Note, Equitable Mortgages and the Homestead Exemption: Tahoe National Bank v. Phillips
California Law Review, Vol. 60, p. 968, 1972
7 Pages Posted: 23 Jul 2009
Date Written: 1972
This article reviews the California Supreme Court’s decision in Tahoe National Bank v. Phillips, 4 Cal. 3d 11(1971). The court held that a standardized form providing for an assignment of rents and a covenant against conveyances of a person's residence, signed as security for a loan benefiting property distinct from that described in the form agreement, does not operate as an equitable mortgage having priority over a homestead declaration filed after the signing and recording of the form. This narrow holding, however, sharply contrasts with the court's circuitous reasoning, which threatens the continued viability of the doctrine of Coast Bank v. Minderhout imposing an equitable mortgage on the property after a similar covenant against conveyances was breached.
If the crucial difference between Tahoe Bank and Coast Bank is whether the loan was made for the improvement of property described in the agreement, Tahoe Bank will have some important ramifications. Where the loan was made for the improvement of distinct property, borrowers who hold outstanding loans under such agreements would be able to further encumber or sell with the new interest in the property having priority over the loan. However, the Tahoe Bank majority stated that the borrower's having actually breached the agreement in Coast Bank was the factor of greater significance. Although the court did not satisfactorily support its claim that there was no breach under the Tahoe Bank facts, this statement emphasizes the importance that the homestead declaration played in the decision. Therefore, the best interpretation of Tahoe Bank is that it reaffirms a strict construction of the homestead statutes in favor of the exemption and implies that a quiet title action by the lender to establish his mortgage does not lie until there is a breach of the agreement by the borrower.
Keywords: Tahoe National Bank v. Phillips, Equitable Mortgage, California Law
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