TOWER INVESTMENT CO v. PEOPLES BANK (1971)

Plaintiff Tower Investment (hereinafter Tower) in a complaint filed December 10, 1964, sought injunctive relief, declaratory relief and damages as a result of defendant Peoples Bank's¹ (hereinafter Bank) actions in connection with a parcel of real property situated in Canoga Park.

Tower acquired title to the property by deed of record July 22, 1964. At that time there was in existence a deed of trust dated December 17, 1963, which affected the property and which secured an indebtedness of $40,000 in favor of Bank. Bank's trust deed was a blanket trust deed that embraced three additional lots in the same tract. Thus the block of four lots was security for the single $40,000 indebtedness. (Because of later reference to another block of lots, we will refer to these lots as Block I.)

On September 30, 1964, Bank recorded a Notice of Default and Election to Sell Under Deed of Trust.

Subsequently, Tower tendered to Bank $10,000 plus interest, trustees fees and other charges with a request for partial reconveyance whereby the said trust deed would no longer appear as an encumbrance upon the property in question. Bank refused the tender and demand. This action ensued.

Specifically, Tower sought (1) an injunction to prevent the Bank from selling or offering for sale or in any way conveying or alienating the property; (2) a determination that Tower is entitled to a partial reconveyance of the property upon such terms and conditions as the court deemed proper; (3) a determination that the property is free of any lien or encumbrance encompassed by the trust deed and that the title to the property be quieted against Bank; (4) damages in the sum of $5,000; and (5) the statutory penalty of $300 pursuant to section 2941 of the Civil Code.

Judgment in the trial court was in favor of Tower as to some of its demands. In essence the court ordered Bank to execute and deliver to plaintiff a partial reconveyance contemporaneously with delivery to Bank by Tower of the sum of $10,175 plus any sums advanced by Bank on taxes or assessments. The trial court refused to award damages or attorney's fees or to assess the statutory penalty. The trial court also refused to declare the property to be free of the encumbrance.

The trial court's judgment ordering partial reconveyance is based upon the finding of a promissory estoppel arising out of an oral promise by the Bank to split the security and Tower's detrimental reliance thereon.

Both parties appeal.

Tower contends that it is entitled to clear title to the property without the payment of the $10,175 plus taxes and assessments for the reason that the previous tender and refusal served to discharge the encumbrance. Secondly, Tower contends that it is entitled to the $300 statutory penalty under section 2941 of the Civil Code for Bank's wrongful failure to reconvey. Thirdly, Tower argues that it is entitled to damages based on a decrease in value of the property between the time of the tender and the time of trial. And lastly, it contends that it is entitled to attorney's fees under section 3306a of the Civil Code.

Bank's contentions on appeal are basically two in number.

(1) That Tower failed to show that it had detrimentally relied upon the promise because it only parted with seven third trust deeds which had no intrinsic value; and

(2) Even if an estoppel is found to exist that estoppel can only supply the element of consideration to the contract, a contract which remains fatally defective because of the Statute of Frauds.

We have concluded that the contentions of both parties are without merit and as between these parties we would be inclined to affirm the judgment.

The record, however, discloses the existence of an issue which the parties have failed to discuss or choose to ignore. That issue concerns the interest of the original owners of the property who are now holders of junior encumbrances and whose interests appear to be detrimentally affected by the actions of the parties.

STATEMENT OF FACTS

Tower is a California corporation, apparently engaged in the promotion of land purchases and sales and in the construction of improvements thereon.

Alan Riseman was president of Tower and owned 50% of its stock. In addition, Riseman was at all times during the transactions here involved a member of the advisory board of the Bank.²

During December 1963, Tower purchased two lots from one Martinez for approximately $9,000 each and a third lot from one Acuna for approximately $12,600. Payment took the form of separate purchase money notes secured by separate purchase money trust deeds. Tower also purchased (apparently for cash or delayed cash) from an undisclosed owner for an undisclosed price a fourth lot at 6911 Milwood Avenue (the property in issue here which we designate as the key lot) in a transaction which, as far as the record shows, resulted in no encumbrances. These four lots comprise Block I. Concurrently with the purchase of these lots, Tower sold them to Janice and Barry Silverton (hereinafter Silvertons) for a sum in excess of $40,000. The Silvertons paid Tower by borrowing $40,000 of the purchase price from Bank in return for their promissory note secured by a blanket first trust deed on all the lots in Block I.

