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

Edward T. GHIRARDO et al., Plaintiffs, Cross-defendants and Respondents, v. Ronald F. ANTONIOLI et al., Defendants, Cross-complainants and Appellants.

No. A053887.

Decided: August 28, 1995

Bowles & Verna, Richard T. Bowles, K.P. Dean Harper, Thomas G.F. Del Beccaro, Walnut Creek, Howard, Rice, Nemerovski, Canady, Robertson & Falk, Steven E. Schon, Laurence F. Pulgram, San Francisco, David G. Kenyon, San Rafael, for plaintiffs, cross-defendants and respondents. Richard A. Hirsch, Novato, for defendants, cross-complainants and appellants.


In this appeal on remand from the California Supreme Court after that court's determination that the law of usury does not apply to the present real estate transactions, we hold that the respondent debtors (Ghirardo) have no liability to the appellant creditors (Antonioli) for the sum of $151,566.82 inadvertently excluded from a payoff demand on a purchase money mortgage.   We also hold that because neither group of parties has prevailed in each's respective action and cross-action, neither is entitled to an award of attorney fees under Civil Code section 1717.


Ronald and Pamela Antonioli (hereafter Antonioli) bought real property from McPhail's, Inc., in 1981, and sold the property to Phillip Gay Associates in 1984.   Gay immediately sold the property to Edward Ghirardo and others (hereafter Ghirardo), who took the property subject to the existing Gay note and deed of trust.   Thereafter, Ghirardo paid directly to Antonioli the payments owed by Gay.

In 1986, a dispute arose between Antonioli and Ghirardo regarding payment on the Gay note.   As part of a settlement, Ghirardo executed two secured notes payable to Antonioli in the amounts of $57,500 (the small note) and $1,072,867.47 (the large note), with the small note bearing 13 percent interest and the large note bearing 10 percent interest plus a $100,000 fee.

Ghirardo paid the small note in full.   On the large note, Ghirardo paid all but $151,566.82, which Antonioli had inadvertently omitted from the payoff demand to the escrow holder.   Antonioli promptly discovered the mistake, but not before escrow had closed and Antonioli had reconveyed to Ghirardo the deed of trust securing the large note.   Antonioli requested payment of the additional amount.   Ghirardo not only refused, but also demanded repayment of all interest on the notes on the ground they were usurious.

Ghirardo sued Antonioli for usury.   Antonioli cross-complained against Ghirardo for the $151,566.82 claimed due on the large note.   The trial court ruled for Ghirardo on the complaint, finding that the notes were usurious.   The court also ruled for Ghirardo on the cross-complaint, on two alternative grounds:  the finding of usury, and Antonioli's failure to comply with the “one form of action” rule in Code of Civil Procedure section 726 for the recovery of a mortgage-secured debt, requiring foreclosure of the security.

We affirmed the judgment in 1993, holding that the usury law applied.   Because of our usury ruling, we did not address the “one form of action” issue.

On November 28, 1994, the California Supreme Court reversed, holding the usury law does not apply because there was no loan or forbearance;  rather, the transaction was a modification of a credit sale that is not subject to the usury proscription.  (Ghirardo v. Antonioli (1994) 8 Cal.4th 791, 795, 808, 35 Cal.Rptr.2d 418, 883 P.2d 960.)   The Supreme Court remanded the cause with directions for us to consider the “one form of action” issue and the propriety of an attorney fees award under Civil Code section 1717.  (Ghirardo, supra, at pp. 808–809, 35 Cal.Rptr.2d 418, 883 P.2d 960.)   Supplemental briefs have been filed by counsel for Antonioli and by one of the Ghirardo respondents in propria persona.


 Under the “one form of action” rule set forth in Code of Civil Procedure section 726, there can be only one form of action—foreclosure—for the recovery of a debt secured by a mortgage on real property.   A creditor who seeks a deficiency judgment in excess of the value of the security must proceed by judicial foreclosure rather than by operation of the power of sale under the deed of trust.   The creditor has no right to bring an independent action on the underlying promissory note.  (Pacific Valley Bank v. Schwenke (1987) 189 Cal.App.3d 134, 140, 234 Cal.Rptr. 298.)

Ghirardo contends this rule precludes Antonioli from recovering the $151,566.82 sought in the cross-action on the large note, for want of foreclosure.   Antonioli seeks to avoid the rule on two grounds:  Ghirardo failed to plead it as an affirmative defense, and Ghirardo waived it by accepting Antonioli's reconveyance of the deed of trust.

 Antonioli waived any pleading defect by failing to assert it below.   Ghirardo may not have pleaded the “one form of action” defense, but did raise the defense in a post-trial brief and a proposed statement of decision.   In Antonioli's own post-trial brief and objections to the proposed statement of decision, Antonioli made no procedural objection based on failure to plead, but instead argued the merits of the “one form of action” issue.   Because Antonioli was made aware of the defense below and argued the point as if it had been pleaded, Antonioli may not assert the pleading defect for the first time on appeal.  (Hilliard v. A.H. Robins Co. (1983) 148 Cal.App.3d 374, 392, 196 Cal.Rptr. 117;  Weil & Brown, Cal. Practice Guide:  Civil Procedure Before Trial (1994) p. 6–49.10, ¶ 6:258.7.)

