Prunty v. Bank of America
37 Cal. App. 3d 430 (Cal. Ct. App. 1974)

RATTIGAN, J.

    The question presented on this appeal (apparently as a matter of first impression) is whether Code of Civil Procedure section 580b n1 bars a deficiency judgment, against a borrower and in favor of a lender, after judicial foreclosure and sale of real property under a deed of trust executed by the borrower to secure payment of a "construction loan" (1) which was used to finance construction of his personal residence on land already owned by him in fee, but (2) which was not used to finance his purchase of the land itself. We hold that the statute bars a deficiency judgment under the circumstances presented here.

    "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 real property."  As originally enacted in 1933, and as reenacted without change in 1935, the statute contained this language only: "No deficiency judgment shall lie in any event after any sale under a deed of trust or mortgage given to secure payment of the balance of the purchase price of real property." (Stats. 1933, ch. 642, @ 5, p. 1673; Stats. 1935, ch. 650, @@ 5, p. 1806, 9, p. 1807.)

    The statute's present language relative to a sale of real property after default under a "contract of sale" was added in 1935 (Stats. 1935, ch. 680, @ 1, pp. 1868-1869); its second paragraph was added in 1949. (Stats. 1949, ch. 1599, @ 1, p. 2846.) Neither of these provisions is involved in the present case.

    Plaintiffs are the owners in fee of certain real property upon which they executed a deed of trust, in favor of defendant Bank of America as beneficiary, to secure payment of a construction loan made by the bank to them for the purpose of financing the erection of a residence on the property. The residence was built and completed with the proceeds of the construction loan, but was demolished as the result of a natural disaster. In this action, thereafter commenced against the bank and the trustee under the deed of trust (defendant Continental Auxiliary Company), plaintiffs sought a declaratory judgment to the effect that Code of Civil Procedure section 580b barred the bank from recovering a deficiency judgment in the event of their default and a judicial foreclosure and sale under the deed of trust.

    After a nonjury trial, the court found in favor of plaintiffs and entered a declaratory judgment substantially as prayed. Defendants appeal from the declaratory judgment.

Facts

    Including those just summarized, most of the material facts appear in the trial court's findings...

"Findings of Fact

    "1. In 1964, plaintiffs purchased with their own funds certain unimproved real property generally known and described as 6163 Chelton Drive, Oakland, California, intending to build their own home thereon. 2. In 1965, while the property was still unimproved, plaintiffs applied to defendant Bank of America for a loan in the sum of $40,000. 3. On June 23, 1965, defendant Bank of America loaned $40,000 to plaintiffs n3 and plaintiffs gave defendant their note in the sum of $ 40,000 and a deed of trust against said real property. 4. Said note provided that said loan would be repaid in equal monthly installments, including principal and interest, over a 25-year period.

    "5. The forms of the note and deed of trust used in the transaction by the [defendant] Bank of America were the same as the forms it would use for a loan to an individual to purchase real property with a home already constructed on it. 6. Said deed of trust was recorded on June 25, 1965, in the official records of Alameda County . . . "7. It was intended both by plaintiffs and defendants that the repayment of said loan would be secured by said deed of trust which would cover not only the land but also a dwelling to be constructed thereon. 8. At the time of the application for said loan and at the time of the execution and recording of said deed of trust, plaintiffs intended to use the proceeds of said loan to construct a single family residential dwelling on the property, which they themselves would occupy, and defendant Bank of America was aware and intended that the proceeds of said loan would be so used.

    "9. All the proceeds of said loan were used by plaintiffs to pay the purchase price of labor and materials which were used in constructing a single family residence on the property. 10. Defendant Bank of America would not have made said loan had not the entire proceeds of said loan been used to pay the purchase price of labor and materials used to construct the residence on said land. 11. Defendant Bank of America looked primarily to the land and to the building thereon as security for its loan.

    "12. Said land, without the improvements [constructed] thereon, had a value of $7,500. 13. After the construction of said improvements, said land had a fair market value of $96,000. 14. Upon completion of the construction of the dwelling, it was occupied by plaintiffs and used by them as their place of residence. 15. In April, 1967, a major landslide occurred in the area of the residence. As a result of the damage done to the residence and to the real property itself, the residence was torn down and demolished.

    "16. Defendant Bank of America required that plaintiffs have a policy of insurance on the land and improvements with a lender's loss payable endorsement. 17. Plaintiffs obtained said policy of insurance but it did not cover them or defendant Bank of America against the risk of a landslide. 18. No insurance which would cover said risk was available to the parties. 19. To the extent of the unpaid balance of its loan to plaintiffs,. . . [defendant bank] . . . is subrogated to plaintiffs' claims against any other party for damages suffered by reason of the destruction of their residence."

    In the declaratory judgment entered pursuant to the above-quoted findings, the trial court ordered that defendant bank was not entitled to recover a deficiency judgment from plaintiffs. The court unmistakably determined that a deficiency judgment was barred, under the facts as found, by the provisions of section 580b. Upon examination of the facts in light of the language of the statute as amended in 1963 (see fn. 1, ante), we agree: for the reasons next stated, we affirm the declaratory judgment.

