## Facts

- Beulah F. Phillips and three co-venturers needed capital for a Lake Tahoe real estate development project and also owed the bank for overdrafts.
- Tahoe National Bank agreed to lend $34,000; Phillips executed a single-payment promissory note payable on demand or by May 20, 1965, and transferred the proceeds to the venture account.
- Phillips also signed a bank-selected printed form titled “Assignment of Rents and Agreement Not to Sell or Encumber Real Property,” stating it was “as security for the loan,” assigning rents from described property and covenanting not to sell or encumber it.
- The described property was Phillips’s residence, owned one-half in fee and one-half as trustee under her deceased husband’s testamentary trust; it was unencumbered at the time.
- The bank recorded the assignment on May 27, 1965.
- On December 6, 1965, Phillips recorded a declaration of homestead on the residence.
- The bank president testified the borrowers needed funds quickly; he required security but used the rent-assignment form because a trust deed could not be prepared within two hours; he considered the instrument equivalent to a mortgage.
- Phillips testified she would not have signed had she understood it to be a mortgage and believed she lacked authority to mortgage the trust-owned half interest.
- After default, the bank sued and sought foreclosure by having the assignment treated as an equitable mortgage; the trial court agreed and decreed foreclosure.

## Issues

1. Whether the “Assignment of Rents and Agreement Not to Sell or Encumber Real Property,” drafted and presented by the lender, was reasonably susceptible to being construed as an equitable mortgage on the borrower’s residence permitting foreclosure.
2. Whether the lender could rely on extrinsic evidence of intent to convert the instrument into a mortgage-like lien when the writing did not objectively indicate creation of such a lien.

## Decision

- The California Supreme Court reversed the portion of the judgment declaring the assignment an equitable mortgage and ordering foreclosure.
- The court held the instrument could not reasonably be construed as a mortgage at the bank’s instance.
- Because the writing was not reasonably susceptible to the mortgage construction urged, the trial court erred in relying on extrinsic evidence offered by the bank to recharacterize it as an equitable mortgage.

## Legal Principles

- A court first determines, from the instrument’s language and purpose, whether it is reasonably susceptible to the meaning asserted; extrinsic evidence cannot be used to supply a meaning the writing cannot reasonably bear.
- A lender that selects and drafts a standardized form bears the risk of ambiguity; doubtful language is construed against the drafter, particularly where the drafter has superior bargaining power.
- An “assignment of rents” and a covenant “not to sell or encumber,” without terms indicating a lien or typical mortgage features, is not treated as a mortgage merely because it is described as “security.”
- The equitable mortgage doctrine does not permit a lender to obtain foreclosure when the written instrument, viewed objectively, does not fairly indicate an intent to create a mortgage-like interest in the land, especially when doing so would defeat the borrower’s reasonable expectations.

## Conclusion

The court refused to allow foreclosure based on recharacterizing a standardized rent-assignment and non-encumbrance agreement as an equitable mortgage, holding that the bank could not use extrinsic intent evidence to transform an instrument whose text did not reasonably indicate creation of a mortgage lien on the borrower’s home.


Tahoe Nat’l Bank v. Phillips, 4 Cal. 3d 11, 480 P.2d 320 (Cal. 1971)