Calif. Supreme Court Allows Creditor Holding Senior and Junior Liens to Seek Deficiency Judgment on Sold-Out Second Lien

Originally posted by Maurice Wutscher LLP June 26 2019

The Supreme Court of California recently held that the anti-deficiency statute in California Code of Civil Procedure § 580d did not bar a creditor holding two deeds of trust on the same property from recovering a deficiency judgment on the junior lien extinguished by a non-judicial foreclosure sale on the senior lien.

A copy of the opinion in Black Sky Capital, LLC v. Cobb is available at: Link to Opinion.

The bank extended two loans to the borrowers that were secured by deeds of trust on a commercial property. The bank sold both loans to an investor that subsequently foreclosed on the first deed of trust and acquired the property at a public auction.

The investor sued the borrowers to recover the amount still owed on the second deed of trust extinguished by the trustee’s sale. Both parties moved for summary judgment.

The trial court granted summary judgment in favor of the borrowers, holding that Code of Civil Procedure § 580d barred a deficiency judgment on the junior lien. The appellate court reversed the trial court’s judgment.

The Supreme Court granted review.

As you may recall, “California has an elaborate and interrelated set of foreclosure and antideficiency statutes relating to the enforcement of obligations secured by interests in real property.” Alliance Mortgage Co. v. Rothwell, (1995) 10 Cal. 4th 1226, 1236.

Secured creditors must abide by the one form of action rule, and that action is foreclosure which may be either judicial or non-judicial. Code of Civil Proc. 726(a).

In a judicial foreclosure, a secured creditor may seek a deficiency judgment to recover the difference between the amount of the debt and the fair market value of the property if the property is sold for less than the amount of the outstanding debt. However, the debtor has a statutory right to redemption. Alliance Mortgage, 10 Cal. 4th at 1236.

In a non-judicial foreclosure, also known as a trustee’s sale, the creditor exercises the power of sale under the deed of trust, and the debtor has no statutory right of redemption. But under section 580d, “the creditor may not seek a deficiency judgment” after a non-judicial foreclosure. Id.  Read More