Daily Development for
Friday, May 10, 1996

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

Note that there are two reports on this cute little California case. Both have some drafting lessons.

ATTORNEY'S FEES; DECLARATORY RELIEF: Where mortgage note provides for payment of attorney's fees "if action be instituted on this note," mortgagee is not entitled to fees when it brings declaratory relief and quiet title action against junior mortgagee to identify and set aside forged reconveyance of mortgagee's mortgage. Curry v. Moody, 48 Cal. Rptr. 627 (Cal. App. 1995).

Apparently the first mortgage was a seller's purchase money mortgage. Under California law, there is no deficiency available on such a debt, so the validity of the mortgage was crucial to the debt. The note was payable, as to both principal and interest, when the buyer sold the property. Buyer instead refinanced the property, and in the course of refinancing a forged release of the seller's mortgage was filed. Later, buyers defaulted on the refinancing mortgage and the refinancing mortgagee foreclosed and bought the property, the seller/first mortgagee brought suit for declaratory relief, quiet title and for damages.

Since, apparently, the foreclosure of the refinancing note would have been a "sale" of the property under the first mortgage, one would assume that the damages would be based upon the note. But the court indicates that the pleadings and the court record indicate that the mortgagee's claim was a suit for damages "for the forged reconveyance," rather than on the note itself. The court doesn't explain whether there was any good reason that suit could not have been brought on the note. Perhaps, through equity or statute, the mortgagee's claim on the note had been cut off.

For purposes of the issues considered here, the parties stipulated that the reconveyance was forged. The real argument was about compounding of interest on the note, an issue discussed elsewhere in this Report. But the court ultimately was called upon to construe the attorney's fee provision in the note.

First, the refinancing mortgagee/owner argued that the attorney's fee provision did not apply to it because it was phrased in the first person ("I agree to pay . . . ") and applied only to the original borrower. Needless, to say, the appeals court gave short shrift to this argument (although it may have confused the trial court.) Provisions of a note phrased in the first person "run" to subsequent parties obligated to pay the note, such as parties who own land subject to a mortgage securing the note.

Then the refinancing mortgagee/owner argued that the suit in question was not a suit "on the note," and therefore the fees provision did not apply by its own terms. The court agreed with this argument.

Comment 1: It is curious why the parties did not just make a claim on the note. It would have been useful if the court had informed us, assuming that it knew.

Comment 2: To the editor, it would seem that a suit to protect the validity of a non-recourse mortgage against a subsequent purchaser of security is a "suit on the note" within the intendment of the parties. If the party contesting the validity of the mortgage were to prevail, there would be no debt.

Comment 3: Since what seemed obvious to the editor was not so obvious to the "real world" court, we have a drafting lesson here. If you intend that actions to protect your security ought to result in the mortgagor paying attorney's fees if it loses, then you might want to look again at your attorney's fee language.

MORTGAGES; INTEREST; COMPOUNDING: A note payable, both as to principal and interest "upon sale of the property," with an interest provision stating "[s]hould interest not be so paid it shall thereafter bear like interest as the principal" does not state a claim for compound interest prior to the date of sale of the property. Curry v. Moody, 48 Cal. Rptr. 627 (Cal. App. 1995)

The court invoked the "face of the instrument" rule to bar evidence of the contrary intent of the parties.

Comment: The case likely demonstrates the danger of overrusing form documents. The "compounding" language probably derived from a note that provided for level debt service payments of principal and interest. The drafter either overlooked or failed to understand how this language was not serviceable under the special repayment circumstances that the parties used.

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