BURKE v. Robert G. Ready et al., Plaintiffs in Intervention and Respondents. (1981)

Plaintiff Richard O. Burke (appellant or Burke) appeals from the trial court's judgment denying him relief in an action brought for specific performance and quiet title or alternatively for damages.

The parties to the action are appellant, a professional dealer in distress property sales and defendants-respondents Richard D. Cunningham and Margaret A. Cunningham (Cunningham), Coast Federal Savings and Loan Association (Coast), CFS Service Corporation (CFS) and intervenors, Investors Yield and Robert Ready (Ready).   The center of the legal dispute is a piece of residential property located at 300 Barton Way, Menlo Park, California (Barton Way property).   The facts leading to the controversy may be summarized as follows.

On April 10, 1973, Cunningham, the owner of the Barton Way property, borrowed money from Coast.   As a security therefor, he executed a deed of trust in favor of Coast securing a promissory note in the principal amount of $23,000.   CFS, a wholly owned subsidiary of Coast, was named as trustee.   The deed gave CFS the power to sell the property upon Coast's delivery to CFS of a written declaration of default and demand for sale.

In February 1975, Cunningham stopped making payments on his loan.   No payments were made by May 1975, and on May 20, Coast recorded a notice of default.   On August 20, 1975, Coast gave CFS a written demand to sell the property at a foreclosure sale.   Phyllis Cheney had responsibility for foreclosure sales at CFS.   Sale of the property was scheduled for October 1, 1975, at 10 a. m., at the Hall of Records, Redwood City, California.

On September 4, 1975, Coast informed Cunningham that his default could be cured by payment to Coast of the sum of $1,800.67.   On September 29, 1975, two days prior to the date of the scheduled sale, Cunningham went to Coast's Sunnyvale office and gave a cashier's check in the sum of $1,800.67 to Wayne Evans, a loan officer who accepted the check and told Cunningham that the loan was thereby reinstated.   Evans then phoned John Jenks, counselor in Coast's Los Angeles Loan Service Department.   Jenks advised Evans to forward the check to the Los Angeles office.   Jenks noted the phone conversation with Evans and payment by Cunningham on the Cunningham foreclosure control card.

On the morning of October 1, 1975, the date of the scheduled trustee's sale, Jenks failed to report to work at Coast's Los Angeles office because his wife had had an automobile accident.   Wauthena Ransom, who handled loan service matters, also failed to show up at the office that morning.   Shortly before 10 a. m., the hour of the trustee's sale, Cheney called the Coast office in Los Angeles to see if there was any reason why the sale could not proceed as scheduled.   She asked to speak to Ransom, but was informed by Ann Lawrence, a clerk, that Ransom would not be in the office that day.   Thereupon Cheney inquired if she could speak to Mr. Jenks, Ransom's superior.   Lawrence informed her that Jenks had not arrived yet at the office due to his wife's automobile accident.   Cheney then asked Lawrence to determine whether a cure had been made on the Cunningham loan.   Lawrence, who apparently failed to consult the Cunningham foreclosure control card, erroneously advised Cheney that no cure had been made.   Operating on this erroneous advice, Cheney permitted the sale to proceed.

Cunningham, who had been assured that his payment had reinstated the loan did not know that a foreclosure sale was conducted on the scheduled day and as a consequence he failed to appear at the sale.   Appellant, who was the only bidder, in addition to Coast, made a successful bid in the amount of $24,818, which was $1 more than the credit bid offered by Coast.   Burke was of the opinion that the Barton Way property had a fair market value of between $34,800 and $39,800 on the date of the sale.   Other testimony indicated that the property had a fair market value of $60,000.   The trial court found that the property was worth $60,000 or more at the time of the trial.

As a professional dealer in distress property sales, Burke, by the time of trial, had attended about 200 to 250 foreclosure sales in his eight-year career and had bought about 55 to 70 homes, of which he still retained title to about 20.   He took subscriptions to approximately 20 to 40 newspapers, which he regularly reviewed for notices of distress sales.   He read the notice of sale for the Cunningham property in the Menlo Park-Atherton newspaper, of which he was a regular subscriber.   Prior to the sale, he made a perfunctory visual review of the exterior of the Cunningham property, but did not examine the interior, and he had no clear recollection of the house or the neighborhood.   He intended to profit from his purchase by fixing up the residence and reselling it at a substantial increase in price.

