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Tahoe National Bank v. Phillips
4 Cal. 3d 11 (Cal. 1971)
Tobriner, Justice
Defendant Beulah F. Phillips appeals from a judgment of the El Dorado
County Superior Court that holds that an instrument entitled, "Assignment of Rents
and Agreement Not to Sell or Encumber Real Property" (hereinafter referred to as
"the assignment") was intended to be an equitable mortgage, and decrees its
foreclosure.
We conclude that this judgment must be reversed. Plaintiff bank, which
occupied the more powerful bargaining position and deliberately chose to use a
standardized form providing for the assignment of rents and a covenant against
conveyances, cannot be permitted to transform this assignment into a mortgage contrary to
the reasonable expectation of its borrower. On examining the terms and purpose of the
assignment, we conclude that it is not reasonably susceptible of construction as a
mortgage at the instance of the bank, and thus that the trial court erred in invoking
extrinsic evidence offered by the bank to prove it to be a mortgage.
Defendant and three co-venturers embarked on a real estate development
in the Lake Tahoe area. About April 20, 1965, the venturers not only needed further
capital but also owed plaintiff sums due on overdrafts on their accounts. Plaintiff agreed
to lend $34,000 to defendant, who transferred the funds to the venture's account. In
return, defendant gave plaintiff a single-payment promissory note, payable on demand or on
May 20, 1965. n1 At the same time plaintiff executed and
delivered to defendant an instrument entitled: "Assignment of Rents and Agreement Not
to Sell or Encumber Real Property." n2 This
document provided that as security for the loan defendant assigned to plaintiff all rent
due from the realty described therein and agreed not to encumber or convey that property.
The bank was authorized to record the instrument and did so on May 27, 1965.
The real property described in the document was not the venture's
apartment development, but defendant's residence, which she owned one-half in fee and
one-half as trustee under the testamentary trust of her deceased husband. This property
was unencumbered as of April 20, 1965. On December 6 of that year defendant recorded a declaration of homestead on the property.
Mr. Ross, president of plaintiff bank, testified that the
venturers first requested an unsecured loan but that he refused to issue the loan without
security and requested collateral; that defendant then offered her residence as collateral
and showed him an FHA appraisal at $34,400. The venturers required the money within two
hours, and, for reasons which are not entirely clear, n3 Mr.
Ross determined that the bank could not conveniently prepare a trust deed within that time
limit; consequently he selected instead a form for an assignment of rents and agreement
against conveyances. The document was prepared by his secretary and executed by the
parties.
Mr. Ross acknowledged that his bank and other banks make
unsecured loans upon agreements by the debtor to maintain unencumbered assets of
sufficient value in the county. He denied, however, that his purpose in having defendant
sign the document in issue was merely to insure that she would have unencumbered assets
reachable by the bank; he maintained that he took the document "knowing it was in
actuality a mortgage instrument against that house in lieu of a deed of trust."
Mrs. Phillips testified that she did not intend to sign or
believe that she was signing any security interest "like a mortgage or deed of
trust." She added that since she owned half her interest as trustee she believed that
she lacked authority to execute a mortgage or trust deed on the property.
Plaintiff brought suit against the venture on various notes and
overdrafts and, in its fifth cause of action, asked foreclosure of the assignment as an
equitable mortgage. The court entered judgment against the venturers, jointly and
severally, for $92,386 plus costs, interest, and attorney's fees. It further found that
the assignment was an equitable mortgage securing $34,000 of the debt, and decreed its
foreclosure.
Mrs. Phillips alone appealed; her appeal challenges only that
portion of the judgment finding the assignment to be an equitable mortgage and ordering
foreclosure. [Before reading the balance of the opinion, I strongly recommend that
you read Commentary.Enforcement of a money
judgment to more fully appreciate why the bank wanted the assignment to be construed
as an equitable mortgage and why Mrs. Phillips resisted.]
1. The language of the assignment is not reasonably susceptible of
interpretation as a mortgage at the instance of plaintiff bank.
We agree with defendant's contention that the assignment cannot
reasonably be construed as a mortgage and thus that extrinsic evidence, offered by
plaintiff to prove the document a mortgage, is legally irrelevant and cannot support the
judgment. n5 We shall examine the purpose and terms of
the assignment, and explain that it is a type of agreement commonly used with unsecured
loans, that it contains no words of hypothecation, and that it includes language
inconsistent with a mortgage. We shall point out that if, as the bank contends, the word
"security" in the assignment renders it ambiguous, the bank bears the
responsibility for that ambiguity. Having on hand instruments which unambiguously impose
liens on realty, the bank cannot select an ambiguous instrument and then, by extrinsic
evidence, give it the effect of the unambiguous form it eschewed.
