Walker v. Community Bank

CourtUnited States State Supreme Court (California)
Citation10 Cal.3d 729,518 P.2d 329,111 Cal.Rptr. 897
Decision Date05 February 1974
Parties, 518 P.2d 329 Glenn E. WALKER, Plaintiff and Appellant, v. COMMUNITY BANK, Defendant and Respondent. L.A. 30150.

Graham A. Ritchie, City of Industry, for plaintiff and appellant.

Schooling & Schooling and Russell F. Schooling, Jr., Huntington Park, for defendant and respondent.

SULLIVAN, Justice.

In this action to quiet title to real property and to enjoin a sale under a power of sale contained in a deed of trust, plaintiff appeals from an adverse judgment denying him all relief prayed for in his complaint. The action was tried by the court on a written stipulation of facts.

In July 1965, Diversified Enterprises, Inc. (DEI) obtained refinancing from de fendant Community Bank (Bank) of debts owed to the Bank and Challenge-Cooke Brothers Equipment Company. DEI borrowed $153,946 from the Bank and in return gave it a promissory note in that amount secured by a chattel mortgage on equipment and trucks owned by DEI. As additional security for the same loan DEI gave the Bank an additional promissory note for $40,000 secured by a trust deed on real property in Los Angeles County.

DEI defaulted and the Bank commenced a judicial foreclosure of the chattel mortgage for $147,209.70, the unpaid balance due on the $153,946 note. Following foreclosure and sale of the chattels, the Bank recovered a deficiency judgment of $93,570.83. Neither the Bank nor DEI made any mention of the $40,000 note or its real property security in this action.

After the commencement of the foreclosure action but before entry of the deficiency judgment, DEI sold to plaintiff Walker the real property securing the $40,000 note. Thereafter but before the said judgment, the Bank commenced foreclosure of the real property by recording a notice of default and election to sell. Walker then communced the instant action to quiet title in the subject property in himself and to enjoin the trustee's sale. The court granted a temporary injunction barring the foreclosure, which was dissolved upon entry of judgment in favor of the Bank. This appeal followed.

Plaintiff contends that section 726 of the Code of Civil Procedure, 1 which provides that there can be but one form of action for the recovery of a debt secured by a mortage on real property, bars the Bank from now resorting to its real property security at a trustee's sale since it failed to foreclose on such security in its prior action to foreclose on the chattel mortgage. We agree.

In California, as in most states, a creditor's right to enforce a debt secured by a mortgage or deed of trust on real property is restricted by statute. Under California law 'the creditor must rely upon his security before enforcing the debt. (Code Civ.Proc., §§ 680a, 725a, 726.) If the security is insufficient, his right to a judgment against the debtor for the deficiency may be limited or barred by sections 580a, 580b, 580d, or 726 of the Code of Civil Procedure.' (Roseleaf Corp. v. Chierighino (1963) 59 Cal.2d 35, 38--39, 27 Cal.Rptr. 873, 874, 378 P.2d 97, 98.) 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. (Salter v. Ulrich (1943) 22 Cal.2d 263, 268, 138 P.2d 7; James v. P.C.S. Ginning Co. (1969) 276 Cal.App.2d 19, 22, 80 Cal.Rptr. 457; 3 Witkin, Summary of Cal.Law (8th ed. 1973) p. 1566; Hetland, Cal. Real Estate Secured Transactions (Cont.Ed.Bar 1970) § 6.18, pp. 257--258; 2 Comment, Mortgages and Trust Deeds: Enforcement of a Secured Debt in California (1943) 31 Cal.L.Rev. 429, 433.)

In the last mentioned situation, section 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. (Salter v. Ulrich, Supra, 22 Cal.2d 263, 267, 138 P.2d 7; Hartman v. Smith, 219 Cla.App.2d 415, 417, 33 Cal.Rptr. 147.) 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. (Hall v. Arnott (1889) 80 Cal. 348, 354, 22 P. 200; James v. P.C.S. Ginning Co., Supra, 276 Cal.App.2d 19, 22, 80 Cal.Rptr. 457.)

