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California Supreme Court Limits Application of the State’s Anti-Deficiency Statute

Posted By USFN, Wednesday, July 17, 2019
Updated: Monday, July 15, 2019

Melissa Coutts, Esq. and Andrew J. Boylan, Esq.
McCarthy & Holthus, LLP

In Black Sky Capital, LLC v. Cobb[i], the Supreme Court of California recently held that where a creditor holds two deeds of trust on the same property, a nonjudicial foreclosure of the senior lien does not preclude the creditor from obtaining a monetary judgment on the extinguished junior lien, where there is no allegation of evasive loan splitting or other “gamesmanship scenarios.”

California’s anti-deficiency statute[ii] prohibits a creditor from collecting a deficiency judgment — that is, the difference between the amount of indebtedness and the fair market value of the property — following a nonjudicial foreclosure, even if the property is sold for less than the amount of the outstanding debt.

For the past 20 years, the leading case on this topic has been Simon v. Superior Court[iii], which held 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 [California’s anti-deficiency statute]…bars recovery of any ‘deficiency’ balance due on the obligation the junior deed of trust secured.” Thus, a creditor that forecloses on its senior deed of trust is precluded from any recovery for the amount owing under the junior deed of trust. There have been several cases following the reasoning provided in Simon, as did the trial court in this case.

However, both the Court of Appeal and Supreme Court of California disagreed with this reasoning, instead concluding that although the lienholder is the same for the senior and junior, “[a]ny debt owed on the junior note in this case has no relationship to the debt owed on the senior note.”[iv] The Supreme Court noted that the language of section 580d makes clear that it was only intended to prevent a deficiency judgment on the deed of trust securing the note that was foreclosed, and not under some other deed of trust. Therefore, the anti-deficiency analysis should only apply to the senior deed of trust.

It is important to keep in mind, however, that the Supreme Court’s decision was driven in part by the factual scenario presented in the case. The Court noted that “in Simon, the junior and senior loans were issued just four days apart, and the deeds of trust securing the loans were recorded on the same date.”[v] But in this case, the loans were issued more than two years apart and there was no “evidence of gamesmanship” or “loan splitting.” Therefore, the loans were treated separately, and since no sale occurred under the junior deed of trust, the statute does not bar a deficiency judgment with respect to the note it secured.

Although this case brings some clarity to the issue, it should not be relied upon blindly. The Court spent time reflecting that it has “consistently looked to the purposes of the statute and to the substance rather than the form of loan transactions in deciding the … applicability [of antideficiency statutes].”[vi] And although this case was distinguishable from Simon, the opinion cautions against “gamesmanship scenarios” or where there is clear evidence of intentional loan splitting. Thus, when a creditor holds both senior and junior deeds of trust, a case-by-case analysis should be undertaken to determine whether it is permitted to sue for judgment on the note secured by the junior deed of trust after completion of a nonjudicial foreclosure on the senior.

[i] Black Sky Capital, LLC v. Cobb (2019) 7 Cal.5th 156.

[ii] Code of Civil Procedure Section 580d

[iii] Simon v. Superior Court (1992) 4 Cal.App.4th 63, 66.

[iv] Black Sky, at p.897

[v] Simon, supra, 4 Cal.App.4th at p. 66.

[vi] Coker v. JPMorgan Chase Bank, NA (2016) 62 Cal.4th 6678, 676.


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