The owner of a parcel of real property with a building on it demolishes the building to make way for new development. Unfortunately, the owner is unable to complete the development and ends up defaulting on a purchase money promissory note secured by a deed of trust on the property. The holder of the note and deed of trust exercises the power of sale under the deed of trust and buys the property back at a foreclosure sale for less than the amount due under the note. The noteholder then sues the former owner and others for waste and impairment of security based on then-demolition of the building, seeking as damages the loss of value in the property that resulted from the destruction of the building. Is such an action barred by the antideficiency statutes (Code Civ. Proc.,
The answer to that question is “no.” While the Supreme Court in Cornelison limited actions for waste following a foreclosure sale under a deed of trust securing a purchase money note to “bad faith” waste, the court defined “bad faith” waste as any waste that is not committed as a result of the economic pressures of a market downturn. (Cornelison v. Kornbluth, supra, 15 Cal.3d at pp. 603-604.) Accordingly, it is no defense to an action for waste based on the demolition of a building to simply claim that the demolition was part of a good faith attempt to improve the property. The impairment of security that results from the destruction of a building is actionable waste, notwithstanding the antideficiency statutes, unless the destruction itself was somehow caused by the economic pressures of a depressed market.
Based on this conclusion, and a few others, we will reverse the judgment the trial court summarily granted in this case.
FACTUAL AND PROCEDURAL BACKGROUND
Defendant Allen Warren is the sole owner and director of defendant New Faze Development, Inc., a company Warren set up to carry out “[t]he functional development responsibilities for a variety of entities.” Defendant New Faze Holdings is also wholly owned by Warren. New Faze Holdings “was set up to own and house property prior to going into construction.”
Defendant Wendy S. Saunders was employed by New Faze Development from April 2006 through December 2007 as its director of project development. Defendant Jay Rivinius was employed by New Faze Development as its director of construction.
At the time of the sale in February 2005, there was a building on the property that housed two tenants: a church and a small social services agency. A new roof had been installed on the building in January 1999, and a new ceiling with new light fixtures had been installed in the space rented by the church in the summer of 2003. At the time of sale the building had fully functioning electrical and plumbing systems, the doors and windows were working and intact, and the building was free of graffiti.
The purchasers bought the property with the intent to redevelop it into a mixed-use development including retail, residential, garage, office, and restaurant services. The redevelopment plans required demolition of the existing building and, thus, eviction of the existing tenants, which was accomplished in the fall of 2005. The demolition occurred a year later in October 2006. Warren was the one who decided to demolish the building. As project manager, Saunders ordered the demolition. Rivinius signed an agreement to hold the city harmless from liability for the demolition.
In April 2007, the 1990 Trust transferred its interest in the note and deed of trust to Donna Fait and the Glenn Fait 2005 Trust (the Faits).
Ultimately, the purchasers defaulted on their payments under the promissory note and failed to pay taxes and insurance on the property. As a result, the Faits initiated nonjudicial foreclosure proceedings under the deed of trust. In May 2009, the Faits bought the property at a public foreclosure sale for $14,097. At the time of the sale, there were more than $7,000 in property taxes owed on the property.
In July 2009, the Faits brought this action against the purchasers, New Faze Development, Warren, Saunders, and Rivinius (among others) for bad faith waste and intentional and negligent impairment of security.
In August 2010, New Faze Holdings, New Faze Development, Warren, Saunders, and Rivinius moved for summary judgment or, in the alternative, summary adjudication. As to the first cause of action, they asserted there was “no evidence that any Defendant acted with the required ‘bad faith.’ ”
The gist of their argument on the claim of “bad faith” waste was that they did not intend to harm the property, and they did not act maliciously or recklessly by demolishing the building because the demolition was “based on a good faith belief that the Property could be developed into a legitimate mixed use commercial project.” As for the claims for impairment of security, they first argued those causes of action were “entirely derivative” of the cause of action for “bad faith” waste and, as to the nonborrower defendants, it would be “nonsensical” for the court to hold the nonborrowers liable on a “lesser standard” than the “bad faith” standard applicable to a borrower. Thus, in their view, if the first cause of action fell, then the impairment claims had to fall as well. They also argued there was no evidence of the wrongful intent necessary for intentional impairment of security and as to the claim of negligent impairment “the individual (non-borrower) defendants should be dismissed because they [we]re innocent agents of New Faze and [we]re therefore not liable for the mere alleged torts of New Faze.”
