Opinion
B109744 (Super. Ct. No. BC141933)
Filed April 6, 1998
APPEAL from a judgment of the Superior Court of Los Angeles County, Ricardo A. Torres, Judge. Reversed and remanded.
Douglas L. Walsh and Robert K. Lee for Defendants and Appellants.
Ralph M. Weiss and Deborah L. Weiss for Plaintiff and Respondent.
In this appeal we conclude that a borrower may not waive the antideficiency provisions of Code of Civil Procedure section 580b in a forbearance agreement entered into subsequent to the execution of the original promissory note and deed of trust.
All statutory references are to the Code of Civil Procedure unless otherwise indicated.
FACTUAL AND PROCEDURAL BACKGROUND
Appellants Myo Za Theresa Lim and Bun Raymond Lim are medical doctors. They were educated in South Korea and immigrated to the United States in 1969 and 1970 respectively.
In 1990, the Lims entered into an agreement to acquire a shopping center from respondent DeBerard Properties, Ltd. for $3.2 million. The purchase price was composed of a $1.12 million cash down payment, an assumption of a first trust deed securing an obligation of approximately $2 million held by Glendale Federal, and a promissory note for $170,000 secured by a second deed of trust.
The Lims took possession sometime in 1990. Beginning in 1991, the real estate market fell into a depression. By 1993 the Lims were unable to make payments on the obligations secured by the first and second trust deeds. The Lims engaged Yung Kim, a CPA, to renegotiate the terms of their obligations to the holders of the first and second deeds of trust. They paid him $6,000 for his services.
Kim succeeded in renegotiating both obligations. The terms of the renegotiation were reduced to a writing entitled "Forbearance Agreement." It was signed and notarized by the principals of DeBerard and the Lims, with Myo Za Theresa Lim executing the document on behalf of herself and Bun Raymond Lim.
The terms of the renegotiation included a 50 percent reduction in the monthly payments, forbearance of foreclosure, and DeBerard's agreement to sign a subordination agreement to facilitate the renegotiation with Glendale Federal. The agreement further required payment by the Lims of past due interest on or before July 31, 1994, plus $4,000, representing attorney fees collectible under the terms of the deed of trust. Most significantly, the agreement provided that the Lims specifically waived the protection afforded by Code of Civil Procedure section 580b Paragraph 10 of the agreement provides as follows:
Section 580b provides: "No deficiency judgment shall lie in any event after a sale of real property or an estate for years therein for failure of the purchaser to complete his or her contract of sale, or under a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property or estate for years therein, or under a deed of trust or mortgage on a dwelling for not more than four families given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser.
"Where both a chattel mortgage and a deed of trust or mortgage have been given to secure payment of the balance of the combined purchase price of both real and personal property, no deficiency judgment shall lie at any time under any one thereof if no deficiency judgment would lie under the deed of trust or mortgage on the real property or estate for years therein."
"10. Anti-Deficiency Waiver. As a material inducement for Lender for its execution of this agreement and Lender's agreement to execute a subordination agreement to facilitate Borrower's modification of its loan with Glendale Federal Bank, Borrower hereby voluntarily and expressly waives and relinquishes each and every right or benefit which Borrower might have under California Code of Civil Procedure § [580b]."
The terms of the forbearance agreement include other provisions conditionally allowing a discount of the $4,000 and a reduction on the interest rate applicable to the sum owed for delinquent interest. Those and other terms are not of any real consequence to the fundamental issues raised by this appeal.
After the execution of the forbearance agreement, the Lims made some payments, but ultimately fell into default on both the first and second trust deeds. Glendale Federal foreclosed and wiped out DeBerard's second deed of trust. DeBerard then filed the instant action on the $170,000 promissory note. In a bench trial, the court concluded that section 580b may be waived as a matter of law and found that the Lims had made a voluntary, knowing, and intelligent waiver of section 580b DeBerard was awarded judgment in the amount of $241,075 plus costs. The present appeal followed.
DISCUSSION
Although the primary issue before us is appellants' contention that the protection of section 580b cannot be waived, we first dispose of DeBerard's procedural objection that the Lims waived the right to assert antideficiency protection by failing to raise it in their pleadings or to otherwise address it in their responses to discovery.
Respondent raised the issue to the trial court by advising that "[T]his issue didn't come up until the eve of trial. It was not only never raised in connection with the answer filed by the defendant[s], but it was . . . completely contradictory to all of the defendant[s'] discovery responses in this case."