Assignments similar to the present one are "used by many
banks in conjunction with small, nominally unsecured loans such as home improvement
loans." (California Real Estate Secured Transactions (Cont.Ed.Bar 1970) § 2.37
(hereinafter cited as "CEB").) n6 They provide the
lender with a measure of security unavailable in a totally unsecured loan; the creditor
holds an assignment of rents and a contractual guarantee that property in which the debtor
has an equity will remain unencumbered and unconveyed, and thus available for levy and
execution should the creditor reduce his debt to judgment. Indeed, the plaintiff
bank commonly makes loans upon the "security" of a promise by the debtor not to
convey or hypothecate property, using for that purpose forms similar to that at issue
here.
Thus we are not dealing with homemade security instruments in
which the parties labor to produce a mortgage but fall short of the legal requirements and
must be rescued by a court of equity. The form used was carefully drafted to produce
a security interest with incidents differing from that of a mortgage. As Justice Friedman
pointed out in his dissenting opinion in the Court of Appeal: "Here is a bank which
prepared its own printed form, selected a particular one from its array of forms and
handed it to the customer for signature. Doubtless the bank had printed forms of trust
deed, perhaps even a few dusty, yellowed mortgages. Now the bank claims that by the
printed form it selected, it intended to create the legal effect of a form it did not
select." We conclude that the plaintiff, having selected a form for "assignment
of rents and agreement not to sell or encumber real property," is bound by the terms
of that agreement.
We turn now to the language of the assignment. Its title gives no
hint of a power of foreclosure. It contains no language of hypothecation, no provisions
imposing a lien or creating a mortgage, no discussion of foreclosure. . . . The
substance of the document comprises six covenants by the borrower, none of which purport
to give the bank a lien on real property. The covenants respecting recordation and
duration of the agreement, and persons bound by its terms, are consistent with a mortgage,
but they are equally consistent with an instrument designed to afford the bank the
security that the borrower retains unemcumbered assets. The third covenant, however, is
inconsistent with an instrument creating a lien on real property. It provides in part that
"borrower will not create or permit any lien or any encumbrance (other than those
presently existing) to exist on said real property . . . without the prior written consent
of bank." This language apparently assumes that the assignment itself is not an
encumbrance; its absolute prohibition on what would be junior encumbrances is
inappropriate in a mortgage, and if in fact such a prohibition appeared in a mortgage it
might be unlawful as an unreasonable restraint upon alienation. (See Coast Bank v.
Minderhout (1964) 61 Cal.2d 311, 317 [38 Cal.Rptr. 505, 392 P.2d 265].) On the other hand,
as unsecured creditor the bank would benefit greatly from an assurance that defendant
would not encumber her assets.
Plaintiff points out that the assignment specifies that it was
given "as security for a loan," and that the word "security" may
signify a right of foreclosure (see Civ. Code, § 2924; Coast Bank v. Minderhout, supra,
61 Cal.2d 311, 314). That phrase, however, appears in the preamble which, read as a whole,
states that "as security for a loan . . . the undersigned . . . hereby covenant and
agree with Bank as follows." The natural interpretation of this language is that it
is the six covenants of the borrower that "secures" that loan; n10 that the word "security" in the preamble does not
create additional rights and duties not specified in the covenants.
Plaintiff further contends that the term "security,"
and the provisions of the assignment describing the real property and permitting
recordation, render the assignment ambiguous, thus requiring extrinsic evidence to
determine whether it places a lien on defendant's property. (See Coast Bank v. Minderhout,
supra, 61 Cal.2d at p. 315.) If ambiguity there is, that ambiguity may be deliberate.
Professor Hetland, referring to assignments similar to that at issue in the present
case, states that "the instrument seems to have been designed by a group of lenders
to afford the lender the option of being a secured or an unsecured creditor at the time of
the debtor's default . . . ." (CEB, § 2.38.) Thus, although the assignment primarily
serves to protect unsecured loans (see fn. 6, supra), it may also be used "[to] lead
a borrower who refuses to give a mortgage into believing he is not doing so"
(CEB, § 2.25).
