MEDOVOI v. First Charter Financial Corporation, Defendant and Respondent. (1976)

Plaintiffs Jorge Yoram Medovoi and his wife Cepora Medovoi (hereinafter referred to collectively as ‘Medovoi’) appeal from a judgment denying them damages in this action for wrongful foreclosure instituted against American Savings and Loan Association (herein referred to as ‘American’) and First Charter Financial Corporation (hereinafter referred to as ‘First Charter’). American appeals from that portion of the judgment denying it recovery on its cross-complaint for fraud and misrepresentation against the Medovoi as cross-defendants.

The Facts

In the spring of 1968 Medovoi purchased certain income producing property consisting of a 6-unit apartment complex situated in North Hollywood which foreclosure proceedings had been instituted by Master, holder of the second trust deed. Although Medovoi became record owners, they did not enter into a formal assumption of the first trust deed; when American learned about the transaction it offered to permit Medovoi to assume and upon Medovoi's failure to do so it accelerated the principal balance under its due-on-sale clause. This litigation resulted.

The record discloses the following series of events upon which the present litigation is based. On August 30, 1963, Mr. and Mrs. Leonard Davis, owners of the 6-unit apartment house which is the subject of this action, conveyed the property to Mr. and Mrs. Katz. In connection with their acquisition of the property, the Katzes executed a promissory note in the face amount of $43,750 at 6.6 percent interest per annum which was secured by a first deed of trust in favor of Mutual Savings and Loan Association of Alhambra in which the trustee was First Charter. American thereafter acquired Mutual Savings and Loan Association by merger and succeeded to all rights and obligations thereof.

The first deed of trust executed by the Katzes contained a due-on-sale clause which expressly permitted the beneficiary to ‘accelerate’ or call due and payable the entire remaining principal balance secured thereby should the property subject to the security interest be sold or otherwise transferred without the prior written consent of the beneficiary. Through a series of conveyances title to the property thereafter passed back to the Davises, thence to Leonard Davis Enterprises, Incorporated, and then to Mr. and Mrs. Martin W. and Carol R. Teague, who assumed the note and first trust deed. On September 14, 1964, Carol R. Teague became sole owner of record title and she transferred the property to James F. Witter who assumed the first trust deed obligation and also assumed or took subject to a note secured by a second trust deed which was owned by Master.

When Witter early in 1968 defaulted on the second trust deed obligation, Master instituted foreclosure proceedings and arranged to make payments to American on the first trust deed. Prior to the foreclosure by Master, American had consented to the assumption of the first trust deed by each of the holders of record title to the property on the payment of a nominal title transfer fee (which did not exceed $25) and without any increase in interest rate. However, sometime after Witter acquired the property and prior to Master's foreclosure thereon, American's policy with respect to the assumption of existing first trust deed obligations changed. As a result of increasing interest rates, American began to require a transferee to assume the obligation at the then-prevailing interest rate and to pay an additional assumption fee. An exception to this policy was customarily made by American when the transferee was the holder of a junior deed of trust who acquired title to the property by foreclosure. Such an owner was given a reasonable opportunity to dispose of the property without being required to pay an assumption fee, higher interest or any other charge so long as the obligations on the first trust deed were maintained without delinquency. Accordingly, when Master instituted foreclosure proceedings on the second deed of trust, Master was permitted by American to bring the first trust deed loan current and to maintain monthly payments whereon to protect its security interest without entering an assumption agreement.

Master completed foreclosure and acquired title by trustee's deed on May 14, 1968, but did not then or later notify American that foreclosure had been completed. Prior to formal foreclosure proceedings, Master obtained from Witter a deed in lieu of foreclosure. Thereupon, Master entered into an agreement with Stephen P. Gluck, doing business as Homeland Realty, authorizing that broker to sell the apartment building on certain terms and conditions, including the condition that the purchaser should assume the first trust deed obligation.