    On their appeal from the declaratory judgment, defendants first contend that section 580b does not bar a deficiency judgment in this case because the deed of trust given by plaintiffs was not a "purchase money" instrument "within the meaning" of the statute. (See fn. 1, ante.) The contention rests upon the premises (1) that section 580b operates to bar a deficiency judgment after the sale of real property under a "purchase money" mortgage or trust deed only, and (2) that plaintiffs' trust deed was not a "purchase money" instrument because it was given to secure payment of a construction loan whose proceeds financed the residential improvement of their property but not its "purchase."

    Defendants' first premise is undeniably correct: section 580b has consistently been interpreted as barring "any deficiency judgment after sale under a purchase money mortgage or trust deed" only. [Citations Omitted.]

    The validity of defendants' second premise -- that plaintiffs' trust deed is not a purchase money instrument within the meaning of section 580b because it was given to secure payment of a construction loan only -- requires analysis of the language of the 1963 amendment of the statute (see fn. 1, ante) according to the conventional canons of statutory construction. "'The fundamental rule of statutory construction is that the court should ascertain the intent of the Legislature so as to effectuate the purpose of the law.' [Citations omitted.] Statutes should be construed so as to be given a reasonable result consistent with the legislative purpose." [Citation Omitted.] Moreover, ". . . a statute should be construed with reference to the entire statutory system of which it forms a part in such a way that harmony may be achieved among the parts . . . ." [Citation Omitted.] We are to construe the express language of a statute "according to the usual, ordinary import" of the words employed (ibid.), but "in context, keeping in mind the nature and obvious purpose of the statute." [Citation Omitted.]

    Applying these rules in the interpretation of section 580b in particular (or of any of the other components of the "entire statutory system" of anti-deficiency legislation which includes it), we must also recognize that the "system" has been liberally construed to effectuate the specific legislative purpose behind it. As one writer has stated, ". . . the courts have exhibited a very hospitable attitude toward the legislative policy underlying the anti-deficiency legislation and have given it a broad and liberal construction that often goes beyond the narrow bounds of the statutory language." [Citation Omitted.]

    Because the Legislature's "purpose" in adopting the 1963 amendment of section 580b is the paramount consideration in our construction of the language employed in it, we first resort to the history of the statute which preceded it. At all times prior to the amendment (and without reference to the language which was added to the statute by earlier amendments and which is not relevant here), section 580b expressly barred a deficiency judgment only after a sale under a mortgage or trust deed "given . . . to secure payment of the balance of the purchase price of real property." (See fn. 1, ante.) The just-quoted language clearly limited the definition of a "purchase money instrument," a sale under which would bar a deficiency judgment according to the statute's terms, to a mortgage or trust deed given by a vendee of the affected real property, for the security purpose expressly stated, because a vendee is ordinarily the person who is obligated to pay "the balance of the purchase price of [the affected] real property." Because a landowner who borrows construction money is not obligating himself to pay any part of "the purchase price of [his] real property," the same language imported that a mortgage or trust deed given to secure payment of the loan was not a "purchase money instrument" which would invoke the anti-deficiency protection of the statute.

***

    In the Roseleaf case (Roseleaf Corp. v. Chierighino, supra, 59 Cal.2d 35), the question was whether certain trust deeds which had been given by one of several vendees of a hotel, for the literal purpose of securing "payment of the balance of the purchase price" thereof, were purchase money instruments which entitled him to the anti-deficiency protection of section 580b as it read prior to the 1963 amendment. The Supreme Court first held that whether a given mortgage or trust deed was a purchase money instrument within the meaning of the statute depended upon whether it comported with the statute's purpose, stating: "Section 580b was apparently drafted in contemplation of the standard purchase money mortgage transaction, in which the vendor of real property retains an interest in the land sold to secure payment of part of the purchase price. Variations on the standard are subject to section 580b only if they come within the purpose of that section." (Roseleaf Corp. v. Chierighino, supra, 59 Cal.2d 35 at p. 41, italics added.)

    [Discussion of Roseleaf and Bargioni omitted.]

    In the 1963 amendment of section 580b, the Legislature first provided that a deficiency judgment would not lie after a sale under a deed of trust or mortgage given to a vendor "to secure payment of the balance of the purchase price of real property." (See fn. 1, ante.) This wording reiterated the narrow language of the pre-1963 statute which necessarily limited the definition of a "purchase money instrument," which would invoke the statutory bar, to one given for the quoted purpose if it had been given to the vendor of the affected property. According to this portion of the amendment, the statute remains within the Roseleaf court's concept that it was "drafted in contemplation of the standard purchase money mortgage transaction, in which the vendor of real property retains an interest in the land sold to secure payment of part of the purchase price." [Citation Omitted.]

