Woodworth v. Redwood Empire Savings & Loan Ass'n

Opinion

Plaintiff, Ben M. Woodworth (hereafter Woodworth) lost his interest in a parcel of real property known as the Linda Del Mar Subdivision Number One in Petaluma, comprising approximately 42 acres subdivided into 199 lots, upon foreclosure of construction loans by the savings and loan association respondents. Woodworth sought declaratory and other relief from the savings and loan respondents, as well as Sonoma County Title, the original escrow agent, and Redwood Empire Title, the successor trustee of the deeds of trust (hereafter title company respondents). On this appeal^[1] from the judgment in favor of the savings and loan respondents and the two title companies, Woodworth asserts that: 1) the trial court erred to his prejudice and surprise by permitting a belated amendment of the pleadings and the pretrial conference order to include the affirmative defense of estoppel;^[2] 2) the lien created by his previously recorded deed of trust was not validly subordinated to the liens created by the deeds of trust of the savings and loan respondents, as the automatic subordination clause of his deed of trust was void for vagueness; 3) even if the automatic subordination clause was valid and enforceable, the trial court erred in concluding that he was estopped from asserting either that the loans secured by any deed of trust were obtained from a source not specified in the automatic subordination clause, or that the funds were not disbursed according to requirements of the subordination clause; 4) the savings and loan respondents were not entitled to lien priority and extinguishment of his interest by the foreclosures, but acquired only an equitable lien for the amount of their construction loans; and 5) he established his cause of action for negligence against the title company respondents and is entitled to damages, as well as his attorney’s fees in this action. For the reasons set forth more fully below, we have concluded that the judgment must be affirmed.

Viewing the record most strongly in favor of the judgment, the following chronology of the facts appears. About 1951 or 1952, Woodworth purchased a 38.5-acre parcel in Sonoma County for $59,000 and a contiguous 4.3-acre parcel. Woodworth commenced the preparation of plans and took the necessary steps to subdivide and sell the property, including the filing of various applications with appropriate government agencies, the

employment of an engineer to survey the property, and prepare a subdivision map, and the employment of an attorney, Mr. Dole, to represent him before the Public Utilities Commission. From 1952 to July 1959, Wood-worth appeared in 44 hearings before various governmental bodies in support of his various applications for permits to subdivide his real property. During this period, Woodworth was a licensed real estate salesman and actively, but unsuccessfully, attempted to sell his real property to third persons.

In July 1959, Woodworth discussed the subdividing and sale of his property with Charles Jess, a real estate subdivider (hereafter Jess) from southern California, whom Woodworth had not previously met. After about three weeks of negotiations, Woodworth and Jess orally agreed: that Woodworth would sell his real property to a newly created corporation, Atwater Investment Company (hereinafter Atwater), which would issue all of its stock to Woodworth and Jess. Woodworth was to receive Atwater’s promissory note for $133,000 and would serve as a director of Atwater. Atwater was to subdivide the property, construct homes and sell the homes and lots. Woodworth was induced to enter the oral agreement in anticipation and expectation of his right as a director to participate in the management of Atwater and his opportunity as a shareholder to derive a greater individual profit than he would have received as a result of a direct cash sale of his property to Atwater.

Thereafter, Woodworth employed and was represented and advised by independent legal counsel (Mr. Moskowitz) in the negotiations and preparation of subsequent written agreements embodying the terms of the oral agreement. After numerous conferences betwen Mr. Moskowitz and Mr. Nielsen, legal counsel representing Jess and Atwater, the parties on August 19, 1959, signed two written agreements: the first, an “Agreement for Sale of Real Property,” was signed by Woodworth individually and by Jess as president of Atwater; the second, a letter from Woodworth to Atwater was signed by Woodworth and by Jess individually and as president of Atwater.

Pursuant to the August 19, 1959, agreements: 1) Woodworth on August 28, 1959, executed and delivered a deed conveying his real property to Atwater; 2) Atwater executed and delivered its promissory note, secured by a deed of trust. The deed of trust contained the “automatic subordination clause” (set forth below)^[3] subordinating Woodworth’s interest as seller

pared the necessary documents and included the subordination clause in the promissory notes and deeds of trust dated October 15, 1959. Wood-worth’s deed of trust and promissory note from Atwater were recorded on October 19, 1959. Thereafter, Woodworth appeared, sometimes alone and at times together with Jess, at the offices of Sonoma Title to sign the notes and deeds of trust as officers of Atwater.

