## Facts

- A property seller agreed to sell real estate for $210,000, taking $40,000 cash and a $170,000 purchase-money deed of trust.
- Escrow instructions stated the buyer would obtain a development/construction loan from a financial institution up to $95,000 and that, upon obtaining it, the seller would subordinate its purchase-money deed of trust.
- The buyer obtained a $95,000 loan from private lenders secured by a deed of trust.
- A subordination agreement was executed by the seller’s representative; before signing, he struck language stating the seller approved the buyer’s note/deed of trust and related agreements, and he struck a notice stating the buyer could use loan proceeds for non-improvement purposes.
- The recorded subordination agreement identified the lenders and the $95,000 maximum loan amount and included language that the lenders had no obligation to oversee the use of loan proceeds.
- The buyer used a substantial portion of the $95,000 loan (about $40,000) to fund the down payment to the seller rather than construction/improvements.
- The buyer defaulted on obligations to both the seller and the lenders.
- The seller foreclosed under its deed of trust, acquired the property at the foreclosure sale, and sued to quiet title, asserting its deed of trust should be senior because the loan proceeds were misused.

## Issues

1. Whether the seller’s purchase-money deed of trust was validly subordinated to the lenders’ deed of trust up to $95,000 despite the buyer’s diversion of some loan proceeds to non-construction purposes.
2. Whether the seller’s deletions of language in the subordination form created a triable issue of material fact about the scope of consent or the parties’ intent, barring summary judgment.
3. Whether the lenders owed any duty to monitor or restrict the borrower’s use of loan proceeds and, if so, whether diversion affected lien priority.

## Decision

- The Court of Appeal affirmed summary judgment for the lenders.
- The written escrow instructions and completed subordination agreement unambiguously subordinated the seller’s deed of trust to the lenders’ deed of trust up to $95,000.
- The seller’s strikeouts did not negate the core promise to subordinate and did not impose a condition that proceeds be used only for improvements.
- The “no duty to oversee” provision meant the lenders were not responsible for the borrower’s diversion of funds, and diversion did not restore the seller’s priority absent fraud or an express condition.

## Legal Principles

- A clear written agreement to subordinate a deed of trust to a specified future loan up to a stated amount is enforced according to its terms absent fraud, ambiguity, or an express limiting condition.
- Deleting boilerplate approvals or risk-notice language from a subordination form does not, without added conditional language, change the basic grant of lien priority created by the executed and recorded subordination agreement.
- When a subordination agreement disclaims any lender obligation to supervise disbursements or use of proceeds, the lender generally has no duty to police the borrower’s spending, and misuse of proceeds does not alter lien priority.

## Conclusion

The court enforced the seller’s advance written subordination to the lenders’ $95,000 construction/development loan and held that the borrower’s diversion of proceeds, and the seller’s limited edits to the form, did not create a triable issue or change lien priority where the recorded agreement disclaimed any lender duty to oversee use of funds.


Protective Equity Tr. #83, Ltd. v. Bybee, 2 Cal. App. 4th 139 (Ct. App. 1991)