Immediately after the sale, the error was discovered when Jenks, who had returned to the office, advised Cheney that the default had been cured before the sale.   Cheney immediately telephoned Burke to advise him of the error and to tender back to him the money paid at the sale.   A check refunding Burke's money was sent to him a few days later.   Burke never received a trustee's deed to the property.

The essential procedural steps taken in the matter may be briefly stated as follows.   On October 6, 1975, Burke brought an action against respondents for specific performance and quiet title or for damages in the alternative.   The same day he also filed a lis pendens concerning the property.   On April 1, 1977, Cunningham filed a cross-complaint to set aside the sale or, in the alternative, for indemnification.   Since after the filing of the original action by Burke, Cunningham executed a second deed of trust in favor of the intervenors encumbering the property.   On June 28, 1977, Ready filed a complaint in intervention to quiet title, to remove the cloud on the title and for declaratory relief.

After receiving oral and documentary evidence and hearing the legal arguments of the parties, the trial court sitting without a jury found that due to the reinstatement of the loan by Cunningham, the purported foreclosure sale was null and void.   The trial court concluded that the “Receipt and Instructions” issued by the agents of CFS was only an executory contract voidable by virtue of mistake of fact on the part of Coast and CFS and rescinded by the latter parties shortly after their consummation of the purported sale;  that Burke was not a bona fide purchaser because no deed of conveyance and hence no title to the property was ever acquired by him;  and that Burke was entitled to neither specific performance nor damages in lieu of specific performance.

I

Appellant's first contention on appeal is that the “cure” of the default by Cunningham did not terminate the power and authority of the trustee to conduct and conclude a final irrevocable sale to Burke, a bona fide purchaser, because (a) the trustee's power to sell was not extinguished by “operation of law” as the cure was made after the statutory reinstatement period had expired (Civ. Code, § 2924c, subd. (a)), and (b) Coast Federal never revoked the authority of its agent CFS to conduct the sale.

 It is well settled that a trustee under a deed has legal authority to sell the property only if the note matures or if there is default in the payment of the principal or interest.  (Huene v. Cribb (1908) 9 Cal.App. 141, 144, 98 P. 78.)   Contrariwise, it is also recognized that a valid tender or the payment of the outstanding debt extinguishes the power of the trustee to sell and renders the whole transaction null and void.   (Firato v. Tuttle (1957) 48 Cal.2d 136, 139, 308 P.2d 333;  Lichty v. Whitney (1947) 80 Cal.App.2d 696;  Temple v. Whittier (Ill.1886) 117 Ill. 282, 7 N.E. 642;  Rogers v. Barnes (Mass.1897) 169 Mass. 179, 47 N.E. 602;  Crowley v. Adams (Mass.1917) 226 Mass. 582, 116 N.E. 241.)   For example, in Temple v. Whittier, supra, similar to the case at bench, the trustee was not by reason of neglect informed that Whittier, the trustor, had paid his debt and as a consequence, his property was sold to a third-party bona fide purchaser at a trustee's sale.   In setting aside the deed the court pointed out that a purchaser under a power purchases at the peril of the sale being void if a material condition precedent to the exercise of the power does not exist.   A sale without existence of such material condition precedent, continued the court, was a sale not authorized by the power, no title could pass by it and, since the payment of the debt extinguished the power of sale, the instrument was void.  (Temple v. Whitier, supra, 7 N.E. at p. 644.)   In Rogers and Crowley, the court likewise underlined that the payment of the debt terminated the interest of the mortgagee and that a subsequent sale of the property passed no title even if bought by a third-party purchaser for value and in good faith because the sale in such an instance is deemed an absolute nullity and considered as if nothing had taken place.   (Rogers v. Barnes, supra, 47 N.E. at p. 603;  Crowley v. Adams, supra, 116 N.E. at p. 242.)   Finally, in Lichty, the trustee under a first deed of trust foreclosed and sold the trust property to the beneficiary, despite the fact that the holder of the second deed of trust had tendered the full amount necessary to pay the debt which tender was refused.   After the sale, the beneficiary contracted to sell the property to a third party.   The trial court found against plaintiff, the holder of the second deed of trust.   In reversing the judgment the appellate court held that the trustee had no power to sell and the sale was absolutely void.   Significantly enough, in its reasoning the court stressed that:  “As the tender released the security, the trustee's sale on June 30th was void and conveyed no title to Mrs. Whitney.   Therefore she had nothing to agree to sell to the prospective purchaser.   As she had nothing to sell her contract in escrow could not give the purchaser any equity in the property and such contract cannot defeat plaintiff's action nor affect his rights.”  (Lichty v. Whitney, supra, 80 Cal.App.2d at p. 702, 182 P.2d 582;  emphasis added.)

