FPCI RE-HAB 01 v. E & G Investments, Ltd.

207 Cal. App. 3d 1018 (1989)

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FPCI RE-HAB 01 v. E & G Investments, Ltd.

California Court of Appeal
207 Cal. App. 3d 1018 (1989)

Facts

E & G Investments, Ltd. (E&G) (defendant) sold a piece of real property to Charles and Carolyn Schultz in exchange for a promissory note secured by the property. The Schultzes then sold the property to Project 80’s Development Corporation (Project 80). The sale to Project 80 was financed in part by the creation of an all-inclusive trust deed (AITD), with E&G as the beneficiary. As part of the same financing structure, Project 80 executed a deed of trust in favor of FPCI RE-HAB 01 (REHAB) (plaintiff) in exchange for an advance of funds to purchase the property. Under the resulting AITD, E&G would continue to make payments attributable to the encumbrances on the property senior to E&G’s lien and receive payments from Project 80 attributable to REHAB’s lien, which was junior to E&G’s lien. Eventually, Project 80 stopped making payments on REHAB’s note, and the AITD went into default. E&G continued to make payments to the senior lienholders. E&G directed the trustee of the AITD to initiate a nonjudicial foreclosure sale of the property. E&G, pursuant to the terms of the AITD, posted notice that any foreclosure purchaser would need to pay at least enough cash to cover all encumbrances on the property, including the senior encumbrances. E&G, as the only bidder, purchased the property in the foreclosure for a purchase price low enough to render REHAB’s security interest worthless. Shortly thereafter, E&G sold the property to a third party at a purchase price that, had it been paid at the foreclosure, would have covered REHAB’s interest. REHAB sued, arguing that E&G’s notice requiring potential buyers to put forward cash to cover all encumbrances, even those not in default, allowed E&G to purchase the property for below market value and unjustly extinguish REHAB’s security interest. The trial court ruled in favor of E&G, and REHAB appealed.

Rule of Law

Issue

Holding and Reasoning (Stone, J.)

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