CAITO v. UNITED CALIFORNIA BANK (1977)

Respondents Philip J. Caito and Theodora M. Caito (the Caitos) filed this action in 1971 seeking partition of certain real property in which they owned an undivided one-half interest, and accounting from their cotenants, and a declaration of the rights and priorities of all parties. They named as defendants: A. P. Caponi and Marie Caponi (the Caponis), the record owners of the other undivided one-half interest in the property; Bank of America (B of A) and Continental Auxiliary Company (Continental), respectively the beneficiary and trustee under a first trust deed on the entire property; and appellant United California Bank (UCB), the beneficiary and trustee under a second deed of trust covering only the Caponis' half-interest in the property.

While the action was pending, Continental, at the request of B of A, sold the property under the power of sale contained in the first trust deed for $130,000. From this sum it paid B of A the balance due on the note secured by its trust deed in the amount of $44,552.34 and then, pursuant to agreement of the parties, deposited the surplus of $85,447.66 with the clerk of the court to be distributed in accordance with the court's judgment. The case then proceeded to trial as an action for an accounting by the Caitos against the Caponis and for a declaration of rights and priorities to the surplus as between the Caitos, the Caponis and UCB.

Mr. Caponi, who had suffered a stroke in 1967, was unable to testify at the trial. Most of the evidence produced on his behalf came from his books and records and the testimony of the accountant who had kept them over the years.

In the trial court the Caitos contended they were entitled to the entire surplus of $85,447.66. UCB claimed a lien, superior to any right of the Caitos, on one-half the surplus ($42,723.83) based upon their second trust deed on the Caponis' undivided one-half interest in the property. Upon facts which were largely undisputed, the trial court determined neither the Caponis nor UCB had any right or interest in the funds remaining after the foreclosure sale and awarded the entire surplus of $85,447.66 to the Caitos. UCB has appealed, contending here, as in the trial court, that it is entitled to one-half the surplus fund.

From 1952 until the foreclosure sale in 1973 the Caitos and the Caponis were cotenants in a 130-acre parcel of farmland near Calexico, California, each being the record owner of an undivided one-half interest. The Caitos lived in Indiana, and Mr. Caponi managed the property until after he suffered a stroke in 1967 and was placed under a conservatorship.

In 1959, to enable the Caponis to borrow $30,000 from B of A, the Caitos and the Caponis executed a $30,000 note in favor of B of A and, as security for the note, executed a first deed of trust on the property, naming Continental as trustee and B of A as beneficiary. The Caitos signed the note as an accommodation to the Caponis, the Caponis received all the proceeds of the loan, and the Caitos received nothing. The recorded documents, however, did not show that the Caitos had signed only as accommodation makers.

In August 1965, again to enable the Caponis to borrow money from B of A, the Caitos and the Caponis executed a $40,000 promissory note in favor of B of A and a deed of trust on the property. The Caitos executed these documents as an accommodation to the Caponis. None of the loan proceeds went to the Caitos but were used to pay the balance due on the previous loan with the remainder going to the Caponis. Again the recorded documents did not disclose that the Caitos had acted only as accommodation makers.

On various occasions, the Caitos advanced money to the Caponis for the express purpose of enabling them to make payments on the Bank of America loan—$5,000 in April 1967, $1,000 in November 1967 and $3,500 in January 1968. Although checks in these sums were actually drawn in favor of the Caponis by Caito and Mascari, Inc., a corporation in which the Caitos owned 25% of the stock, the corporation charged the amounts drawn to the Caitos' personal account.¹ [The Caponis' books and records showed they were indebted to the Caitos in the amount of $16,000 prior to December 14, 1967, the date they executed a second trust deed on their interest in the property in favor of UCB.]

During the time Mr. Caponi managed the property, he leased it for a period of three years (July 1965 to June 1968) to Jackson Produce Company at an annual rental of $7,147. Because the Caponis were indebted to Jackson Produce Company, the company actually paid no rental but instead offset the entire amount ($21,441) against the Caponis' debt.

After Mr. Caito took over management of the property in July 1968, he collected the rent. From that date until August 1970, he collected $17,500 in rent which he paid on the B of A note.² After August 1970, B of A refused to accept further payments on the delinquent note. From that date until the foreclosure sale, Mr. Caito collected $6,275.15 in rent which he retained. [The trial court found the Caitos were entitled to offset the Caponis' share of this rent against the earliest indebtedness of the Caponis to the Caitos.]

