by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
randolphp@umkc.edu

MORTGAGES; DISCHARGE; UNDERPAYMENT: Notwithstanding state law bar on deficiency judgments and "one action" rule; mortgagee who provides mortgagor with erroneous payoff amount still has an unsecured claim in restitution for the balance of the mortgage debt.

Girardo v. Antonioli, 56 Cal. Rptr. 2d 687 (Cal. 1996)

This complex case probably cost more to litigate than the $150,000 claim that was involved. Although the facts probably are not relevant to the legal issue, veteran dirt lawyers will enjoy the story. It began when plaintiff acquired property, giving a first lien purchase money deed of trust. Thereafter, plaintiff sold the property to Gay, taking back a substantial amount of the purchase price in the form of a note secured by a second lien deed of trust "wrapped around' the original deed of trust. Gay "flipped" the property to defendant, selling subject to the wraparound financing and taking cash and a third lien deed of trust.

Defendant began making payments directly to plaintiff on the wraparound second lien deed of trust note. The parties got into a dispute about payment amounts, and the dispute ultimately was settled with defendant paying some cash to plaintiff and the parties substituting two new secured notes for the wraparound obligation. (There is no mention of what happened to the third lien deed of trust.) Plaintiff also received attorney's fees and a $100,000 "fee," which was added to the principal of the larger of the two secured notes.

Two years later Defendant, who already had paid off the smaller of the two notes, asked plaintiff for a payoff escrow on the larger one. Plaintiff complied and sent a payoff demand reconveyance of the deed of trust to an escrow account through which Defendant paid the requested amount and received athe reconveyance.

Soon thereafter, Plaintiff realized that he had made an error of about $150,000 in computation of the amount owed, and demanded that Defendant pay him the difference. Defendant responded with a lawsuit for usury, pointing out that the $100,000 "fee" kicked the return on the larger note over the usury limit. (California's arcane Constitutional usury laws hardly apply to anyone, but apparently Plaintiff did not fit within any of California Supreme Court, which held, in an earlier opinion, that there was no usury here because the fee was part of a debt restructuring of a purchase money sale and, under the "time price doctrine," the debt was part of the price and not a charge for extension of credit.

On remand, the Court of Appeals then had to deal with the issue of whether Plaintiff could collect the "payoff shortfall" as a deficiency claim. The Court of Appeals held that CCP Sec. 726 - the "one form of action" rule - did not bar Plaintiff because the original payoff had not been an "action." [The Supreme Court here really doesn't uphold that conclusion but doesn't reject it either - simply talking around it.] The Court of Appeals then held that Plaintiff nevertheless was barred from recovery because the original note was a purchase money deed of trust, and under California law there can be no recovery of a deficiency on a purchase money deed of trust. For the same reason that usury laws didn't apply, the anti-deficiency laws did.

The Court of Appeals then applied specific statutory language in CC 2943 to conclude that if antideficiency laws barred Plaintiff's recovery of a deficiency generally, it barred Plaintiff from recovery here. This California statute, which deals specifically with incorrect payoff demands, was enacted after the payoff and reconveyance in this case. California courts have been somewhat haphazard in their addressing retroactivity concerns, frequently finding statutes retroactive where other courts might not, and the Court of Appeals felt free to apply the statute here. Thus, the Court of Appeals concluded, the Plaintiff had no right to recover.

In a second appeal in the case, the California Supreme Court first noted that the statute has since been amended and would have permitted recovery of the shortfall on an unsecured basis, albeit not as a "deficiency." But it then concluded that the statute had no application because it should not be retroactively applied. Then, as a matter of common law interpretation, the court concluded that the Plaintiff in fact could recover the shortfall anyway as an "unjust enrichment" of the Defendant.

The court proclaims a general "unjust enrichment" theory in California that says, in a nutshell, all unjust enrichment will be made right, whatever it takes. Enrichment is unjust when the court says it is. Although Plaintiff here could not show that Defendant knew of the error at the time the discharge occurred, Defendant also made no showing that Defendant relied upon the erroneous figure to its detriment. The court does state as a control that the mistake leading to unjust enrichment in cases such as this must be a mistake of fact, and not a mistake of law.

Defendant argued nevertheless that the policy of the purchase money anti-deficiency statute "altered the equities" in this case. The court held that this was true to a degree. If the value of the property at the time of the original discharge had not exceeded the actual amount of the debt, the Plaintiff was entitled only to the amount of the debt that was equal to the property value, and consequently Defendant here would not have been unjustly enriched for amounts in excess of the property value. But the debt here did not exceed the property value.

Plaintiff gets a judgment for the $150,000. Plaintiff will also get reasonable attorney's fees. Nevertheless, this is a case that should have been settled long ago.

Comment: Although the case is laden with special "Californese" real estate principles, such as purchase money anti-deficiency, etc., readers should not lose sight of the extremely broad holding on restitution. Plaintiff got restitution of unjust enrichment even when he didn't have a specific count invoking the restitution remedy, but merely pleaded facts showing an unjust enrichment. Further, the court's very, very broad definition of when unjust enrichment arises appears as a panacea for all hopeless cases. When you just feel that your client came out with an unfair result, and you can't say way, you have a friend in the California Supreme Court.

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