September 9, 2013
by Kathy Shakibi
Northwest Trustee Services, Inc. – USFN Member (California)
California has a tradition of anti-deficiency protections, but over the past few years these have edged beyond the traditional notions, swiftly and surely. Notably, new protections have been established to address short sales, and even old protections are newly interpreted to extend to short sales. One such ruling was issued on July 23, 2013, where the appellate court in Coker v. J.P. Morgan Chase Bank, 2013 Cal. App. LEXIS 573, held that the prohibition on collecting deficiency judgment on a purchase money loan, conventionally applied to foreclosure sales, extends to short sales as well.
For a bird’s eye view of the anti-deficiency protections, it helps to separate them into two eras: the pre-2010 prohibitions and the post-2010 ones. All of the anti-deficiency protections are codified in the Code of Civil Procedure. There is no common law prohibition on collecting deficiency in California.
Since the pre-2010 era, collecting deficiency judgment following a sale on a purchase money loan has been prohibited (CCP § 580b). A purchase money loan is a non-recourse loan, meaning a borrower has no personal liability after a sale of a property. Sale was commonly thought of and interpreted as a foreclosure sale, either judicial or nonjudicial. In the case of a nonjudicial sale of a residential property, no deficiency judgment could be collected by the foreclosing entity (CCP § 580d). In the pre-2010 era, a foreclosure sale was needed to trigger the protections.
Starting in 2010, California enacted a series of new restrictions on collecting deficiencies. These newer prohibitions do not need a foreclosure sale as a trigger, and are not limited to obtaining a deficiency judgment. Since 2010, California has passed a new law each year broadening the prohibitions on collecting a deficiency:
- 2010: SB 931 enacted a new code section specifically addressing short sales, and prohibiting collecting deficiency judgment on a first lien secured with residential property (CCP § 580e).
- 2011: SB 458 swiftly amended the newly enacted CCP § 580e to extend its application to all liens, and to expand the prohibition on collecting any funds from a borrower, either before or after completing a short sale.
- 2012: With the passage of SB 1069, CCP § 580b, which had traditionally prohibited collecting deficiency on a purchase money loan was amended to extend to subsequent refinances of a purchase money loan.
- 2013: SB 426 was passed to clarify that the protections in CCP §§ 580b and 580d prohibit collecting any deficiency owed, not just a deficiency judgment.
In the midst of the new anti-deficiency legislation remain short sale agreements predating the effective date of CCP § 580e (January 1, 2011) and its subsequent amendment on July 11, 2011. The short sale agreements drafted prior to January 1 and July 11, 2011, sometimes conditioned the short sale approval on the borrower agreeing to contribute funds toward the short sale or agreeing to remain personally liable for any deficiency owed on the debt. The concept behind those provisions was to bridge the gap between the purchase price and the debt owed, and to facilitate obtaining approval from all parties. The short sale agreement reviewed by the Coker court contained such a provision and predated July 11, 2011.
The Coker Case
In Coker, the borrower was in default on her mortgage loan and had arranged for a short sale. The borrower entered into a written agreement with the lender where she agreed to remain personally liable for any deficiency (the difference between the purchase price and the outstanding balance of the debt). After the short sale transaction was completed, a demand letter was sent to the borrower to collect the unsatisfied portion of the loan. The borrower filed suit and invoked the protections of the anti-deficiency statutes, CCP § 580e and § 580b.
The protections of CCP §580e specific to short sales did not apply to this borrower because the statute is not retroactive, and the borrower’s agreement predated its effective date. However, the borrower’s loan was a purchase money loan. The novel question before the court was, Does the prohibition on collecting deficiency judgment on a purchase money loan, following a sale, extend to short sales? If yes, can a borrower agree to waive this protection?
Prior to Coker, no California court had considered this question because, conventionally, the anti-deficiency protections were triggered by a foreclosure sale, and collecting deficiency was thought of as pursuing a legal action for a judgment, post-foreclosure. The court in Coker dispensed with these notions, and expanded the protections of CCP § 580b, not previously applied to short sales, to cover short sales as well.
The court interpreted the existing statute broadly, as a matter of public policy, to shift the risk of falling property values onto the lender. The court believed the protection is needed to stabilize property sales, and keep from aggravating an economic downturn. (See Coker at *13, 14). Further, the court ruled that a borrower cannot agree to waive anti-deficiency protections. This ruling is a reflection of how liberally California’s anti-deficiency statutes are construed and how sweeping is their grasp.
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