In this action to foreclose a deed of trust, cross-defendants Sherwin L. Memel, Robert A. Memel and Sol Kossoff appeal from a judgment entered in favor of cross-complainant, May Spangler, and against said cross-defendants in the sum of $44,684.25 together with interest and costs.
In 1956 Ralf and May Spangler purchased a lot on Sunset Boulevard in Los Angeles for $43,000. The property was improved with a single-family, two-story residence, which Ralf converted into an office for his advertising business. The property which was zoned for commercial use, appreciated in value in view of the possibility of erecting a commercial office building upon the site.
In 1960 Ralf and May decided to try to realize the property's potential for commercial development by listing it for sale with Hubert Boisvert, a licensed real estate broker. In 1961 Ralf quitclaimed all his interest in the property to May, who thereby became the sole owner of the property. However, Ralf continued to act with full authority as her agent in selling the property.
In the summer of 1961, Mr. Arnold, a salesman for Mr. Boisvert, the real estate broker, contacted Sherwin Memel and informed him the property was available. Throughout the month of August, negotiations were carried on between, on the one hand, Messrs. Arnold and Boisvert, acting for the Spanglers and, on the other, Sherwin and Robert Memel, acting for
Ralf Spangler, on behalf of his wife May, insisted that Robert Memel, Sherwin Memel, Sol Kossoff and Leon Kossoff, the four general partners of Memel-Kossoff Ventures, in return for Mrs. Spangler's agreement to subordinate her prior lien to lenders of construction money, each individually waive their protection from deficiency judgments and each give a written personal guaranty of joint and several liability for the payment of the $63,900 promissory note. Ralf so insisted in order to protect his wife against the hazard that her purchase money trust deed might become valueless in the event the holder of a future prior encumbrance securing a construction loan should foreclose. This agreement was embodied in the escrow instructions, and during escrow each partner signed a written personal guaranty and waiver of the anti-deficiency statutes.
Memel-Kossoff Ventures transferred the property to MKS Investment Co. (MKS), a partnership consisting of the four general partners plus Irving Shapiro, an architect. MKS negotiated a construction loan with Union Bank in the amount of $408,000 in order to construct an office building upon the property. MKS gave Union Bank a promissory note in the amount of $408,000, secured by a first deed of trust in that amount. Union Bank, as a condition to this loan, required May Spangler to execute a specific subordination agreement recognizing the priority of Union Bank's lien, in lieu of the automatic subordination clause contained in the original trust deed. This agreement was executed on November 29, 1962.
MKS used the $408,000 to construct a three-story commercial office building on the property. Despite diligent efforts by the partners to obtain tenants, the building was never a commercial success. The project failed due to higher costs than expected, because the building was noncompetitive in attracting tenants as compared to other new buildings in the area,
On September 7, 1965, Union Bank brought the present action to foreclose its first deed of trust. It secured a judgment of foreclosure and subsequently purchased the property at the ensuing foreclosure sale for $440,000. Since the $440,000 price at the foreclosure sale was $45,943.08 less than the amount of indebtedness, Union Bank recovered a deficiency judgment from the individual partners of MKS. It thereafter entered a satisfaction of judgment on February 16, 1969 and is no longer a party to the case in any respect.
In February 1967, May Spangler, the seller of the property and one of the defendants in the foreclosure action, having had her subordinated purchase money deed of trust rendered valueless by the bank's foreclosure, filed an amended cross-complaint (hereafter for convenience "cross-complaint") against Memel-Kossoff Ventures, a partnership; Sherwin Memel, Robert Memel, Leon Kossoff and Sol Kossoff, individually and as partners, their wives; and Union Bank. The ensuing procedural progress of the action, though quite complicated, is not material to the resolution of this appeal and is, therefore, set forth in the margin.
