Lender Prevails in Lawsuit Against Borrower Who Agreed to Remain Liable for Home Equity Loan After Short Sale

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A lender who held a second deed of trust on real property agreed to a short sale of the property after the borrower agreed to remain obligated to repay the balance of the home equity loan.  The court of appeal upheld the judgment in the lender’s favor and rejected the borrower’s claim that California law precluded a deficiency judgment against her.  (Bank of America v. Roberts (--- Cal.Rptr.3d ----, Cal.App. 5 Dist., July 17, 2013).

Facts

Margaret Roberts (“Roberts”) obtained a home equity line of credit for $250,000 from Bank of America, N.A. (“B of A”), which was secured by a second deed of trust on real property.  The holder of the first deed of trust commenced nonjudicial foreclosure proceedings.  Roberts wanted to avoid foreclosure and asked B of A if it would consent to a short sale of the property to a third party.  The proposed short sale would pay the entire obligation secured by the first deed of trust but only $27,000 of the home equity loan.  Roberts made an agreement with B of A that if it would consent to the short sale, she would remain obligated to repay B of A for the balance of the home equity loan.  B of A consented to the short sale and released its security interest to the subject property.

Roberts defaulted on the home equity loan and B of A brought a lawsuit against Roberts for the balance due on the loan.  The trial court granted summary judgment in favor of B of A.  

Decision

Roberts argued that B of A was barred from seeking a deficiency judgment against her based on Code of Civil Procedure sections 580e and 726.  The court of appeal agreed with the trial court that B of A was not barred from seeking a deficiency judgment and affirmed its decision.

Roberts asserted that the July 2011 amendments to Code of Civil Procedure 580e should be applied retroactively to her short sale.  Prior to 2011, section 580e provided that a deficiency judgment could not be “rendered against a homeowner ‘under a note secured by a first deed of trust’ . . . if the holder of the first deed of trust consented in writing to a short sale and received the proceeds thereof.”   The Legislature amended section 580e in July 2011 “to expand the antideficiency protection in the event of a short sale to any deed of trust, including junior lienholders, if the holder of said deed of trust consented to the short sale and received the proceeds of the sale as agreed.” 

The short sale of Roberts’ property occurred over two years prior to the time the July 2011 amendment to section 580e went into effect.  The issue before the court was whether the Legislature intended for the amendment to section 580e to apply retroactively.  The court held that it did not.  The court stated that “not only do the language and history of the amendment fail to show any intent by the Legislature to make the new provision retroactive, but to the contrary, every indication is that it was understood to be prospective only.”  Therefore, the court concluded that section 580e did not prevent B of A from obtaining a judgment against Roberts.

Roberts also asserted that B of A could not pursue a judgment against her based on Code of Civil Procedure section 726, which requires that a creditor bring only one lawsuit to enforce its security interest, and requires the creditor to exhaust its security before obtaining a monetary deficiency judgment against the borrower.  The court held that section 726 did not apply because Roberts, who asked for and consented to the short sale of the property, waived any rights she may have had under section 726.  In addition, the short sale was not itself an “action” and therefore “the short sale arrangement did not subject Roberts to a multiplicity of lawsuits.” Moreover, the security was in fact exhausted by the sale.

The court also rejected Roberts’ claim that the Federal Troubled Asset Relief Program (“TARP”) barred B of A’s action against her because Roberts did not present this argument to the trial court and failed to adequately support her argument on appeal.  Furthermore, there are no private rights or causes of action under the federal act that established TARP.  The court also rejected Roberts’ argument that the doctrine of unclean hands should apply to B of A.  Roberts alleged that B of A was aware of her financial hardship during the negotiations for the short sale and unfairly coerced her into the short sale arrangement.  The court found that “there was nothing inequitable or prejudicial to Roberts regarding the terms of the short sale arrangement.”