Proceed with Caution: California’s One-Action Rule (2024)

Proceed with caution. Words for a lender to heed when recovering a debt or enforcing any other right secured by a mortgage or deed of trust upon California real property to avoid violating California’s One-Action Rule. A lender who fails to comply with the One-Action Rule could forfeit its lien upon its real property collateral.

This article identifies some of the pitfalls lenders should be aware of when navigating California’s One-Action Rule.

The One-Action Rule, as codified under California Code of Civil Procedures Section 726(a), requires a lender to foreclose on the real property securing its debt before enforcing other available remedies against a defaulting debtor. Section 726(a) provides that: “[t]here can be but one form of action for the recovery of any debt, or the enforcement of any right secured by mortgage upon real property.”

The One-Action Rule has two general limitations on a lender’s ability to recover debt secured by real property collateral. The first limitation is commonly referred to as the Security First Rule. This rule prohibits a lender from collecting against any of the debtor’s unpledged assets unless the lender seeks, as part of its action, an order for judicial foreclosure of its mortgage or deed of trust. The Security First Rule serves to protect the interests of the debtor by requiring the lender to exhaust the real property collateral before proceeding against the debtor personally. Although outside the scope of this article, it should be noted that a debtor’s personal liability, even after exhausting the security, may still be limited or restricted by California’s anti-deficiency laws.

The second limitation restricts a lender from bringing more than one “action” against a debtor to exhaust the security. For purposes of Section 726(a), in Security Pac. Nat’l Bank v Wozab (1990) 51 C3d 991, the court interpreted an “action” to mean: “an ordinary proceeding in a court of justice by which one party prosecutes another for the declaration, enforcement, or protection of a right, the redress or prevention of a wrong, or the punishment of a public offense.” Simply put, a lender must enforce all of its security in a single action (i.e., a lender is prohibited from filing multiple lawsuits against a debtor on a single debt).

Violation Consequences

A debtor may utilize the One-Action Rule as either a shield or a sword. The debtor may use the One-Action Rule as a shield by pleading it as an affirmative defense when a lender commences an action for damages against the debtor personally without first exhausting the real property collateral. By doing so, the debtor can require the lender to proceed against the real property collateral.

The One-Action Rule can also be used as a sword by a debtor seeking to invoke the “sanction aspect” of violating the rule. The sanction, in general terms, can result in the lender forfeiting its security interest in the real property collateral. This would bar the lender from judicially foreclosing or selling the security under a power of sale even if the security has not been exhausted.

Lessons for Lenders

It is critical for a lender making a loan secured by California real property to understand and appreciate the One-Action Rule. Certain conduct that does not on its face appear to be problematic may in fact violate the rule and could result in potentially devastating consequences for a lender. Before commencing a foreclosure, a lender should confer with California licensed counsel to confirm any proposed actions do not violate the One-Action Rule or other applicable law. Although not exhaustive, the following are some general facts a lender should be mindful of when navigating the enforcement of a debt secured by California real property.

The following are generally considered “actions” for purposes of the One-Action Rule:

• Entry of a judgment
• A prejudgment attachment on unpledged assets owned by the debtor
• A release of security without the debtor’s consent

The following are not “actions” for purposes of the One-Action Rule:

• Enforcing an assignment of rents
• Seeking appointment of a receiver
• Drawing on a letter of credit
• A setoff against a bank account maintained by the debtor at the lender (however, such action does violate the Security First Rule if the lender did not have an express pledge of such bank account or a broadly worded security interest in the debts and accounts of the debtor).

Notably, a non-judicial foreclosure (i.e., a trustee’s sale) is not considered an action within the meaning of the One-Action Rule because it does not require or involve a court proceeding. Accordingly, a lender may conduct multiple, successive non-judicial trustee’s sales.

In addition, foreclosure of personal property collateral is not subject to the One-Action Rule, the Security First Rule, reinstatement rules, or other rules relating to debt secured by real property merely by virtue of the fact that the parties included real property in the transaction.

Waivers

California courts have held that waivers of the One-Action Rule are unenforceable, and will void any clause that is construed as an implicit waiver of the rule. The law is well settled that waivers of the One-Action Rule and anti-deficiency laws made by a debtor contemporaneously with the closing of an initial loan transaction are invalid, although it is an open question whether subsequent waiver by a debtor would also be invalid. Courts have held subsequent waivers of certain code sections by debtors to be enforceable, while other courts have held such waivers to be unenforceable on the grounds that public policy prohibits a valid waiver of the particular code section.

It should be noted that unlike debtors, guarantors may waive the benefits and defenses of California Code of Civil Procedures Sections 580a, 580b, 580d and 726, and California Civil Code Section 2856 contains “safe harbor language” for valid waivers.