Opinion
Page __
__ Cal.App.2d __332 P.2d 727Jannie HAMUD and Robert Hamud, Plaintiffs,v.E. T. HAWTHORNE, Elmer H. Hansen, Quay O. Shaffer, Helen M. Shaffer, Title Insurance and Trust Company, a corporation, John Doe, Jane Doe, Richard Roe, Sarah Green, John Doe Company, a copartnership, consisting of Howard Moe and George Coe, Jane Doe Company, a corporation, and Richard Roe, as Administrator of the estate of William Black, deceased, Defendants.Jennie HAMUD and Robert Hamud, Plaintiffs and Respondents,v.E. T. HAWTHORNE, Elmer H. Hansen, Quay O. Shaffer and Helen M. Shaffer, Defendants and Appellants.Jennie HAMUD and Robert Hamud, Plaintiffs and Appellants,v.E. T. HAWTHORNE, Elmer H. Hansen, Quay O. Shaffer and Helen M. Shaffer, Defendants and Respondents.Civ. 22894.California Court of Appeals, Second District, Third DivisionDec. 17, 1958Hearing Granted Feb. 11, 1959.
[332 P.2d 728] George C. Gillette, Whittier, Herbert Gall, John U. Gall, and Edward Fitzpatrick, Los Angeles, for appellants and cross-respondents E. T. Hawthorne, Elmer H. Hansen, Quay O. Shaffer, and Helen M. Shaffer.
Curtis L. Gemmil, Rivera, for respondents and cross-appellants Jennie Hamud and Robert Hamud.
VALLEÉ, Justice.
Appeal by defendants from a judgment for plaintiffs in an action to have a quitclaim deed declared to be a mortgage; for surrender and cancellation of a note, a deed of trust, and the quitclaim deed; for reconveyance to plaintiffs of the property covered by the deed; and for an accounting. Plaintiffs appeal from that part of the judgment allowing defendants reimbursement for upkeep expenses, for sums paid as principal and interest on first and second deeds of trust and for taxes and sewer bonds.
On January 25, 1951 plaintiffs and defendant E. T. Hawthorne entered into a contract in the form of escrow instructions whereby Hawthorne agreed to loan plaintiffs $3,500. Plaintiffs agreed to deliver into the escrow a promissory note dated January 25, 1951 for $3,850, payable to Hawthorne in full on May 1, 1951 without interest, and a third deed of trust securing the note on property owned by plaintiff Mrs. Hamud. The escrow instructions recited that there then existed on the property a first deed of trust in the approximate amount of $6,200, a second deed of trust in the approximate amount of $2,000, and a bond of record in the approximate amount of $195. The first deed of trust securing an indebtedness of $6,500 had been executed by plaintiffs on February 23, 1950. The second deed of trust securing an indebtedness of $2,250 had been executed by Mrs. Hamud on September 28, 1950.
The escrow instructions contained these provisions:
'It is agreed between the parties hereto that the above third trust deed shall be recorded on the property described above as soon as the preliminary title report is received by Hansen Escrow & Mortgage Co. In addition to this third trust deed, the borrowers agree to execute a Quit Claim Deed in favor of the Lender, said Quit Claim Deed to be retained in this escrow file and used only on the following condition: (1) In the event the within described Note for $3850.00 is not paid when due, your company is authorized and instructed to record this Quit Claim Deed at once, and the borrowers herein agree to have no further claim upon this property of any nature or kind whatsoever. (2) In the event the Quit Claim Deed is recorded, any and all rentals due or to become due in the future shall immediately become the property of E. T. Hawthorne as of the date of recordation of said Quit Claim Deed.'
Hawthorne deposited the $3,500 into the escrow. Plaintiffs delivered the note, the third deed of trust, and the quitclaim deed dated January 25, 1951, into the escrow.
[332 P.2d 729] The third deed of trust was recorded January 30, 1951. Plaintiffs received the amount of the loan and Hawthorne received the note on that date.
At the time the loan was made by Hawthorne to plaintiffs, the latter were in default in payments on the first deed of trust and foreclosure was threatened. Payments were also delinquent on the second deed of trust. The value of the property at the time Hawthorne made the loan was about $10,100. The total encumbrances against the property, including the third deed of trust, were about $12,245.
On April 16, 1951 the excrow officer advised plaintiffs in writing that the Hawthorne note would be due on or before May 1, 1951 and that if it was not paid the 'property' would be recorded in the name of Hawthorne. No reply was made to this letter, nor was a request made for an extension of time.
The note given to Hawthorne was not paid on May 1, 1951. The quitclaim deed was recorded May 4, 1951 at the request of the escrow company. It contained this statement over the signatures of plaintiffs:
'The purpose of this Quit Claim Deed is to accomplish a mutual agreement between the parties hereto, and upon recordation, the grantees release any and all claim of any nature or kind whatsoever to the property described herein or to any rentals which may be due or accure from the property after the date of recordation.'
