When the Same Lender Has Both a Senior and Junior Deed of Trust….
If the same lender has both a senior and junior deed of trust on the same security property, can that lender foreclose on the senior lien by trustee’s sale, and then sue the debtor personally for the junior debt?
The answer just got more complicated, thanks to a recent decision from California’s Fourth Appellate District — Black Sky Capital, LLC v. Cobb.
First, some background:
Legal background re “sold out” juniors
California Code of Civil Procedure section 580d — one of the State’s most noteworthy anti-deficiency statutes — bars a lender from recovering a deficiency judgment on a promissory note following a completed trustee’s sale (non-judicial foreclosure) pursuant to a power of sale clause in the deed of trust related to the note.
This means that after a lender completes a trustee’s sale of the security property, the lender cannot sue the borrower for any debt remaining on the note (the “deficiency”). If the lender really wants a deficiency judgment, and if a deficiency is not barred by other anti-deficiency statutes, then judicial foreclosure — with its accompanying procedural hurdles including the borrower’s post-sale right of redemption — is the only permissible route.
In Roseleaf Corp. v. Chierighino (a 1963 decision), the California Supreme Court held that section 580d does not apply to a “sold out” junior lienholder. In other words, if the senior lienholder forecloses, a “sold out” junior lienholder who has lost its security can sue the debtor personally to recover the junior debt. In Roseleaf, the senior and junior lienholders were different parties.
In Simon v. Superior Court (1992), the First District Court of Appeal held that when the same lender owns both the senior and junior deeds of trust, a trustee’s sale on the senior does not render the lender a true “sold out” junior, and section 580d bars any recovery on the junior debt. In Simon, the lender made the senior and junior loans within four days of each other. The court viewed this as an attempt to circumvent section 580d by structuring one loan as two.
The common wisdom after Simon was that any lender holding both the senior and junior lien on security property would, by non-judicially foreclosing on the senior, eliminate any chance of recovery on the junior.
Then came the Black Sky decision.
The facts in Black Sky
On August 18, 2005, Michael and Kathleen Cobb borrowed over $10 million from Citizens Business Bank. The note was secured by a deed of trust on a parcel of commercial property in Rancho Cucamonga.
More than two years later, the Cobbs borrowed another $1.5 million from Citizens Business Bank. The note was secured by a second deed of trust on the same property.
Black Sky purchased both notes from Citizens Business Bank.
The Cobbs defaulted on the senior loan, and Black Sky conducted a trustee’s sale pursuant to the power of sale provisions in the senior deed of trust, acquiring the property for a credit bid of $7.5 million.
Shortly after, the Cobbs defaulted on the junior loan. Black Sky sued the Cobbs personally to recover the junior debt. The Cobbs moved for summary judgment.
The trial court’s ruling
The trial court granted the Cobbs’ motion and entered judgment in their favor. The court ruled that under Simon, any recovery on the junior debt was barred by section 580d.
Black Sky appealed.
The court of appeal’s opinion
The court of appeal reversed the trial court’s judgment, and expressly parted ways with Simon. (California’s various District Courts of Appeal must follow Supreme Court precedent, but are free to disagree with each other.)
The court relied primarily on the text of section 580d and the Supreme Court’s decision in Roseleaf.
The court pointed to the language of section 580d, which bars a deficiency on “a note” secured by a deed of trust following a trustee’s sale pursuant to that deed of trust. Thus, the court held, following a trustee’s sale on the senior note, the statute bars a deficiency only on the senior note. The court stated: “By using the singular throughout the statute, the Legislature unambiguously indicated that section 580d applies to a single deed of trust; it does not apply to multiple deeds of trust, even if they are secured by the same property. … It makes no difference whether the junior lienholder is the same entity or a different entity as the senior lienholder.”
Looking to Roseleaf, the court observed that the Supreme Court also followed the plain language of section 580d in allowing a sold out junior to pursue recovery. Roseleaf, the court held, did not create any equitable exceptions to the statutory language, and the equitable exception created by Simon was not supported by the statute or Roseleaf.
The court noted that the Simon decision was likely a result of that court’s concern over the lender’s questionable behavior in that case — i.e., issuing “nearly simultaneous loans secured by the same property” in an apparent attempt to circumvent section 580d. Even if these facts justified the result in Simon, the court held, the equitable rule announced by Simon was not warranted under the facts here, where the two loans were separated by more than two years, and there was no evidence that the lender had attempted to circumvent any anti-deficiency statute.
What Next?
Splits among the District Courts of Appeal like this can get the attention of the Supreme Court. The Supreme Court might be motivated to grant review of the Black Sky decision and settle the law conclusively.
On the other hand, the Supreme Court often prefers to let a split of authority “ripen” a bit further, so that other Courts of Appeal can weigh in.
It is also possible that the Supreme Court might not view Simon and Black Sky as incompatible — after all, the facts in each case were very different, and may have justified the outcomes.
For example, in cases where the same lender makes two loans secured by the same property separated by a substantial time period, with no evidence of trying to evade California’s anti-deficiency statutes, the Black Sky decision (and the general rule from Roseleaf) may apply. But in cases where the same lender makes two loans very close in time secured by the same property, those loans may be viewed as one true loan under section 580d, and therefore subject to the equitable rule set forth in Simon.
Stay tuned for further developments.