Opinion
The trial court granted summary judgment to defendant William N. Lobel, reasoning that plaintiff Cadlerock Joint Venture, L.P. (Cadlerock), the assignee of a loan that had previously been secured by a junior real property lien, was barred by Code of Civil Procedure section 580d from obtaining a deficiency judgment against Lobel.
Section 580d “precludes a judgment for any loan balance left unpaid after the lender’s nonjudicial foreclosure under a power of sale in a deed of trust... on real property.” (Western Security Bank v. Superior Court (1997)
We must decide a novel question of law: When a single lender contemporaneously makes two nonpurchase money loans secured by two deeds of trust referencing a single real property and soon thereafter assigns the junior loan to a different entity, can the assignee of the junior loan, who is subsequently “sold out” by the senior lienholder’s nonjudicial foreclosure sale, pursue the borrower for a money judgment in the amount of the debt owed?
Because we answer this question in the affirmative, we reverse the court’s grant of summary judgment in favor of Lobel. By its plain terms, section 580d applies only to a lender seeking a “deficiency upon a note secured by a deed of trust. . . upon real property ... in any case in which the real property . . . has been sold by the . . . trustee under power of sale contained in the . . . deed of trust.” As interpreted by our Supreme Court in Roseleaf, supra,
FACTS
In 2004, Lobel acquired certain real property located at 71 Anjou, Newport Beach, California (the Property). In October 2006, Lobel borrowed $878,750 from lender Sea-Breeze Financial Services, Inc. (Sea-Breeze). The money was used in part to pay off outstanding debt (approximately $600,000) secured by the Property. Lobel’s transaction with Sea-Breeze consisted of two loans evidenced by two separate promissory notes and secured by two separate deeds of trust: (1) a $740,000 loan evidenced by an October 5, 2006 promissory note (senior loan) with a first deed of trust on the Property (senior lien) and (2) a $138,750 loan evidenced by an October 6, 2006 promissory note (junior loan) with a second deed of trust on the Property (junior lien).
On October 16, 2006, Sea-Breeze assigned the junior loan to Residential Funding Company, LLC. Subsequently, the junior loan was assigned to LaSalle Bank, N.A., as trustee. There is no intimation in the record that either of these assignees was affiliated with Sea-Breeze.
Lobel last made a payment on the junior loan in August 2007. Lobel has since refused to pay the overdue principal amount of $138,750 and applicable interest accruing thereon. Lobel also defaulted with regard to the senior loan (the record does not disclose when Lobel last made a payment on the senior loan).
In February 2008, Sea-Breeze assigned its interest in the senior loan/lien to Central Mortgage Company (Central). Central conducted a nonjudicial foreclosure sale on April 23, 2008. No surplus proceeds over and above the amount secured by the senior lien resulted from the sale. The junior lien was therefore extinguished on April 23, 2008.
LaSalle Bank, N.A., as trustee, assigned the junior loan/lien to Cadlerock on September 22, 2008.
The parties filed competing motions for summary judgment based on the undisputed facts recited above. The court denied Cadlerock’s motion and granted Lobel’s motion: “[Section] 580d bars an anti-deficiency recovery on [Cadlerock’s] junior lien. The original lender structured the final loan with two notes. Based on the liberal construction of anti-deficiency statutes, it would be exalting form over substance to treat [Cadlerock’s] loan as a ‘sold out junior.’ ”
We review de novo the trial court’s rulings on the parties’ respective motions for summary judgment. The relevant facts are undisputed and relatively straightforward. Thus, we may turn our undivided attention to discerning the rule of law applicable to the facts presented.