Arrangements had apparently been consummated prior to close of escrow for Martinez and Acuna to subordinate their trust deeds. In addition to the cash for the purchase of the lots in Block I, the Silvertons completed the purchase price by executing promissory notes secured by third trust deeds in an undisclosed amount in favor of Tower. The purchases by Tower from Martinez and Acuna, the sale by Tower to the Silvertons and the borrowing from the Bank by the Silvertons were all handled in the same escrow and all instruments were concurrently recorded on December 31, 1963.

While not directly involved in the present case, the circumstances of the acquisition and sale by Tower of four other lots form part of the background.

Shortly prior to December 20, 1963, Tower purchased four lots from one Agueros (Block II) for the approximate sum of $10,600 each and paid for the same with its purchase money promissory note secured by a separate purchase money first trust deed on each lot.

As in the case of Block I, the lots in Block II were, concurrent with the purchase, sold to the Silvertons for an undisclosed price, $40,000 of which was borrowed from Bank on Silvertons' note secured by a blanket first trust deed. Agueros' four trust deeds were subordinated to the Bank's blanket first trust deed. The Silvertons additionally executed in favor of Tower a promissory note in an undisclosed amount secured by a third trust deed on each of the four lots. All phases of this transaction were handled in a single escrow and the documents recorded at the same time.

The Acuna lot in Block I together with the key lot and the four Agueros lots from Block II were continuously contiguous and formed a parcel of land approximately 300 feet by 150 feet. The two remaining Martinez lots were separated by approximately 200 feet from the contiguous parcel of six.

At this juncture it is clear that Tower, by its December activities, had disposed of eight lots, at least seven of which it had acquired without any cash investment and had before the close of the year 1963 received in cash $80,000 plus seven third trust deeds in an undisclosed amount on each of the lots in Blocks I and II except the key lot. The amount of cash invested by the Silvertons in excess of the $80,000 borrowed from Bank does not appear.

Since the money borrowed from Bank by the Silvertons was obviously for the purchase of Blocks I and II, and since the third trust deeds given by the Silvertons to Tower on seven of the eight parcels were also purchase money trust deeds, the liability of the Silvertons appears to be practically nil.

In June 1964, Silvertons entered into an arrangement whereby they planned to sell seven of the eight lots to Don W. Clark for $35,000 in cash and $143,000 in first and second deeds of trust. The key lot was not to be sold to Clark but was instead to be sold to Tower in return for Tower's cancelling and reconveying the purchase money notes and third deeds of trust covering the seven lots being sold to Clark. In order to consummate both transactions, two escrows were opened at Sherwood Escrow Company. Escrow No. 8983 was opened on June 5, 1964 to handle the Clark-Silverton deal, and escrow No. 9113 was opened on June 25, 1964 to handle the transfer of the key lot to Tower. Both escrows were handled by the same escrow officer at the same time. The Sherwood Escrow Company occupied offices in the same building as Tower. Tower concedes in its brief that the escrows were inter-dependent.

The events which followed are disclosed by the findings of the trial court.

‘(c) On June 20, 1964, two beneficiary statements were received * * * from * * * BANK relative to Escrow No. 8983. One of said beneficiary statements pertained to the three lots which were, together with the one lot covered by Escrow No. 9113, subject to a blanket deed of trust.

‘The escrow officer * * * showed said beneficiary statement to [Tower]. Furthermore, during the pendency of Escrow No. 9913 * * * BANK orally stated to [Tower] that they would convey the one lot in issue [the key lot] upon payment of $10,000, plus accrued interest.'³

‘(d) In reliance upon this representation, [Tower] believed that it would receive a partial reconveyance from [Bank] * * * when it tendered $10,000, plus interest, * * *

‘(e) On July 21, 1964 the escrow officer * * * with [Tower's] knowledge, requested in writing a beneficiary statement on the one lot involved therein * * *

‘(f) On July 22, 1964, * * * No. 9113 was closed and the deed transferring title to [Tower] was recorded.

