SHIVERS v. LIBERTY BUILDING LOAN ASS (1940)

The decisive question in this case concerns the validity of a $300 note secured by a second deed of trust exacted of the appellant by the respondent Liberty Building-Loan Ass'n as a condition of its assent to the refinancing of a mortgage debt by the Home Owners' Loan Corporation.

The record shows that in 1934 the appellant sought the help of the Home Owners' Loan Corporation. He then owed the building and loan association a balance of $2,228 upon a note secured by a deed of trust on his home. The association agreed to accept in full satisfaction of this obligation bonds of Home Owners' Loan Corporation of a face value of $1,579, $25 in cash, and a $300 note to be executed by the appellant and secured by a second deed of trust on the property.

The refinancing was consummated on these terms. The appellant thereafter defaulted in making payments upon the $300 note and upon the institution of proceedings to foreclose the deed of trust securing it, he filed the present action asking that the sale of the home be restrained, that the $300 note and second trust deed be declared void, and that his title to the property be quieted against that encumbrance.

Upon trial of the cause the appellant testified that although his signature appeared on the note and trust deed, he had no remembrance of signing either of them and had refused at all times during the refinancing negotiations to agree to give the building and loan association any consideration in addition to the bonds. In conflict with this testimony was evidence offered on behalf of the association indicating that it had always insisted upon a second deed of trust as a condition of its assent to the refunding, and that it had never made any attempt to conceal its demand. Its secretary and manager testified to several conversations with the appellant in which he stated the association would not agree to proposed refinancing plan without the note and deed of trust which it eventually secured. He also said that he had discussed the matter with the Home Owners' Loan Corporation. ‘I made an effort,’ he said, ‘to find out whether it was agreeable to them or not. I was in the office of the Home Owners' and discussed it with the individual that was handling it at the time, and he said: ‘Send in your instructions to escrow, providing for a second trust deed of $300.00.’ I have no letters. That was just a conversation with one of the officials or clerks in the Home Loan office handling the matter at that time. That was the manner in which they handled those things at that time—they gave me certain papers to sign and in reference to the second trust deeds, you had to put your instruction into the escrow company, and it was understood with one of the officers in the Home Owners' Loan Corporation that we would sign those papers and then put our instructions in the escrow company regarding the second.'

The escrow instructions of the association show a demand for the note and deed of trust now in controversy as part payment of the note it then held. No express approval of these instructions by the Home Owners' Loan Corporation appears but a representative testified that its files contain nothing to indicate it had refused to permit a second deed of trust on the property. He explained also that under some circumstances the corporation consented to a requirement by the creditor for a second trust deed. Upon this evidence the court found that no unfair advantage had been taken of the appellant and no fraud had been practiced upon him. A further finding was that the note and deed of trust were not delivered without the consent of the Home Owners' Loan Corporation.

In the case of McAllister v. Drapeau, 92 P.2d 911, 125 A.L.R. 800, this court held that a deed of trust to be a second lien which is executed with the knowledge or consent of the Home Owners' Loan Corporation is valid and enforceable, but that where such instrument is secretly or fraudulently exacted by the creditor, it is void and unenforceable. This holding follows the weight of authority. 28 Cal.Law Rev. 232; 13 S.C.L.R. 162; 52 Harvard Law Rev. 842; Note 110 A.L.R. 250 and 121 A.L.R. 119. The Home Owners' Loan Corporation, under its regulations, will refuse as a matter of policy to refund a first mortgage in any case where the creditor demands a second, unless it appears that the financial arrangements and the financial ability of the debtor are such that he will have a reasonable opportunity to pay off both encumbrances. It is essential, therefore, in order that the corporation may ascertain the facts in a given case, that a full disclosure be made to it of the amount and terms of a proposed second lien, and whether it is reasonably probable that the home owner will be able to fulfill his obligations.

But in the conflicting evidence which was before the trial court, there is ample support for the judgment. The testimony of the association's secretary shows that there was no secrecy, fraud or concealment in connection with its requirement for a note of $300 in addition to the bonds of the government agency. On behalf of the creditor he demanded such a note in the escrow instructions after discussing its terms with an officer or employee of the Home Owners' Loan Corporation. This and other evidence shows that the requirement of the creditor was fully disclosed in the refunding transaction.

The judgment is affirmed.

