CORNELISON v. KORNBLUTH

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Court of Appeal, Second District, Division 3, California.

Mary Pauline CORNELISON, Plaintiff and Appellant, v. O. John KORNBLUTH, Defendant and Respondent.

Civ. 43200.

Decided: October 02, 1974

William J. Ferrin, Sherman Oaks, for plaintiff and appellant. Levinson, Marcus & Bratter, Beverly Hills, for defendant and respondent.

In a verified amended complaint plaintiff seeks damages from Maurice L. Chanon, Leona Chanon, O. John Kornbluth, also known as Jack Kornbluth, Richard Vee Larkins and Does I through XXV. In the first cause of action for breach of contract it is alleged that on July 15, 1964, plaintiff sold certain described real property to the Chanons who, in accordance with the terms of the sale, executed a note in the sum of $18,800 secured by a deed of trust on the property in favor of plaintiff.

The deed of trust, recorded on August 21, 1964, contained provisions accelerating the maturity of its obligation in the event the purchasers should resell and requiring purchasers to keep the property in good repair and free of waste. It is alleged that thereafter the Chanons sold the property to defendant Kornbluth, who knew, or should have known, of the terms of Chanons' obligations to plaintiff and who agreed in writing to be bound thereby. It is further alleged in this respect that plaintiff did not consent to substitute Kornbluth in the place of Chanons, and that Kornbluth breached the agreement by failing to make payments on the note, by selling the property to defendant Larkins in September 1968, by failing to pay property taxes and by failing to properly care for and maintain the premises, resulting in their being condemned as unfit for habitation by the county health department in January 1969, to her damage in the sum of $18,169.66.

In the second cause of action for nuisance it is alleged that by reason of the facts previously alleged defendant Kornbluth owed a duty to plaintiff to properly and adequately care for and maintain the property and as a result of his negligent failure to do so plaintiff was damaged by reason of loss of improvements, demolition thereof and filling and regrading the lot, in the sum of $16,100. Plaintiff also claims damages for loss of use of the property at $4.00 per day from July 21, 1969, general damages of $4500 for loss of use and $45,000 punitive damages.

In a verified answer to the amended complaint defendant Kornbluth admits the sale of the property by Chanons to him and by him to defendant Larkins, but denies all other allegations for lack of knowledge or belief.

A motion for summary judgment in favor of defendant Kornbluth was granted. The minute order granting the motion reads as follows:

‘Motion for summary judgment in favor of defendant Kornbluth against plaintiff is now granted on the ground that the action has no merit as against said defendant in that there is no showing of a duty owing to plaintiff on the part of said defendant arising by contract (agreement) or otherwise to pay taxes on or to care for and maintain the real property and improvements in question; on the contrary, the absence of such a duty has been affirmatively shown by the uncontroverted declaration filed in support of the motion.’

A judgment in favor of defendant Kornbluth was entered April 3, 1973. Plaintiff appeals from that judgment contending the summary judgment was improperly granted because (1) the complaint is regular on its face and contains the allegation of a duty, (2) the covenants in question were contained in the recorded deed of trust and as such ran with the land, and (3) her action for ‘waste’ can be maintained independently of the anti-deficiency provisions of Code of Civil Procedure section 580b.

Discussion

In support of her first contention plaintiff argues that the drastic remedy of summary judgment should not be allowed in this case because the complaint, in the first cause of action, alleges that defendant Kornbluth ‘agreed in writing to be bound by and to perform all of the covenants contained in the Note and Deed of Trust theretofore executed by defendants MAURICE L. CHANON and LEONA CHANON for the benefit of plaintiff herein.’

Kornbluth concedes that the complaint states a cause of action because it does allege a duty but argues that the action had no merit because in fact he did not agree to assume the obligations in the Chanon deed of trust despite the allegation that he did so in writing.

