Filed 11/21/14 unmodified opn. attached
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIFTH APPELLATE DISTRICT
FIRST CALIFORNIA BANK,Plaintiff and Respondent,
v.
MARY ALICE MCDONALD et al.,
Defendants and Appellants. / F067812
(Super. Ct. No. CV272097)
Order Modifying Opinion and Denying Rehearing
[No Change in Judgment]
THE COURT:
It is ordered that the published opinion along with its concurrence filed herein on October 24, 2014, be modified as follows:
- On page 10, the first full paragraph beginning with “Another component” and the footnote are deleted. The following paragraph and footnote are inserted in its place.
Another component of the broader rule is the “security first” principle or rule, which requires the creditor to proceed initially against all the real property security before enforcing the underlying debt. (Bernhardt, supra, § 4.6, p.4-6.)[7] The combination of the security first principle and the one action rule can be stated as follows: Pursuant to section 726, the creditor must pursue all of the real property security first in the form of a single legal action for judicial foreclosure.
- On page 11 through 12, subheading “5 ‘Security First’ Principle”AND the two full paragraphs that follow, including footnote 9, are relocated to page 10 following the first paragraph ending with “judicial foreclosure.” This requires renumbering of all subsequent footnotes.
- On page 12 subheading “6. Examples Involving Multiple Parcels” is added prior to the paragraph beginning with “To illustrate ….” This will require renumbering of all subsequent subheadings.
- On page 12 the paragraph beginning “To illustrate” is deleted and the following is inserted in its place:
To illustrate the application of the section 726, suppose a debtor whose loan was secured by multiple parcels of real estate raises the security first principle as an affirmative defense in a judicial foreclosure action that did not include all of the parcels. The creditor can respond in a number of ways, including dismissing the foreclosure lawsuit. If the creditor decides to maintain the judicial foreclosure action, there are four ways in which that case might proceed.
- At the end of the last full paragraph on page 17, after the sentence ending “were actually applied” add as footnote 12 the following, which will require renumbering of all subsequent footnotes:
12 Bank’s petition for rehearing asserts this opinion “omits to mention the material fact in the present case that all proceeds from the sale of the Shafter Property were applied to the loan, thereby reducing the obligation of the co-debtor.…” This incorrect representation of the contents of the record appears to be based on counsel’s failure to differentiate between a fact that is stated in the moving party’s separate statement and a fact that might be inferred from other facts set forth in the separate statement. Paragraph 9 of Bank’s separate statement merely sets forth the understanding that Bank would receive the net proceeds from the sale of the Shafter Property. Based on this understanding between Bank and Sally, Bank’s counsel infers the parties actually implemented the understanding and Bank received the proceeds. That inference is contrary to the statutory rules governing the use of inferences in connection with motions for summary judgment or adjudication. Under the statute, courts shall consider all inferences reasonably deducible from the evidence, but cannot draw inferences favorable to the moving party “if contradicted by other inferences ….” (§437c, subd. (c); see Guz v. Bechtel National, Inc. (2000) 24 Cal.4th 317, 337 [if evidence logically permits conflicting inferences, a question of fact is presented].) Here, the mere existence of an agreement about net proceeds allows one to logically infer that it was (1) performed in full, (2) performed only in part, or (3) not performed at all.
Similarly, we note that paragraph 9 of Bank’s separate statement fails to indicate what happened to its deed of trust for the Shafter Property—specifically, whether the sale was subject to the deed of trust or whether Bank released the deed of trust so that the sale was free and clear of Bank’s lien. The omission of this material fact from the separate statement provides another ground for denying Bank’s motion, but for purposes of this appeal, we (like appellants) have assumed Bank released its deed of trust.
Bank’s petition for rehearing also asserts this opinion ignores the fact Sally had ostensible authority to act on behalf of appellants. This purported fact is not among the material facts set forth in Bank’s separate statement. Thus, the assertion is another example of the failure to understand section 437c and how to establish facts for purposes of a motion for summary adjudication.
- In the footnote on page 18, now footnote number 13, the word “dissent’s” is replaced with the word “concurrence’s.”
- On page 18, the third paragraph following subheading 2 beginning with “In addition” is deleted and the following paragraphs and footnote 14 are inserted in its place.
Bank contends that Security Pacific National Bank v. Wozab (1990) 51 Cal.3d 991 (Wozab) is controlling authority. We disagree.
First, the majority in Wozab did not mention, criticize or expressly overrule the consent requirement set forth in Schwenke.
Second, there is no basis for concluding the California Supreme Court impliedly overruled Schwenke. Approximately six years after Wozab, a unanimous California Supreme Court quoted Schwenke for the basic proposition that a secured creditor, by its own act, may deprive itself of the right to an action on the note for a deficiency judgment. (Ghirardo v. Antonioli (1996) 14 Cal.4th 39, 48.) On the next page of the opinion, the court cited Wozab as follows: “Security Pacific National Bank v. Wozab (1990) 51 Cal.3d 991, 1005 [275 Cal.Rptr. 201, 800 P.2d 557] [by acquiescing in creditor bank’s decision not to foreclose and by demanding reconveyance, debtor caused the bank to forgo its security and waived the right to rely on Code of Civil Procedure section 726].” Because Wozab and Schwenke were cited with approval in a subsequent Supreme Court opinion, we reject the position that Wozab impliedly overruled Schwenke.
