BLACK, J.
Defendant and respondent, Brian P. Lanz, an attorney, represented plaintiff and appellant, Hebe Garcia-Bolio, in an action against Garcia-Bolio's former fiancé. Garcia-Bolio signed a contingent fee agreement that contained a clause granting Lanz a lien on the proceeds recovered for Garcia-Bolio. In this litigation, Lanz obtained a residence for Garcia-Bolio. Lanz filed a notice of attorney lien and received a deed of trust securing this lien against the residence.
Lanz filed an action against Garcia-Bolio seeking a judicial declaration establishing the amount, validity, and enforceability of the attorney lien and deed of trust. After the trial court fixed the amount of the lien, Lanz proceeded with a non-judicial trustee's sale of the residence.
Garcia-Bolio filed the underlying action against Lanz, respondent Hibernian Properties, LLC (Hibernian), and respondent Cimarron Service Corp. of Nevada (Cimarron), seeking to set aside the trustee's sale and have title to the residence transferred to her. Garcia-Bolio claimed she was entitled to relief based solely on her allegation that Lanz violated the "one action/security first" rule. (Code Civ. Proc.,
The trial court entered judgment in respondents' favor. The court ruled that, because Lanz did not seek a personal money judgment against Garcia-Bolio, he did not violate section 726 and thus did not waive his right to foreclose on the security.
Garcia-Bolio challenges the trial court's judgment on the ground that Lanz elected to sue to perfect his attorney lien rather than foreclose on the deed of trust and therefore Lanz violated section 726.
Garcia-Bolio's position is meritless. Therefore, we affirm the judgment.
In October 2009, Garcia-Bolio retained Lanz to file and prosecute a Marvin action (Marvin v. Marvin (1976) 18 Cal.3d 660) in Sonoma County against Garcia-Bolio's former fiancé, Denis Ronchelli.
Garcia-Bolio executed an "Attorney-Client Contingency Fee Contract." Garcia-Bolio agreed to pay Lanz 40 percent of the recovery obtained plus costs and expenses advanced if the action against Ronchelli should go to trial. The contingent fee agreement also included a provision entitling the prevailing party to recover attorney fees incurred in any action to enforce the agreement. Garcia-Bolio additionally granted Lanz a lien against any prospective recovery.
Lanz filed and prosecuted the action against Ronchelli and, after three days of trial, negotiated a settlement for Garcia-Bolio. Under the settlement agreement, Ronchelli agreed to pay Garcia-Bolio $10,000, pay off the existing mortgage balance on Ronchelli's house located at 505 Kimble Street in Modesto (Kimble Property), and then transfer ownership of the Kimble Property to Garcia-Bolio. In return, Garcia-Bolio was to vacate Ronchelli's house located in Santa Rosa.
At Garcia-Bolio's request, Lanz provided Garcia-Bolio with an estimate of what Garcia-Bolio owed him under the contingent fee agreement on September 15, 2010. Approximately one week later, Garcia-Bolio responded by firing Lanz as her attorney. Garcia-Bolio failed to pay Lanz any amount she owed for attorney fees. Garcia-Bolio also rejected Lanz's offer to arbitrate the fee.
In November 2010, following his termination, Lanz served Ronchelli's attorney with a notice of attorney's lien for an amount "up to $60,000." In response, Ronchelli moved the Sonoma County court for instructions regarding the settlement.
The trial court granted Ronchelli's motion for instructions and ordered Ronchelli to give Lanz a deed of trust securing Lanz's lien against the Kimble Property before conveying title to Garcia-Bolio. The court further instructed Ronchelli to deliver the $10,000 settlement check directly to Garcia-Bolio and, after Lanz recorded the deed of trust, to deliver a deed to the property to Garcia-Bolio.
Ronchelli granted Lanz a short form deed of trust to the Kimble Property and delivered the $10,000 settlement check to Garcia-Bolio. After Lanz recorded the deed of trust on January 11, 2011, Ronchelli delivered a grant deed to Garcia-Bolio conveying title to the Kimble Property.
On November 1, 2010, Lanz filed a separate breach of contract action against Garcia-Bolio in Sonoma County to establish and collect the sums owed under the contingent fee agreement. Thereafter, Lanz filed an amended complaint to include a request for a judicial sale of the Kimble Property.
Garcia-Bolio retained attorney Peter Goldstone in February 2011 to represent her and filed an answer and a cross-complaint against Lanz. The cross-complaint alleged that Lanz breached his fiduciary duty and committed legal malpractice.
In November 2011, Garcia-Bolio filed a voluntary petition for bankruptcy causing an automatic stay of Lanz's action against Garcia-Bolio. Garcia-Bolio's only debts were the amount owed to Lanz, approximately $17,000 owed to Goldstone for his representation of Garcia-Bolio in the Lanz action, and approximately $950 owed to two other creditors.