Medovoi offered to purchase the property through Gluck. Under the terms of the deposit receipt and escrow instructions executed by Medovoi, it was made known to them that American might require them to assume the note and first trust deed at a higher interest rate. In fact, Gluck informed them that American might terminate the obligation upon learning of the purchase, the terms of which required Gluck to take a third trust deed and Master to continue to carry a second trust deed on the property. Therefore, at the suggestion of Gluck and Master, Medovoi and Master entered an agreement, which was confirmed in a letter from Master to Medovoi prior to clase of escrow, that Medovoi should pay Master, which would in turn convey payments on the first trust deed to American. One of the reasons for this agreement was to prevent American from learning of the transfer of title to Medovoi.

Master did not inform American that it had acquired title to the property from Witter, and it did not respond to written requests relating to the status of title which American sent in May, June, July, and August 1968. From February 1968 through March 1969 American accepted checks sent by Master in payment on the first trust deed in the belief that Master as holder of the second deed of trust was continuing to make interim payments during foreclosure proceedings. However, on September 23, 1968, American received notice of an assignment of insurance policy on the property in favor of Medovoi. American rejected the policy endorsement and informed Medovoi that the property could not be transferred without American's consent to an assumption of first trust deed. Medovoi did not respond and the insurance company led American to believe their name on the policy was an error.

On March 10, 1969, American finally contacted Title Insurance and Trust Company and learned for the first time that Master had completed foreclosure and transferred the property to Medovoi. It thereupon sent an assumption application form to Medovoi. On March 18, 1969, Medovoi advised American that they were willing to assume the loan. Thereafter, however, they attempted to negotiate to keep the loan ‘on its present terms' with the declared intent to sell the property as soon as possible to another buyer who would assume the loan. Meanwhile, Medovoi completed and returned the loan application sent to them by American. American by letter of April 29, 1969, advised them of the terms and conditions under which it would allow them to assume that obligation and enclosed a form of assumption agreement providing for 8.25 percent interest reflecting then prevailing rates of interest. Medovoi neither accepted the terms of the assumption proposed by American nor returned the assumption agreement.

American continued to accept monthly checks from Master during April, May and June 1969 because Medovoi advised American that they wished to arrange to assume the note and first trust deed. However, since Medovoi procrastinated, American by letter on June 10, 1969, notified both Witter as the last assuming owner and Medovoi as holders of record title that it elected to accelerate the balance due on its first deed of trust pursuant to the due-on-sale clause therein contained. American thereafter refused to accept any further monthly payments and rejected two tenders by Master of the $296 monthly payment due on July 1, 1969, on grounds that this amount was insufficient to constitute payment of the full principal balance which had been declared due and payable.

When the full principal balance remained unpaid, American, on or about July 8, 1969, caused a notice of default to be recorded by First Charter and began collecting rents pursuant to the assignment of rents contained in the first trust deed. Medovoi thereupon instituted the present action but they were unsuccessful in obtaining a preliminary injunction to restrain American from pursuing that remedy, and American continued to collect rents. Thereafter, Medovoi became unable to maintain payments on the first and junior encumbrances. On or about August 1969 Medovoi abandoned the property and defaulted on the second and third deeds of trust held by Master and Gluck, respectively. By agreement with American, Master completed foreclosure upon the property under its second trust deed in February 1970. Following the foreclosure, the property was sold to Mr. and Mrs. Fox on April 7, 1970. That couple assumed the note and deed of trust in favor of American, agreeing to pay an assumption fee, impounds for insurance and taxes, and an interest rate increased to 8.5 percent per annum. The present litigation was continued as an action for wrongful foreclosure; subsequently American filed a cross-complaint against Medovoi for fraud.

Issues

Plaintiffs-appellants Medovoi contend (1) that American, by accepting payments with knowledge of the transfer of ownership to Medovoi, waived any rights it might have had to the remedies of acceleration and foreclosure under the due-on-sale clause in its first trust deed; (2) that American's enforcement of its due-on-sale clause constituted an unreasonable restraint on alienation (Civ.Code, § 711); and (3) that in any event American was improperly awarded costs.