Since the alleged ambiguities appear in a standardized contract,
drafted and selected by the bank, which occupies the superior bargaining position, those
ambiguities must be interpreted against the bank. The rule of resolving ambiguities
against the drafter "does not serve as a mere tie-breaker; it rests upon fundamental
considerations of policy." (Steven v. Fidelity & Casualty Co. (1962) 58 Cal.2d
862, 871 [27 Cal.Rptr. 172, 377 P.2d 284].) Thus, in determining whether an instrument is
reasonably susceptible to an interpretation suggested by the extrinsic evidence, one
factor for consideration by the court is whether that interpretation would do violence to
the principles of construing documents against the party who drafts and selects them.
In the present case, we conclude that to permit a creditor to
choose an allegedly ambiguous form of agreement, and then by extrinsic evidence seek to
give it the effect of a different and unambiguous form, would be to disregard totally the
rules respecting interpretation of adhesion contracts, and to create an extreme danger of
overreaching on the part of creditors with superior bargaining positions. The bank
must bear the responsibility for the creation and use of the assignment it now claims is
ambiguous; it is only "poetic justice" (CEB, § 2.38) if such ambiguity is
construed in favor of the borrower. Legal alchemy cannot convert an assignment into an
equitable mortgage, violating the customer's reasonable expectation and bestowing upon the
bank the riches of an hypothecation of title.
We recognize that in Coast Bank v. Minderhout, supra, 61 Cal.2d
311, we ordered foreclosure as an equitable mortgage of an instrument similar to the
assignment in the present case, but we do not consider that case controlling. The
agreement in Coast Bank contained an acceleration clause and stated that the loan was
intended to improve the property described in the agreement -- both characteristics
indicative of a mortgage and both absent in the present assignment. Of greater
significance is the differing context of Coast Bank and the present case. In Coast Bank,
the borrower had breached a covenant prohibiting conveyance of the realty. Such a breach
confronts the court with a difficult problem in fashioning a remedy. An award of damages
would prove ineffective; "[the] maximum damages the bank could suffer from breach
would be the amount of the debt, the same amount for which it could get a judgment on the
note." (CEB, § 2.38.) Specific performance of the covenant against conveyances might
create an invalid restraint against alienation. (See Coast Bank v. Minderhout, supra, 61
Cal.2d at p. 317.) Under these circumstances, enforcement as an equitable mortgage, which
permits the property to be conveyed subject to the lien, is the only alternative to
invalidation of the instrument. (See Comment, supra, 12 U.C.L.A. L.Rev. 954, 966-967.)
In the present case defendant has performed all terms of the
assignment, n14 with the result that defendant's interest in
the realty, over the homestead exemption, is available to satisfy the bank's judgment on
the note. If this security is not fully adequate, such is the result of the bank's choice
of the governing instrument.
2. Defendant's failure to object to extrinsic evidence at trial
does not bar her from contending on appeal that the instrument is not fairly susceptible
of interpretation as a mortgage.
We turn now to plaintiff's contention that since defendant did
not object at trial to plaintiff's extrinsic evidence intended to show that the assignment
was a mortgage, she is precluded from arguing on appeal that the assignment is not
reasonably susceptible of that construction. To support its contention plaintiff relies on
Pao Ch'en Lee v. Gregoriou (1958) 50 Cal.2d 502, 506 [326 P.2d 135], in which we held that
"the admission of parol evidence to vary or add to a written instrument cannot be
objected to for the first time in the appellate court."
Developments in the law of parol evidence since 1958, however,
require a modification of the approach of Pao Ch'en Lee. Recent decisions make clear that,
in most cases, extrinsic evidence must be admitted provisionally in order that the court
may determine if that evidence is relevant to establish an interpretation of the
instrument to which it is reasonably susceptible. (Pacific Gas & E. Co. v. G. W.
Thomas Drayage etc. Co., supra, 69 Cal.2d 33, 40; Delta Dynamics, Inc. v. Arioto (1968) 69
Cal.2d 525, 528 [72 Cal.Rptr. 785, 446 P.2d 785].) Moreover, "[the] parol evidence
rule, as is now universally recognized, is not a rule of evidence but one of substantive
law. It does not exclude evidence for any of the reasons ordinarily requiring exclusion,
based on the probative value of such evidence or the policy of its admission. . . .
Extrinsic evidence is excluded because it cannot serve to prove what the agreement was,
this being determined as a matter of law to be the writing itself." (Estate of Gaines
(1940) 15 Cal.2d 255, 264-265 [100 P.2d 1055].) Thus the Legislature, when it enacted the
Evidence Code in 1965, excluded from it the subject of parol evidence. (See Witkin, Cal.
Evidence (2d ed. 1966) § 714.)
