Judicial and non-judicial foreclosure
In a recent opinion of the United States Supreme Court, Justice Scalia presented a useful one paragraph summary of the history and current status of judicial and non-judicial foreclosure.
In California, a creditor secured by a deed of trust or mortgage on real property may conduct a judicial foreclosure or, if the deed of trust or mortgage contains a power of sale, may conduct a non-judicial foreclosure. Non-judicial foreclosure is unavailable absent a power of sale in the security instrument. The law of some jurisdictions permits only judicial foreclosure on real property. California law precludes the recovery of a deficiency following non-judicial foreclosure. In some cases, notably those involving seller carry-backs and purchase money transactions involving 1 to 4 unit owner occupied real property, other California anti-deficiency law prohibits the recovery of a deficiency. Accordingly, a real property secured creditor whose rights are governed by California law will typically choose judicial foreclosure if not barred from a deficiency and if it believes that the value of the real property is insufficient to satisfy the outstanding debt. If barred from a deficiency, either by provisions of the agreement between the parties (a non-recourse agreement) or by law, the real property secured creditor will typically choose non-judicial foreclosure because it is quicker, less expensive, and sacrifices nothing to which the creditor would otherwise be entitled.
Where anti-deficiency law does not bar the recovery of a deficiency, a creditor may initiate judicial and non-judicial foreclosure simultaneously, perhaps because it is unsure of the value of the real property and thus does not yet know if a deficiency will exist, or because it wishes the judicial appointment of a receiver to collect rents and profits pending foreclosure. The creditor may abandon a non-judicial foreclosure at any time prior to the sale, thus preserving a right to a deficiency in the judicial foreclosure, or may abandon judicial foreclosure at any time prior to the entry of a judgment of foreclosure.
Non-judicial foreclosure is conducted by a trustee at a noticed public auction, although often the only person to show up at the auction is the foreclosing creditor itself. A specific and detailed procedure (follow this link for a graphical representation of the procedure) is prescribed by statute (e.g., Cal. Civ. Code 2924-2924h) and the statutory requirements may be supplemented by procedures required in the deed of trust or mortgage. A creditor must exercise great care to comply with the required procedures to avoid a debtor's challenge of the sale for noncompliance. If the challenge is successful, the creditor must begin anew, wasting time and money in the process. Professional literature provides valuable checklists to help the foreclosing creditor or its attorney avoid mishap.
Several aspects of the required procedure merit special mention. The foreclosing creditor must prepare and record a notice of default and may not notice a sale until the expiration of three months from the date of recording. See Cal. Civ. Code 2924. The creditor must also send a notice of default to specified parties, including any party who has recorded a request for notice of default and any party who has recorded a subsequent encumbrance on the property. See Cal. Civ. Code section 2924b. A key purpose of the notice of default is to notify the debtor and subordinate lienholders of the right to reinstate. See Cal. Civ. Code 2924c(b). Article 9 affords no right to reinstate and thus it is not surprising that Article 9 does not impose a requirement for the recording or sending of a notice of default. Compare U.C.C. 9-611, which only imposes a requirement of notice of disposition.
The foreclosing creditor must thereafter (but no sooner than 3 months following the recording of a notice of default) prepare a notice of sale that includes specified information, record it, publish it in a manner specified, post it in locations specified, and mail it to specified persons, including any persons who have recorded a separate request for such notice or any persons whose recorded deed of trust or mortgage contains such a request. See Cal. Civ. Code 2924, 2924b, 2924f. Article 9 imposes analagous requirements that we explore in Problem.Foreclosure by disposition. In the real property context it is customary for the foreclosing creditor to retain a title company to search the record to identify other lienholders to whom notices must be sent and to purchase from the title company a Trustee's Sale Guarantee insuring the purchaser at the foreclosure sale against claims of subordinate lienholders who should have been given but were not given required notices. See our sample Trustee's Sale Guarantee.
Statutory provisions also govern the location and time of sale, the manner of conducting the sale, the nature and effect of bidding and payment, and postponement of the sale. See Cal. Civ. Code 2924g. Postponement is common, in part because institutional lenders will generally prefer allowing a debtor some additional time to refinance or to close a pending voluntary sale. Reports from our law students help paint a more detailed picture of what typically happens at the time of sale.
Judicial foreclosure, like other lawsuits, involves the filing of a complaint, service of process, and the potential for responsive pleadings, discovery, motions, trial and appeal. If contested, the outcome of the lawsuit will depend on the resolution of disputes between the parties about the amount of the debt, the existence of default, or other matters relevant to the right to foreclose which are put in issue by the defendant. A successful plaintiff will be granted a judgment of foreclosure entitling it to a writ of sale.
As with non-judicial foreclosure, subordinate lienholders of record must receive notice of a pending judicial foreclosure. Cal. Code Civ. Pro. 726(c) requires that such lienholders be named as parties (and, presumably, served) in the action. Sanction for non-compliance is survival of the subordinate liens. Prior to bringing a judicial foreclosure action, the plaintiff should obtain a Litigation Guarantee from a title company. The Litigation Guarantee sets forth the current record title of and encumbrances upon the real property at issue and identifies the parties who should be named in a judicial foreclosure action. The Guarantee insures against claims of lienholders, if any there be, who should have been but were not made parties to the action because not named in the Litigation Guarantee. See our sample Litigation Guarantee. The Litigation Guarantee thus serves the same function which the Trustee's Sale Guarantee serves in a non-judicial foreclosure. Contrast the solution that Article 9 provides for failure of a foreclosing secured party to notify subordinate lienholders. See U.C.C. 9-617 and 9-625(b), (c).