Defendant-respondent and cross-complainant American contends that Medovoi's failure to inform American of their purchase of the property constituted intentional fraud for which American is entitled to damages.

Discussion

Medovoi contends that American's conduct constituted a waiver, express or implied, of its right to enforce the due-on-sale clause by acceleration and foreclosure. That issue, however, was fully litigated and the trial court found on substantial evidence that American did not waive the due-on-sale clause in its first trust deed. Our review, therefore, is limited to a focus upon that evidence which supports the trial court's determination. It is not the function of the appellate court to weigh favorable evidence against unfavorable. (Stevens v. Parke, Davis & Co. (1973) 9 Cal.3d 51, 64, 107 Cal.Rptr. 45, 507 P.2d 653.) All conflicts must be resolved in favor of American on this issue. (Nestle v. City of Santa Monica (1972) 6 Cal.3d 920, 926, 101 Cal.Rptr. 568, 496 P.2d 480.)

It is the well established law of California that waiver rests upon intent. “Waiver is the intentional relinquishment of a known right after knowledge of the facts.' [Citations.] It implies ‘the intentional forbearance to enforce a right’ [citations], and necessarily, therefore, assumes the existence of an opportunity for choice between the relinquishment and the enforcement of the right.' (Wienke v. Smith (1918) 179 Cal. 220, 226, 176 P. 42, 44.) A waiver requires a clear showing of intent and doubtful cases will be decided against waiver (Church v. Public Utilities Com. (1958) 51 Cal.2d 399, 401, 333 P.2d 321). Moreover, constructive knowledge is generally insufficient to support a finding that waiver occurred. In landlord-tenant cases acceptance of payments due, such as rental payments, is insufficient to constitute waiver unless the party accepting payment has actual knowledge of the assignment or sublease of the premises. (German—American Sav. Bank v. Gollmer (1909) 155 Cal. 683, 102 P. 932; Weisman v. Clark (1965) 232 Cal.App.2d 764, 768–769, 43 Cal.Rptr. 108.)

The evidence discloses that all payments on the first trust deed between February 1968 and March 10, 1969, were made to American by Master on Master's check. American accepted those payments in the belief that they were being made by a foreclosing second trust deed holder. American did not know that those payments were being made on behalf of Medovoi. On March 10, 1969, American first learned that Medovoi held record title. American thereafter advised Medovoi that they would be required to enter into a formal assumption or, in the alternative, American would accelerate the principal balance. American accepted monthly checks from Master for the months of April, May and June 1969 because it was advised by Medovoi that they wished to assume the note and first trust deed. The trial court found that American in so doing did not intend to waive its right to accelerate the principal balance but intended merely to provide for Medovoi a period of time for negotiation of the terms of assumption.

The trial court found further that during the period between April and June 1969 American at all times intended to accelerate if Medovoi failed to assume. This finding is supported by American's subsequent conduct. Although Medovoi expressed dissatisfaction with the terms of the assumption agreement proposed by American, negotiation relating to alternative terms continued until after the beginning of June when the final payment was accepted from Master. Thereafter it became clear to American that there was no ground for mutual agreement on the terms of assumption. As a result, American notified Medovoi and Witter by letter dated June 10, 1969, that it was accelerating the principal balance on the note as a consequence of the unconsented transfer of the property. American thereafter refused tender by Master of the July payment on grounds that the amount was insufficient to pay the full principal balance then due by virtue of the exercise of its option to accelerate.

When the full principal balance remained unpaid, American on or about July 8, 1969, initiated proceedings to perfect foreclosure of the property, and in August Medovoi abandoned the premises. The evidence amply supports the trial court's finding that American at all times intended to retain its rights under the due-on-sale clause.

