Opinion
No. 70-094 (Supreme Court No. 23213)
Decided April 14, 1970.
Action to recover funds from savings account which had been pledged by plaintiffs as collateral security on a loan by defendant to third parties. From a finding that foreclosure of the primary security for the full amount of the secured indebtedness extinguished the debt and terminated any rights of defendant against the savings account, the defendant appealed.
Reversed
1. SECURED TRANSACTIONS — Foreclosure — Primary Security — Full Amount — Normally — Terminates — Rights Against Collateral Security. Normally, foreclosure of the primary security for the full amount of the secured indebtedness extinguishes the debt secured and terminates, as a matter of law, any rights against collateral security.
2. Contract Clause — Collateral Security — Automatically — To Secured Party — Given Effect — Unless Unconscionable. Where the contract entered by the parties contains a clause which, in unambiguous language, states that upon issuance of a Public Trustee's deed to the secured party on foreclosure of the primary security then the collateral security will automatically become the property of the secured party, this clause will be given effect unless to do so would be unconscionable.
3. EQUITY — Broad and Reasonable Rights — Protect Collateral Security — None Exercised — No Equitable Relief — No Fraud, Surprise, Accident, Mistake. Where the plaintiffs had broad and reasonable rights to protect the savings account pledged as collateral security but where plaintiffs exercised none of these rights, equitable relief will not be extended to them since they made no attempt to fulfill their part of the contract and their loss was not caused by fraud, surprise, accident, or mistake.
Error to the District Court of Arapahoe County, Honorable Donald P. Smith, Jr., Judge.
Michael T. Vaggalis, Stanley W. Prisner, for plaintiff in error.
James E. Turre, for defendants in error.
This case was originally filed in the Supreme Court of the State of Colorado and was subsequently transferred to the Court of Appeals under authority vested in the Supreme Court.
Plaintiff in error was the defendant below and will be referred to herein as "Circle" or as "the defendant." Defendants in error were the plaintiffs below and will be referred to as "the plaintiffs" or as "the Nortons."
This case involves the interpretation of a collateral assignment agreement executed by the plaintiffs to secure a loan made by Circle to third parties, whom we shall call "the Dorrises." The case was tried to the trial court on an agreed statement of facts.
The plaintiffs were the owners of certain real property. In October 1963, the Dorrises agreed to purchase this property at a sales price of $10,500. Financing was arranged through Circle. Circle agreed to lend the Dorrises the entire purchase price for the sale provided that $2,700 of the funds to be loaned were to be retained by Circle in a savings account to be established under the Nortons' names. Circle's loan was to be primarily secured by a first deed of trust covering the sold property. Under the terms of a collateral assignment agreement between the Nortons and Circle, the Nortons' savings account with Circle was pledged as secondary security for the loan. The language of the collateral assignment agreement which defines Circle's rights to make claim against the pledged savings account is as follows:
"That in the event there shall exist a default or delinquency in the original loan, and pledgor(s) do not bring loan to date as allowed above, then the Association, in its sole discretion shall have the right to transfer all or any part of said savings account to the unpaid balance of the loan account and may foreclose said Deed of Trust upon giving thirty (30) days advance notice by certified mail to the pledgor(s) at their address as the same hereinafter appears. Said foreclosure shall demand the sale of said property to satisfy the full amount due on said loan plus costs, interest and other items secured by said Deed of Trust. If at the foreclosure sale of said property, the Association shall be the only bidder, then and in that event the Association shall bid the said total amount due and shall take a Certificate of Purchase for said property. Provided, however, and subject to the provisions hereof, pledgor(s) shall have the right during said thirty day notice period, or during the six months redemption period, to purchase said Note and Deed of Trust or Certificate of Purchase for a sum equal to the unpaid balance, together with interest and any costs or expenses incurred by the Association, and less the balance of said savings account. In the event said property is sold to a bidder other than the Association for the full amount due on the loan or upon the assignment of said Certificate of Purchase, the Association shall release said savings account to the pledgor(s).