At the outset we note that the summary judgment was not granted upon the ground that the amended complaint failed to state a cause of action but rather because the action itself was without merit. The motion for judgment was made on this ground and was based on the pleadings and files in the action. The latter contained the declarations of attorney Marcus and of Kornbluth referred to above in the minute order. In these declarations it is stated that prior to the filing of this action plaintiff had foreclosed and regained possession of the property by purchasing same for a full credit bid of $21,921.42, resulting in satisfaction of the indebtedness secured by the deed of trust, and that while aware of the deed of trust in favor of plaintiff, Kornbluth purchased the property from the Chanons and voluntarily made certain payments to plaintiff totaling some $3500 although he never executed any agreement regarding assumption of Chanons' liability for property taxes or for maintenance and repairs to the premises. The facts set forth in these declarations were not controverted by declaration or evidence presented in opposition to the motion. While the complaint may have stated a cause of action the moving papers show affirmatively there is no triable issue of fact under the first cause of action and that defendant Kornbluth would be entitled to a judgment thereon as a matter of law since the allegations of the first cause of action and the uncontroverted declarations establish that this defendant had no contractual duty to plaintiff which was breached. It remains for us to determine whether, despite the foregoing, the action may be maintained on any other legal theory.

Although we agree that the record discloses no legal duty on the part of defendant Kornbluth to plaintiff arising from contract, we do not agree that no duty otherwise exists on his part. It appears clear that Kornbluth's equitable interest in this property was subject to a lien created by the deed of trust between plaintiff and the Chanons. Although not a party to the security transaction he had constructive notice thereof by recordation. Civil Code section 2929 provides: ‘Waste. No person whose interest is subject to the lien of a mortgage may do any act which will substantially impair the mortgagee's security.’ While this section refers to a mortgage and not to a deed of trust, the terminology creates a difference without a distinction. Any difference that might be urged in this case has long since been eliminated by a process of judicial assimilation.1 It follows in the case at bench that Kornbluth was a ‘person whose interest is subject to the lien of a mortgage’ within the meaning of section 2929. He therefore had a duty not to do any act which would substantially impair the security of the transaction. The principle involved was suggested in the early case of Lavenson v. Standard Soap Co., 80 Cal. 245, 22 P. 184. Subsequently in Easton v. Ash, 18 Cal.2d 530, 539, 116 P.2d 433, 438, it was said:

‘A mortgagee has a right of action for damages against his mortgagor and third persons who have cut and removed timber from the mortgaged land when these acts have rendered the mortgage insufficient security for the debt. Robinson v. Russell, 24 Cal. 467, 473; Buckout v. Swift, 27 Cal. 433, 87 Am.Dec. 90; Lavenson v. Standard Soap Co., 80 Cal. 245, 22 P. 184, 13 Am.St.Rep. 147; Van Pelt v. McGraw, 4 N.Y. 110.’

Later in American Sav. & Loan Assn. v. Leeds, supra, 68 Cal.2d 611, 614, footnote 2, 68 Cal.Rptr. 453, 440 P.2d 933, we find a recognition of the rationale giving rise to a beneficiary's right to sue for the impairment of security. Finally we find the applicable law currently summarized and clarified in the recent case of U. S. Financial v. Sullivan, 37 Cal.App.3d 5, 12–13, 112 Cal.Rptr. 18, 22, as follows:

‘We are uncertain whether respondents contest the general proposition that the beneficiary of a deed of trust may maintain an action against a third party who has negligently impaired the beneficiary's security. Reference is made in respondents' brief to the so-called ‘New York rule’ that a mortgagee may maintain a cause of action against a third party for impairment of security only if the third party's tortious conduct was intentional. (See Denton, ‘Right of a Mortgagee to Recover Damages from a Third Party for Injury to Mortgaged Property in Ohio,’ 3 Ohio St.L.J. 161, 165–166; Anno., 37 A.L.R. 1120, 1121–1122.) If this constitutes a contention that a beneficiary of the deed of trust may recover from a third party for impairment of security only in the case of an intentional tort, we reject it.

