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While most foreclosures result in the inability to pursue the borrower due to the creation of a non-recourse debt, there are some exceptions and issues that arise.

ONE REMEDY RULE: One of the least understood, most important, and often overlooked California Anti-Deficiency Laws is CCP 726(a), the “One Form of Action Rule.”

(a) 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 or an estate for years therein, which action shall be in accordance with the provisions of this chapter.In the action the court may, by its judgment, direct the sale of the encumbered real property or estate for years therein (or so much of the real property or estate for years as may be necessary), and the application of the proceeds of the sale to the payment of the costs of court, the expenses of levy and sale, and the amount due plaintiff, including, where the mortgage provides for thepayment of attorney’s fees, the sum for attorney’s fees as the court shall find reasonable, not exceeding the amount named in the mortgage.

Essentially, it provides that, “A secured creditor can bring only one lawsuit to enforce its security interest and collect its debt.” Security Pacific National Bank v. Wozab (1990) 51 Cal. 3rd 991, 997.  Under this rule, the creditor is supposed to pursue its collateral first; it is permitted to seek a personal judgment against the borrower, only after exhausting its collateral.  Thus, if the lender takes action against the debtor individually instead of pursuing the debt, then the lien is extinguished.

This rule can be quite harsh to creditors, and result in a windfall to the debtor. In Security Pacific National Bank v. Wozab (1990) 51 Cal. 3rd 991, the bank was owed approximately one million dollars, which was secured by real property.  The bank made the mistake of grabbing approximately $3,000 out of the borrower’s checking account, using the power of set off.  The Supreme Court held that, by setting off the $3,000, the bank lost its lien against the real property.  The one million dollar debt was still owing, but it was no longer secured by the real property!  A similar result occurred in In re Prestige Limited Partnership – Concord (9th Cir. 2000) 234 F. 3rd 1108.

Add a bankruptcy to the mix to discharge the underlying debt, and the borrower may end up with the property free and clear (for example, bank exercises setoff on mortgage by taking money from bank account on first mortgage behind on payments, debtor files bankruptcy, lien is extinguished, and bank has no other claim against debtor due to 580b).

GUARANTORS: Notwithstanding all the forgoing, there are a few additional items of importance.  While most mortgages contain language waiving the forgoing statutes, they are not enforceable against the borrower. Nevertheless, they are enforceable against a guarantor.  So if someone guaranteed the loan such as a family member, even though no deficiency can arise in the foreclosure against the borrower, the guarantor can still be sued.

So what’s the bottom line?  The reality of most foreclosure cases in today’s economic times in California are that the loans are either purchase money loans which prohibit recourse under 580b, or are loans that have been converted to non-recourse loans under 580d due to a non-judicial sale.  But there are a fair number of exceptions now arising to the forgoing as a result of refinanced seconds, HELOCs, and other junior deeds of trusts.

However, with proper planning, often utilizing Federal Laws under Title 11, these junior trust deeds can often be removed nonetheless, from the property and without any tax liabilities.  As always, seek a competant attorney in your area if you have any questions over the ramifications of a foreclosure proceeding against you.

Written by Michael G. Doan- Mr. Doan practices on the cutting edge of bankruptcy law, and was the first attorney in the entire Southern District of California to file the very first Chapter 7 Bankruptcy and very first Chapter 13 Bankruptcy under the new Bankruptcy Laws which went into effect on October 17, 2005.

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