## Facts

- Plaintiffs bought a residence from defendant Ross in April 1974 for $14,500, executing a promissory note secured by a deed of trust naming Ross as beneficiary and Modesto Title Guaranty as trustee.
- The note required $100 monthly payments; by January 1975, $13,585.01 remained due.
- Plaintiffs obtained fire insurance providing an option to take the actual cash value ($8,250) or to rebuild and receive reimbursement up to $14,100.
- The deed of trust required the trustor to maintain fire insurance with loss payable to the beneficiary and provided that insurance proceeds could be applied to the secured indebtedness or, at the beneficiary’s option, released to the trustor.
- A fire destroyed the house in January 1975; plaintiffs elected to rebuild.
- The insurer issued a joint check for $8,250 payable to plaintiffs and Ross, requiring both endorsements, and indicated additional payments would follow reconstruction.
- Ross refused to allow the insurance proceeds to be used for rebuilding and elected to retain/apply the proceeds under the deed-of-trust clause.
- Plaintiffs, displaced and paying rent, stopped making monthly payments; Ross directed the trustee to foreclose.
- At a private trustee’s sale, Ross purchased the property.
- Plaintiffs sued alleging Ross’s conduct breached the implied covenant of good faith and fair dealing and violated obligations arising from the deed of trust.

## Issues

1. Whether a deed-of-trust beneficiary’s contractual option to apply fire-insurance proceeds to the debt is limited by the implied covenant of good faith and fair dealing.
2. Whether, when rebuilding would not impair the beneficiary’s security, the beneficiary must permit insurance proceeds to be used for reconstruction rather than withholding them and foreclosing.
3. Whether the trustee’s appeal was properly before the appellate court when no judgment was entered against the trustee.

## Decision

- The judgment for plaintiffs against Ross was affirmed.
- The court held Ross breached the implied covenant of good faith and fair dealing by refusing to permit use of insurance proceeds for rebuilding and by using her control over the proceeds to precipitate default and foreclosure.
- The court ruled that, to the extent the security is not impaired, the beneficiary must allow insurance proceeds to be used to rebuild.
- The trustee’s appeal was dismissed because no judgment was entered against the trustee, leaving it without an appealable grievance.

## Legal Principles

- Every deed of trust is subject to an implied covenant of good faith and fair dealing that limits discretionary contractual powers.
- A beneficiary’s right to apply fire-insurance proceeds to the secured indebtedness must be exercised in good faith and for purposes consistent with protecting the security.
- When allowing reconstruction will not impair the beneficiary’s security, the beneficiary must permit insurance proceeds to be used for the cost of rebuilding rather than withholding proceeds to improve the beneficiary’s position.
- A party may not appeal absent an adverse judgment or other appealable order affecting that party.

## Conclusion

The court held that a deed-of-trust beneficiary cannot use a contractual insurance-proceeds clause to block reconstruction and force foreclosure when rebuilding would not impair the security; the beneficiary must act in good faith and allow proceeds to fund rebuilding to that extent, and a trustee with no judgment against it lacks standing to appeal.


Schoolcraft v. Ross, 81 Cal. App. 3d 75, 146 Cal. Rptr. 57 (Cal. Ct. App. 1978)