Opinion
Defendants 1333 North California Boulevard, a limited partnership (the Partnership), Sunset Ridge, Co., Inc. (Sunset) and Sanford Diller (Diller; the Partnership, Sunset and Diller are referred to collectively as Borrowers) appeal from the order denying their motion for judgment notwithstanding the verdict after a jury found them liable to plaintiff The Nippon Credit Bank, Ltd., Los Angeles Agency (Bank) for bad faith waste. Bank appeals from the order granting a new trial, and Borrowers appeal from a subsequent order involving the order for new trial.
The principal issues are whether a lender can recover for waste when the lender’s security is substantially impaired by the borrower’s bad faith failure to pay real property taxes, and whether that failure in this case supports an award of punitive damages. We answer both of those questions in the affirmative in the published portion of this opinion.
I. Background
Sunset and Diller were the general and managing partners, respectively, of the Partnership, which developed, owned and operated a two-building office complex in Walnut Creek (the Project). Diller owned Sunset and, through *490 Sunset and the DNS Trust (DNS), a family trust, he owned over 80 percent of the Partnership. Diller was the “last word” on all important financial decisions for the Partnership.
The Partnership borrowed $73 million from Bank in 1989 to refinance an initial construction loan of approximately $55 million from another lender and complete construction of the Project. Bank’s loan officer, Greg Gillam, testified that a “large chunk” of the difference between the amounts of the original construction loan and Bank’s loan was earmarked to repay Diller for his investment in the Project. Diller acknowledged that the Partnership received $10 million of the proceeds of Bank’s loan. Cal Prom Inc., a construction company wholly owned by Diller, received $5.1 million of the loan proceeds.
Bank’s loan was structured as a nonrecourse obligation. The Partnership paid interest on the loan at a variable rate tied to the London Inter-Bank Offer Rate (LIBOR), and could elect to “lock in” specified rates for one- to six-month periods. The Partnership was required under the deed of trust securing the loan to timely pay all property taxes for the Project, and Bank had the right under the loan documents to pay the taxes if the Partnership did not. The Partnership was authorized under the deed of trust to collect and retain rents from the Project until written revocation of that right from Bank after an event of default.
The Partnership made all loan and property tax payments until December 1994, when Diller directed that the $358,000 property tax installment due on the 12th of that month not be paid. Before that decision was made, the Partnership had asked Bank for a concession on the rate of interest payable on the loan, and the request had been denied.
Vicki Mullins, who was the chief financial officer of the Project’s property manager, another Diller-owned entity called Maxim Property Management, and another Partnership representative met with Gillam and another Bank representative on November 15, 1994. Mullins presented projections showing that, because of rising interest rates and other factors, the Project would have a cash flow shortfall of over $1 million in 1995. A number of leases were coming due the next year, rental rates were decreasing, and tenants were demanding shorter leases with more tenant improvements. Mullins and Diller testified that there was a severe real estate recession at the time. “[Tjhe state of the economy was an absolute disaster,” Diller said, and “[djevelopers were dropping like flies.” Appraisals submitted by the Partnership to Bank showed that the Project’s value had dropped from $103 *491 million in September of 1989 to $52 million in November-December of 1994.
In his memo of the November 1994 meeting, Gillam said he thought that the Partnership could pay more interest than Mullins projected if it paid all tenant improvement costs, and requested that Diller “use his own cash to cover deficits of the [Pjroject because he has already earned a large amount of money through the [Pjroject.” On December 2, Mullins faxed Gillam a letter stating that the Project would have a negative cash flow “prior to any increase in the LIBOR rate” if it paid Bank’s loan, the property tax installment, the operating expenses, and the tenant improvements due that month. The letter requested a “six-month lock” at the current LIBOR rate. Diller conceded at trial that this request was for a “below market” interest rate—a concession Bank was not legally obligated to make. Gillam called Mullins about five minutes after receiving the fax and rejected the request.
Diller testified that he would have paid the December 1994 tax installment if Bank had “worked with us,” but he was “convinced that they were not dealing fairly . . . .” He said that his decision not to pay the taxes was “very difficult” and taken with “a lot” of thought. Diller admitted that the Project had sufficient cash flow that month to make the payment. There was no dispute that the Partnership had the means to pay the taxes. On the date the $358,000 tax payment was due, the Partnership paid Diller’s entity DNS over $683,000. Diller said that this payment was made to reduce DNS’s investment in the Partnership.