In the first place, several California cases have strongly implied, if not held, that a mortgagee or beneficiary of a deed of trust has a cause of action for impairment of security against a negligent third party tortfeasor. (See American Sav. & Loan Assn. v. Leeds, 68 Cal.2d 611, 614 [fn. 2], 616, 68 Cal.Rptr. 453, 440 P.2d 933; cf. Connor v. Great Western Sav. & Loan Assn., 69 Cal.2d 850, 856, 870, 73 Cal.Rptr. 369, 447 P.2d 609, 39 A.L.R.3d 224; Los Angeles T. & S. Bk. v. Bortenstein, 47 Cal.App. 421, 424, 190 P. 850; Snelson v. Ondulando Highlands Corp., 5 Cal.App.3d 243, 257–258, 84 Cal.Rptr. 800, 85 Cal.Rptr. 806.)

Secondly, general principles of California tort law indicate the same result.'

Defendant argues that the deficiency provisions of Code of Civil Procedure section 580b bar the action. We do not agree. The judgment being sought is not for a deficiency within the meaning of this section. In American Sav. & Loan Assn. v. Leeds, supra, it is said in footnote 2 at pages 614–615, 68 Cal.Rptr. at page 456, 440 P.2d at page 936:

‘The theory upon which all these remedies rest is one of equitable conversion or substituted property: ‘[T]he money so awarded by the court as damages to the realty must be treated, in equity, as the land itself. It takes the place of the reduced value of the land. The mortgaged land, in its present damaged condition, together with such portion of all the moneys awarded for the total injury as represents the damage to the mortgaged premises, stand now in the place and stead of the original uninjured mortgaged premises.’ (Los Angeles Trust & Sav. Bank v. Bortenstein, supra, 47 Cal.App. 421, 424, 190 P. 850.)

If plaintiff were attempting to reach substitute property, it could do so without being barred by section 580b of the Code of Civil Procedure. (See fn. 3, infra.) That section prohibits a deficiency judgment when a mortgage or deed of trust secures the payment of purchase money on real property, but it does not prohibit mortgagees from preventing mortgagors or third parties from physically harming the security or from recovering damages for such harm. Such a recovery is not a deficiency judgment. (Los Angeles Trust & Sav. Bank v. Bortenstein, supra, 47 Cal.App. 421, 424, 190 P. 850.) Since the purchase money lender is confined to his security, it is all the more important that he be allowed effectively to protect it.'

While it is true that this may be dictum, it clearly is a correct statement of the law as we understand it to be at the present time. In any event section 580b does not apply to defendant since he is not a debtor for whom the protection of this section is intended as he is not a party to the deed of trust, either originally or by written assumption thereof. In addition defendant suggests that the failure of the Leeds court to discuss the ‘one form of action’ provision of section 726 of the Code of Civil Procedure also destroys its value as precedent in the instant case. Be that as it may, the matter was discussed and clarified for us in U. S. Financial, supra, 37 Cal.App.3d at page 15, 112 Cal.Rptr. at page 23, where the court said, citing Leeds:

