Facts
- Western Fuel Company sold and delivered coal to S. G. Lewald Company on an open book account, creating indebtedness of about $13,513.15.
- On December 2, 1916, Lewald executed two promissory notes to evidence the debt: one for $3,750 and one for $8,000.
- The $8,000 note was secured by a mortgage on real property.
- The $3,750 note and other portions of the debt were paid, but the $8,000 note remained unpaid.
- In November 1920, Western tendered cancellation and redelivery of the $8,000 note and mortgage to Lewald; Lewald refused the tender.
- Western sued for $8,000 as a balance due on the original book account rather than bringing a foreclosure action.
- The trial court sustained Lewald’s demurrer without leave to amend and entered judgment for Lewald; Western appealed.
Issues
- Whether a creditor whose debt is evidenced by a promissory note secured by a real property mortgage may sue on the underlying book account without foreclosing the mortgage, by tendering cancellation of the note and mortgage.
- Whether Code of Civil Procedure § 726 bars an independent action on the debt when the complaint shows the debt remains secured by an existing mortgage.
Decision
- The California Supreme Court affirmed the judgment sustaining the demurrer without leave to amend.
- The court held that, because the complaint showed the obligation was secured by a real property mortgage, § 726 required a foreclosure action as the exclusive form of action.
- Western’s unilateral tender to cancel and return the note and mortgage did not permit it to proceed on the book account instead of foreclosure.
- The complaint stated no cause of action because it sought a personal money judgment without foreclosing the security and without alleging facts excusing foreclosure (such as loss or complete worthlessness of the security).
Legal Principles
- Under Code of Civil Procedure § 726, there is but one form of action for recovery of a debt secured by a mortgage on real property: foreclosure, with any allowable deficiency sought in the same action.
- When a complaint affirmatively shows a debt is secured by an existing real property mortgage, the creditor may not disregard the security and sue separately on the underlying obligation.
- A creditor cannot avoid § 726’s limitation through a unilateral “waiver” or tendered cancellation of the mortgage security, absent pleaded facts showing the security has been eliminated or foreclosure is not available.
Conclusion
Because Western’s complaint showed the $8,000 debt remained secured by a real property mortgage and sought recovery on the underlying account without foreclosure or a recognized excuse, § 726 barred the action and the demurrer was properly sustained.