UNITED STATES BANKRUPTCY COURT
|DO NOT PUBLISH
This case disposition has no value as precedent and is not intended for publication. Any publication, either in print or electronically, is contrary to the intent and wishes of the court.
NORTHERN DISTRICT OF CALIFORNIA
MICHAEL and ALETA ROSEN, No. 96-13030
NORTH BAY CONSTRUCTION, INC., et al.,
v. A.P. No. 97-1084
GOLDEN GATE BANK,
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
without first exhausting security. California Mortgage and Deed of Trust Practice
Ed.) § 4.5, p.190.
There is not a shred of authority for the Bank's assertion that a voluntary
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 ____________________________
United States Bankruptcy