    The second portion of the 1963 amendment provides that a deficiency judgment is barred, after sale under a deed of trust or mortgage given "on a dwelling," if the "dwelling" meets a specific description and if the instrument had been given to a "lender" (as distinguished from a "vendor") "to secure repayment of a loan which was in fact used to pay all or part of the purchase price of such dwelling occupied . . . by the purchaser." n10 (Italics added.) Because this language refers to a "lender," and departs from the pre-1963 wording of the statute by referring to the "purchase price of . . . [a] . . . dwelling," instead of the "purchase price of real property," the anti-deficiency protection of the amended statute is no longer limited to the narrow bounds of the "standard purchase money transaction," and the retention of a security interest by the vendor of "land sold," as discussed in the Roseleaf decision. [Citation Omitted.] On the other hand, it appears that the broader language of the second portion of the amendment bars a deficiency judgment in contemplation of another "standard" transaction in which a third party lender finances the "purchase price" of a described "dwelling" and receives from the "purchaser" a mortgage or trust deed to secure payment of his loan. The final question in the present case is whether the broader language should be interpreted to bar a deficiency judgment after a sale "under a deed of trust [plaintiffs'] . . . given to a lender [defendant bank] to secure repayment of a loan which was in fact used to pay all or part" of the cost of constructing plaintiffs' "dwelling occupied . . ." by the borrower(s) (plaintiffs). n11

    The common -- and various -- definitions of the words "purchase" and "purchaser" are sufficiently flexible to include the suggested alternative meanings (see, e.g., Webster's Third New Internat. Dict. (1967) pp. 1844-1845); n12 the owner of real property who finances and builds a "dwelling" on it "acquires" or "obtains" the dwelling for a "price," in no less a sense than the "purchaser" of real property "acquires" or "obtains" the land itself. (See fn. 12, ante.) The flexibility of both definitions has been recognized in pertinent decisions. [Citations Omitted.] Thus, the terms actually used by the Legislature in the 1963 amendment ("purchase price" and "purchaser") may reasonably be assigned the suggested alternative definitions "according to the usual, ordinary import" of the statutory language. [Citation Omitted.] The reach of that language is therefore to be assessed according to a liberal construction thereof in light of the legislative purpose underlying the amended statute and the "entire statutory system" of anti-deficiency legislation which includes it. [Citation Omitted.]

    Despite the operation of the 1963 amendment to eliminate the anti-deficiency protection previously afforded the purchaser of commerical property against a third party lender (see fn. 10, ante), under the pre-1963 language of the statute and under the Bargioni decision (Bargioni v. Hill, supra, 59 Cal.2d 121 at p. 123), it appears that the amendment was adopted in direct response to Bargioni (Hetland, op. cit. supra, @ 6.24, p. 272), and that the Legislature thereby codified that decision to the extent of continuing the protection extended, against third party lenders, to the limited class of residential purchaser-borrowers described in the amendment. Although decided upon inapposite facts, at least one recent decision clearly indicates that the Roseleaf-Bargioni definition of the statute's purposes survived the 1963 amendment. (Spangler v. Memel, supra, 7 Cal.3d 603 at p. 610.)

    As stated in Bargioni, "[the] purposes [of section 580b] are [1] to discourage land sales that are unsound because the land is overvalued and [2], 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 at p. 123 [citing Roseleaf Corp. v. Chierighino, supra, 59 Cal.2d 35 at p. 42].) The first purpose is served by application of the amended statute's anti-deficiency protection to residential construction borrowers who fall within its terms (see fn. 11, ante): it thus tends to discourage construction borrowing which is "unsound" because the financed construction is overvalued.

    The amended statute's application to residential construction borrowers also serves its second purpose, which contemplates " depression in land values" and "aggravation of the downturn that would result if defaulting purchasers lost the land and were burdened with personal liability." We perceive no real distinction between the present situation, where the value of the security has been diminished by a natural disaster, and a case where the same result has occurred by reason of cyclical economic decline: the spirit of the statute is to protect the borrower against the "aggravation" of any such "downturn," and the Roseleaf and Bargioni courts both held that its effect is to impose the "risk" of inadequate security upon the secured lender rather than upon the borrower. [Citations Omitted.]

    In the present case, it seems particularly appropriate that the "risk," and the ensuing loss in consequence, be borne by defendant bank because of the opportunities it had -- and utilized -- to protect its security interest against the landslide loss which actually occurred. These opportunities included the control exercised by the bank over the plans, specifications and construction of plaintiffs' residence in contemplation of landslide and other physical risks (see fn. 3, ante), and the requirement in plaintiffs' trust deed that they furnish insurance whose coverage protected the bank against loss and which was "satisfactory" to it. (See fn. 4, ante, and the trial court's findings 16, 17 and 18, quoted supra.) We may reasonably assume that such protective measures are readily available to lenders who finance residential construction, that the Legislature was aware of this when it amended section 580b in 1963, and that its protection of residential construction borrowers, against deficiency judgments, was continued (under the 1963 amendment) in recognition of the fact that the lenders involved are able to protect themselves against loss or devaluation of their security which might be caused by physical catastrophe. Under these and all the circumstances previously discussed, we hold that section 580b bars a deficiency judgment in the present case.

***

    ...It is undisputed that any personal property acquired by plaintiffs under the contract for the construction of their residence had become real property upon the completion of the contracted work... [Citations Omitted.]

    The judgment is affirmed.