It is generally true that the fact that a note is secured is an affirmative defense which must be pleaded. (Cf. Salter v. Ulrich (1943) 22 Cal.2d 263, 267.) However, "Amendments during the trial may be allowed. (C.C.P. 473, 576 [`at any time before of after commencement of trial, in the furtherance of justice'].) And, where the delay is excusable and no prejudice to the adverse party is shown, the liberal rule of allowance prevails, usually subject to the conditions of continuance and payment of costs [citation]." (5 Witkin, Cal. Procedure (4th ed. 1997) Pleading, § 1136, pp. 592-593.) In the exercise of its discretion, the trial court permitted the amendment and allowed the Lims to assert the protection provided by section 580b DeBerard's counsel did not request a continuance nor payment of costs and failed to indicate how his client's rights would be prejudiced. In fact, the record reveals that DeBerard's counsel was well-versed and prepared to address this issue. Against this background, we cannot and do not find that the trial court abused its discretion.
The Antideficiency Law
Section 580b provides in relevant part: "No deficiency judgment shall lie in any event after a sale of real property . . . for failure of the purchaser to complete his or her contract of sale, or under a deed of trust . . . given to the vendor to secure payment of the balance of the purchase price of that real property . . . ." Before the trial court, DeBerard argued that section 580b could be waived, relying on the holding of Russell v. Roberts (1974) 39 Cal.App.3d 390. The Lims argued to the trial court that section 580b could not be waived, relying on the contrary holding of Palm v. Schilling (1988) 199 Cal.App.3d 63. The trial court reviewed both cases and concluded that Russell v. Roberts was the better reasoned opinion and applied it, leading to the result favoring DeBerard. Which authority of these two authorities is controlling is the linchpin of this appeal, a pure question of law, subject to de novo review.
Russell v. Roberts
In Russell v. Roberts, supra, 39 Cal.App.3d 390, appellants purchased an interest in real property from one Mattox, giving as part of the purchase price a promissory note for $17,500 secured by a fourth deed of trust. When the entire balance on the promissory note became due, appellants entered into an agreement with Mattox modifying the terms of the note by extending the due date and providing for installment payments. The agreement included a provision essentially waiving the protection of section 580b Later, the promissory note and deed of trust were assigned to respondent Russell. Thereafter, the holder of a senior deed of trust foreclosed, rendering the trust deed held by the respondent valueless. Appellants defaulted on the note and the respondent sued for the balance owing. Appellants asserted section 580b as an affirmative defense.
"Any and all securities for said principal obligation held by you, including the encumbrance, may be enforced by you concurrently or independently in such order as you may determine; and with reference to any such security in addition to the encumbrance, you may, without consent of or notice to any of the undersigned, exchange, substitute or release such security without affecting the liability of the undersigned, or any of them, and you may release any one or more parties hereto or to the above obligation, or permit the liability of said party or parties to terminate without affecting the liability of any other party or parties liable thereon." ( 39 Cal.App.3d at p. 393.)
The Russell court held that the appellants had lawfully waived the protection of the antideficiency law. It reasoned that the law did not prohibit waiver of section 580b after the sale and deed of trust transaction is completed relying on Salter v. Ulrich, supra, 22 Cal.2d 263, 267, which states: "Since necessity often drives debtors to make ruinous concessions when a loan is needed, section 726 should be applied to protect them and to prevent a waiver in advance. This reasoning, however, does not apply after the loan is made, when all rights have been established and there remains only the enforcement of those rights. . . ." The Russell court continued: "(To the same effect see Morello v. Metzenbaum [(1944)] 25 Cal.2d 494, 496.) The court in Freedland v. Greco [(1955)] 45 Cal.2d 462, 467, made it clear that the same rationale applies to such statutes as section 580b" ( Russell v. Roberts, supra, 39 Cal.App.3d at p. 395.)
The essence of the Russell court's holding that section 580b is waivable is its rationale that, "It . . . [is] not `within the purposes of the section' to deny a vendee whose rights have long been established, and who is no longer subject to the coercion of the lender, the privilege of waiving for a new consideration one of those earlier attained rights." ( Id. at p. 395.)
Palm v. Schilling
In Palm v. Schilling, supra, 199 Cal.App.3d 63, buyers purchased the sellers' home paying $210,050 down and executing two promissory notes for the balance. Both notes were secured by second and third deeds of trust. Appellant buyers intended to pay an existing obligation secured by a senior trust deed and the note secured by the second trust deed with institutional financing and planned to pay the note secured by the third trust deed with the proceeds from the sale of their existing home. The appellants did obtain institutional financing to pay off the preexisting first trust deed and the second purchase money trust deed, resulting in a new first deed of trust in favor of an institutional lender. However, the appellants were unable to sell their existing home and could not pay off the note secured by the junior trust deed (formerly the third deed of trust) held by the sellers, the "Palm note."
Thereafter, the buyers were able to obtain a 12-month loan to pay the past due Palm note. However, the lender insisted its note have priority over the second trust deed. The sellers agreed and in return extracted an increase in the interest rate on the Palm note retroactive to the date of purchase. Subsequently, the obligation to the institutional lender holding the first trust deed became due and the Palm note was about to fall due within a short time.