In opposing the motion, the Faits argued they could prevail on the claim of “bad faith” waste because defendants acted “intentionally” in demolishing the building. In their view, “when waste was not committed solely or primarily as a result of the economic pressures of a market depression, the lender can recover” for “bad faith” waste. The Faits also argued summary judgment should be denied on the impairment of security claims because there was a triable issue of fact as to whether defendants knew of the security interest and they owed a duty to exercise reasonable care not to eliminate that interest.
With respect to the cause of action for intentional impairment of security, the court held it was “derivative of the first cause of action” and therefore the court granted summary adjudication for the reasons stated in connection with the “bad faith” waste claim. The court also agreed it would be “ ‘nonsensical’ ” to hold the borrower’s agents and employees liable when the borrower itself was “protected from liability for all but ‘bad faith waste.’ ”
As for the cause of action for negligent impairment of security, the court reached the same conclusions as it did with respect to the intentional impairment claim. The court also concluded that “regardless of whether defendants were aware of the Deed of Trust’s provisions, plaintiffs make no showing that the building’s demolition was a negligent act.”
Having granted summary adjudication on all causes of action as to New Faze Development, Warren, Saunders, and Rivinius, the trial court granted summary judgment in their favor. New Faze Holdings remained in the case on the claim of “bad faith” waste for failure to pay taxes on the property.
The Faits timely appealed the judgment in favor of New Faze Development, Warren, Saunders, and Rivinius.
DISCUSSION
I
Standard of Review
A defendant may move for summary judgment “if it is contended that the action has no merit. . . .” (§ 437c, subd. (a).) “A defendant. . . has met his or her burden of showing that a cause of action has no merit if that party has shown that one or more elements of the cause of action, even if not separately
“When the defendant moves for summary judgment, in those circumstances in which the plaintiff would have the burden of proof by a preponderance of the evidence, the defendant must present evidence that would preclude a reasonable trier of fact from finding that it was more likely than not that the material fact was true [citation], or the defendant must establish that an element of the claim cannot be established, by presenting evidence that the plaintiff ‘does not possess and cannot reasonably obtain, needed evidence.’ ” (Kahn v. East Side Union High School Dist. (2003)
“Because the trial court’s determination [on a motion for summary judgment] is one of law based upon the papers submitted, the appellate court must make its own independent determination regarding the construction and effect of the supporting and opposing papers. We apply the same three-step analysis required of the trial court. We begin by identifying the issues framed by the pleadings since it is these allegations to which the motion must respond. We then determine whether the moving party’s showing has established facts which justify a judgment in movant’s favor. When a summary judgment motion prima facie justifies a judgment, the final step is to determine whether the opposition demonstrates the existence of a triable, material factual issue.” (Hernandez v. Modesto Portuguese Pentecost Assn. (1995)
“The affidavits of the moving party are strictly construed, while those of the party opposing the motion are liberally construed, and doubts as to the propriety of granting the motion must be resolved in favor of the party opposing the motion.” (Miller v. Bechtel Corp. (1983)
As we will explain, on independent review, we conclude the trial court here erred in summarily adjudicating each cause of action against the Faits and therefore also erred in entering summary judgment against them.
Bad Faith Waste
The Faits contend the trial court erred in granting summary judgment because, among other things, there are triable issues of fact as to whether “bad faith” waste was committed. They make this argument, even though the “bad faith” waste claim against New Faze Holdings is not directly before us on appeal, because the trial court determined that the causes of action for impairment of security were “derivative” of the “bad faith” waste claim and summarily adjudicated the impairment causes of action against the Faits because the Faits had failed to raise a triable issue of fact as to “bad faith” waste.
