WALKER v. COMMUNITY BANK

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Court of Appeal, Second District, Division 2, California.

Glenn E. WALKER, Plaintiff and Appellant, v. COMMUNITY BANK, a California corporation, Defendant and Respondent.

Civ. 40546.

Decided: March 28, 1973

Graham A. Ritchie, Los Angeles, for plaintiff and appellant. Schooling & Schooling by Russell F. Schooling, Jr., Huntington Park, for defendant and respondent.

Plaintiff Glenn Walker brought this action to quiet title to real property owned by him and to enjoin defendant Community Bank from proceeding to foreclose under a power of sale contained in a trust deed. The case was tried on an agreed statement of facts. Plaintiff appeals from a judgment for the defendant.

In 1965, pursuant to a refinancing arrangement, defendant loaned the sum of $153,496.00 to Diversified Enterprises, Inc. (D.E.I.), plaintiff's predecessor in title. The loan was secured by a note and chattel mortgage for the full amount of the loan. As additional security D.E.I. provided defendant with a note for $40,000 secured by a deed of trust covering the real property now owned by plaintiff.

When D.E.I. later defaulted in its payments, defendant commenced a judicial foreclosure of the chattel mortgage. Following commencement of that action but before judgment, plaintiff purchased the real property subject to the deed of trust. Apparently plaintiff did not assume the obligation on the debt. After plaintiff's purchase but prior to judgment defendant recorded notice of default and election to sell under the trust deed. Defendant thereafter obtained a judgment against D.E.I. of $147,209.70, an amount equal to the entire balance then due on the obligation. Sale of the personalty covered by the chattel mortgage resulted in a deficiency of $93,570.83 in favor of the defendant.

By this action plaintiff seeks to prevent defendant from resorting to the real property for satisfaction of its deficiency judgment. He asks that the deed of trust be adjudged to be satisfied, claiming the protection of Code of Civil Procedure sections 726, 580a and 580d, as well as the doctrine of election of remedies.

The starting point is that defendant has a legitimate claim to a sum of money which is due and owing and thus is entitled to attempt in all legal manner to satisfy that claim.

‘In the absence of a statute to the contrary, a creditor secured by a trust deed or mortgage on real property may recover the full amount of the debt upon default. He may realize the security or sue on the obligation or both; the obligation is an independent undertaking by the debtor to pay. (See 2 Glenn, Mortgages (1943) § 140, p. 811.)’ (Roseleaf Corp. v. Chierighino, 59 Cal.2d 35, at 38, 27 Cal.Rptr. 873 at 874, 378 P.2d 97 at 98.)

Thus we first undertake to determine whether there is any statutory law which bars defendant from looking to the additional real property security.

Code of Civil Procedure section 726 presently provides in pertinent part: ‘There can be but one from of action for the recovery of any debt, or the enforcement of any right secured by mortgage upon real property . . .’ (Emphasis added.)

Prior to 1963, that section covered any ‘right secured by mortgage upon real or personal property.’ In that year the reference to personal property was deleted and coincidentally the Uniform Commercial Code was adopted in California.

Thus as to debts secured by personalty the ‘one-form of action rule’ is no longer applicable and the creditor may pursue cumulative remedies which are enumerated in Commercial Code section 9501 et seq. including the obtaining of a deficiency judgment without first exhausting its collateral.

‘When a debtor is in default, Commercial Code sections 9501–9507 give a creditor holding a security interest several alternative, cumulative remedies. ‘He may reduce his claim to judgment, foreclose or otherwise enforce the security interest by any available judicial procedure.’ (§ 9501.) Unless otherwise agreed, the creditor has the right to the possession of the collateral, and may take possession without judicial process if he can do so without a breach of the peace (§ 9503). He may sell, lease or otherwise dispose of the property and apply the proceeds, first, to the expenses (including attorney fees if provided in the agreement) of retaking, preparing for sale, and selling the property; and second, to the satisfaction of the indebtedness (§ 9504). While the debtor remains liable for any deficiency (§ 9504), he is not without some measure of protection. The creditor must dispose of or sell the collateral in a manner which is ‘commercially reasonable’; the expense he incurs and adds to the balance due must be reasonable; and he must account to the debtor for any surplus (§ 9504).' (Liberty Loan Corp. of North Park v. Petersen, 24 Cal.App.3d 915, 919, 101 Cal.Rptr. 395 at 397.)