On October 19, 1959, Jess withdrew about $55,000 from Sonoma Title. Woodworth called Moskowitz and ascertained that his countersignature was not required and that nothing could be done.

On November 10, 1959, Woodworth received from his attorney Moskowitz a letter providing a detailed status report of the escrow and financing proceedings. The letter enclosed a copy of the statement of Sonoma Title showing all receipts and disbursements to date and further advised Woodworth, as set forth below.^[4]

On March 9, I960, Woodworth initialed at least three of the 22 subcontract agreements between Jess Concrete and various subcontractors. About May 3, 1960, the date of the recordation of the Barnes deeds and assignments thereof to Porter, subsequent assignments from Porter to third party investors and the payment of loan proceeds from Porter to Sonoma Title for the Atwater account were completed. The moneys received were disbursed in accordance with the Barnes-Atwater agreement of September 19, 1959, and written instructions from Porter as well as from Moskowitz and Woodworth.

On January 2, 1960, Woodworth, on behalf of Atwater, signed the construction agreement with Jess Concrete Company for the construction of 203^[5] homes in the subdivision. Pursuant to the construction agreement, Atwater agreed to pay Jess Concrete Company $125 per house, in addition to all allowable costs and expenses as further detailed in the agreement. Woodworth was specifically authorized to sign this agreement on behalf of Atwater by a directors' resolution.

On February 29, 1960, the Atwater board of directors met and authorized its president, Jess, to execute such promissory notes and deeds of trust as may be necessary, convenient or proper to place individual and/or group construction loans against any of the lots in the subdivision. Wood-worth approved this authorization as evidenced by his signature of the minutes.

During the same period of time, Woodworth and Jess, on behalf of Atwater, met with officers of a number of the savings and loan respondents^[6] and applied for construction loans for the homes to be built and sold

Woodworth was aware of the payments made to Porter but made no complaint to Bear Flag or any of the respondents. Woodworth also knew that a number of companies controlled or owned by Jess were performing the required subcontract work described in the lot cost sheet.

In April 1960, Woodworth agreed to refrain from seeking further advice or counsel from Moskowitz, as Jess and his attorney continually complained that Moskowitz continued to “preach suspicion” to him and was a bad influence on Woodworth. On April 29, 1960, the Atwater directors met and authorized Woodworth, as vice president, to sign, on behalf of Atwater, an agreement with Columbus Investment Company^[7] (of which Jess was president) for the purchase by Atwater of $50,000 of promissory notes and second deeds of trust. Woodworth signed his approval of the minutes and executed the agreement on behalf of Atwater. On May 18, 1960, the Atwater directors again met and Woodworth signed his approval of the minutes which provided that all of the past acts of Jess had been approved and ratified.

From April 15, 1960, until October 10, 1960, Woodworth drew a weekly salary of $100 as an employee of Atwater Investment Company (a total of $3,583.50). He also received $100 a week until April 1961, as an employee of Columbus Investment Company.

On November 16, 1960, Woodworth signed his approval of minutes, including a resolution ratifying all acts taken by the officers for and on behalf of the corporation since the May meeting. In January 1961, the shareholders of Atwater met and adopted a resolution that Woodworth also approved in writing, again ratifying, confirming and approving all of the acts of the officers. On April 17, 1961, the Atwater directors met again and ratified the assignment by Jess of certain escrow funds from Atwater to its creditors. Woodworth approved these minutes and the resolution in writing.

On May 4, 1961, Woodworth for the first time took action to protect his interests. On that date, he instructed respondent, Redwood Empire Title Company (substituted as trustee under the deed of trust from Atwater to Woodworth) to record a notice of default^[8] as Atwater failed to complete interest payments current on construction loans and failed to pay Porter second deeds of trust when due, thereby endangering the security of his deed of trust. On June 1, 1961, Woodworth, by written instructions, canceled his May 4 instructions to respondent, Redwood Empire, and again recognized the priority of the deeds of trust held by the savings and

loan respondents. Woodworth also instructed Redwood Empire to release for payment to the savings and loan respondents the surplus realized on the closing of one house. On September 22, 1961, the Atwater directors met and a majority authorized Jess to file a bankruptcy petition; Wood-worth opposed the resolution. In July 1961, Woodworth filed a separate action against Jess and Atwater for damages and lost profits.^[9] Woodworth filed the instant action in 1962; the matter was tried in 1967.

