A California Court of Appeal recently addressed the issue of whether the anti-deficiency protections of Code of Civil Procedure (“CCP”) section 580b applied after a borrower, with her lender’s approval, sold her residence in a “short sale” for an amount less than the amount she owed on her purchase money loan. The Court held “that section 580b applies to any loan used to purchase residential real property (purchase money loan) regardless of the mode of sale.” (Coker v. JP Morgan Chase Bank, N.A. (--- Cal.Rptr.3d ----, Cal.App. 4 Dist., July 23, 2013).
Carol Coker (“Coker”) obtained a $452,000 loan to purchase real property in San Diego (called a purchase money loan), memorialized by a promissory note. The note was secured by a deed of trust that was recorded against the property. The original lender went defunct and Chase Home Finance (“Chase”) was the successor in interest. After Coker stopped paying on the loan, “a notice of default and election to sell under the deed of trust was recorded.” Coker negotiated a sale of the real property to a third party. However, the sale price was less than she owed on the loan. This type of transaction is known as a ‘short sale’ because the sale price is less than the balance of the outstanding debt secured by the deed of trust. Coker asked Chase to agree to the sale. Chase approved the sale subject to several conditions, including the condition that Coker would still be responsible for any deficiency balance after the proceeds from the sale were applied to the balance. After the sale closed, Chase received the proceeds from the sale and executed and recorded a substitution of trustees and reconveyance of the deed of trust.
After the short sale, Allied Credit International, Inc., sent a collection letter on behalf of Chase demanding that Coker pay $116,686.89 for the unsatisfied portion of the home loan. Coker filed a lawsuit seeking a declaration that Chase was prohibited by CCP sections 580b and 580e and the common law from collecting a deficiency. The trial court dismissed Coker’s complaint.
The Court of Appeal reversed the decision of the trial court. The Appellate Court held that “section 580b’s anti-deficiency protections prohibit a deficiency judgment following any sale of the subject real property,” not just following a foreclosure sale as Chase had argued.
Section 580b establishes that purchase money loans are nonrecourse loans, which means a “borrower has no personal liability and the lender’s sole recourse is against the security for the obligation.” By placing the risk of inadequate security on the mortgagee, section 580b discourages a vendor “from overvaluing the security” and “serves as a stabilizing factor in land sales.”
The Court found nothing in section 580b that indicated that its provisions only apply after a foreclosure sale. It states, “No deficiency judgment shall lie in any event . . . after a sale of real property.” The Court found there is no language that modified the term “sale”, and that the phrase “in any event” indicated that “the Legislature intended section 580b to apply to all sales.”
The Court stated that such an interpretation is supported by the addition of the newest anti-deficiency statute found at section 580e. The Legislature first enacted section 580e in 2010. Section 580e “bars deficiencies where there is a ‘deed of trust or mortgage for a dwelling of not more than four units’ if ‘the trustor or mortgagor sells the dwelling for a sale price less than the remaining amount of the indebtedness outstanding at the time of sale, in accordance with the written consent of the holder of the deed of trust or mortgage.” Section 580e expands the 580b’s protection “by prohibiting a deficiency judgment arising out of a short sale approved by the creditor of any mortgage loan, not just purchase money loans.” However, section 580e, unlike section 580b, only applies to a short sale.
The legislative history of section 580e “shows the Legislature knew section 580b applied to short sales” and that section 580e “was enacted to extend anti-deficiency protections beyond the purchase money loans covered by section 580b to include nonpurchase money loans.” The Court concluded that section 580b’s plain language, its purpose, and the language of other anti-deficiency statutes clearly show that it applies to the short sale of Coker’s property.
The Court additionally rejected Chase’s argument “that section 580b does not apply when a borrower acquiesces in a lender’s relinquishment of its security interest.” Chase claimed that when a borrower waives the security first rule of CCP section 726, section 580b is not applicable. Section 726 and related statutes “require a secured creditor to proceed against the security before enforcing the underlying debt.” Chase’s argument is just another variant of its claim that section 580b only applies after a foreclosure and, as discussed above, the Court rejected that argument.
The Court also rejected Chase’s argument that section 580b did not apply because Chase required Coker to agree to pay the deficiency as a condition of the short sale. The Court stated that Chase and Coker could not agree to waive the anti-deficiency protection because a waiver of anti-deficiency protections is void as contrary to public policy.