As we will explain, the trial court erred in determining that the cause of action for “bad faith” waste based on the demolition of the building could not be maintained here because of an “absence of recklessness and intent to despoil at the time of the demolition.” Under Cornelison, any waste that is not committed solely or primarily as a result of the economic pressures of a market depression qualifies as “bad faith” waste. (Cornelison v. Kornbluth, supra, 15 Cal.3d at pp. 603-604.) Thus, it does not strictly matter whether those who demolished the building on the property did so based on a good faith belief that the property could be developed, or that they made substantial efforts to get the development project underway. As long as the demolition did not occur solely or primarily as a result of the economic pressures of a market depression, they can be liable for what the Supreme Court in Cornelison labeled “bad faith” waste.
To properly understand Cornelison, we begin with the facts of the case. There, the plaintiff sold a house and took back a promissory note secured by a deed of trust on the property. (Cornelison v. Kornbluth, supra,
On review, the defendant argued that because the “plaintiff purchased the property for a full credit bid an action for waste is precluded both by reason of the antideficiency legislation [citations] and by reason of the extinguishment of the security interest through a full credit bid at the trustee’s sale.”
The Supreme Court began by explaining that waste is conduct on the part of a person in possession of property that substantially impairs a security interest in the property.
The court then addressed whether recovery for waste was barred “because such recovery . . . would amount to a deficiency judgment proscribed by sections 580b and 580d.” (Cornelison v. Kornbluth, supra,
“It will be recalled that damages in an action for waste are measured by the amount of injury to the security caused by the mortgagor’s acts, that is by the substantial harm which ‘impair[s] the value of the property subject to the lien so as to render it an inadequate security for the mortgage debt.’ [Citation.] A deficiency judgment is a personal judgment against the debtor-mortgagor for the difference between the fair market value of the property held as security and the outstanding indebtedness. [Citation.] It is clear that the two judgments against the mortgagor, one for waste and the other for a deficiency, are closely interrelated and may often reflect identical amounts. If property values in general are declining, a deficiency judgment and a judgment for waste would be identical up to the point at which the harm caused by the mortgagor is equal to or less than the general decline in property values resulting from market conditions. When waste is committed in a depressed market, a deficiency judgment, although reflecting the amount of the waste, will of course exceed it if the decline of property values is greater. However, when waste is committed in a rising market, there will be no deficiency judgment, unless the property was originally overvalued; in this event, there would be no damages for waste unless the impairment due to waste exceeded the general increase in property values.
“Accordingly, we hold that section 580b should apply to bar recovery in actions for waste following foreclosure sale in the first instance but should not so apply in the second instance of ‘bad faith’ waste. We further hold that it is within the province of the trier of fact to determine on a case by case basis to what, if any, extent the impairment of the mortgagee’s security has been caused (as in the first instance) by the general decline of real property values and to what, if any, extent (as in the second instance) by the bad faith acts of the mortgagor, such determination, in either instance, being subject to review under the established rule of appellate review.” (Cornelison v. Kornbluth, supra, 15 Cal.3d at pp. 602-604.)
The Cornelison court also assessed “the effect upon an action for waste of section 580d which applies to a nonpurchase money mortgage.” (Cornelison v. Kornbluth, supra,
Having determined that the antideficiency statutes barred recovery for all but “bad faith” waste, the Supreme Court concluded that whether the defendant was liable for committing “bad faith” waste “need not be resolved” because even if he was liable on that basis, the plaintiff could not recover any damages because she purchased the property by making a full credit bid, thereby establishing that “the value of the security [was] equal to the outstanding indebtedness and ipso facto the nonexistence of any impairment of the security.” (Cornelison v. Kornbluth, supra,
We now turn back to the case before us. In the trial court, defendants argued that Cornelison “defined ‘bad faith waste’ as ‘reckless,’ ‘intentional,’ or ‘malicious’ conduct,” and they argued there was no such conduct here because “[t]he building demolition was based on a good faith belief that the Property could be developed.” The trial court accepted this argument. We do not.