Diller acknowledged at trial that the unpaid taxes would be a charge against the Project, and that Bank would eventually have to pay the taxes or accept a reduced sale price for the Project. He also agreed that the missed $358,000 payment was a substantial sum of money. However, he thought that the amount of the unpaid taxes was insignificant compared to the value of the Project and that the missed payment did not substantially impair Bank’s security. He denied using nonpayment of the taxes to try to gain leverage to force Bank to make concessions. However, Diller did say that he wanted Bank to “share the pain.”
In addition to directing that the December 1994 taxes not be paid, Diller caused the Partnership to default on the January and February 1995 loan payments to Bank. He explained: “The reason it was decided [not to make the January loan payment] was that it was determined at that time [Bank] in negotiations and restructuring this loan was acting in bad faith, [Bank] was not dealing fairly, [Bank] had no intention of restructuring the loan. [¶] What *492 [Bank] intended to do was to bleed the [P]artnership dry, to have the [P]artnership come up with outside funds and to convert this loan from a nonrecourse loan to a recourse loan, and then as soon as [Bank] has bled the [P]artnership dry and got all the money it could out of it through outside sources so that the loan would be kept current, then it would go ahead on its previously-determined course of action and take the property away from the partnership, [¶] And that’s why we felt it was hopeless to allow this bank to extract all of this money from us and also throw us off the property. [¶] They were not negotiating in good faith, although negotiations did continue to try and save the ship after that . . . .”
The Partnership sent Bank a series of proposals in January and February of 1995. On January 5, Mullins faxed Gillam a proposal to purchase the Project at fair market value. On January 6, Mullins faxed Gillam a letter stating: “Rather than a deed in lieu, we would like to propose a cash flow mortgage.” On February 3, Mullins faxed Gillam a term sheet for restructuring Bank’s loan. On February 16, Mullins faxed Gillam a letter asking for “your thoughts on an outright sale for cash.” On February 28, Mullins faxed Gillam a letter proposing a deed in lieu of foreclosure.
No agreement was ever reached, other than a “pre-workout” agreement which stated that no agreement on preliminary issues would be binding in the absence of a global settlement. Gillam testified that Bank agreed at one point to take a deed in lieu of foreclosure, but that arrangement fell through when the Partnership proposed additional conditions. Gillam said that Bank would sometimes make concessions if the customer kept the loan current and generally lived up to its obligations. Here, Gillam said, “there were so many proposals and the borrower was still unwilling to pay any amount of the past due interest, we didn’t know whether he was serious or not.” Gillam said he told Diller that he thought Diller was negotiating in bad faith and trying by his tactics to hold Bank “hostage.” Gillam said Bank eventually came to believe that “they were not serious about any kind of negotiation, that they were just intent on withholding the rent or not paying the interest and on taking as much cash out of [the] building as they could before eventually they would—they were going to lose it.”
On February 14, 1995, Bank sent the Partnership an effective demand to turn over rents from the Project, and the Partnership thereafter complied with the demand. Diller testified that, before receipt of that demand, he regarded the Project’s revenue as “our money.” Diller acknowledged that his family trust, DNS, received a net amount of $1.7 million from the Partnership from December 5, 1994, to April 1, 1995. He said that he still lost $5.2 million in the Project.
*493 The Partnership remitted approximately $300,000 from Project revenues to Bank in March 1995, and approximately $440,000 in April 1995. Gillam testified that when these funds were delivered the outstanding balance of the loan was about $1 million. Bank used these funds in April 1995 to pay the $394,713.56 then due for the delinquent December 1994 property tax installment.
The jury awarded this $394,713.56 sum to Bank as compensatory damages for bad faith waste, based on findings that Borrowers’ failure to pay the December 1994 taxes was not “caused solely or primarily by an economic downturn,” and that the failure to make this payment was intended to harm, and did substantially impair, Bank’s security interest. The jury found by clear and convincing evidence that the failure to pay the taxes was done with malice, and awarded $8,333,333.33 in punitive damages. Borrowers’ motion for judgment notwithstanding the verdict was denied, but their new trial motion was granted unless Bank agreed to remit all but $1.6 million of the punitive damage award. Bank declined the remittitur and a new trial was ordered.
II. Discussion
A. Motion for Summary Disposition of Appeals *
B. Judgment Notwithstanding the Verdict
1. Liability for Bad Faith Waste
Borrowers contend that they were entitled to judgment notwithstanding the verdict on the ground that their failure to pay the property tax installment cannot be deemed to have been an act of bad faith waste. The “bad faith waste” cause of action was established in
Cornelison
v.
