California and San Diego Foreclosures: Can I Be Sued?

14 Feb California and San Diego Foreclosures: Can I Be Sued?

With the flood of foreclosures hitting the state, especially in San Diego County, debtors receiving notices of default and notices of trustee sales are scratching their heads, not only trying to understand theintricaciesof the upcomingforeclosure and eviction proceedings, but also wondering whether they will be exposed to any deficiency judgment and tax liabilities. Chances are, there will be neither, and some planning may be in order.

California has two primary laws that deal with foreclosures and ensuing potential deficiencies. These two laws are 580b and 580d, and are found in the California Code of Civil Procedure. Essentially, one provides that no deficiency may arise under any circumstance as long as the loan was “purchase money” and the other provides that no deficiency may arise if the lender makes an “irrevocable election” to pursue the property thru a “non-judicial sale.”

CCP 580b: This is thepurchase money rule. Under this rule, a lender can not pursue a debtor after foreclosure for any deficiency balance as long as the qualifications under 580b are met. That means that if there was a judicial or non-judicial sale, and the lender did not receive their full loan balance from the sale and money is still owed, they can not enforce payment on the difference. Specifically, the statute holds as follows:

No deficiency judgment shall lie in any event after a sale of real property or an estate for years therein for failure of the purchaser to complete his or her contract of sale, or under a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property or estate for years therein, or under a deed of trust or mortgage on a dwelling fornot more than four families given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser.

To qualify under this statute, you must meet the following three requirements:

1)Purchase Money: The loan must finance the purchase of the property. A refinance will not work.

2)Occupancy: The purchaser must occupy the property entirely or in part. Investment property where the purchaser never occupied the property at least in part, will not work.

3)Under 4 Dwelling: The property must be residential property with 4 or less families.

EXCEPTIONS: There are two exceptions: Fraud (Birman v. Loeb (1998) 64 Cal. App. 4th 502)and Waste (Evans v. California Trailer Court, Inc. (1994) 28 Cal. App. 4th 540). If the loan was fraudulentlyinduced (the application contained purposeful misrepresentations of assets, income, etc) or waste was committed on the property (the homeowner in anger over foreclosure proceedings damaged the property, removed out plumbing, appliances, lighting, granite, flooring, etc) then the Lender can still sue the homeowner in Court for damages, even after a non-judicial or judicial sale on a purchase money loan.

How does this play out? If you purchased a home for $500,000 with a $400,000 first deed of trust and $100,000 second deed of trust, which was never refinanced,where there was no fraud or waste, and which you occupied, if the first forecloses and receives $300,000, then the first and second can not pursue you for any deficiency. So even though the first and second are still owed $100,000 each, they are prohibited to pursue the deficiency by law.

Nevertheless, had a refinance been involved or had the second been taken out after the purchase, such as the case in most HELOC loans, then the 580b exception does not apply and both would be able to sue on its $100,000 deficiency, but only in the context of a judicial sale per below, or if the lender was a “sold out junior” (first forecloses, thus selling out the junior lien, who then still has recourse against the debtor). There may also be tax implications as well. For that analysis,click here.

CCP 580d: This is theTrustee Sale Non-Deficiency Rule: Under this rule, once a lender irrevocably elects to proceed with a non-judicial sale, it is prohibited from poceeding any further on any deficiency. That means that if even if there is non-judicial sale, and the lender did not receive their full loan balance from the sale where you still owe money, it still can not enforce payment on the difference. Specifically, the statute holds as follows:

No judgment shall be rendered for any deficiency upon a note secured by a deed of trust or mortgage upon real property or an estate for years therein hereafter executed in any case in which the real property or estate for years therein has been sold by the mortgagee or trustee under power of sale contained in the mortgage or deed of trust.

Unlike 580b above, the loan does not need to be purchase money, there is no occupancy requirement, and there is no dwelling requirement. Thus this rule applies to investment property, commercial properties, and other real estate purchases. Quite simply, if a lender proceeds with a non judicial sale, there is no further recourse against the borrower. This is simply because the lender, at its election, converted the loan from a recourse to non-recourse loan. The election for this remedy is considered final and irrevocable upon the sale. (Carpenter v Title Insurance and Trust Co, 163 P.2d 73, 57-76)

However, a lender is free to pursue both remedies simultaneously until the sale occures. In other words, the lender can file a lawsuit and litigate the matter in state or federal court while at the same time proceed non-judicially by recording a notice of default and notice of sale. If the lender obtains judgment in court while delaying the actual sale date non-judicially, then that non-judicial proceeding becomes irrelevant, yet the judgment for possession is final and the lender is also entitled to a deficiency judgment.

Deficiency judgments are allowed in judicial sales as long as 580b does not apply. However, if the non-judicial sale occurs first, then the lawsuit must be dismissed and no longer has any effect. Notwithstanding the forgoing,the same two exceptions for Fraud and Waste exist and still entitle a lender to sue regardless if 580d applies and a non-judicial sale takes place.

While the forgoing touches on the most basic ramifications of foreclosure under California Law, there are sometimes other issues that need to be dealt with as well. To read about these other issues, please click my personal blog here.

Written byMichael Doan

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