Bank is Not Entitled to Deficiency Judgment Against Debtors Who Did Not Consent to Disposal of One of Two Properties Securing the Loan

The California Fifth Appellate District (Appellate Court) has decided that in a judicial foreclosure action, a bank whose loan was secured by two parcels of real property is precluded by C.C.P. section 726 (the one form of action rule) from obtaining a deficiency judgment against a borrower who did not consent to a co-borrower's sale of one parcel of the real property security and the bank's release of its lien from that real property.

(First California Bank v. McDonald (October 24, 2014, F067812)  ___Cal.App. 4th ___).


Sally ("Sally") and John ("John") DeVincenzo, husband and wife, obtained a $1,509,000.00  loan ("Loan") from First California Bank ("Bank") and secured it with a deed of trust on a parcel of community real property located in Wasco, California ("Wasco Property") and a deed of trust on a parcel of real property owned by Sally as her separate property located in Shafter, California ("Shafter Property").  At Sally's request, the Bank reconveyed its deed of trust on the Shafter Property to accommodate a sale and the Bank received and applied the net proceeds of the sale to the Loan.  John died.  John and Sally's children ("Children"), the representatives of John's probate estate,  apparently did not know of and did not consent to the sale of the Shafter Property and the release of the Bank's deed of trust encumbering it. 

When the Loan became delinquent, the Bank commenced a judicial foreclosure action seeking to sell the Wasco Property at a judicial foreclosure sale and to obtain a deficiency judgment against the Children (Sally filed Chapter 7 bankruptcy), as representatives of John's probate estate.  The trial court awarded the Bank summary judgment for sale of the Wasco Property and a deficiency judgment against the Children.


The Fifth Appellate District reversed the summary judgment award.  The Appellate Court reasoned that the "security first" principle of the one form of action rule in C.C.P. section 726 requires that all real property security must be included in a judicial foreclosure action.  Here, since the Shafter Property had been sold previously with the Bank's participation, the Bank could not comply with the security first requirement of the one form of action rule and it was deemed to have waived its right to a deficiency judgment.  Therefore, unless it could be proved that the borrowers consented to the sale of the Shafter Real Property, the Bank was precluded from obtaining a deficiency judgment against them.  Since Sally consented to the sale of the Shafter Property, a deficiency judgment could be obtained against her, but she filed bankruptcy.  There was no evidence in the record that the Children had consented to the sale.  Therefore, the Appellate Court reversed the summary judgment award and remanded the matter to the trial court.  The Appellate Court noted that if the Bank could prove the Children consented to the release of the Shafter Property from the Bank's lien and application of the sales proceeds to the Loan, a deficiency judgment could be awarded against them.  The Appellate Court also noted that nothing in its opinion prevented the Bank from pursuing a judicial or nonjudicial foreclosure of the Wasco Property. 


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