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Banks can not both Trustee sell and sue for Deficiency Judgment

Posted by Anton Ewing Posted on Nov 13 2012

When it comes to enforcing loans secured by California real estate, California is a ?single action? state. Civil Procedure Code Section 726(a) provides in part that ?[t]here can be but one form of action for the recovery of any debt or the enforcement of any right secured by a mortgage upon real property.? This?one-action? rule applies whenever a lender with a loan secured by real property collateral exercises its remedies to recover a debt or to protect its security. The purpose of the one-action rule is to protect a defaulting mortgagor from being harassed by a lot of different actions filed against it by the mortgagee.

California?s ?one-action? statute prohibits the secured lender from pursuing any other judicial cause of action, such as suing the borrower directly, without foreclosing on the real property collateral. As a result, if a lender takes real estate collateral as security for a loan, then lender must foreclose on its real estate security first. Further, a lender can only bring one ?action? against the borrower, and must use it as the primary source of repayment when collecting the loan.

A corollary to the one-action rule, the ?security-first? rule (also codified in Civil Procedure Code Section 726(a)) provides that a creditor must first proceed against the security for the debt prior to trying to enforce, by judicial action or otherwise, the underlying debt. Perhaps the most notorious instance of a creditor running afoul of this prohibition is Security Pacific National Bank v. Wozab, (1990) 51 Cal. 3d 991, 275 Cal. Rptr. 201, 800 P.2d 557,  where the creditor set off approximately $3,000 in the debtor?s accounts held by the creditor in partial satisfaction of a $1,000,000 debt without first foreclosing on the real property securing the debt. The California Supreme Court held that the creditor?s exercise of its equitable right of setoff, while it was not an ?action,? violated the requirement that a creditor rely on its security before attempting to enforce the debt. As a result, the creditor in that case lost its security.

Even though California?s ?one-action? rule applies to foreclosures, lenders can start both a judicial process and a nonjudicial power of sale process (also known as a ?trustee?s sale?).  Simply beginning a nonjudicial foreclosure is not deemed to constitute an ?action? in California.  Neither the commencement of a judicial foreclosure action, nor the filing of a notice of default which commences the nonjudicial foreclosure process, is considered an irrevocable election of remedies under the one-action rule.  A lender is deemed to have elected its remedy, and had its one action, only when a judgment has been entered if a judicial foreclosure action is completed.  A lender that completes a nonjudicial foreclosure sale is also deemed to have elected its remedies and may not seek a deficiency judgment against the borrower.  So, a lender will not be deemed to have made an election between these two foreclosure methods until one of them has been completed.

Posted by Anton A. Ewing, JD