O'Neil v. General Security Corp.

• Decision Date: 11 March 1992
• Docket Number: No. D013286,D013286
• Citation: 4 Cal.App.4th 587,5 Cal.Rptr.2d 712
• Court: California Court of Appeals Court of Appeals
• Parties: Gloria C. O'NEIL, et al., Cross-Complainants and Appellants, v. GENERAL SECURITY CORPORATION, et al., Cross-Defendants and Respondents.

Page 712

5 Cal.Rptr.2d 712

4 Cal.App.4th 587

Gloria C. O'NEIL, et al., Cross-Complainants and Appellants, v. GENERAL SECURITY CORPORATION, et al., Cross-Defendants and Respondents.

No. D013286.

Court of Appeal, Fourth District, Division 1, California.

March 11, 1992.

Law Offices of Lesley Ann Ash, Lesley Ann Ash and William R. Thomas, II, San Diego, for cross-complainants and appellants.

Lindley, Lazar & Scales, Michael H. Wexler and R. Gordon Huckins, San Diego, for cross-defendants and respondents.

FROEHLICH, Associate Justice.

In this action Gloria C. O'Neil et al. (collectively "Judgment Creditors") filed a cross-complaint against cross-defendants General Security Corporation et al. (collectively "Refinancers"). Judgment Creditors' cross-complaint sought to have a particular trust deed, which encumbered certain real property in favor of Judgment Creditors and secured a promissory note in which the various Judgment Creditors held fractional interests, declared senior to Refinancers' trust deed. The cross-complaint also sought an order compelling Refinancers to "marshal assets" by first pursuing other assets allegedly available to repay the indebtedness owed them.

Refinancers moved for judgment on the pleadings as to Judgment Creditors' cross-complaint. Refinancers' motion essentially argued that Judgment Creditors, by obtaining a monetary judgment on the underlying note in an earlier action against the debtors, had forfeited any further rights to pursue the security for the note (i.e., the trust deed) and therefore lacked "standing" to pursue the cross-complaint. The trial court granted Refinancers' motion. Judgment Creditors appeal from the subsequent order dismissing their cross-complaint.

Our review of the facts of this case, in light of the statutory scheme regulating real property secured transactions, convinces us the trial court correctly concluded Judgment Creditors waived their ability to assert an interest in the property adverse to Refinancers when Judgment Creditors obtained a personal judgment against the debtors. Accordingly, we affirm as to all Judgment Creditors except Leonore Jacksland. I. Facts ¹

A. The Loans and Trust Deeds

Judgment Creditors were members of a group of individuals who lent money to Rancho View Partners in late 1981. Judgment Creditors received varying fractional interests in the promissory note (the Judgment Creditors' note) evidencing the loan, and Judgment Creditors' note was secured by a deed of trust on certain real property then owned by the borrower. By early 1983, however, Judgment Creditors' note was in default. A newly formed entity, which included Rancho View Partners and Barclays Newport Investment Corporation (hereinafter Rancho), eventually sought a new loan to permit it to develop and sell the property in order to insure repayment of Judgment Creditors' loan.

Rancho obtained new lenders, Refinancers herein. As a condition to the loan, Refinancers required that their security be a first trust deed on the property. To satisfy this demand, Rancho sought and obtained a subordination agreement from Judgment Creditors, under which Judgment Creditors agreed to and did subordinate their trust deed to the trust deed securing Refinancers' loan.

Thus, by late 1983 Rancho's property was encumbered by a first trust deed securing Refinancers' note and a second trust deed securing Judgment Creditors' note.

B. Judgment Creditors' Prior Action

In early 1985 Rancho defaulted on both notes. Accordingly, in October 1985, 37 beneficiaries of the now-subordinated Judgment Creditors' trust deed filed suit against numerous defendants (including the Rancho parties) asserting damages for fraud, negligent misrepresentation and breach of contract, and also seeking judicial foreclosure of the trust deed. In late 1989 a settlement was reached between the Rancho defendants and numerous members of the class of beneficiaries of the first note. ² The legal effect of that settlement on Judgment Creditors' right to maintain their current cross-complaint is the central issue in this appeal.

The settlement stipulated that a personal judgment be entered against the Rancho defendants and in favor of Judgment Creditors (other than Leonore Jacksland) ³ for the amount of $280,000. The case as to the remaining plaintiffs and defendants was dismissed without prejudice.

