CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
JERVE M. JONES et al.,
2d Civil No. B137593
(Super. Ct. No. SC019528)
Plaintiffs, Cross-defendants and
FIRST AMERICAN TITLE INSURANCE
COMPANY et al.,
Defendants, Cross-complainants and
Civil Code section 2934a, subdivision (a)(4)1 provides that the beneficiary of
a deed of trust may replace the appointed trustee simply by recording a substitution, and that
"the new trustee shall succeed to all the powers, duties, authority, and title granted and
delegated to the trustee named in the deed of trust." We conclude that under the
circumstances here reformation may validate a sale under section 2934a2 when the
substitution of trustee has not been recorded.
1All further statutory references are to the Civil Code unless otherwise noted.
2 Section 2934a, subdivision (a) provides in part: "(a)(1) The trustee under a trust
deed upon real property or an estate for years therein given to secure an obligation to pay
money and conferring no other duties upon the trustee than those which are incidental to the
exercise of the power of sale therein conferred, may be substituted by the recording in the
county in which the property is located of a substitution . . . . [¶] . . . [¶] (4) The
substitution shall contain the date of recordation of the trust deed, the name of the trustor,
the book and page or instrument number where the trust deed is recorded, and the name of
the new trustee. From the time the substitution is filed for record, the new trustee shall
FACTS AND PROCEDURAL HISTORY
The Loan and Deed of Trust
In June 1988, LCF Income Group (hereafter LCFIG), La Canada Flintridge
Development Corporation (hereafter LCFDC), San Martin Investment Development
Corporation (hereafter San Martin), and Peppertree Corporate Business Park, Ltd. (hereafter
Peppertree), obtained a loan in the amount of $8.7 million from the predecessor in interest to
Union Bank of California (hereafter the bank). The borrowers used the loan proceeds to
purchase and develop property in Simi Valley (hereafter the Peppertree property). The loan
was secured by a deed of trust on the Peppertree property. The deed of trust contained the
standard provision for nonjudicial foreclosure in the event of default. Jerve Jones, Gilbert
Dreyfuss and Evelyn Dreyfuss personally guaranteed the loan.3 California-Sansome
Corporation, a subsidiary of the bank, was designated as trustee.
The loan was due on July 1, 1991. After the borrowers defaulted, the bank
agreed to modify the loan to extend the due date to October 1993. In exchange, LCFIG
gave deeds of trust on parcels of real property in Maryland (hereafter the Maryland
property) and California (hereafter Lot 66) as additional security. The bank also allowed the
borrowers to sell Parcel 2 of the Peppertree property to pay down the loan, and reconveyed
the parcel for that purpose.
The Substitution of First American as Trustee and
Institution of Foreclosure Proceedings
When the borrowers defaulted again, the bank instituted foreclosure
proceedings against the Peppertree property, the Maryland property, and Lot 66. On
February 9, 1994, the bank recorded a document substituting First American Title Insurance
Company (hereafter First American) as trustee in place of the California-Sansome
succeed to all the powers, duties, authority, and title granted and delegated to the trustee
named in the deed of trust."
3The Dreyfusses own LCFDC, and LCFIG is a general partnership of two Dreyfuss
family trusts. Peppertree is a limited partnership controlled by Jerve Jones and his sons, and
San Martin is Peppertree's general partner. The borrowers and guarantors are sometimes
collectively referred to as "the borrowers" as the context requires.
Corporation. That same date, First American recorded a notice of default on the Peppertree
property deed of trust. In order to stay foreclosure, LCFDC and LCFIG filed Chapter 11
bankruptcy proceedings. The automatic stay was lifted on April 14, 1995. First American
subsequently recorded a notice of sale on May 18, 1995.
The Limited Forbearance Agreement and Release
On June 29, 1995, the parties executed a limited forbearance agreement. The
agreement provided that the borrowers would make an initial payment of $1.2 million,
obtain release of a set-aside letter pledged by the bank on the borrowers' behalf, and pay an
additional $4 million by December 1, 1995. The borrowers also agreed to "deliver to
Lender such certificates . . . (a) to confirm that the postponement of Lender's foreclosure
sales on the Peppertree Property and Lot 66 in accordance with this Forbearance Agreement
has occurred by the mutual consent of the parties pursuant to California Civil Code § 2924
(g) (c) (2) [2924g (c)(2)], and (b) to confirm that the acceptance by Lender of the Initial
Payment shall have no adverse effect on Lender's presently pending foreclosure proceedings
against said properties." In exchange, the bank agreed to extend the due date on the loan
and forgive the remaining indebtedness of approximately $1.3 million. The borrowers
subsequently made the initial payment and obtained release of the set-aside letter. The
forbearance agreement also contained a general release by which the borrowers and
guarantors released the bank from any and all claims, known and unknown.