Where a debt is secured by an interest in real property the creditor is limited by the provisions of Code of Civil Procedure section 726 and the ‘anti-deficiency’ statutes (Code Civ.Proc. § 580a et seq.).

The purpose of Code of Civil Procedure section 726 is to prevent a multiplicity of actions and to require a secured creditor to exhaust his security before obtaining a personal judgment against the debtor. (Toby v. Oregon Pac. R. R. Co., 98 Cal. 490, 33 P. 550; Haas v. Palace Hotel Co. of S. F., 101 Cal.App.2d 108, 224 P.2d 783.) The result of the application of the section is that the security is made the primary fund for the discharge of the indebtedness. (Bank of Italy etc. Assn. v. Bentley, 217 Cal. 644, 20 P.2d 940.)

In addition, Code of Civil Procedure section 580a prescribes the method of judicial foreclosure of real estate designed to insure that the debtor is credited with the fair value of his property before suffering a judgment for the deficiency. As a corollary, Code of Civil Procedure section 580d provides in pertinent part: ‘No judgment shall be rendered for any deficiency upon a note secured by a deed of trust or mortgage upon real property hereafter executed in any case in which the real property has been sold by the mortgagee or trustee under power of sale contained in such mortgage or deed of trust.’ (Emphasis added.)

The combined effect of Code of Civil Procedure sections 726 and 580d is that by invoking a nonjudicial power of sale a creditor elects to look solely to the security for the obligation. This rule and its underlying social policy is for the benefit of the original debtor. The underlying purpose of the ‘anti-deficiency’ statutes is to place the risk of inadequate security on the lender thereby discouraging the lender from over-valuing the security. (Cf. Roseleaf, supra.) There is no evidence here that the real property was over-valued at the time D.E.I. pledged it as additional security. On the contrary, plaintiff alleges in his complaint that it is worth at least more than twice the value of the security interest. Further, plaintiff has alleged in the complaint that there is a senior encumbrance on the property in favor of a third party. If these things be true defendant must invest additional money to obtain title and is in no better position than plaintiff who appears well able to protect his interest by bidding in at the sale. Nor will the ‘fair value’ principle be violated. The defendant resorted to judicial foreclosure as to the personal property.

In any event plaintiff has no standing to complain. He did not assume the obligation and does not stand in the principal debtor shoes. There is no possibility that plaintiff will lose the property and still be liable for the obligation, the result which the statutes are designed to avoid.

Defendant frankly admits that its intention from the inception of the loan was, in the event of default, to look to both security devices in the event that one or the other alone was insufficient to satisfy the unpaid balance and that the following language from Commercial Code section 9501(4) authorizes the procedure it adopted. ‘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 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.’

While the parties disagree in their interpretation of the authority granted by that provision of the law it seems clear that nothing therein prohibits the defendant from following the course of action it adopted.

Note 5 of the Official Comments on Uniform Commercial Code section 9501 provides in part as follows:

‘The collateral for many corporate security issues consists of both real and personal property. In the interest of simplicity and speed subsection (4) permits, although it does not require, the secured party to proceed as to both real and personal property in accordance with his rights and remedies in respect of the real property. Except for the permission so granted, this Act leaves to other state law all questions of procedure with respect to real property.’ (Emphasis added.)

Further, the language of Code of Civil Procedure sections 580a and 580d does not indicate that the Legislature intended any protection of property which is only secondarily liable as security for the principal debt. (Hatch v. Security-First Nat. Bank, 19 Cal.2d 254, 120 P.2d 869.) The pursuit of additional security is not a deficiency judgment. (Hatch, supra; Mortgage Guarantee Co. v. Sampsell, 51 Cal.App.2d 180, 124 P.2d 353.)

Defendant in electing to sell under the trust deed is not seeking a deficiency judgment. True it has already obtained a deficiency judgment as to the personalty which was the principal security for the debt, a remedy afforded by Commercial Code section 9501. If the Legislature desired to prevent such procedure, it has not done so in either the Commercial Code or in Code of Civil Procedure sections 726, 580a or 580d.

In his memorandum of points and authorities filed in the trial court in connection with his stipulation of facts plaintiff concedes that defendant could have properly resorted to the real property security and also obtained a deficiency judgment by either (1) foreclosing the real property in a private sale first and then judicially foreclosing the chattel mortgage, or (2) judicially foreclosing both the chattel mortgage and trust deed together in one action. In addition, it goes without saying that if D.E.I. had retained title to the real property, defendant could seek to satisfy its judgment by levying on the property regardless of the trust deed.