In February 2012, the bankruptcy court granted Garcia-Bolio a discharge but did not disallow Lanz's attorney lien or deed of trust. The bankruptcy court later explained that, "while [Garcia-Bolio's] bankruptcy discharge ended her personal liability for her pre-bankruptcy debts, any such debt secured by a lien on her property may be satisfied by repossessing or foreclosing upon that property. A bankruptcy discharge has no effect on the vitality of a lien."
In May 2012, Lanz filed a second amended complaint in the Sonoma County action. This complaint stated one cause of action for declaratory relief to establish the amount, validity, and enforceability of Lanz's attorney lien and court ordered deed of trust securing the lien. Lanz alleged that an actual controversy existed between Lanz and Garcia-Bolio. Lanz contended that the lien secured by the deed of trust was in an amount, according to proof, up to $60,000 and that the lien and deed of trust securing the lien were valid and immediately enforceable. In contrast, Garcia-Bolio contended that the lien and deed of trust securing Lanz's lien were invalid and unenforceable because (1) Garcia-Bolio allegedly obtained no recovery under the settlement agreement and (2) Lanz did not advise Garcia-Bolio in writing of the right to seek the advice of independent counsel before executing the contingent fee agreement.
Before trial, the court dismissed Garcia-Bolio's cross-complaint. The court then tried Lanz's second amended complaint for declaratory relief. The trial court found, among other things, that: Lanz had "a valid lien and deed of trust against the subject Modesto property"; Lanz's "lien and deed of trust were not avoided or disallowed by the bankruptcy court"; and Lanz "was entitled to enforce his lien and deed of trust." The court determined that Lanz's "lien and deed of trust [were] in the amount of $48,824.20" increased by "attorney fees and costs reasonably incurred" by Lanz in prosecuting this action. The trial court further concluded that Garcia-Bolio's "testimony was incredulous and her attack on" Lanz was "unwarranted."
After the court fixed the amount of attorney fees and costs, the court entered a declaratory judgment in Lanz's favor declaring Lanz's attorney lien and deed of trust "valid and enforceable by Lanz in the . . . total amount of $86,864.20."
Garcia-Bolio appealed to the First District Court of Appeal. However, the court dismissed this appeal and awarded costs to Lanz.
Shortly after the trial court entered the declaratory judgment, Cimarron was appointed trustee under the deed of trust granted to Lanz. On May 6, 2013, Cimarron recorded and served Garcia-Bolio with a "Notice of Default and Election to Sell." Thereafter, on August 21, 2013, Cimarron recorded and served Garcia-Bolio with a "Notice of Trustee's Sale" notifying Garcia-Bolio that Cimarron will sell the Kimble Property at public auction on September 18, 2013.
Garcia-Bolio did not have the financial ability to redeem the Kimble Property. Accordingly, she did not tender any amount at any time to Cimarron.
Hibernian purchased the Kimble Property at the trustee's sale as the highest bidder for $97,017.27. Cimarron executed a trustee's deed upon sale conveying title to Hibernian. Hibernian recorded this deed on October 9, 2013. The Kimble Property required repairs to bring it up to habitable standards and Hibernian invested an additional $40,000 to renovate and improve the property and pay the back taxes.
In April 2014, Garcia-Bolio filed the underlying action to cancel the trustee's deed and quiet title. Garcia-Bolio alleged that Lanz's actions in suing her in Sonoma County to enforce his attorney lien and thereafter proceeding with a trustee's sale of the Kimble Property on the same obligation violated section 726, the one action rule. According to Garcia-Bolio, Lanz's pursuit of his Sonoma County action "to a money judgment was an `action' within the meaning of § 726(a)." Garcia-Bolio pled no other theory of liability.
Lanz moved for summary judgment. Lanz argued he did not obtain a personal money judgment against Garcia-Bolio before foreclosing on the real property security. Rather, Lanz obtained only a judicial declaration establishing the amount of his attorney lien and that it and the related deed of trust were valid and enforceable. Therefore, Lanz argued, he did not elect a remedy other than foreclosure or violate section 726.
The trial court granted Lanz's summary judgment motion. The court concluded that Lanz's action to establish the amount and validity of his attorney lien was not an election of remedies. The court noted that, had Lanz "sued `on the obligation' and sought a `personal money judgment against [Garcia-Bolio] without seeking therein foreclosure of . . . [his] deed of trust' he would have elected the `single remedy of a personal action.' Since Defendant Lanz did not seek a personal money judgment against [Garcia-Bolio], he did not waive his right to foreclose on the security."