The Bank's Substitution as Trustee and the Partial Reconveyance
As an accommodation to the borrowers, the bank also agreed to release Parcel
3 of the Peppertree property from the trust deed for sale to a third party. On October 20,
1995, Chicago Title Company, the escrow agency chosen by the borrowers to conduct the
purchase and sale, requested that the bank forward a partial reconveyance for Parcel 3 along
with its demand for payment.
The bank subsequently approved the sale and sent Chicago Title its demand
on October 26, 1995, along with a document entitled "Substitution of Trustee and Partial
Deed of Reconveyance." In that document, the bank substituted itself as trustee in place of
First American. The bank intended to substitute itself as trustee only as to Parcel 3, and to
otherwise retain First American as trustee for purposes of the already-pending foreclosure
proceedings. The substitution however was not so limited.4 The bank appeared as trustee
for all parcels. The demand letter directed Chicago Title to record the document upon
satisfaction of all conditions.
On three different occasions, the bank sent copies of the substitution along
with updated demand letters to Gilbert Dreyfuss and Michael Milam, the chief financial
officer of LCFIG and LCFDC. Dreyfuss and Milam each claimed that they did not review
the substitutions of trustee that were sent to them by the bank. Chicago Title recorded the
substitution of trustee and partial reconveyance on borrowers' behalf on November 20,
1995. The borrowers subsequently contributed the sale proceeds from Parcel 3 ($1,490,000)
to reduce the discounted amount owed under the forbearance agreement to $2,510,000.
The Extension of the Limited Forbearance Agreement
and Postponements of the Foreclosure Sale
On December 6, 1995, the parties executed an extension to the limited
forbearance agreement whereby the bank agreed to extend the loan until December 21,
1995, in exchange for, among other things, borrowers' promise to provide documentation
confirming "that the postponement of Lender's foreclosure sales on the Peppertree Property
and Lot 66 in accordance with the Forbearance Agreement and/or this Extension Agreement
has occurred by the mutual consent of the parties pursuant to California Civil Code § 2924
(g) (c) (2)." The borrowers also "reaffirm[ed] and confirm[ed] their respective releases of
claims in favor of Lender as set forth in Section VIII of the Forbearance Agreement as of
4The document provided in pertinent part: "WHEREAS, the undersigned desires to
substitute a new Trustee under said Deed of Trust in the place and instead of First American
Title Insurance Company. [¶] NOW THEREFORE, the undersigned hereby substitutes [the
bank] as Trustee under said Deed of Trust . . . . [¶] The undersigned hereby accepts such
assignment and as such Trustee DOES HEREBY RECONVEY to the person or persons
legally entitled thereto, without warranty, all the estate, title, and interest acquired by
Trustee under said Deed of Trust in and to . . . Parcel 3 . . . ."
the date hereof." First American postponed the sale five times pursuant to the borrowers'
The borrowers once again defaulted. On January 4, 1996, the bank informed
the borrowers that it had terminated their right to pay a discounted amount under the limited
forbearance agreement and demanded payment in excess of $3.8 million. After the
foreclosure sale was scheduled for January 9, 1996, LCFIG filed another bankruptcy
petition. The bank obtained relief from the automatic stay, and rescheduled the foreclosure
sale for January 30, 1996.
The Foreclosure Sale
As directed by the bank, First American conducted the foreclosure sale on the
Peppertree property on January 30, 1996. A representative appeared at the sale on behalf of
borrowers. The bank obtained the property with a credit bid of $2,150,000, and First
American executed a trustee's deed in favor of the bank that was recorded on February 6,
1996. The bank then foreclosed on the Maryland property and Lot 66. It obtained both
properties by credit bids of $1.4 million and $200,000, respectively.
On October 18, 1996, the bank sold the Peppertree property to Heritage Oak
Partners (hereafter Heritage) for $3,050,000.5 In September 1996, the bank sold Lot 66 for
The Complaint, Lis Pendens, and Quitclaim of Parcels 1 and 5
On October 18, 1997, Dreyfuss discovered a copy of the substitution of trustee
while reviewing documents produced by the bank in another action challenging the bank's
foreclosure on the Maryland property and Lot 66.6 In December 1997, borrowers filed this
5Heritage dismissed its appeal against the borrowers pursuant to settlement after
filing its opening brief.
