Union Bank v. Wendland

The Wendlands (defendants) owned a home. The Wendlands borrowed money from Stanford Bank—predecessor to Union Bank (plaintiff)—in exchange for a promissory note (the former note) secured by a deed of trust (the former deed) on their residence. Later, the Wendlands borrowed an additional sum of money from Stanford Bank in exchange for another promissory note (the latter note) secured by a different deed of trust (the latter deed) also on the property. The purpose of the latter note was to refinance the Wendlands’ debts to Stanford Bank, and the latter note’s proceeds were used to pay off a portion of those debts. The former deed contained a dragnet clause whose language provided that the Wendlands’ residence would serve as security for any other past or future debts the Wendlands might owe to Stanford Bank. The Wendlands defaulted on the notes, and Stanford Bank held a nonjudicial sale under the former deed. Stanford Bank purchased the residence at the sale for less than the outstanding balance on the former note. Stanford Bank later sold the residence to a third party. Union Bank, as Stanford’s successor, then sued the Wendlands under the latter note. The trial court held that, despite the dragnet clause in the former deed, the latter note was not secured by the former deed and thus had not been extinguished by the sale under the former deed. The trial court ruled that the Wendlands were personally liable to Union Bank—into which Stanford Bank had merged—for the outstanding balance under the latter note. The Wendlands appealed.