General Background: Real Property Security Interests and Antideficiency Laws
“In the absence of a statute to the contrary, a creditor secured by a trust deed or mortgage on real property may recover the full amount of the debt upon default. He may realize the security or sue on the obligation or both; the obligation is an independent undertaking by the debtor to pay.’’ (Roseleaf, supra,
“Pursuant to this statutory scheme, there is only ‘one form of action’ for the recovery of any debt or the enforcement of any right secured by a mortgage or deed of trust. That action is foreclosure, which may be either judicial or nonjudicial.” (Rothwell, supra,
When the entire “value of the security has been lost through no fault of the creditor, the creditor may [immediately] bring a personal action on the debt” despite the one form of action rule. (Graves, supra,
If, after a foreclosure sale, the security is insufficient to satisfy the underlying obligation, the creditor’s “right to a judgment against the debtor for the deficiency may be limited or barred by sections 580a, 580b, 580d, or 726 . . . ,”
Section 580d provides in relevant part: “No 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.” “This statute effectively limits the right to obtain a deficiency judgment to cases where a creditor employs the remedy of judicial foreclosure . . . .” (MDFC Loan Corp. v. Greenbrier Plaza Partners (1994)
“In a judicial foreclosure, if the property is sold for less than the amount of the outstanding indebtedness, the creditor may seek a deficiency judgment, or the difference between the amount of the indebtedness and the fair market value of the property, as determined by a court, at the time of the sale. [Citation.] However, the debtor has a statutory right of redemption, or an opportunity to regain ownership of the property by paying the foreclosure sale price, for a period of time after foreclosure.” (Rothwell, supra,
“In a nonjudicial foreclosure, also known as a ‘trustee’s sale,’ the trustee exercises the power of sale given by the deed of trust. [Citations.] Nonjudicial foreclosure is less expensive and more quickly concluded than judicial foreclosure, since there is no oversight by a court, ‘[n]either appraisal nor judicial determination of fair value is required,’ and the debtor has no postsale right of redemption. [Citation.] However, the creditor may not seek a deficiency judgment. [Citation.] Thus, the antideficiency statutes in part ‘serve to prevent creditors in private sales from buying in at deflated prices and realizing double recoveries by holding debtors for large deficiencies.’ ” (Rothwell, supra,
“The antideficiency statutes are to be construed liberally to effectuate the legislative purposes underlying them, including the policies ‘ “(1) to prevent a multiplicity of actions, (2) to prevent an overvaluation of the security, (3) to prevent the aggravation of an economic recession which would result if [debtors] lost their property and were also burdened with personal liability, and (4) to prevent the creditor from making an unreasonably low bid at the foreclosure sale, acquire the asset below its value, and also recover a personal judgment against the debtor.” ’ ” (Graves, supra,
The “Sold-out” Junior Lienholder
The foregoing black letter law is usually easy to apply to a single creditor with a single promissory note secured by a single deed of trust. But what about circumstances in which multiple loans have been secured by multiple deeds of trust referencing the same real property?
Clearly, a junior lienor that forecloses its own lien by the power of sale in its deed of trust is barred by section 580d from obtaining a deficiency judgment. “Section 580d unequivocally provides that where real property has been sold under power of sale contained in a deed of trust, no judgment may be rendered for any deficiency on the underlying promissory note.” (Ballengee v. Sadlier (1986)
Less clear is how the antideficiency laws should be applied to a junior lienor when a senior lienor conducts a nonjudicial foreclosure. “The term ‘sold-out junior lienor’ refers to the situation in which a senior lienholder forecloses its lien, eliminating the junior lienor’s security interest.” (Graves, supra,
Roseleaf held that none of the antideficiency statutes prevent a sold-out junior lienor from suing the borrower for the amount owed on a junior promissory note. (Roseleaf, supra, 59 Cal.2d at pp. 39-44.) Because the value of Roseleaf Corporation’s security had been lost entirely at the senior trustees’ sales, the one form of action rule did not preclude a lawsuit on the notes. (Id. at p. 39; see Brown v. Jensen (1953)
As to section 580d, its text does not explicitly contemplate the existence of multiple liens on a single real property or the possibility of a sold-out junior lienor. Section 580d currently
Going beyond its textual analysis, Roseleaf also explicated several policy explanations for its holding. “The purpose of achieving a parity of remedies would not be served by applying section 580d against a nonselling junior lienor. Even without the section the junior has fewer rights after a senior private sale than after a senior judicial sale. He may redeem from a senior judicial sale [citation], or he may obtain a deficiency judgment. [Citations.] After a senior private sale, the junior has no right to redeem. This disparity of rights would be aggravated were he also denied a right to a deficiency judgment by section 580d. There is no purpose in denying the junior his single remedy after a senior private sale while leaving him with two alternative remedies after a senior judicial sale. The 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 p. 44, italics added.)
In the course of describing policy reasons why the fair market value limitations of sections 726 and 580a should not apply to a junior lienor seeking a deficiency judgment, Roseleaf added: “The position of a junior lienor whose security is lost through a senior sale is different from that of a selling senior lienor. A selling senior can make certain that the security brings an amount equal to his claim against the debtor or the fair market value, whichever is less, simply by bidding in for that amount. He need not invest any additional funds. The junior lienor, however, is in no better position to protect himself than is the debtor. Either would have to invest additional funds to redeem or buy in at the sale. Equitable considerations favor placing this burden on the debtor, not only because it is his default that provokes the senior sale, but also because he has the benefit of his bargain with the junior
A subsequent appellate court applied the sold-out junior lienholder rule to a home equity line-of-credit lender, even though the lender intentionally delayed its scheduled trustee’s sale to allow the senior lienor (Federal Home Loan Mortgage Corporation—i.e., “Freddie Mac”) to conduct its nonjudicial foreclosure. (Graves, supra, 51 Cal.App.4th at pp. 610, 613-616.) The junior lienholder did not violate the one form of action rule or section 580d by suing on its promissory note for damages rather than proceeding with its own foreclosure on the real property. (Graves, at pp. 613-616.) Graves rejected an argument that the junior lienor had destroyed its own security by delaying its trustee’s sale in favor of allowing the senior trustee’s sale to extinguish the junior lien. (Id. at pp. 613-614.)
