Published on:

Multiple Deed of Trust held By the Same Lender –Why Foreclosure of the First Does Not Prevent Deficiency on the Second

When there are multiple liens on real property and the senior lien or deed of trust is foreclosed, the junior liens are wiped out, and the junior lienholders have lost their security for the debt. All they have left is the underlying debt, which they can then seek to collect directly from the debtor. These latter parties are termed “sold-out juniors.” Generally, when a debt is secured by real property, the creditor must seek to be paid from the property first (by foreclosure). If the senior lienholder conducts a trustee sale, and the property does not raise enough cash to pay them off, it’s too bad- they cannot go after the debtor personally. However, if they are a junior, once they lose the security, they may go after the debtor for a monetary judgment. But sometimes Sacramento real estate attorneys are confronted by senior and junior loans that are made by, or acquired by, the same individual lender. If the lender forecloses on the first, does it become a sold-out junior as to the second?

Sacramento-one-form-of-action-lawyerIn Black Sky Capital, LLC v. Michael Cobb, plaintiff Black Sky held both the first and second loans (totaling over $11.7 million dollars) on a property in Rancho Cucamonga. Black Sky foreclosed on the first, holding a trustee’s sale. It then filed suit to recover the balance owed on the 2nd junior note, and this appeal was the result.

Section 580d Applies only to the Deed of Trust Foreclosed, and does not apply to a Junior Lien after a Trustee’s Sale on the first – Regardless of whether it is the same lender

This case came down to the difference between Code of Civil Procedure section 726, which applies to judicial (court) foreclosures, and section 580d, which applies only to nonjudicial foreclosures (trustee sales). Cobb argued that 580d prohibited the lender from suing on the 2nd, sold-out debt, because that would be a deficiency judgment, citing an earlier decision (Simon, 4 CalApp.4th 63). The appellate court disagreed, finding that Simon was incorrect.

In California, 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. Section 726 provides that, in a judicial foreclosure, the creditor may seek a deficiency judgment. However, in the event of nonjudicial foreclosure (trustee’s sale), 580d prohibits such a deficiency judgment.

Specifically, Section 726 provides that 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.
Section 726 is both a “security-first” and “one-action” rule: It requires the secured creditor, in a single action, to exhaust his security judicially before he may obtain a monetary “deficiency” judgment against the debtor. A secured creditor can bring only one lawsuit to enforce its security interest and collect its debt.’

Sacramento-deficiency-judgment-attorneySection 726 does not apply if a nonjudicial foreclosure is pursued – then section 580d applies. This prohibits a judgment for any loan balance left unpaid after the lender’s nonjudicial foreclosure [or trustee’s sale] under a power of sale in a deed of trust. In other words, it prohibits a deficiency judgment.
Section 580d refers solely to the “instrument securing the note sued upon.” the plain language of section 580d does not “extend to a junior lienor whose security has been sold out in a senior sale. (Roseleaf 59 Cal.2d 35.) The unambiguous language of section 580d applies only to a lien that is nonjudicially foreclosed and that it simply does not apply to a junior lienholder unless the junior lienholder elects to exercise its power of sale under its own deed of trust.