Woods

This appeal raises the issue whether, in a case where senior and junior debts, secured by the same property, were once held by the same creditor, which thereafter sells the loans to two independent parties, California’s one-form-of-action rule under Code of Civil Procedure section 726 prohibits the junior lienholder from bringing a separate action to recover its debt following the senior lienholder’s judicial foreclosure of the property.

In this case, a bank made to a single borrower successive loans secured by successive deeds of trust on the same property. The bank failed; the borrower defaulted on the loans; and the receiver sold the two loans to different parties. Appellant National Enterprises, Inc. (NEI) acquired the junior of the two debts. After a bench trial, the court concluded that NEI could not recover its junior debt because of a prior judicial foreclosure brought by the holder of the senior debt.

We shall reverse. Neither the plain language nor the underlying purpose of the one-form-of-action rule bars an independent junior lienholder from bringing a single action to recover a debt after the security for that debt has been lost following a judicial…