Junior Lienholders Who Are Not Really “Sold Out”
A single creditor that, at the time of foreclosure, has both a senior and junior lien on the same real property cannot conduct a nonjudicial foreclosure on the senior lien, then pursue a deficiency judgment as a sold-out junior lienor. (Mitchell, supra, 204 Cal.App.4th at pp. 1206-1208; Ostayan v. Serrano Reconveyance Co. (2000)
In Simon, supra, 4 Cal.App.4th 63, Bank of America NT & SA (Bank) loaned the Simons $1,575,000. The loan was split into two: (1) a $1.2 million senior note, with accompanying senior deed of trust and (2) a $375,000 junior note, with accompanying junior deed of trust. (Id. at p. 66.) Two years later, the Simons defaulted on the senior note and Bank conducted a trustee’s sale “under the power of sale conferred by the senior lien.” (Ibid.) Bank “purchased the Simon residence for a credit bid of $1,050,000, later selling the property to a third party for $1,025,000.” (Ibid.) Bank then sued the Simons for $319,591, the amount claimed due on the junior note. (Ibid.) The trial court, relying on Roseleaf, supra,
According to Simon, the holding of Roseleaf, supra,
The Simon court also suggested, in the absence of its holding, lenders would intentionally thwart the purposes of section 580d: “We will not sanction the creation of multiple trust deeds on the same property, securing loans represented by successive promissory notes from the same debtor, as a means of circumventing the provisions of section 580d.” (Simon, supra, 4 Cal.App.4th at p. 77.) But according to Simon, its rule must apply regardless of whether thwarting section 580d was a motivating factor behind the structure of the particular loans at issue: “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, as here, the senior and junior lenders and lienors are identical and those liens are placed on the same real property.” (Simon, at p. 78.)
In expressing agreement with the Simon rule, Evans, supra, 28 Cal.App.4th at pages 551-552, and Ostayan, supra, 77 Cal.App.4th at pages 1421-1422, also focused on fairness and policy considerations. The “right to recover on [the] junior note [is] not controlled by the whim of a senior lienholder; it [is such a creditor’s] own choice to proceed by nonjudicial foreclosure of the
Recently, the Second Appellate District extended the Simon rule to situations in which a single lender assigns the junior lien after the senior trustee’s sale; “Here, [borrower] executed two promissory notes, for $252,000 and $63,000, secured by the first and second deeds of trust in the property. As in Simon, the first and second deeds of trust were held by a single lender, GreenPoint. GreenPoint, as beneficiary under the first deed of trust, chose to exercise its power of sale by holding a nonjudicial foreclosure sale. GreenPoint thus was not a ‘sold-out junior’ lienor and would not have been permitted to obtain a deficiency judgment against [borrower] under the rule articulated in Simon. The result is no different because GreenPoint, after the trustee sale, assigned the second deed of trust to the Bank. ‘An assignment transfers the interest of the assignor to the assignee. Thereafter, “ ‘[t]he assignee “stands in the shoes” of the assignor, taking his rights and remedies, subject to any defenses which the obligor has against the assignor prior to notice of the assignment.’ ” [Citation.]’ [Citation.] Accordingly, because GreenPoint could not have obtained a deficiency judgment against [borrower], the [assignee] Bank also is precluded from doing so.” (Mitchell, supra,
Analysis and Conclusion
Lobel advocates for a further expansion of the interpretation of section 580d put forth by Simon, supra, 4 Cal.App.4th 63. According to Lobel, we should assess the status of a junior lienor by applying section 580d (as interpreted by Simon) at the moment of loan creation rather than the time of the senior trustee’s sale. Thus, assignment of junior liens at any time in the secondary mortgage market would be ineffectual in changing the section 580d consequences that have attached to multiple loans so created. The trial court agreed with this analysis.