The cases relied upon by Medovoi are inapposite involving as they do either lease assignments or acceptance of partial or late payment on loans after default. The cases in which the landlord was estopped to enforce a forfeiture by having accepted rental payments after the breach are inapplicable on several grounds. One prominent reason for their inapplicability is the fact that estoppel was imposed because the landlord accepting rent after breach of the lease condition had full knowledge of the facts (Miller v. Reidy (1927) 85 Cal.App. 757, 260 P. 358; Kern Sunset Oil Co. v. Good Roads Oil Co. (1931) 214 Cal. 435, 6 P.2d 71) or the facts otherwise support a finding that a waiver was intended (Linnard v. Sonnenschein (1928) 94 Cal.App. 729, 272 P. 315). In addition, these cases involved forfeitures, which are traditionally regarded with disfavor. ‘Mindful that the law provides other remedies more consonant with justice, courts avoid enforcing covenants for forfeiture wherever possible.’ (Miller v. Reidy, supra, 85 Cal.App. at p. 761, 260 P. at p. 360.) The present case does not deal with a forfeiture. (See, e. g., R. G. Hamilton Corp., Ltd. v. Corum (1933) 218 Cal. 92, 97, 21 P.2d 413.)

The distinction between a forfeiture and acceleration of the balance due under a deed of trust is a significant one. There is no true forfeiture when enforcement of the terms of a due-on-sale clause is undertaken by acceleration, which merely requires early repayment of a money obligation pursuant to prior agreement with the borrower. (See, e. g., Hunt v. Smyth (1972) 25 Cal.App.3d 807, 831, 101 Cal.Rptr. 4.) Medovoi was advised of the existence of the due-on-sale clause at the time the property was purchased and could have obtained alternative financing or assumed the existing loan at that time and during escrow. Once again when American subsequently elected to exercise its prerogative to accelerate under the due-on-sale clause, Medovoi was free to obtain new financing, pay off American's loan, and in that way protect the ownership interest in the property.

Other cases relating to estoppel of the lender to compel repayment of the full balance by acceleration or foreclosure after acceptance of late or partial payments have no applicability. The beneficiary under a trust deed may be estopped to foreclose by having previously waived defaults occasioned by late payment and then concealing the recording of notice of default (Altman v. McCollum (1951) 107 Cal.App.2d Supp. 847, 236 P.2d 914). Similarly, a creditor is estopped to enforce payment by a guarantor where an extension of time was granted the principal obligor by acceptance of payments after formal notice of default since the obligations of surety and principal are coextensive (Mortgage Finance Corp. v. Howard (1962) 210 Cal.App.2d 569, 26 Cal.Rptr. 917.) However, in the present case American obtained no unfair advantage and at all times after it had knowledge of grounds for foreclosure it asserted its intention to accelerate, pending a reasonable period for assumption of the loan.

Although Medovoi further claims that American's consent to the transfer may be implied from its prior conduct, the facts do not support this contention. Medovoi relies upon American's presumed consent to the giving of a further encumbrance on the property by Witter to Teague. Even if the evidence clearly established the existence of an express consent by American to the transaction, no waiver of the right to accelerate on a further transfer of the property could be implied therefrom. Medovoi cannot take advantage of any earlier waiver by American of its right to accelerate the debt since such provisions are enforceable at American's option, depending upon its evaluation of the transferee and the surrounding circumstances. Moreover, the due-on-sale clause expressly provides that consent by the beneficiary to one transfer shall not be deemed to be a waiver of the right to require its consent to future or successive transfers of the property.

