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Donna Fait et al v. New Faze Development

June 27, 2012

DONNA FAIT ET AL., PLAINTIFFS AND APPELLANTS,
v.
NEW FAZE DEVELOPMENT, INC., ET AL., DEFENDANTS AND RESPONDENTS.



(Super. Ct. No. 34200900053953CUPOGDS) APPEAL from a judgment of the Superior Court of Sacramento County, Shelleyanne Wai Ling Chang, Judge. Reversed.

The opinion of the court was delivered by: Robie , Acting P. J.

CERTIFIED FOR PUBLICATION

The owner of a parcel of real property with a building on it demolishes the building to make way for new development. Unfortunately, the owner is unable to complete the development and ends up defaulting on a purchase money promissory note secured by a deed of trust on the property. The holder of the note and deed of trust exercises the power of sale under the deed of trust and buys the property back at a foreclosure sale for less than the amount due under the note. The note holder then sues the former owner and others for waste and impairment of security based on their demolition of the building, seeking as damages the loss of value in the property that resulted from the destruction of the building. Is such an action barred by the antideficiency statutes (Code Civ. Proc.,*fn1 §§ 580b, 580d) under the reasoning of Cornelison v. Kornbluth (1975) 15 Cal.3d 590?

The answer to that question is "no." While the Supreme Court in Cornelison limited actions for waste following a foreclosure sale under a deed of trust securing a purchase money note to "bad faith" waste, the court defined "bad faith" waste as any waste that is not committed as a result of the economic pressures of a market downturn. (Cornelison v. Kornbluth, supra, 15 Cal.3d at pp. 603-604.) Accordingly, it is no defense to an action for waste based on the demolition of a building to simply claim that the demolition was part of a good faith attempt to improve the property. The impairment of security that results from the destruction of a building is actionable waste, notwithstanding the antideficiency statutes, unless the destruction itself was somehow caused by the economic pressures of a depressed market.

Based on this conclusion, and a few others, we will reverse the judgment the trial court summarily granted in this case.

FACTUAL AND PROCEDURAL BACKGROUND

Defendant Allen Warren is the sole owner and director of defendant New Faze Development, Inc., a company Warren set up to carry out "[t]he functional development responsibilities for a variety of entities." Defendant New Faze Holdings is also wholly owned by Warren. New Faze Holdings "was set up to own and house property prior to going into construction."

Defendant Wendy S. Saunders was employed by New Faze Development from April 2006 through December 2007 as its director of project development. Defendant Jay Rivinius was employed by New Faze Development as its director of construction.

In February 2005, New Faze Holdings and another company, Soul First Properties, LLC (jointly, the purchasers), purchased from the Harrison Holland Fait and Barbara Fait 1990 Trust (the 1990 Trust) the real estate located at 2005 and 2007 Del Paso Boulevard for $525,000. The purchasers made a down payment of $52,500 and executed a $472,500 promissory note to the 1990 Trust secured by a deed of trust on the property.

At the time of the sale in February 2005, there was a building on the property that housed two tenants: a church and a small social services agency. A new roof had been installed on the building in January 1999, and a new ceiling with new light fixtures had been installed in the space rented by the church in the summer of 2003. At the time of sale the building had fully functioning electrical and plumbing systems, the doors and windows were working and intact, and the building was free of graffiti.

The purchasers bought the property with the intent to redevelop it into a mixed use development including retail, residential, garage, office, and restaurant services. The redevelopment plans required demolition of the existing building and, thus, eviction of the existing tenants, which was accomplished in the fall of 2005. The demolition occurred a year later in October 2006. Warren was the one who decided to demolish the building. As project manager, Saunders ordered the demolition. Rivinius signed an agreement to hold the city harmless from liability for the demolition.

In April 2007, the 1990 Trust transferred its interest in the note and deed of trust to Donna Fait and the Glenn Fait 2005 Trust (the Faits).

