Daily Development for Wednesday, November 15, 2000

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu

OK, OK, this is one of those arcane "only in California" mortgage cases. But many of us watch California mortgage law, since it's a big market, and the little piece about prepayment interpretation, remedies, and drafting makes the case of more general application.

MORTGAGES; DEFICIENCY JUDGMENTS; ANTI DEFICIENCY; ONE FORM OF ACTION: Where mortgagee waives the security and sues for damages, mortgagor must raise the defense of one form of action rule to force a foreclosure, or mortgagor will lose potential protection of purchase money antideficiency protection of section 580b.

Pegorare v. Wong, 2000 WL 1665557 (11//7/00)

Mortgagor had assumed a mortgage on certain California property. The note was for fifteen years and eleven percent interest. The note had originally been secured by a five unit residential building, but the property had been converted into a single family residence later. When interest rates came down and the property became more mortgageable, the mortgagor attempted to prepay the note. But the mortgagee claimed that the note could not be prepaid. The mortgagor then stopped payment on the note, and the mortgagee brought suit in the alternative for specific performance with damages or judicial foreclosure.

The note contained ambiguous prepayment provisions, but the court concluded, based upon parole evidence, that the parties intended to restrict prepayment. The court then found for mortgagee, ans asked the mortgagee to elect between specific performance with damages or judicial foreclosure. The mortgagee elected for specific performance. The judge asked the mortgagor's counsel whether he had any response, and counsel stated: "I don' t know if there' s anything I can say. I mean, that' s the remedy he [respondent] wants."

The court then entered judgment for the mortgagee for all accumulated monthly interest installments, with prejudgment interest at 10 percent per annum, and costs and attorney fees. The court also ordered that all monthly interest payments be made until July 1, 2001, at which time all principal and unpaid interest would be due in full.

On appeal: Held: Affirmed.

As the court on appeal notes, the mortgagor's counsel may have made a serious blunder in concluding that he had "nothing to say" at the time that mortgagee elected for specific performance. Under California's "one form of action" rule, a mortgagor can compel a secured party to collect its claim through a judicial foreclosure. In this case, because of the application of California's "purchase money antideficiency" statute Section 580b, the mortgagee in the event of foreclosure would have been limited to the remedy of foreclosure and could not have collected a deficiency judgment.

As the appeal demonstrates, the mortgagor apparently concluded that a foreclosure would have benefitted it either because of the antideficiency protection. But cases have interpreted the one form of action rule to mean that a mortgagor who does not raise the defense affirmatively at time that judicial foreclosure is sought is viewed as having waived the defense and then is subject to a general judgment. Thus, the antideficiency statute, which only applies in the event of foreclosure, has not application to limit the size of the judgment awarded to the mortgagee.

The court notes that the result is equitable because the mortgagor, instead of continuing to make payments on the mortgage and seek declaratory relief, elected to "force the issue" by withholding payments on the mortgage, leaving the mortgagee with little recourse but to initiate its action.

Comment 1: The mortgagor argued that this interpretation of the one form of action rule had never been applied to cut off a mortgagor's rights under Section 580b. The court does not cite any case that has applied the waiver rule in this context, although the editor suggests that they exist, but concluded that the logic of prior authority would extend this far. If, indeed, this is a case of first impression on the point, the case is a significant precedent.

Comment 2: The ruling on prepayment is also interesting, because the note stated that the debt could be paid off "on or prior to" the due date, but at another point stated specifically that principal could not be reduced or retired before the due date. Obviously, a form note had been marked up, and the drafter created an ambiguity that cost a lot of money for both parties to resolve. Further, note the remedy, which neatly circumvents the need to foreclose by requiring payments as scheduled for the life of the note. Note that this is an unsecured claim. Good result if you have a "deep pockets" buyer.

Comment 3: The lesson for real estate lawyers is plain. If you don't really understand all the implications of California's one form of action rule, don't go in the kitchen!!!

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

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