Two Loans, Same Lender: California Supreme Court to Decide State’s Deficiency Judgment Law

If the same lender has both a senior and junior lien on your California home, will a foreclosure of the first lien prevent a deficiency judgment on the second? The California Supreme Court will soon determine the answer.

When a senior lienholder forecloses, any junior liens—like second mortgages and HELOCs—are also foreclosed, and those junior lienholders lose their security interest in the real estate. If a junior lienholder has been sold out in this manner, that junior lienholder can usually sue the borrower personally on the promissory note to collect the balance of the loan, called the “deficiency.” (Read more about what happens to junior liens in a foreclosure.)

For over 20 years, courts in California have followed a decision by the First District Court of Appeal, which said that if the same lender holds both the senior and junior loans, that lender can’t pursue a personal judgment—a deficiency judgment—against the borrower for the junior loan after foreclosing the senior. (Simon v. Superior Court, 4 Cal.App.4th 63 (1992)). However, in June 2017, the Fourth District Court of Appeal disagreed with the Simon case, and held that California law—specifically California Code of Civil Procedure § 580d—doesn't prevent a sold-out junior lienholder from seeking a deficiency judgment after a nonjudicial foreclosure of the first lien, even when the same lender 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.)

The Black Sky decision created a split between the Courts of Appeal in the First and Fourth Districts on the interpretation and application of Section 580d. So, the California Supreme Court granted review of the Black Sky case. (California’s District Courts of Appeal have to follow Supreme Court precedent, but they can disagree with each other.)

How the Supreme Court might decide this one is anybody’s guess. The Court might not see the Simon and Black Sky decisions as incompatible because the facts in each case were very different. For example, in Black Sky, the lender made two loans that were separated by a substantial time period; whereas in Simon, the lender made both loans concurrently. This distinction might, therefore, justify the different outcomes in the cases. Or the Supreme Court could decide to reverse the Black Sky decision and uphold the Simon rule, or perhaps overturn the Simon case instead. As of mid-2018, the California Supreme Court has not issued its ruling. Stay tuned for further developments.

Effective date: June 13, 2017