Insights

In July, the Court of Appeal of California issued two decisions discussing two of California’s anti-deficiency statutes, California Civil Code Sections 580b and 580d, and whether the statutes prohibit a lender from collecting a deficiency judgment after a short sale of a mortgaged property. In the first case, Pena v. PNC Bank, N.A., a borrower obtained a home equity loan secured by a deed of trust on his home. The assignee of the loan consented to a short sale agreement on the condition that the assignee would receive at least $15,000 and that it would continue to pursue the borrower for any remaining deficiency balance. After the short sale, the assignee attempted to collect the deficiency. The borrower sued for declaratory relief to prevent it from collecting the deficiency. The trial court granted the assignee’s motion for judgment on the pleadings, and the Court of Appeal of California affirmed the decision. The appellate court concluded that California Civil Code Section 580d, which prohibits a deficiency judgment after a non-judicial foreclosure sale, does not apply to short sales. The appellate court explained that Section 580d applies only to the foreclosure sale of mortgaged property based on the plain language of the statute, which provides that the deficiency prohibition applies to sales “by the mortgagee or trustee under power of sale contained in the mortgage or deed of trust.” The appellate court also declined to retroactively apply California Civil Code Section 580e, which prohibits the collection of deficiencies after a short sale. Section 580e became effective on January 1, 2011, and was amended effective July 15, 2011 to include short sales of properties covered by both first and second mortgages. Because the borrower’s short sale closed in August 2010, Section 580e did not apply.

In the second case, Coker v. JP Morgan Chase Bank, N.A., the Court of Appeal of California concluded that California’s statutory anti-deficiency protection for purchase-money loans secured by deeds of trust under California Civil Code Section 580b applies to short sales. In that case, the borrower obtained a purchase money home loan. Prior to the foreclosure sale of the property, the loan assignee approved a short sale subject to several conditions, including that the borrower agree to pay any amount remaining unpaid on the loan after the sale. After the short sale, the assignee attempted to collect the deficiency. The borrower filed a complaint for declaratory relief, arguing that California’s Section 580b anti-deficiency protections apply to a short sale. The trial court found in favor of the assignee and the borrower appealed. The appellate court reversed.

The appellate court explained that Section 580b establishes that purchase money loans are non-recourse loans under California law. The appellate court noted that, with a non-recourse loan, the borrower has no personal liability and the lender’s sole recourse is against the security for the obligation. As such, in the event of a default in payment under a purchase money debt owed to a creditor and secured by the property purchased, the creditor can only look to the security for the recovery of the debt. The appellate court then explained that the public policy goals behind Section 580b are achieved by shifting the risk of falling property values to the lender, which discourages lenders from overvaluing property. After explaining the text and purpose of Section 580b, the appellate court stated that it sees nothing in Section 580b that leads it to believe that its protections only apply after a foreclosure sale. Indeed, the appellate court observed that Section 580b’s plain language in effect as of the borrower’s transaction does not limit the mode of sale and, therefore, supports an interpretation that its protections apply after any sale, not just a foreclosure. The appellate court did not address a 2012 amendment to Section 580b, which in future litigation may arguably weaken the court’s plain language textual explanation, but likely does not undermine its public policy and statutory purpose explanation. The appellate court also noted that its interpretation that Section 580b applies to all sales of property encumbered by a deed of trust securing a purchase money loan is further supported by California’s newest anti-deficiency statute, Section 580e, which expands the anti-deficiency protection found in Section 580b by prohibiting a deficiency judgment arising out of a short sale approved by the creditor of any mortgage loan, not just purchase money loans. The appellate court also rejected the Bank’s argument that the borrower waived the Section 580b anti-deficiency protection, explaining that waivers of California’s anti-deficiency protections and promises to remain personally liable on the note are void as contrary to Section 580b and public policy. See Pena v. PNC Bank, N.A., 2013 Cal. App. Unpub. LEXIS 5094 (Cal. App. July 19, 2013) and Coker v. JP Morgan Chase Bank, N.A., 2013 Cal. App. LEXIS 573 (Cal. App. July 23, 2013).

Dana F. Clarke is a partner in the Santa Ana, CA office of Hudson Cook, LLP. Dana can be reached at 714-263-0427 or by email at dclarke@hudco.com.