We conclude the trial court’s judgment must be reversed. In the case before us, the junior lienor and senior lienor were different entities at the time of the senior trustee’s sale. There is no suggestion in the record that the loan originator (Sea-Breeze) and any of the various assignees of the senior and junior loans were affiliated in any way or conspired in any way to evade the antideficiency laws. Sea-Breeze provided both loans to Lobel at the same
We reject the proposition that the moment of loan origination is determinative for purposes of applying the one form of action rule or section 580d. (Woods, supra, 94 Cal.App.4th at pp. 1235-1236 [in context of rejecting one form of action defense to junior’s suit on the junior note following a judicial foreclosure by senior, court observed that its “review has not disclosed any case where the California courts have treated related loans assigned to different parties as if the originating creditor still held them”].) There is no principled distinction to be made between (1) this case (a piggyback transaction with a single lender in which the junior lien is immediately assigned to a third party) and (2) a two-lender piggyback transaction in which two loans are made contemporaneously by two separate lenders, each maintaining ownership of their respective loans until the senior lien is nonjudicially foreclosed (a hypothetical scenario that clearly would fall under Roseleaf, supra,
Having decided the case before us, we could end our opinion here. But our review of the relevant case law on this topic compels us to make several additional observations on the subject of the interpretation of section 580d.
Section 580d does not refer to or contemplate multiple notes secured by multiple deeds of trust on the same real property. “No judgment shall be rendered for any deficiency upon a note secured by a deed of trust . . . upon real property . . . executed in any case in which the real property . . . has been sold by the . . . trustee under power of sale contained in the . . . deed of trust.” (Ibid.)
Freedland v. Greco, supra,
Conspicuously absent from Simon, supra,
In our view, courts purporting to interpret section 580d have conflated the analysis of section 580d with the one form of action rule. Under section 726, subdivision (a), a secured creditor is generally required to pursue its security, not the underlying obligation. Arguably, a creditor that owns both the senior and junior lien might be deemed to have rendered the junior lien valueless by its own actions when it conducts a nonjudicial foreclosure on the senior lien. (See Union Bank v. Wendland, supra,
The judgment is reversed. The trial court is directed to vacate its orders on the cross-motions for summary judgment, and to enter new orders granting Cadlerock’s motion and denying Lobel’s motion. Cadlerock shall recover costs incurred on appeal.
Rylaarsdam, Acting P. J., and Aronson, J., concurred.
On June 21, 2012, the opinion was modified to read as printed above. Respondent’s petition for review by the Supreme Court was denied October 10, 2012, S204372.
Notes
All statutory references are to the Code of Civil Procedure.
Section 580b is inapplicable to the instant case because the loans at issue were not used as purchase money. Section 580b “prohibits all deficiency judgments” in specified real property transactions involving the provision of purchase money, regardless of whether the creditor conducts a judicial or nonjudicial foreclosure. (In re Marriage of Oropallo (1998)
The loan structure utilized in this transaction is referred to in the mortgage industry as a “piggyback loan.”
Cadlerock “is engaged in the business of purchasing asset portfolios which include, but are not limited to, non-performing loans, such as the one at issue in this action.” There is no suggestion in the record that Cadlerock is affiliated with any of the other entities that owned the senior and junior loans. Cadlerock does not identify the consideration it provided to obtain the junior loan, but its ability to purchase the loan at a discount based on either the legal uncertainty of being able to obtain a judgment against Lobel and/or uncertainty about the practical value of such a judgment is irrelevant to the legal issue presented.
As previously noted, section 580b is inapplicable to the instant case as Lobel did not obtain purchase money from Sea-Breeze.
Subsequent appellate cases have limited this rule to junior lienors that do not purchase the real property at the senior trustee’s sale. A junior lienor that purchases the property at the senior trustee’s sale may also recover a deficiency judgment, but section 580a applies “to limit the amount of the deficiency judgment recoverable by the purchasing junior” to “the lesser of the excess of the combined debts of the senior and junior lienholders over 1) the fair market value of the property or 2) the selling price at the foreclosure sale.” (Walter E. Heller Western, Inc. v. Bloxham (1985)
The phrasing of section 580d was slightly different at the time of the Roseleaf decision, but subsequent changes do not affect the analysis in Roseleaf.
It may have been accurate under the facts of Roseleaf to suggest that the junior lienor was not in a better position than the debtor to invest additional funds to buy the secured property at the senior lienor’s nonjudicial foreclosure sale. Query whether, in the modem real estate finance market, most junior lienors are in a better position than a defaulting borrower to invest additional funds to protect their security should they choose to do so.
“In enacting section 580d the Legislature obviously had in mind the two-party transaction between the creditor whose loan is secured by a deed of trust or mortgage and the debtor who gave that security for the loan to him.” (Union Bank v. Gradsky (1968)
Assuming Simon, supra,