 Appellant contends that the trustee's power to sell was not extinguished by operation of law because the “cure” was made after the statutory reinstatement period (Civ.Code § 2924c, subd. (a)) had expired.   Appellant cites no authority for this interpretation of the statute.

The statute gives the debtor the right to cure the default if done so within three months of the recording of the notice of default.   The statute does not provide nor imply that a debtor cannot cure the default after the expiration of the three month period if the lender is willing to accept the cure check;  in fact, public policy favors the cure.

 The cases generally state that acceptance of a delinquent installment of principal and interest results in curing the particular default and precludes a foreclosure sale based upon such existing delinquency.   The rationale of this rule is predicated on four well established principles.   One, as repeatedly pointed out forfeiture and penalty are disfavored both in law and equity (Civ. Code, § 3275); ¹  Bisno v. Sax (1959) 175 Cal.App.2d 714, 724–726, 346 P.2d 814.)   Yet to sustain a foreclosure in an instance where the default had been cured would amount to enforcement of penalty or forfeiture, a thing equity abhors.   Two, it is widely recognized that a court of equity relieves a party from a mere technical default in payment especially in a case where, as here, the mortgagee or other beneficiary had already been compensated.  (Bisno v. Sax, supra, at pp. 726–728, 346 P.2d 814;  see also Bard v. Rabinfried Realty Co. (1924) 126 Misc. 427, 213 N.Y.S. 44, 45;  Towbridge v. Malex Realty Corporation (1921) 198 App.Div. 656, 191 N.Y.S. 97, 102–104.)   As the court aptly observed in Times-Mirror Co. v. Superior Court (1935) 3 Cal.2d 309, 331, 44 P.2d 547:  “Equity does not wait upon precedent which exactly squares with the facts in controversy, but will assert itself in those situations where right and justice would be defeated but for its intervention.”  (See also Wuest v. Wuest (1942) 53 Cal.App.2d 339, 346, 127 P.2d 934.)   Three, it is axiomatic that pursuant to general statutory authorization the courts of equity are empowered to cancel a written instrument where, as here, there is a reasonable likelihood that it may seriously injure a person against whom it is void or voidable.  (Civ. Code, § 3412; ²  Duley v. Westinghouse Electric Corp. (1979) 97 Cal.App.3d 430, 432, 158 Cal.Rptr. 668.)   Four, the public policy underlying the foreclosure statutes (Civ. Code, § 2924 et seq.) is to provide increased protection to the debtors.   (Magnus v. Morrison (1949) 93 Cal.App.2d 1, 3, 155 Cal.Rptr. 552.)   The avowed goal and objective of the statutes would be definitely weakened if not entirely undermined if the trustee could sell the property under the deed despite a prior reinstatement of the loan by the debtor.  (Cf. Fleisher v. Continental Auxiliary Co. (1963) 215 Cal.App.2d 136, 30 Cal.Rptr. 137.)

II

 Appellant argues that trial court erred in holding that the trustee had no power to sell the property or convey title to appellant and that the sale was void.   Appellant bases his argument on the law of agency contending that the trustee was the agent of the beneficiary (Coast Federal) for the purpose of conducting the sale and that Coast Federal did nothing to revoke the agent's authority to conduct the sale prior to the sale.   However, the problem presented in this case is not whether the principal Coast Federal revoked the agency prior to sale as discussed at length by appellant, but whether the principal had authority to sell.   As stated in Civil Code section 2305:  “Every act which, according to this code, may be done by ․ any person, may be done by ․ the agent of such person for that purpose, unless a contrary intention clearly appears.”   Here the principal could not have done the act, i. e., sell the property, thus the agent could not.   As neither Coast Federal nor CFS had the power to sell the property there could be no valid sale and thus no purchaser, bona fide or otherwise.

III

Appellant's further claim that even if the foreclosure sale was properly set aside he was still entitled damages against respondents Coast and CFS, suffers from two fatal infirmities and must be disregarded.

