Protective Equity Trust #83 v. Bybee

Protective Equity Trust #83, Ltd. (seller) (plaintiff) sold a piece of real property to Adams Development Company (buyer). The majority of the purchase price was covered by a purchase-money trust deed. Moreover, the escrow instructions for the transaction contained a subordination clause whereby the seller agreed to subordinate its lien up to $95,000 upon the buyer obtaining a new construction loan. Basil Bybee (defendant) agreed to loan the buyer $95,000. The buyer and the seller executed a subordination agreement identifying Bybee as the beneficiary. The seller’s agent, before executing the subordination agreement, struck a term providing that the buyer could use the proceeds of the subordinating loan for purposes other than improvement of the property. The executed agreement also contained a term, which was left intact, providing that Bybee had no obligation to monitor the buyer’s use of the loan proceeds. The buyer used approximately $40,000 of the $95,000 loan from Bybee to cover the buyer’s down payment on the property. The buyer then defaulted on its debts both to the seller and to Bybee. The seller held a foreclosure sale at which it purchased the property. The seller then brought an action to quiet its title, seeking a ruling that Bybee’s interest in the property was subordinate to the seller’s. Bybee argued that the subordination agreement was enforceable against the seller. The trial court ruled in favor of Bybee, and the seller appealed.