Prior to its amendment in 1963 (Stats. 1963, ch. 819, § 26, p. 2007, effective Jan. 1, 1965), section 726 applied to any debt secured by mortgage on real or personal property so that there could be but one form of action for the recovery of debt whether the debt was secured solely by real property, solely by personal property or by both real and personal property. Thus, in the case at bench if the Bank under pre-1963 law had foreclosed only on the chattel mortgage and had obtained a deficiency judgment against DEI, it would have waived the real property security for the same debt.

However, upon the enactment of the California Uniform Commercial Code (hereafter Commercial Code) in 1963 (simultaneously with the above amendment to § 726 and simultaneously effective on Jan. 1, 1965 (Stats.1963, ch. 819, § 1, p. 1849 et seq.)), the reference to personal property in section 726 was deleted. Commercial Code section 9501 unequivocally prescribes use of the Commercial Code enforcement procedures where the security is solely personal property. Thus, in such instance the deletion of personal property in section 726 clearly means that personal property security can be enforced only pursuant to the Commercial Code. However, where the security is Both real and personal property, the effect of this deletion from section 726 is less clear due to the language used in subdivision (4) of section 9501 of the Commercial Code. That subdivision provides: 'If the security agreement covers both real and personal property, the secured party may proceed under this chapter as to the personal property or he may proceed as to both the real and the personal property in accordance with his rights and remedies in respect of the real property in which case the provisions of this chapter do not apply.'

The above subdivision clearly specifies that if the creditor proceeds as to Both real and personal property security, he must do so according to the rights and remedies accorded real property security and Not pursuant to the Commercial Code. We think it is clear that a creditor who has both real and personal property security, can elect to proceed solely as to the personal property under the Commercial Code. Although subdivision (4) is silent on the point, the official comment indicates that the effect of such an election is determined by other state law. 3

Accordingly, the question which we must decide in the case at bench is whether the deletion from section 726 of the reference to personal property totally exempted personal property security from the one-form-of-action rule, even where together with real property it constitutes security for a single debt. Or, to put it another way, is section 726 still applicable where there is Both real and personal property security?

Professor Hetland has answered this question as follows: 'Prior to 1963, CCP 726 applied to enforcement of any right secured by mortgage on real or personal property. With the enactment of the Uniform Commercial Code, however, personal property was omitted from CCP 726. Clearly the effect of this is to allow the enforcement procedures of the Uniform Commercial Code where the security is entirely personal property. Where the debt is secured partially by real property and partically by personal property, however, omission of personal property from CCP 726 seems of no significance. ( ) The reasons underlying both the affirmative defense and the sanction aspect of CCP 726 remain the same when part of the security is personal property, i.e., prevention of a multiplicity of suits, compelling competitive bidding to test the value of all security for the debt, and forcing the creditor to look to all security as the primary fund for payment of the indebtedness before looking to the debtor. . . . ( )

(T)he creditor may not first have a judicial action to foreclose on any security (either real or personal) without losing the balance of his security, thereby precluding any future nonjudicial sales.' (Hetland, Op. cit. supra, § 6.18 at pp. 260--261.)

Plaintiff and defendant Bank agree upon the basic purposes underlying not only sections 726 and 580a relating to fair market value but also section 580d relating to deficiency judgments. These sections were intended to prevent multiplicity of actions, to compel exhaustion of all security before entry of a deficiency judgment and to require the debtor to be credited with the fair market value of the secured property before being subjected to personal liability. But the parties before us disagree as to the extent these purposes come into play in the instant case.

The Bank points out, and plaintiff concedes, that it could have properly resorted to the real property security first by a private sale and then judicially foreclosed the chattel mortgage pursuant to section 9501, subdivision (4) of the Commercial Code. Such a procedure is of course entirely permissible since a private sale under the power contained in the the trust deed is not a Judicial foreclosure within section 726;...

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