In re Madigan

• Decision Date: 04 January 1991
• Docket Number: Bankruptcy No. SA88-04927JR,Adv. No. SA89-0604JR.,BAP No. CC-90-1149 VJMe
• Citation: 122 BR 103
• Parties: In re Francis William MADIGAN, Jr. and Laura Madigan, Debtors. Francis William MADIGAN, Jr. and Laura Madigan, Appellants, v. POTRANS INTERNATIONAL, INC., Appellee.
• Court: U.S. Bankruptcy Appellate Panel, Ninth Circuit

122 B.R. 103 (1991)

In re Francis William MADIGAN, Jr. and Laura Madigan, Debtors Francis William MADIGAN, Jr. and Laura Madigan, Appellants, v. POTRANS INTERNATIONAL, INC., Appellee.

BAP No. CC-90-1149 VJMe, Bankruptcy No. SA88-04927JR, Adv. No. SA89-0604JR.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted September 12, 1990.

Decided January 4, 1991.

David S. Brower, Santa Ana, Cal., for Francis & Laura Madigan.

Walter Tribbey, Ontario, Cal., for Potrans Intern., Inc.

Before: VOLINN, JONES and MEYERS, Bankruptcy Judges.

OPINION

VOLINN, Bankruptcy Judge:

The appellee, Potrans International Inc. ("Potrans"), sued the debtor Francis W. Madigan¹ in state court on a guaranty that was secured by a trust deed. Potrans did not seek to foreclose the trust deed in that action. Prior to bankruptcy, a default was entered against the debtor in the state court action, but no judgment was entered. After filing bankruptcy, the debtor sought to avoid the trust deed based on the California "single action rule," Cal.Code Civ. Proc. Sec. 726(a), alleging that Potrans waived its right to foreclose on the real property collateral by initiating and prosecuting to default the state court action. The bankruptcy court ruled that Potrans' rights were not waived because the state court action was not reduced to judgment. We affirm.

FACTS

The relevant facts were agreed to by stipulation. D.B.R. Security Systems, Inc. ("DBR") was indebted to Potrans on a promissory note secured by a security interest in certain personal property of DBR. The debtor guaranteed the DBR debt and secured the guarantee with a deed of trust covering certain real property executed by the debtor and his co-debtor wife.

After default by DBR, Potrans filed suit against the debtor in state court seeking to recover under the guaranty. Potrans sought only monetary damages in the state court action and did not seek to foreclose the trust deeds which secured the guaranty.

On July 13, 1988, the debtor's default was entered in the state court action. Judgment was neither requested nor entered in the state court action.

The debtor subsequently filed the bankruptcy case and this adversary proceeding seeking to avoid Potrans' interest under the trust deed.

ISSUE

The sole issue on this appeal is whether initiation of an action on a debt secured by real property, without concomitantly seeking to foreclose on the real property, and prosecuting to the point of an order of default, but short of judgment, results in an election of remedies and waiver by the plaintiff of the right to foreclose on the real property collateral under the California "single action rule."

STANDARD OF REVIEW

Only issues of law are raised in this appeal; there are no factual issues in dispute. We review issues of law de novo. In re Cole, 93 B.R. 707, 708 (9th Cir. BAP 1988).

DISCUSSION

The California "single action rule" derives from Cal.Code Civ.Proc. § 726(a),² which provides in pertinent part:

There can be but one form of action for the recovery of any debt . . . secured by mortgage upon real property . . . which action shall be in accordance with the provisions of this chapter.

The California courts have held that § 726 prohibits a mortgagee from suing the mortgagor on the secured obligation without first foreclosing on the real property collateral. Walker v. Community Bank, 10 Cal.3d 729, 733, 111 Cal.Rptr. 897, 899, 518 P.2d 329, 331 (1974). If the mortgagee seeks to enforce the secured obligation without first foreclosing on the collateral, the mortgagor may assert § 726 as an affirmative defense to such an enforcement action. Walker, 10 Cal.3d at 734, 111 Cal. Rptr. at 900, 518 P.2d at 332.

The California courts have also held that under § 726 and the single action rule, if the mortgagee does enforce an obligation which is secured by obtaining a money judgment against the mortgagor without foreclosing on the real property collateral, then the mortgagor is deemed, under the single action rule, to have elected a remedy other than foreclosure, and consequently to have waived its right to foreclose on the real property collateral. Id.; James v. P.C.S. Ginning Co., 276 Cal.App.2d 19, 22, 80 Cal.Rptr. 457, 459 (1969).

However, simple institution of an action on the debt does not act as a waiver of the right to foreclose on security for the debt. Brice v. Walker, 50 Cal.App. 49, 194 P. 721 (1920). The foregoing case was cited and followed recently by Tidrick v. General Bank (In re Tidrick), 105 B.R. 584, 586 (Bankr.C.D.Cal.1989). Tidrick was considered determinative by the trial court and will be discussed below.

The debtor contends that under California law, entry of default terminates the defendant's right to file an answer, and entitles the plaintiff to obtain a judgment upon ex parte request. The debtor argues that for these reasons, the entry of default was "the functional equivalent" of a judgment, and should be sufficient to constitute an election of remedies by Potrans, citing Cal.Code of Civ.Proc.Sec. 585(a) relating to judgment by default:

That the clerk shall enter the default and immediately thereafter enter judgment for the principal amount demanded in the complaint or a lesser amount if credit has been acknowledged, together with interest allowed by law or in accordance with the terms of the contract, and costs.

Appellant contends that the duty of the clerk is a mandatory one, citing the following:

For the same reason, failure to enter judgment is of no consequence. Plaintiff\'s proper request for Entry of Default is the important step. Once the default is entered the time to answer or demur is cut off, regardless of whether the clerk delays or fails to take the final step of entry of judgment. After default is entered, it is then, or thereafter, the ministerial duty of the clerk to enter and docket the judgment . . . and he could not neglect to perform that duty or destroy or impair the effect of judgment.

Witkin, California Procedure 3d Edition Vol. 6, p. 543.

The purpose of the election of remedies doctrine is to prevent the creditor from enforcing its rights by more than one remedy, e.g., by both obtaining a judgment on the secured debt and foreclosing on the collateral; allowing both remedies would enable the mortgagee to circumvent the statutory limitations on postforeclosure deficiency judgments. See Bank of Am. v. Daily, 152 Cal.App.3d 767, 773, 199 Cal. Rptr. 557, 560 (1984); James v. P.C.S. Ginning Co., 276 Cal.App.2d 19, 23, 80 Cal. Rptr. 457, 460 (1969). Potrans argues, however, that it has not gone beyond the point of no return since it has not yet availed itself of either remedy. While it would require no more than a mere ministerial act to obtain a judgment, the fact that it has not taken this step is functionally meaningful. Cal.Code Civ.Pro. § 472 provides that

Any pleading may be amended once by the party of course . . . at any time before the answer or demurrer is filed. . . .

Tidrick, 105 B.R. at 587.

The amended pleading "furnishes the sole basis of the cause of action. The prior pleadings are superseded, cease to perform any function as pleadings, and cannot be looked to as defining any of the issues to be tried."

Id. (citing Neuland v. Russell, 50 Cal....