On May 4, 1951 the escrow officer advised plaintiffs in writing that the quitclaim deed had been recorded and that foreclosure proceedings were to be brought by Atlantic Savings and Loan Association, holder of the first deed of trust, on May 7, 1951. There was no reply to this letter. Immediately thereafter Hawthorne took possession of the property. The court found that Hawthorne took possession with the consent of plaintiffs.
This letter stated: 'We wish to advise that the Quit Claim deed from yourselves to Mr. E. T. Hawthorne involving the 'easterly 50 feet of Lot 57 of Tract No. 8047, etc., etc.' has been recorded.
'At the request of Mr. Hawthorne, we are writing to determine why the payments on the first trust deed loan were not made in January, February, March and April? This amounts to $280.00. Furthermore, Mr. Hawthorne desires to know why the interest on the second deed of trust loan was not paid since September 29th, 1950, through May 1st, 1951, a total of $78.75? The total due Mr. Hawthorne is $358.75!
After Hawthorne took possession of the property he paid off the second deed of trust note of $2,338.88 and paid the delinquencies on the first deed of trust. On May 7, 1951 he conveyed the property to defendant Hansen. On May 29, 1951 Hansen conveyed to defendants Shaffer. They assumed the existing encumbrances; went into possession; collected the rents; paid the taxes, water bills and upkeep expenses; and made improvements to the property during the ensuing nearly five years.
Plaintiffs made no claim and exercised no rights whatever as owners of the property after the defendants took possession until October 1955; even then they did not contend they had any interest in the property except to make a claim by Mr. Hamud in a telephone conversation with Mrs. Shaffer that they (plaintiffs) held out the mineral rights on the property. In August 1951 an action was filed against plaintiffs by an assignee of defendant Hawthorne to recover the payments he had made on the first deed of trust. Mrs. Hamud employed an attorney to take care of the matter and 'explained the details' of how the property was taken from her. She filed a verified answer in which she alleged as a defense 'that a settlement was [332 P.2d 730] effec[t]uated between the plaintiff's assignor [Hawthorne] and defendants [the Hamuds] wherein the defendants returned to said plaintiff's assignor the property upon which said assignor is now claiming the defendants as owing to him as money paid and expended.' Plaintiffs both considered the property was lost to them until June or July, 1955, when a representative from Richfield Oil Corporation sought to obtain a new deed from the Hamuds to the Shaffers. Mr. Hamud went to the Hall of Records, read the original deed, discovered the error, the use of the word 'grantees' instead of 'grantors,' and immediately contacted his attorney. This action was not filed, however, until April 30, 1956.
The court found the quitclaim deed was executed by plaintiffs as additional security for the loan and was intended by both plaintiffs and defendant Hawthorne to be a mortgage only. Judgment was for plaintiffs. Defendants appeal.
Defendants contend the evidence does not support the finding that the quitclaim deed was given as security for the loan and that it was in fact a mortgage. It is argued the evidence without conflict shows the deed was delivered in accordance with the written contract after the debt became due, not when deposited in the escrow at the time the deed of trust was recorded; that the conduct of plaintiffs after delivery of the deed on their default and transfer of possession is inconsistent with their present claim that the quitclaim deed was executed as additional security and that it was a mortgage. Plaintiffs also rely on the escrow instructions but they argue that the plain import of the words, 'In addition to this third trust deed, the borrowers agree to execute a Quit Claim Deed * * *' following the provision for a note secured by a third deed of trust, is that the deed was to be executed as 'further security in addition to the third trust deed.'
Where, as here, the grantor's instructions to an escrow holder are in writing, the effect of the transactions depends on the true construction of the writing. Osborn v. Osborn, 42 Cal.2d 358, 364, 267 P.2d 333. 'The presumption is that a deed is what it purports to be and one who seeks to overcome such presumption has the burden of producing clear and convincing proof.' Spataro v. Domenico, 96 Cal.App.2d 411, 413, 216 P.2d 32, 33; Beeler v. American Trust Co., 24 Cal.2d 1, 7, 147 P.2d 583.
Conveyances of mortgaged properties by mortgagors for the purpose of avoiding foreclosure have not been uncommon occurrences, and such conveyances have been held valid. McDonald v. Huff, 77 Cal. 279, 282, 19 P. 499; Phelan v. De Martin, 85 Cal. 365, 368, 24 P. 725; Bastajian v. Brown, 57 Cal.App.2d 910, 915, 135 P.2d 374, 137 P.2d 475.