‘Respondents also appear to have placed some reliance on Lavenson v. Standard Soap Co., 80 Cal. 245, 22 P. 184. In that case, a mortgagee sought damages against the mortgagor and a third party for impairment of the mortgaged security. The court noted that before the mortgagee could restort to other property of the mortgagor, he must exhaust the mortgaged security, citing Code of Civil Procedure, section 726 and cases based thereon. Code of Civil Procedure, section 726, however, applies only to situations in which the action is against a mortgagor or trustor or his successor in interest. (See 3 Witkin, Summary of Cal.Law (8th ed.) pp. 1560, 1567.) Where the beneficiary seeks to recover damages from the trustor, there is reason to require the beneficiary to first seek satisfaction from the property subject to the deed of trust. The security is the primary fund for the discharge of the indebtedness, and the requirement that the security first be exhausted protects the debtor and prevents a multiplicity of actions. (Code Civ.Proc., § 726: Haas v. Palace Hotel Co. of S. F., 101 Cal.App.2d 108, 121, 224 P.2d 783.) Where the defendant is a third party tortfeasor, however, the reason for the rule disappears. The action is not for the recovery of the debt secured by the mortgage but for damages for the tortious conduct of the third party tortfeasor resulting in impairment of the security. In legal theory, the monetary recovery against the third party tortfeasor is treated as the land itself. It takes the place of the reduced value of the land. (American Sav. & Loan Assn. v. Leeds, supra, 68 Cal.2d at p. 614, fn. 2, 68 Cal.Rptr. 453, 440 P.2d 933; Los Angeles T. & S. Bk. v. Bortenstein, supra, 47 Cal.App. at p. 424, 190 P. 859.)’ (Fn. omitted.)

As previously pointed out Kornbluth is neither the trustor nor a successor to the interest of the Chanons. He occupies the status of a third party insofar as the security transaction is concerned. The action against him is not barred by the one form of action rule.

Finally defendant argues that the ‘full credit bid’ submitted by plaintiff at the foreclosure sale resulted in a total satisfaction of the secured obligation, relying heavily upon Schumacher v. Gaines, 18 Cal.App.3d 994, 96 Cal.Rptr. 223, a case ‘on all fours with the instant case.’ Once again we do not agree. In Schumacher the action was brought against the buyers who were signatories to the deed of trust as trustors and against their agents. In reversing the judgment for the seller the Schumacher court said at pages 999–1000, 96 Cal.Rptr. at page 226:

‘We think the holding in Brown v. Jensen, supra [41 Cal.2d 193, 259 P.2d 425], to be that section 580b of the Code of Civil Procedure deprives the holder of a purchase money note and deed of trust of any remedy other than the right to look solely to the security and no personal judgment may be recovered. The bar of Code of Civil Procedure section 580b applies against deficiency judgments for enforcement of the obligatory rights flowing from the promisory note secured by the deed of trust.’

We note that Brown v. Jensen2 did not involve a tortious depreciation of the security by either the trustor or a third party, but rather the rendering of the security for seller's second trust deed valueless by a foreclosure of an existing first. It follows that the majority opinion in Schumacher is founded on a premise which we deem inapplicable to the decision therein, thus rendering Schumacher questionable authority for an affirmance herein.

In Schumacher no reference is made to any of the cases cited in this opinion and in U. S. Financial v. Sullivan, supra, 37 Cal.App.2d 5, 112 Cal.Rptr. 18. Furthermore U. S. Financial does not cite Schumacher at all, much less as being authority for a contrary decision in the instant case. In fact, the Schumacher court opines over a dearth of applicable precedent by saying 18 Cal.App.3d at page 1000, 96 Cal.Rptr. at page 227:

‘In support of their contention that Code of Civil Procedure, section 580b bars recourse against them in this action, defendants cite no cases which are precisely in point. Nor have we found a California case involving both waste and breach of contract causing impairment of the security.’

Presiding Justice Pierce, recognizing the injustice created by the majority in holding recovery to be barred by section 580b, filed a dissent in Schumacher. We believe that his dissenting opinion is an accurate rationalization of the law applicable in the instant case, wherein it says at pages 1001–1002, 96 Cal.Rptr. at page 227:

‘I dissent. The majority opinion is an open invitation under the situation existing in this case to any defaulting ‘equitable’ owner (herein for convenience described as the ‘mortgagor’)—and particularly to this one—before moving out to lay waste to the real property which stands as security for the debt. That is not justice; it is not the law; it was not the intent of the Legislature when Code of Civil Procedure, sections 580a and 580b were enacted in their present form.