Neither the stipulation for entry of judgment nor the judgment itself purported to except any of the causes of action of the original complaint from the operation of the judgment. However, the underlying II. The Present Action

settlement agreement purported to preserve the right of Judgment Creditors to pursue non-judicial foreclosure under their subordinated trust deed. ⁴

In February 1988, General Security Corporation, as trustee under Refinancers' deed of trust, filed a second amended complaint seeking, among other things, judicial foreclosure of Refinancers' deed of trust. Judgment Creditors cross-complained, seeking a judgment declaring Judgment Creditors' trust deed senior to Refinancers' trust deed because the subordination agreement which reversed their priorities was invalid based on failure of consideration. Alternatively, Judgment Creditors sought to compel Refinancers to marshal assets by first pursuing other assets allegedly available to repay the indebtedness to Refinancers.

In late 1990, after the stipulated judgment against Rancho was entered in Judgment Creditors' prior action, Refinancers moved for judgment on the pleadings as to Judgment Creditors' cross-complaint. Refinancers asserted Judgment Creditors had waived any right to pursue their cross-complaint because the 1989 settlement and judgment had extinguished all of Judgment Creditors' rights to pursue recovery under Judgment Creditors' trust deed. Specifically, Refinancers argued that Judgment Creditors' judgment against Rancho constituted an election of remedies which, under CODE OF CIVIL PROCEDURE SECTION 726⁵ and relevant case law, resulted in a forfeiture of any further right to pursue either judicial or non-judicial foreclosure of the trust deed. Refinancers also argued that because Judgment Creditors lost all further rights to pursue the security, Judgment Creditors lacked standing to assert that such trust deed should be reinstated to first priority, as prayed for in their declaratory relief cause of action. Refinancers also argued the "marshaling of assets" claim should be dismissed because a claimant seeking such remedy must first show he has a competing interest in the same security as his opponent, and Judgment Creditors' forfeiture of rights in the trust deed eliminated any competing claim to the real property.

Judgment Creditors opposed the motion, arguing that Rancho had specifically waived the protections afforded it by the "one form of action" rule under Code of Civil Procedure section 726, and that Refinancers were not entitled to assert such protections in their own stead, being neither debtors nor successors of the debtors.

The trial court granted Refinancers' motion and dismissed the cross-complaint. Judgment Creditors timely appealed.

We conclude the trial court correctly ruled that entry of the personal judgment in Judgment Creditors' prior action barred them from further pursuing their security interest as against Refinancers, and that the purported waiver by Rancho of the "one form of action" rule was ineffective to preserve Judgment Creditors' trust deed rights as against Refinancers. Accordingly, as to those Judgment Creditors who recovered a personal judgment against Rancho, the order dismissing their cross-complaint was proper.

DISCUSSION

I. Obtaining a Personal Judgment on a Note Secured by a Mortgage on Real Property Without First Judicially Foreclosing Results in Forfeiture of the Secured Party's Rights Under the Mortgage

The single issue here is whether, on the facts of this case, section 726 operates If a creditor, in violation of section 726, files suit on the note without pursuing foreclosure on the security, section 726's protections can be invoked in two distinct ways. (Security Pacific, supra, 51 Cal.3d at p. 997, 275 Cal.Rptr. 201, 800 P.2d 557.) First, the debtor may raise section 726 as an affirmative defense, compelling the creditor to first exhaust the security before being entitled to a monetary judgment on the unsatisfied portion of the debt. Alternatively, if the debtor elects not to raise the affirmative defense aspect of section 726, he may later invoke it as a sanction: The creditor who obtains a monetary judgment in contravention of the security-first rules of section 726 will be deemed to have forfeited his right to further pursue his security interest. (Walker v. Community Bank (1974) 10 Cal.3d 729, 733, 111 Cal.Rptr. 897, 518 P.2d 329.)

to bar further recourse by Judgment Creditors on the trust deed which secured Judgment Creditors' note. Section 726, which sets forth the so-called "one form of action" rule, is part of the statutory protections and procedures which restrict the secured creditor's remedies for notes secured by real property. As judicially construed, section 726 is both a "security-first" and "one-action" rule: It compels the secured creditor, in a single action, to exhaust his security judicially before he may obtain a monetary "deficiency" judgment against the debtor. (Security Pacific National Bank v. Wozab (1990) 51 Cal.3d 991, 999, 275 Cal.Rptr. 201, 800 P.2d 557.)

The operation of the "sanction" aspect of section 726 was illustrated in Walker. There, a loan was secured by both a trust deed and a chattel mortgage. The creditor filed judicial proceedings to foreclose on the chattel mortgage but omitted any mention of the trust deed. The debtor answered without invoking section 726 as an affirmative defense. The matter proceeded to judgment, with the creditor foreclosing on the chattel and eventually obtaining a personal judgment against the debtor for the...