What is the One Action Rule in California?
The One Action Rule is a term that describes the California statutory requirements for enforcing obligations of debts secured by mortgages and deeds of trust on real property. The rule is codified in California Civil Code section 580a through 580d for various types of loans.
The legislature enacted the one action rule in 1933 during the Great Depression to prevent the lawfully authorized foreclosure of real property to be challenged by the debtor in order to avoid the obligation to pay off the remaining balance due under the note. In other words, the rule prohibits a mortgage holder or its agent from having more than one opportunity to collect a debt secured by real property as defined under the statute. In other states , obligations secured by real property are typically governed by a "one action rule" or a "deficiency rule" which requires an unsecured creditor to pursue only one remedy for the collection of a debt and prevents the creditor from seeking a deficiency judgment for the balance of the debt after foreclosure.
Whether a foreclosing party will be subject to the one action rule depends on whether the action involves a judicial foreclosure under California Civil Code section 726 or a non-judicial foreclosure under California Civil Code section 2924. Unlike a judicial foreclosure which operates to bar a deficiency judgment under section 726 as to any other enforcement action on the note, a non-judicial foreclosure does not bar an enforcement of the note under a separate enforcement action.
One Action Rule Legalities
The legal implications of the One Action Rule for lenders and borrowers
The one action rule requires that, as to a debt secured by real property, a secured creditor may only pursue one form of action and may only obtain a single judgment—either against the security only, or for a personal judgment against the borrower. A plaintiff may not pursue a deficiency judgment on an obligation that is secured by real property if the remedy sought is inconsistent with the intended remedy of obtaining a court-ordered sale of the property. A lender is therefore limited to a single form of action in order to recover on a debt where security is being foreclosed; it cannot simultaneously pursue both judicial foreclosure and a deficiency judgment. (Cal. Code Civ. Proc., §726(b).)
The one action rule applies only if the secured creditor wants to collect the debt from the security or the borrower personally. If the creditor is indifferent, then recourse to the courts is not required. This is true even if there are multiple parcels subject to a deed of trust (unless the deeds of trust or promissory note expressly limit the remedy available to the lender). If there are multiple parcels securing the same debt, the foreclosing creditor may proceed simultaneously or in separate, additional suits against the property itself (sometimes referred to as "one form of action"). Although more than one lawsuit is permissible in that circumstance, failure to pursue the foreclosure through judicial means will not waive the one action rule.
One Action Rule Exceptions
Exceptions to the One Action Rule:
The first two exceptions to the One Action Rule are found in Code of Civil Procedure section 726(a)(1) and (a)(2). Exception 1 states, "a secured creditor may pursue the debtor personally if the creditor joins a secured claim for money, other than rent or homeowner association dues, with an action for judicial foreclosure on residential property where the creditor can demonstrate to the court that the real property security is inadequate to satisfy the total amount of the indebtedness due the creditor." (Code Civ. Proc., § 726(a)(1).) Exception 2 states "if a secured creditor has a separate agreement with a debtor for the debtor to personally pay a sum certain, and that sum certain is not secured by the property described in Paragraphs (1) and (2), then the creditor may seek to recover that sum certain through any remedy available to a creditor. The creditor is not required to comply with Section 726 prior to seeking recovery on that sum certain." (Id. at § 726(a)(2).)
The policy of the One Action Rule is sound as it serves to protect the equity of redemption. In using the first exception to pursue the debtor personally for a deficiency judgment, the mortgagee shows that the debtor is responsible for the debt and must pay $1.2 million regardless of the equity in the property. That’s fair. In the second exception, the mortgagee here acknowledges that there is an unencumbered note for $200,000 signed by the debtor and evidencing an unsecured indebtedness. In this case, a judicial remedy is permitted outside the One Action Rule.
Examples of the One Action Rule
Case studies of the One Action Rule are abundant in California. For instance, in Trabuco Highlands Community Association v. TCH Trabuco, LLC, the Fourth District Court of Appeal of California affirmed that the One Action Rule did not bar a homeowner’s association from enjoining, via a Mechanics Lien, a negligent developer from demolishing certain improvements on a condominium property (See 8 Cal.App.5th 562, 564, 570). The Court ruled that the association’s Mechanics Lien recorded against the affected property was not an "action" as contemplated under the One Action Rule. The rules of civil procedure clearly distinguish among an action, a writ, a mandamus, and an appeal. Each is a special procedure with its own unique purpose. The Court held that because the One Action Rule only applies to the filing of a single lawsuit on the same cause of action, and not to the recording of a Mechanics Lien, the Mechanics Lien does not trigger the One Action Rule to prohibit the filing of suit (see Trabuco Highlands Community Association at page 570).
Similarly, in New1915, LLC v. Monier Community Association, the Third District Court of Appeal also found that the One Action Rule did not apply to invalidate a notice of default that preceded a trustee’s sale of the debtor’s property to collect on the homeowner’s lien. The Third District found that under the plain language of the statute , the One Action Rule does not bar an action on a security interest in real property unless the action is brought to the exclusion of all other actions, but allows creditors to bring as many actions against the debtor to enforce the debt as the creditor thinks proper. (See 222 Cal.App.4th 1104, 1109.) Other courts have also distinguished between mechanics’ liens and conventional liens, noting mechanics’ liens are not "debts in any sense" and mechanics’ liens "are not a part of the debt obligation to which the provisions of [the One Action Rule] apply." (See 222 Cal.App.4th at pages 1109, 1110.)