Plaintiff has not demonstrated how his position can be any different after the proposed sale than if defendant had proceeded in the manner which plaintiff concedes would have been proper.

The complaint contains allegations that plaintiff purchased the property from D.E.I. for ‘valuable consideration’ and that the fair market value of the property is at least $90,000. These allegations were not carried forward into the agreed statement of facts. There is nothing else in the record which discloses the circumstances of plaintiff's acquisition of the property. Plaintiff concedes, however, that he had knowledge of the trust deed at the time of purchase and his predecessor D.E.I. obviously knew of the default and defendant's action to foreclose the chattel mortgage.

Plaintiff is seeking equitable relief. One who would invoke the equitable jurisdiction of the court must himself offer to do equity. In seeking to have his property absolved of any liability for an obligation for which it was admittedly offered and accepted as security, plaintiff has tendered nothing toward the satisfaction of the concededly unsatisfied debt. Thus plaintiff's claim to relief must rest on a clear showing that as a matter of law and equity defendant is prohibited from now asserting its previously established right in the property.

In Freedland v. Greco, 45 Cal.2d 462, 289 P.2d 463, decided in 1955, prior to the amendment of Code of Civil Procedure section 726 and the adoption of Commercial Code section 9501, plaintiffs sold a business to defendant who paid part of the purchase price in cash. The unpaid balance of the purchase price was $7,000. Defendant executed two notes each in the sum of $7,000. One note was secured by a trust deed on realty and the other by a chattel mortgage. On default plaintiffs foreclosed first on the real property trust deed and bought the property at sale. They then brought an action to foreclose the chattel mortgage and obtained a deficiency judgment. Defendant appealed. The Supreme Court reversed the granting of the deficiency judgment, holding that the two notes were in reality a single note for the balance although secured by two forms of security. The court said at pages 456–466, 467, 289 P.2d at pages 464–465: ‘If, in the instant case, there had been only one note, secured by a chattel mortgage as well as a trust deed, which represented the debt of defendant to plaintiffs, it is clear that plaintiffs would not be entitled to a deficiency judgment under the plain wording of section 580d . . .. In such a situation legislative intent must have been that the two notes are, in legal contemplation and under section 580d, one, secured by a trust deed.’ The court did hold that the chattel mortgage could be foreclosed, and cited Hatch and Mortgage Guarantee, supra, with approval.

In contrast to Freedland, the real property here has not yet been sold under the trust deed. The ‘plain wording’ of 580d does not prevent a nonjudicial foreclosure, it only prevents the obtaining of a deficiency judgment after such sale. Secondly, plaintiff here is not the primary debtor and thus is not affected by the deficiency judgment already obtained.

Finally, in Freedland, the real property was security for the entire debt due. Here the trust deed secured only a relatively small portion of the total debt. As to that portion defendant has attempted only one ‘action,’ i. e., sale of the property and, of course, no deficiency judgment will result from that action. Plaintiff stands to suffer no more onerous a burden than the one which he foresaw upon purchase of the property.

Plaintiff rather awkwardly attempts to characterize the defendant's position after the proposed sale as one of being unjustly enriched in that, according to plaintiff, defendant will have its judgment plus the $40,000 to be realized from the property. Of course, whatever defendant realizes from the sale would be credited in satisfaction of the judgment if in the future defendant attempts to collect further from D.E.I. It appears to us that if there is a potential for unjust enrichment in this case it is that of plaintiff's obtaining clear title to the property while leaving defendant with its unsatisfied claim.

Plaintiff has yes another string to his bow claiming that defendant by proceeding to judgment in the action to foreclose the chattel mortgage made an election of remedies and thereby waived the additional security.

The chronology of events here, i. e., notice of default and election to sell filed prior to judgment in the foreclosure action belies any intent by defendant to waive the additional security. Prior to judgment defendant could not know whether it would be necessary to resort to the additional real property. Thus the question is whether defendant's obtaining a judgment after its notice of default and after plaintiff acquired the property resulted in a waiver of the trust deed by operation of law.

