Nat'l Enter. v. Woods

Decision Date31 December 2001
Docket NumberC030453,3
CourtCalifornia Court of Appeals Court of Appeals
PartiesNATIONAL ENTERPRISES, INC., Plaintiff and Appellant, v. MICHAEL W. WOODS et al., Defendants and Respondents. C030453 IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA THIRD APPELLATE DISTRICT (Sacramento) Filed

(Super.Ct.No. 96AS03798)

APPEAL from the judgment of the Superior Court of Sacramento County, Faith J. Geoghegan, Judge. Reversed and Remanded.

Michael H. Fish, McKenna & Cuneo, LLP, Nugent & Newnham, APC, Jeffrey Poindexter, for Plaintiff and Appellant.

George P. Eshoo, George P. Eshoo & Associates, for Defendants and Respondents.

CERTIFIED FOR PARTIAL PUBLICATION*

Kolkey, J.

This appeal raises the issue whether, in a case where senior and junior debts secured by the same property were once held by the same creditor, which thereafter sells the loans to two independent parties, California's one-form-of-action rule under Code of Civil Procedure section 726 prohibits the junior lienholder from bringing a separate action to recover its debt following the senior lienholder's judicial foreclosure of the property.

In this case, a bank made to a single borrower successive loans secured by successive deeds of trust on the same property. The bank failed; the borrower defaulted on the loans; and the receiver sold the two loans to different parties. Appellant National Enterprises, Inc. (NEI) acquired the junior of the two debts. After a bench trial, the court concluded that NEI could not recover its junior debt because of a prior judicial foreclosure brought by the holder of the senior debt.

We shall reverse. Neither the plain language nor the underlying purpose of the one-form-of-action rule bars an independent junior lienholder from bringing a single action to recover a debt after the security for that debt has been lost following a judicial foreclosure brought by the senior lienholder.

The purpose of the rule is to limit a secured creditor to a single suit to enforce its security interest and collect its debt and to compel the exhaustion of all security before a monetary deficiency judgment may be obtained against the debtor. (Security Pacific National Bank v. Wozab (1990) 51 Cal.3d 991, 997 (Wozab); Walker v. Community Bank (1974) 10 Cal.3d 729, 736 (Walker).) Here, neither purpose would be furthered: The security for the debt had previously been exhausted for purposes of paying the senior lienholder's debt and the junior lienholder sought to enforce its debt in a single suit.

Moreover, the plain language of the statutory rule only speaks in terms of an action on "any debt" and does not bar separate actions on separate debts. Treatment of two bona fide debts (held by senior and junior lienholders) as if they were one within the meaning of the one-form-of-action rule, simply because the two debts were once secured by the same property and held by a single creditor, not only is an unnecessary extension of the statute's language (because it would treat two debts as one and would fail to further the rule's purpose), but would also place the more patient lienholder at the mercy of the more impatient one, hindering the sale of such debts in the secondary mortgage market and accelerating (ironically) the collection of both debts to the detriment of the debtor.

I. FACTUAL AND PROCEDURAL BACKGROUND

Defendants Michael Woods, William Mitchell, and Robert Laird are former general partners of Parkway Garden Associates (PGA).1

A. The Original Loans

In 1986, PGA, by and through defendants, executed a $2,700,000 promissory note in favor of County Savings Bank (County Savings). The note was secured by a first deed of trust on a 128-unit apartment building.

In 1988, PGA, by and through defendants, executed a second promissory note for $150,000 in favor of County Savings to cover the delinquent amounts of the first loan. This second note was secured by a second deed of trust on the same property.

Both the first and second deeds of trust contained a clause, known as a dragnet clause, that provided in part: "Upon request of Borrower, Lender [County Savings], at Lender's option so long as this Instrument secures indebtedness held by Lender, may make Future Advances to Borrower. Such Future Advances, with interest thereon, shall be secured by this Instrument when evidenced by promissory notes stating that said notes are secured thereby."

The dragnet clause further provided that such future advances could not exceed the original amount of the note, plus an "additional sum," which amount was to be entered in a blank space. The term "N/A" was typed in that space on the first deed of trust, and was left blank on the second deed of trust.

B. The Modification of the Loans

PGA continued to have trouble making loan payments. In connection with the sale of PGA to Jose Diaz (Diaz) based on a purchase agreement scheduled to close on May 1, 1989, PGA sought to modify the two loans to increase the amount of the second loan to $280,000 and to reduce slightly the amount of the first loan.

