On June 20, 2012, the Fourth District Court of Appeals, Division Three, in Cadlerock Joint Venture, L.P., v. Lobel (Case No. G045936) recently decided a novel question of law. In Cadlerock, the Court asked when a single lender contemporaneously makes two non-purchase 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 non-judicial foreclosure sale, pursue the borrower for a money judgment in the amount of the debt owed?
Or more simply, can the assignee of a second deed of trust, from a lender on a first and second mortgage made simultaneously, sue on the second after the original lender forecloses on the first?
Related: Is A Deed Of Trust The Same As A Mortgage? Not In California.
Current State of the Law In California:
Currently, California Code of Civil Procedure §580b prohibits all deficiency judgments in specified real estate transactions involving purchase money regardless of whether the creditor conducts a judicial or non-judicial foreclosure against the borrower. In re Marriage of Oropallo (1998) 68 Cal.App.4th 997, 1003, [80 Cal.Rptr.2d 669]. However, in Cadlerock, the court could not rely on Civ.Proc. §580b, because the loans were not original purchase money loans.
Civ.Proc. §580d “precludes a judgment for any loan balance left unpaid after the lender’s non-judicial foreclosure under a power of sale in a deed of trust … on real property.” Western Security Bank v. Sup. Ct. (1997) 15 Cal.4th 232, 237, [62 Cal.Rptr.2d 243, 933 P.2d 507]. On its face, Civ.Proc. §580d contemplates a single loan. Thus, when two separate loans are secured (via separate deeds of trust) by the same real property, §580d does not prevent a junior creditor from obtaining a money judgment for the full amount due on the underlying junior debt obligation when the senior lienholder conducts a non-judicial foreclosure that extinguishes the junior lienholder’s security interest. See, Roseleaf Corp. v. Chierighino (1963) 59 Cal.2d 35, 43–44, [27 Cal.Rptr. 873, 378 P.2d 97] (“Roseleaf”); Bank of America v. Graves (1996) 51 Cal.App.4th 607, 611–616, [59 Cal.Rptr.2d 288] (“Graves”).)
Several appellate courts have held, however, that §580d does preclude a deficiency judgment when the same lender is both the senior lienholder and the junior lienholder. See, e.g., Simon v. Sup. Ct. (1992) 4 Cal.App.4th 63, 77, [5 Cal.Rptr.2d 428] (“Simon”). Moreover, a single lender cannot avoid the application of §580d under Simon by assigning the junior loan to a different entity after the trustee’s sale on the senior lien. Bank of America, N.A. v. Mitchell (2012) 204 Cal.App.4th 1199, [139 Cal.Rptr.3d 562] (“Mitchell”).
Further, a junior lienor that purchases the property at the senior trustee’s sale may also recover a deficiency judgment, but §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.” See, Walter E. Heller Western, Inc. v. Bloxham (1985) 176 Cal.App.3d 266, 273, [221 Cal.Rptr. 425]; see also, Citrus State Bank v. McKendrick (1989) 215 Cal.App.3d 941, 948-950, [263 Cal.Rptr. 781] (Noto Bene: junior creditor that purchases at senior’s foreclosure sale is also subject to §580a’s three-month time limit on deficiency action).
The Court’s Reasoning In Cadlerock:
Facts:
In 2004, Lobel acquired certain real property located at 71 Anjou, Newport Beach, California (“Property”). In October 2006, Lobel borrowed $878,750 from lender Sea-Breeze Financial Services, Inc. (“Sea-Breeze”). The money [*5] 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). The senior loan featured an initial interest rate of 8.5 percent; the interest rate was adjustable based on a formula fixed to the London Interbank Offered Rate. The junior loan was a fixed rate loan with an interest rate of 16 percent, with interest only payments of $1,850 for the first 120 months of the loan.
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. Neither 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.
In February 2008, Sea-Breeze assigned its interest in the senior loan/lien to Central Mortgage Company (“Central”). Central conducted a non-judicial 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. Cadlerock filed a complaint on July 26, 2010, asserting causes of action for breach of contract, account stated, book account, money lent, and money had and received. The outstanding balance on the junior loan as of April 12, 2011, was $220,828.33, consisting of principal ($138,750) and interest ($82,078.33).
The Cadlerock Holding:
The Fourth District Court of Appeal found that by its plain terms, §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 the Supreme Court in Roseleaf, supra, 59 Cal.2d at page 43, §580d “does not appear to extend to a junior lienor whose security has been sold out in a senior sale.” Certain cases have found room to maneuver around Roseleaf, supra, 59 Cal.2d 35, based on concerns that lenders could undermine the underlying purposes of §580d by artificially structuring loans to allow themselves to both non-judicially foreclose on the security and obtain a deficiency judgment. (E.g., Simon, supra, 4 Cal.App.4th 63; Mitchell, supra, 204 Cal.App.4th 1199.) However, the Court felt it improper to extend this line of cases to the factual circumstances in Cadlerock, where the junior loan was assigned soon after origination.
As such, the Court held that because the junior lienor and senior lienor were different entities at the time of the senior trustee’s sale, Cadlerock was not precluded by sections 580d, 726, or any of the cases applying these rules, from suing Lobel for the amount due on the junior loan. Cadlerock at p. 27.
DISCLAIMER: Because of the generality of this blog post, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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