Memorandum of Decision Re: One Form of Action

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Decisions
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re MICHAEL and ALETA ROSEN,                                                                           No. 96-13030      Debtor(s). ______________________________________/ NORTH BAY CONSTRUCTION, INC., et al.,      Plaintiff(s),      v.                                                                                                                       A.P. No. 97-1084 GOLDEN GATE BANK,      Defendant(s). _______________________________________/
Memorandum of Decision
     The remaining dispute in this adversary proceeding is over the priority of two competing security interests in a partnership interest. The primary parties are defendant Golden Gate Bank and plaintiff North Bay Construction, Inc. By virtue of a settlement, the bankruptcy trustee has obtained an interest in North Bay's position.      Prior to their bankruptcy, the debtors held general and limited partnership interests in a partnership known as CLP II. The Bank obtained a perfected first position security interest in the limited partnership interest by duly filing a UCC-1 with the Secretary of State on June 7, 1990.      In February, 1993, the debtors executed four promissory notes in favor of North Bay. They gave multiple security for the notes, including several deeds of trust, a note and deed of trust they held, and the debtors' interests in two partnerships, one of which was CLP II. North Bay filed a UCC-1 in May, 1993, perfecting an interest junior to that of the Bank in CLP II..      The fundamental fact generating this dispute is that the Bank failed to file a timely continuation statement, so that its security interest in CLP II lapsed, moving North Bay into first position. The Bank is now grasping at legal straws to avoid the effect of its failure to diligently protect its position. The theory it has concocted is that North Bay violated either § 580d or § 726 of the California Code of Civil Procedure by entering into a workout agreement with the debtors in 1994 after the debtors defaulted on their obligations under the notes. The court finds these arguments unconvincing.      The court doubts that a junior lienholder has standing to raise issues relating to § 580d or § 726, as these statutes were intended to protect the makers of notes, not junior creditors. The Bank has failed to cite any case where a junior creditor was heard on the issues. However, the dispositive fact is that there was no legal action taken by North Bay against unpledged assets. A workout agreement does not trigger either § 580d or § 726.      Section 580d bars a money judgment after nonjudicial foreclosure. In this case, there was neither a money judgment nor nonjudicial foreclosure. The argument is so baseless that the court would consider sanctions were it not for the fact that the bankruptcy trustee, who has now acquired an interest in North Bay's position, argued it himself at one time.      The Bank's argument regarding § 726 is hardly more meritorious. The theory is that the 1994 workout provided for the debtors to deed outright to North Bay title to three parcels of real property which had formerly been subject to North Bay's deeds of trust, thereby bringing § 726 into play. The Bank does not explain why accepting these deeds constitute an action, triggering § 726.      In order for § 726 to apply at all, there must be a legal action taken to appropriate a debtor's unpledged assets without first exhausting security. California Mortgage and Deed of Trust Practice (2nd Ed.) § 4.5, p.190. There is not a shred of authority for the Bank's assertion that a voluntary surrender of assets already pledged violates § 726.      For the foregoing reasons, the court finds no merit whatsoever in the Bank's position. Its motion for summary judgment will accordingly be denied. Since the parties have stipulated that the above issues are dispositive of the case, judgment shall be entered in favor of North Bay. North Bay shall recover its costs. Counsel for North Bay shall submit an appropriate form of judgment.
Dated: September 13, 1998                                                                 ____________________________                                                                                                           Alan Jaroslovsky                                                                                                            United States Bankruptcy