 Antonioli's claim that Ghirardo waived the “one form of action” rule by accepting reconveyance of the deed of trust is based on “the rule that a debtor can waive the protection of section 726 by failing to insist that the creditor first proceed against the security.”  (Security Pacific National Bank v. Wozab (1990) 51 Cal.3d 991, 1005, 275 Cal.Rptr. 201, 800 P.2d 557.)   Antonioli's argument seems to be that Ghirardo should have insisted that Antonioli commence foreclosure proceedings to recover the claimed underpayment, and Ghirardo's acceptance of reconveyance instead of insisting on foreclosure was a waiver of section 726.   The answer to this argument is that at the time of reconveyance, Ghirardo had no reason to believe that Antonioli desired any further payment—Ghirardo paid the amount Antonioli demanded—and therefore had no reason to insist on foreclosure.   Thus, the waiver rule cannot apply because there was no intentional relinquishment of a known right.  (See, e.g., Guild Wineries & Distilleries v. Land Dynamics (1980) 103 Cal.App.3d 966, 977, 163 Cal.Rptr. 348.)

Consequently, neither of Antonioli's arguments has merit.   But we do not view this case as being governed by Code of Civil Procedure section 726 at all.   That statute applies to the recovery of a debt “secured by mortgage upon real property․”  (Code Civ.Proc., § 726, subd. (a).)  Once Antonioli reconveyed the deed of trust securing the large note, the $151,566.82 unpaid on the note was no longer a secured debt.   Thus this appeal is governed by Civil Code section 2943, which provides that a sum inadvertently omitted from a payoff demand on a secured obligation “shall continue to be recoverable by the beneficiary as an unsecured obligation of the obligor pursuant to the terms of the note and existing provisions of law.”  (Civ.Code, § 2943, subd. (d)(3);  see Freedom Financial Thrift & Loan v. Golden Pacific Bank (1993) 20 Cal.App.4th 1305, 1309–1313, 25 Cal.Rptr.2d 235.)

 Nevertheless, Civil Code section 2943 does not help Antonioli.   The phrase “and existing provisions of law” in subdivision (d)(3) of section 2943 is a reference to the antideficiency statute (Code Civ.Proc., § 580b);  it qualifies the phrase “obligation of the obligor” (Civ.Code, § 2943, subd. (d)(3)) and “means any amounts excluded from the lender's payoff demand statement would not be collectible from the debtor in the event the debt was a ‘purchase money mortgage.’ ”  (Freedom Financial Thrift & Loan v. Golden Pacific Bank, supra, 20 Cal.App.4th at p. 1313, 25 Cal.Rptr.2d 235.)   Ghirardo's debt was a purchase money mortgage;  it was “given to the vendor to secure payment of the balance of the purchase price” (Code Civ.Proc., § 580b) and was “the functional equivalent of a modification to a credit sale” (Ghirardo v. Antonioli, supra, 8 Cal.4th at p. 808, 35 Cal.Rptr.2d 418, 883 P.2d 960).   Thus, the $151,566.82 inadvertently excluded from Antonioli's payoff demand was not collectible once escrow closed.  (Freedom Financial Thrift & Loan v. Golden Pacific Bank, supra, 20 Cal.App.4th at p. 1313, 25 Cal.Rptr.2d 235.)

Antonioli's misfortune derives from the neglectful omission of the $151,566.82 from the payoff demand to the escrow holder and reconveyance of the deed of trust before the error was discovered.   The reconveyance deprived Antonioli of the right to foreclose (Pacific Valley Bank v. Schwenke, supra, 189 Cal.App.3d at pp. 140–141, 234 Cal.Rptr. 298), and because of the nature of the transaction as a purchase money mortgage he could not sue Ghirardo for the unpaid balance.   The judgment for Ghirardo on the cross-complaint was correct.

The trial court awarded Ghirardo attorney fees of $76,350 on the complaint as the prevailing party under Civil Code section 1717.   Now, because of the Supreme Court's ruling on the usury issue, Ghirardo has failed to prevail on the complaint, and due to our present ruling Antonioli has failed to prevail on the cross-complaint.   Because Antonioli and Ghirardo both sought relief in cross-actions but neither has prevailed, and Antonioli's cross-action was not defensive, there is no prevailing party under Civil Code section 1717.  (See Hsu v. Abbara (1995) 9 Cal.4th 863, 875, 39 Cal.Rptr.2d 824, 891 P.2d 804, and cases cited therein.)   Nobody is entitled to recover attorney fees.


The judgment is reversed as to the award of money, interest and attorney fees on the complaint, and is affirmed as to the denial of relief on the cross-complaint.   The parties shall bear their own costs and attorney fees on appeal.

KING, Associate Justice.

PETERSON, P.J., and HANING, J., concur.

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