I dissent.

Upon a reading of the transcript herein I am unable to accept the reasoning and conclusion announced in the majority opinion in this case. In McAllister v. Drapeau, 92 P.2d 911, 915, 125 A.L.R. 800, wherein this court affirmed a judgment canceling a secret second trust deed executed by the debtor upon insistence of the creditor, it is declared: ‘It is obvious, from a reading of the statute and the rules and regulations above quoted, that the main and controlling purpose of the act was to assist small home owners who, because of the then existing financial conditions, faced loss of their homes through inability to meet the charges due on mortgages on their home property. It is to be noted that the act places no compulsion, direct or indirect, on the creditor. The creditor had complete liberty of action. If he refused to accept the offer of the H. O. L. C. as to the amount of bonds and cash it would advance to refund the debt, there was nothing the H. O. L. C. or the debtor could do about it. It was contemplated, however, that many creditors would, and experience under the act proved that many did, accept a reduction in the amount of the existing loan in order to secure liquid assets such as bond of the H. O. L. C. rather than foreclose on the property and have to hold it until conditions in the real estate market improved. The act provides that such reduction should be passed on to the home owner, the debtor. The rules and regulations contemplated that under some circumstances it would be to the interest of the home owner to give a second mortgage to the creditor to secure a part of the refunded debt, but such rules and regulations provided that the H. O. L. C. would not refund the first mortgage if the creditor demanded a second unless the financial ability of the debtor and the financial arrangements were such that the debtor would have a reasonable opportunity to pay off both mortgages. Obviously, before these facts could be ascertained, a full disclosure of the amount and the terms of the proposed second lien would have to be made to the H. O. L. C. The securing of a second lien by the creditor without such disclosure is clearly in violation of the letter and spirit of the statute and regulations.’

While it may be true that the same degree of ‘secrecy’ was not here employed by the creditor in exacting the second trust deed, the fact still remains that there is a dearth of evidence to establish ‘full disclosure to the Home Owners' Loan Corporation of the amount and the terms of the proposed second lien’, as contemplated and required by the decision in McAllister v. Drapeau, supra, in order to permit the Home Owners' Loan Corporation before granting its loan to determine whether the debtor upon refinancing could carry the two loans. True, one of the officers of the creditor testified that he had a conversation with respect thereto ‘with one of the officials or clerks' in the Home Loan office but nowhere is there any showing that said individual, whoever he may have been, had any authority or power to consent on behalf of the Home Owners' Loan Corporation to the then contemplated second lien. In Council v. Cohen, Mass., 21 N.E.2d 967, 968, wherein a lien second to a Home Owners' Loan Corporation lien was declared void, it is stated that ‘there was some evidence * * * offered that the attorney communicated with some one connected with the corporation [Home Owners' Loan Corporation] with respect to the second mortgage, but I do not find that it was authorized or even known to the proper officers of the corporation [Home Owners' Loan Corporation] although the attorney doubtless acted in good faith.’

In the case now before us the trial judge declared at the conclusion of the evidence that ‘There is no evidence in this record that the Home Owners' Loan Corporation consented to the execution of the second trust deed. They handed in certain (escrow) instructions but there is no evidence in this record that they were familiar with the contents of the escrow.’ It is true that the trial judge apparently later changed his mind and found: ‘That it is not true that the said plaintiff made, executed and delivered the promissory note and (second) trust deed for the sum of $300.00 above described, without the consent of said Home Owners' Loan Corporation,’ but this finding may not rely for support upon the fact that the Home Owners' Loan Corporation, along with the parties, offered certain escrow instructions for, as stated by the trial court at the conclusion of the trial, ‘there is no evidence in this record that they (Home Owners' Loan Corporation) were familiar with the contents of the escrow.’ In addition, one of the Home Owners' Loan Corporation officers testified that there was ‘no instrument in the files in the form of a request by the creditor to place a second trust deed on the real property * * * or of any consent on the part of the Home Owners' Loan Corporation to the debtor or to the creditor to place a second trust deed for $300.00 on said property’. In other words, the evidence in this case is far from satisfactory in establishing notice to and consent of the Home Owners' Loan Corporation to a second lien, as contemplated in McAllister v. Drapeau, supra, which decision came down subsequent to the trial and judgment herein and was not therefore available for the guidance of the court below. Under the circumstances, a reversal of the judgment in this case should be ordered to permit of a full and clear showing on this issue.

