A recently published decision from California's Fourth District Court of Appeal limited what can be accomplished through a deed of trust, finding that a “deed of trust” is practically and substantially only a mortgage with a power of sale. It cannot include damages that were not secured by the contract underlying the deed of trust, including tort damages.
In Majestic Asset Management LLC v. Colony at California Oaks Homeowners Association (2024) 107 Cal.App.5th 413, the appellate court put to an end a long series of litigation regarding the upkeep of a golf course attached to a homeowners association. The Colony at California Oaks Homeowners Association (“Association”) governs a large community of single-family homes in Murrieta. Within the community is an 18-hole golf course, which is owned and operated by Majestic Asset Management, LLC (“Majestic”) and Wintech Development, Inc. (“Wintech”). Hai Huang and Jen Huang (“Huangs”) are married to each other and own and manage the affairs of Majestic and Wintech.
Under a 2007 purchase agreement, Majestic assumed certain obligations, including to use the property only as a golf course, to maintain it in at least as good condition as that of other similar golf courses in the area, and to maintain and water the fingers in a manner acceptable to the Association. As part of its purchase of the golf course, Majestic executed a performance deed of trust (PDOT). The PDOT granted the Association a security interest in the golf course for its observance of the use restriction and performance of the maintenance obligations it had assumed upon purchase.
In 2015, after the golf course had deteriorated substantially, the Association received a favorable judgment against Majestic, Wintech, and the Huangs, which included a permanent injunction requiring repair and restoration of the golf course. However, the trial court declined to allow the Association to foreclose on the PDOT at the time.
In June 2019, the Association moved the trial court to enforce the judgment based on Majestic, Wintech, and Huangs' disobedience of the permanent injunction. It sought an order directing a foreclosure sale of the golf course or for the court to appoint a receiver to take control of the golf course and bring it into compliance with the judgment. In 2020, the court again declined to decree foreclosure and appointed a receiver to take control of the golf course.
After two-and-a-half years, it became clear the receiver could not rehabilitate the golf course. In September 2022, the Association again asked the court to order foreclosure of the PDOT. The court found judicial foreclosure was appropriate, and finally, the sole remaining question was the value of the PDOT and whether it was subject to redemption.
The Association argued against redemption and that the value of the PDOT was the cost of repairing and maintaining the golf course as required by the judgment, which the Association's expert estimated was $2,503,500. Majestic, Wintech, and the Huangs argued they had a statutory right to redeem the golf course and that the PDOT was worth between $0 and $3,000.
The trial court rejected Defendants arguments and found that they could not rely on the doctrine of impossibility to excuse performance of the secured maintenance obligations because their “own acts and omissions that span over more than a decade ... created the conditions which have made performance difficult.” The court concluded the value of the PDOT was that of “having a professionally-maintained golf course within the [Association],” and appellants' failure to provide that value should be evaluated as an “injury to real property.”
The court stated that although the measure of damages for such an injury ordinarily is the difference between the property's market value before and after the injury, another permissible measure is the reasonable costs to repair or restore the property. Using the latter measure and the Association's evidence, the court found the value of the PDOT was $2,503,500 plus a monthly management fee of $12,000 for three years. The court discounted the management fees to a present value of $244,934.37 and set the value of the PDOT for purposes of the foreclosure sale at $2,748,434.37.
The appellate court determined that the trial court improperly expanded the PDOT's effect by including three years' of management fees in its reliance on the injury to real property damages analysis. The court stated that the PDOT alone “st[oo]d as security for such performance” and “therefore [was] security for damages for breach of contract.” The trial court thus improperly relied on a tort measure of damages rather than on a contract measure to value the PDOT for purposes of the foreclosure sale. The appellate court reduced the foreclosure sale amount to $2,503,500 but awarded costs and attorney's fees to the Association as the prevailing party.
The lesson is that only contemplated contract damages can secure a piece of real property under a deed of trust. Tort damages that are not otherwise contemplated by the underlying contract will be disallowed.
