MCCONNELL v. HERBERT ET AL

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District Court of Appeal, First District, Division 2, California.

MCCONNELL v. HERBERT ET AL.*

Civ. 9312.

Decided: May 18, 1934

W. I. Gilbert, of Los Angeles, for appellant. Hinsdale, Otis & Johnson, of Sacramento, and Moote & Longcroft, of Los Angeles (Robert W. Jennings, of Sacramento, of counsel), for respondent.

In an action to recover the amount due on a promissory note the trial court rendered its judgment against the makers, one of whom has appealed. The plaintiff's complaint was in the ordinary form. It alleged the execution of a note in favor of the plaintiff on July 1, 1926, for the principal sum of $9,000, payable July 1, 1927, and bearing interest at 7 per cent. In their answers the defendants set up certain facts which they claimed discharged them. The findings are long and it is unnecessary to quote them in full. A substantial summary is as follows: The Auburn Creek Farms Company, hereinafter called the corporation, owned property in Placer county. The defendants in this action were the directors and only stockholders thereof. On July 10, 1922, the corporation borrowed from the plaintiff $36,000 on its promissory note. By the terms of that note it was payable three years after date, together with interest at 7 per cent per annum. To secure the payment of the note the corporation, as trustor, executed a trust deed to C. F. Dillman and F. H. Pierce, as trustees, in favor of the plaintiff, as beneficiary. Among other provisions of the trust deed there was incorporated the power to sell in the event of a default. On May 27, 1926, the trustor was in default in the payment of its interest and foreclosure proceedings had been commenced. On that date the plaintiff through her attorneys wrote a letter to the corporation as follows:

“Gentlemen: In reference to the note and deed of trust which I hold against you, dated July 10th, 1922, and recorded July 24th, 1922, in Book 187 of Trust Deeds at Page 418 Placer County Records, would say––

“If you will pay on or before July 1st, 1926, the interest up to July 10th, 1926, and $1,000 on the principal, I will not proceed with the foreclosure of the Deed of Trust unless you make default in one of the following payments, that is to say: that you pay the semiannual installment of interest due January 10th, 1927, on or before January 1st, 1927, and that on or before July 1st, 1927, you pay $9,000 on the principal and the interest up to July 10th, 1927. In the meantime the $9,000 payment of July 1st, 1927, is to be covered by an individual joint and several promissory note of Mr. Herbert, Mr. Elliot and Mr. Cyriacks, three of your stockholders, due on or before July 1st, 1927, with interest at 7%, payable at maturity, and any payments made on the note to be credited on your indebtedness to me. Any payments made on the principal or interest on your indebtedness to me in the meantime, to be credited on the note of these three stockholders, except the July 1st, 1926, payment, and except that the interest of January 1st, 1927, if paid by you will pay interest on the $9,000 up to January 10th, 1927. If the $9,000 is paid on the principal and the interest paid on your notes on or before July 1st, 1927, then I will not enforce the foreclosure of said Deed of Trust before July 1st, 1928, unless you fail to pay the interest due in January, 1928.

“In other words––I am offering to allow the note to stand without foreclosure if you pay $1,000 on the principal by July 1st, 1926, $9,000 on the principal on or before July 1st, 1927, and keep up the interest until July 1st, 1928, at which latter date I will expect the balance of the principal and interest.

“In the meantime you should pay my attorneys on account of services and costs in connection with the above matter.”

In pursuance of that offer the corporation did, on July 10, 1926, pay the sum of $1,000 on the principal of the note and at the same time the defendants executed the above–mentioned note for $9,000. Afterwards the corporation paid the interest on the $36,000 note to January 1, 1929. By the contract of the parties the payment last mentioned was to be considered as a payment of the interest to January 1, 1929, on the note sued on in this action. On August 2, 1928, there was paid on the principal of the note in suit $3,006.12, which sum was credited on the $36,000 note also.

The consideration for making the note in suit was that the plaintiff would forbear foreclosure proceedings until after July 1, 1928. After that date the plaintiff commenced proceedings to foreclose the trust deed. She did so by giving notice on November 12, 1929, and causing the trustees under the terms of the deed to sell the properties described in the deed. At the time of the sale there was due $36,791.02. The plaintiff bid in the property for $28,000. The deficiency was $8,791.02. After making its findings of fact the court drew conclusions of law that the plaintiff is entitled to judgment against the defendants for the sum of $9,000, together with interest at 7 per cent. per annum from January 10, 1927, to August 2, 1928, less the sum of $3,006.12 paid on that date. It further directed that said payment be applied first to the payment of interest due and the balance applied to the principal. In its judgment it computed the balance to be $8,291.95.