Kornbluth
(1975)
The plaintiff in Comelison sold a residence and took back a note and deed of trust. The home was subsequently conveyed by buyers to the defendant *494 and eventually condemned as unfit for human habitation. The plaintiff caused the property to be sold at a trustee’s sale, and bought it for a full credit bid. She then sued the defendant for breach of contract and waste. Summary judgment was entered for the defendant on the contract claim on the ground that he had not assumed the secured debt and thus was not liable for breaching covenants in the deed of trust, and on the waste claim on the ground that plaintiff’s full credit bid precluded any claim that her security had been impaired. The Supreme Court affirmed, but concluded that the plaintiff might have had a claim for bad faith waste had she not made a full credit bid for the property.
The court noted that the common law action for waste was partially codified in Civil Code section 2929, which provides that “[n]o person whose interest is subject to the lien of a mortgage may do any act which will substantially impair the mortgagee’s security.”
(Cornelison
v.
Kornbluth, supra,
The
Osuna
case held that an action for waste could be predicated on the failure of a trustor of a deed of trust or a mortgagor to pay real property taxes, finding that this conclusion was supported by “a fair reading of the holding in
[Cornelison],
in relation to the facts alleged.”
(Osuna v. Albertson, supra,
Nor are we persuaded that
Osuna
was wrongly decided.
Osuna
acknowledged that the court in
Krone
v.
Goff
(1975)
“Relatively few courts have had occasion to consider whether waste includes nonpayment of real estate taxes by the mortgagor,” but “[t]his broad conception of waste appears to be part of an emerging legal trend with roots dating to the 19th Century.”
(N. American Sec. Life
v.
Harris Trust & Sav. Bank
(N.D.Ill. 1994)
*496
The commentaries persuasively endorse this liability. The Restatement Third of Property, Mortgages, section 4.6, subdivision (a), page 262, lists as a form of waste, along with physical alteration or neglect of mortgaged property, a mortgagor’s failure to pay property taxes secured by a lien with priority over the mortgage. (See also
id.,
§ 4.6, subd. (b)(3), p. 262 [damages may be recovered to the extent of the security’s impairment].) Waste encompasses default on senior tax liens because the mortgagee “has a reasonable and legitimate expectation that the mortgagor will not place a governmental entity in a position to destroy the mortgage.”
(Id.,
§ 4.6, com. b, p. 265.) “While there may be disagreement as to the scope of the borrower’s obligation to maintain the property physically, particularly if the documents are imprecise, there can be little question that the borrower, as owner, is expected to pay all real estate taxes.” (Stein,
supra,
55 Wash. & Lee L.Rev. at p. 1275.) As Diller conceded at trial, amounts secured by a tax lien will either have to be paid by the lender (Rest.3d Property, Mortgages, § 2.2, com. a, pp. 70-71 [authorizing advances for this purpose]) or they will reduce the price paid for the property at foreclosure (Stein, at p. 1269, fn. 169). Unpaid real property taxes thus reduce the chances of full recovery of the debt
(id.
at p. 1270, fn. 171), and “from the secured creditor’s vantage point. . . may be as costly as a leaky roof’
(Travelers Ins. Co. v. 633 Third Associates, supra,
The Stein article discusses at length why borrowers should be subject to personal liability for failing to pay property taxes and other forms of waste even if their loans are nonrecourse. On the one hand, “the tax payment is just another check that the borrower must write, resembling the obligation to pay principal and interest for which the nonrecourse borrower is not personally liable.” (Stein, supra, 55 Wash. & Lee L.Rev. at p. 1277, fn. 196.) Moreover, the lender’s failure to require that the borrower expressly assume personal responsibility for the obligation to pay taxes could be interpreted to mean that no such liability was intended. (Id. at p. 1277.) On the other hand, nonpayment of taxes may be just as damaging to the security as intentional destruction of the property, an act which the lender could not have intended to permit. (See id. at pp. 1275, fn. 192 & 1277, fn. 196.) Moreover, “nonrecourse borrowers have a special responsibility to protect an asset of theirs that they have pledged to another as the sole security for repayment of a debt.” (Id. at p. 1245.) Thus, there are circumstances where a nonrecourse borrower should be liable for waste, including failure to pay real property taxes. (Id. at p. 1272.)
