Memorandum of Decision Re: Deed as Disguised Security

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re WALTER and SUSANNE PEDDY,                                       No. 1-87-00622      Debtors. ___________________________/ WALTER and SUSANNE PEDDY,      Plaintiffs,    v.                                                                                          A.P. No. 1-89-0113 JAMES W. PAUL AND RICHARD PAUL,      Defendants. ______________________________/
Memorandum of Decision
     In 1984, plaintiffs Walter and Susanne Peddy sold a 45-acre parcel of undeveloped real property, taking back a note for $130,000.00 secured by a junior deed of trust to the property. In 1986, with foreclosure pending on the senior deed of trust, the buyers agreed to deed the property back to the Peddys. Having no means to stop the foreclosure themselves, the Peddys asked their friend and business associate, Richard Paul, for help. Paul agreed to help them, bringing in his brother James because of the cash which would be needed to pay off the foreclosing deed of trust holder.      All of the rest of the facts in this case are totally disputed, and the versions urged by each side are completely inconsistent with each other. There are independent witnesses and circumstantial evidence to support both versions.      The Peddys allege that they entered into a written contract whereby the Pauls would pay off the foreclosing creditor, take record title to the property, and place the property on the market for sale. The Peddys further allege that the written contract, which is in the possession of the Pauls, provided that the Peddys would receive an unsecured note for $130,000.00 from the Pauls and, when the property was sold, would get the $130,000.00 plus half of the profits after the Pauls had recovered their investment plus ten percent annual interest. The Peddys further allege that the contract gave them the right to buy the property back from the Pauls.      The Pauls allege that it was a simple sale, whereby they purchased unrestricted ownership of the property. They admit that they were motivated by a desire to help the Peddys, but the nature of that help was solely the granting to the Peddys of water rights in the property, which was adjacent to the Peddys' residence. The Pauls deny that they agreed to pay the Peddys $130,000.00, or that any agreement restricted their ownership rights. They deny that there ever was a written agreement.      While there is certainly evidence to the contrary, the court finds that the weight of the evidence strongly favors the Peddys' version. The court bases this finding on many factors:
     1. The $130,000.00 described in the escrow papers as water rights was the same amount as the Peddys' note, and bore no relation to the true value of the water rights.
     2. The Pauls admit that they were entering into the transactions as a favor to their friends, and had absolutely no idea what the property was worth.
     3. After the Pauls had taken title, the Pauls and Walter Peddy listed the property with a broker for sale together.
     4. In the presence of the broker, the Pauls referred to the transaction as a loan and indicated that the Peddys still had some sort of interest in the property aside from the water rights, and that the property needed to be sold at a minimum price to "cover everyone involved."
     5. Richard Paul told Walter Peddy that he had not sold the property when in fact he had sold it.
     6. Richard Paul has a recent felony conviction for making a false claim.
     7. Most convincingly, at his deposition Richard Paul produced a copy of a letter which he claimed to have sent to the Peddys on March 15, 1987 (the Peddys deny receiving it). While at first appearing to be self-serving to the Pauls' case, upon analysis it pokes serious holes in it. The tenor of the letter is clearly angry, as if the Pauls did not get all that they were promised. However, the undisputed testimony is that the property was worth a minimum of $180,000.00, and the Pauls in fact sold it, albeit with no cash down, for $217,500.00. All the Pauls paid was $91,383.66. If the transaction was a simple sale as the Pauls argue, there is absolutely no reason for the Pauls to be anything less than pleased with their investment. The letter only makes sense if the Pauls had agreed to sell the property for enough to allow the Peddys to recoup their $130,000.00, and no buyer could be found at that price.
     Under California law, a deed absolute may be deemed a to be something else if it can be inferred from all of the facts and circumstances, including the conduct of the parties after the transaction, that something else was intended. 5 Augustine & Zarro, California Real Estate Law & Practice, section 120.61[2]. While the court gives the Pauls the benefit of the doubt and will not find that they unconditionally promised to pay the Peddys $130,000.00 for the property, it does find that the Peddys and the Pauls intended and agreed to a partnership whereby they would market the property together with the Pauls getting the first $91,383.66 plus ten percent interest, the Peddys getting the next $130,000.00, and any balance split between them. The Pauls breached this agreement by selling the property without the Peddys' consent or knowledge and keeping all the profits.      The court finds that the actual value of the property when the Pauls sold it was $200,000.00, and that they were entitled to the first $113,467.16. The court concludes that the Peddys are entitled to judgment against the Pauls in the sum of $86,532.84, together with interest at the legal rate from July 29, 1988, and costs of suit.      Because this is not a core proceeding, the court makes the foregoing its proposed findings and conclusions pursuant to Local Rule 700-6(a).
Dated: February 9, 1990                                                                              _______________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy