Gaffney v. Downey Savings and Loan Association

Donna Gaffney and Michael Gaffney (plaintiffs) took out a loan from Downey Savings and Loan Association (Downey) (defendant) in exchange for a promissory note secured by a deed of trust on real property owned by the Gaffneys. The note called for the Gaffneys to tender monthly installments to Downey that had to arrive by the sixteenth day of each month. The Gaffneys fell two months behind on their payments while they attempted to borrow more money from a different lender. By the third month, the Gaffneys secured the second loan. On the sixteenth day of the third month, two checks were delivered to Downey. First was a check from the new lender for the past-due amount plus late fees. Second was a check from the Gaffneys for that month’s installment. Neither check indicated that it was merely one of two components of the total amount due to Downey. Downey’s payment processors flagged each check individually as insufficient to cover the full amount the Gaffneys owed, and Downey returned the checks uncashed with notices of the payment errors. The notices informed the Gaffneys that Downey planned to foreclose. The Gaffneys engaged their lawyer, Jerry Sandefur, who opened a bank account into which he deposited an amount equal to the sum of the two checks Downey rejected. Sandefur represented to Downey that the account was a trust account for Downey’s benefit, although Sandefur did not structure the account to grant Downey access to the funds. Sandefur also informed Downey that the Gaffneys would be suing Downey to have the promissory note and deed of trust extinguished on account of Downey’s refusal to accept the checks. After the Gaffneys filed suit, Downey offered to waive any late fees and cease foreclosure proceedings if the Gaffneys resubmitted the full amounts of past-due installments. Sandefur refused the offer. To prepare for foreclosure, Downey sent appraisers to the property, which the Gaffneys claimed caused them emotional distress. The trial court issued several rulings favorable to the Gaffneys. The trial court extinguished the note and deed of trust, awarded compensatory damages for emotional distress, and awarded punitive damages. Downey appealed.