II

The due-on-sale clause in American's first deed of trust is not, as Medovoi contends, rendered invalid and unenforceable as an unlawful restraint on alienation (Civ.Code, § 711). The propriety of a promise not to transfer property which constituted security for an indebtedness was accepted by the California Supreme Court in Coast Bank v. Minderhout (1964) 61 Cal.2d 311, 38 Cal.Rptr. 505, 392 P.2d 265. Coast Bank in that case had extracted a promise from its debtors, the Enrights, not to transfer the property without its consent. The Enrights subsequently conveyed the property without the knowledge or consent of the bank. When this was discovered, the bank accelerated the due date on the loan and foreclosed upon its security interest. The court upheld this agreement as a reasonable restraint designed to protect a security interest. (Coast Bank v. Minderhout, supra, 61 Cal.2d at pp. 316–317, 38 Cal.Rptr. 505, 392 P.2d 265.) The due-on-sale provisions in trust deeds have henceforth been accepted (Hellbaum v. Lytton Sav. & Loan Assn. (1969) 274 Cal.App.2d 456, 79 Cal.Rptr. 9; Cherry v. Home Sav. & Loan Assn. (1969) 276 Cal.App.2d 574, 81 Cal.Rptr. 135; see also La Sala v. American Sav. & Loan Assn. (1971) 5 Cal.3d 864, 97 Cal.Rptr. 849, 489 P.2d 1113).

The due-on-sale provisions which commonly appear on printed trust deed forms constitute acknowledged restraints designed to protect the justifiable interests of the parties. The enforceability of the due-on-sale provision is supported by sound business reasons. ‘[1b] . . . First, a substantial loan ordinarily is not obtained for the asking. Lenders run the risk that security may depreciate in value, or be totally destroyed. This risk of loss is reduced in the lender's viewpoint if the borrower is known to be conscientious, experienced and able. Often, as here, a trust deed requires the borrower to maintain the property in good repair, secure and keep adequate insurance in force, satisfy liens, taxes and other encumbrances and in other ways to protect the security. If a borrower were able to sell the security without concern for the debt, he may take the proceeds of the sale, leaving for parts unknown, and the new owner of the property might permit it to run down and depreciate. . . . [¶] Secondly, loan agreements frequently permit a borrower to pay off a loan before it is due. When interest rates are high, a lender runs the risk they will drop and that the borrower will refinance his debt elsewhere at a lower rate and pay off the loan, leaving the lender with money to loan but at a less favorable interest rate. On the other hand, when money is loaned at low interest, the lender risks losing the benefit of a later increase in rates. As one protection against the foregoing contingency, a due-on-sale clause is employed permitting acceleration of the due date by the lender so that he may take advantage of rising interest rates in the event his borrower transfers the security. This is merely one example of ways taken to minimize risks by sensible lenders.’ (Cherry v. Home Sav. & Loan Assn., supra, 276 Cal.App.2d at pp. 578–579, 81 Cal.Rptr. 135, 138.)

The enforceability of this provision by acceleration is thus recognized on the basis of sound economics. The court in the Cherry case further observed that respondent Home Savings and Loan did nothing to render the performance of the borrower more difficult by undertaking to enforce the due-on-sale clause. ‘[¶] . . . It did not, and could not, prevent the Wickershims from selling to Cherry if they so wished. But respondent could, and allegedly did by threatening to exercise its option to accelerate the debt, refuse to accept Cherry as owner of the security unless respondent received from him a higher return for the use of its money than obtained from the Wickershims. Such refusal on respondent's part demonstrated no lack of good faith or fair dealing, but merely insistence on its rights under the terms of the deed of trust. It had the power of free decision regarding use its money by others, the right to determine in its own discretion whether it would exercise its option, and it had no obligation to act only in a manner which others might term ‘reasonable.’ . . .' (Cherry v. Home Sav. & Loan Assn., supra, 276 Cal.App.2d at pp. 579–580, 81 Cal.Rptr. at p. 138.)