If we treat the parol evidence rule as one of substantive law, we
cannot consistently subjugate that rule to the principles of objection and waiver codified
in the Evidence Code. (Evid. Code, § 353.) To be sure, a party who has not objected to
the introduction of extrinsic evidence cannot complain if that evidence is considered by
the trier of fact. But in determining whether substantial evidence supports a judgment,
extrinsic evidence inconsistent with any interpretation to which the instrument is
reasonably susceptible becomes irrelevant; as a matter of substantive law such evidence
cannot serve to create or alter the obligations under the instrument. Irrelevant evidence
cannot support a judgment. (Kitchel v. Acree (1963) 216 Cal.App.2d 119, 124 [30 Cal.Rptr.
714].)
We conclude that defendant, having not objected at trial, cannot
now take exception to the trial court's receipt of extrinsic evidence, but that she may
argue on appeal that such extrinsic evidence conflicts with any interpretation to which
the instrument is reasonably susceptible.
3. Conclusion.
Part 2 of the superior court judgment, the only portion of that
judgment from which defendant appeals, held that the assignment was an equitable mortgage
and ordered foreclosure. We conclude that this determination is in error; the assignment
cannot reasonably be construed as a mortgage at the instance of the party who drafted and
selected it.
Part 2 of the judgment against defendant Beulah Phillips is
reversed.
SULLIVAN, J. I dissent.
The sole issue before us on this appeal is whether the evidence
is sufficient to support the trial court's finding that the Assignment was intended by the
parties to make defendant Beulah F. Phillips' real property security for her indebtedness
to the plaintiff bank. It is beyond dispute that this crucial finding has ample support in
the record and that the trial court's resultant conclusion that the Assignment was an
equitable mortgage must be sustained. I can find no merit in the majority's elaborate
disquisition which attempts to avoid a straightforward confrontation with the issue before
us and to elude the settled principles of appellate review.
Our inquiry as to the sufficiency of the evidence in this case
centers upon that facet of the parol evidence rule which deals with the admissibility of
extrinsic evidence to interpret an integration. I start, therefore, with the principles
recently enunciated by this court in Pacific Gas & E. Co. v. G. W. Thomas Drayage etc.
Co. (1968) 69 Cal.2d 33 [69 Cal.Rptr. 561, 442 P.2d 641] and Delta Dynamics, Inc. v.
Arioto (1968) 69 Cal.2d 525 [72 Cal.Rptr. 785, 446 P.2d 785]. In Thomas Drayage, we said:
"The test of admissibility of extrinsic evidence to explain the meaning of a written
instrument is not whether it appears to the court to be plain and unambiguous on its face,
but whether the offered evidence is relevant to prove a meaning to which the language of
the instrument is reasonably susceptible. [Citations.]" (69 Cal.2d at p. 37.)
"Although extrinsic evidence is not admissible to add to, detract from, or vary the
terms of a written contract, these terms must first be determined before it can be decided
whether or not extrinsic evidence is being offered for a prohibited purpose. The fact that
the terms of an instrument appear clear to a judge does not preclude the possibility that
the parties chose the language of the instrument to express different terms." (Id. at
p. 39.) "Accordingly, rational interpretation requires at least a preliminary
consideration of all credible evidence offered to prove the intention of the parties.
[Citations.] Such evidence includes testimony as to the 'circumstances surrounding the
making of the agreement . . . including the object, nature and subject matter of the
writing . . .' so that the court can 'place itself in the same situation in which the
parties found themselves at the time of contracting.' [Citations.] If the court decides, after considering this evidence, that
the language of a contract, in the light of all the circumstances, 'is fairly susceptible
of either one of the two interpretations contended for . . .' [citations], extrinsic
evidence relevant to prove either of such meanings is admissible." (Fns.
omitted.) (Id. at pp. 39-40.) (See, also, Delta Dynamics, Inc. v. Arioto, supra, 69 Cal.2d
525, 528.)
The case at bench was tried and judgment entered well
before we announced the above-quoted principles in Thomas Drayage. Hence, the trial court
did not have the opportunity of following the procedure prescribed by Thomas Drayage, that
is by first considering provisionally all credible evidence offered to prove the intention
of the parties and then deciding whether the offered evidence was relevant to prove a
meaning of which the language of the Assignment was reasonably susceptible. Indeed, all of
the extrinsic evidence offered by plaintiff bank was admitted without any objection by
defendants.