In contrast, in Buhler v. George, the court held that the One Action Rule "applies when a plaintiff has an enforceable right arising from a single cause of action but amends his or her complaint so as to create a second cause of action based on the same ‘default’" by an executor for the recovery of money, and that the plaintiff must elect which cause of action to pursue. (8 Cal.App.4th 769, 775.) Since the plaintiff filed two separate complaints against the defendant on the same default, the court concluded that the plaintiff brought two separate causes of action, and as a result, "plaintiff has two valid claims against the estate arising from a single default. These claims, however, are of different natures, one sounding in contract and the other sounding in tort, and plaintiff can pursue only one of them." (See Buhler v. George at page 776.)
Making the One Action Rule Work
For Borrowers:
— Consider utilizing non-judicial foreclosure whenever possible. It is often the quickest and cheapest method for a lender to recover on a defaulted loan against real estate. Be prepared though; you may have a deficiency claim for the difference between the amount owed on the loan and what the property sells for. You also need to understand how to vacate a wrongful foreclosure if you believe that the lender made an error during the sale process.
— If a judicial foreclosure is commenced, it is often more complicated and time consuming than non-judicial foreclosure, but it may also be the most important option if the collateral is personal property or possession of real property is desired (as opposed to plain title). It also may provide the borrower with leverage to negotiate a specific business outcome. Determine whether you can bring or maintain this action without jeopardizing such other assets as insurance or other sources of recovery in the event of bankruptcy or other insolvency. Lastly, understand that if a foreclosure judgment is entered against the borrower, there is a risk that the entire amount of the judgment will be discharged in bankruptcy. Thus, the potential for bankruptcy as well as the ability to litigate in bankruptcy should also be analyzed if bankruptcy is likely.
— In collecting payments on debts and enforcing any remedies under a security agreement or deed of trust, particularly rights of possession, the borrower should be certain to follow the terms and conditions of the applicable agreement and any applicable law. Failure to follow such restrictions may provide the lender a basis to challenge the enforcement of the underlying debt or obligation.
— Even after losing a judicial foreclosure case brought by a lender, borrowers can still have a statutory right to a deficiency claim against any co-signers or guarantors of the debt. Thus, adversely losing a foreclosure judgment could help to preserve the ability to obtain a recovery against other obligors on the loan, even if there would be no recovery from the original borrower.
— Finally, it is important to remember that actions by which a lender strives to obtain a full recovery from a single loan obligation, may result in a claim by a borrower that the lender has violated the One Action Rule. As a result, borrowers should analyze whether they have legal claims against lenders when having to defend against lender actions to recover collateral securing a loan.
For Lenders:
— Understand whether the One Action Rule applies to a proposed transaction.
— Understand that lenders, even with a well-drafted security agreement or deed of trust should not expect that they can choose any remedy they desire for breach of a present or future security agreement or deed of trust, despite language in those documents stating that a foreclosure will satisfy the debt secured by the collateral.
— Know your rights and obligations for taking and disposing of any collateral securing a loan; and finally,
— Know when there may be a risk of a borrower obtaining the benefit of bankruptcy preferences for a "lender option loan."
One Action Rule Trends and Future
Future trends and potential developments for the One Action Rule are difficult to predict in the face of an uncertain real estate and economic market in California. Though there is a likelihood that the current One Action Rule will remain substantially intact for the next few years, some believe that the One Action Rule will be impacted by a number of potential changes in California. For example, some experts expect that whatever is left of the one action rule may face an attack over the issue of discrimination. This attack presumably would be brought under the theory that properties themselves are subject to discrimination based on their collateral characteristics, including location, age, and size, etc. Such a claim would result in a statutory re-evaluation by the California legislature of a bank’s use of the one action rule, or a more serious re-evaluation and re-write of the entire California anti-deficiency law and the One Action rule in particular.
Another important potential trend involves the continuing loss of influence of the member banks on the governing committee of the Bankers’ Associations, which committee promulgates the policy documents and forms frequently used by lenders making loans to California real estate owners . Many of the early one action legal documents were drafted by members of the Bankers’ Associations and, as a result, the committee’s decisions had a profound impact on the development of the One Action rule. As the effect of the One Action rule loses favor and member banks of the Bankers’ Association lose influence on the committees affecting one action rule documents, competing interests will have greater opportunity to exert their views on the one action rule and alter the remaining policy documents and the trade forms prepared by the committee.
Finally, courts continue to issue significant opinions interpreting, applying, and affecting the one action rule. Specifically, one or more courts may weigh in on the confusion caused by the California courts’ overly expansive interpretation that lenders in California need not pursue the note and the security pledged to secure the note in the same action. More importantly, whether the California Court of Appeals, and the California Supreme Court or other appellate courts, will address the issues raised by California creditors, which underlie the one action rule, or its effects on them, remains to be seen.