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First California Bank v. McDonald

California Court of Appeals, Fifth District

October 24, 2014

FIRST CALIFORNIA BANK, Plaintiff and Respondent,
MARY ALICE MCDONALD et al., Defendants and Appellants.


[As modified Nov. 21, 2014.]

APPEAL from a judgment of the Superior Court of Kern County, No. CV272097 Sidney P. Chapin, Judge.

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[Copyrighted Material Omitted]

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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.



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.[1] 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

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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[2] 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 deficiency judgment, 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 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.


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[3] 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

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(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.”

In September 2009, John died. A probate proceeding was initiated and appellants—his children—were appointed as the personal representatives of his estate.

The note went into default when the December 2009, payment was not made. No further payments were made. As a result of the lack of payment, Bank declared all sums under the note to be immediately due and payable, with interest and late charges.

The declaration of Bank’s vice-president of special assets stated that, as of February 29, 2012, there was due an unpaid principal sum of $1, 019, 278.98 plus accrued interest of $158, 868.23 and certain late charges, expenses and loan fees.


In November 2010, Bank filed a complaint for judicial foreclosure on the Wasco Property and a deficiency judgment against Sally and appellants. Bank later filed a second amended complaint, which named appellants only in their capacities as personal representatives of John’s estate.

Bank filed the motion for summary adjudication that is the subject of this appeal. In March 2013, following a hearing, the trial court issued a minute order granting the motion for summary adjudication of Bank’s third cause of action for judicial foreclosure.

In June 2013, the trial court signed and filed (1) the formal order and (2) a decree for judicial foreclosure and order for writ of sale of the Wasco Property. The decree also stated appellants were liable for the subject debt and that a deficiency judgment could be entered against them in an amount to be determined after the sale of the Wasco Property.

Appellants appealed.

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I. Standard of Review

A motion for summary judgment “shall be granted if all the papers submitted show that there is no triable issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” (§ 437c, subd. (c).)

Appellate courts determine whether a triable issue of material fact exists by conducting an independent review of “the record that was before the trial court when it ruled on defendants’ motion.” (Martinez v. Combs (2010) 49 Cal.4th 35, 68 [109 Cal.Rptr.3d 514, 231 P.3d 259].) When conducting this independent review of the record, appellate courts view the evidence in the light most favorable to the nonmoving parties, resolving evidentiary doubts and ambiguities in their favor. (Ibid.)

Ordinarily, we methodically apply “the required step-by-step evaluation of the moving and opposing papers.” (Brantley v. Pisaro (1996) 42 Cal.App.4th 1591, 1607 [50 Cal.Rptr.2d 431] (Brantley).) In this case, however, we will adopt the approach employed by the parties and move directly to the central issue: Was Bank’s right to collect a deficiency judgment against appellants dependent upon Bank obtaining their consent to the arrangement in which Bank released its deed of trust to the Shafter Property? Stated in terms of the summary adjudication statute, was appellants’ consent a material fact that must be undisputed for Bank to prevail on its claim for a deficiency judgment? We answer “yes” to these questions.

II. Necessity of Consent to Private Sale of Security

A. Background—The Pleadings and Motion

1. Bank’s Complaint

Bank’s second amended complaint included a cause of action for judicial foreclosure of the deed of trust. Bank alleged that because of the defaults on the note, Bank was entitled to enforce the deed of trust by judicial foreclosure on all of the defendants’ rights in the Wasco Property. Bank’s prayer for relief under its judicial foreclosure cause of action requested foreclosure against the Wasco Property and a deficiency judgment against John’s estate.[4]

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2. Appellants’ Answer

Appellants’ answer asserted a number of affirmative defenses. Their seventh affirmative defense asserted that Bank failed to seek, in this action or in any other single action, a foreclosure of all the property that was or had been security for the debt, in violation of the requirements of section 726 and, therefore, Bank’s recovery was barred.

3. Summary Adjudication—Bank’s Motion and Separate Statement

Bank’s moving papers included a separate statement of undisputed facts that defined the issue to be summarily adjudicated as follows: “There is no triable issue of material fact as to the third cause of action for Judicial Foreclosure.” Bank’s motion argued it should obtain a judgment on its third cause of action because (1) it was entitled to (a) judicial foreclosure on the Wasco Property and (b) a deficiency judgment against appellants, and (2) appellants’ affirmative defenses had no merit.

4. Appellants’ Opposition

Appellants’ opposition papers asserted Bank’s release and reconveyance of the deed of trust for the Shafter Property without their consent violated the security first principles of section 726, subdivision (a) (section 726(a)) and released them from personal liability for a deficiency judgment. Appellants did not contend the violation affected Bank’s right to foreclose on the Wasco Property. Supplemental briefing filed by appellants in the trial court stated Bank remained able to pursue recovery against the Wasco Property under the deed of trust that remained in effect.

Based on the arguments presented below and on appeal, the question we must resolve is whether Bank waived its right to a deficiency judgment against appellants by violating the security first principle in section 726(a). The violation asserted is Bank’s release of its deed of trust to the Shafter Property without the consent of appellants, which release of collateral meant ...

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