Putting this last circumstance to one side, the majority contend
that the extrinsic evidence is entirely irrelevant and therefore furnishes no support
whatsoever to the judgment below. To expose the utter lack of merit in this contention we
need only make the same determination with respect to the extrinsic evidence that would
now be required of a trial court under Thomas Drayage. Thus, we must determine on the
basis of "all credible evidence offered to prove the intention of the parties"
whether the Assignment "in the light of all the circumstances" is fairly
susceptible of the interpretation urged by plaintiff and accepted by the trial court. (69
Cal.2d at pp. 39-40.) Under Thomas Drayage we must consider the extrinsic evidence as well
as the Assignment itself in making this determination. This indispensable task, the
majority ignore.
I thus turn to the extrinsic evidence. Ross, plaintiff's
president, testified as to the circumstances under which the loan, secured by the
Assignment, was made. He stated that defendant Charles Herron, a joint venturer with
defendant Mrs. Phillips, telephoned him and said that the joint venture needed an
immediate loan in order to close an escrow covering the purchase by the joint venture of
real property on which it planned to construct the second of its apartment units.
According to Ross, Herron suggested that the loan be unsecured, but Ross refused to make a
loan on that basis. Ross further testified that soon thereafter both Herron and Mrs.
Phillips telephoned him again, reiterating the urgency of the loan. After some discussion
and Ross' repeated demand for collateral, it was agreed that Mrs. Phillips would put up
her house as collateral for the loan.
According to Ross, the Assignment form was used rather than an
ordinary deed of trust form because the latter could not have been prepared, recorded and
covered by an appropriate title insurance policy within the two-hour period left before
the escrow was to be closed. He testified that based on the FHA appraisal of the property,
Mrs. Phillips' statements, and their previous relationship, he "took the agreement
[not] to encumber knowing it was in actuality a mortgage instrument against the house in
lieu of the deed of trust."
Ross' testimony, though partially contradicted by defendant, was
strong evidence that the parties intended that the Assignment would make her property
security for the loan. Ross' testimony amply supports the conclusion that the Assignment
was reasonably susceptible, in light of the intention of the parties and all the
circumstances, of the interpretation shown by the extrinsic evidence and accepted by the
trial court.
Moreover, the provisions of the Assignment itself show, as we held in
Coast Bank v. Minderhout (1964) 61 Cal.2d 311 [38 Cal.Rptr. 505, 392 P.2d 265], that the
Assignment could reasonably have been interpreted as creating a security interest and
giving rise to an equitable mortgage.
In Coast Bank the defendant appealed from a judgment of
foreclosure after he had failed to answer the complaint. At issue was whether an
instrument nearly identical to the Assignment n5 had
created an equitable mortgage. As this court unanimously held: "An agreement that
particular property is security for a debt also gives rise to an equitable mortgage even
though it does not constitute a legal mortgage." (Coast Bank v. Minderhout, supra, 61
Cal.2d 311, 314.) "Specific mention of a security interest is unnecessary if it
otherwise appears that the parties intended to create such an interest." (Id. at p.
314.) "In the present case, however, plaintiff pleaded and defendants admitted by
demurring and failing to answer that the parties intended to create a security interest in
the property. Accordingly, the question presented is not what meaning appears from the
face of the instrument alone, but whether the pleaded meaning is one to which the
instrument is reasonably susceptible. [Citations.] It is essentially the question that
would be presented had defendants denied that the parties intended to create a security
interest and plaintiff had offered extrinsic evidence to prove that they did. Such
evidence would be admissible to interpret the instrument, but not to give it a meaning to
which it is not reasonably susceptible. [Citations.] [Par.] The instrument restricts
the rights of the Enrights [defendants] in dealing with their property for plaintiff's
benefit; it describes itself as 'For use with Property Improvement Loan,' it specifically
sets forth the property it covers, and it authorizes plaintiff to record it. These
provisions afford some indication that the parties intended to create a security interest
and are clearly sufficient to support the pleaded meaning." (Coast Bank v.
Minderhout, supra, 61 Cal.2d 311, 315.)
Of the four factors mentioned by the court in Coast Bank as
indicating that the parties intended the instrument to create a security interest, only
the second is absent in the case now before us. In addition, the Assignment contains an
assignment of rents, a provision typically found in deeds of trust. It is
beyond dispute that the Assignment could reasonably have been interpreted as creating a
security interest and giving rise to an equitable mortgage. Therefore, the extrinsic
evidence had probative value supportive of the finding and conclusion of the trial court.
Despite this compelling similarity between the Coast Bank instrument
and the Assignment in the instant case (see fn. 5, ante)
the majority simply close their eyes to the rationale of this court in Coast Bank and
conclude that the Assignment cannot be interpreted as creating a security interest. It
seems beyond argument that if the document in one case could be interpreted as creating a
security interest, the strikingly similar document in the other case should be susceptible
of the same interpretation. It is indeed a strange and ironic process of ratiocination by
which the majority opinion professes to regard Coast Bank as precedent, gives no
intimation of overruling it, but nevertheless declines to pay it any respect.