 First, we have concluded that due to a lack of power of the trustee to sell the property under the deed, the foreclosure sale was null and void in its entirety.   It is well settled that where the contract is void, no action can be brought to enforce such contract either in law or equity.  (Stockton Morris Etc. Co. v. Calif. Etc. Corp. (1952) 112 Cal.App.2d 684, 689, 247 Cal.Rptr. 90;  Industrial Indem. Co. v. Golden State Co. (1953) 117 Cal.App.2d 519, 527, 256 Cal.Rptr. 677.)

 Secondly, the finding of the trial court that the sale in dispute could be and was in effect, rescinded by the parties under Civil Code section 1577, is well supported by both the law and the record.

Mistake of fact giving rise to rescission is defined in section 1577, which sets forth that:  “Mistake of fact is a mistake, not caused by the neglect of a legal duty on the part of the person making the mistake, and consisting in:  [¶] 1. An unconscious ignorance or forgetfulness of a fact past or present, material to the contract;  or, [¶] 2. Belief in the present existence of a thing material to the contract, which does not exist, or in the past existence of such a thing, which has not existed.”

 The cases interpreting section 1577 spell out that rescission may be had for mistake of fact if the mistake is material to the contract and was not the result of neglect of a legal duty, if the enforcement of the contract as made would be unconscionable, and if the other party seeking relief gives prompt notice to rescind and restores or offers to restore to the other party everything of value which he has received under the contract.   (M. F. Kemper Const. Co. v. City of L. A. (1951) 37 Cal.2d 696, 701, 235 P.2d 7.)   In elaborating on the statutory element of neglect of a legal duty the cases emphasize that not all carelessness constitutes “neglect of a legal duty” within the meaning of section 1577.   What the statute means is not a lack of ordinary care, (i. e., ordinary negligence), but rather gross negligence that is the want of even scant care or an extreme departure from the ordinary standard of conduct.  (Van Meter v. Bent Construction Co. (1956) 46 Cal.2d 588, 594, 297 P.2d 644;  White v. Berrenda Mesa Water Dist. (1970) 7 Cal.App.3d 894, 901, 87 Cal.Rptr. 338, 1 Witkin, Summary of Cal. Law (1973) Contracts, § 299, p. 252.)

 When tested by the forestated principles, the record indicates that respondents complied with the law in every respect by giving prompt notice of rescission after the discovery of mistake and by returning the purchase price to appellant.   As far as the question of neglect of legal duty is concerned, the record attests to the fact that the employees of respondent Coast and CFS were at best guilty of ordinary negligence, rather than gross negligence as required by the law.   A brief summary of the relevant evidence shows that after Cunningham had paid up his delinquency at Coast's Sunnyvale office, Evans called up Jenks on the telephone without delay and advised him that the Cunningham default had been cured.   Jenks, counselor at the Los Angeles office, immediately recorded this important event on the Cunningham foreclosure control card.   The fact of payment therefore appeared as a matter of record in the Los Angeles office of Coast.   The only carelessness occurred when Ann Lawrence who was a clerk and was not closely connected with the case, failed to consult the record prior to advising Cheney that she could proceed with the foreclosure sale.   Her conduct amounts to no more than lack of ordinary care which does not preclude rescission based on mistake of fact under section 1577.   Since the determination of negligence (including gross negligence) is a question of fact for the trier of fact (Greyhound Lines, Inc. v. Superior Court (1970) 3 Cal.App.3d 356, 83 Cal.Rptr. 343;  Rice v. Southern Pacific Co. (1967) 247 Cal.App.2d 701, 55 Cal.Rptr. 840), we cannot say in light of the record before us that the implied finding of the trial court that no gross negligence occurred in the case is not supported by sufficient evidence.

In view of our conclusion the additional issues raised by the parties need not be discussed.

The judgment is affirmed.

FOOTNOTES

1.   Section 3275 provides that:“Whenever, by the terms of an obligation, a party thereto incurs a forfeiture, or a loss in the nature of a forfeiture, by reason of his failure to comply with its provisions, he may be relieved therefrom, upon making full compensation to the other party, except in case of a grossly negligent, willful, or fraudulent breach of duty.”

2.   Section 3412 sets out that:“A written instrument, in respect to which there is a reasonable apprehension that if left outstanding it may cause serious injury to a person against whom it is void or voidable, may, upon his application, be so adjudged, and ordered to be delivered up or canceled.”

CALDECOTT, Presiding Justice.

RATTIGAN and POCHE, JJ., concur.