Third, the discussion in Wozab confirms the importance of consent when the relationship involving the secured creditor, the debtor and the collateral is altered. The debtors in Wozab demanded the bank’s reconveyance of the deed of trust after the bank had offset approximately $2,800 in the Wozabs’ deposit account against a debt of over $975,000. (Wozab, supra, 51 Cal.3d at p. 1005.) The bank complied and the Wozabs accepted the reconveyance of the deed of trust, which led the majority to conclude the Wozabs had voluntary relinquished (i.e., waived) the protections of the security first rule. (Ibid.) By demanding that the bank not foreclose, the Wozabs “freely chose not to have the bank foreclose upon the security interest.” (Ibid., italics added.) Freely choosing something is the same as consenting to it. In contrast to the Wozabs, the Schwenkes did not request or otherwise consent to the reconveyance of the two deeds of trust that secured the promissory note.
Fourth, in Wozab, the majority concluded that when a secured lender violates the security first principle by offsetting funds in a deposit account, the appropriate remedy for the debtor is to demand (1) the return of the amount offset and (2) the lender pursue the real property security first. (Wozab, supra, 51 Cal.3d at p. 1006.) The court rejected the debtors’ argument that the violation caused by the offset of $2,800 should bar any subsequent action for a personal judgment on the unpaid debt. The majority’s statement that this result “is so harsh as to be punitive” (ibid.) is based on the fact that the lender had relinquished the real property security and the only way it could collect the debt was a personal action. Thus, the majority did not address the lesser consequence of the loss of the right to collect a deficiency judgment in a judicial foreclosure action. Here, Bank is not in the same position as the lender in Wozab because Bank can enforce the debt by judicially foreclosing on the remaining security. Consequently, the harsh result advocated in Wozab is different from the waiver of a deficiency judgment advocated by appellants in this case.[1]14
Another reason we reject Bank’s argument that Schwenke is bad law is our recent opinion citing Schwenke for the proposition that the consent of a debtor to an arrangement in which the secured creditor relinquishes the security without retiring the note can take the matter outside the protections of section 726. (Bank of America, N.A. v. Roberts (2013) 217 Cal.App.4th 1386, 1398-1399 [debtor liable for balance of home equity line of credit that had been secured by junior deed of trust; lender released the junior deed of trust in a short sale arrangement approved by the debtor in writing].)
- On page 19, in the first full paragraph beginning “Lastly, Bank” footnote number 15 is inserted between the sentence ending “securing the loan” and the sentence beginning “Here, John’s death.”
15Bank’s petition for rehearing asserts this “opinion has the potential to impact hundreds of millions, if not billions, of dollars in multi-party commercial loans” and “opens the sluice gates to decisions imposing a loss-of-debt penalty and other draconian consequences where a lender did not act in bad faith.…” There is a Chicken Little “the sky is falling” quality to this assertion because, among other things, this case does not involve the loss of the debt, but only a waiver of the deficiency judgment.
- On page 1 of the concurring opinion, the last sentence of the second paragraph is deleted and replaced with the following: “Therefore, I concur in the judgment, though I do not concur in all aspects of the majority’s analysis.”
- On page 3 of the concurring opinion, in the third paragraph beginning “I am pleased” footnote 3 is inserted after the second sentence ending “to be punitive.” This will require renumbering of all subsequent footnotes. The new footnote shall read:
3In an order denying rehearing and modifying the opinion, the majority now addresses this notion raised in my original concurrence. The majority submits that the result in this case is less harsh than the one imposed in Wozab. (Maj. opn. at pp. 21-22 & fn. 16.) But the harshness of a remedy is a function of both its severity and the nature and scope of circumstances under which it is imposed. A $1 sanction can be harsh if imposed for blameless conduct. The result in this case is harsh not only because the Bank’s loss of any deficiency judgment is significant, but also because the Bank’s conduct does not seem worthy of sanction. While the punishment in Wozab may have been more severe, the bank’s conduct in that case was also clearly more deserving of sanction. (See Wozab, supra, 51 Cal.3d at p. 1011 (conc. & dis. opn. of Broussard, J.) [improper bank setoffs constitute illegal conversion].)
Here, there is no evidence of defalcation or other misconduct. Yet, the remedy imposed places the substantial burden of forfeiture upon the bank under conditions that do not suggest any improper motive but instead reflect a common practice under the law that happens to run afoul of the Hibernia rule in this instance.
I do not join in the majority’s disparagement of the Bank’s concerns that the result in this case is unduly harsh.
- On page 3 of the concurring opinion, in the first paragraph of section D the two sentences, beginning “While there is no evidence” and ending “appellants suffered any prejudice” are deleted and the following sentences shall be inserted in their place.
