Deficiency after non-judicial foreclosure
Cal. Code Civ. Pro. 580d bars a deficiency following a non-judicial foreclosure. Prior to its enactment in 1940, creditors could obtain a deficiency (unless barred by Cal Code Civ. Pro. 580b) following either judicial or non-judicial foreclosure, but judicial foreclosure was (and still is) subject to redemption for a year following sale and non-judicial foreclosure was (and still is) free of any right of redemption following sale. Enactment of Cal. Code Civ. Pro.580d is therefore said to have created a "parity of remedies," allowing the creditor to elect between judicial foreclosure (with a right to a deficiency but subject to a statutory right of redemption) and non-judicial foreclosure (with no right to a deficiency but free of the right of redemption). By barring a deficiency following non-judicial foreclosure, the hope was to discourage underbidding, a result supposedly accomplished for judicial foreclosure sales by the statutory right to redeem, following foreclosure, for the amount bid at the foreclosure.
Cal. Code Civ. Pro. 580d does not bar a deficiency for a sold out junior (see Walter E. Heller Inc. v. Bloxham, 176 Cal.App.3d 266 (1985)), although, as we have seen, section 580b will bar some sold out juniors from recovery of a deficiency. However, the holder of a junior deed of trust that has sold itself out through non-judicial foreclosure on its senior lien will be barred from a deficiency on the note secured by the junior lien. In Simon v. Superior Court, 4 Cal.App.4th 63 (1992), a bank gave two separate, sequential loans to a debtor. The first loan, for $1,575,000, was secured by a first deed of trust on the debtor's personal residence. The second loan, for $375,000, was secured by a second deed of trust on the same property. Neither loan was purchase money. After default, the bank non-judicially foreclosured the first, credit bidding less than the amount due, and then sued the debtor for $375,000 on the second note. The court barred the bank from recovery on the second note, holding that it amounted to a deficiency barred by 580d.
. . . The Supreme Court in Roseleaf found the purpose of section 580d is "to put judicial enforcement on a parity with private enforcement. . . . If the creditor wishes a deficiency judgment, his sale is subject to statutory redemption rights. If he wishes a sale resulting in nonredeemable title, he must forego the right to a deficiency judgment. In either case the debtor is protected. The purpose of achieving a parity of remedies would not be served by applying section 580d against a nonselling junior lienor. . . . He may redeem from a senior sale . . . , or he may obtain a deficiency judgment. . . . After a senior private sale, the junior has no right to redeem. This disparity of rights would be aggravated were he also denied a right to a deficiency judgment by section 580d . . . . The junior's right to recover should not be controlled by the whim of the senior . . ." (Roseleaf Corp. v. Chierighino, supra, 59 Cal.2d at pp. 43-44, italics added.)
Neither will a parity of creditor's remedies be served if Bank here is permitted to make successive loans secured by a senior and junior deed of trust on the same property; utilize its power of sale to foreclose the senior lien, thereby eliminating the Simons' right to redeem; and having so terminated that right of redemption, obtain a deficiency judgment against the Simons on the junior obligation whose security Bank, thus, made the choice to eliminate.
Unlike a true third party sold-out junior, Bank's right to recover as a junior lienor which is also the purchasing senior lienor is obviously not controlled by the "whim of the senior." We will not sanction the creation of multiple trust deeds on the same property, securing loans represented by successive promissory notes from the same debtor, as a means of circumventing the provisions of section 580d. The elevation of the form of such a contrived procedure over its easily perceived substance would deal a mortal blow to the antideficiency legislation of this state. Assuming, arguendo, legitimate reasons do exist to divide a loan to a debtor into multiple notes thus secured, section 580d must nonetheless be viewed as controlling where, as here, the senior and junior lenders and lienors are identical and those liens are placed on the same real property. Otherwise, creditors would be free to structure their loans to a single debtor, and the security therefor, so as to obtain on default the secured property on a trustee's sale under a senior deed of trust; thereby eliminate the debtor's right of redemption thereto; and thereafter effect an excessive recovery by obtaining a deficiency judgment against that debtor on an obligation secured by a junior lien the creditor chose to eliminate. . . .
Simon v. Superior Court, 4 C.A. 4th at 77-78
Elsewhere we consider a similar result in a case in which the court held recovery on a second note barred by a non-judicial foreclosure on the first note where the first note included a dragnet clause. See the discussion of Union Bank v. Wendland in Commentary.Future Advances.1. In Simon, the bank argued that Wendland was inapplicable because the bank's deeds of trust did not contain a dragnet clause. The Simon court rejected that argument: "We believe Justice Elkington [in Wendland] correctly perceived that section 580d bars a deficiency action of the type Bank has here initiated, regardless of whether a dragnet clause exists in the senior deed of trust 'merg[ing]' the junior and senior loans which arguably are, as merged, secured by the senior lien." Id. at 77.