Security Pacific National Bank v. Wozab, S010502

Citation51 Cal.3d 991,275 Cal.Rptr. 201,800 P.2d 557
Decision Date29 November 1990
Docket NumberNo. S010502,S010502
CourtUnited States State Supreme Court (California)
Parties, 800 P.2d 557, 59 USLW 2382 SECURITY PACIFIC NATIONAL BANK, Plaintiff and Appellant, v. Anton J. WOZAB et al., Defendants and Respondents.

Lillick & McHose, Robert L. Morrison, Scott W. Carlson and Karen L. Heilman, for plaintiff and appellant.

Gibson, Dunn & Crutcher and Dennis B. Arnold, Los Angeles, as amici curiae, on behalf of plaintiff and appellant.

Wise, Wiezorek, Timmons & Wise, Anthony F. Wiezorek and Richard P. Dieffenbach, Long Beach, for defendants and respondents.

EAGLESON, Justice.

A bank depositor owed a debt of approximately $1 million to his bank. The debt was secured by a deed of trust on the depositor's real property. Without first The question before us is whether the bank's setoff without first foreclosing its real property security interest precludes this action by the bank to recover the balance of the depositor's debt. We hold the bank's action on the debt is not precluded.

[800 P.2d 559] seeking to foreclose the security interest, the bank set off approximately $3,000 in the depositor's account in partial satisfaction of the debt. The debtor protested to the bank, contending it was required first to foreclose its security interest. The bank responded by reconveying the deed of trust to the debtor and then filing suit to collect the remainder of the debt.


Defendant Anton J. Wozab was president and majority shareholder of Anco Fire Protection, Inc. (Anco). His wife, Dorothea Wozab, was an Anco director. Anco had a line of credit with plaintiff Security Pacific National Bank (the bank) in excess of $1 million. Anco also had demand deposit accounts with the bank. The Wozabs had a term savings account and demand deposit accounts with the bank. The Wozabs executed written continuing general guaranties to the bank for its loans or advances to Anco. The bank became concerned with Anco's financial condition and, after discussions between Anton Wozab and the bank, the Wozabs executed a deed of trust on their personal residence as security for their continuing guaranties.

The bank became concerned that Anco might file a bankruptcy petition. To reduce Anco's debt as much as possible, the bank set off $110,635.19 in Anco's demand deposit accounts and $2,804.82 in the Wozabs' demand deposit and term savings accounts against Anco's indebtedness of $1,090,015.96, leaving due the bank a balance of $976,575.95. The bank exercised these setoffs without first foreclosing its real property security interest for the Wozabs' guaranties. Anco filed a bankruptcy petition shortly thereafter. 1

The bank and the Wozabs entered into discussions as to the Wozabs' liability under their guaranties. The Wozabs contended that, under the then recently decided case of Bank of America v. Daily (1984) 152 Cal.App.3d 767, 199 Cal.Rptr. 557, the bank's setoff constituted a waiver of its security interest in the Wozabs' home. After considering the matter, the bank reconveyed the deed of trust to the Wozabs and filed the present action to enforce their guaranties, which became unsecured as a result of the bank's reconveyance. The bank alleged breach of the guaranties and sought to recover the unpaid debt of approximately $976,000.

The bank and the Wozabs filed cross-motions for summary judgment. The Wozabs contended the bank's setoff of their deposit accounts constituted not only a waiver of the security interest but also a waiver of the underlying debt (the personal guaranties). The trial court concluded the Wozabs were correct under Bank of America v. Daily, supra, 152 Cal.App.3d 767, 199 Cal.Rptr. 557, and granted their motion for summary judgment. The trial court, however, expressed its strong disagreement with Daily, noting that it allowed the Wozabs to avoid paying a debt of almost $1 million. The court recommended that the bank appeal.

The bank did so, and the Court of Appeal affirmed. We granted the bank's petition for review.


