Daily Development for Thursday, September 30, 2004
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri dirt@umkc.edu
MORTGAGES; “ONE ACTION” RULE; MIXED COLLATERAL: California’s new “mixed
collateral” statute permits a lender to foreclose on personal property through a
UCC foreclosure even a real estate mortgage secures the same debt, and lender
can still foreclose on the real estate notwithstanding the “one form of action
rule.” But lender cannot seek a deficiency in the personal property foreclosure
without running afoul of the rule.
Kearns v. Transamerica Home Loan, 2004 Banks. LEXIS 1389 (9th Cir. BAP 9/2/04)
Consumer borrowers gave lender a lien on their car and their home to secure a
$34,000 debt. They executed separate financing instruments for each form of
security. Later, borrowers declared bankruptcy, which discharged their personal
liability on the debt, but the liens passed through the bankruptcy unaffected.
Apparently the borrowers attempted to make further payments on the debt, but
eventually defaulted and the lender decided to foreclose.
Lender first conducted an Article 9 repossession and “commercially reasonable”
sale of the car. Thereafter, the borrowers attempted to sell their home, and the
lender interposed a demand in the escrow for payment of $17,400 as a condition
to its release of the real estate deed of trust. (Apparently this amount took
into account any homestead protection or else borrowers had not declared this
property to be their homestead.)
Borrowers protested that the lender, by selling the car, had triggered their
rights under the California “one form of action rule,” CCP 726, which has been
construed to provide that if a lender seeks to collect a debt secured by a real
estate mortgage through an action other than a mortgage foreclosure, the
borrower may either block the first collection effort or else permit it to
proceed and then treat the mortgage in the real estate as terminated. Therefore,
the borrowers asserted, the deed of trust on the real estate was no longer of
any effect and the lender, by seeking to prevent their sale of the property by
making a demand in the escrow, slandered their title.
The matter wound up in bankruptcy court, and the bankruptcy court gave summary
judgment to the lender. On borrowers’ appeal to the 9th Cir. BAP, held:
Affirmed.
The appeals court acknowledged that this appeared to be a matter of first
impression following the enactment of California’s new “mixed collateral”
statute. It doesn’t say what the law was prior to the statute, but does note
that CCP 726 at one time covered both real property and personal property liens,
but it was amended to apply only to real property liens when California adopted
the UCC. The new “mixed collateral” statute (Cal Com. Code Sec. 9604) is part of
the recent revision of Article Nine, but California’s version of the statute is
non uniform. Here is the relevant language:
(a) If an obligation secured by a security interest in personal property or
fixtures is also secured by an interest in real property or an estate therein:
(1) the secured party may do any of the following:
(A) Proceed, in any sequence, (i) in accordance with the secured party’s rights
and remedies in respect of real property as to the real property security, and
(ii) in accordance with this chapter as to the personal property or fixtures.
(B) Proceed in any sequence, as to both, some or all of the real property and
some or all of the personal property or fixtures in accordance with the secured
party’s rights and remedies in respect of the real property, by including the
portion of the personal property or fixtures selected by the secured part in the
judicial or nonjudicial foreclosure of hte real property in accordance with the
procedures applicable to real property . . . .”
This seems clear enough, and Section (A) appears to authorize the procedure used
by the lender. But of course the statute doesn’t indicate whether the lender
must proceed with foreclosures under Section (A) in any set order. Further, the
court noted that in general, Section 726 does not bar lenders with additional
security for the same debt from choosing the order in which it proceeds against
the security. It concluded that the UCC language should be read that lender can
use whatever foreclosure device it chooses to execute on the personal property,
and in whatever order it chooses as well.
The borrower pointed that another part of the UCC contained a sort of “safe
harbor” exempting proceedings under that part from Section 726 requirements, and
that such “safe harbor” did not appear in connection with the mixed collateral
language. Borrower argued that this meant that Section 726 did apply and that
the lender was required to foreclose first on the real property.
The court felt that the absence of the “safe harbor” was not dispositive here,
but it acknowledged that in some circumstances the requirement that the lender
proceed first against the real estate had the additional impact in California
that lender would be driven into the provisions of the various California
anti-deficiency statutes. Normally, California’s anti-deficiency provisions
would not prevent a lender from foreclosing on additional security for the same
debt, but it would bar deficiencies. The borrower argued that if the lender were
proceeded to foreclose first under a UCC foreclosure device that permitted
deficiencies, the anti-deficiency scheme would be frustrated.
The court noted that the whole issue was moot in this particular case, since the
borrowers enjoyed protection for a personal judgment for any deficiency as a
consequence of the prior bankruptcy. But it noted that borrowers’
anti-deficiency argument was relevant to its interpretation of the statute, and
therefore noted that the proper interpretation of the mixed collateral statute
was that the lender could foreclose pursuant to the UCC, but Section 726 would
be triggered if the lender proceeded to seek a judgment for a deficiency
following its non judicial foreclosure. Lender didn’t do that here, so it was
not prevented from foreclosing against the real estate after proceeding against
the car.
Comment 1: The case seems straightforward enough, but unfortunately nothing is
that straightforward when we’re talking about California’s extremely complex
real estate security provisions - made all the more complex by frequent and
convoluted judicial interpretations. Since this is a decision of first
impression on what likely is an important issue, and since California likely is
the dominant real estate economy in the nation, the editor concluded that the
case was worth reporting to a national audience.
Comment 2: The editor isn’t necessarily criticizing the California courts that
have wrestled with the proper application of the anti-deficiency and one form of
action statutes. These are obviously statutes intended to be “anti-market” and
to protect debtors from agreeing to security realization practices that are
deemed to be too harsh. The fact that the consequences may be inconvenient for
lenders would appear to be an intended outcome. Further, it’s not surprising
that we have a jillion hair-splitting decisions, since lenders are paying smart
lawyers to come up with ways around the restrictions. From time to time, lenders
have been successful in going into the legislature and getting changes in the
statutory scheme to avoid the spirit of the California system. For example, in a
protracted battle some years ago, lenders obtained legislation that , in the
editor’s view, basically gutted the overall intent of the California scheme as
it applies to letters of credit. At least part of the battle is set forth in the
DD for 7/2/96. The editor takes no position as to whether what the lenders did
was bad or good or necessary or unnecessary. He merely points out that many
inconsistencies in the California scheme result from lenders ramming their tanks
against the citadel.
Readers are encouraged to respond to or criticize this posting.
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