‘(g) On July 30, 1964, the beneficiary statement referred to above in Finding 4(e) was received * * *

‘(h) [Tower] did * * * in purchasing the [key] lot * * *, rely upon the representations referred to * * * [Tower] did not rely upon the writing referred to * * * in * * * 4(g) because * * * 9113 had at that time already closed.’

The Silverton-Clark deal was aborted. The escrow covering the seven lots other than the key lot was never closed. Escrow No. 9113 was closed.

As noted, Tower, by the judgment rendered below, would gain possession of the key lot on payment of the sum called for in the judgment.

The only testimony concerning value of the property was by Mr. Riseman. He estimated the value of the lots as of September 1964 to be about $18,500 each, and at the time of trial $14,000 each.

The record is silent as to how the original sellers of the lots in Block I were persuaded to subordinate what were apparently purchase money first trust deeds to the first trust deeds of the Bank. The least one can assume from the inherent nature of the transaction is that because the key lot had no encumbrances other than the lien of Bank's first trust deed on all four lots, the original sellers were persuaded to in effect take second trust deeds on their respective lots because the four lots in Block I used in their entirety as security for the Bank's blanket first trust deed represented additional security to them and appeared to insure the fact that whatever project was being contemplated was on its way to fruition.

It now appears that original owners stand to suffer a substantial, if not complete, loss of their property.

Since the release and reconveyance as to the key lot would obviously affect the security of the junior encumbrances on the other three lots the original owners were at least entitled to notice of any attempted reconveyance. (See Jeanese, Inc. v. Surety Title & Gty. Co., 176 Cal.App.2d 449, 452–453, 1 Cal.Rptr. 752.)

An equity in favor of a junior encumbrance vis-a-vis a senior encumbrance arises when the holder of the senior encumbrance does anything to the prejudice of the holder of the junior, or to the impairment of his security, with actual knowledge of the existence of the junior encumbrance. (See 59 Cal.Jur.2d, § 276, at p. 339, and cases cited therein.) (Also see Manning v. Queen, 263 Cal.App.2d 672, 69 Cal.Rptr. 734.)

‘And if the senior mortgagee, with actual knowledge of the junior encumbrance voluntarily releases a portion of its security to the prejudice of the junior encumbrancer without releasing a proportionate part of its debt, it is accountable to the junior encumbrancer for the value of the released security.’ (Continental Supply Co. v. Marshall, 10 Cir., 152 F.2d 300, at 308.)

While in the case at bar there was an attempted release of a share of the indebtedness, whether it was an adequate ‘proportionate’ share is not established.

Nothing in the record shows that Bank had the authority under its blanket first trust deed on the lots in Block I to release or reconvey any portion of its blanket security without the consent of the original sellers who held second trust deeds on three of the lots in Block I. Assuming Bank made the promise to reconvey as testified to by Riseman, and found as a fact by the court, the record is alive with evidence which placed both the Bank and Tower on notice, that in respect to three lots in Block I there were extant junior encumbrances held by the original sellers of the three lots.

Assuming, as the inherent nature of this transaction suggests that building operations were projected, the key lot may have been worth more to the project than $10,000. Irrespective of any speculation of what the key lot was worth, it is fair to assume that any release of the key lot eliminates a vital part of the consideration which implicitly impelled the original sellers of the three lots to become involved in the subordination executed in the Tower-Silverton escrows.

It could well be that because of representations made to Martinez and Acuna, the Bank could be estopped to release and reconvey the key lot without their consent.

As to Agueros, of course his property is not embraced within the same blanket trust deed as the key lot. However, his property is contiguous to the key lot and it would appear that the acquisition by Tower of his lots was accomplished as part of an integrated project. We reiterate that the record fails to disclose by what means Tower was able to induce Agueros to surrender a valuable holding in real property in trade for paper which could, by the actions of Tower, be rendered valueless.

It is entirely possible that, when these transactions are examined in context, Agueros also might raise an estoppel against the release and reconveyance of the key lot.