'The delivery of a deed into escrow to be delivered to a mortgagee in case the mortgage debt is not paid by the grantor does not constitute such deed a mortgage, for in the absence of a showing of a contrary intention, it is presumed that the intent of the parties is that the mortgage lien is to be merged in the legal title, and though the delivery into escrow does not discharge the debt, it is discharged if the deed is delivered to the mortgagee in the absence of payment of the mortgage.' 33 Cal.Jur.2d 459, § 46. '[T]he mere circumstance that the conveyance is made on application for a loan is not sufficient of itself to show the transaction to be a mortgage.' 33 Cal.Jur.2d 464, § 52. Where the grantee takes immediate possession any presumption that the parties considered the deed was security is rebutted. 33 Cal.Jur.2d 463, § 51.
Deming v. Smith, 19 Cal.App.2d 683, 66 P.2d 454, is in point. A deed had been placed in escrow pursuant to an agreement extending the maturity of the plaintiffs' mortgage not to the defendant. The escrow instructions provided that the deed was to be returned to the plaintiffs upon payment of the debt, and if the debt was not paid by a stipulated time the deed was to be delivered to the defendant. The plaintiffs sought to enjoin delivery of the deed [332 P.2d 731] on default. On appeal from a judgment in favor of the defendants the plaintiffs contended the deed could not operate as a transfer of title because it was not delivered, that it was given only as a mortgage and as additional security for the debt. In affirming the judgment the court stated (19 Cal.App.2d at page 686, 66 P.2d at page 456):
'Under the instructions given to the title company, the grantors parted with all control over the deed as that expression is used in the cases. Control passed to the escrow holder, to be exercised in accordance with the instructions. Because of the conditions under which the deed was held in escrow, there was no immediate vesting of title in the grantee, but when the deed was delivered to the grantee out of escrow, title passed as of the effective date of the agreement under which the deed was delivered into escrow. [Citations.] Appellants contend that they did not part with control over the deed because they had the right to withdraw it from the title company upon payment of the amount of the debt and advances on or before January 1, 1935. But this right was not one which affected the sufficiency of the delivery to the grantee upon the failure of the grantors to pay the debt within the stipulated time. When the deed was placed in escrow the grantors had made up their minds to part with title to the property in the event they failed to pay the debt within that time. They reserved the right to pay the debt, but they did not reserve the right to change their minds or their instructions with reference to the delivery of the deed through the escrow. In McDonald v. Huff, 77 Cal. 279, 19 P. 499, it was held that a deed of a mortgagor, placed in escrow for delivery to the mortgagee in the event the indebtedness of the grantor was not paid within a given time, was effectively delivered where the debt was not paid and the deed was delivered to the grantee out of the escrow in accordance with the instructions. The authority of that case has not been questioned in later decisions and is decisive upon the point.
* * *
* * *
'[19 Cal.App.2d at page 688, 66 P.2d at page 457] It is next urged that the deed was given only as a mortgage and as additional security for the debt. * * * It is quite clear that the delivery into escrow did not discharge the debt and that the relation of debtor and creditor continued. It was not alleged whether it was intended that the delivery of the deed out of escrow should satisfy the debt. The conveyance, however, would have placed the legal title in the mortgagee. Therefore, in the absence of an intermediate estate or of equitable considerations sufficient to make it appear that no merger was intended, the mortgage lien would have become merged in the legal title and the debt would thereby have been extinguished. Such must be presumed to have been the intention of the parties, in the absence of an allegation of a contrary intention. Anglo-Californian Bank v. Field, 154 Cal. 513, 98 P. 267; 10 Cal.Jur. 606; Jones on Mortgages, 8th ed., vol. 2, p. 508. The facts alleged were therefore insufficient to show that the deed was intended to operate as a mortgage. They show rather that it was intended as a conveyance of the entire estate of the grantors in satisfaction of the debt for which the mortgage stood as security. No interest in the property passed to the grantee under any other conditions.'
In the present case it was not until the time the escrow holder was authorized by the conditions in the escrow instructions to deliver the deed to Hawthorne that any right could vest in him. Only in the event the note was not paid by plaintiffs when due could there be a delivery of the deed by the escrow holder. By the deed plaintiffs simply executed that part of the contract which called for a quitclaim deed on default in payment of the note. On [332 P.2d 732] the authorized delivery of the deed the escrow terminated; there was a merger of the legal and equitable interest in the property in Hawthorne, and plaintiffs' right of possession automatically terminated. The effect of the merger was to extinguish the debt. 34 Cal.Jur.2d 26, § 358.
That this was plaintiffs' understanding of the legal effect of the contract clearly appears from their conversations with Hawthorne at the time the deed was executed as well as by their conduct subsequent to delivery of the deed and change of possession of the property.
