Recent Case May Change Anti-Deficiency Rules For Creditors With Multiple Liens Secured By The Same Real Property

A recent California case may enable a lender to seek a deficiency judgment on a junior lien against real property where the same lender already foreclosed on a senior lien secured by the same property.  In particular, California “anti-deficiency” statute, Code of Civil Procedure Section 580d, prevents a lender from seeking a deficiency judgment against a borrower after the lender has completed a non-judicial foreclosure under its deed of trust.  Courts have consistently held that Section 580d does not apply to prevent junior lienholders from seeking deficiency judgments against the borrower when a senior lienholder forecloses on and eliminates the security for the junior lien.  In that case, the junior lienholder is referred to as having been “sold-out” by the senior lienholder’s foreclosure.

In 1992, however, a decision by the Court of Appeal in the First District of California created an exception to the rule regarding “sold-out” junior lienholders.  In Simon v. Superior Court (1992), the Court held that Section 580d does preclude a “sold-out” junior lienholder from seeking a deficiency judgment, if the same lender is both the senior lienholder and the junior lienholder.  The Simon decision was motivated by the Court’s concern that the bank in that case, by issuing nearly simultaneous loans secured by the same property, then non-judicially foreclosing on the senior lien and seeking deficiency on the junior lien, was attempting to circumvent the anti-deficiency statutes. 

A June 2017 decision by the Court of Appeal in the Fourth District of California marks a significant shift in the application of the exception created by the Court in Simon.  The Court in Black Sky Capital, LLC v. Cobb (2017) 12 Cal.App.5th 887 disagreed with the holding in Simon, and held that Section 580d does not preclude a “sold-out” junior lienholder from seeking a deficiency judgment, even when the same lender holds both the senior and junior liens.  The Court reasoned that, regardless of the Simon Court’s motivation to prevent “circumvention” of the anti-deficiency statutes, the plain language of Section 580d “cannot be read to support the rule created by Simon.”

While the Black Sky decision appears to be a step in the right direction for lenders, the case does not represent a reversal of Simon.  Rather, with Black Sky there is now a split between the Courts of Appeal in the First and Fourth Districts on the interpretation and application of Section 580d.  That Circuit split will likely continue to exist unless and until it is resolved by the California Supreme Court.  In the interim, at the very least, the Black Sky case provides some new support to lenders holding both senior and junior deeds of trust.

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