Such liability redresses the kind of harm the tort of waste was originally designed to remedy. (See
Travelers Ins. Co. v. 633 Third Associates, supra,
*497
Such “milking” of the security has been recognized as a form of bad faith waste within the meaning of
Cornelison
(see
In re Mills
(9th Cir. 1988)
This case is distinguishable, however, from
In re Mills, supra,
The ultimate test proposed in the Stein article for waste liability in connection with a nonrecourse loan is whether the lender has “suffered losses caused by actions the borrower would not have taken had it been fully liable.” (Stein, supra, 55 Wash. & Lee L.Rev. at p. 1244.) Assuming that this test correctly reflects the “bad faith” standard for liability under Cornelison, it was satisfied here. Borrowers cannot plausibly claim that the Partnership would not have paid the property taxes even if Diller and his partners had been personally liable on Bank’s loan. Taxes on the Project were paid for years when it appeared that the Partnership had something of value to lose; only when the Project was threatened was DNS paid in lieu of the tax authorities. (Stein, supra, 55 Wash. & Lee L.Rev. at p. 1258, fn. 136 [noting that the nonrecourse borrower is likely to perform like one who is personally liable as long as the project is successful].) Diller’s decision not to pay the taxes was apparently made “only because [he] believed that [he] would not have to pay for [its] consequences.” (Id. at p. 1283.)
Borrowers argue that bad faith waste liability under
Osuna
for failing to pay real property taxes improperly “converts” conduct which is only a breach of contract into a tort. (See
Applied Equipment Corp. v. Litton Saudi Arabia Ltd.
(1994)
This line of argument is unconvincing. Tax policy and tort law are separate fields. That the state has chosen not to impose personal liability on property owners for real property taxes says nothing about owners’ liability to other persons for the tort of waste. The tort codified in Civil Code section 2929
(Cornelison v. Kornbluth, supra,
Borrowers contend that Osuna is distinguishable because the nonpayment of taxes in that case resulted in tax sales of the properties securing the debt. However, total loss of the lender’s security is not required; mere impairment of the security constitutes waste if the impairment is “substantial.” (Civ. Code, § 2929.)
Borrowers argue that the impairment of security in this case was insubstantial as a matter of law. On the one hand, as Diller admitted, the unpaid $358,000 tax installment was a “substantial” sum of money. On the other hand, as Diller also noted at trial, the unpaid taxes were a small fraction of the value of Bank’s security. In these circumstances, where reasonable minds might differ as to the substantiality of the impairment, the question was properly left to the trier of fact.
Borrowers contend finally that, because Bank added the amount it advanced to pay the real property taxes to the indebtedness secured by the deed of trust and conducted a trustee’s sale of the property to satisfy that debt, liability for waste is precluded in this case by the one form of action (Code Civ. Proc., § 726) and antideficiency (id., § 580d) rules. Borrowers submit that Bank effectively elected its remedy by pursuing its contract rights to recover the tax advance, and thus could not pursue its tort claim for nonpayment of the taxes.
This argument was raised for the first time in Borrowers’ motion for judgment notwithstanding the verdict; no evidence concerning the foreclosure was presented at trial. In connection with the posttrial motion, Borrowers requested judicial notice of: allegations in Bank’s April 1995 verified complaint for judicial foreclosure listing the $394,713.56 tax advance as part of the $2,543,797.37 amount then delinquent on the loan; Bank’s April 1995 notice of default under the deed of trust listing $2,543,328.37 as the amount to reinstate as of April 20, 1995; and Bank’s January 1996 notice of sale under the deed of trust. Borrowers renew their request for judicial notice on appeal, and also refer to Bank’s accounting in its complaint herein of amounts due under the loan after the foreclosure, which listed the tax advance as part of the unpaid balance of $28,551,390.59 remaining after *500 application of the $52,000,000 credit bid entered by Bank’s subsidiary to purchase the Project at the trustee’s sale.
A legal argument may be raised for the first time in a new trial motion or on appeal only “so long as the new theory presents a question of law to be applied to undisputed facts in the record.”
(Hoffman-Haag
v.
Transamerica Ins. Co.
(1991)
This belated argument is contrary to the
Cornelison
case in any event.
Comelison
provides for a tort action for bad faith waste following a nonjudicial foreclosure unless the foreclosure results, by full credit bid or otherwise, in full satisfaction of the secured debt. Where as here the creditor “bids less than the full amount of the obligation and thereby acquires the property valued at less than the full amount, his security has been impaired and he may recover damages for waste in an amount not exceeding the difference between the amount of his bid and the full amount of the outstanding indebtedness immediately prior to the foreclosure sale.”
