Reversing the lower court's ruling to the contrary, the California Court of Appeal, Fourth District, recently held that a separate "sold-out" junior lien holder could pursue a deficiency against a debtor, ruling that California's anti-deficiency statute did not apply where junior and senior liens were held by different entities at the time of the senior trustee's sale and there was no intent to evade the antideficiency statute at the time of loan origination.
A copy of the opinion is available at:
A copy of the opinion is available at:
Defendant-borrower ("Borrower") refinanced a loan with a so-called "piggyback loan," consisting of two separate loans, a senior loan and a junior loan, evidenced by separate promissory notes and separate deeds of trust on the same piece of real estate. Shortly after the loan transaction, the lender assigned the junior loan to another financing company, which in turn assigned the loan to a bank. Borrower defaulted on both the junior and senior loans. The lender then assigned its senior lien to a debt buyer, which conducted a non-judicial foreclosure sale of the property, thereby extinguishing the security of the junior lien.
Following the foreclosure sale, the junior lien was assigned to plaintiff ("Junior Lienholder"), a purchaser of non-performing loans. Junior Lienholder filed suit against Borrower, asserting causes of action for breach of contract, money lent, and money had and received, among others. The parties filed cross-motions for summary judgment.
The trial court granted Borrower's motion, ruling that California's anti-deficiency statute precluded recovery on the loan formerly secured by the junior lien which, in the court's view, was not a true "sold-out" junior lien, because Borrower's loan from a single lender was originally structured with two notes and trust deeds as a way to thwart California's anti-deficiency statute.
Junior Lienholder appealed. The Court of Appeal reversed.
As you may recall, California's anti-deficiency statute limits the right to obtain a deficiency judgment against a debtor where a foreclosure sale recovers less than is owed on a debt. The statute provides in relevant part: "[n]o judgment shall be rendered for any deficiency upon a note secured by a deed of trust or mortgage upon real property . . . executed in any case in which the real property . . . has been sold by the mortgagee or trustee under power of sale contained in the mortgage or deed of trust." Cal. Civ. Proc. §580d.
The Appellate Court reviewed the history of and policies behind California's anti-deficiency laws and noted that section 580d clearly applied to situations where a junior lienor foreclosed its lien pursuant to a trust deed and thus barred that junior lienor from obtaining a deficiency judgment against the debtor. See National Enterprises, Inc. v. Woods, 94 Cal.App.4th 1217, 1221 (2001)(discussing the "one form of action" rule).
The Appellate Court reviewed the history of and policies behind California's anti-deficiency laws and noted that section 580d clearly applied to situations where a junior lienor foreclosed its lien pursuant to a trust deed and thus barred that junior lienor from obtaining a deficiency judgment against the debtor. See National Enterprises, Inc. v. Woods, 94 Cal.App.4th 1217, 1221 (2001)(discussing the "one form of action" rule).
The Court also observed that the law is less clear where, as in this case, a single lender has made multiple loans secured by multiple deeds of trust on a single piece of property, assigned the junior loan to a third party, and the assignee of the senior lien has held a non-judicial foreclosure that eliminated the security of the the junior lienor.
Relying on a California Supreme Court opinion, the court noted that section 580d did not refer to multiple liens on a single piece of property and did not apply where a different entity's senior trustee's sale rendered the junior lien unsecured. See Roseleaf Corp. v. Chierighino, 59 Cal. 2d 35, 43-44 (1963)(section 580d inapplicable to "sold-out" junior lienor who may pursue debtor for amounts owed).
Relying on a California Supreme Court opinion, the court noted that section 580d did not refer to multiple liens on a single piece of property and did not apply where a different entity's senior trustee's sale rendered the junior lien unsecured. See Roseleaf Corp. v. Chierighino, 59 Cal. 2d 35, 43-44 (1963)(section 580d inapplicable to "sold-out" junior lienor who may pursue debtor for amounts owed).
As in Roseleaf, the Appellate Court noted that in cases involving multiple notes and trust deeds held by different parties, section 580d's policy concerns about a single secured creditor obtaining both a non-judicial foreclosure and a deficiency judgment did not come into play. Quoting Roseleaf, the Court explained, "[t]he junior's right to recover should not be controlled by the whim of the senior, and there is no reason to extend the language of section 580d to reach that result." Roseleaf, supra, 59 Cal.2d at 44.
The Appellate Court thus rejected Borrower's argument that section 580d should be applied whenever a single lender makes multiple loans secured by multiple trust deeds on a single piece of real estate, regardless of whether the parties' intent was to thwart section 580d. See Simon v. Superior Court, 4 Cal. App. 4th 63 (1992)("Assuming, arguendo, legitimate reasons do exist to divide a loan to a debtor into multiple notes thus secured, section 580d must nonetheless be viewed as controlling where . . . the senior and junior lienors are identical and those liens are placed on the same real property").
In so doing, the Court distinguished the facts of this case, where the lender assigned the junior lien shortly after loan origination, from the situation where a single creditor, holding both the senior and junior liens, assigned the junior lien after the trustee's sale on the senior lien. In such a scenario, the Court noted, the assignee would simply stand in the position of the assignor, and section 580d would apply to prevent a deficiency judgment against the debtor. Bank of America, N.A. v. Mitchell, 204 Cal. App.4th 1199, 1207 (2012).
The Court further rejected Borrower's assertion that the status of the junior lienor should be determined by applying section 580d at the time of loan origination rather than at the time of the senior trustee's sale. The Court pointed out that, according to Borrower's reading of section 580d, "assignment of junior liens at any time . . . would be ineffectual in changing the section 580d consequences that have attached to multiple loans . . . ."
In so doing, the Court distinguished the facts of this case, where the lender assigned the junior lien shortly after loan origination, from the situation where a single creditor, holding both the senior and junior liens, assigned the junior lien after the trustee's sale on the senior lien. In such a scenario, the Court noted, the assignee would simply stand in the position of the assignor, and section 580d would apply to prevent a deficiency judgment against the debtor. Bank of America, N.A. v. Mitchell, 204 Cal. App.4th 1199, 1207 (2012).
The Court further rejected Borrower's assertion that the status of the junior lienor should be determined by applying section 580d at the time of loan origination rather than at the time of the senior trustee's sale. The Court pointed out that, according to Borrower's reading of section 580d, "assignment of junior liens at any time . . . would be ineffectual in changing the section 580d consequences that have attached to multiple loans . . . ."
Thus, the Court stressed that the critical factor in this case was that, at the time of the senior trustee's sale, the junior and senior lienors were different entities. The Court further pointed out that there was no evidence in this case of any intent to avoid the consequences of section 580d.
Accordingly, the Appellate Court rejected the trial court's analysis and reversed.
Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
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