Moreover, McAllister v. Drapeau, supra, announces a second and distinct ground of decision which is not mentioned in the opinion herein of Justice Edmonds, and which would appear to require a reversal, rather than an affirmance, of the judgment. It definitely appears from the record herein, as in McAlister v. Drapeau, supra, that the creditor signed the usual consent and release required by the Home Owners' Loan Corporation which, among other things, declared that the creditor ‘hereby consents, if said refunding can be consummated, to accept in full settlement of the claim of the undersigned the sum of $1,579.00 face value of the bond of Home Owners' Loan Corporation, to be adjusted with not exceeding $25 cash and thereupon to release all the claim of the undersigned against said property’. The express mention by the creditor in said consent and release of a $25 cash adjustment to accompany the Home Owners' Loan Corporation bonds, and its complete silence as to the additional note for $300 and accompanying second lien, definitely tends to indicate an attempt to conceal the note and second lien from the Home Owners' Loan Corporation. But aside from this, in McAllister v. Drapeau, supra, 92 P.2d at page 916, 125 A.L.R. 800, it is held that where, as here, the creditor agrees to accept the bonds in ‘full settlement’, without any mention of a second lien, an accord and satisfaction, novation or release results. In this connection the cited case declares that ‘Several of the courts to which the problem here involved has been presented, in addition to holding the secret second mortgage illegal, have held that in signing the ‘Mortgagee's Consent to Take Bonds', above quoted, the creditor agreed to accept such bonds ‘in full settlement’ of his claim, and that such agreement constitutes an accord and satisfaction, a release or a novation. Cook v. Donner, supra [145 Kan. 674, 66 P.2d 587, 110 A.L.R. 244]; Chaves County Building & Loan Ass'n v. Hodges, supra [40 N.M. 326, 59 P.2d 671]. The holding of these courts is sound. The agreement signed by the creditor was to accept the bonds ‘in full settlement of the claim of the undersigned * * * and thereupon to release all the claim of the undersigned against said property’. The argument of amici curiae that this broad language only constitutes an agreement by the creditor to release his security and does not constitute an agreement to release the debt secured is unsound. In the instant case, at the time California Security Loan Corporation signed the consent, the debtor owed it but one debt, which was secured by the recorded first mortgage, and partially secured by the secret unrecorded second mortgage. By signing the consent, that company agreed to release its entire ‘claim’. This could have no reasonable meaning other than that it was an unqualified agreement in writing to release the existing debt for the amount of bonds offered. This constitutes a valid release, and an accord and satisfaction. Sections 1524, 1541, Civ.Code.'

This latter ground would appear equally applicable here, for the creditor, as in the cited case, agreed in writing to accept $25 in cash and the Home Owners' Loan Corporation bonds ‘in full settlement of (its) claim’, without any reference being made to the $300 note and the second lien to secure the same. It is also interesting to note that McAllister v. Drapeau, supra, 92 P.2d at page 917, 125 A.L.R. 800, expressly declares ‘That this illegality argument [i. e., the first ground of the decision therein having to do with the secrecy of the second lien] has no application to the second ground set forth in this opinion, namely, that the ‘Mortgagee's Consent’ constituted a release, and an accord and satisfaction.' In other words, regardless of any secrecy in the execution of a second lien, such second lien is void and unenforceable where, as here, the creditor accepts the Home Owners' Loan Corporation bonds ‘in full settlement’ of his claim. A satisfaction and release of the claim thereupon results.

A review of the authorities relative to the validity of a secret second encumbrance when the first mortgage is held by the Home Owners' Loan Corporation, and a discussion of the principles of law contained in these authorities is contained in the January, 1940, issue of the California Law Review, volume 28, pages 232, 235, inclusive. It appears from this article that second trust deeds on mortgages executed under the circumstances as disclosed by the record in the case at bar have been uniformly held invalid and canceled by the courts.

For the foregoing reasons, I cannot join in the majority opinion in the instant case as I am persuaded that the ends of justice, as well as the weight of authority, requires a reversal of the judgment.

EDMONDS, Justice.

We concur: WASTE, C. J.; GIBSON, J.; SHENK, J.; CURTIS, J. HOUSER, J., does not participate in the foregoing decision.