Thereafter, the court tried the action against the remaining defendants, Cimarron and Hibernian, and ruled in their favor. The court reaffirmed its legal conclusion that Lanz did not violate the one action rule. The court further concluded that neither Cimarron nor Hibernian were creditors of Garcia-Bolio. Finally, the court found the laches doctrine barred Garcia-Bolio in that her delay in initiating the action resulted in Hibernian investing approximately $40,000 in the property.
In California, statutes restrict a creditor's right to enforce a debt secured by a mortgage or deed of trust on real property. (Walker v. Community Bank (1974) 10 Cal.3d 729, 733 (Walker).) The law requires the creditor to rely on his security before enforcing the debt. (Ibid.)
Section 726 is one aspect of this statutory scheme. It provides, in relevant part, "There 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 . . . in accordance with the provisions of this chapter." (§ 726, subd. (a).) In general, section 726, subdivision (a), operates to prevent a secured creditor from bringing more than one lawsuit to enforce his security interest and collect his debt. (Security Pacific National Bank v. Wozab (1990) 51 Cal.3d 991, 997 (Wozab).)
As construed by case law, section 726 is both a "one action" and a "security first" rule. It compels the secured creditor, in a single action, to exhaust the security before obtaining a monetary deficiency judgment. (Ziello v. Superior Court (1995) 36 Cal.App.4th 321, 330.) Where the creditor sues on the obligation and seeks a personal money judgment against the debtor before exhausting the security, the creditor makes an election of remedies. The creditor elects the single remedy of a personal action and thereby waives the right to foreclose on the security or to sell the security under a power of sale. (Walker, supra, 10 Cal.3d at p. 733.)
Section 726 serves two fundamental purposes. It prevents a multiplicity of lawsuits against the debtor and requires the creditor to exhaust the security before resorting to the debtor's unencumbered assets. (Wozab, supra, 51 Cal.3d at p. 1005.)
Although an "action" is defined as "`an ordinary proceeding in a court of justice,'" a creditor can violate section 726 without a court proceeding. (Wozab, supra, 51 Cal.3d at p. 998.) An extrajudicial appropriation of the debtor's unencumbered assets before foreclosing on the security also violates section 726. (Wozab, at p. 999.)
For example, a secured creditor elects a remedy other than foreclosure in violation of section 726 if the creditor obtains a prejudgment attachment order and attaches non-security property. (Shin v. Superior Court (1994) 26 Cal.App.4th 542, 544 (Shin).) Similarly, the creditor violates section 726 if the creditor exercises an extrajudicial set-off against the debtor's unencumbered assets before exhausting the security. (Wozab, supra, 51 Cal.3d at p. 995.) Thus, in operation, the one action/security first rule "`applies to any proceedings or action by the beneficiary for the recovery of the debt, or enforcement of any right, secured by a mortgage or deed of trust. The only "action" that is permitted is foreclosure; any other "action" is a violation of the rule that invokes severe sanctions.'" (Shin, supra, 26 Cal.App.4th at p. 545.)
Lanz's attorney lien arose upon Garcia-Bolio's execution of the contingent fee agreement. (Saltarelli & Steponovich v. Douglas (1995) 40 Cal.App.4th 1, 6.) Although Garcia-Bolio's bankruptcy ended her personal liability for the debt, the bankruptcy did not prevent Lanz from enforcing his lien and deed of trust. (Id. at p. 5.)
As pointed out by Garcia-Bolio, Lanz was required to bring an independent action against Garcia-Bolio to establish the existence and amount of the lien and to enforce it. (Mojtahedi v. Vargas (2014) 228 Cal.App.4th 974, 977-978.) This is precisely what Lanz did through his second amended complaint for declaratory relief filed in Sonoma County. Lanz sought, and obtained, a judgment declaring that Lanz's attorney lien and deed of trust were valid and enforceable and establishing the total amount of the lien.
Garcia-Bolio argues that Lanz's declaratory relief action was an action within the meaning of section 726. This is correct. Garcia-Bolio then asserts that Lanz violated the one action rule simply by filing this action. According to Garcia-Bolio, in bringing the declaratory relief action, Lanz elected a remedy other than foreclosure. Garcia-Bolio claims that all Lanz could do without waiving his right to foreclose on the security was to foreclose on the deed of trust on the Kimble Property to collect the $60,000, i.e., the amount stated on that deed of trust. Garcia-Bolio's position is untenable.
First, as discussed above, Lanz was required to bring the independent action to establish the amount of the lien, i.e., the amount of the attorney fees and costs owed to Lanz under the contingent fee agreement. Lanz requested, and the court instructed Ronchelli to grant, Lanz a deed of trust to secure the amount of the attorney fees "up to $60,000." This was merely an estimate of those fees and costs. The fact that the deed of trust states the indebtedness is in the principal sum of $60,000 did not give Lanz the right to collect $60,000 in fees without a judicial determination of the correct amount.
