Monday, October 27, 2014
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Court of Appeal Invokes One-Form-of-Action Rule, Overturns Deficiency Judgment in Favor of Bank
By a MetNews Staff Writer
A bank that agreed to a short sale of one of two properties securing a loan, then brought a judicial foreclosure action with regard to the other, lost its right to a deficiency judgment when it failed to obtain a joint debtor’s consent to the short sale, the Fifth District Court of Appeal ruled Friday.
The court overturned a Kern Superior Court judge’s ruling in favor of First California Bank. Judge Sidney Chapin had ruled that the estate of John P. DeVincenzo was liable for a deficiency following foreclosure on property in Wasco.
DeVincenzo and his wife had pledged the property in March 2009 as security for a loan of about $1.5 million, with monthly payments thereafter, and a final balloon payment due in April of this year. Sally DeVincenzo simultaneously pledged a separate property she owned in Shafter as additionally security for the loan.
John DeVincenzo died in September 2009, and no payments were made on the loan after December of that year. The Shafter property was sold, and the bank filed a court document explaining that Sally DeVincenzo has asked for the bank’s approval to sell the property, and the bank had agreed on condition that it receive the proceeds and that “the Borrowers would not be released of liability.”
In November 2010, the bank sued for judicial foreclosure, saying it had accelerated the debt and that the principal due was in excess of $1 million, and that interest and costs and fees were due as well.
Sally DeVincenzo was named as a defendant, along with John DeVincenzo’s children in their capacities as administrators of his estate. The trial judge subsequently granted the relief sought by the bank, including a forced sale of the property and a deficiency judgment in an amount to be determined after the sale.
Justice Donald Franson Jr., writing for the Court of Appeal, said the deficiency judgment was barred by Code of Civil Procedure §726, setting forth the “one form of action” and “security first” rules.
The statute, the justice explained, permits an order for sale of the indebted property, as well as a judgment for any deficiency, “unless judgment for any deficiency…is waived by the judgment creditor.” But it protects debtors by limiting the amount of the deficiency to the amount owed minus the fair value of the property, as determined by the court within three months following the sale, and by allowing a post-sale redemption from the purchaser based on the sale price, unless the creditor waives any deficiency, the justice pointed out.
Franson elaborated that a creditor will be deemed to have waived a deficiency if it fails to follow the mandates of the statute, absent the consent of the debtor.
Under the undisputed facts of the case before the court, the jurist said, the estate established that bank violated the security-first principle by neither foreclosing on Sally DeVincenzo’s Shafter property, nor obtaining the consent of John DeVincenzo’s heirs to Sally DeVincenzo’s sale of the property.
Franson cited Pacific Valley Bank v. Schwenke (1987) 189 Cal.App.3d 134, a case in which two men and their wives signed a promissory note in order to obtain financing for the husbands’ business partnership, the loan being secured by real property belonging to one of the two couples, the O’Briens.
After the partnership dissolved, the other couple, the Schwenkes, learned that the bank had entered into a separate transaction in which it had released the real estate collateral. The bank sued the Schwenkes for what was still owed on the partnership loan, and obtained a judgment for $59,000. On appeal, however, the court held that the Schwenkes, even though not parties to the trust deed encumbering the real estate, were protected by the one form of action rule because they did not consent to the release of the encumbrance.
“Based on the text of section 726, the conceptual foundation for the security first principle…and Schwenke…we conclude that Bank was required to include both parcels of real property security in its judicial foreclosure action unless Bank can show that all of the debtors consented to the release of the Shafter Property as security for the loan,” the justice wrote. “We further conclude that Bank’s release of the Shafter Property without appellant’s consent would operate as a waiver of Bank’s right to a deficiency judgment under the provision in section 726(b) that provides for such a deficiency ‘unless judgment for any deficiency … is waived by the judgment creditor .…’”
Fresno Superior Court Judge Hilary Chittick, sitting on assignment, concurred in Franson’s opinion.
Justice Charles Poochigian concurred separately.
He argued that the bank complied with the security-first rule by proceeding against the Wasco property after the other pledged asset, the Shafter property, had already been sold. But the bank would lose anyway, he said, under Hibernia S. & L. Soc. v. Thornton (1895) 109 Cal. 427, holding that a creditor may not seek a deficiency if it is responsible for the extinguishing of its own security.
In this case, he said, the rule creates a harsh result, because if the bank had asked the estate to consent to the short sale, it would have accomplished its desired result, regardless of the response, because it would either have obtained consent or foreclosed on both properties. But the rule remains good law unless and until the Legislature says otherwise, he concluded.
The case is First California Bank v. McDonald, F067812.
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