Opinion
This сase involves the so-called "dragnet" or "other indebtedness” clause sometimes used in deeds of trust and other security agreements. Plaintiffs (Mr. and Mrs. Wong) appeal from a judgment after the trial court found defendants not liable for damages for their alleged wrongful refusal to accept plaintiffs’ tender of an amount sufficient to redeem four out of eight concurrently executed deeds of trust.
IA 1963, Mrs. Margaret Roerden constructed eight four-plex apartment buildings оn land she owned in Rancho Cordova, a suburb of Sacramento. Financing was provided by Beneficial Savings and Loan Association which later merged into Fidelity Savings and Loan Association (both hereinafter referred to as “defendant”). For the purpose of taking advantage of the 80 percent loan limitation of Financial Code section 7153, rather than to be restricted to the 70 percent limitation of section 7152, 1 the property was subdivided into eight parcels.
On or about November 17, 1964, Mrs. Roerden sold the property to a partnership consisting of plaintiff Gene Wong, George Takehara and William Ausseresses (and their respective spouses) for $266,734.44. The partners assumеd the eight loans and deeds of trust in the then aggregate sum of $221,356.32, as well as a Wells Fargo Bank furniture loan of $18,056.56.
Mr. Ausseresses negotiated the purchase and loan assumption for the partners. Plaintiffs did not directly participate. Mr. Ausseresses also handled payments on the property for the partners after the purchase. Financial problems were encountered, and in June 1965, the other partners transferred their interests to Mr. and Mrs. Wong.
On July 1, 1965, plaintiffs received eight notices of default and elections to sell under the deeds of trust. At approximately the same time, defendant took possession of the apartments and began collecting the rents under the assignment of rents provision of the deeds of trust. Discussions about curing the default were unproductive; and on October 11, 1965, defendant published seven notices of trustee’s sale set for November 16, 1965, and an eighth notice of trustee’s sale (for parcel No. 8) set for Novembеr 29, 1965. No tender of the arrearages was made before the expiration of the 90 days provided in Civil Code section
One of the attorneys for defendant who was present at the meeting at which the tender took place testified as follows: “As I recall, Mr. Cofod, Mr. Angelí or myself, stated that we weren’t in a position to accept reinstatement at that time, but we had no authority from our client to do so, that the three months statutory period had expired and that he had no right to reinstate as a matter of law, and there was some discussion also about the three front lots and the fact that they contained or two of them contained the parking lots that were used by all the lots in the complex and that one of the front lots also contained a swimming pool, which was used by all the tenants in all eight buildings and that we weren’t authorized to accept a reinstatement of part of them or less than'all eight lots.”
On November 15, 1965, plaintiffs filed suit to enjoin the sale of the three parcels for which they had tendered payment, and obtained an ex parte temporary restraining order. The trustee’s sale of the other four parcels was not held and defendant stipulated to an indefinite continuation of the restraining order. On November 23, 1965, plaintiffs tendered an additional $30,000 certified check to redeem parcel No. 8 (the last front parcel), which tendered was refused. The noticed sale of parcel No. 8 also did not take place.
During the course of subsequent negotiations, plaintiffs rejected an offer of defendant to consolidate the eight loans and deeds of trust into a single loan and deed of trust upon payment of $13,598.29; they also rejected an offer by defendant to accept plaintiffs’ tender for the four front parcels upon condition that plaintiffs give defendant an easement for use of the parking lot and swimming pool by tenants of the four rear parcels.
Meanwhile, plaintiffs defaulted on the furniture loan with Wells Fargo, and .Wells Fargo obtained a judgment against them.
On May 22, 1969, the injunction suit was dismissed without prejudice; the present suit was filed on October 16, 1967 (or Dec. 12, 1967,
The case came to trial on February 10, 1971. Inter alia, plaintiffs testified that when they assumed the loans, they were unaware of the dragnet clause in the deeds of trust. The Sacramento County Planning Director testified that the rear lots, if treated separately, would violate zoning ordinances requiring minimum lot width, street frontage, and off-street parking facilities.