In our opinion, section 389 of the Code of Civil Procedure and the law generally dictates, in a factual situation such as at bench, that the holder of the junior encumbrances are necessary parties to the action. Section 389 declares in pertinent part:

‘A person is an indispensable party to an action if his absence will prevent the court from rendering any effective judgment between the parties or would seriously prejudice any party before the court or if his interest would be inequitably affected or jeopardized by a judgment rendered between the parties.’

In volume 3 of California Procedure, 2d ed. Witkin, speaking of indispensable and necessary parties, says at page 1817:

‘But the cases which express this view do not distinguish between ‘necessary’ and ‘indispensable.’ Without the junior encumbrancers the foreclosure decree and sale are incomplete: The interest of the mortgagor is sold, but the land still remains encumbered and subject to further foreclosure proceedings by the other claimants. They are therefore necessary to a complete determination of the controversy in a single action.'

It appears to us that there is much in this case that does not meet the eye. Tower has elected to seek relief in a court of equity.

Code of Civil Procedure, section 187 provides:

‘When jurisdiction is, by the Constitution or this Code, or by any other statute, conferred on a Court or judicial officer, all the means necessary to carry it into effect are also given; and in the exercise of this jurisdiction, if the course of proceeding be not specifically pointed out by this Code or the statute, any suitable process or mode of proceeding may be adopted which may appear most conformable to the spirit of this Code.’

‘In Witkin, Summary of California Law, Equity, volume 4, page 2788, we find the following comment: ‘* * * equitable relief is flexible and expanding, and the theory that ‘for every wrong there is a remedy’ (C.C. 3523) may be invoked by equity courts to justify the invention of new methods of relief for new types of wrongs [authorities cited].'' (Holibaugh v. Stokes, 192 Cal.App.2d 564, at 568, 13 Cal.Rptr. 528, at 530.) As in Holibaugh, ‘This flexible principle of equity is tailored to fit the situation before us.’

In our opinion, the rights and liabilities of Tower, Bank, and Silvertons and the original sellers of the seven lots should be determined and fixed by the court.

The judgment is reversed and the cause remanded for a new trial in accordance with the principles we have outlined. Each party to bear his own respective costs.

FOOTNOTES

1.  Prior to the litigation the United States National Bank succeeded to the interest of the Peoples Bank and is at this time the real party in interest.

2.  Mr. Riseman testified: ‘Q In your relationship with Peoples Bank, say, up to July 1, 1964, had you had many occasions to deal with the principal officers and directors of this banking and loan institution? A Yes. Q Tell me the names of the people you dealt with and what their capacities were. A Barney Berman, chairman of the board; Mr. Hoffman was president; Mr. Blackman was the vice president; Mr. Hasty was vice president, I believe; and Marvin Levine was the cashier at that time, I think. * * * They did rely on me when they made—I specified before that my primary advice to them was on construction loans. I was a nonpaid maker of cost breakdowns in checking over figures on the land loans. They made their own loans. they never consulted me on this loan at the time they made it to Silverton or consulted me in an advisory capacity when I asked for partial * * *’ (Emphasis added.) * * *' (Emphasis added.)The underscored portion of the excerpt refers to the transactions here involved which will be discussed infra.

3.  This finding was based on the testimony of Mr. Riseman.‘A. I explained the deal to them, [officers of Bank] that we were taking one lot back that was covered by a blanket mortgage and we wanted to be in a position to have it under a separate deed of trust or be able to pay it off. They said, ‘Whatever you want to do.’ Q. When you say ‘pay it off,’ what did you tell them? A. We wanted a partial reconveyance on it. Q. Did you tell them you wanted a partial reconveyance for what? THE COURT: The paying off of one lot. THE WITNESS: The paying off one-fourth of $40,000, $10,000. Q. BY MR. FIERSTEIN: Did they respond to this request? A. Yes. Q. They said they would it? A. Yes.'None of the officers or persons referred to by Mr. Riseman in the foregoing excerpt appeared at the trial. It was apparently stipulated by counsel that after the merger of Peoples Bank and United States National Bank the personnel referred to by Mr. Riseman were no longer employed and could not be found.

COMPTON, Associate Justice.

ROTH, P. J., and HERNDON, J., concur.