During the period of their cotenancy in the property with the Caitos, the Caponis became indebted to UCB. On February 9, 1967 the debt was in the amount of $139,360.83. On that date, to evidence the indebtedness, the Caponis executed two demand notes in favor of UCB—note ‘A’ in the amount of $44,360.83 and note ‘B’ in the amount of $95,000. On the same date, to secure these notes, they executed three deeds of trust on property owned by them in Imperial County (not the land involved in this action), San Diego County, and in Yuma County, Arizona.³

In December of 1967, UCB made demand upon the Caponis for payment of notes ‘A’ and ‘B’. The Caponis were unable to pay the notes and entered into an agreement with UCB in which the bank agreed to forebear taking legal action at that time to collect notes ‘A’ and ‘B’, and the Caponis agreed to give a second trust deed on their one-half interest in the 130-acres they owned with the Caitos. The agreement was made, carried out, and the trust deed recorded without the knowledge or consent of the Caitos.

After finding the Caitos were accommodation makers on the B of A note, the trial court concluded their half-interest in the sale price of $130,000 was not chargeable with the $44,552.34 which was used to pay that obligation since the Caponis' half-interest ($65,000) was sufficient to satisfy it. Accordingly it found the Caitos were entitled to the first $65,000 from the $85,447.66 surplus fund. Applying the doctrine of equitable subrogation, the court also concluded the Caitos were entitled to the remaining balance of the surplus because they had advanced the Caponis $6,000 to make payments on the B of A note before December 14, 1967 (the date of the UCB trust deed) and had paid $17,500 on the note from rents collected after that date. Since the amounts it found were chargeable to the Caponis alone ($44,552 plus $6,000 plus $17,500) came to more than the Caponis' halfinterest in the total sale price, the court concluded the Caitos were entitled to the entire surplus fund.

In arriving at its judgment awarding the Caitos the entire fund remaining from the sale of the property after satisfaction of the obligation secured by the B of A first trust deed, the trial court considered the transactions between the Caitos and the Caponis arising out of their cotenancy in the property, including the fact the Caitos were accommodation makers on the B of A note, as creating equitable rights and liens in the property and its proceeds in favor of the Caitos which were entitled to priority over UCB's second trust deed on the Caponis' interest alone. Had the action been between the Caitos and the Caponis alone, these conclusions and the judgment unquestionably would be correct. The evidence establishes without conflict that the Caitos were, in fact, accommodation makers on the B of A note, and that other equitable adjustments arising out of their relationship as cotenants in the property more than accounted for their half-interest in the $130,000 for which the property was sold. It does not necessarily follow, however, that UCB, as holder of a trust deed on the Caponis' half-interest in the property, stands in the Caponis' shoes, or that any or all of the equitable adjustments the Caitos would be entitled to against the Caponis are equally available against UCB.

After payment of the expenses of a foreclosure sale and satisfaction of the obligation for which the sale was made, subordinate liens and rights cut off as to the property by the foreclosure sale attach to the surplus proceeds in order of their priority (Nomellini Constr. Co. v. Modesto S. & L Assn., 275 Cal.App.2d 114, 118, 79 Cal.Rptr. 717; Dockrey v. Gray, 172 Cal.App.2d 388, 391, 341 P.2d 746; Sohn v. California Pac. Title Ins. Co., 124 Cal.App.2d 757, 766, 269 P.2d 223).

A cotenant may sell or encumber his interest in the commonly held property without the consent or knowledge of the other cotenants, but such sale or encumbrance affects only his interest in the property (Schoenfeld v. Norberg, 11 Cal.App.3d 755, 765, 90 Cal.Rptr. 47; Haster v. Blair, 41 Cal.App.2d 896, 898, 107 P.2d 933; 13 Cal.Jur.2d, Cotenancy, § 38, p. 325).

A right of contribution exists in favor of a cotenant who pays taxes, liens, and other legitimate expenses attributable to the whole property, and the creditor-tenant is entitled to an equitable lien on his cotenant's shares for their proportional amount of such expenditures which he may enforce by foreclosure on their interests (Ogden, Rev.Cal. Real Property Law, Vol. II, p. 291). Although not judicially recognized until declared by a judgment, such equitable liens when so declared relate back to the time of their creation by the acts and conduct of the parties (Hise v. Superior Court, 21 Cal.2d 614, 627, 134 P.2d 748).

