As noted in my prior post, Money and Dirt: Reviewing 2015; Previewing 2016, one of the expected developments for 2016 was the California Supreme Court’s decision on whether to proceed with review of the Fifth District Court of Appeal’s opinion in First California Bank v. McDonald, which addressed a lender’s ability to recovery a deficiency judgment in the context of a loan with multiple borrowers.
Early in 2015, the Supreme Court granted review, but did so on a “grant and hold” basis with further action awaiting the Supreme Court’s decision in a different case.
Recap of the McDonald opinion: no deficiency judgment against co-borrower who never consented to non-foreclosure disposition of security property
In McDonald, originally published in late 2014, the court of appeal held that under Code of Civil Procedure section 726 (the “One Action Rule”), a lender cannot pursue a deficiency judgment against a borrower who did not consent to the lender’s “non-foreclosure” disposition of real property securing the loan.
Before filing the judicial foreclosure action, the lender agreed with only one co-borrower on a short sale of one parcel of security property, and then filed a judicial foreclosure action seeking the sale of the remaining security property AND a deficiency judgment against all of the borrowers, including those who never consented to the earlier short sale. The court of appeal held that the lender was barred from seeking a deficiency judgment against those non-consenting borrowers.
The court’s decision applied a long line of authorities holding that the only way a lender can obtain a deficiency judgment on a loan secured by real property is to first include all of the real property security in a single action action for judicial foreclosure, and then follow the detailed mechanisms (designed to ensure “fair value”) set forth in section 726. Deviations from that procedure, if permissible at all, require borrower consent.
California Supreme Court grants review of McDonald on a “grant and hold” basis, with Coker as the lead case
The California Supreme Court granted the lender’s petition for review of the McDonald decision in February 2015, but did so on a “grant and hold” basis, deferring any further action until after a decision in the “lead case” — Coker v. JPMorgan Chase Bank. The grant of review caused the McDonald decision to become de-published.
Like McDonald, the Coker case also involved a short sale, but in Coker there was only one borrower, who fully consented to the short sale.
The Supreme Court issued its decision in the Coker case — Coker v. JPMorgan Chase Bank — in January. For a summary of that decision, see my prior post here: California Supreme Court Clarifies Anti-Deficiency Protection for Purchase Money Loans.
In short, Coker confirmed that under Code of Civil Procedure section 580b, lenders cannot recover deficiency judgments on standard purchase money loans, regardless of whether the security is exhausted by foreclosure or consensual short sale. (Section 580e, enacted after the facts in Coker, also limits deficiency judgments after short sales.)
The Coker decision did not spend much time on section 726, and did not address short sales lacking co-borrower consent as featured in McDonald.
The Supreme Court dismisses review of McDonald
Perhaps because the lead case, Coker, did not address the issues at play in McDonald, the California Supreme Court dismissed review of McDonald on March 9, 2016.
Under the Advisory Committee Comment to California Rules of Court, Rule 8.528(b), “after the court decides a ‘lead’ case, its current practice is to dismiss review in any pending companion case (i.e., a ‘grant and hold’ matter under rule 8.512(c)) that appears correctly decided in light of the lead case and presents no additional issue requiring resolution by the Supreme Court or the Court of Appeal.”
In short, “nothing to see here.”
The Supreme Court apparently concluded that nothing in the Coker decision cast doubt on the Fifth District’s decision in McDonald, and that nothing in McDonald raised any additional issues that the Supreme Court felt compelled to review.
As such, the McDonald decision remains intact, albeit now unpublished.
While the McDonald decision is no longer published, its holding was based on prior cases which essentially ruled the same way.
The lesson from McDonald and the authorities on which McDonald is based is clear: the cleanest path to a deficiency judgment is to play it straight and narrow and include ALL security property in a single action for judicial foreclosure against all the borrowers.
In loans involving multiple borrowers, if the lender decides to pursue some type of “non-foreclosure” (i.e., private short sale) disposition of some or all of the real property security, the lender needs to obtain consent from ALL the borrowers. Any borrowers who don’t consent to such a deviation from the typical judicial foreclosure playbook will likely escape deficiency judgment liability.