Facts

The dispute concerns a $1 million note and deed of trust on real property owned by plaintiff and the relationship of that note and deed of trust to a construction contract with the defendants that affects this same property. Plaintiff filed the adversary proceeding to determine the validity of the note and deed of trust.

PLAINTIFF'S CONTENTIONS:
Plaintiff contended that the note and deed of trust are unenforceable under California law. In particular, and among other things, plaintiff contended that the note was to secure payment of defendants' contractor fees under the construction contract. Defendants did not do any work that was not paid for by plaintiff and thus the note was security for an unearned contractor fee.

In addition, the note operated as an unenforceable penalty for not building with defendants and was a defective liquidated damages clause. The note and deed of trust also constituted an impermissible restraint on alienation, there was no consideration for the note and defendants breached the construction contract.

Finally, plaintiff claimed that the note and deed of trust constituted unfair and unlawful business practices.

DEFENDANT'S CONTENTIONS:
Defendants contended that the note and deed of trust were not to secure payment of contractor fees, but instead were for real estate value for the balance of the purchase price for the property that was due to defendants due to plaintiff's failure to build under the construction contract.

Result

The Court found that the note and deed of trust were to secure the defendants' contractor fees. Because the defendants received payment of all that they are entitled to under the construction contract, the Court ordered that the trust deed must be removed from the property. In addition, the Court rejected the plaintiff's claim that the note and deed of trust were a liquidated damages provision, and also rejected the claim that the plaintiff was entitled to damages for unfair and unlawful trade practices. The Court found that the defendants' witnesses were not credible and rejected all of the defendants' arguments that the note and deed of trust were related to real estate value.

Other Information

FILING DATE: July 24, 2009.