CALIFORNIA DEFICIENCY JUDGMENTS FOLLOWING RESIDENTIAL SHORT SALES ARE UNENFORCEABLE AS A MATTER OF LAW
August 09th, 2016/By Admin/In Newsletter
California Deficiency Judgments Following Residential Short Sales Are Unenforceable As A Matter Of Law
In Carol Coker v. JP Morgan Chase Bank, et al., the California Supreme Court recently upheld an Appellate ruling which found that the anti-deficiency provisions of California Code of Civil Procedure Section 580b also apply to residential properties sold by short sale.
Under California Code of Civil Procedure Section 580b, when an individual borrows money from a bank to buy a home and the bank forecloses on the home, the bank can collect proceeds from the foreclosure sale but nothing more. In other words, the bank cannot obtain a deficiency Judgment against the borrower if the sale proceeds are not enough to repay the loan.
In Coker, the issue was whether the statute’s anti-deficiency protections also apply when a defaulting borrower arranges a short sale. In a short sale, the borrower sells the home to a third party for an amount that falls short of the outstanding loan balance; the lender agrees to release its lien on the property to facilitate the sale, and the borrower agrees to give all proceeds to the lender.
In this case, Coker purchased a condo using a $452,000 loan from Valley Vista Mortgage. Coker later fell behind on her payments and received a Notice of Default and Election to Sell from JP Morgan Chase, Valley Vista’s successor in interest on the loan. As Chase began the foreclosure process, Coker asked Chase if it would release its security interest so she could sell her property to a third party for $400,000.
In response to Coker’s request, Chase approved the sale subject to several conditions. First, Chase would receive all sale proceeds. Second, the total proceeds to be received by Chase would be $375,061.86 (the sales price minus closing costs) and no less. Third, Chase could rescind its approval of the sale should any variances in the approved transaction occur. And fourth, Coker would still be responsible for any deficiency balance remaining on the loan.
Coker accepted Chase’s terms and sold the condo to a third party for $400,000.
Following the sale, Coker received a collection letter from an agent of Chase demanding $116,686.89 which remained due on the loan. Coker then brought the within declaratory relief action claiming that, among other things, Code of Civil Procedure Section 580b prohibited Chase from collecting any deficiency amount.
Chase demurred to Coker’s Complaint, and the Trial court sustained without leave to amend. On appeal, the Appellate Court reversed the Trial court’s decision and held that Chase’s efforts to recover the deficiency were barred by section 580b; and that Coker’s agreement to pay the deficiency following the sale was an unenforceable waiver of the statute’s protections. In so holding, the Court of Appeal explained that section 580b’s protections apply after any sale, and not just a foreclosure. The Appellate Court also rejected Chase’s contention that because Coker waived her rights under section 726, which require a secured creditor to foreclose on a borrower’s property before seeking a personal Judgment, section 580b did not apply.
The California Supreme Court reviewed the matter and upheld the Appellate Court’s ruling. It found that California Code of Civil Procedure Section 580b limits a lender’s recovery on any standard purchase money loan to the secured property, regardless of how the security is exhausted and regardless of whether a short-sale has occurred.
[This article is for informational purposes only and does not constitute legal advice. Do not act or rely upon any of the resources and information contained herein without seeking appropriate professional assistance.]
