ENOCH PACKING COMPANY v. EQUITABLE FEDERAL SAVINGS AND LOAN

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Court of Appeal, Fifth District, California.

ENOCH PACKING COMPANY, Plaintiff and Respondent, v. EQUITABLE FEDERAL SAVINGS AND LOAN, Defendant and Appellant.

No. F008272.

Decided: February 11, 1988

John L. Fort, Long Beach, for defendant and appellant. Robert Vartan, Fresno, for plaintiff and respondent.

OPINION

FACTS AND PROCEEDINGS BELOW

Appellant seeks reversal of a judgment after a court trial granting to respondent, rather than appellant, advance rental payments and/or security deposits by the tenants.   For the reasons to be discussed below, we find appellant's contentions to be without merit and we affirm the judgment.

David Walton, Julie Tiechmann and Jeffrey Heaton (hereafter WTH) were owners of certain real property which included an apartment building.   Household Federal Savings and Loan Association held a note and first deed of trust on the property.   On February 24, 1984, Equitable Federal Savings and Loan (hereafter Equitable) purchased the note and deed of trust from Household Federal Savings and Loan Association.   On July 2, 1982, Enoch Packing Company (hereafter Enoch) received from WTH a promissory note in the amount of $340,000 secured by a deed of trust.   Included in this agreement as additional security was a clause assigning the rents, issues and profits of the property to Enoch.

WTH defaulted on the Equitable note.   A trustee's sale was held on June 20, 1984.   Equitable never perfected its assignment of rents clause.   A full credit bid was made by Equitable at the sale eliminating any claim by them to a deficiency.   After the foreclosure sale, Equitable sold the property to Earl Minnis.   Mr. Minnis was given a rental/security deposit credit on the purchase price in the amount of $37,100 by Equitable.   On October 25, 1985, WTH assigned $37,100 to Enoch.   The $37,100 was being held by Turnco Incorporated (hereafter Turnco) and represented rental and/or security deposits originally paid to WTH by the tenants of the apartments.   This money was “security” within the meaning of Civil Code section 1950.5.1  Enoch and Equitable both claim that they are the legal owners of the money.   Turnco filed an action in intervention and interpleader asking that Enoch and Equitable litigate the issue of who the money belongs to.   The court found that the money belonged to Enoch.   Equitable appeals claiming that they are entitled to the money.

DISCUSSION

Equitable contends that section 1905.5, subdivision (f), mandates that WTH had only two ways they could dispose of the security deposit money:  (1) They could refund it to the tenants, or (2) they could transfer the security to their successor in interest.   Since Equitable has already credited the amount equal to the security deposits to the new owner, Mr. Minnis, Equitable seeks to be made whole.   Equitable claims that any attempted assignment to Enoch was ineffective.

Enoch responds that the sale of the property did not transfer the security deposits to the buyer because the deposits did not run with the title but remained as a personal obligation of the owners.

Section 1950.5 provides in pertinent part:

“(a) The provisions of this section shall apply to security for a rental agreement for residential property, that is, property used as the dwelling of the tenant.

“(b) As used in this section, ‘security’ means any payment, fee, deposit or charge, including, but not limited to, an advance payment of rent, used or to be used for any purpose, including, but not limited to, any of the following:

“(1) The compensation of a landlord for a tenant's default in the payment of rent.

“(2) The repair of damages to the premises, exclusive of ordinary wear and tear, caused by the tenant or by a guest or licensee of the tenant.

“(3) The cleaning of the premises upon termination of the tenancy.

“(4) To remedy future defaults by the tenant in any obligation under the rental agreement to restore, replace or return personal property or appurtenances, exclusive of ordinary wear and tear, if the security deposit is authorized to be applied thereto by the rental agreement.

“․

“(g) Upon termination of the landlord's interest in the dwelling unit in question, whether by sale, assignment, death, appointment of receiver or otherwise, the landlord or the landlord's agent shall, within a reasonable time, do one of the following acts, either of which shall relieve the landlord of further liability with respect to the security held:

“(1) Transfer the portion of the security remaining after any lawful deductions made under subdivision (e) to the landlord's successor in interest.   The landlord shall thereafter notify the tenant by personal delivery or by first-class mail, postage prepaid, of the transfer, of any claims made against the security, of the amount of the security deposited, and of the names of the successors in interest, their address, and their telephone number.   If the notice to the tenant is made by personal delivery, the tenant shall acknowledge receipt of the notice and sign his or her name on the landlord's copy of the notice.