The trial court found: at the time of the execution of the agreements of August 19, 1959, Woodworth knew and understood that: 1) neither Jess nor Atwater had the funds to pay for the installation of the off-site improvements required by the City of Petaluma as a condition of the permit; 2) money for the construction of such off-site improvements would necessarily be borrowed from sources other than the banking institutions, building and loan associations, federal or state savings and loan associations and life insurance companies specified as the source of construction loans by the subordination clause. These loans for off-site improvements would be secured by first deeds of trust, to which Woodworth would be required to subordinate his deed of trust; 3) the loans for off-site improvements would be obtained from one John Barnes, individually or doing business as John H. Barnes, Inc., or Porter Trust Deed Investment Company. Neither of these loan sources was the type of lending institution specified by the automatic subordination clause as the source of construction loans; 4) any loans obtained from Barnes or Porter would require the payment by Atwater of above-average interest rates, loan discount fees and compensation for services rendered by Barnes in obtaining the loans; 5) money for the construction of homes and other on-site improvements would be borrowed from various savings and loan associations. The construction loans would be secured by deeds of trust to which Woodworth would also be required to subordinate his deed of trust from Atwater; 6) the amounts of loans to be secured by deeds of trust covering the real property pursuant to the automatic subordination clause, together with the terms of repayment, interest rates and all other charges to be paid by Atwater, would be determined by agreement between Jess and the respective lenders; 7) at all times from and after August 19, 1959, Wood-worth knew of the source of all moneys loaned to Atwater and secured by deeds of trust covering the real property and the cost and terms of repayment of these loans.

Woodworth made no inquiry as to the status, qualification or financial condition of Barnes or Porter, nor did he inquire as to the amounts,

338 ] (petition for hg. den. Sept. 22, 1971). We agree that Middlebrook effectively abolished the distinction and confusion (created by previous case law) in holding that the principles of fair dealing set forth in Handy v. Gordon, 65 Cal.2d 578 at page 581 [ 55 Cal.Rptr. 769 , 422 P.2d 329 , 26 A.L.R.3d 848 ],^[10] and Stockwell v. Lindeman, 229 Cal.App.2d 750 [ 40 Cal.Rptr. 555 ],^[11] apply to executed as well as executory subordination clauses.

It does not follow, however, that an application of these cases to the particular facts of the instant case must result in a reversal in favor of Woodworth. Woodworth was not the usual seller. He owned one-third of the stock and was a director and officer of the buyer, Atwater. As a director and officer of Atwater, Woodworth participated in all of the transactions and signed the necessary documents. He also collected a salary from Atwater.

The uncontroverted evidence here indicated that the subordination clause was drafted by Woodworth’s attorney, who represented him in the negotiations between the time of the oral agreement and the written agreements executed in August 1959. Woodworth and his attorney must have known that subordination agreements are in the nature of a mutual enterprise, wherein the vendor provides the land, the purchaser the “know-how” and the purchaser’s lending agency the capital for the mutually beneficial purpose of developing the land and disposing of it (usually by sale) to provide a fund out of which the vendor is paid for his land, the lender is repaid its loan with interest, and the purchaser receives compensation for his efforts and skill. In effect, as here, the vendor assists in the financing of the purchaser’s development and becomes a quasi-joint venturer in the project. The safety of the vendor’s investment depends upon the success of the development for as soon as the new lien is imposed on the property to secure the construction loan, the property is overencum

bered and the total liens exceed the value of the property until the improvements are completed (Miller, Starr & Regalia, Subordination Agreements in California, 13 U.C.L.A. L.Rev. 1298, 1299). Here, both Moskowitz and Woodworth, a licensed real estate salesman,^[12] knew prior to the execution of the August 19 agreements that neither Jess nor Atwater had the money or any commitment for the needed off-site improvements- and that the financing for these improvements would be obtained through Barnes and Porter at the high cost of 10 percent and points. However, Woodworth was ready to sign anything to obtain the needed moneys as he did not want to lose the anticipated profits from the sale of his property to Atwater. He anticipated greater profits from the sale to a corporation in which he had an interest than from a direct sale.