Although subsequent cases have acknowledged limitations on the circumstances which will justify resort to the remedy of acceleration, none has explicitly overruled the decision in the Cherry case that the due-on-sale provision is valid and enforceable. The California Supreme Court has recently recognized the validity of due-on-encumbrance clauses, which permit acceleration where the debtor incurs subsequent liens on the secured property, but in the same decision it disapproved their automatic enforcement. (La Sala v. American Sav. & Loan Assn., supra, 5 Cal.3d 864, 97 Cal.Rptr. 849, 489 P.2d 1113.) The court imposed a requirement that the lender show that acceleration is reasonably necessary to protect its security when a due-on-encumbrance provision is involved, but expressly distinguished due-on-sale clauses, concluding that the automatic performance of a due-on-sale clause may be required because patently ‘such a provision is necessary to the lender's security.’ (La Sala v. American Sav. & Loan Assn., supra, 5 Cal.3d at p. 883, 97 Cal.Rptr. 849, at p. 862, 489 P.2d 1113, at p. 1126.) Furthermore, since the borrower on the sale of his property generally receives cash sufficient to repay the obligation in full, acceleration under the due-on-sale clause merely insures that all purchasers of property must finance at the current interest rate and none obtain an advantage because of the fortuitous fact that the seller purchased during a period of lower rates. (See La Sala v. American Sav. & Loan Assn., supra, 5 Cal.3d at p. 880, fn. 17, 97 Cal.Rptr. 849, 489 P.2d 1113.)

The California Supreme Court recently restricted the enforceability of the due-on-sale clause under the particular circumstances of a purchase by installment land contract. (Tucker v. Lassen Sav. & Loan Assn. (1974) 12 Cal.3d 629, 116 Cal.Rptr. 633, 526 P.2d 1169.) In that decision the court emphasized again that Civil Code section 711 prohibits only unreasonable restraints on alienation. In the Tucker case the trial court's determination that the due-on-sale clause was not enforceable by acceleration was affirmed because the lender failed to make a showing either that the installment land contract impaired its security, or that its primary recourse to the borrowers for payment of their note was jeopardized. The court carefully distinguished the installment land contract from an outright sale of the property. ‘[¶] . . . In . . . [an outright sale], as we pointed out in La Sala, the automatic application of the ‘due-on’ clause results in little if any restraint on alienation because the terms of the second sale usually provide for full payment of the prior trust deed. In other words, the trustor-vendor normally receives enough money through the financing of the second sale to pay off his note, and he is normally required to do so. Little, if any restraint on alienation results through enforcement of the provision. [¶] In the case of the installment land contract, however, the matter is otherwise. The trustor-vendor normally receives a relatively small down payment upon execution of the contract, the remainder of the purchase price to be paid through monthly installments. This down payment, like the proceeds of the junior encumbrance involved in La Sala, ‘does not often provide the borrower with the means to discharge the balance secured by the trust deed.’ [Citation.] The result is that a conveyance by means of an installment land contract would essentially be precluded in all cases wherein the balance due on the trustor-vendor's note was substantial if the ‘due-on’ clause were to be given automatic effect. . . .' (Tucker v. Lassen Sav. & Loan Assn., supra, 12 Cal.3d at p. 637, 116 Cal.Rptr. 633, 638, 526 P.2d 1169, 1174.)

It is abundantly clear from the facts of the present case that the transaction by which title was conveyed to Medovoi was a simple purchase and sale. Medovoi became holders of record title at close of escrow. The persuasive authority of the prior cases supports the enforceability of the due-on-sale clause in American's trust deed under these circumstances. Moreover, the trial court found that the amounts demanded by American as the terms of the assumption were reasonable, in conformity with American's assumption policy, and not discriminatory. Under the entire circumstances of this case, therefore, it can be said that American acted reasonably in enforcing a valid due-on-sale clause.

III

American in its cross-appeal contends that it should have had recovery on its cross-complaint in which it alleged that it was damaged by the negligent or fraudulent concealment of the transfer by Medovoi. The trial court found that Medovoi never assumed or became parties to the deed of trust; nonetheless, the Medovoi title was recorded and became a matter of public record. The trial court further found that Medovoi knew that American might accelerate the principal balance or demand an assumption fee and increased interest rate if it learned of the transfer to Medovoi; that Medovoi did not inform American of the purchase; that Medovoi intentionally refused to respond to an inquiry by American in September of 1968 concerning the status of title; and that Medovoi concurred in having the monthly payment on the American trust deed made through Master. The facts support its further determination that had Medovoi promptly informed American, the interest rate demanded by American would have been lower because the prevailing interest rate in July 1968 was lower than in March and April 1969.