On March 31, 1971, the court filed its memorandum of intended decision, ruling that plaintiffs had no right to redeem the four parcels because of the dragnet clause, that plaintiffs had no right to notice of the trustee’s sales, and that plaintiffs had failed to prove any damages from the alleged conversion. But the court did rule that plaintiffs had a right to an accounting. The court appointed a Sacramento attorney, Eugene Anderson, as a special referee under Code of Civil Procedure section 639, to make proposed findings regarding the accounting.
On February 22, 1974, plaintiffs settled the accounting cause of action for $17,280. Judgment for defendant was entered on April 10, 1974, as to the remaining causes of action.
I
Plaintiffs’ major contention on appeal is that the dragnet clause in the deeds of trust should not have been enforced against them so as to prevent the division of the apartment complex. The clause in question states that the deed of trust is:
The literal effect of this clause is to make each deed of trust security for all eight loans (and conversely, to secure each loan with all- eight deeds of trust). Clauses such as this are often termed “dragnet” or “anaconda,” “as by their broad and general terms. they enwrap the. unsuspecting debtor in the folds of indebtedness embraced and secured in the mortgage
which he did not contemplate . .
. (Italics added.)
(Berger
v.
Fuller
(1929)
California Real Estate Secured Transactions (Cont. Ed. Bar 1970) page 135, in a chapter by Roger H. Bernhardt, contains a comprehensive discussion of future advance and dragnet clauses at sections 4.18-4.30. We quote portions thereof: “The literal meaning of this clause extends the deed of trust to cover every past and present obligation between the debtor and the creditor. The clause purports to say that a bank holding a deed of trust on a borrower’s property to secure his real estatе loan from it may turn to that deed of trust any time he falls behind on a personal loan from it, misses a payment on his automobile loan from it, or overdraws his checking account at the bank. ... It also appears to mean that any other creditor of the debtor can sell his obligation to the bank, which can then tack that debt to its deed of trust.... (At § 4.18, p. 152.)
“[The result in these cases] was based far more on the perceived inequity of permitting a creditor to subject his debtor to such claims than on any inadequacies in the fine print.
“Even when a secondary obligation is one that was originally created solely between the debtor and his creditor, it may not necessarily come under the dragnet clause. In Moran v Gardemeyer (1889) 82 C 102,
“In many statеs a rule exists that other obligations of a debtor to his creditor that either already exist or are created simultaneously with a primary debt and the security instrument are not secured unless they are explicitly described in the security instrument. See, e.g., National Bank v Blankenship (1959)
Professor Bernhardt suggests that “the burden should be on the proponent to show that both parties intended the other loan to be included.”
(Ibid.)
This we deem to be the law in California. It is supported by the two most recent cases dealing with dragnet clauses,
Gates
v.
Crocker-Anglo Nat. Bk.