Further, the declaratory judgment was not a remedy other than foreclosure. Rather, establishing the correct amount of the lien was a prerequisite to foreclosing on the property securing that lien. In fact, due to Garcia-Bolio's discharge in bankruptcy, Lanz could not collect against Garcia-Bolio's personal non-security assets.
Garcia-Bolio also claims that Lanz could have brought a declaratory relief action on the $60,000 deed of trust only rather than on the amount of his attorney lien under the contingent fee agreement. That way, Garcia-Bolio asserts, Lanz would not have been able to recover his attorney fees. This argument is baseless. The issue to be resolved was the amount of attorney fees and costs owed to Lanz under the contingent fee agreement, not the validity of the deed of trust.
Without citation to authority, Garcia-Bolio asserts that Lanz violated section 726 by proceeding with a trustee's sale rather than a judicial foreclosure. According to Garcia-Bolio, "judicial supervision of the execution of such a lien is clearly required." This is yet another groundless argument.
In analyzing section 726, the court in Walker noted that if the creditor violates the one action rule by seeking a personal money judgment against the debtor without seeking foreclosure of the mortgage or deed of trust, the creditor "waives his right to foreclose on the security or to sell the security under a power of sale." (Walker, supra, 10 Cal.3d at p. 733; italics added.) There is no requirement that the creditor proceed with a judicial foreclosure. The difference between a judicial and a non-judicial foreclosure is that the creditor who exercises the power of sale in a deed of trust loses the ability to obtain a deficiency judgment. (Id. at p. 736.)
In sum, Lanz did not prosecute his declaratory relief action to obtain a personal money judgment against Garcia-Bolio. Rather, that action was a necessary part of the process of foreclosing on his security. Moreover, due to Garcia-Bolio's discharge in bankruptcy, Lanz could not and did not take any judicial or extra-judicial action to enforce the underlying debt against Garcia-Bolio's personal unencumbered assets. Therefore, Lanz did not violate section 726. Since Garcia-Bolio based her complaint solely on Lanz's alleged violation of section 726, the trial court properly entered judgment in favor of all respondents. In light of this conclusion, we need not consider appellant's remaining arguments.
Lanz and Cimarron filed a motion for sanctions, as did Hibernian. Both motions assert that Garcia-Bolio and her attorney, James D. Struck, filed a frivolous appeal for the purpose of harassing Lanz and causing unnecessary cost and delay.
"When it appears to the reviewing court that the appeal was frivolous or taken solely for delay, it may add to the costs on appeal such damages as may be just." (§ 907.) In re Marriage of Flaherty (1982) 31 Cal.3d 637 (Flaherty) sets forth the standards for determining whether an appeal is frivolous. A reviewing court may find an appeal to be frivolous and impose sanctions when the appeal (1) "is prosecuted for an improper motive—to harass the respondent or delay the effect of an adverse judgment," or (2) "indisputably has no merit—when any reasonable attorney would agree that the appeal is totally and completely without merit." (Id. at p. 650.)
"However, an appeal that is simply without merit is not by definition frivolous for the purpose of awarding sanctions." (Cohen v. General Motors Corp. (1992) 2 Cal.App.4th 893, 896.) Further, courts must read any definition of frivolous in a manner that avoids a serious chilling effect on the assertion of litigants' rights on appeal. Courts must also be aware that the borderline between a frivolous appeal and one without merit is vague. Thus, courts should not use their power to punish attorneys and litigants for prosecuting frivolous appeals except in the clearest cases. (Flaherty, supra, 31 Cal.3d at p. 650.) "[T]he punishment should be used most sparingly to deter only the most egregious conduct." (Flaherty, supra, 31 Cal.3d at p. 651.)
As discussed above, this appeal is without merit. Struck's understanding of the one action rule and its application is limited and his reasoning is incorrect. Nevertheless, he did not engage in "egregious conduct" by prosecuting this appeal. Although the general law regarding the one action rule is settled, the application of the rule is not necessarily straightforward.
It is also not clear that Garcia-Bolio prosecuted the appeal for an improper motive. First, since there was not a judgment against her in the underlying action, she received no benefit from a delay. Further, while she displayed a pattern of attempts to delay and harass Lanz in the Sonoma County action, the trial court stated it could not find that she brought this action in bad faith. Accordingly, we deny respondents' motions for sanctions.
The judgment is affirmed. Respondents are awarded costs on appeal.
HILL, P.J. and DETJEN, J., concurs.