On May 1, 1989, County Savings and PGA modified the existing first and second notes and deeds of trust. The first note for $2,700,000 was replaced with a new note in the amount of $2,651,497.55 (which we will continue to refer to as the first note), executed by PGA, by and through its general partners, now identified as Woods, Mitchell, Laird, and Diaz. On the same day, PGA, by and through the same PGA partners, signed a note for $280,000 to replace the $150,000 note (which we will continue to refer to as the second note). The first and second deeds of trust were accordingly modified, and Woods, Mitchell, Laird, and Diaz concurrently executed a repayment guaranty of the $280,000 note.

C. The Foreclosure Action

From 1992 on, no payments were made on the first and second notes.

The Resolution Trust Corporation (RTC), which had been appointed as receiver of County Savings in 1992 to liquidate the bank, assigned the first note and the modified first deed of trust to State Street Bank (State Street), while it retained the second note and the modified second deed of trust.

In April 1993, State Street commenced a judicial foreclosure action with respect to the first deed of trust and moved for summary judgment. The court entered a judgment of foreclosure and ordered the property sold. It also found PGA, Woods, Mitchell, Laird, and Diaz personally liable for the debt and subject to a deficiency judgment to be determined pursuant to section 726 of the Code of Civil Procedure. Woods, Mitchell, and Laird settled the deficiency for $500,000.2

D. The Assignment of the Second Loan

In 1996, the Federal Deposit Insurance Corporation (FDIC), which had succeeded the RTC as receiver of County Savings, sold the second loan to Morehouse Acquisitions No. 1 LLC (Morehouse), assigning its interest in the second note, the second deed of trust, as modified, and the guaranty. Morehouse, which is controlled by NEI, transferred its interest in the loan to NEI.

E. The Present Proceeding

On or around July 10, 1996, NEI commenced the present action against defendants and their spouses for nonpayment of the second note and breach of the guaranty.

The court conducted a trial and issued a statement of decision in favor of defendants. The court determined that the first and second deeds of trust had "merged" by virtue of the "dragnet clause" in the first deed of trust, which provided that the first deed of trust could be used as security for future advances. The court reasoned that "the intent of County Savings Bank was to rely on the original security . . . as security for the first and second loans." It therefore concluded, citing Code of Civil Procedure section 726 (the one-form-of-action rule),3 that "[w]ith the merger of the liens and the obligations and [State Street's] foreclosure of the first deed of trust, plaintiff NEI is barred from any further attempt to collect the obligation on the second note . . . ." As to the guaranty, the court found that Woods, Mitchell, and Laird were still general partners of PGA when they signed the guaranty and that "a guaranty of the partnership debt by a partner is not enforceable" because "a true guarantor is one who is not already liable on the guaranteed obligation."

The court entered judgment for defendants and awarded them, as prevailing parties, attorney fees and costs (later determined to be $88,203.15) pursuant to section 1717 of the Civil Code. NEI filed a timely notice of appeal from the judgment.

II. DISCUSSION
A. Standard of Review

Defendants maintain that the substantial evidence test guides our review. Under this test, a trial court's resolution of a factual issue supported by substantial evidence must be affirmed. (See Winograd v. American Broadcasting Co. (1998) 68 Cal.App.4th 624, 632.)

But with the possible exception of the issue of judicial estoppel -- an issue we need not reach in this appeal -- NEI does not contest the trial court's findings of fact. Accordingly, we agree with NEI that the primary issue before us -- whether NEI's action is barred by the one-form-of-action rule -- involves no disputed facts and can be reviewed de novo. (Ghirardo v. Antonioli (1994) 8 Cal.4th 791, 799; Paykar Construction, Inc. v. Bedrosian (1999) 71 Cal.App.4th 803, 806 (Paykar).)

B. NEI's Action Is Not Barred by the One-Form-of-Action Rule

The trial court in this case concluded that "County Savings . . . intended to merge the first and second deeds of trust as it looked to the original security in making the second loan to the partnership . . . ." It therefore held that "[w]ith the merger of the liens . . . and the foreclosure of the first deed of trust, plaintiff NEI [was] barred from any further attempt to collect the obligation on the second note" by reason of the one-form-of-action rule under Code of Civil Procedure section 726.4

Presumably, the logic of the trial court's decision is that if the first and second deeds of trust had merged, State Street's judicial foreclosure (and the...

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