The interpretation of the general and all inclusive language of the subordination clause restricting the use of the loan funds to construction and subdivision improvement purposes is governed by the intent of the parties at the time of the drafting of the subordination clause (Collins v. Home Savings & Loan Assn., 205 Cal.App.2d 86 [ 22 Cal.Rptr. 817 ]). The language of the subordination clause was negotiated and approved by Wood-worth’s attorney Moskowitz and no qualifying language inserted. Nor is there any evidence that Woodworth intended to qualify the language in any manner. After many years of proceedings to subdivide his property, Woodworth sought out and contacted Jess because of his experience and knowledge of subdivisions. Jess warned Woodworth that Porter was going to want a lot of points for its loans for the off-site improvements. Wood-worth made no objection as he knew that the off-site improvements had to be financed before Atwater could obtain any construction loans. Wood-worth knew that Jess did not have the money for the off-site improvements and that without the Porter financing, the whole deal would fall through. We hold that because Woodworth himself participated in the original discussions that led to the oral agreement and was then represented by his counsel in the subsequent negotiations that led to the written agreements, Woodworth cannot now argue that the subordination clause in his deed of trust from Atwater is unenforceable on the ground that it is void for vagueness.

Woodworth next asserts that under Middlebrook, supra, the trial

court erred in concluding that the savings and loan respondents owed him no duty to protect his interest as a seller and that he was estopped from asserting either that any loans secured by a deed of trust were obtained from a source not specified in the automatic subordination clause or that the construction loan funds were not disbursed according to the requirements of the subordination clause.

In Middlebrook, supra (decided on a demurrer), the court held that on the facts there alleged, the priority acquired by the lender created by the seller’s subordination agreement extended only to the money spent for construction purposes. The court also imposed on the lender an implied agreement to protect the seller’s interest because of the lender’s actual knowledge of the provisions of the seller’s lien and subordination provision, and the lender’s better position to control disbursements and protect both its own and the seller’s interests.^[13] Of course, the trial court did not have the benefit of the well-reasoned opinion in Middlebrook.

We are, therefore, presented with the question of whether Woodworth’s dual role of buyer, with his interest in Atwater, and seller, as well as his knowledge and participation (directly or by his attorney) in the Barnes-Porter loans and construction loans and the disbursements made therefrom by Bear Flag, constituted a waiver of the responsibilities imposed on lenders in more usual fact situations involving independent sellers, buyers and developers by Middlebrook.

Woodworth here, pursuant to his agreement with Jess, the developer, became a one-third owner of the buyer, Atwater. Thus, Woodworth not

only subordinated his interest to aid the financing of the development (as in any subordination situation) but also acquired an interest in the buying corporation. In addition to this dual capacity resulting from his corporate ownership, Woodworth also became an officer and director of the buyer. As such, he had access to more information than an ordinary seller, and, in fact, directly participated in the many transactions relating to the negotiation of all of the loans and the disbursement of the loan proceeds. Woodworth’s knowledge, participation and approval of the Barnes-Porter loans is detailed above. As an officer and director of Atwater, Woodworth actually signed some of the documents required to consummate the construction loans. He participated in the discussions with Bear Flag concerning disbursements and approved the third ‘progress payment from which the final payments on the Barnes-Porter loans were made. We hold that so much active participation by a seller who is also a part-owner and officer and director of the buyer, and who repeatedly orally and in writing indicates his understanding of the subordination clause in his deed of trust, amounts to a waiver by the seller of the duties imposed by Middle-brook on a lender for the protection of the ordinary seller.

Woodworth asserts that, contrary to the findings and conclusions of the trial court, his knowledge and conduct do not meet the strict requirements for estoppel when the effect of the estoppel is to take title to land from him and vest it in the savings and loan respondents. He cites City of Long Beach v. Mansell, 3 Cal.3d 462 [ 91 Cal.Rptr. 23 , 476 P.2d 423 ], wherein the court noted at pages 489-491, that the doctrine of estoppel should not be applied to divest title to land unless the culpability of the party to be estopped is of a sufficient dimension that in addition to containing the ordinary elements of estoppel,^[14] it also constitutes actual or constructive fraud.