Liability for negligent or intentional misrepresentation may be imposed only when the evidence clearly supports a finding of the presence of each of the elements of the action. These are: (1) misrepresentation; (2) knowledge of falsity; (3) intent to defraud or induce reliance; (4) justifiable reliance; and (5) resulting damage. (Harazim v. Lynam (1968) 267 Cal.App.2d 127, 130, 72 Cal.Rptr. 670.)

Assuming all of the foregoing facts and circumstances are true, there is no authority to impose upon Medovoi, as transferees or vendees of the property, any affirmative duty to inform American of the purchase and, accordingly, Medovoi could not breach such a duty by concealment. Substantial evidence supports the trial court's further determination that, even assuming misrepresentation by Medovoi, the purchasers did not entertain the requisite intent to induce American to rely to its detriment. Medovoi's conduct was passive; it was American that initiated inquiry as to status of title and failed to follow up with further investigation.

Finally ‘[a]ctionable deceit occurs if a material and knowingly false representation, made with intent to induce action, causes reasonable and detrimental reliance.’ (Block v. Tobin (1975) 45 Cal.App.3d 214, 219, 119 Cal.Rptr. 288, 290.) There is a lack of clear and convincing evidence to support the inference that American's reliance upon the Medovoi's denial of ownership was either justified or detrimental. It was incumbent upon American to show not only actual reliance, but also that it was reasonable for the company to accept the Medovoi denial without independent inquiry. There is little justification for reliance under the circumstances of this case since American was in a business intimately involved with real property transactions and had both the knowledge and access to public records which would disclose the status of title. Although the trial was bifurcated and the issue of damages was not litigated, it is clear that the only potential detriment flowed from the delay in opening negotiations relating to assumption, and damages were speculative. One net result was that American in 1969 received a higher interest rate upon assumption by the new purchaser than it might have obtained in 1968.

IV

Medovoi contends that, in any event, American and First Charter were improperly awarded costs over Medovoi's objection that no costs should be awarded because neither side prevailed on its affirmative pleadings. The court awarded costs to defendants-respondents and cross-appellants on the basis that had the Medovoi complaint not been filed, American would not have filed a cross-complaint. There was no impropriety in the trial court's award.

This issue was determined similarly in a case in which plaintiffs instituted an action for damages sustained in an automobile accident and defendant cross-complained for damages arising out of the same accident. (Gerstein v. Smirl (1945) 70 Cal.App.2d 238, 160 P.2d 585.) Both parties were denied relief and the trial court's award of costs to defendant was affirmed on appeal on the ground that while defendant might never have litigated her claim, once plaintiff instituted the action she had no alternative but to set up her counterclaim for damages allegedly sustained in the same transaction or be foreclosed therefrom altogether. The court in considering the issue of costs made the following observation: ‘[¶] As we read Sec. 1032, it is intended thereby that, if plaintiff in an action fails to make out his case, the defendant is entitled to judgment and must be regarded as the prevailing party. In other words, a party who defeats an action by a counterclaim is as much entitled to his costs as is a party who defeats it by any others means. In an action such as the instant one for damages, the ‘net result’ of a judgment requiring defendant to pay nothing to the plaintiff is favorable to the former. Although defendant did not recover on her cross-complaint, she was the prevailing party in the court below because plaintiff was denied recovery against her. . . .' (Gerstein v. Smirl, supra, 70 Cal.App.2d at pp. 240–241, 160 P.2d at 586.)

The judgment and order are affirmed.

Each of the parties is to bear their own costs.

HANSON, Associate Justice.

WOOD, P. J., and THOMPSON, J., concur.