After finding the facts to be as already narrated, the trial court further found
The court concluded: (1) that because the guaranty was a separate obligation from the partnership obligation within the meaning of section 15015, subdivision (b) of the Corporations Code, Riddle v. Lushing (1962) 203 Cal.App.2d 831 [21 Cal.Rptr. 902] was not controlling;
The principal dispute engaged in by the parties revolves about California's anti-deficiency statutes. Cross-defendants contend that cross-complainant is actually attempting to obtain a deficiency judgment in connection with a purchase money deed of trust, that any such recovery is barred by section 580b of the Code of Civil Procedure
In Brown v. Jensen, supra, this court held that section 580b (see fn. 5, ante) which proscribes a deficiency judgment after any sale of real property under a deed of trust or mortgage, given to the vendor to secure payment of the balance of the purchase price, applies to a junior lienor whose security has been rendered valueless by foreclosure of a senior encumbrance. The plaintiff in that case sold real property to the defendants, who as part of the purchase price executed a note in favor of a savings and loan association secured by a first deed of trust on the property and, also as part of the purchase price, a note in favor of the plaintiff secured by a second deed of trust on the property. The defendants defaulted on the first note and the savings and loan association caused the property to be sold under the power of sale contained in the first deed of trust, thus rendering valueless the security under the plaintiff's second deed of trust.
The plaintiff then brought an action on her promissory note to recover the unpaid balance of the purchase price and in order to meet the "one form of action" rule of section 726 alleged in the complaint that her security had become valueless as a result of the sale under the first deed of trust. This court held section 580b applicable since the second deed of trust was a purchase money deed of trust, even though there had been no sale of the property under that instrument. We reasoned: "The section states that in no event shall there be a deficiency judgment, that is, whether there is a sale under the power of sale or sale under foreclosure, or no sale because the security has become valueless or is exhausted." (Brown v. Jensen, supra, 41 Cal.2d 193, 198; original italics.)
We have never overruled or modified this central ruling that section 580b applies to a sold-out junior lienor holding such security for the payment
In Roseleaf Corp. v. Chierighino, supra, 59 Cal.2d 35, also involving a junior lienor, we examined in depth the purposes and scope of the anti-deficiency legislation (§§ 580a-580d, 726) and held that sections 580a and 580d by their terms did not apply to sold-out junior lienors.
In Bargioni v. Hill (1963) 59 Cal.2d 121 [28 Cal.Rptr. 321, 378 P.2d 593], decided three weeks after Roseleaf, we held section 580b applicable to a sold-out junior lienor, a real-estate broker who partially financed the purchase of the property by accepting for his commission the purchaser's promissory note secured by a second deed of trust. In Kistler v. Vasi (1969) 71 Cal.2d 261 [78 Cal.Rptr. 170, 455 P.2d 106] this court cited Brown v. Jensen approvingly as reinforcing our determination in Bargioni.
Thus, we reaffirm our ruling in Brown v. Jensen that section 580b by
In Handy v. Gordon (1967) 65 Cal.2d 578 [55 Cal.Rptr. 769, 422 P.2d 329, 26 A.L.R.3d 848] this court delineated the minimum terms necessary to constitute an enforceable subordination clause in an agreement of purchase and sale so that the vendor would not be "forced to rely entirely on the buyer's good faith and ability as a developer to insure that he will not lose both his land and the purchase price." (Id. at p. 581.) We there said: "Even if we were to assume that a contract of sale contemplating subdivision by the vendee is sufficiently different from the usual land sale contract to take it out of the operation of the anti-deficiency legislation (Code Civ. Proc., § 580b; see Hetland, Real Property, 53 Cal.L.Rev. 151, 161-162), the personal liability alone of the vendee would not constitute sufficient protection to the vendor to permit specific performance. [Citations.]" (Id. at p. 581.)
We, therefore, conclude that the subordination clause situation is sufficiently different from the standard purchase money mortgage situation to
In Bargioni, we restated and summarized the purposes of section 580b thusly: "The purposes are to discourage land sales that are unsound because the land is overvalued and, in the event of a depression in land values, to prevent the aggravation of the downturn that would result if defaulting purchasers lost the land and were burdened with personal liability." (Bargioni v. Hill, supra, 59 Cal.2d 121, 123.)
Thus we emphasized in both Roseleaf and Bargioni that the first clear purpose of the statute is to prevent overvaluation in those situations where "the security value of the land gives purchasers a clue as to its true market value," by placing the risk of inadequate security on the purchase money mortgagee. In the standard purchase money mortgage transaction involving a junior lienor, the purchaser generally speaking has not been able to meet the value placed on the land by the vendor by giving the latter a normal cash down payment and obtaining from a third party lender a loan for the balance of the purchase price using the property as security. Obviously such a loan could not be obtained since the amount of the loan would exceed the security value. Instead, it usually happens that the purchaser will finance the balance of the purchase price by obtaining a third party loan equal to the security value, secured by a first deed of trust on the property, and by also giving the vendor a promissory note for the difference between the purchase price (less any down payment) and the security value, said note being secured by a second deed of trust on the property. We reasoned in Roseleaf that in such situation, the inability of the purchaser to obtain the purchase price from a lender using the land as security, should warn the vendor that he is perhaps overvaluing the land, and that he insists, at his peril, upon his premium price secured by a second trust deed.