Ultimately, the purchasers defaulted on their payments under the promissory note and failed to pay taxes and insurance on the property. As a result, the Faits initiated non-judicial foreclosure proceedings under the deed of trust. In May 2009, the Faits bought the property at a public foreclosure sale for $14,097. At the time of the sale, there were more than $7,000 in property taxes owed on the property.

In July 2009, the Faits brought this action against the purchasers, New Faze Development, Warren, Saunders, and Rivinius (among others) for bad faith waste and intentional and negligent impairment of security.*fn2 The cause of action for bad faith waste alleged that the purchasers and Warren committed waste by demolishing the building and failing to pay taxes on the property. The causes of action for intentional and negligent impairment of security alleged that all of the defendants impaired the Faits' security interest by demolishing the building.

In August 2010, New Faze Holdings, New Faze Development, Warren, Saunders, and Rivinius moved for summary judgment or, in the alternative, summary adjudication. As to the first cause of action, they asserted there was "no evidence that any Defendant acted with the required 'bad faith.'"*fn3 As to the second and third causes of action, they asserted there was "no evidence of improper intent" and that "such a cause of action cannot be asserted against a borrower, its agents or employees."

The gist of their argument on the claim of "bad faith" waste was that they did not intend to harm the property, and they did not act maliciously or recklessly by demolishing the building because the demolition was "based on a good faith belief that the Property could be developed into a legitimate mixed use commercial project." As for the claims for impairment of security, they first argued those causes of action were "entirely derivative" of the cause of action for "bad faith" waste and, as to the nonborrower defendants, it would be "nonsensical" for the court to hold the nonborrowers liable on a "lesser standard" than the "bad faith" standard applicable to a borrower. Thus, in their view, if the first cause of action fell, then the impairment claims had to fall as well. They also argued there was no evidence of the wrongful intent necessary for intentional impairment of security and as to the claim of negligent impairment "the individual (non-borrower) defendants should be dismissed because they [we]re innocent agents of New Faze and [we]re therefore not liable for the mere alleged torts of New Faze."

In opposing the motion, the Faits argued they could prevail on the claim of "bad faith" waste because defendants acted "intentionally" in demolishing the building. In their view, "when waste was not committed solely or primarily as a result of the economic pressures of a market depression, the lender can recover" for "bad faith" waste. The Faits also argued summary judgment should be denied on the impairment of security claims because there was a triable issue of fact as to whether defendants knew of the security interest and they owed a duty to exercise reasonable care not to eliminate that interest.

Relying on Cornelison, the trial court concluded that "[t]he issue of bad faith waste . . . hinges on whether defendants' conduct in demolishing the building was reckless, intentional despoilment, or malicious." Because defendants had shown that the building demolition was based on a good faith belief that the property could be developed, and they made substantial efforts to get the development project underway, the court concluded there was an "absence of recklessness and intent to despoil at the time of the demolition." Accordingly, the "bad faith" waste cause of action could not be maintained based on the demolition. Because the court found that New Faze Holdings' failure to pay the property taxes could qualify as "bad faith" waste, the court denied summary adjudication as to New Faze Holdings on the "bad faith" claim, but the court granted the motion as to the other four defendants.

With respect to the cause of action for intentional impairment of security, the court held it was "derivative of the first cause of action" and therefore the court granted summary adjudication for the reasons stated in connection with the "bad faith" waste claim. The court also agreed it would be "'nonsensical'" to hold the borrower's agents and employees liable when the borrower itself was "protected from liability for all but 'bad faith waste.'"

As for the cause of action for negligent impairment of security, the court reached the same conclusions as it did with respect to the intentional impairment claim. The court also concluded that "regardless of whether defendants were aware of the Deed of Trust's provisions, plaintiffs make no showing that the building's demolition was a negligent act."

Having granted summary adjudication on all causes of action as to New Faze Development, Warren, Saunders, and Rivinius, the trial court granted summary judgment in their favor. New Faze Holdings remained in the case on the claim of ...


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