The basic error which infects the majority's treatment of the
crucial question before us lies in the fact that the majority preoccupy themselves with
only the language of the Assignment itself. But as Thomas Drayage makes clear, the court
should consider "all credible evidence offered to prove the intention of the parties.
[Citation.] Such evidence includes testimony as to the 'circumstances surrounding the
making of the agreement . . . including the object, nature and subject matter of the
writing . . .' so that the court can 'place itself in the same situation in which the
parties found themselves at the time of contracting.' [Citations.]" (Pacific Gas
& E. Co. v. G. W. Thomas Drayage etc. Co., supra, 69 Cal.2d 33, 39-40.)
Not only do the majority adopt this restrictive approach to the
problem at hand; they actually misconceive the scope of our review in dealing with it. Our
first task is not to interpret the Assignment; it is rather to determine whether the
extrinsic evidence in the record shows a meaning to which the Assignment is reasonably
susceptible.
Persisting in this erroneous approach to the problem, the
majority argue that the Assignment is ambiguous and that the bank as the allegedly more
sophisticated party, having selected the Assignment from one of its own standardized
forms, should not now be allowed to take advantage of its ambiguities. This argument
is completely irrelevant to the question before us and reflects the majority's basic
misunderstanding of the rule established in Thomas Drayage. The real question is not
whether a document is ambiguous, but rather whether in the light of all the evidence the
document is reasonably susceptible of more than one meaning, including the meaning shown
by the extrinsic evidence. "Extrinsic evidence has often been admitted in such cases
on the stated ground that the contract was ambiguous [citation]. This statement of the
rule is harmless if it is kept in mind that the ambiguity may be exposed by extrinsic
evidence that reveals more than one possible meaning." (Pacific Gas & E. Co. v.
G. W. Thomas Drayage etc. Co., supra, 69 Cal.2d 33, 40, fn. 8.)
The rule that an instrument is to be interpreted against the
drafter and the cases relied upon by the majority in invoking it (Gray v. Zurich Insurance
Co. (1966) 65 Cal.2d 263 [54 Cal.Rptr. 104, 419 P.2d 168]; Steven v. Fidelity &
Casualty Co. (1962) 58 Cal.2d 862 [27 Cal.Rptr. 172, 377 P.2d 284]) are inapposite. The
citation of those cases by the majority graphically illustrates their misconception of the
issue in this case. Gray and Stevens apply to the construction of a contract when no
extrinsic evidence has been introduced to show the actual intent of the parties. We are
concerned here only with the question of whether the extrinsic evidence of this case
supports the trial court's finding that the parties intended Mrs. Phillips' property to be
security for the loan. The rule enunciated in Gray and Stevens is irrelevant to that
consideration.
The majority also argue that the third covenant of the Assignment
is inconsistent with an instrument creating a lien upon real property. They, therefore,
conclude that the Assignment is not reasonably susceptible of the interpretation that it
created a security interest. But an identical covenant appeared in the instrument involved
in the Coast Bank case (see fn. 2, supra) and we there held unanimously that despite such
provision the instrument in that case was reasonably susceptible of the interpretation
that it created a security interest.
The majority attempt to attenuate the impact of the use of the
word "security" in the preamble of the Assignment. To be sure, the mere use of
that word is not an overwhelming indication that the parties intended the instrument to
create a lien on real property. Similarly, use of the subtitle "For use with Property
Improvement Loan" in the Coast Bank instrument was not an overwhelming indication of
the similar conclusion reached in that case. However, the standard of reasonable
susceptibility is one easily met. (Coast Bank v. Minderhout, supra, 61 Cal.2d 311; Delta
Dynamics, Inc. v. Arioto, supra, 69 Cal.2d 525; Hulse v. Juillard Fancy Food Co. (1964) 61
Cal.2d 571 [39 Cal.Rptr. 529, 394 P.2d 65].)
The attempt by the majority to distinguish Coast Bank on its
facts is equally unpersuasive. They first observe that in Coast Bank the agreement
provided for an acceleration of the note in the event of a breach of the agreement.
While it is true that the agreement in Coast Bank contained an acceleration clause whereas
the Assignment before us does not, the court in Coast Bank did not find the acceleration
clause to be a significant, much less essential, circumstance in concluding that the
agreement created a lien on real property. The absence of such a clause in the instant
case is also without significance.