Those sections embrace a complete legislative scheme of foreclosure for defaulted debts. Section 580a covers foreclosure of real property where there is no purchase money mortgage or trust deed and where, therefore, a deficiency judgment can or may be sought. Section 580b covers foreclosure sales where a purchase money deed of trust or mortgage is involved. When a foreclosure sale for the first type is involved, section 580a prevents the ‘mortgage'-debtor from being gouged by exacting from the beneficiary (cestui que trust) or mortgagee (I will, for convenience, refer to him hereinafter by the latter term) the duty, before any deficiency judgment can be sought, to have the court appoint one of the inheritance tax appraisers to appraise and ascertain the fair market value of the secured real property, and a judgment may not be given for any deficiency exceeding that amount. Section 580b, which applies only to purchase money secured debts, flatly wipes out all deficiency judgments. In the event of the foreclosure of such real property mortgage, the Legislature is not in the least concerned with the amount at which the mortgagee bids in the property at the foreclosure sale except as hereinafter noted in the margin. There is no mention of ‘fair market value.’ Where no real equity exists in the mortgagor it makes not the slightest difference whether the mortgagee buys the property in for a dollar or for the full amount of the then unpaid balance of the mortgage-debt or whether the amount so bid is or is not the equivalent of the fair market value. Under no circumstances can the mortgagee get a deficiency judgment. All he can do is get back his security by the foreclosure sale. That the security instrument provides, and that the law (§ 580b) guarantees.

The majority opinion displays a myopic concern for one party only to the security transaction and foreclosure—the mortgagor. It unnecessarily penalizes the mortgagee for having insured that he will get back his security (because of the unexpunged default in payment of the debt) or its equivalent in cash by bidding in the property (or instructing some agent to do it for him) at the full amount of the unpaid debt. That—unless the majority opinion shall become law—is what any wise mortgagee would do lest he lose his security. True, when, as here, waste has been committed, he might consult a clairvoyant trying to ascertain the amount in dollars—not of the damage done by the waste committed by the mortgagor, but of the value of his chose in action against the mortgagee and of the judgment he might obtain against him and deduct that from the amount of his bid. I think he would prefer the bird in the hand to the bird in the bush.

I point out that there is no relationship in this, or any, trust deed or mortgage between the provision against the commission of waste written therein and the obligation of the mortgagor to respond in damage for waste committed on the one hand and the provisions regarding the protection of the mortgagee's security interest, including the procedural steps to enforce them under the law on the other hand. The two provisions are entirely separate and distinct.

If a third party had moved onto the property and laid it waste and the mortgagee had acquired both the equitable and legal title (whether by foreclosure or deed from the mortgagor), the manner of his having acquired ownership and the price he paid to get back the property would have no bearing on his choice of action for the tort. It has no greater relevancy to his action ex contractu against the mortgagor who has committed waste. The trial court saw that (see fn. 2 of the majority opinion). The majority opinion, as I see it, fails to see this.

I have no quarrel with the cases cited in the majority opinion. They simply have no relevance to the problem.' (Fn. omitted.)

For reasons stated we decline to follow the majority in Schumacher in deciding the case at bench. Defendant also requests our review of Duarte v. Lake Gregory Land and Water Co., 39 Cal.App.3d 101, 113 Cal.Rptr. 893, a case ‘on all fours with the case at bar.’ We find Duarte factually distinguishable and not controlling of our opinion since it involved a dispute between the previous and the present owners of property over a sum paid to the owners jointly for damages caused to the property by a third party tortfeasor. The present owner claimed the sum under provisions of a deed of trust he had foreclosed to obtain the property from the previous owner which provided for assignment of damages for injury to the property to the beneficiary. The court held the debt had been satisfied through foreclosure sale for the full amount of obligation owing to the beneficiary which extinguished the deed of trust and the provision for assignment contained therein. In the case at bench, the second cause of action is founded on a duty of defendant independent of any provision contained in the deed of trust.

