Key Decisions

July 2012 – In An Action For “Waste”

(filed under: | July 16, 2012)

Other Cases Of Interest

In An Action For “Waste,” “Bad Faith Waste” Does Not Necessarily Require Recklessness, Intentional or Malicious Conduct

Fiat v. New Faze Development, Inc.
(Cal. Ct. of App., 3d Dist.), filed June 27, 2012 

New Faze and another company purchased certain real property with the intention of redeveloping it.

The purchase price was $525,000. The purchasers made a down payment of $52,500 and executed a $472,500 promissory note secured by a deed of trust on the property.

At the time of the purchase, there were two buildings on the property.

After demolishing the structures in preparation for developing the property, but before developing it, the purchasers defaulted. The sellers, who held the promissory note, foreclosed. They then sued the purchasers and various associated individuals for bad faith waste and intentional and negligent impairment of security. The cause of action for bad faith waste alleged that the purchasers and the controlling owner 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 seller’s security interest by demolishing the building.

The trial court granted summary judgment for the individual defendants and ruled that the purchasers could be liable for waste only to the extent that they did not pay property taxes on the property. It reasoned that because of California’s anti-deficiency statute, there could be liability only for “bad faith” waste. It considered “bad faith” waste to be waste that is the result of “recklessness,” “intentional” or “malicious conduct.” It ruled that the demolition of the buildings was not in “bad faith,” because, even though the development project never came to fruition, it was part of the intended improvement project.

In the ensuing appeal, the Court of Appeal recognized that California’s anti-deficiency statutes barred recovery by the sellers for anything but “bad faith” waste. It then held that as long as the demolition did not occur solely or primarily as a result of the economic pressures of a market depression, the purchasers could be liable for “bad faith” waste.

The court noted:

For purposes of determining liability for waste, it is not dispositive that defendants demolished the building as part of their effort to develop the property and thus (presumably) to add value to it. Indeed, defendants may have had the best of intentions, but that fact alone does not entitle them to escape liability for waste. The pertinent question is whether the demolition of the building, which is what the [sellers] claim impaired the value of the property as security for the note, was caused by the economic pressures of a market depression.

The court observed that there was evidence that the defendants demolished the existing buildings prematurely, i.e. before they had adequate financing for their project and that the loss was due to bad planning rather than economic pressures of a market depression. Thus, the defendants were not entitled to a summary judgment.