To understand our conclusion requires a proper understanding of Cornelison, and to properly understand Cornelison it is critical to remember that what the Supreme Court was called on to do there was determine when a cause of action for waste is foreclosed by the policies behind the antideficiency statutes (for our purposes, especially § 580b). In that regard, the court noted that “[t]he primary purpose of section 580b is ‘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 [the] personal liability’ ” of a deficiency judgment. (Cornelison v. Kornbluth, supra,
Having identified the purpose behind section 580b, the court in Cornelison sought to identify the circumstances in which “an action for waste following a foreclosure sale of property securing purchase money mortgages” would “frustrate this purpose.” (Cornelison v. Kornbluth, supra,
In other words, when the owner of property subject to a deed of trust that secures a purchase money loan engages in conduct that impairs the value of the property as security for the loan—i.e., commits waste—because of “the economic pressures of a market depression,” the reduction in the value of the property that results is, for all intents and purposes, the same as if the loss in value had resulted directly from the general decline in property values due to the depression. It is in that circumstance that damages for waste would be the functional equivalent of a deficiency judgment.
On the other hand, when the conduct that impairs the value of the property as security is not “solely or primarily ... a result of the economic pressures of a market depression” (Cornelison v. Kornbluth, supra,
Among those circumstances in which the devaluation of security is not the result of economic pressures of a depression are the “reckless, intentional, and at times even malicious despoilers of property” the Supreme Court mentioned in Cornelison. (Cornelison v. Kornbluth, supra, 15 Cal.3d at
Applying that understanding of Cornelison here, we conclude the Faits are correct in arguing that triable facts exist as to whether “bad faith” waste was committed in this case. For purposes of determining liability for waste, it is not dispositive that defendants demolished the building as part of their effort to develop the property and thus (presumably) to add value to it. Indeed, defendants may have had the best of intentions, but that fact alone does not entitle them to escape liability for waste. The pertinent question is whether the demolition of the building, which is what the Faits claim impaired the value of the property as security for the note, was caused by the economic pressures of a market depression. Here, that is for the trier of fact to decide.
For example, it appears that in their zeal to develop the property, defendants demolished the building before they had the financial means to complete the development and/or pay off the promissory note.
Our conclusion is consistent with the two “bad faith” waste cases from the California state courts the parties cite. In Nippon Credit Bank v. 1333 North Cal. Boulevard (2001)
The decision in Hickman v. Mulder (1976)
Some of the defendants argued “that Cornelison is of no comfort to the plaintiffs because it requires that bad faith waste be ‘by owners who ... are reckless, intentional, and at times even malicious despoilers of property.’ They then argue[d] that because the plaintiffs allege[d] only acts of omission that there is nothing to indicate that the plaintiffs could honestly allege any act of misconduct by defendants which would amount to bad faith waste as defined by Cornelison.” (Hickman v. Mulder, supra,
We believe the court in Hickman got it exactly right: “bad faith” waste under Cornelison is any waste that is not the result of the economic pressures of a market depression. Thus, to prevail on a motion for summary adjudication of the “bad faith” waste cause of action here based on the demolition of the building, defendants would have had to produce undisputed evidence that the demolition was the result of such economic pressures. They
III
Intentional Impairment of Security
In addition to arguing they were entitled to judgment on the cause of action for intentional impairment of security because it was “derivative” of the “bad faith” waste cause of action, defendants argued there was “no evidence that [they] acted with the requisite intent to harm.” The cases they cite, however, do not support their implicit assertion that “intent to harm” is a required element of such a cause of action.
In Easton v. Ash (1941)
The same is true of Lavenson v. Standard Soap Co. (1889)
Inasmuch as defendants failed to show that “intent to harm” is a required element of a cause of action for intentional impairment of security, they failed to show they were entitled to summary adjudication of this cause of action based on the lack of evidence that they acted with such intent. It follows that the trial court erred in granting summary adjudication on this cause of action.
