September 2017

Code of Civil Procedure §580d antideficiency rule did not bar creditor holding both senior and junior liens on same property from obtaining monetary judgment for balance due on junior note after conducting nonjudicial foreclosure on senior note.

Black Sky Capital, LLC v Cobb (2017) 12 CA5th 887

The Cobbs borrowed $10,229,250 from Citizens Business Bank. The note was secured by a deed of trust on a parcel of commercial real property in Rancho Cucamonga. Years later, the Cobbs obtained a second loan from Citizens Business Bank, secured by a second deed of trust on the same property. Black Sky Capital purchased both notes from Citizens Business Bank. After the Cobbs defaulted on the senior loan, Black Sky conducted a trustee’s sale under the senior deed of trust and acquired the property. Later, after the Cobbs defaulted on the junior loan, Black Sky sued to recover the amount still owed on the junior note. The Cobbs moved for summary judgment, arguing the monetary damages sought by Black Sky would constitute a deficiency judgment prohibited by CCP §580d. The trial court granted the Cobbs’ motion and entered judgment for them. The court of appeal reversed.

Black Sky contended that the trial court erroneously expanded §580d based on an incorrect reading of Roseleaf Corp. v Chierighino (1963) 59 C2d 35. Black Sky argued that §580d, by its express terms, did not apply here. Black Sky asserted it was a “sold-out junior” lienholder within the meaning of Roseleaf and that it had the right to seek a judgment for the balance owed on the junior note. The court of appeal agreed, holding that §580d expressly applies only to the particular deed of trust that was foreclosed and does not apply to a junior deed of trust secured by the same property. That the junior lienholder is the same entity as the senior lienholder is immaterial. Thus, the court reversed the judgment.

THE EDITOR’S TAKE: The First District’s 1992 decision in Simon v Superior Court (1992) 4 CA4th 33, reported at 15 CEB RPLR 196 (May 1992), caused lenders significant worries about its scope and impact: Would it apply to all piggyback arrangements or only to cases when both loans had been executed at the same time? Would it cover loans secured by the same property and made by different lenders but which had been subsequently acquired by the same party? Could its consequences be avoided by selling off one or both of the loans to different parties? (Etc, etc.) Now, given the Fourth District’s evident hostility to Simon—in Black Sky and earlier in Cadlerock Joint Venture v Lobel (2012) 206 CA4th 1531, reported at 35 CEB RPLR 136 (Sept. 2012)—that level of concern is reduced, at least unless our supreme court decides that the First District was more right than the Fourth District thinks.

Black Sky and Cadlerock have eliminated some worries about CCP §580d for lenders who hold two notes on the same property, but those lenders should still proceed cautiously with their collection strategy in such two-note cases. Here are some (not all) of the risks to worry about:

Seeking a money judgment without having foreclosed first. The one-action rule of CCP §726 still applies; it is not eliminated by holding two notes (and is more complicated and uncertain if one of the notes is duplicative or is unsecured). A wrong strategy can still affect rights to do more.

Foreclosing by trustee sale when the collateral lacks sufficient value to cover both notes. The existence of any nonjudicial foreclosure sale along the way could give the borrower an effective §580d defense.

Foreclosing first on the senior note when the collateral lacks sufficient value to also cover the junior. Foreclosing the senior note first may render the security on the junior note worthless, perhaps due to “fault,” and may impair getting a money judgment on it.

Foreclosing on the second note first and bidding more than enough to also cover the first note. A trustee’s sale under the second will convey a title that remains subject to the lien of the first, meaning that an overlarge bid at that junior sale will not generate a surplus that will then be applied to the other loan, but will instead go the borrower or to her other creditors instead.

I wish I could say something about foreclosing on the two notes together, but we don’t really know anything about that.—Roger Bernhardt

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40 Real Property Law Reporter 116 (Cal CEB Sep. 2017), © The Regents of the University of California, reprinted with permission of CEB.

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