While there is no evidence that the nonowner/codebtors (i.e., appellants) consented, the trial court found all of the proceeds of the sale were applied to the joint debt.4 If the proceeds were so applied, it is highly unlikely appellants suffered any prejudice.
- On page 4 of the concurring opinion, the text “, as here,” is deleted from the penultimate sentence of the second paragraph of section D so that the sentence now reads:
The law should provide that when (1) real property security is exhausted with the owner/codebtor’s consent but without a nonowner/codebtor’s consent and (2) all proceeds are applied to the joint debt: the nonconsenting codebtor is not bound by the actual sale price of the property.
- On page 6 of the concurring opinion, the first full paragraph beginning “I urge the Legislature” is deleted and the following is inserted in its place.
I urge the Legislature and Supreme Court to consider providing for alternative remedies when a Hibernia violation causes only hypothetical prejudice that can be cured by a lesser sanction.
There is no change in judgment.
Respondent’s petition for rehearing is denied.
As to the majority opinion modifications:
______
FRANSON, J.
I CONCUR:
______
CHITTICK, J.[2]
I CONCUR as to the concurring opinion modifications:
______
POOCHIGIAN, ACTING P.J.
Filed 10/24/14 unmodified version
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIFTH APPELLATE DISTRICT
FIRST CALIFORNIA BANK,Plaintiff and Respondent,
v.
MARY ALICE MCDONALD et al.,
Defendants and Appellants. / F067812
(Super. Ct. No. CV272097)
OPINION
APPEAL from a judgment of the Superior Court of Kern County. Sidney P. Chapin, Judge.
Calfee Konwinski, Christopher J. Konwinski; Wendel, Rosen, Black & Dean, Charles A. Hansen and Kevin R. Brodehl for Defendants and Appellants.
Epport, Richaman & Robbins, Steven N. Richman and Renata A. Guidry for Plaintiff and Respondent.
-ooOoo-
First California Bank (Bank) filed this judicial foreclosure action to collect a loan secured by two parcels of real estate. The loan had been made to a husband and wife and, after the husband died, the loan went into default. Bank and the wife agreed to a private sale of one of the parcels that was her separate property. Afterward, Bank filed this action to foreclose on the remaining parcel and obtain a deficiency judgment.
Bank successfully moved for summary adjudication of its judicial foreclosure cause of action. The trial court’s decree of judicial foreclosure stated Bank was entitled to obtain a deficiency judgment against the representatives of the husband’s estate.[3] On appeal, appellants contend the trial court erred by holding them liable for a deficiency judgment.
Generally, a creditor to a loan secured by real property has two potential sources of repayment if the loan is not repaid and goes into default—proceeds from the sale of the real property collateral and a personal judgment against a debtor (or what is known as a deficiency judgment). For policy reasons, resort to real property collateral for repayment of secured loans is favored, and deficiency judgments are not, and creditors must follow certain statutory mandates in order to ultimately obtain a deficiency judgment.
There are two basic statutory requirements under Code of Civil Procedure section 726[4] for creditors seeking deficiency judgments: (1) “security first,” which means that a creditor must first exhaust all real property security to qualify for a deficiency judgment; and (2) such exhaustion of the real property collateral must be through a single judicial foreclosure lawsuit. These requirements in section 726 are referred to as the “one form of action” rule. These statutory protections may be waived by debtors in certain situations.
Secured creditors are allowed to “exhaust” their collateral to repay secured loans in ways other than judicial foreclosure, such as nonjudicial foreclosure or private sales. However, the consequence of not following the dictates of section 726 is a waiver of the creditor’s right to a deficiency judgment. In order to obtain a deficiencyjudgment, all real property collateral must be exhausted in one single action for judicial foreclosure. If any of the real property collateral is exhausted through any other means, such as a private sale without the consent of the debtors, a deficiency judgment is barred. Because Bank failed to follow the requirements of section 726 by disposing of the Shafter Property outside of judicial foreclosure and without appellants’ consent or waiver, Bank has waived any right to a deficiency against them.
We therefore reverse the judgment.
FACTS
On March 19, 2009, Sally DeVincenzo (Sally) and John P. DeVincenzo (John), husband and wife, signed a five-year promissory note stating they would pay Bank[5] the principal amount of $1,509,000, with interest. Under the note, monthly installment payments were due, with the final balloon payment due in April 2014. The note provided that, upon default, Bank could accelerate the note and declare all monies payable immediately due and payable. Sally and John secured the note by signing a deed of trust that granted Bank an interest in real property located in Wasco, California (Wasco Property).
Also on March 19, 2009, Sally provided additional security for the note by signing a deed of trust for a property located in Shafter, California (Shafter Property). The deed of trust stated Sally was a married woman and described the Shafter Property as Sally’s “sole and separate property.”
On a date not specified in the record, Sally sold the Shafter Property. Bank’s separate statement asserts Sally “requested that First California agree to the sale of the parcel. First California agreed with the understanding that (a) First California would receive the net proceeds, and (b) the Borrowers would not be released of liability.”