INC v. ENTERPRISES (1979)

In an action to collect on a promissory note the trial court entered judgment for the defendant-maker on the grounds that collection was barred by Code of Civil Procedure section 580d.¹ That statute prohibits a deficiency judgment on a note secured by a trust deed or mortgage on real estate after nonjudicial foreclosure of the security interest.

The note, upon which this action proceeded, was in fact an unsecured note. The applicability of Code of Civil Procedure section 580d was based on the trial court's perception that the underlying debt was actually represented by two notes—one of which was secured by a second deed of trust that had been nonjudicially foreclosed. Based on that perception the trial court considered itself bound by the rule enunciated in Freedland v. Greco, 45 Cal.2d 462, 289 P.2d 463, where it was held that the anti-deficiency statutes could not be circumvented by the issuance of two notes, one secured and one unsecured, representing a single debt.

We have concluded that the facts of this case are distinguishable from the situation in Freedland and that awarding judgment on the unsecured promissory note would not offend the policies served by the anti-deficiency statutes.

U.P.P. Real Estate Program No. 6 (U.P.P.) is a limited partnership which owns several commercial buildings including the Encino Medical Tower and the CEIR Building. U.P.P. was indebted to E.I.C., Inc. (E.I.C.) on a promissory note in the sum of $6,840,000. That note was secured by a blanket trust deed on all of U.P.P.'s buildings. U.P.P. was in the process of a “Chapter XI” reorganization under the jurisdiction of the Federal Bankruptcy Act.

M & O Enterprises (M & O), a partnership, proposed to purchase the Encino Medical Tower for $2,300,000, and the CEIR Building for $3,700,000. Each of these buildings was subject to encumbrances which were senior to E.I.C.'s blanket trust deed and the proposed purchase prices were not large enough to satisfy all the encumbrances.

An arrangement was devised, with the approval of the bankruptcy court, whereby M & O would purchase the buildings by satisfying the senior encumbrances with proceeds from a new note and first trust deed and giving U.P.P. the remainder of the sale prices in the form of notes secured by second trust deeds on the buildings.

As part of the arrangement E.I.C. agreed to lift its encumbrances on the buildings and accept, basically, an unsecured position. This action was essential to the consummation of the sale. The consideration for this accommodation by U.P.P. that it would pay to E.I.C. the first $500,000 realized from the aggregate of the two sales.

It was contemplated that the sale of the Encino Medical Tower would be consummated first and that it was possible that the sale of the CEIR Building might not go through. It was thus agreed that in the event of that latter eventuality, E.I.C. would receive the first $500,000 realized by U.P.P. from the sale of the Encino Medical Tower alone. The second sale did not in fact come to fruition.

Simply stated then the arrangement was that M & O would pay $2,300,000 to U.P.P. for the Encino Medical Tower—$1,300,000 to be obtained from the Metropolitan Life Insurance Company in exchange for a promissory note and first trust deed. The bulk of that money was to be used to satisfy an existing note and first trust deed on the building. The remainder of the purchase price, represented primarily by a note for $990,000 secured by a second trust deed, was to be delivered to U.P.P. in escrow.

By a separate agreement, U.P.P. agreed to pay to E.I.C. the first $221,000 received in payment on the $990,000 note. Upon the failure to consummate the sale of the CEIR Building, U.P.P. also agreed to pay E.I.C. the next 65 percent of the payment on principal of that same note with a prorating of the interest. Approximately $45,000 in actual cash was generated by the escrow and credited to E.I.C.

At that point there was nothing remarkable about the transaction. The dispute now engaging our attention arose out of two additional features of the arrangement. Those features were (1) M & O executed its own note in the amount of $221,000 in favor of E.I.C. with the understanding that any payments made on this note would be credited against the larger $990,000 note, and (2) U.P.P. delivered to E.I.C., in pledge as security for its obligation, the $990,000 note and second trust deed.

M & O defaulted on all of its obligations which in turn led to a default by U.P.P. on its obligation to E.I.C. E.I.C. then commenced this action against M & O on the $221,000 unsecured note. E.I.C., by virtue of its rights as a pledgee, caused the institution of a nonjudicial foreclosure of the pledged second trust deed.

The reliance of M & O and the trial court on Freedland v. Greco, supra, stems from the obvious fact that the $990,000 secured note included the $221,000 represented by the unsecured note and that by reason of the pledge agreement the secured note, as well as the unsecured note, were both held by E.I.C.

