Memorandum of Decision Re: Extension Agreement

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re WALTER and ELAINE PARDEE,                                       No. 1-90-00978      Debtors. ___________________________/ MASON & BATH, LTD.,      Plaintiff,    v.                                                                                          A.P. No. 91-1024 WALTER and ELAINE PARDEE,      Defendants. _____________________________/
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 v. Weingartner (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 sequestered proceeds.      This memorandum constitutes the court's findings and conclusions pursuant to FRCP 52(a) and FRBP 7052.
Dated: August 29, 1991                                                                              _______________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy