September 9, 2013
by Drew A. Callahan
Pite Duncan, LLP – USFN Member (California)
The California Court of Appeal for the Fifth Appellate District recently issued a decision holding that: (1) the anti-deficiency protections of California Code of Civil Procedure (C.C.P.) section 580e do not apply retroactively; and (2) a short sale of real property is not itself an “action” as defined by C.C.P. § 22 and, thus, does not trigger the provisions of C.C.P. § 726, California’s one-form-of-action rule.
In Bank of America v. Roberts, 2013 DJDAR 9358 (Cal. App. 5th, July 17, 2013), the borrower appealed from the Superior Court for the County of Tulare’s ruling granting Bank of America’s motion for summary judgment for the balance due on a home equity line of credit, which the borrower agreed to remain liable for pursuant to an agreement allowing for the short sale of the real property formerly securing the loan. The borrower argued, among others things, that Bank of America was barred from recovering a deficiency judgment based upon the subsequent enactment of C.C.P. § 580e, barring short sale deficiencies, and the provisions of C.C.P. § 726, asserting that foreclosure was the only form of action allowable for collecting the debt secured by real property.
The recent amendment of C.C.P. § 580e, extending its protections to junior liens, did not take effect until July 15, 2011, more than two years after the short sale took place. In analyzing the legislature’s intent in enacting C.C.P. § 580e the court found nothing to support the borrower’s argument for retroactivity. Instead, the appellate court ruled that the fairness rationale supporting the general rule for statutes to apply prospectively only was particularly compelling in this case as the short sale was part of a “contractual transaction agreed to under the law in effect at that time.” Accordingly, the appellate court concluded that the anti-deficiency protections of C.C.P. § 580e do not apply retroactively to short sales that were concluded prior to the effective date of the statute.
The judicial application of C.C.P. § 726 is both as a “security-first” and “one action” rule, which compels a secured creditor to exhaust its security judicially before it may obtain a monetary deficiency judgment, in furtherance of the legislative objective of protecting borrowers from a multiplicity of lawsuits. In this case, the appellate court ruled that the short sale exhausted the security for the loan and the borrower had not been subjected to a multiplicity of actions as a short sale is not an “action” as defined by C.C.P. § 22. Additionally, the appellate court held that, because the borrower had sought and obtained Bank of America’s consent to the short sale, she could not successfully complain that the bank had failed to bring a foreclosure action against her, as she waived any protection she may have had under C.C.P. § 726.
While the scope of the issues within this ruling are narrow, the decision clears the way for lenders who entered into a short sale agreement prior to the enactment of C.C.P. § 580e to seek judgment for any remaining deficiency on those accounts. Accordingly, as the statute of limitations generally applicable to loan agreements is either: (1) four years of the date of default on a non-negotiable note/contract (See, C.C.P. § 337 and Com. C. § 2725); or (2) within six years of the accelerated due date on a negotiable promissory note (See, Com. C. § 3118), lenders should review their files in order to ensure that timely actions are filed to pursue recovery of any deficiency balance that is due following a short sale that preceded the enactment of C.C.P. § 580e.
Editor’s Note: The author’s firm represented Bank of America in the case summarized in this article.
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