EVERYONE'S FAVORITE TOPIC - more on
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.
Thanks so much.. so informative. i enjoyed reading through each section. Helps put things clearly into perspective. Thanks again!
Posted by: Home Owner Loans | April 22, 2010 at 02:59 AM
Would Bank X be able to credit bid BOTH loans at the Trustee Sale? If so, is that likely what the bank would do?
Posted by: Evandtwins | May 10, 2010 at 04:36 PM
What would happen for the same lender owned both the 1st and 2nd TD and the 2nd TD were sold "at the last minute" to a debt collection company. I.e., sold before the 1st completed the foreclosure? It would seem that the court would see this as a contrivance to cimcumvent the Simon vs Superior Court finding (in favor of the debtor)
Posted by: joan | June 19, 2010 at 10:48 AM