The application of the strict standard of Mansell to the instant case is doubtful as Woodworth was not divested of his title by the trial court’s finding, but by the foreclosure sales of the savings and loan respondents which extinguished his junior interest pursuant to the automatic subordination clause. Woodworth knew and understood the effect of this clause (that he signed after negotiations pursuant to his agreement with Jess) and affirmed the junior nature of his interest, in writing, on several occasions, and as late as June 1, 1961. We note that the trial court’s finding on estoppel was also based on the automatic subordination clause. All of the steps taken by the title company respondents and disbursements made by the savings and loan respondents were made pursuant to written

instructions from Woodworth’s attorneys or on documents duly authorized and signed by Woodworth in his capacity as an officer of Atwater. Prior to the filing of this action in 1962, neither Woodworth nor his attorney ever indicated to any of the respondents that any funds were borrowed from sources not specified in the subordination clause^[15] or disbursed in a manner inconsistent with the requirements of the clause.^[16]

Besides Woodworth’s affirmative approval of loan and disbursement procedures as indicated above, there were a number of occasions when Woodworth encountered problems with Jess,^[17] but chose to go ahead in order to complete the deal and protect his anticipated profits. Clearly, Woodworth’s over-all conduct met all of the traditional elements of estoppel.

Finally, citing Jones v. Sacramento Sav. & Loan Assn., 248 Cal.App.2d 522 [ 56 Cal.Rptr. 741 ],^[18] Woodworth maintains that to prevent unjust enrichment, he is entitled to the difference of $347,483 between the amounts collectively realized by the savings and loan respondents on the sales of the 199 homes (for $1,932,833.68) and the amounts of the original loans. Woodworth urges that the recovery of the savings and loan respondents should be limited to an equitable lien for the amount of their construction loans, less the amount previously repaid.

In Jones, the owner of 13 lots of residential property gave purchase money trust deeds containing subordination provisions for the construction loans made by Sacramento Savings and Loan. After the homes were built, both loans became delinquent and Jones acquired the purchase money notes at a discount, held trustee sales, and purchased the properties. Sacramento Savings and Loan, relying on its subordination clause, ignored Jones’ sale, conducted its own sale and purchased the properties. Jones sued to quiet title. The court held that: 1) the savings and loan lost its

priority as it had departed substantially from the conditions specified in the subordination clause; 2) Jones was, therefore, entitled to priority, but would be unjustly enriched if his trustee’s sale wiped out the construction loans. Jones had purchased the $800 per lot purchase money notes at a discount; the construction loans amounted to $11,000-$ 12,000 per lot. Thus, the savings and loan, mistakenly relying on its expected priority, stood to lose $143,000 while Jones, with knowledge of the facts, acquired improved property at a fraction of its value; 3) accordingly, the savings and loan was entitled to an equitable lien to the extent of its construction loans, to be paid off, as each home was resold, in a manner to be determined by the lower court to avoid undue hardship to Jones.

Woodworth’s reliance on the Jones case is based on two misconceptions: first, that he is in the same position as Jones;^[19] second, that the savings and loan respondents here lost the priority of their liens created by the subordination clause. As the savings and loan respondents here retained their lien priority, by the foreclosure sale they acquired title, including Woodworth’s interest. Accordingly, they are entitled to retain the entire amount of $347,483 realized on the subsequent sale of the homes.

Finally Woodworth contends that the title company respondents were liable for negligence as they failed to dispense the funds in their hands in accordance with the terms of the subordination clause, and he is entitled to his attorney’s fees in this action. However, the trial court’s conclusion is supported by Weiss v. Brentwood Sav. & Loan Assn., 4 Cal.App.3d 738 , 744 [ 84 Cal.Rptr. 736 ]. There, as here, the borrower sought to ' impose on one, not party to the transaction culminating in the subordination agreement, a duty of care. Similarly here, from the record before us, we are unable to find that the title company respondents owed any duty of care to Woodworth or that they breached any duty.

Woodworth, citing Ruth v. Lytton Sav. & Loan Assn., 266 Cal.App.2d 831 [ 72 Cal.Rptr. 521 ], further argues that the title company respondents were “trustees.” It is well established, however, that a trustee under a deed of trust is not a trustee in the technical sense. Rather, he is the agent of all the parties to the escrow at all times prior to performance of the conditions of the escrow and bears a fiduciary relationship to each of them. His obligation to each is measured by an application of the ordinary principles of agency. It is the duty of an escrow holder to comply strictly with the instructions of his principal and to exercise