The parties were not in a fiduciary relation but were dealing at arm's length. There is no suggestion of fraud or misrepresentation on the part of the escrow officer, Hansen, or of Hawthorne in the preparation and execution of the documents, nor is there any evidence plaintiffs misunderstood the recitals contained in them. To the contrary: Mr. Hamud testified that when he read the instructions and deed he told defendant he did not like the idea of a quitclaim deed being left in the file of the escrow, or what was mentioned in the instructions. He asked Hawthorne if the quitclaim deed could be eliminated and 'he said, no, that was the only way they could make the loan. Take it or leave it,' and he 'decided to take it.' Although he was reluctant to do so Mr. Hamud signed the escrow instructions and executed the deed the following day. He told Mrs. Hamud to do the same. Hawthorne testified Mr. Hamud agreed to execute the quitclaim deed so as to avoid the necessity of foreclosure in case of default by plaintiffs.
At the time the plaintiffs obtained the loan it was understood the balances on the first and second trust deeds were about $6,200 and $2,000 respectively, and there was a bond of record in the approximate amount of $195. Plaintiffs were then delinquent in the payments on the first and second deeds of trust with the entire balance on the second deed of trust due and payable May 1, 1951. Construction of a duplex on other property of Mrs. Hamud had just been completed and they had outstanding bills in connection therewith. Mr. Hamud was not working and plaintiffs' only income was $50 to $59 a month from each of three rental units on the subject property and $45 a month from a rental unit on other property owned by Mrs. Hamud. Immediately after receiving the proceeds of the loan Mr. Hamed left for South America to work for a construction company, returning about five weeks later when he became temporarily disable. He testified the proceeds of the loan from Hawthorne were used to pay bills on these premises. However, none of the delinquent payments on either the first or second deeds of trust was paid from the proceeds of the loan or from rents from the property which were collected by Mrs. Hamud, even after it was learned that Atlantic Savings and Loan Association threatened foreclosure proceedings; nor were any payments ever made or tendered on Hawthorne's note up to the time of trial. When the note became due on May 1, 1951, plaintiffs did not have the money to pay it.
The fact that the escrow instructions stated that in addition to the third deed of trust plaintiffs agreed to execute a quitclaim deed in favor of Hawthorne to be retained in the escrow file does not in any way indicate that the deed was intended to be a mortgage as plaintiffs assert. The escrow instructions make it definite and clear that the deed was to be retained in the escrow and that it was not to be recorded unless the note was not paid when due. In other words, the deed was executed to avoid foreclosure of the third deed of trust in the event the note was not paid. The note states that it is secured by the third deed of trust. It makes no mention of the quitclaim deed. As stated previously, the deed itself, signed and acknowledged by plaintiffs, said: 'The purpose of this Quit Claim Deed is to accomplish a mutual agreement between the parties hereto, and upon recordation, [332 P.2d 733] the grantees release any and all claim of any nature or kind whatsoever to the property described herein or to any rentals which may be due or accrue from the property after the date of recordation.'
The use of the word 'grantees' instead of 'grantors' is an obvious typographical error which was not discovered by the parties until July 1955, when it was brought to their attention by a representative of Richfield Oil Corporation during his negotiations with defendants Shaffer for an oil lease on the property.
Cases cited by plaintiffs holding in effect that parties to a mortgage cannot legally stipulate at the time of execution of the mortgage that the mortgagor shall not enjoy the right of redemption are not in point. The argument assumes that the quitclaim deed was a mortgage, which we hold it was not.
Plaintiffs did not sustain their burden of proof. The evidence here without conflict shows that the deed was not intended to operate as a mortgage. It shows that it was intended as a conveyance of the entire estate of the Hamuds in satisfaction of the debt for which the third deed of trust stood as security. The finding that the quitclaim deed was executed as additional security for the loan and that it was intended to be a mortgage is not only unsupported by the evidence but is contrary to all the evidence. Consequently the judgment must be reversed. This conclusion renders it unnecessary to discuss the other specifications of error made by defendants and to consider plaintiffs' appeal.
The judgment entered May 29, 1957 provided that if plaintiffs within 90 days from its date pay or cause to be paid to Hawthorne or to the clerk for the benefit of Hawthorne the sum of $2,052.55 less costs, and less rents and royalties collected by defendants after April 30, 1957 together with interest thereon at 6 per cent from April 30, 1957 until paid, plaintiff Jennie Hamud may redeem the property and defendants shall forthwith surrender possession. On June 12, 1957 the court made an ex parte order authorizing plaintiffs to deposit this amount with the clerk of the court. Defendants appealed from the ex parte order. Since this order is bottomed on the correctness of the judgment, it must be reversed.
The judgment and the order of June 12, 1957 are reversed.
SHINN, P. J., and PARKER WOOD, J., concur.
'Furthermore, we are advised by Atlantic Savings & Loan Association that they will file foreclosure proceedings Monday, May 7th, 1951. They state you are fully aware of the delinquency on their loan.
'Non-payment of these loans apparently has jeopardized Mr. Hawthorne's purchase. He states he will take immediate action to obtain these payments.'