Be careful Banks – in California you get one bite at the apple in collecting a deficiency judgment against a homeowner (or possible debtor in bankruptcy).
For creditor attorneys – make sure you’ve complied with the ‘one action rule,’ or you waive your client’s right in a deficiency judgment against the former homeowner.
For debtor attorneys – if the creditor has violated the ‘one action rule,’ and are seeking to recoup against your debtor-client now, make sure to object to their proof of claim under §502(b)(1), such that the claim is unenforceable against the debtor under state law.
So — what is the “One Action Rule”?
To begin, a Bank has two sources of repayment if the loan is not repaid: collect the sale proceeds and get a personal judgment against the former homeowner (i.e. deficiency judgment). The law favors the bank to first seek to recoup their losses from the property first, then go after the homeowner.
In seeking a deficiency judgment, CCP §726 says that the bank must first try to sell all real property which is secured by the debt in a single judicial foreclosure lawsuit, then and only then, may the bank seek to get a deficiency judgment against the former homeowner. If any of the real property is exhausted through any other means, such as a private sale without the consent of the homeowner, the bank waives its right to a deficiency judgment later.
So basically, the Bank has one shot in collecting the unpaid debt.
Example: Bank holds a promissory note secured by a deed of trust against two real properties. Homeowner defaults, and Bank initiates a judicial foreclosure on only one of the properties. The Bank has now waived its right to a deficiency judgment against the Debtors because the Bank did not attempt to judicially foreclose on all real property (both properties). So, if the homeowners file bankruptcy and the Bank files a proof of claim for the deficiency amount, the claim is disallowed as it would be unenforceable under state law.
This was the holding in seminal case of First California Bank v. McDonald from the fifth appellate district of California, which is currently in review by the California Supreme Court.