After reciting the foregoing facts, the defendant Cyriacks says: “We believe it obvious that the $9,000 note was executed merely to cover the corresponding payment in that amount to be made by Auburn Creek Farms Company on the $36,000 note under the terms of the extension agreement.” We think that contention must be sustained. In her letter quoted above, the plaintiff stated: “In the meantime the $9,000 payment of July 1, 1927, is to be covered by an individual joint and several promissory note of Mr. Herbert, Mr. Elliot, and Mr. Cyriacks, three of your stockholders, due on or before July 1, 1927, with interest at seven per cent, payable at maturity, and any payments made on the note ($9,000 note) to be credited on your indebtedness ($36,000 note) to me. Any payments made on the principal or interest on your indebtedness ($36,000 note) to me in the meantime, to be credited on the note ($9,000) of these three stockholders; except the July 1, 1926, payment and except that the interest of January 1, 1927, if paid by you will pay interest on the $9,000 up to January 10, 1927.” (All of the parentheses are ours.) However, the context contains expressions which clearly justify the parenthetical expressions. In the first place it is perfectly clear that the $36,000 note and the $9,000 note were different pieces of evidence of one indebtedness. Down to January 10, 1929, the interest was paid on the $36,000 note. According to the plaintiff's letter, interest paid on either note after July 1, 1926, was to be credited as interest on the other note. On August 3, 1928, $3,006.12 was paid as principal and was credited on the $36,000 note. By the same letter principal paid on one note was to be credited on the other. When at the sale held pursuant to the terms of the trust deed the plaintiff bid in the property for $28,000, the effect of the bid was the same as though she had received $28,000 in cash. John P. Mills Organization v. Unger, 215 Cal. 308, 9 P.(2d) 833, 82 A. L. R. 758. Taking up the transaction by its four corners, it is perfectly clear that on the 27th day of May, 1926, the plaintiff sought to compel a payment of $10,000 on the $36,000 note. To accomplish that result she required that Auburn Creek Farms Company pay $1,000 on or before July 1, 1926, and $9,000 on or before July 1, 1927. If at any time the $9,000, in principal, had been paid before the foreclosure of a trust deed manifestly it would have entirely discharged and paid the $9,000 note. The mere fact that it was not paid in cash and that the plaintiff foreclosed and bid in the property at $28,000 in no manner changed the payment from being one on the principal.

As stated above, the main object of the plaintiff was to force a payment on the principal of $1,000 and another payment on the principal of $9,000. In her letter dated May 27, 1926, it was provided that the $9,000 be paid on or before July 1, 1927. That payments made before the principal was so reduced would be credited two ways was a general expression. It may be said that some doubt arises by use of the expression “in the meantime.” Possibly so. But if any doubt does so arise it must be resolved in favor of the defendant Cyriacks. The plaintiff wrote the letter. Its provisions will therefore be construed against her. There was nothing in the letter, nor in the acts of the parties, showing or tending to show that it was only such moneys as were paid on or before July 1, 1927, which should be credited on both notes. That the parties so understood the language of the letter is evidenced by at least one of their subsequent acts. On May 2, 1927, the plaintiff gave an extension of time. It was a formal document. It contained no words limiting the double application of payments, but granted the extension regarding both notes. Furthermore, it recited the fact that both notes were part of the same indebtedness.

At the time of the sale the principal of the $36,000 note had been reduced to $32,000. But there was owing in principal, interest and costs $36,791.02. When the $28,000, the proceeds of plaintiff's bid, was applied, it paid $1,897.71 in accrued interest, $2,893.25 in accumulated charges and costs, and $23,208.98 on the principal. The evidence is clear that the proceeds were so applied. It follows that, under the terms of the plaintiff's letter, the $28,000 payment was to be applied on both notes just the same as any other payments and, being so applied, it is clear that the $9,000 note has been paid, both principal and interest.

The judgment is reversed, and the trial court is directed to reframe its findings and enter a judgment in accord with the views herein expressed.

STURTEVANT, Justice.

We concur: NOURSE, P. J.; SPENCE, J.

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