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.
In this factual context, the security value of the property at the time of the sale, which in Roseleaf we found to be at once an indicator of market value and a significant factor in deterring overvaluation by the vendor, gives no clue to market value, since the sale contemplates radical improved and changed use of the property. Effective prevention of overvaluation in a sale of property for commercial development utilizing a subordination clause lies in forcing the purchaser-developer to make realistic assessments of the likelihood of the project's success and in inducing him to exert his highest efforts in carrying it out. We think this can be accomplished by placing the risk of failure upon the purchaser-developer where it in reality belongs, by permitting the sold-out junior lienor vendor to recover a deficiency judgment in an action on his promissory note. We are of the opinion that the purpose of preventing overvaluation in this context is best subserved by not applying section 580b.
Another facet of the difference between the sold-out junior lienor in the subordination clause context and the standard purchase money situation
The second purpose delineated in Roseleaf, namely to prevent aggravation of a depression in land values by not burdening purchasers with loss of the property plus personal liability, has little applicability to a sold-out junior lienor in the subordination clause context. If section 580b is applied to prevent the deficiency judgment, then the subordinating sold-out junior lienor loses both the land and the purchase price. If section 580b is not applied then the purchaser is subjected to the same burden. Neither party has the land in this context; the sole question is who shall bear the cost of the unpaid portion of the purchase price.
We, therefore, conclude that when in the sale of real property for commercial development, the vendor pursuant to the agreement of sale, subordinates his purchase money lien to the lien securing the purchaser-developer's construction loan and thereafter, upon the default of the purchaser-developer, loses his security interest after sale or foreclosure under the senior lien, section 580b should not be applied to bar recovery by the junior vendor lienor of the unpaid balance of the purchase price of the property.
The judgment is affirmed.
Wright, C.J., McComb, J., Peters, J., Tobriner, J., and Burke, J., concurred.
Trial commenced September 2, 1969 on the claim of fraudulent misrepresentation by the Memel and Kossoff brothers. At the conclusion of all the evidence, at the suggestion and with the approval of the trial court, Mrs. Spangler amended her amended cross-complaint to state a fifth cause of action seeking to enforce the written guaranties of Sherwin Memel. Robert Memel and Sol Kossoff.
Leon Kossoff, the fourth partner, died during the pendency of the action, no claim was ever made against his estate, and so the action was dismissed as to him. The trial court gave judgment in favor of the wives of the four partners as against Mrs. Spangler. This portion of the judgment is not appealed from.
Hereafter, unless otherwise stated, all section references are to the Code of Civil Procedure.
In Kistler v. Vasi, supra, 71 Cal.2d 261, this court recognized that the Legislature by this amendment singled out commercial development purchasers for different treatment with respect to nonvendor purchase money lenders. It is consistent with the spirit of that amendment to treat the commercial development of property differently in determining the applicability of section 580b.
Our attention has been directed to two other cases, both subsequent to Roseleaf, where the Courts of Appeal have applied section 580b to bar recovery by a sold-out junior lienor vendor who had subordinated his security interest to a construction loan. (Valinda Builders, Inc. v. Bissner (1964) 230 Cal.App.2d 106 [40 Cal.Rptr. 735] and Kincaid v. Gomez (1969) 274 Cal.App.2d 839 [79 Cal.Rptr. 539].) However, in both cases the actions were not upon the promissory note, but upon guaranties of payment of the promissory note. The courts in both cases concluded that the guarantors were not legitimate guarantors within the meaning of Roberts v. Graves (1969) 269 Cal.App.2d 410 [75 Cal.Rptr. 130] and Heckes v. Sapp, supra, 229 Cal.App.2d 549, but were purchasers and, therefore, entitled to protection against a deficiency judgment under section 580b. However, neither opinion contains any language concerning the applicability of section 580b to the factual situation presented in the light of Roseleaf.