While the transactions between the Caitos and the Caponis relating to their common ownership in the property involved in this action created a debt owing from the Caponis to the Caitos which exceeded the value of the Caponis' interest (as established by the foreclosure sale price), the transactions did not give the Caitos any legal right or interest in the Caponis' share of the property or its proceeds. The most that can be said of these inter-owner transactions, including the fact the Caitos signed the B of A note as accommodation makers only, is that they gave rise to equitable rights or liens in favor of the Caitos on the Caponis' share or interest.

The critical question presented by this appeal is whether these equitable rights or liens attaching to the Caponis' interest are entitled to priority over UCB's legal claim on that interest arising out of its second trust deed.

This precise question is asked and answered in the following manner in Ogden's treatise on California real property law:

‘Conceding that a lien on real property is binding from its inception on the debtorowner and his heirs, devisees, and transferees without consideration, the question is whether the lien binds subsequent purchasers and encumbrancers for value whose rights accrue before adjudication of the lien. A purchaser (including an encumbrancer) in good faith for value and without actual or constructive notice is entitled to protection against undisclosed liens and equities existing against the title of his predecessors in title, as well as against unrecorded instruments.’ (Ogden, Rev.Cal. Real Property Law, Vol. II, pp. 973–974.)

(See also 50 Cal.Jur.2d Vendor and Purchaser, § 345, pp. 443–445.)

The question of priority between the Caitos' equitable claims against the Caponis' interest in the property and UCB's second trust deed on that interest hinges upon whether the latter meets the requirements of the above stated rule. In this connection it is pertinent that the trial court found as follows:

‘On December 14, 1967, UCB made demand on the CAPONIS for the payment of Note A and Note B. At that time the CAPONIS told UCB that they were unable to pay Note A and Note B. On December 14, 1967, at El Centro, California, UCB and the CAPONIS entered into an oral agreement whereby UCB agreed to forebear taking immediate legal action to collect Note A and Note B, to withdraw its demand for immediate payment of Note A and Note B, and to accept the UCB Deed of Trust as additional security for the payment of Note A and Note B. The foregoing oral agreement was fully performed by UCB and the CAPONIS, and the UCB Deed of Trust is supported by the full, fair and adequate consideration of the parties thereto. Ever since the date of its execution, the UCB Deed of Trust has been and now is the binding obligation of the CAPONIS, enforceable in accordance with its terms. All of the foregoing was done without the knowledge or consent of CAITO.’

This finding is supported by the evidence.

It is also true that none of the equitable claims asserted by the Caitos against the Caponis' interest in the property were recorded and that there is no evidence that UCB had either actual or constructive notice of any of them on or before December 14, 1967, the date the bank acquired its second trust deed.⁴

Since UCB acquired the second trust deed on the Caponis' interest in the property in good faith for value without actual or constructive notice of the Caitos equitable claims, the second trust deed is entitled to priority over the Caitos' equitable claims against that interest, and UCB is entitled to one-half the surplus fund remaining after satisfaction of the indebtedness to B of A.

The judgment is reversed; the trial court is directed to enter a judgment declaring the Caitos and UCB are each entitled to one-half of the surplus fund on deposit with the clerk.

FOOTNOTES

FOOTNOTE.  

1.  The checks were apparently drawn in favor of the Caponis and not made payable to B of A. According to the B of A record of the note account, not all of these funds were applied by the Caponis to payment of the account. Of the $5,000 April 1967 advance, only $3,232.94 was applied; no money was paid out of the $1,000 November advance, and only $1,183.86 was paid out of the $3,500 January 1968 advance.

2.  The B of A trust deed contained an assignment of rents.

3.  The deed of trust on the Imperial County land had been reconveyed before this action was filed. At the time of the trial, the deeds of trust on the San Diego and Yuma land were still in existence and constituted first liens on the property.

4.  UCB requested a specific finding on its lack of knowledge both as to the fact the Caitos were accommodation makers on the B of A note and as to advances made by the Caitos to the Caponis to make payments on the note. The court declined to make the finding. Under these circumstances we cannot infer that the trial court found in favor of the Caitos on this issue (Code Civ.Proc. § 634). In any event, the evidence supports the requested finding and it should have been made.

AULT, Associate Justice.* FN* Retired Associate Justice of the Court of Appeal sitting under assignment by the Chairman of the Judicial Council.

GERALD BROWN, P. J., and COLOGNE, J., concur.