(1968)
Lomanto
also involved two signers of the original note and deed of trust, this time husband and wife. Mr. and Mrs. Lomanto signed an $11,600 note on August 26, 1965, secured by a deed of trust acknowledged August 31, 1965, which coatained a dragnet clause. A year and a half later, Mr. Lomanto alone obtained two additional unsecured loans in the amounts of $11,500 and $5,500 respectively. Upon default on all three loans in 1970, the bank asserted that all three were secured by the encumbered property under the dragnet clause. The Lomantes sued, and the bank’s demurrer was sustained without leave to amend. The Court of Appeal stated in regard to Mr. Lomanto, despite his allegation of lack of knowledge, “He would find it difficult to explain why he would think Bank would lend him $11,500 on his unsecured note of hand in 1967 and an additional $5,500 in the same manner, when in 1965 Bank rеquired security for a loan of $11,500, which was still unpaid. If he alone were involved, we should have no hesitation in holding there was no abuse of discretion in sustaining the demurrer without leave to amend.” (
In determining the intention, or rather the reasonable intention of the parties, at least two significant considerations are apparent in the cases in this and other jurisdictions; (1) the relationship of the loans, and (2) the reliance on the security. We quote again from the excellent discussion of Professor Bernhardt:
“(1) [4.23] Relationship of Loans
“The two Morаn cases discussed [above] illustrate a pair of considerations that have been dignified in other states into important determinants of whether a later loan by the same creditor will be protected by the original security. In Moran v Gardemeyer (1889) 82 C 96,
“(2) [4.24] Reliance on the Security
“Moran v Gardemeyer (1889) 82 C 96,
We now apply the foregoing principles to this case. First, debtors testified without contradiction that they were unaware of the dragnet provision. In fact, they did not sign the original notes and deeds of trust which they later assumed. However, they physically walked through the complex before they purchased it; they cannot have been misled as to its “singleness” which from the record before us was unmistakable. In fact, they themselves purchased it as a single unit in one transaction.
It may be technically argued that the second of the two aforecited considerations bearing on the question of intent militates against upholding the dragnet clause here, because there was nо expressed reliance on any other security; each note says that it is secured by “a” deed of trust, not eight deeds of trust. However the fact that in actuality there was a single transaction, that it was split into eight units in order to obtain a more favorable loan, and that the back lots would lose their
Furthеrmore, the first consideration, the relationship among the loans, undeniably indicates, and indeed compels, a contrary result. Despite the separation of the property into eight parcels for financing purposes, we again note that the eight units comprising the apartment complex constituted an indivisible whole. The individual parcels are not separable either for zoning purposes or in terms of use or market value. Zoning laws would have prohibited construction of some, of the units if attempted to be erected alone; and the utility as well as the market value of each unit depends upon access to the common facilities (the swimming pool and parking lot) and also upon the ability to control the rest of the complex (to keep congenial tenants, for proper maintenance, etc.).
Finally, since relief from the effect of dragnet clauses involves princiрles of equity, we note the lack of bona tides on the part of plaintiffs. They were offered the four front lots if they would give an easement to the parking lot and swimming pool for the benefit of the rear lots. Knowing the devastating effect the absence of such an easement would have upon the rear lots, they refused. Their ignoble scheme made them unworthy of equity’s favor.
Under these circumstances, we hold that the dragnet clause was properly held еnforceable, and plaintiffs were not entitled to redeem any one parcel without redeeming them all.
II
Plaintiffs also contend that the court erred in failing to award damages for defendant’s alleged conversion of the furniture. In its notice of intended decision, the court refused to award damages because plaintiffs failed to establish them.
Plaintiffs suggest in their brief that the value of the furniture could be determined from (1) the obligation owed to the bank (2) depreciation guidelines published by the Internal Revenue Service or (3) the amount of the money judgment on the furniture contract. All of the suggested measures, however, relate to the obligation, and not the furniture, and hence are irrelevant. Plaintiffs point to nothing in the record which shows the value of the furniture itself.
The judgment is affirmed.
Puglia, P. J., and Friedman, J., concurred.
Notes
Although they have since been amended, in 1963 the Finanсial Code sections read as follows;
Ҥ7152.
“An association may make amortized loans upon the security of improved real
Ҥ 7153.
. “An association may make amortized loans upon the security of residential real property, the principal improvements on which consist of a dwelling or dwellings for not more than four families ... in an amount not in excess of 80 percent of the appraised value of such real property if the appraised value does not exceed forty thousand dollars ($40,000), or not in excess of 80 percent of the first forty thousand dollars ($40,000) of such appraised value if it exceeds forty thousand dollars ($40,000) plus 70 percent of the remainder of such appraised value."
We cannot readily confirm the correct date, because the clerk’s transcript begins with the third amended complaint filed April 23, 1970.