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This week’s reader Dhillon writes: “To my understanding, under 580(d), if a junior lender uses non-judicial means to foreclose on the property, then he or she is barred from seeking a deficiency judgment (please correct me if this is wrong).
Now, suppose a homeowner obtained a non-recourse/purchase money loan from BANK X. Subsequently, the homeowner obtained a HELOC, also from Bank X. Next, the homeowner fails to make his payments on both loans. BANK X uses non-judicial means to sell the property at auction for defaulting on the non-recourse loan/purchase money.
580(d) reads: No judgment shall be rendered for any
deficiency upon a note secured by a deed of trust or mortgage upon real
property or an estate for years therein hereafter executed in any case in which
the real property or estate for years therein has been sold by the mortgagee or
trustee under power of sale contained in the mortgage or deed of trust.
Now, did BANK X also trigger 580(d) with respect to the HELOC, barring any deficiency judgment on the second deed of trust, since, tracking the language of 580(d), it, BANK X, the trustee or mortgagee, sold the real property securing its loan through non-judicial means?"
Dear Dhillon – this is a common fact pattern because with
real estate prices being so high in
When the same lender has both loans against the same property and attempts to enforce the junior loan, the California Court of Appeals has said the Bank is NOT a sold-out junior and cannot pursue the borrower under the Note.
Tthe California Court of Appeals addressed this fact pattern in Simon v. Superior Court [4 Cal.App.4th 63, 5 Cal.Rptr.2d 428 Cal.App. 1 Dist.,1992.] The actual lender there was Bank of America who held both the first and the second loans against the borrower’s property. The Simons apparently defaulted on their $1.575M worth of loans so BofA foreclosed (non-judicial sale) under the power of sale in the senior deed of trust. The bank then sued the borrowers on the junior note.
The Court shot Bank of America down and said: “…we hold that, where a creditor makes two successive loans secured by separate deeds of trust on the same real property and forecloses under its senior deed of trust's power of sale, thereby eliminating the security for its junior deed of trust, section 580d of the Code of Civil Procedure bars recovery of any “deficiency” balance due on the obligation the junior deed of trust secured.”
The Court went on further to explain the rationale: “As the holder of both the first and second liens, Bank was fully able to protect its secured position. It was not required to protect its junior lien from its own foreclosure of the senior lien by the investment of additional funds. Its position of dual lienholder eliminated any possibility that Bank, after foreclosure and sale of the liened property under its first lien, might end up with no interest in the secured property, the principal rationale of the court's decision in Roseleaf. (59 Cal.2d at p. 41, 27 Cal.Rptr. 873, 378 P.2d 97.)” So there you have it. Same lender? No deficiency arises from the bank’s own actions.
Here’s the twist – what happens if Chase or Wamu has the 2nd and later the bank who had the first acquires the 2nd through a merger or sale? Should the same rule apply? I would argue yes because the bank who acquires the 2nd still has the power to decide how they want to handle the foreclosure aspect. What about the reverse? 2 simultaneous loans go on with the same lender but the lender sells one later and now 2 different lenders hold the notes? Think in that circumstance, then one lender cannot control what the other is doing and clearly, if the new 1st forecloses, there is a strong argument that the 2nd is a genuine sold-out junior lienholder. Other legal minds and real estate attorneys may disagree and argue that in choosing the split the loan into two parts, rather than making one large loan, the lender assumed the risk of becoming barred by 580(d) and their sale does not “morph” that loan.