1Code of Civil Procedure section 726

The threshold question is whether the bank's setoff of the Wozabs' accounts was improper under Code of Civil Procedure section 726. 2 If the bank's setoff did not violate section 726, the setoff does not preclude the bank's present suit to recover for breach of the guaranties. If, however, the setoff violated section 726, we must Section 726, subdivision (a) states in relevant part, "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...." 4 This provision was first enacted in substantially similar form more than a century ago, and its general operation has long been clear. 5 A secured creditor can bring only one lawsuit to enforce its security interest and collect its debt. Moreover, section 726(a) is part of a broader statutory scheme designed to protect debtors. "Under California law 'the creditor must rely upon his security before enforcing the debt' ... However, since under section 726 '[t]here can be but one form of action for the recovery of any debt' secured by a mortgage or deed of trust on real property, where the creditor sues on the obligation and seeks a personal money judgment against the debtor without seeking therein foreclosure of such mortgage or deed of trust, he makes an election of remedies, electing the single remedy of a personal action, and thereby waives his right to foreclose on the security or to sell the security under a power of sale.... [p] [S]ection 726 is susceptible of a dual application--it may be interposed by the debtor as an affirmative defense or it may become operative as a sanction. If the debtor successfully raises the section as an affirmative defense, the creditor will be forced to exhaust the security before he may obtain a money judgment against the debtor for any deficiency.... If the debtor does not raise the section as an affirmative defense, he may still invoke it as a sanction against the creditor on the basis that the latter by not foreclosing on the security in the action brought to enforce the debt, has made an election of remedies and waived the security." (Walker v. Community Bank, supra, 10 Cal.3d 729, 733-734, 518 P.2d 329, quoting Roseleaf Corp. v. Chierighino (1963) 59 Cal.2d 35, 38-39, 27 Cal.Rptr. 873, 378 P.2d 97 [citations omitted]; see generally Comment, What is an Action for Purposes of California Civil Procedure Code Section 726? 1988) 25 San Diego L.Rev. 1093, 1099-1101; 3 Witkin, Summary of Cal. Law (9th ed. 1987) Security Transactions in Real Property, § 119, pp. 620-621; 4 Miller & Starr, Current Law of California Real Estate (2d ed. 1989) § 9-104, pp. 342-344.) With this understanding of how section 726 operates, we turn to the question of whether the bank's setoff violated either the one-action or security-first rules that arise from section 726 and related statutes.

[800 P.2d 560] determine the setoff's effect, if any, on the bank's right to recover. 3

A. Definition of "action"

Whether the bank's setoff was an "action" is answered by section 22, which The bank's setoff was not a "proceeding in a court of justice." No court had anything to do with the setoff. It was therefore not an action within the meaning of section 22. The statute's plain language permits no other reasonable conclusion. "It is axiomatic that in the interpretation of a statute where the language is clear, its plain meaning should be followed." (Great Lakes Properties, Inc. v. City of El Segundo, supra, 19 Cal.3d 152, 155, 137 Cal.Rptr. 154, 561 P.2d 244.) To construe section 22 to include the bank's nonjudicial setoff, we would have to insert into section 22 language not used by the Legislature. Doing so would violate the cardinal rule of statutory construction that courts must not add provisions to statutes. (People v. Campbell (1902) 138 Cal. 11, 15, 70 P. 918; Ross v. City of Long Beach (1944) 24 Cal.2d 258, 260, 148 P.2d 649.) This rule has been codified in California as section 1858, which provides that a court must not "insert what has been omitted" from a statute. 6

[800 P.2d 561] states, "An action is an ordinary proceeding in a court of justice by which one party prosecutes another for the declaration, enforcement, or protection of a right, the redress or prevention of a wrong, or the punishment of a public offense." (Italics added.) " 'When a statute prescribes the meaning to be given to particular terms used by it, that meaning is generally binding on the courts.' " (Great Lakes Properties, Inc. v. City of El Segundo (1977) 19 Cal.3d 152, 156, 137 Cal.Rptr. 154, 561 P.2d 244, quoting People v. Western Air Lines, Inc. (1954) 42 Cal.2d 621, 638, 268 P.2d 723.)

Despite the clear language of section 22, the Wozabs contend a long line of decisions supports the view that the bank's setoff was an action within the scope of section 726(a). The Wozabs are right for the wrong reason. The setoff was a violation of section 726 but was not an "action." Prior decisions have invalidated bank setoffs, not because the setoffs were "actions," but because the security had not first been foreclosed.

B. Security-first rule

Section 726 embodies more than the "one-action" rule. As explained above, section 726 and the statutory scheme of which it is a part require a secured creditor to proceed against the security before enforcing the underlying debt. (Walker v. Community Bank, supra, 10 Cal.3d 729, 733-734, 518 P.2d 329.) This rule is hornbook law in California and warrants no extended discussion.

We first addressed the effect of this rule on a bank setoff almost a century ago in McKean v. German-Am. Savings Bank (1897) 118 Cal. 334, 50 P. 656 (McKean ), in which a depositor's assignee sued a bank to recover the amount of the bank's setoff. As a defense, the bank...

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