Secondly, much is sought to be made of the fact that the
agreement in Coast Bank contained the subtitle "For use with Property Improvement
Loan," whereas the Assignment before us does not. But despite its subtitle, the
agreement in the Coast Bank case secured all previous and future debts owed to the bank.
Here, the Assignment did not contain the subtitle, but it did state that it was
"security for a loan" and the proceeds of that loan were used in purchasing
other real estate. When the titles of the two agreements are considered side by side (see
fn. 5, ante) and read in a common-sense manner, the point raised by the majority indeed
seems trivial at best.
Finally, we are urged to distinguish Coast Bank on the basis that
the defendant in that case breached the agreement by conveying the property.
However, in the instant case, defendant has also breached the Assignment by declaring a
homestead on her property. A declaration of homestead is neither a conveyance nor an
encumbrance for other purposes, but it does exempt the property from execution or forced
sale. (Civ. Code, § 1240.) Since the purpose of an agreement not to encumber is, as the
majority acknowledge, to acquire a "guarantee that property in which the debtor has
an equity will remain unencumbered and unconveyed, and thus available for levy and
execution should the creditor reduce his debt to judgment," (italics added) a
declaration of homestead on such property effectively frustrates the clear purpose of the
agreement. Therefore, in this situation a declaration of homestead must be deemed
tantamount to an encumbrance or other disposition of the property and thus a breach of the
agreement.
But even assuming arguendo that defendant did not breach the
Assignment, that fact, coming as it did, long after the execution of the document can
throw little, if any, light on the reasonableness of its interpretation. The breach of the
Assignment is relevant on the issue whether an equitable mortgage should be declared as an
exercise of the discretion of a court of equity; it is not relevant on the issue whether
the Assignment is reasonably susceptible to the interpretation given it by the trial
court.
In sum, the majority's labored attempts to distinguish Coast Bank
-- a well-considered and unanimous opinion of this court -- are totally ineffective. It
remains compelling authority for the proposition that the Assignment in this case was
reasonably susceptible of the interpretation shown by the extrinsic evidence. The
conclusion is ineluctable that the extrinsic evidence admitted below was not violative of
the parol evidence rule.
The remaining inquiry is practically routine: whether,
considering the extrinsic evidence and all other evidence in the case, the finding and
conclusion of the trial court were adequately supported. As we recently stated in Pierpont
Inn, Inc. v. State of California (1969) 70 Cal.2d 282, 294 [74 Cal.Rptr. 521, 449 P.2d
737]: "However, in truth a realistic interpretation of these documents 'turns upon
the credibility of extrinsic evidence' [citation], and where, as here, such evidence is in
conflict, the findings made by the trier of the fact are binding upon appellate
review." (Parsons v. Bristol Development Co. (1965) 62 Cal.2d 861, 865 [44 Cal.Rptr.
767, 402 P.2d 839]; Estate of Platt (1942) 21 Cal.2d 343, 352 [131 P.2d 825].)
Here, as already pointed out, Ross testified that "[based]
on further discussion and asking for a collateral, it was proposed and accepted [by both
parties] that the house . . . would be put up as collateral. . . ." and that he took
the Assignment "knowing it was in actuality a mortgage instrument against the
house."
Defendant's testimony, on the other hand, was that she did not
intend to sign, nor did she believe she was signing, any type of security interest on her
property. She stated that at the time the Assignment was executed she believed that she
lacked the power to create a security interest in the entire parcel, since she owned an
undivided one-half interest individually and the other one-half as trustee under a
testamentary trust. Clearly, the extrinsic evidence was in conflict. The trial court chose
to believe Ross rather than defendant.
The majority now choose to ignore an elementary principle of
appellate review which forbids this court to weigh the evidence or determine the
credibility of the witnesses. Like it or not, the majority are bound by the trial court's
determination of these matters. "It is not our province to weigh the evidence nor to
determine the credibility of the witnesses, but only to decide whether the evidence, as
matter of law, supports the findings." (Southern Cal. Co. v. Amalgamated Assn. (1921)
186 Cal. 604, 618 [200 P. 1].)
Ross' testimony amply supports the trial court's finding that
both parties intended and agreed that Mrs. Phillips' property was to be security for the
loan. To this finding, the trial court properly applied the controlling principle of law
-- that "[an] agreement that particular property is security for a debt also gives
rise to an equitable mortgage even though it does not constitute a legal mortgage"
(Coast Bank v. Minderhout, supra, 61 Cal.2d 311, 314) -- to reach the unimpeachable
conclusion that the Assignment created an equitable mortgage. Thus, the finding and the
conclusion are amply supported by Ross' testimony. Having found substantial evidence in
support of the findings our function as an appellate court ends and we must affirm the
judgment. (Primm v. Primm (1956) 46 Cal.2d 690, 693 [299 P.2d 231]; Estate of Bristol
(1943) 23 Cal.2d 221, 223 [143 P.2d 689].)
