The one form of action rule

At some point in their careers, California real estate lawyers must inevitably face one of the more arcane and unusual, yet important, provisions of California law: the “one form of action” rule. In the wake of the Great Depression and its catastrophic impact on land values, the California legislature enacted a host of measures designed to standardize and regulate the process of collecting debts secured by mortgages.  One of the most significant of these is the so-called “one action” rule, which imposes strict requirements on foreclosing lenders to prevent them from pursuing multiple legal actions to collect obligations secured by real property.

In its simplest iteration, in a loan made to one borrower secured by one property, the “one action” rule prevents the lender from first taking advantage of California’s streamlined non-judicial foreclosure process (in which the lender can conduct a private auction of the property securing its loan simply by giving notice pursuant to the “power of sale” provision of the mortgage), and then, in the event the loan is not fully repaid through the sale of the property, filing a lawsuit against the borrower to collect any unpaid amount of the loan remaining after the sale of the property (a “deficiency”) by the enforcement of a personal judgment against the borrower (a “deficiency judgment”).

This rule forces the lender to choose one remedy or the other in order to collect its debt. Under more complex circumstances, however, where a lender makes a loan to multiple borrowers secured by multiple properties, matters can get thornier.

Once recent California Court of Appeal ruling illustrates the problems that can occur in these situations when a lender fails to heed the requirements of the “one action” rule. In that case, a lender made a loan to a husband and wife secured by (a) one parcel of property owned by the couple, and (b) a second parcel of property owned separately by the wife. The wife’s property was then sold, and the sales proceeds were paid by agreement to the lender. After the husband died, the loan went into default, and the bank filed a lawsuit for judicial foreclosure against the wife and the personal representatives of the husband’s estate for the sale of the remaining property.

Although the trial court awarded judgment to the lender, the appeal court ruled that, by agreeing to accept payment against its debt from the sale of the wife’s property, the lender had waived its right to sue the wife and the husband’s representatives to foreclose on the other property and seek a deficiency judgment, and set aside the ruling of the trial court. The case can be found here.

As demonstrated by this case, it behooves a lender to be extremely careful when making secured loans that fall outside the usual simple “one loan, one security” framework, and even more so if any of the security is proposed to be disposed of prior to maturity. Any lenders faced with such circumstances are well advised to consult with experienced real estate counsel in order to prevent unfortunate mistakes such as the one that occurring in this case.