“(2) Return the portion of the security remaining after any lawful deductions made under subdivision (e) to the tenant, together with an accounting as provided in subdivision (f).

“(h) Prior to the voluntary transfer of a landlord's interest in a dwelling unit the landlord shall deliver to the landlord's successor in interest a written statement indicating the following:

“(1) The security remaining after any lawful deductions are made.

“(2) An itemization of any lawful deductions from any security received.

“(3) His or her election under paragraph (1) or (2) of subdivision (g).

“Nothing in this subdivision shall affect the validity of title to the real property transferred in violation of the provisions of this subdivision.

“(i) In the event of noncompliance with subdivision (g), the landlord's successors in interest shall be jointly and severally liable with the landlord for repayment of the security, or that portion thereof to which the tenant is entitled, when and as provided in subdivisions (e) and (f).   A successor in interest of a landlord may not require the tenant to post any security to replace that amount not transferred to the tenant or successors in interest as provided in subdivision (g), unless and until the successor in interest first makes restitution of the initial security as provided in paragraph (2) of subdivision (g) or provides the tenant with an accounting as provided in subdivision (f).

“Nothing in this subdivision shall preclude a successor in interest from recovering from the tenant compensatory damages that are in excess of the security received from the landlord previously paid by the tenant to the landlord.

“Notwithstanding the provisions of this subdivision, if upon inquiry and reasonable investigation, a landlord's successor in interest has a good faith belief that the lawfully remaining security deposit is transferred to him or her or returned to the tenant pursuant to subdivision (g), he or she shall not be liable for damages as provided in subdivision (k), or any security not transferred pursuant to subdivision (g).

“(j) Upon receipt of any portion of the security under paragraph (1) of subdivision (g), the landlord's successors in interest shall have all of the rights and obligations of a landlord holding the security with respect to the security.”  (Emphasis added.)

In Federated Mortgage Investors v. American Sav. & Loan Assn. (1975) 47 Cal.App.3d 917, 121 Cal.Rptr. 137:

“Eichler Corporation (Eichler) built a building—Central Towers—in San Francisco.   A portion of the costs of construction ($4.2 million) was supplied by American who acquired a first trust deed dated October 21, 1963, recorded October 28, 1963.   This trust deed gave American the right, inter alia, to receive rents, issues, and profits as additional security.   In April of 1965 Federated's predecessor (Kirkeby–Natus) loaned Eichler $1.8 million and acquired a second trust deed (recorded Apr. 9, 1965) which was subordinate to American's first trust deed.   Eichler defaulted.   Federated gave notice of default and election to sell on August 29, 1966.   American gave notice of default and election to sell on September 8, 1966.   In January 1967, Eichler filed in bankruptcy and the bankruptcy count [sic ] enjoined foreclosure by American and Federated.   The bankruptcy court allowed Eichler to remain in possession but ordered him to pay all rents to American and American was ordered to pay operating expenses and apply the remaining balance to its first trust deed.   In May 1967, the bankruptcy court removed Eichler and substituted Coldwell Banker as manager as agent for American.   Coldwell Banker managed the property, turning rents, issues and profits over to American after deducting operating expenses.   Those funds which Coldwell Banker collected disbursed and remitted to American included security deposits made by tenants, all or some portion of which might be repayable to the tenants at the end of their leases depending on whether or not the tenants were guilty of any breach and if so, the amount thereof.   It is the disposition of these security deposits which is the gravamen of this action.   Federated claims that they amount to $31,895 and that American is obligated to pay Federated that sum.   American denies that the correct sum of the security deposits is $31,895 but irrespective of the amount American denies that it is obligated to pay Federated any sum whatsoever for reasons hereinafter stated.”  (Id. at pp. 919–920, 121 Cal.Rptr. 137, fn. omitted.)

The court found:

“Absent evidence that American created a trust fund of the monies which it received from the tenants or that it was obligated to do so, no trust arose.  [Citations.]  There was no such evidence here.   As we view it, Federated's trust argument is a ‘strawman’ argument.   The obligation of American to the tenants was a personal obligation whether it arose out of a trust duty or a debtor/creditor relationship.   Federated could no more succeed to American's trust duties, if any, than it could to an obligation arising out of a debtor/creditor relationship.   American's right to the deposit receipts existed either by virtue of its first trust deed or the orders of the bankruptcy court, not because it had any ownership right in the property.   The obligation which American owed the tenants was a personal obligation which existed because of privity of contract and which did not run with the title.   [Citations.]  In the absence of agreement, a sale of the property did not transfer the security deposits to the buyer.  [Citation.]  Federated acquired no right to the security deposits merely because it succeeded to the title to the property.   It had no contractual rights to such security deposits with either American or Eichler or Central Towers.   It should be noted that this rule regarding transfer of security deposits was changed in certain limited respects effective January 1, 1971 (subsequent to the transaction involved in the case at bar) when the Legislature enacted Civil Code section 1951.   Under the 1971 statute a landlord, upon selling the property, has an option to refund security deposits to tenants or transfer the funds to the new buyer under certain conditions and in either event the landlord is relieved of personal liability.”  (Id. at pp. 922–923, 121 Cal.Rptr. 137, fn. omitted;  emphasis added.)