I would affirm the judgment.
[Supplementary reading: Farnsworth, 7.12]
Notes and questions
1. Make sure that you understand fn. 5 of the majority opinion, my editorial comment in that footnote, and the second paragraph of the dissent. Also be sure that you understand the "two-step" process for consideration of extrinsic evidence, a process that is integrally related to the dissent's view of the correct rule.
2. Without looking at the extrinsic evidence, the majority opinion concludes that the "Assignment of Rents . . . " is not on its face reasonably susceptible to being construed as a mortgage. Why?
3. Thereafter the majority concludes that even if the "Assignment of Rents . . . " is reasonably susceptible to more than one meaning (a phrase that seems to be essentially synonymous with "ambiguous"), the ambiguity should be construed against the drafter, especially when the drafter has superior bargaining power. What is the dissent's response to this argument? What does Cal. Civil Code 1654 suggest? Why doesn't either opinion refer to that statute?
4. In concluding that the "Assignment of Rents . . . " is not on its face reasonably susceptible to being construed as a mortgage, the majority attempts to distinguish the Court's prior decision in Coast Bank v. Minderhout in which the Court found a very similar but not identical document to be susceptible to being construed as a mortgage. The dissent argues that the Coast Bank is not distinguishable. Which opinion do you find more persuasive and why?
5. An assignment of rents means that the lender may collect rental payments for the property from the borrower's tenants if the borrower/landlord defaults on the loan. The real property referred to in this "Assignment of Rents . . . " was probably a condominium (see the description of the property in fn. 2 of the majority opinion) and Mrs. Phillips probably used it as her permanent residence (otherwise the Declaration of Homestead that she filed would not have provided an exemption). Given those facts, how much "security" would the assignment of rents from Mrs. Phillips provide the bank? Contrast such an assignment made by an owner of an apartment building who gives an assignment to a lender as "security" for a loan. Should this be relevant to deciding whether the "Assignment of Rents . . . " is reasonably susceptible to construction as a mortgage?
Now consider the covenant not to convey or encumber included in the document. Suppose Mrs. Phillips were to sell the property to a third party. What would the bank's remedy be if it didn't have a mortgage? How do your conclusions on these questions affect your view of whether the parties intended a mortgage?
6. The trial court admitted the extrinsic evidence without objection from Mrs. Phillips. Normally, if an appealing party failed to object to introduction of evidence at trial, an appellate court will not overturn a judgment in part based upon such evidence. How does the majority deal with this problem?
7. In 2001, Gary Wolf, author of a novel Who Censored Roger Rabbit?, sued Walt Disney Pictures and Television, alleging failure of Disney to pay Wolf sufficient royalties for his license to them of rights to use his novel and its characters in its productions and associated promotions. The licensing agreement required Disney to pay Wolf 5% of its gross receipts attributable to use of the novel or its characters. A key dispute in the case was whether the phrase "gross receipts" in the licensing agreement meant only cash consideration received by Disney (e.g. from ticket purchases to watch a movie), for which royalties had been paid, or whether it also included valuable in-kind consideration (such as an agreement by fast food franchise McDonald's to promote a motion picture by displaying characters on 18 million collector cups), for which royalties had not been paid. The trial court heard expert testimony offered by Wolf to the effect that in the entertainment industry "gross receipts" includes non-cash consideration, and the trial court acknowledged that such evidence created an ambiguity concerning the meaning of "gross receipts." Nonetheless, the court rejected the proferred evidence on the ground that on its face the term "gross receipts" was clear and unambiguous, and it granted a motion for summary adjudication in favor of Disney. A California Court of Appeal issued a writ of mandate directing the trial court to vacate its order granting the motion and directing the trial court to consider the proferred evidence. Wolf v. Superior Court, 114 C.A.4th 1343 (2004). It relied on P.G.&E. Co. v. Drayage in concluding: "Even if a contract appears unambiguous on its face, a latent ambiguity may be exposed by extrinsic evidence which reveals more than one possible meaning to which the language of the contract is yet reasonably susceptible." Id. at 1351. The opinion did not include a single reference to the Tahoe case. What do you make of that?