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California Lenders Waive Right to Deficiency Judgment When Property is Sold Outside Judicial Foreclosure Without Borrower Consent – Glass & Goldberg | Financing, Property & Bankruptcy Law
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California Lenders Waive Right to Deficiency Judgment When Property is Sold Outside Judicial Foreclosure Without Borrower Consent

California Lenders Waive Right to Deficiency Judgment When Property is Sold Outside Judicial Foreclosure Without Borrower Consent A California appeals court has ruled lenders that allow real property collateral to be sold outside judicial foreclosure without borrower consent have waived their right to a deficiency judgment.

In First California Bank v. McDonald, defendants John and Sally DeVincenzo secured a promissory note from First California Bank with a deed of trust for a Wasco, California property the couple owned as well as with another deed of trust to separate property Sally owned in Shafter, CA. Later, Sally sold the Shafter property, supposedly with the bank’s agreement that it would receive the net proceeds from the sale with no release of liability for the DeVincenzos.

After John died, the note went into default and the bank filed for judicial foreclosure on the Wasco property as well as for a deficiency judgment against the DeVincenzos’ children, who were representatives for the estate. A trial court ruled in the lender’s favor on both the sale and deficiency judgment.

On appeal, the Fifth Appellate Court ruled that the deficiency judgment was barred by Code of Civil Procedure §726, setting forth the “one form of action” and “security first” rules.  The Court found that the lender had violated the security-first principle by neither foreclosing the Shafter property, nor obtaining the consent of John DeVincenzo’s heirs the sale of the property:

“Based on the text of section 726, the conceptual foundation for the security first principle…and Pacific Valley Bank v. Schwenke…we conclude that Bank was required to include both parcels of real property security in its judicial foreclosure action unless Bank can show that all of the debtors consented to the release of the Shafter Property as security for the loan,” Justice Donald Franson Jr. wrote. “We further conclude that Bank’s release of the Shafter Property without appellant’s consent would operate as a waiver of Bank’s right to a deficiency judgment under the provision in section 726(b) that provides for such a deficiency ‘unless judgment for any deficiency … is waived by the judgment creditor .…’”

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