A creditor who holds a debt secured by a Deed of Trust or Mortgage is held to various restrictions as to how to enforce the right to seize the security and whether, if the real property sale does not amount to enough to pay off the entire debt, further relief may be sought by then suing the debtor directly.
The reader should first read our article on Real Estate Transactions which describes Deeds of Trust as well as the Anti Deficiency Statute before reading further.
In addition to the restrictions applicable described in the articles above, the law in California also imposes the SINGLE ACTION RULE which severely restricts the choices open to a holder of real property security in seeking to enforce the debt. This article shall outline the restrictions applicable under California Code of Civil Procedure Section 726.
The Basic Law:
CCP § 726, commonly referred to as the single action rule, mandates one form of action[1] for the recovery of any debt secured by a mortgage or deed of trust on real property. The single action must be a foreclosure[2].
In addition, if a creditor wants a deficiency judgment, the rule contemplates a single action consisting of a two-stage judicial proceeding: the first stage orders the sale of the property, determines the liability for a deficiency and culminates in a foreclosure decree; the second stage establishes the amount of the deficiency. 3 Witkin Summary of California Law, Security Transactions in Real Property § 155 (9th ed. 1987) citing United Calif. Bank v. Tijerina, 25 C.A.3d 963, 968 (1972).
If the creditor elects a non-judicial foreclosure, a trustee’s sale, it cannot obtain a deficiency judgment. The rule is designed to prevent the creditor from commencing an action against the debtor before exhausting its security. If the creditor does not follow this security-first mandate, the debtor can raise the single action rule as a defense or as a sanction. The debtor can raise the defense that the debt is secured and he can force the creditor to foreclose first. If the debtor does not raise the defense, the creditor is sanctioned by the loss of its security. 3 Witkin Summary of California Law, Security Transactions in Real Property § 119 (9th ed. 1987).
The Requirements and the Risks:
The three essentials provided by the statute are to confine a recovery to one action, to make the mortgaged property the primary fund out of which satisfaction is to be had, and to give the plaintiff a personal judgment for the balance remaining after exhaustion of the security. Toby v Oregon Pacific R. Co. (1893) 98 C 490, 33 P 550; Ladd v Mathis (1899) 125 C 535, 13 P2d 1012; Otto v Long (1900) 127 C 471, 59 P 895.
A secured creditor who fails to exhaust all his security for the same debt in a single action, in contravention of the one-form-of-action rule of Code Civ. Proc., § 726, waives the balance of the security and waives any claim to the unpaid balance of the debt. Although this is a harsh sanction, the harshness flowing from application of § 726 as a sanction is necessary to uphold the statutory policy of protecting debtors' rights. Bank of America V. Daily (1984, 4th Dist) 152 Cal App 3d 767, 199 Cal Rptr 557.
The purpose of this statute is to prevent a multiplicity of suits. Ould v Stoddard (1880) 54 C 613; Felton v West (1894) 102 C 266, 36 P 676; Commercial Bank v Kershner (1898) 120 C 495, 52 P 848; Savings Bank of San Diego County v Central Market Co. (1898) 122 C 28, 54 P 273. Because of the substantive importance of §§ 726, a creditor cannot circumvent the requirement of looking to the security first by “waiving” the security and suing the debtor directly on the debt. The objective of this section is to force the creditor to look to the security as the primary source for payment of the debt before looking to the creditor’s other assets.
REFERENCES:
Code of Civil Procedure Section 726
See generally 3 Witkin, Summary of California Law, Security Trans-actions in Real Property §§ 111-180 (9th ed. 1987); Miller & Starr, California Real Estate §§ 9:104-195 (2nd ed. 1975).
Conclusion:
As with so much pertaining to California real property law, the risks in not carefully planning all steps and obtaining good legal and tax advice are myriad. This writer recalls a creditor who arrived at our office after a nonjudicial foreclosure on a deed of trust which only netted him about half of what was owed and who was dumbfounded to discover that he had already waived the right to collect the rest by his election of remedies. He was outraged that an admitted debt would now be unpaid due to his error in seeking to enforce his rights before obtaining competent legal advice before he acted. His rage was compounded when the debtor, relieved that the error had been made, sent him a note crowing about the results. The note quoted Auden:
Perhaps there is only one cardinal sin: impatience. Because of impatience, we were driven out of Paradise; because of impatience, we cannot return.
Our client may have found paradise but he certainly did not recover his entire debt. Be warned.
[1] There can be but one action for the recovery of any debt secured by a mortgage. Bartlett v Cottle (1883) 63 C 366; First Nat. Bank v Holt (1890) 87 C 158, 25 P 272; Byrne v Hoag (1899) 126 C 283, 58 P 688; Crescent Lumber Co. v Larson (1913) 166 C 168, 135 P 502.
[2] The one-form-of-action rule (Code Civ. Proc., §726, subd. (a)) applies to any proceeding or action by the beneficiary for the recovery of the debt, or enforcement of any right, secured by a mortgage or deed of trust. The only action that is permitted is foreclosure; any other "action" is a violation of the rule, which invokes severe sanctions. Shin v Superior Court (1994, 2nd Dist) 26 Cal App 4th 542, 31 Cal Rptr 2d 587.