Facts: A husband and wife own a parcel of real estate as community property. The wife also separately owns a second parcel of real estate. The couple obtains a mortgage secured by both parcels. Later, the wife obtains the mortgage holder’s permission to privately sell her separate property, and the mortgage holder releases and reconveys the trust deed securing her separate property. The husband does not consent to the agreement between the wife and the mortgage holder to sell the property. The couple later defaults on the mortgage, and the mortgage holder filed suit to foreclose judicially.
Claim: The mortgage holder seeks to judicially foreclose on the couple’s property and obtain a deficiency judgment for the remaining unpaid balance of the mortgage, claiming it is adhering to the security first rule since the mortgage holder’s security interest in the wife’s separate property was extinguished when the property was sold and the trust deed reconveyed.
Counterclaim: The couple seeks to bar the mortgage holder’s collection of a deficiency judgment, claiming that the wife’s separate property was sold without the consent of the husband and therefore the mortgage holder waived its right to a deficiency judgment by not complying with the security first principle which requires it to first resort to the entire security—both properties—before seeking a deficiency judgment.
Holding: A California Court of Appeals holds the mortgage holder is barred from seeking a deficiency judgment since the husband did not consent to the disposition of the wife’s separate property, and thus the mortgage holder waived its right to a deficiency judgment since the security first principle requires both parcels be included in the judicial foreclosure action unless the husband had consented to the release of the wife’s property as security for the mortgage. [First California Bank v. McDonald (2014) __ CA4th __]
It’s PRINCIPAL not principle.