Court Whacks Lender for Failing to Get Consent from All Borrowers

Lending/Lender Issues and Mortgage Issues by Peter N. Brewer, Esq.

In March, 2009, Sally DaVincenzo (“Sally”) and John DeVincenzo (“John”) were borrowers on a promissory note (“Note”) secured against a property in Wasco, California (“Wasco Property”) and a property in Shafter, California (“Shafter Property”).  The Wasco Property was community property while the Shafter Property was the sole and separate property of Sally.  At some point in time, Sally sold the Shafter Property with First California’s (the beneficiary of the Note) permission.  First California’s approval was based on its understanding that it would receive the net proceeds from the sale and the borrowers would remain liable on the Note.

Later that year, John passed away and the Note went into default.  Eventually, First California moved for a judicial foreclosure on the Note.  In that lawsuit, the trial court ruled in favor of First California by requiring the sale of the Wasco Property and finding that Sally and John were responsible for any deficiency.  John’s estate appealed the decision on the theory that a deficiency judgment was barred.

THE DECISION:

The Fifth Appellate District overturned the trial court’s judgment and remanded the case back to the trial court.  In First California Bank v. Mary McDonald, the appellate court reaffirmed earlier case law finding that a lender must get consent from all borrowers for any private sale or it will lose its claim for a deficiency.  The Appellate Court notes that California has a strong policy in favor of lenders pursuing any claims against the security and against a deficiency.  Accordingly, any requirements under the statute are strictly construed.  Here, Section 726 essentially requires that a lender must judicially foreclose on all of the secured property before it can get a personal judgment against a borrower.  The exception to this is if all borrowers waive the protections under Section 726 or consent to the lender’s action.  Here, First California only got the consent of Sally and did not get the consent of John.

WHY THIS DECISION IS IMPORTANT:

The Court reaffirmed the holding in a previous case, Pacific Valley Bank v. Schwenke.  On appeal, the lender explicitly contended that Schwenke was bad law and should have been overturned.  However, the Court went out of its way to reaffirm Schwenke’s holding – that a lender must get the consent of all borrowers even if one of the borrowers was not a party to the deed of trust.  Even though John had no interest in the Shafter Property, the fact that the Shafter Property was additional collateral was sufficient to protect John from a deficiency judgment.

COMMENT:

It is interesting to note that the Court found against the lender in this case even though it appeared that the lender’s actions most likely benefited John.  Presumably, the private sale of the property netted more funds than any foreclosure sale would have and would have reduced the amount owed on the loan.  In its decision, the Court did not address this issue and instead strictly interpreted the statute.

Latest Posts

Marijuana & Real Estate

Navigating the Unstable World of Real Estate and Cannabis in California

by Ashlee D. Gonzales, Esq. on June 25, 2018

Marijuana legalization in California is here, but the fact that the substance is still considered illegal at the Federal level is causing some confusion and hardships for growers and sellers. Learn about how to navigate the unknown areas in attorney [more]

Legal Update, Real Estate Law

Recreational Pot In 2018: High-Times Or A Buzz-Kill For California Real Estate?

by Adam Pedersen, Esq. on November 29, 2017

California is set to roll out new guidelines implementing the voter-mandated legalization of recreational marijuana use and production in January of 2018.  At the same time, cities and counties are scrambling to implement their own regulations before the state rules [more]

Landlord/Tenant Disputes

Progress Report on Rent Control Initiatives in Silicon Valley

by Ashlee D. Gonzales, Esq. on November 21, 2017

Few topics have drawn more heated discussions throughout the Silicon Valley real estate industry than the ever-changing and increasing rent control efforts happening all across the region. From 2011 to 2016, the median wage in San Francisco, Santa Clara, and [more]