FOR THE NORTHERN DISTRICT OF CALIFORNIA
WALTER and ELAINE PARDEE, No. 1-90-00978
MASON & BATH, LTD.,
v. A.P. No. 91-1024
WALTER and ELAINE PARDEE,
Memorandum of Decision
In 1979, plaintiff Mason & Bath, Ltd., sold a 52-unit apartment building in Santa Maria,
California, to one William Kogelschatz. As part of the purchase price, Mason & Bath took
back a note secured by an all-inclusive deed of trust. The face amount of the note was for
$1,375,000.00. However, at the substantially the same time the note was made Mason & Bath
and Kogelschatz entered into a "Rent Subsidy Agreement" which increased Kogelschatz'
obligation by a net amount of about $7,000.00.
In 1983, debtors and defendants Walter and Elaine Pardee acquired Kogelschatz' interest in
the property, subject to the Mason & Bath deed of trust and the junior liens it wrapped.
In 1985, the Pardees were contacted by Sears Savings Bank, which held the senior deed of
trust on the property. Sears asserted that the transfer to the Pardees triggered the "due on sale"
clause in its deed of trust, and unless the Pardees assumed the Sears obligation foreclosure
proceedings would be initiated. However, all Sears required was that Walter Pardee sign a
two-sentence letter and pay $250.00. Pardee sensibly complied.
The Mason & Bath note became all due and payable in May, 1989. The Pardees were
unable to pay, but they entered into a written contract with Mason & Bath which provided for
an increased rate of interest until the note was paid. In return, Mason & Bath held off on
foreclosure until early 1990, when they began the foreclosure proceedings which caused the
Pardees to file their Chapter 11 petition.
The Pardees have sold the apartment building. However, they dispute the amount claimed
by Mason & Bath. They argue that they do not have to pay the extra $7,000.00 provided for
in the Rent Subsidy Agreement (together with ten years' interest). They argue that because they
"assumed" the Sears obligation, they, and not Mason & Bath, are entitled to the benefits of the
lower interest rate of the Sears obligation. They argue that the Mason & Bath foreclosure was
improper. The court finds no merit in any of these arguments.
The Pardees argue that because the Rent Subsidy Agreement did not specifically reference
the note and sales agreement and was not recorded, it cannot be considered in computing the
obligation on the note. This argument fails factually because the court finds, from all of the
facts and circumstances, that the Rent Subsidy Agreement was part of the terms of the sale
notwithstanding lack of express reference. The argument fails legally because there is no
requirement that every agreement modifying an obligation secured by real property be
recorded. The recorded deed of trust puts all purchasers on notice of an obligation; it is then
the responsibility of a subsequent purchaser, in the exercise of ordinary diligence, to inquire as
to the balance owing. Oaks
(1951) 105 Cal.App.2d 598, 601. The Pardees
stepped into Kogelschatz' shoes, without the consent of Mason & Bath. They must pay all of
Kogelschatz' obligation, including that provided for in the Rent Subsidy Agreement.
The Pardees take the position that the effect of the Pardee "assumption" of the Sears
obligation was to sever the Kogelschatz obligation into two obligations, a senior obligation to
Sears and a junior obligation to Mason & Bath for its "equity." Thus, they argue that after
assumption they, and not Mason & Bath, get the benefits which usually accrue to the holder of
a note secured by a wrap-around deed of trust: the right to "pocket" the difference between the
interest called for in the note secured by the all-inclusive deed of trust and the interest required
by the wrapped lienholder. The Pardees cite no authority for this position, nor can the court
find any. In essence, the Pardees argue that by signing a simple letter and paying $250 to Sears
they, who had no privity of contract with Mason & Bath, reduced Kogelschatz' obligation to
Mason & Bath by $89,000.00. The terms of the note clearly provide that the only way
Kogelschatz would be excused fromhis obligations to Mason & Bath was by paying them a sum
equal to the full amount owing on the all-inclusive note less the amount owed to Sears and any
other senior lienholders. The Pardees have no more rights than Kogelschatz.
The clear language of the extension agreement signed by the Pardees and Mason & Bath was
that there was "no obligation whatsoever to refrain from instituting immediate collection
procedures, including foreclosure." If Mason & Bath had immediately thereafter instituted
foreclosure, the court would agree that the agreement was illusory and decline to award Mason
& Bath the increased rate of interest. However, Mason & Bath held off from foreclosure for
over five months thereafter, thereby giving the Pardees sufficient consideration to bind them
to the increased interest rate.
The court has previously ordered the sequestration of the proceeds of sale, pending this
adversary proceeding to determine the amount to which Mason & Bath is entitled. The court
finds that as of July 22, 1991, after considering all amounts previously paid, Mason & Bath was
owed $241,868.92 plus reasonable attorneys' fees. This amount shall bear interest at the rate
of fifteen percent per annum until paid.
Mason & Bath shall forthwith make application for attorneys' fees and notice a hearing
thereon. The application shall detail the services rendered and the costs therefor, and shall
break down the services by activity (e.g. foreclosure, proposal of plan, litigation of balance
owed, etc.) Once the court has fixed the amount of attorneys' fees, it will enter a judgment for
the total due Mason & Bath and order that sum to be paid over to Mason & Bath from the
This memorandum constitutes the court's findings and conclusions pursuant to FRCP 52(a)
and FRBP 7052.
Dated: August 29, 1991 _______________________