Courts have generally held that the California “anti-deficiency” statute Code of Civil Procedure Section 580d does not apply to prevent a junior lienholder from seeking a monetary “deficiency” judgment against the borrower after a senior lienholder has foreclosed on and eliminated the real property security for the junior lien. In that case, the junior lienholder is referred to as having been “sold-out” by the senior lien’s foreclosure.
Starting in the 1990’s, however, various appellate court decisions created an exception to the rule regarding “sold-out” junior lienholders. Beginning with Simon v. Superior Court (1992), various courts applied Section 580d to preclude a “sold-out” junior lienholder from seeking a deficiency judgment, if the same lender is both the senior lienholder and the junior lienholder, a situation sometimes referred to as “stacked deeds of trust.”
A 2017 decision by the Court of Appeal in the Fourth District marked a significant shift in the application of the exception created by the courts in other districts. The court in Black Sky Capital, LLC v. Cobb (2017) 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. While Black Sky was positive for lenders, the case created a split of opinion on this issue among courts of appeal, which could only be resolved by the California Supreme Court.
The California Supreme Court issued its decision on May 6, 2019, resolving the uncertainty by affirming the Black Sky decision and overturning Simon and similar cases. Accordingly, it is now settled that under Section 580d, a lender with two deeds of trust encumbering the same real property may foreclose the senior deed and sue for deficiency on the junior loan as a “sold out junior.” It is important to note, however, the Court also appears to have created an exception to the Black Sky rule in instances where a lender engages in intentional “loan splitting,” i.e., creating two loans out of one secured by the same property, in an attempt to circumvent anti-deficiency statutes. Loan splitting may occur where the loans secured by the senior and junior liens were made in close proximity by the same lender.
The Supreme Court’s decision represents a major turning point in the application of California’s anti-deficiency statute and provides substantial support to lenders holding both senior and junior deeds of trust encumbering the same property. Lenders making multiple loans secured by the same property should, however, exercise caution to avoid the appearance of loan splitting. Please contact us if you have questions or need assistance regarding secured lending strategy, documentation, or enforcement.