The anti-deficiency statutes were enacted with a view to the usual two-party transaction wherein the creditor advances capital and the debtor, who receives the loan, gives security in the form of a trust deed or mortgage. The often-stated public policy served by the anti-deficiency statutes is to prevent creditors from over valuing the security and in the case of Code of Civil Procedure section 580d, to achieve parity between debtors in terms of the right of redemption and realistic bids at sales following either judicial or nonjudicial foreclosures.

In the instant case we do not have the traditional two-party transaction. That relationship existed between M & O and U.P.P., but not between M & O and E.I.C. E.I.C. was not the vendor nor did it set the sale price or value of the property. The financing of the $990,000 balance due on the sale was between U.P.P. and M & O. Thus the bar of Code of Civil Procedure section 580d, as applied to E.I.C., would serve none of the underlying purposes of the statute. The commercial nature of this transaction suggests a strict interpretation of the statute insofar as E.I.C. is concerned.

E.I.C.'s primary obligor was U.P.P. who was indebted to the former in the amount of $6,480,000. In exchange for E.I.C. moving from a secured to an unsecured position in relation to the Encino Medical Tower, U.P.P. agreed to pay over to E.I.C. the first $500,000 realized from the sale of the building.

As security for its obligation, U.P.P. pledged the $990,000 note and second trust deed. By specific written agreement, the security device was created as a pledge as follows.

“E.I.C. shall act as pledgeholder of these instruments and shall not transfer [them] except in accordance with its right as a pledgee.”

That agreement did not put E.I.C. in the position of “owner” or princial obligee of the secured note nor did it put M & O in the position of principal obligor vis-a-vis E.I.C.

Notes and mortgages may be the subject of a pledge and, in that context, are considered to be personal property. (Seaboard Finance Co. v. Federal Leasing Co., 247 Cal.App.2d 444, 55 Cal.Rptr. 458; Guyselman v. Ramsey, 179 Cal.App.2d 802, 4 Cal.Rptr. 133.) In Riebe v. Budget Financial Corp., 264 Cal.App.2d 576, 70 Cal.Rptr. 654, a pledge of promissory notes secured by second trust deeds on real property was held not to violate the law prohibiting personal property brokers from accepting interests in real estate as security for loans.

The distinction between this case and Freedland v. Greco, supra, is that in Freedland the transaction was the traditional two-party vendor-creditor and vendee-debtor situation. The two notes covered the identical obligation and the vendee-creditor was the owner and principal obligee on both notes.

We view M & O's unsecured note for $221,000 in favor of E.I.C. as a separate guarantee of a portion of U.P.P.'s debt to E.I.C. The agreement to credit M & O on both notes for any payment made to E.I.C. is consistent with this view.

It has been consistently held that Code of Civil Procedure section 580d does not apply to an action by the creditor against a guarantor of the secured obligation. (Union Bank v. Gradsky, 265 Cal.App.2d 40, 71 Cal.Rptr. 64; Roseleaf Corp. v. Chierighino, 59 Cal.2d 35, 27 Cal.Rptr. 873, 378 P.2d 97; Mariners Sav. & Loan Assn. v. Neil, 22 Cal.App.3d 232, 99 Cal.Rptr. 238.)

Of course M & O could not be guarantor of its own primary secured obligation to U.P.P. M & O's unsecured note was a guarantee of a portion of U.P.P.'s debt to E.I.C. The latter debt was secured only by a pledge of personal property, i. e., the note and trust deed and was, for the purposes of section 580d, unsecured. (See Riebe v. Budget Financial Corp. supra.)

In our opinion, the fact that M & O's secured debt to U.P.P. included the amount which U.P.P. in turn owed to E.I.C., does not mean that E.I.C. was the holder of a secured obligation, vis-a-vis M & O. E.I.C's only security was the pledge agreement with U.P.P. M & O was not a party to that agreement and cannot claim any benefit from it in attempting to avoid its obligation to E.I.C.—an obligation in the form of an unsecured note supported by adequate consideration.

The judgment is reversed.

FOOTNOTES

1.  Code of Civil Procedure section 580d provides in part:“No judgment shall be rendered for any deficiency upon a note secured by a deed of trust or mortgage upon real property hereafter executed in any case in which the real property has been sold by the mortgagee or trustee under power of sale contained in such mortgage or deed of trust.”

COMPTON, Associate Justice.

ROTH, P. J., and FLEMING, J., concur.