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Mixed Collateral Security – What the Lender Must Do to Be Sure It Avoids The California Antideficiency Rules

When the same debt is secured by liens on both real property and personal property, the lender has options as to how they are allowed to enforce their security interest. They can enforce against the real property under real property law, against personal property under the Commercial Code, or both. There are specifics under both areas of law which must be observed, or the lender may lose their security, and a party in this situation may want to consult with a business and real estate attorney. Otherwise, they may run into the problem faced by a lender recently when they failed to adequately describe the personal property in the deed of trust. The Court of Appeals found that the deed of trust did not successfully describe personal property as additional security, and thus any further recourse for the lender would be contrary to the purpose of the antideficiency laws.

mixed collateral attorney sm.jpgIn Thoryk v. San Diego Gas and Electric Company, the owner of an avocado ranch in San Diego County wanted to subdivide it into two-acre homesites. The owner borrowed $1 and ½ million from Highland for this purpose. There was a wildfire which did extensive damage to the property, and the project stopped. Highland foreclosed and obtained title to the property. The owner believed that San Diego Gas and Electric was at fault and sued for damages. Highland joined the suit, claiming that its deed of trust was secured by more than just the property, and extended to any of the owner’s recovery of damages caused to the property; i.e. it was also secured by personal property. Highland argued that it was entitled to a judicially imposed lien under the terms of its deed of trust and related note.
The owner argued that he was protected by the antideficiency laws, which prohibits collecting money from the owner after a trustee’s sale. However, where there are liens established upon both personal and real property in the subject transaction, a foreclosing lienholder using the power of sale may continue to pursue remedies against the former property owner/borrower. The creditor is not seeking a personal judgment for the unpaid balance of a loan, but instead seeks to enforce additional security secondarily liable for the principal loan.

The Court noted that where additional collateral was created for an obligation, a debtor-creditor relationship may survive a nonjudicial foreclosure, if the proceeds of the sale were insufficient to pay the debt, by showing that the language of the trust deed and note created additional collateral, beyond the real property security that it took under power of sale. It looked at the terms of the deed of trust. There, “real property” was defined to also include all fixtures, easements, water rights, plans or engineering reports, permits, entitlements, “and all money held on deposit for any of the foregoing or otherwise related to the Real Property; and all other rights, royalties, and profits relating to the real property, including without limitation all minerals….”

deed of trust attorney.jpgAlso provided was that it “shall constitute a Security Agreement to the extent any of the Property constitutes fixtures or other personal property, and Lender shall have all of the rights of a secured party…
with regard to the personal property, such as fixtures, the lender is given all the rights of a secured party, “including without limitation the right to recover any deficiency in the manner and to the full extent provided by California law.”

Here, there was no express provision in the deed of trust that assigned any tort claims for injury to the real property as “additional security” for the mortgage debt. Without more specific language, the court refused to find that the deed of trust language included in the “personal property” defined by the trust deed as money “related to the Real Property. Thus, the lender was restricted to the real property alone. A better description in the deed of trust was required.