Problem.Security first
A. A debtor owes your client $25,000, evidenced by a promissory note, and has defaulted on required installment payments. The debt is secured by a third deed of trust on the debtor's real property. Your client estimates the fair market value of the real property to be $250,000 and tells you that a debt of $200,000 (perhaps more if the debtor has defaulted in payment of that obligation) is secured by a first deed of trust on the property and a debt of $50,000 (perhaps more if the debtor has defaulted in payment of that obligation) is secured by a second deed of trust on the property. Thinking that her lien is underwater, client asks you to file a lawsuit seeking a judgment on the note. What is your advice?
B. Your client holds a note in the amount of $250,000 secured by a deed of trust on real property originally located atop a cliff overlooking the Pacific Ocean. The debtor has recently defaulted on payments. The foreclosure company that your client hired to conduct a foreclosure has advised your client that the real property has recently descended into the Pacific Ocean. Does the one form of action rule constrain your client's options? Is the situation more like the situation in Barbieri v. Ramelli or more like the situation in Savings Bank v. Central Market Co?
C. Your client holds a note for $40,000 secured by a second deed of trust on real property located atop a cliff overlooking the Pacific Ocean, immediately adjacent to the property mentioned in Part B, above, that has gone to seaweed. The debtor has defaulted on payments on the $40,000 note, but not on another note secured by a first deed of trust on the property on which the balance owing is currently $150,000. By virtue of the landslide on the adjacent property, the estimated fair market value of the real property on which your client holds a deed of trust has declined precipitously to approximately $140,000. Assume for reasons we discuss later that your client's deed of trust is not purchase-money. If your client sues on the note, will it be subject to the affirmative defense of CCP 726?
D. 1. Cookie borrowed $160,000 from Valley Bank, evidenced by a promissory note. Cookie's friend Sally gave the bank a deed of trust on Sally's home to secure the debt but was not a co-maker of the note.. Upon Cookie's default, the bank sued Cookie on the $160,000 note but did not seek to foreclose on its deed of trust. Does Cookie have a defense to the action?
2. Cookie and Sally borrowed $160,000 from Valley Bank and were co-makers of the promissory note. Sally gave the bank a deed of trust on her home to secure the note. Thereafter, Valley Bank made a $60,000 unsecured loan to Sally. Later still, upon Sally's request, the bank reconveyed her deed of trust upon her repayment of the $60,000 unsecured loan. Thereafter, Cookie and Sally defaulted on the $160,000 note. Do either Cookie or Sally have any defenses to an action by the bank on the note?
3. Cookie and Sally are partners in a partnership and the $160,000 loan in Part B, above, was a loan to the partnership. Cookie and Sally, as partners, signed a promissory note in favor of the bank and Sally gave the bank a deed of trust on her home to secure the note. After lending $160,000 to the partnership, Valley Bank made a $60,000 unsecured loan to Sally in her individual capacity. Thereafter, Cookie and Sally orally agreed to a dissolution of their partnership; as part of the dissolution Cookie orally agreed to assume liability on the $160,000 note and Sally agreed to pay off other partnership debts in like amount. Later still, upon Sally's request, the bank reconveyed her deed of trust upon her repayment of the $60,000 unsecured loan. Cookie then defaulted on the $160,000 note. Do either Cookie or Sally have any defenses to an action by the bank on the note? Would it make any difference if the dissolution agreement were written? If the agreement, whether oral or written, included Cookie's authorization to Sally to seek reconveyance of the deed of trust? Would it matter whether the bank knew of any such authorization?
E. Your client recently graduated from veterinary school owing $100,000 in student loans. After defaulting in payments, the Bank of Petaluma, to whom the student loan payments were owed, suggested an extension of payments to be secured by a second deed of trust on your client's residence. Your client agreed and signed a new note reflecting the obligation (replacing the extant student loan notes) and a deed of trust securing the note. Subsequently, your client defaulted on payments to the Bank of Petaluma. Your client has just been served with a complaint alleging only a cause of action on the new note and praying for monetary relief in the amount of the note together with accrued interest, costs, and attorneys fees. What options do you discuss with your client?If the client first consults you after the Bank of Petaluma has taken a default judgment, garnished the client's bank account, and initiated a non-judicial foreclosure on the client's residence through service of a Notice of Default, what do you advise?
F. Suppose that your client, the veterinary grad from Part E, above, gave the Bank of Petaluma deeds of trust on two separate parcels of real property to secure the renewal student loan note. When your client defaulted on the note, the Bank foreclosed non-judicially on one of the two parcels. A third party purchased the property at the foreclosure sale for an amount insufficient to pay off the note. May the Bank now foreclose non-judicially on the second parcel of real property? May it foreclose judicially on the second parcel of real property?
G. Suppose the Bank of Petaluma initially pursued judicial foreclosure, obtained a decree of foreclosure and, following sale, a deficiency judgment. Your client did not raise an affirmative defense under 726 insisting on foreclosure on both parcels of property. Could the Bank foreclose non-judicially on the second parcel of property? Could it execute on that property to enforce its deficiency judgment? What if the second parcel of property were a residence?
H. Assume the following variation from the facts in Salter v. Ulrich. Kassell, a manufacturer, granted Ulrich a consensual security interest in Kassell's equipment to secure a debt owed Ulrich. Thereafter, Kassell granted Oswald a consensual security interest in the same equipment to secure a debt owed Oswald. Under the priority scheme of Article 9 of the Commercial Code, Ulrich's lien, if filed or perfected first, has priority over Oswald's lien. Suppose that Kassell defaults, and that Ulrich sues Kassell only on the underlying obligation and recovers a judgment against Kassell for the amount owing on the obligation. Ulrich then executes on the equipment in which it had a consensual security interest. Will the buyer at the execution sale take title to the equipment subject to Oswald's consensual security interest (in the same manner that Ulrich took subject to Salter's lien in Salter v. Ulrich)? Consult U.C.C. 9-601(a), (e) and U.C.C. 9-617(a).
I. Your client owed Clerical Bank $100,000, secured by a first deed of trust on your client's property. Following your client's default, Clerical Bank set off your client's bank account (the bank's obligation to your client) against a portion of the amount which your client owed the bank under the real property secured loan. Clerical Bank has recently commenced a judicial foreclosure of the deed of trust. What do you advise?