 Although the Federated case arose before the present subdivision (g) of section 1950.5 was effective, it is good law for the proposition that security deposits collected by the lessor from the tenants give rise to a personal obligation which exists because of privity of contract.   Because they are personal obligations, these deposits do not run with the title.   Also, subdivision (h)(3) of section 1950.5 states that “[n]othing in this subdivision shall affect the validity of title to the real property transferred in violation of the provisions of this section.”

 Equitable's argument is, in effect, that when the initial landlord's interest is terminated, if that landlord does not elect to refund the deposits to the tenants (§ 1950.5, subd. (g)(2)), then the other option is automatically chosen for the landlord and the deposit accrues to the successors in interest.   Subdivision (i) was added in 1985 and was effective in 1986.   Although not in effect when this action arose, it is clear that subdivision (i) does not change the meaning of subdivision (g).   Subdivision (i) clarifies subdivision (g) by providing the remedy for an aggrieved tenant when there is noncompliance with subdivision (g).   Although subsequent legislation is not binding on this court when construing the previous statute, it is a factor which we may consider in correctly determining the meaning and effect of the statute.   The subsequent legislation “does not change the meaning;  it merely supplies an indication of the legislative intent which may be considered together with other factors in arriving at the true intent existing at the time the legislation was enacted.”  (Stockton Sav. & Loan Bank v. Massanet (1941) 18 Cal.2d 200, 204, 114 P.2d 592.)  “[W]here an amendment is only for the purpose of clarification it is merely a restatement of the prior law in a clearer form, the law before the amendment being the same as after it.”  (Fahey v. City Council (1962) 208 Cal.App.2d 667, 676, 25 Cal.Rptr. 314.)   The enactment of subdivision (i) clarifies that subdivision (g) does not mandate a transfer of funds to the successor in interest.   These sections were written to insure that the landlord's obligations to the tenants are fulfilled.   Subdivision (g) sets forth two ways in which the landlord can relieve himself of personal liability for the security deposits.   This subdivision was written for the landlord's protection.   Subdivision (i) was written for the tenant's protection assuring them that there is someone who will be liable for the refund of the security deposits due to them.

The transfer of the security deposits did not occur with the transfer of the title to Equitable when they bought the property.   Equitable did nothing to enforce its rights under section 1950.5 against WTH.   It did not include the deposits as part of the sale nor did it in any way bring an action protecting their interest in the funds until after WTH had transferred the money to Enoch.   As a successor in interest Equitable was entitled to the money, but the money did not automatically run with the title.   Equitable had to take affirmative action to perfect its interests.   It failed to do so in a timely manner and WTH transferred the money away to Enoch.   Equitable's cause of action is against WTH for the security deposits not transferred to them at the time of the transfer of title to the property.   As between Equitable and Enoch, Enoch is entitled to the money by virtue of the assignment on October 25, 1985.   Equitable's credit to Minnis of the amount of the security deposit has no significance to the instant action.   Equitable cannot rearrange the position and rights of the parties by its own unilateral act.

 In sum, by making a full credit bid at the foreclosure sale, Equitable extinguished the lien on the real property and is not entitled by virtue of the lien to access to additional monies (the security deposits).   (Cornelison v. Kornbluth (1975) 15 Cal.3d 590, 606–607, 125 Cal.Rptr. 557, 542 P.2d 981.)   The security deposit money did not accrue to Equitable by virtue of the transfer of title because the interest was a personal obligation and did not run with the title.   Equitable did nothing to protect its interests until after WTH assigned the money to Enoch to satisfy part of the second deed of trust.   Enoch is entitled to the money.

The judgment is affirmed.   Respondent awarded costs on appeal.

FOOTNOTES

1.   All code references shall be to the Civil Code unless noted otherwise.

BALLANTYNE, Associate Justice.

WOOLPERT, Acting P.J., and HAMLIN, J., concur.