## Facts

- A corporation, Anco Fire Protection, Inc., had an accounts receivable line of credit with a bank exceeding \$1 million and maintained demand deposit accounts at the bank.
- Anton and Dorothea Wozab executed continuing guaranties of Anco’s obligations and also maintained personal deposit and savings accounts at the bank.
- After the bank became concerned about Anco’s financial condition, the Wozabs granted the bank a deed of trust on their residence as security for the guaranties.
- Before any foreclosure, the bank set off funds from Anco’s demand deposit accounts and from the Wozabs’ personal accounts against Anco’s outstanding debt, reducing (but not eliminating) the balance due.
- Anco filed for bankruptcy shortly thereafter.
- After being advised the setoff violated Code of Civil Procedure § 726(a), the bank reconveyed the deed of trust and then sued the Wozabs on their guaranties for the remaining indebtedness.

## Issues

1. Whether a bank that holds a deed of trust securing guaranties violates Code of Civil Procedure § 726(a)’s security-first rule by setting off a guarantor’s deposit accounts before foreclosing on the real property security.
2. If so, whether the sanction under § 726(a) is limited to waiver of the deed of trust or instead bars any later action to recover the remaining balance on the debt.

## Decision

- The court held the bank’s setoff constituted a violation of the security-first component of § 726(a) because it reached nonsecurity assets before exhausting the real property security.
- The violation resulted in waiver/forfeiture of the bank’s real property security interest (the deed of trust).
- The court held the violation did not preclude a later action on the underlying obligation once the bank relinquished its security.
- The judgment for the guarantors was reversed and the matter was remanded for further proceedings.

## Legal Principles

- Code of Civil Procedure § 726(a) requires a creditor whose obligation is secured by real property to proceed against the security first; reaching nonsecurity assets before foreclosure violates the security-first rule.
- A setoff against deposit accounts is treated as pursuit of personal property and, when taken before foreclosure while real property security is held, triggers § 726(a)’s sanctions.
- The ordinary sanction for violating the security-first rule is waiver of the real property security; § 726(a) does not, without clear direction, extinguish the underlying debt.
- When guarantor obligations are secured by a deed of trust on the guarantor’s real property, § 726(a)’s security-first rule applies to the creditor’s enforcement choices against the guarantor.

## Conclusion

A bank that sets off a guarantor’s deposit accounts while holding a deed of trust securing the guaranties violates § 726(a) and forfeits the real property security, but the bank may still sue on the remaining debt after giving up the security.


Sec. Pac. Nat'l Bank v. Wozab, 51 Cal. 3d 991 (Cal. 1990)