While not a model of pleading and, in the absence of attack thereon by demurrer, we construe the second cause of action in the instant case to be one for the impairment of security cognizable under Civil Code section 2929, which presents triable issues of fact, i. e., was the duty in fact negligently breached by Kornbluth and, if so, was the security substantially impaired as a result of that breach. In this respect we hold that the ‘full credit bid’ submitted by plaintiff at the foreclosure sale, although constituting an extinguishment of the obligation as between the parties to the deed of trust and in the nature of a declaration against plaintiff's interest, does not necessarily establish as between plaintiff and a third party tortfeasor that no impairment of the security had resulted from defendant's waste. The bid may have been ill-advised under the mistaken impression that it was necessary to bid the full amount of the indebtedness or it may have resulted from actual competitive bidding during an auction. The record is not clear in this respect. Neither does the record indicate that plaintiff is estopped by the fact of her bid to deny that the property's value was other than the amount of her bid, since there is no evidence that defendant relied in any way upon her bid to his detriment. Affirmative findings on these matters would require a determination also be made as to plaintiff's contributory negligence or assumption of risk and the nature and extent of the damage resulting from the impairment.

The judgment is reversed.

FOOTNOTES

1.  As stated in California Real Estate Secured Transactions (CEB 1970) pages 10–12:‘A deed of trust, like a mortgage, must describe the property, set forth the fact that it secures an obligation, and be signed by the trustor. In addition, it must set forth the fact of the conveyance to the trustee and his power to sell or reconvey, and it must affirm the beneficial interest of the beneficiary. See, e. g., Domarad v. Fisher & Burke, Inc. (1969) 270 CA 2d 543, 76 CR 529. Its function is the same as that of the mortgage, i. e., secure an obligation, and as a result there is little substantive difference between the two.‘A judicial assimilation process that reached its apex in Bank of Italy v. Bentley (1933) 217 C. 644, 20 P.2d 940, eliminated all but a few differences between the mortgage with a power of sale and the deed of trust. Since the economic function of the two is the same, it seems evident that creditor's remedies and debtor's defenses ought also to be the same. See, e. g., Domarad v. Fisher & Burke, Inc. (1969) 270 CA2d 543, 76 CR 529; Bank of America v. Embry (1961) 188 CA2d 425, 10 CR 602; Lancaster Sec. Inv. Corp. v. Kessler (1958) 159 CA2d 649, 324 P.2d 634. Each is subject to the same restrictions on judicial and nonjudicial foreclosure (CC 2924–2924c; CCP 725a–726; Bank of Italy v. Bentley, supra); each is equally within the redemption provisions (CCP 701–726) in the event of judicial foreclosure (see Salsbery v. Ritter (1957) 48 C2d 1, 306 P.2d 897; Bank of Italy v. Bentley, supra); and each is identically affected by the antideficiency statutes (CCP 580b, 580d, 726; see chap. 6). Also, if necessary to reach a result consistent with the security character of the deed of trust, the trustee's title is considered an encumbrance on the mortgagor's estate rather than a conveyance of legal title. See, e. g., Hamel v. Goodtkin (1962) 202 CA2d 27, 20 CR 372, in which the trustor's joint tenancy was not severed by passage of title to the trustee, although it would be severed on judicial or nonjudicial foreclosure sale just as it would be on foreclosure sale under a mortgage or on an execution sale under a judgment. Cf. Russell v. Lescalet (1967) 248 CA2d 310, 56 CR 399.’American Sav. & Loan Assn. v. Leeds, 68 Cal.2d 611, 68 Cal.Rptr. 453, 440 P.2d 933, a case involving a trust deed, refers to seetion 2929 in the course of discussion without making any distinction between the two types of security.

2.  Brown v. Jensen, 41 Cal.2d 193, 259 P.2d 425.

ALLPORT, Acting Presiding Justice.

COBEY and POTTER, JJ., concur.