6In December 1996, the Dreyfusses and LCFIG filed a complaint against the bank in
Los Angeles County Superior Court seeking to set aside the bank's foreclosures on the
Maryland property and Lot 66 on the ground, among others, that the bank's failure to give
borrowers credit for the fair market value of those properties violated the antideficiency
provisions of Code of Civil Procedure sections 580a and 580d. The California Supreme
Court subsequently affirmed the Court of Appeal's decision affirming summary judgment in
favor of the bank. (Dreyfuss v. Union Bank of California (2000) 24 Cal.4th 400.)
complaint against the bank and First American (hereafter collectively "the bank"), alleging
that the foreclosure sale was void under section 2934a and seeking to quiet title. In the
meantime, borrowers quitclaimed Parcels 1 and 5 to Heritage for $300,000. The bank
answered the complaint and filed cross-complaints seeking reformation or cancellation of
the substitution of trustee, and asserting defenses of release, consent, laches, res judicata,
and collateral estoppel.
In its statement of decision, the trial court noted that "plaintiff was clearly in
default on a legitimate obligation . . . [a]nd the Bank and First American Title could just as
easily, on the very date of the sale, . . . have carried out a valid foreclosure . . . ." The court
concluded, however, that reforming or canceling the substitution of trustee as urged by the
bank "would be a wrench in the gears of the machinery facilitating the purchase and
improvement of real property in this state . . . ." The court also concluded, among other
things, that section 2934a is not subject to waiver because it was enacted for a "public
reason" as defined by section 3513. The court did not discuss the bank's contention that the
borrowers consented to the sale. In rejecting the defense of laches, the court concluded that
the borrowers had merely received "constructive notice" of the substitution of trustee, and
thus could not be held accountable for failing to contest First American's authority to
conduct the foreclosure sale.
Accordingly, the court rendered the foreclosure sale void pursuant to section
2934a and ordered title to the remaining Peppertree property parcels quieted in the
borrowers. The loan balance of $3,860,228 was reinstated. Since foreclosure, the properties
had increased in value. Against the balance owing, the trial court credited the borrowers
with the fair market value of Lot 66 ($250,000) and the two parcels that borrowers had
quitclaimed to Heritage ($3,470,228), minus the $300,000 that borrowers had received for
those parcels. The court also awarded borrowers $450,000 in attorney fees and ordered the
bank to return the Maryland property. The resulting judgment gave borrowers the
Peppertree property and the Maryland property free and clear of the bank's interest in those
properties, with the bank owing the borrowers $10,739.
The bank contends the trial court abused its discretion by denying reformation.
Section 3399 provides, "When, through fraud or a mutual mistake of the
parties, or a mistake of one party, which the other at the time knew or suspected, a written
contract does not truly express the intention of the parties, it may be revised on the
application of a party aggrieved, so as to express that intention, so far as it can be done
without prejudice to rights acquired by third persons, in good faith and for value."
In denying reformation the trial court found that the bank's substitution of
trustee was not a mistake; the mistake was in the failure to resubstitute First American as
trustee prior to foreclosure. The court also found the mistake was not mutual nor one that
the other party knew or suspected.
But the trial court viewed its powers of reformation too narrowly. It is well
settled that the remedy of reformation is equitable in nature and not restricted to the exact
situations stated in section 3399. (Demetris v. Demetris (1954) 125 Cal.App.2d 440, 443.)
The broad reach of reformation is illustrated in Merkle v. Merkle (1927) 85
Cal.App. 87. There decedent during her life entered into an agreement with plaintiff that
required plaintiff to care for decedent. In return, upon decedent's death, plaintiff would
receive certain real property. Plaintiff performed her part of the agreement. Decedent
attempted to perform her part by executing a deed and giving it to a third party with
instructions to deliver it to plaintiff upon decedent's death. Plaintiff never saw the deed
prior to decedent's death. After decedent died, plaintiff discovered that the description of
the property in the deed was defective. The trial court granted reformation of the deed. The
Court of Appeal affirmed.
In affirming reformation the court recognized that, because plaintiff never saw
the deed, the mistake was "literally" neither mutual nor one that the plaintiff knew or
suspected. (Merkle v. Merkle, supra, 85 Cal.App. at p. 105.) The court, however,
emphasized the equitable nature of the remedy. Because each party believed the deed
would be sufficient to carry out their agreement, the court affirmed that reformation was
appropriate to carry out the intent of the parties. (Id. at pp. 107-108.)
Merkle illustrates that mistake is an ingredient of reformation, but not its
essence. The essential purpose of reformation is to reflect the intent of the parties.
Here the parties entered into a complex set of agreements. The agreements
included the bank's right to foreclose if the borrowers did not perform. As in Merkle, one of
the documents necessary to effectuate the agreements was deficient. Under the
circumstances, reformation is necessary to carry out the manifest intent of the parties.
Mutual mistake is satisfied by the undisputed evidence that at the time of foreclosure all
parties believed that the documents were sufficient to carry out the intent of the parties.
