Previously, under California law, if a bank or mortgage company held both senior and junior deeds of trust on a property, the holder was barred from suing to collect the deficiency on the “sold-out” junior debt after nonjudicially foreclosing the senior deed of trust. But the California Supreme Court’s decision in Black Sky Capital, LLC v. Cobb potentially opens the door for banks and other entities to enforce two liens on the same property.
If a senior lienholder forecloses on your home, any junior liens—such as second mortgages, home equity loans, and HELOCs—are also foreclosed. This means that those junior lienholders lose their security interest in the property. In this kind of situation, the junior lienholders are called a “sold-out junior lienholders.” (Read more about what happens to junior liens in a foreclosure.)
For more than two decades, California courts have followed the First District Court of Appeal’s decision in Simon v. Superior Court, 4 Cal.App.4th 63 (1992). In that case, the court decided that if the same entity (like a mortgage company or bank) holds both a senior and junior loan on a property, that entity can’t go after the borrowers for a deficiency judgment regarding the junior loan after foreclosing the senior.
But in June 2017, the Fourth District Court of Appeal disagreed with the decision in the Simon case. The Fourth District Court of Appeal held that California law (California Code of Civil Procedure § 580d, specifically) doesn't prohibit a sold-out junior lienholder from suing the borrower for the deficiency after the nonjudicial foreclosure of the first lien—even in situations when the same entity holds both the senior and junior liens. (Black Sky Capital, LLC v. Cobb, 12 Cal.App.5th 887 (2017)). (To learn more about sold-out junior lienholders and California foreclosures, see The One-Action Rule & Foreclosure in California and Utah.)
Because the Courts of Appeal in the First and Fourth Districts interpreted Section 580d differently, the California Supreme Court agreed to hear the matter.
The California Supreme Court agreed with the Fourth District Court of Appeal. On May 6, 2019, the Court issued its finding, which determined when a bank or mortgage company holds two deeds of trust on the same property, the holder may seek a deficiency judgment on the extinguished junior lien.
While this decision expands lienholder deficiency rights in California, keep in mind that—even if you have two deeds of trust on your home that are held by the same entity—another anti-deficiency law might apply that would prohibit that bank from coming after you for a deficiency judgment on the junior lien. (To learn more about anti-deficiency laws in California, see Deficiency Judgments After Foreclosure in California.)
Also, in the Black Sky case, the senior and junior loans were separated by a substantial time period. The court stated that "Where there is evidence of gamesmanship by the holder of senior and junior liens on the same property, a substantial question would arise whether the two liens held by the same creditor should...be treated as a single lien." In such circumstances, the anti-deficiency protection of Section 580d might apply. So, if a lender made both loans concurrently, essentially treating one loan as two (perhaps in order to recover under the junior loan what it couldn't recover if it had issued a single loan on the same property), then the outcome of such a case could be different.
If you have questions about this case, how it applies to your situation, and whether you might face a deficiency judgment after a foreclosure sale in California, talk to a foreclosure lawyer.
Effective date: May 6, 2019