Coast Bank v. Minderhout

Summary

The California Supreme Court held that an agreement restricting the transfer or encumbrance of specified real property could create an equitable mortgage when the parties intended the property to secure a debt and the instrument was reasonably susceptible to that interpretation. The court further held that the restraint on alienation did not invalidate the separate lawful security interest, and it affirmed foreclosure.

Holdings

1. A written executory agreement sufficiently indicating an intention to make identified property security for a debt creates an equitable lien or equitable mortgage enforceable against the property in the hands of purchasers or encumbrancers with notice. The agreement at issue could create such a security interest even though it was not a legally executed mortgage or deed of trust.
2. When the complaint pleads, and the defendants admit through demurrer and failure to answer, that the parties intended to create a security interest, the relevant question is whether the instrument is reasonably susceptible to that meaning, not whether that meaning appears from the instrument's face alone.
3. The agreement's restriction on transfer was a restraint on alienation, but it was valid insofar as it permitted the bank to accelerate the debt when the borrowers transferred or encumbered the property. The restraint did not invalidate the separate lawful creation or foreclosure of the bank's security interest.

Questions Presented

1. Whether the agreement restricting transfer or encumbrance of specified property created an equitable mortgage or equitable lien securing the borrowers' debt.
2. Whether the pleaded allegation that the parties intended to create a security interest was a meaning to which the agreement was reasonably susceptible.
3. Whether the transfer restriction was an invalid restraint on alienation that prevented foreclosure of the security interest.
4. Whether the creation and foreclosure of the security interest remained lawful even if direct enforcement of the promise not to transfer or encumber might be subject to separate limitations.

Disposition

affirmed