"It is specifically understood and agreed that upon the issuance of a Public Trustee's or Sheriff's Deed to the Association, the savings account shall immediately become the sole and exclusive property of the Association, free and clear of all claims by pledgor(s), and pledgor(s) in such event agree to release all right, title and interest in and to said savings account." (Emphasis added.)
There was no contractual arrangement of any kind between the Nortons and the Dorrises for indemnification of the Nortons in the event claim was made against the pledged savings account. The loan account became delinquent in July and August of 1965, and the Nortons were notified of such fact. Subsequently some payments were made against the loan account by the then owners of the property, but the loan account always remained on a delinquent basis. In December 1965, Circle foreclosed the loan and sale was held by the Public Trustee in February 1966. As required by the collateral assignment agreement, Circle bid the property in for an amount equal to the unpaid principal balance, interest, costs, and attorney fees. The Nortons admit they did not at any time attempt to exercise nor desire to exercise either their rights to prevent delinquency of the loan account or their rights to purchase Circle's note, deed of trust or certificate of purchase.
A Public Trustee's deed issued to Circle on August 18, 1966. Circle made no transfers of all or any part of the savings account to the unpaid balance of the loan account until after the issuance of a Public Trustee's deed. In April 1966, the Nortons made demand upon the defendant to deliver and turn over to them the savings account. Circle refused to pay any funds from the savings account to the Nortons, and this action was then brought.
1. VALIDITY OF COLLATERAL ASSIGNMENT
The trial court concluded as a matter of law that the collateral assignment agreement was a valid agreement, and with this we agree. If further concluded, in effect, that under the terms of the agreement Circle had to apply the funds within the pledged savings account to the loan account prior to foreclosure, and that if it did not its rights to make claim against this secondary security were extinguished. Such conclusion was reached on the theory that foreclosure of the primary security for the full amount of the secured indebtedness extinguished the debt secured, thereby terminating, as a matter of law, any rights against the pledged collateral security. This, we agree, would normally be the case. See Grooms v. Rice, 163 Colo. 234, 429 P.2d 298. Here, however, the parties clearly contracted to the contrary.
Circle's ownership of the pledged savings account after issuance of the Public Trustee's Deed occurred automatically by reason of the unambiguous language in the second paragraph of the quotation from collateral assignment set forth above. This language must be observed and given effect unless to do so would be unconscionable. In our opinion, such would not be the case in this instance.
2. PROTECTION OF COLLATERAL
By the terms of the collateral assignment, the Nortons had broad and reasonable rights to protect the pledged savings account. They were to have and did have notice of any delinquency in the loan account. Coupled to this, they had the right to bring such account into a non-delinquent status. They were to have and did have thirty days' advance notice of any proposed foreclosure of the primary security. Attendant to this, they held the right, during such notice period and during the six-months' redemption period after foreclosure, to purchase all of Circle's security rights and its rights against the principal debtors. To exercise any of these rights the Nortons were not required to compensate Circle beyond what was legitimately due it under the terms of its loan agreement and under the applicable law of this State. Noteworthy, too, is the obligation that Circle was compelled to offer the primary security for foreclosure sale and to purchase such property at such sale, if it were the sole bidder, only on a basis which would maintain the secondary security in an undiminished status. Under the law of this jurisdiction, equitable relief against a contract provision of this type will not be extended where the party seeking such relief has made no attempt to fulfill his part of the contract and where his loss was not caused by fraud, surprise, accident, or mistake. See American Mortgage Co. v. Logan, 90 Colo. 157, 7 P.2d 953.
The judgment of the trial court is reversed, and this case is remanded with directions that the trial court enter judgment in favor of the defendant, Circle. Specifically, the court is directed to enter its order divesting the title of the plaintiffs to savings account No. 5595 in the Circle Savings and Loan Association of Littleton, Colorado, and vesting title to such account in the name of defendant, in accordance with R.C.P. Colo. 70. Such order divesting and vesting title shall include any accrued interest and dividends applicable to such account from and after August 18, 1966.
JUDGE COYTE and JUDGE DWYER concur.