Once again the buyers found a willing lender to provide funds on the condition that it obtain a security position senior to the Palm note trust deed. Again, the sellers agreed and subordinated to the new lender, but required the buyers (1) to pay $25,000 to reduce the balance owing on the Palm note to $100,000, (2) to give their personal guarantee of payment, and (3) to waive the antideficiency protection of section 580b This arrangement was consummated and one year later the senior institutional lender foreclosed, wiping out the trust deed securing the Palm note. The sellers sued the buyers for the deficiency based on the waiver of section 580b The trial court held the waiver of the antideficiency protection was valid according to the holding in Russell v. Roberts, supra, 39 Cal.App.3d 390. The buyers appealed.
The Court of Appeal observed that the Supreme Court held that ". . . the provisions of Code of Civil Procedure section 580b may not be contractually waived by the debtor in advance of or at the time a purchase money obligation is incurred. (See, e.g., Freedland v. Greco (1955) 45 Cal.2d 462, 467.) The court has not yet determined whether the provisions of section 580b may be waived after the obligation is incurred." ( Palm v. Schilling, supra, 199 Cal.App.3d at p. 67, emphasis in original.) Having underscored the issue, the Palm court dissected the analysis of Russell v. Roberts and rejected its holding.
The Palm court analyzed Salter v. Ulrich, supra, 22 Cal.2d 263, the principal authority on which Russell v. Roberts relies, and reasoned that Salter is simply inapplicable because it involved a judgment creditor on a secured note where the debtor failed to assert the single action rule of section 726 In dictum the Salter court mused that the result was consistent with Civil Code section 2953 which provides, "Any express agreement made or entered into by a borrower at the time of or in connection with the making of or renewing of any loan secured by a deed of trust, mortgage or other instrument creating a lien on real property, whereby the borrower agrees to waive the rights, or privileges conferred upon him by Sections 2924, 2924b, 2924c of the Civil Code [pertaining to notices of default and election to sell] or by Sections 580a or 726 of the Code of Civil Procedure, shall be void and of no effect. . . ." The Palm court noted that ". . . a literal reading of [Civil Code section 2953 by] the Salter court determined that the debtor's subsequent waiver . . . was not against public policy or inconsistent with Civil Code section 2953 `since by its terms it purports to apply only to a waiver agreement which is exacted in advance as a condition to the making or renewing of any loan secured by a mortgage or deed of trust.' ( Salter v. Ulrich, supra, 22 Cal.2d at p. 267 .)" ( Palm v. Schilling, supra, 199 Cal.App.3d at p. 75) The Court of Appeal astutely pointed out that section 580b is not included within Civil Code section 2953 Consequently, Russell's reliance on the language in Salter provides no support for its conclusion that section 580b may be waived after the purchase money transaction is consummated.
In addition, the opinion in Palm v. Schilling distinguishes the other principal authorities relied on by the Russell court. Freedland v. Greco, supra, 45 Cal.2d 462, involved the application of section 580d prohibiting deficiency judgments where property is lost through the power of sale. The Palm court aptly commented that " Freedland indisputably dealt only with an advance or contemporaneous waiver. It is an unreasonable leap of logic to suggest [that as] a corollary of the statement that section 580d may not be waived in advance of a loan obligation . . . that sections 580b and 580d may be waived after one. Nothing in Freedland remotely justifies that conclusion." ( Palm v. Schilling, supra, 199 Cal.App.3d at p. 74.) Similarly, Morello v. Metzenbaum (1944) 25 Cal.2d 494 is distinguished because it also involved the application of section 580d where the security was sold under a power of sale, barring a deficiency.
Palm v. Schilling also articulates the public policy underlying the antideficiency law applicable to purchase money transactions. These same policy considerations are articulated by the Palm court in its recitation of the holding in Roseleaf Corp. v. Chierighino (1963) 59 Cal.2d 35, 39: ". . . on the origins of section 580b, the [Supreme Court] finally settled on two explanations. First, forcing a seller to bear the risk of insufficient security on a purchase money mortgage discourages the overpricing of real property. [Citation.] Second, the section fosters a broader social purpose: In the event of a market decline and drop in property values, relieving the defaulting debtor from personal liability will benefit a sagging economy. [Citations.] More recently, a third rationale was noted: `In certain situations . . . the Legislature deemed even [the] partial deficiency (permitted under section[s] 580a and 726) too oppressive. Accordingly, . . . it enacted section 580b . . . which barred deficiency judgments altogether on purchase money mortgages.' ( Cornelison v. Kornbluth [(1975)] 15 Cal.3d [590,] 601.)" ( Palm v. Schilling, supra, 199 Cal.App.3d at p. 69.) These policy objectives are generally recognized by courts and commentators alike.
