California Supreme Court Confirms Lender Foreclosure Option


California Supreme Court Confirms Lender Foreclosure Option

California Supreme Court Confirms Lender Foreclosure Option


Earlier this month, in Black Sky Capital v. Cobb, the California Supreme Court addressed the following question: when a creditor holds senior and junior liens on the same property, can the creditor non-judicially foreclose on the senior lien, and then seek a deficiency judgment against the borrower on the junior debt? For 25 years, California courts had answered that question “No” based on the First District Court of Appeal’s 1992 decision in Simon v. Superior Court, which held that the anti-deficiency protections of California Code of Civil Procedure 580d barred a creditor in such circumstances from pursuing a deficiency on the junior note. In 2017, however, the Fourth District Court of Appeal reached a different conclusion in Black Sky Capital v. Cobb, holding that section 580d only barred further recovery on that note following a non-judicial foreclosure sale, and did not bar recovery on a different (i.e. the junior) note. The conflict between the two Courts of Appeal has now been resolved.

The California Supreme Court has affirmed the Fourth District’s ruling, adopting the stricter reading of section 580d which holds that the statute only bars deficiency judgments on the same debt at issue in the senior foreclosure sale. While the Supreme Court recognized the concern raised in Simon that lenders will simply structure one loan as separate senior and junior loans in order to circumvent the borrower’s anti-deficiency protections, the court stated that such circumstances were not present in the case before it, as the loans at issue were made more than two years apart. The court did note that “a substantial question would arise” if “there is evidence of gamesmanship by the [creditor].” The court did not define “gamesmanship” but referenced two situations that might qualify: “intentional loan splitting” and “recovery in excess of what any junior lienholder would be able to recover.” The former situation clearly refers to a lender making two loans rather than one to avoid anti-deficiency protections, and the latter situation likely refers to the lender manipulating the senior foreclosure sale itself (e.g. bid rigging).


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