The doctrine of election of remedies is basically described as ‘Where a person has two concurrent remedies to obtain relief on the same state of facts, and these remedies are inconsistent, he must choose or elect between them; and, if he has clearly elected to proceed on one, he is bound by this election and cannot thereafter pursue the other. . . . ‘Broadly speaking, an election of remedies is the choice by a plaintiff to an action of one of two or more coexisting remedial rights, where several such rights arise out of the same facts, but the term has been generally limited to a choice by a party between inconsistent remedial rights, the assertion of one being necessarily repugnant to or a repudiation of the other.’ (Mansfield v. Pickwick Stages (1923) 191 Cal. 129, 130, 215 P. 389, [doctrine held inapplicable].)' (2 Witkin, Cal.Proc. 2d Ed., § 112, p. 981.) (Emphasis added.)

“At best this doctrine . . . is a harsh, and now largely obsolete rule, the scope of which should not be extended.” (Perkins v. Benguet Cons. Min. Co., 55 Cal.App.2d 720, at 756, 132 P.2d 70 at 92.)

Where the debt is secured primarily by a chattel mortgage, there is nothing inconsistent in pursuing the remedies afforded by the Commercial Code as to the chattels and when the remedies are found inadequate to then turn to the additional real property security.

In its proposed application to the case before us ‘The doctrine is based on estoppel and . . . operates only if the party asserting it has been injured.’ (Pac. Coast Cheese, Inc. v. Sec.-First Nat. Bk., 45 Cal.2d 75, 80, 286 P.2d 353, 356.)

Plaintiff places heavy reliance on two cases where the court appeared to invoke the doctrine of election of remedies to deny a judgment creditor his security interest in real property. Neither case is helpful to him.

In James v. P.C.S. Ginning Co., 276 Cal.App.2d 19, 80 Cal.Rptr. 457, property owners gave as collateral for a loan, chattel mortgages covering farming equipment and a security agreement which created an equitable lien on their home. When a default on the debt occurred the creditor obtained a judgment and a writ of execution on the home and purchased it at the sale. In the meantime, the property owners had prior judgment recorded a homestead and filed voluntary bankruptcy in which they claimed exemption for the home by virtue of the homestead. The referee set aside the real property as exempt and discharged the property owners in bankruptcy.

In an action by the property owners the trial court quieted title to their home as against the judgment and execution sale. The Court of Appeal affirmed, pointing out that the action was between debtor and creditor and that the creditor by obtaining a personal judgment had, pursuant to Code of Civil Procedure sections 726 and 580a, waived the right to foreclose the equitable lien. Since the creditor's title then rested on its purchase at the execution sale it was subordinate to the prior recorded homestead.

There, of course, the action was between the creditor and the primary debtor who did not waive the provisions of section 726 of the Code of Civil Procedure. Also present was an element of estoppel and the favorable position in the law which the right of homestead enjoys.

Salter v. Ulrich, 22 Cal.2d 263, 138 P.2d 7, dealt with a situation in which an owner encumbered real property with a trust deed to secure a promissory note. Shortly thereafter, an improvement bond was issued to a third party. The trust deed holder later sued on the note without reference to the trust deed, obtained judgment against the owner and a writ of execution was issued. Between the date of the execution sale and delivery of the deed to the creditor, the holder of the improvement lien commenced an action to foreclose without joining or serving the creditor. Pursuant to that action a second sale was conducted and a deed issued.

In a quiet title action brought by the holder of the second deed, it was claimed that the first judgment and deed were invalid for failure to comply with Code of Civil Procedure section 726. The trial court found that the defendant holder of the first deed became the owner by reason of the execution proceedings subject to the lien of the improvement bond. The Supreme Court affirmed, holding that the primary debtor had waived the provisions of Code of Civil Procedure section 726. As to the lien, it was noted that defendant had not appealed that portion of the judgment and thus could not attack it. However, the court concluded that the judgment was proper in that regard and in dicta alluded to an ‘election’ by defendant to disregard the security stating significantly, however, that ‘This is an action in equity and the decision carries out the principles of equity by giving justice to both parties.’ (Salter, supra, at 268, 138 P.2d at 9.)

In the case at bench the primary debtor D.E.I. waived the provisions of section 726 and further waived the right to force an election of remedy by transferring the property prior to judgment and ‘subject’ to the trust deed. Plaintiff's acquisition of the property prior to judgment and ‘subject’ to the trust deed created no estoppel in his favor.

The judgment is affirmed.

COMPTON, Associate Justice.

ROTH, P. J., and HERNDON, J., concur.

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