Creditor Holding Deed of
Trust Must Foreclose First Before
Seeking Money Judgment
12/18/05
Dear
Mr.
Duman:
My
brother-in-law received a deed of trust on a neighbor’s Clear Lake
vacation
property in order to secure a personal loan.
The
neighbor
has defaulted on the loan payments, because he does not want the
property any
longer and he has had difficulty selling the property at a price, which
is
large enough to pay off the loan.
My
brother-in-law believes the neighbor has money in his bank accounts. He would rather sue the neighbor for the
money rather than foreclose with the likelihood he would end up with
the
property.
Can
my
brother-in-law file a lawsuit for the money owed, instead of
foreclosing?
G.
B., Oakland
Dear G. B.:
According to
California Code of Civil Procedure, Section 726, "There can be but one
form of action for the recovery of any debt or the enforcement of any
right
secured by mortgage upon real property..."
This concept,
known as the “one form of action” rule, requires creditors, who have
accepted
real property as collateral for a loan, to file a single judicial
foreclosure
lawsuit to exhaust that collateral first, before getting a personal
judgment to
satisfy the underlying debt.
The "one
form of action” rule is intended to prevent multiple concurrent actions
arising
out of an otherwise single underlying debt.
The "one form of action”, also, is intended to discourage
dishonest
behavior by requiring the sale of the collateral, through competitive
bidding
at a court approved foreclosure sale to satisfy the debt.
A secured
creditor, who fails to comply with Section 726 by attempting to pursue
a
borrower’s other assets, before first foreclosing upon real property
collateral, faces a variety of consequences, not the least of which is
jeopardizing the right to subsequently look to the real property
security, as a
means of paying the debtor's obligation.
Also, a
secured party can be compelled, by court order, to first foreclose upon
the
real property collateral, before looking to other assets of the debtor
to pay
off the loan.
There are
certain exceptions to the "one-form-of-action" rule. Where
applicable, these exceptions allow a secured creditor to lawfully
bypass the
real property collateral and sue directly on the debt.
For example, the debtor’s gross neglect of
the secured property, when it is shown to have diminished its value,
can
provide grounds for permitting a secured creditor to bypass the
"one-form-of-action" rule.
A secured
creditor may pursue the debtors other assets, once the designated real
property
collateral is exhausted, except where prohibited by California’s
“anti-deficiency” laws, which are set forth within Code of Civil
Procedure
Sections 580(a) through 580(d). The
most prominent example of the “anti-deficiency” laws can be found in
Section
580(b), which prohibits the recovery of a “deficiency judgment” under a
deed of
trust securing a loan for the purchase of “a dwelling for not more than
four
families...occupied, entirely or in part, by the purchaser”.
However,
even
where not prohibited by “anti-deficiency” laws, a secured creditor, who
wishes
to pursue any of the debtors’ other assets, when the value of the
security is
insufficient to satisfy the debt, must do so through a judicial
foreclosure in
order to obtain a “deficiency judgment” as required by the “one form of
action”
rule.
Judicial foreclosures are
not popular with
creditors, because of the burdensome requirements that must be
satisfied, when
pursuing that remedy. To avoid the time
consuming, complex legislation, the creditor frequently chooses to
waive the
right to obtain a deficiency judgment and institute a “non-judicial”
foreclosure, which is conducted under a contractual “power of sale” set
forth
in the deed of trust. When a
foreclosure is conducted under a “power of sale”, the creditor is not
entitled
to sue the debtor in court to recover the deficiency.
Our readers
with questions pertaining to this subject should consult directly with
their
lawyer, for specific attention and guidance.
FD776 12/9/05
4\column\forclose.rq5
Readers may address their
questions to The Real Estate
Lawyer, Fred M. Duman, 2807 Castro Valley Boulevard, Castro Valley, California
94546. Mr. Duman will answer those of
general
interest in his column. He reserves the
right to edit the letter for brevity and clarity.
Each real estate problem
usually has its own distinct
circumstances, and frequently is more complicated than realized by a
layperson. Readers are also encouraged
to consult with their own lawyers to obtain guidance concerning their
problems
when they first arise.
Readers are cautioned that
these answers are not intended
to be the basis for any action or reliance by the reader.
You are welcome to
visit our web site at “www.dumanlaw.com”.
© 2005, Fred M. Duman All Rights Reserved. Please see our disclaimer.
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