Security Pacific National Bank v. Wozab

Anton and Dorothea Wozab (defendants) were customers of Security Pacific National Bank (bank) (plaintiff). The Wozabs owned and operated a business that had a substantial line of credit with the bank. The business ran into financial trouble, and the bank sought protections for its debt. The Wozabs granted the bank personal guarantees on the business’s debt. The Wozabs also executed a deed of trust on their home as security for the guarantees. The Wozabs’ business’s financial condition further deteriorated, and the bank feared the business would declare bankruptcy. The bank used funds in the Wozabs’ deposit accounts to set off a portion of the amount due to the bank under the guarantees. The bank had not first sought to foreclose on the Wozabs’ residence. The Wozabs’ lawyer informed the bank that, under § 726 of the California Code of Civil Procedure, the bank should have brought a foreclosure action to exhaust its security in the guarantees before going after the Wozabs’ personal assets. In response, the bank reconveyed the deed of trust back to the Wozabs and filed a personal action against the Wozabs to collect the outstanding balance of their debt. The trial court granted summary judgment in favor of the Wozabs, holding that the bank’s improper setoff served as a waiver not only of the bank’s security interest in the Wozabs’ home but also of the bank’s claim to the underlying debt. The bank appealed.