"[S]everal policy objectives [are] achieved by the purchase-money anti-deficiency legislation. It places the risk of inadequate security on the purchase-money mortgagee, who is in a better position to know its value and can assume the risk of its adequacy. It discourages a seller or lender from overvaluing the security. Precarious land promotion schemes are discouraged since the security value of the land gives purchasers a clue as to its true market value. If the security becomes inadequate from a decline in property values during a general or local recession, and not from overvaluing, the legislation prevents the aggravation that would result if defaulting purchasers were burdened with large personal liability in addition to the loss of their property." (4 Miller Starr, Cal. Real Estate (2d ed. 1989) Deeds of Trust and Mortgages, § 9:173, p. 579.)
The Palm court concluded, "The explicit language of section 580b brooks no interpretation other than that deficiency judgments are prohibited by a purchase money mortgagee so long as a purchase money mortgage or deed of trust is in effect on the original real property. To allow a purchase money creditor to circumvent the absolute rule by enforcing a purported waiver of section 580b in exchange for other concessions would flaunt the very purpose of the rule. If the purchase money creditor retains an interest in the original property, the debtor cannot be held for a deficiency. If the purchase money creditor does not wish to accept the risk that the property will be lost through foreclosure by another secured creditor, the remedy is to either foreclose himself or destroy the purchase money nature of the transaction by reconveying the deed or mortgage on the original real estate in exchange for the substitution of other security. [Citation.] Contractual waiver as the quid pro quo for any other concession is contrary to public policy." ( 199 Cal.App.3d at p. 76.)
It is clear that Russell v. Roberts, supra, 39 Cal.App.3d 390, is premised on inapposite authorities and fails to embrace the important public policy underlying the enactment of section 580b Therefore, we conclude that Palm v. Schilling, supra, 199 Cal.App.3d 63, is the better reasoned opinion and controlling authority for the disposition of the present matter. Our view is reinforced by the holdings in DCM Partners v. Smith (1991) 228 Cal.App.3d 729, 737-738 ["It is now well established that as a general rule where a note is created as a purchase money note it remains as such even though the terms of that note may be altered, modified or extended provided the obligation is secured by the same property. (See Palm v. Schilling (1988) 199 Cal.App.3d 63, 76)"] and Conley v. Matthes (1997) 56 Cal.App.4th 1453, 1466 ["Such [section 580b] waivers are against public policy. (See Palm v. Schilling (1988) 199 Cal.App.3d 63, 76 [allowing purchase money creditor to circumvent rule against waivers of section 580b in exchange for other concessions would flaunt purpose of rule].)"].
Here there was no subordination to a construction loan as was the case in Spangler v. Memel (1972) 7 Cal.3d 603. There a property was purchased with a view to constructing an office building on it. The terms of the sale provided for a cash down payment of $26,100 and a $63,900 promissory note secured by a purchase money deed of trust, which was to be subordinated to construction loans of up to $2 million. The sale was consummated and the purchaser obtained a construction loan of $408,000. The venture failed and the construction lender foreclosed. The seller sued on the $63,900 note and the buyers countered with an affirmative defense under section 580b
The Supreme Court held that the buyers were not entitled to the protection of the antideficiency law. The Spangler court reasoned that "If in such situation section 580b is applied to prevent the vendor from suing on his promissory note, after the development has failed and the senior lienor has caused the property to be sold, the risk of the failure of the commercial development is thrust upon the vendor. In fact, however, the success of the commercial development depends upon the competence, diligence and good faith of the developing purchaser. It would seem proper, therefore, that the purchaser not the vendor bear the risk of failure, particularly since in the event of default, the junior lienor vendor will lose both the land and the purchase price." ( Id. at p. 613.) Therefore, Spangler v. Memel and its progeny have no application here since there has been no subordination for a loan for construction or development of the property and the vendors remained in the best position to assess the value of the security and must, therefore, bear the risk that it is insufficient to satisfy the Lims' obligation.
CONCLUSION
Because section 580b precludes the recovery of a deficiency by DeBerard as a matter of law, it is unnecessary to review the trial court's factual findings regarding the Lims' voluntary, knowing, and intelligent waiver of section 580b Although there was sufficient evidence before the trial court to support its finding, it is of no moment. Given the underlying public policy and the factual setting of this matter, antideficiency protection could not be waived.
We reverse the judgment and remand to the trial court with directions to enter judgment for the appellants. Appellants to recover costs on appeal including attorney fees as determined by the trial court.
CERTIFIED FOR PUBLICATION
_____________________________ VOGEL (C.S.), P.J.
We concur:
_____________________________ BARON, J.
_____________________________ CZULEGER, J.
Assigned by the Chairperson of the Judicial Council.