Court Holds Lender Waived Right to Deficiency Judgment

In First California Bank v. McDonald, a California appellate court recently held that a lender waived its right to a deficiency judgment where it permitted the sale of real property outside of the judicial foreclosure without the borrower’s consent. In First California, a husband and wife signed a promissory note secured by a deed of trust against certain real property in California. They also provided additional security in the form of a deed of trust against a different property. The wife subsequently sold the second property with the bank’s agreement that it would receive the proceeds from that property. There was no release as to the borrowers. The bank’s note went into default after the husband died. The bank subsequently filed a complaint for judicial foreclosure and sought a deficiency judgment against the wife and children. The trial court granted summary adjudication as to the bank’s claim for judicial foreclosure ordering the sale of the property. The court found that the wife and estate representatives were subject to a deficiency judgment for the unpaid amount.

The wife and estate appealed, contending that their arrangement with the bank released its deed of trust as to the second property and therefore, the bank had waived any right to a deficiency judgment under Code of Civil Procedure §726(a). The court of appeals agreed and reversed. The appellate court found that the bank failed to follow the requirements of §726 and did not obtain the wife’s nor children’s consent or waiver that the property was being sold outside of judicial foreclosure. There was no evidence that the bank obtained their consent to the release of the secured interest in the property and there was no evidence as to how the proceeds of the sale were actually applied. As such, the bank waived its right to a judicial foreclosure.

Shannon B. Jones, Partner, sbj@sbj-law.com