The Bank bid in the property for $112,500, its fair market value, and applied the proceeds of sale to advances for delinquent taxes, costs of sale, interest and principal on the note. There remained unpaid on the note after application of the net proceeds of sale the sum of $11,565.97, which the Bank sought to recover from Max.

The sole alleged relationship between Max and Bess at the time the guarantee was executed was that of general contractor and owner. Although their last names are the same, no facts are pleaded showing that they were related to one another by blood or marriage. Max's guarantee was a 'true' guarantee taken by the Bank as additional security for Bess's construction loan. We call Max's guarantee a 'true' guarantee to distinguish it from a purported guarantee executed by one who is a principal obligor. ²

Section 580d of the Code of Civil Procedure provides in pertinent part: 'No judgment shall be rendered for any deficiency upon a note secured by a deed of trust or mortgage upon real property hereafter executed in any case in which the real property has been sold by the mortgagee or trustee under power of sale contained in such mortgage or deed of trust.'

The effect of section 580d is to permit deficiency judgments only in those cases in which the creditor, by foreclosing judicially, allows the debtor the opportunity of exercising his right of redemption. Upon judicial foreclosure, the creditor can recover from the debtor whose obligation is secured by the foreclosed mortgage or deed of trust any deficiency remaining after the proceeds of sale are applied to the debt, and the debtor has a statutory right of redemption. No right of redemption exists following a nonjudicial sale of the security. Section 580d makes up, at least in part, for the loss of the debtor's right of redemption by depriving the creditor who elects the nonjudicial foreclosure or sale remedy from obtaining a deficiency judgment against the debtor. (Roseleaf Corp. v. Chierighino (1963) 59 Cal.2d 35, 43--44, 27 Cal.Rptr. 873, 378 P.2d 97.)

In enacting section 580d the Legislature obviously had in mind the two-party transaction between the creditor whose loan is secured by a deed of trust or mortgage and the debtor who gave that security for the loan to him. The more difficult question is whether the Legislature also contemplated a tripartite transaction among the debtor, the creditor and a guarantor, in which the creditor has a multiple choice of remedies, and his selection of a particular remedy in turn affects the remedies of the guarantor against the principal debtor. Did the Legislature intend section 580d to shield the debtor only from a deficiency judgment obtained by the originally secured creditor, or did it intend to protect him from all personal liability in each instance in which he has no right of redemption? Did the Legislature intend to extend section 580d protection to anyone other than the original debtor, who has no right of redemption? To answer these questions requires an examination of the remedies of each of the parties against the other and an exploration of the effect of section 580d on those remedies.

At the time of Bess's default the Bank had three options: (1) It could have brought an action for judicial foreclosure, joining Max and Bess; (2) it could have sued Max upon his guarantee for the full amount of the unpaid balance of the principal obligation without proceeding against either Bess or the security; ³ or (3) it could have realized upon the security by way of a nonjudicial sale.

Had the Bank elected the judicial foreclosure remedy, no section 580d problem would have existed, because the Bank could have obtained a deficiency judgment against Bess, and she would have had a statutory right of redemption.

Had the Bank elected the second course, section 580d would not have insulated Max from liability for the unpaid balance of the debt. Section 580d begins with the words, 'No judgment shall be rendered for any deficiency upon a note.' An action by the Bank against Max before any resort to the security is neither an action on 'a note' nor is it an action to recover a 'deficiency.' The action is on the guarantee, not on the note, and in absence of either judicial or nonjudicial foreclosure of the security, there exists no 'deficiency.' Section 580d cannot be stretched to shield Max from liability to the Bank on his guarantee before resort to the security.

Despite the fact that section 580d could not have been used defensively by Max if he had been sued by the Bank before a resort to the security, the section would have had a critical effect upon the rights of the parties because it would have limited Max's rights against Bess. To understand why this is so, we turn to an exploration of the rights Max would have acquired from the Bank had Max paid Bess's debt to the Bank before the Bank resorted to the security.

Max would have thereby acquired all of the rights which the Bank had against Bess upon the application of familiar principles of subrogation: One who is neither an intermeddler nor a volunteer and who pays the obligation of another, for which the other is primarily liable, is equitably subrogated to all of the rights and to the security formerly held by the obligee against the principal obligor. (Civ.Code, §§ 2848--2849; Sanders v. Magill (1937) 9 Cal.2d 145, 70 P.2d 159; cf. Offer v. Superior Court etc. (1924) 194 Cal. 114, 118, 228 P. 11.) Therefore, Max would have obtained by subrogation the right to pursue either judicial or nonjudicial sale of the security. If he elected the former, he could have obtained a deficiency judgment against Bess. However, Max could stand no better against Bess than could the Bank with respect to the rights he acquired by subrogation. If he elected the second remedy, section 580d of the Code of Civil Procedure would have barred his obtaining a deficiency judgment against her. (Anheuser-Busch, Inc. v. Starley (1946) 28 Cal.2d 347, 351, 170 P.2d 448, 166 A.L.R. 198; March v. Barnet (1898) 121 Cal. 419, 423, 53 P. 933.) ⁴

Max's payment of Bess's debt, evidenced by a negotiable note, does not extinguish the note nor affect the security for it. (Sanders v. Magill, supra, 9 Cal.2d at p. 150, 70 P.2d 159.) ⁵ Subjecting a subrogated guarantor to the same defenses which the principal debtor could have asserted against the subrogorcreditor does not work any hardship upon the guarantor. The guarantor, like the original creditor, has an election whether to pursue judicial foreclosure, thereby obtaining a deficiency judgment, or a nonjudicial foreclosure, thereby foregoing a deficiency judgment but cutting off the debtor's right of redemption.

If the Bank elects nonjudicial sale of the security, the respective positions of the parties are substantially different from those which exist following exercise of the other options. If Max is required to pay the Bank the unpaid balance of the note, he does not thereby acquire any rights from the Bank by subrogation, because the Bank no longer has any rights against Bess, and no security remains after the sale. ⁶...