(See Merkle v. Merkle, supra, 85 Cal.App. at pp. 107-108.)
Of course failure to have a recorded trustee conduct a foreclosure sale will not
justify reformation in every case. Each case must be judged on its own facts. This case
involves a complex set of transactions that included multiple forbearances and a partial
release of the trust deed. Merkle involved a mistake in the description of property in a deed.
Here the mistake concerned only who was to perform a ministerial act. There was no
showing the borrowers were prejudiced by the former trustee's conduct of the foreclosure
sale. The borrowers claim they did not read the notice of substitution of trustee prior to the
sale. The borrowers did not raise the issue until almost two years after foreclosure when
fortuitously the properties had greatly increased in value. More importantly, reformation is
an equitable remedy. The trial court's judgment amply shows the failure to apply
reformation gives a windfall to the borrowers and works a great injustice on the bank.
The trial court's concern that granting reformation "would be a wrench in the
gears of the machinery facilitating the purchase and improvement of real property in this
state" is misplaced. To the contrary, here reformation reflects the intent of the parties. This
removes a wrench from the machinery so that its gears mesh smoothly to facilitate the
purchase and improvement of real property.
The borrowers' reliance on Dimock v. Emerald Properties (2000) 81
Cal.App.4th 868 is misplaced. There the court held that a foreclosure sale conducted by a
former trustee is void. The court reasoned that the only statutory means of changing a
recorded substitution is the recording of another substitution under section 2934a. (Id. at
p. 876.) But Dimock did not consider reformation. A case is not authority for propositions
not considered. (Contra Costa Water Dist. v. Bar-C Properties (1992) 5 Cal.App.4th 652,
Here the trial court expressed concern that waiver of the provisions of section
2934a would be against public policy. We would be reluctant to apply reformation where
the result would be tantamount to a waiver of a statutory right in violation of public policy.
There is, however, no such concern here.
Any public purpose attendant to section 2934a would not be compromised by
allowing waiver in this context. It is well settled that parties to a deed of trust may agree to
a form of substitution of trustee other than that provided in section 2934a. (See Pacific
S. & L. Co. v. N. American etc. Co. (1940) 37 Cal.App.2d 307, 309-311.)
Moreover, no statute expressly prohibits the waiver of section 2934a.
Tellingly, the Legislature has enacted a statute enumerating the statutory provisions incident
to foreclosure that are not subject to waiver. (§ 2953.) Section 2934a is not included.
Following the maxim of statutory construction, expressio unius est exclusio alterius, or "'the
expression of one thing is the exclusion of another'" (People v. Anzalone (1999) 19 Cal.4th
1074, 1078, quoting Black's Law Dict. (6th ed. 1990) p. 581, col. 1), we conclude that if the
Legislature had intended section 2934a to be nonwaivable, it would have included it in
section 2953, which prohibits the waiver of rights under sections 2924, 2924b, and 2924c
and Code of Civil Procedure sections 580a and 726. (See Strang v. Cabrol (1984) 37 Cal.3d
720, 725 ["[A]n express exclusion from the operation of a statute indicates the Legislature
intended no other exceptions are to be implied"].)
The trial court abused its discretion in refusing to grant reformation. In light
of our conclusion, we need not address the bank's remaining contentions.7 The borrowers'
7The borrowers' December 28, 2001, motion to strike portions of the bank's reply
brief relating to its defense of res judicata/collateral estoppel, and the bank's December 14,
2001, motion for judicial notice, are denied as moot.
cross-appeal, which is predicated on the court's finding that the foreclosure sale is void, is
dismissed as moot. Borrowers claim that they are entitled to their attorney fees on appeal is
The judgment is reversed and the matter is remanded for further proceedings
consistent with this opinion. Appellants Union Bank and First American shall recover their
costs on appeal.
CERTIFIED FOR PUBLICATION.
Joe D. Hadden, Judge
Superior Court County of Ventura
Norman, Dowler, Sawyer, Israel, Walker & Barton, Richard M. Norman,
Michael G. Walker, and Matthew P. Guasco for Plaintiffs, Cross-defendants and Appellants.
Ferguson, Case, Orr, Paterson & Cunningham, Michael W. Case, Joseph L.
Strohman, Jr., and Douglas E. Kulper for Defendant, Cross-complainant and Appellant,
First American Title Insurance Company.
Arter & Hadden, John L. Hosack, Aaron M. Peck and Andrea L. Slade for
Defendant, Cross-complainant and Appellant, Union Bank of California, N.A.
Epstein Becker & Green, Alan E. Walcher and Diane B. Sherman for
Defendant, Cross-complainant and Appellant, Heritage Oak Partners.