Legal Update From the Law Firm of Pircher, Nichols & Meeks, Los Angeles, Chicago.

LOS ANGELES--(BUSINESS WIRE)--Aug. 13, 1998--

California Court Explains When Action Triggers Sanction Under One Form of Action Rule

In an opinion filed July 28, 1998, the California Court of Appeal for the Third Appellate District found that a partial summary adjudication in favor of the borrower of a lender's claim did not violate California's one form of action rule (CCP section 726). Kirkpatrick v. Westamerica Bank.

Facts

The lender made a $6.5 million nonrecourse loan secured by a deed of trust on an apartment complex. The lender later filed a lawsuit against the borrower alleging (among other things) that the borrower breached its implied obligation to sell apartment units as condominiums. The borrower successfully obtained a partial summary adjudication of this claim.

Afterwards, the borrower contended that by initially seeking a remedy other than foreclosure, the bank violated California's one form of action rule, resulting in a loss of collateral. Since the note was nonrecourse, the borrower also maintained that the debt was effectively waived.

Arguments

The borrower argued that the lender had progressed far enough along the "spectrum," from filing of the complaint to judgment, to trigger CCP section 726's sanction. The bank responded that the one form of action rule applies only to final judgments.

Determination

The court rejected both approaches. Instead, the court found that the dispositive issue was whether there had been an election of remedies: CCP section 726's sanction applies only if there has been an election of remedies.

The court further found that an election of remedies can occur in two ways. First, an election can occur when a judgment becomes final (under the doctrine of "res judicata"). Second, an election of remedies can occur under the doctrine of estoppel. An estoppel, the court explained, arises when permitting the lender to seek an alternative remedy after commencing an action will "prejudice" or "work a substantial injury" to the borrower.

The court found that neither res judicata nor estoppel applied. Res judicata did not apply because the partial summary judgment was not final. Estoppel did not apply because the only prejudice to the borrower was the expenditure of borrower's attorneys' fees. This cost was insufficient prejudice because (1) the borrower did not raise the one form of action claim until after the litigation, and (2) the attorneys' fees would be the same regardless of the relief sought.

Significance of Case

Although the lender prevailed, the case indicates that a final judgment is not necessary to trigger the sanction aspect of CCP section 726. Lenders are reminded of the necessity of carefully considering the possible effect of CCP section 726 before exercising any remedies in connection with a loan secured by a deed of trust.

For more information or to arrange an interview, contact Leeza Hoyt, APR, The Hoyt Organization, at 310/373-0103, or David L. Packer at 310/201-8904.

    CONTACT: Pircher, Nichols & Meeks
              David L. Packer, 310/201-8904
                     or
              The Hoyt Organization
              Leeza Hoyt, 310/373-0103