IV
Negligent Impairment of Security
In addition to arguing they were entitled to judgment on the cause of action for negligent impairment of security because it was “derivative” of the “bad faith” waste cause of action, defendants argued “the individual (non-borrower) defendants should be dismissed because they [we]re innocent agents of New Faze and [we]re therefore not liable for the mere alleged torts of New Faze.” In support of this argument, defendants cited only Witkin, which states that “[o]rdinarily, an innocent agent is not liable for the principal’s tort, but in some cases of fraud or conversion, where the agent participates in the act, liability may be imposed.” (3 Witkin, Summary of Cal. Law (10th ed. 2005) Agency and Employment, § 201, p. 255.) Defendants did not cite to their separate statement of facts to support their assertion that they were “innocent,” but instead argued only that “[t]here [wa]s no evidence ... of any wrongful conduct by any of the individual defendants as it relates to the demolition of the building and/or any other acts.”
California case law recognizes negligent impairment of security as a viable tort. (See U. S. Financial v. Sullivan (1974)
In light of the principle that a third party generally can be held liable for negligent impairment of security, defendants bore the burden of demonstrating here in support of their motion for summary judgment why the “individual (non-borrower) defendants” could not be held liable for that tort under the facts of this case. Simply claiming they were “innocent” agents and that “[t]here [wa]s no evidence ... of any wrongful conduct by any of the[m] . . .” was not enough to carry that burden. Moreover, there was evidence that each of the three individuals was involved in the demolition of the building in one way or another: Warren decided to demolish the building; Saunders ordered the demolition; and Rivinius signed an agreement to hold the city harmless from liability for the demolition. Defendants failed to show in their motion that, as a matter of law, each of these individuals acted with ordinary care or skill with respect to the security interest in the property when they did these things.
DISPOSITION
The judgment is reversed, and the case is remanded to the trial court with directions to vacate its order granting the motion for summary judgment by New Faze Development, Warren, Saunders, and Rivinius and to enter a new
Duarte, J., and Hoch, J., concurred.
Respondents’ petition for review by the Supreme Court was denied October 17, 2012, S204548.
Notes
Undesignated section references hereafter are to this code.
The cause of action for waste “insofar as it involves protection for the security interest of mortgagees [citation] is limited to protection against harm committed by persons in possession of the property subject to the lien.” (Cornelison v. Kornbluth, supra,
At oral argument, counsel for respondents asserted that Warren was not a proper defendant to the first cause of action for bad faith waste; however, that was not a basis for the motion in the trial court and therefore we do not consider that issue.
The Supreme Court noted that Civil Code section 2929, “enacted in 1872, codified a portion of the common law action for waste, as developed in England and adopted in early California cases.” (Cornelison v. Kornbluth, supra,
In a declaration in support of the motion for summary judgment, Warren asserted that “due to the economic downturn, New Faze was unable to obtain enough financing to perform the construction of the ... [p]roject and it had to be postponed. This led to New Faze being unable to satisfy its obligations under the Promissory Note.”
We note that in their respondents’ brief in this court, defendants have attempted to significantly bolster their argument on the negligent impairment of security cause of action. These new arguments come too late, however, as our task is merely to make our own determination, independent of the trial court, “regarding the construction and effect of the supporting and opposing papers” filed in that court. (Hernandez v. Modesto Portuguese Pentecost Assn., supra,
To the extent the trial court concluded that “regardless of whether defendants were aware of the Deed of Trust’s provisions, plaintiffs ma[d]e no showing that the demolition was a negligent act,” it is sufficient to observe that the Fails had no obligation to make any such showing. Rather, as the moving parties, it was defendants who had to show the demolition was not a negligent act. Even if they had made that showing, it would have only shifted the burden to the Fails to raise a triable issue of fact, but because defendants never carried their burden in the first place, the burden never shifted to the Fails.