(Cornelison v. Ko-rnbluth, supra,
2. Jury Instructions
Borrowers contend that the court erred in its instructions on the issue of substantial impairment of Bank’s security by defining “substantial” as “more than a slight, trivial, negligible, or theoretical factor.” The court borrowed this language from the comment to the standard instruction on the substantial factor test in negligence law. (See com. to BAJI No. 3.76 (8th ed. 1994) p. 99.) Borrowers submit that the court should instead have defined “substantial” as “[o]f real worth and importance; of considerable value; . . . [something worthwhile as distinguished from something without value or merely nominal.” (Black’s Law Dict. (Abridged 5th ed. 1983) p. 744, col. 2.)
As Bank observes, a requirement that the security impairment be “considerable” may put a lender in an untenable position where the impairment
*501
stems from a failure to pay real property taxes. Given the duty to mitigate damages
(Valle De Oro Bank v. Gamboa
(1994)
We note further that even if Borrowers’ definition would have been preferable, there is no reasonable probability that its use would have produced a different verdict.
(Soule
v.
General Motors Corp.
(1994)
3. Liability for Punitive Damages
Borrowers assert that there is no precedent for an award of punitive damages for waste, and contend that there was no substantial evidence to support the jury’s finding that the waste in this instance was malicious. However, entitlement to punitive damages is generally an issue for the trier of fact (Civ. Code, § 3294, subd. (a);
Beckett v. City of Paris Dry Goods Co.
(1939)
Borrowers argue that they cannot be held liable for punitive damages because, in failing to pay the taxes, they did no more than exercise their contractual right to retain the rents and profits from the Project. As has been indicated, Bank did not effectively revoke that right until two months after the taxes were due. However, as has also been explained, Borrowers had a legal duty under tort law, as well as a contractual obligation, to pay the taxes. They indisputably breached that legal duty and contractual obligation when Diller decided that the taxes would not be paid. Borrowers’ right to retain funds from the Project rather than turning that money over to Bank did not give them a license to commit waste.
Borrowers argue that “[t]o look back at [their] decision not to pay the December 1994 installment of property taxes, and say that it was malicious, and intended to harm [Bank] rather than to further the interests of [Borrowers], is not a permissible inference from the evidence.” There are multiple problems with this argument. First, it is not apparent why the aim of Borrowers’ conduct had to be either furthering their own interest or harming *502 Bank. Those aims are not mutually exclusive. Second, no authority supports the suggestion that a party can escape liability for malicious conduct merely because it hopes to benefit from its actions. Third, Diller admitted that the taxes would have been paid if Bank had granted the interest rate concession the Partnership sought. The jury could infer from this testimony that Borrowers withheld the tax payment to “punish” Bank for failing to accede to their demand, and that inference was sufficient to support the finding of malice. (Civ. Code, § 3294, subd. (c)(1) [malice includes conduct which is intended to injure the defendant].) 1
Borrowers maintain that “the mere breach of a contractual obligation, even if committed in order to gain an advantage in negotiations with the other party to the contract,” cannot support a finding of malice. They derive this proposition from
Beck
v.
State Farm Mut. Auto. Ins. Co.
(1976)
Third, the evidence does not necessarily justify Borrowers’ assertion that they intended to try to reach some agreement with Bank after they defaulted on the tax payment. While conflicting inferences could be drawn from the evidence, the jury could have determined that Borrowers’ sole aim in defaulting on the taxes and thereafter was to extract as much money from the Project as possible before walking away from it. The jury could have accepted Bank’s argument that the Partnership’s flurry of proposals after the tax default was meant only to delay Bank’s demand for the Project’s revenues. We observe that Diller had already determined by the time he decided not to pay the taxes that Bank had no intention of making any fair *503 accommodation—that was his professed reason for withholding the tax payment.
Exposure to punitive damages may be as much a deterrent to bad faith waste as to any other tort. (See Stein, supra, 55 Wash. & Lee L.Rev. at p. 1245, fn. 97.) It was up to a jury to decide whether those damages were justified in this case.
C. Motion for New Trial *
1., 2*
III. Disposition
The order denying the motion for judgment notwithstanding the verdict, and the order for a new trial on the amount of punitive damages only, are affirmed. The parties shall bear their own costs on appeal.
Reardon, Acting P. J., and Sepulveda, L, concurred.
The petition of defendants and appellants for review by the Supreme Court was denied May 16, 2001.
Notes
Retired Presiding Justice of the Court of Appeal, First Appellate District, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.
See footnote, ante, page 486.
Malice also includes despicable conduct taken with a willful and conscious disregard of the rights of others (Civ. Code, § 3294, subd. (c)(1)), and Bank cites authority on this “conscious disregard” form of malice. However, since the jury here was not instructed on this form of malice, it will not be considered.
See footnote, ante, page 486.