Problem.Deficiency.2 (real property)

     A. Seller sold her residence for $375,000. The purchaser, who also used the purchased property as her residence, paid the seller $50,000 down, and obtained a loan from Bank of Eureka for $325,000 to pay the balance of the purchase price. The bank's loan was secured by a first deed of trust on the real property. Several years later, the purchaser defaulted on her note to the bank and the bank judicially foreclosed. At the foreclosure sale, the highest bid (either the bank's credit bid or a third party bid) was $280,000. If the outstanding balance on the note at the time of sale (including interest, penalties and collection costs) was $290,000, does Cal. Code Civ. Proc. 580b bar the bank from obtaining a judgment for the $10,000 deficiency? Should the bank have considered non-judicial foreclosure? Would the result be different had the real property consisted of a duplex, one unit of which the purchaser occupied and one unit of which the purchaser leased to others?  Would the result be different if, after a year residing in one unit of the duplex, the purchaser leased both units to others? 

     B. Same facts as in Part A, above, except that the property sold was an apartment building with ten units.  Does Cal. Code Civ. Proc. 580b bar the bank from obtaining a deficiency judgment following a judicial foreclosure?

     C. Seller sold her residence for $250,000, taking $200,000 down and carrying back a note, secured by a first deed of trust on the real property, for $50,000. The purchaser defaulted on the note and the seller judicially foreclosed. The highest bid (either the seller's credit bid or a third party bid) was $30,000. If the outstanding balance on the note at the time of sale (including interest, penalties and collection costs) was $40,000, does Cal. Code Civ. Proc. 580b bar seller from obtaining a judgment for the $10,000 deficiency? Should Seller have considered non-judicial foreclosure?

     D. Would your analysis in Part C, above, change if the property sold were an apartment complex with ten units?

     E.  Seller sold an undeveloped parcel of property, zoned for commercial use, for $115,000. Purchaser paid $50,000 down and obtained a $50,000 loan from Bank of Eureka, to be applied to the purchase price, secured by a first deed of trust on the property being purchased. Seller carried back a note in the amount of $15,000, secured by a second deed of trust on the property being purchased. The purchaser defaulted immediately. The bank foreclosed judicially and the highest bid at the foreclosure sale was $40,000. Does Cal. Code Civ. Proc. 580b bar the bank from obtaining a judgment against the purchaser for the $10,000 deficiency? Does Cal. Code Civ. Proc. 580b bar the seller, a sold-out junior, from obtaining a judgment against purchaser for the $15,000 due on its note? See Brown v. Jensen.

     F. Patricia and Gerald had lived in their home for 10 years. As their two young daughters approached teenage years, Patricia and Gerald decided to add a second story to their home to provide separate bedrooms and additional closet space to their daughters. At the same time they decided to remodel their kitchen. They obtained a $150,000 construction loan, secured by a second deed of trust on the residence, to finance the construction. A few years later the holder of the first deed of trust on the residence foreclosed following default and the holder of the second deed of trust was sold out. May the holder of the second deed of trust obtain a judgment for the balance still owing on the construction loan? What if Patricia and Gerald only borrowed money to remodel the kitchen?  To remodel a small bathroom?  To replace a toilet?  See Prunty v. Bank of America.

     G. Assume that a residence is encumbered by a purchase money first deed of trust securing a note in the amount of $200,000 and by a second deed of trust securing a seller carry-back in the amount of $15,000. The debtor would like to refinance, consolidating both notes into one, because interest rates have dropped significantly and because a balloon payment on the note secured by the second deed of trust will be due soon. If the new consolidated loan is also secured by a deed of trust on the debtor's residence, should the anti-deficiency protection of Cal. Code Civ. Pro 580b apply to the new loan?  What if the lender is the same lender who advanced the original purchase-money?  What if the new lender also advances the debtor $50,000 to finance college tuition for debtor's daughter and that advance is also secured by the new lender's deed of trust?  In formulating your analysis, consider: (1) the approach taken by U.C.C. 9-103(e) - (h); (2) the California legislature has failed to act on a bill that would explicitly extend the protection of Cal. Code Civ. Pro. 580b to refinancing of purchase-money loans.  If the anti-deficiency protection of Cal. Code Civ. Pro. 580b does not extend to refinancing, should the legislature enact legislation requiring that lenders disclose that fact prior to closing a refinance loan?  Try drafting a mandatory form of such disclosure.   Given the extensive amount of disclosure already required in connection with real property secured loans, particularly those secured by residences, how effective would such disclosure be?  Perhaps we are asking about issues that do not demand attention; perhaps lenders who have refinanced originally purchase-money loans will not generally pursue deficiencies after foreclosure because stable or increasing land values will make that unnecessary or because a deficiency will often be uncollectible.  Empirical study of the practices of lenders where there is no anti-deficiency protection might illuminate the inquiry.

     H. Seller sold the Sleep Inn for $200,000.00. The purchaser paid $60,000.00 down. The seller carried back the balance of the purchase price in the form of four secured promissory notes as follows: $50,000.00 secured by a first deed of trust on the Sleep Inn; $30,000.00 secured by a second deed of trust on parcel X owned by the purchaser; $30,000.00 secured by a second deed of trust on parcel Y owned by the purchaser; $30,000.00 secured by a second deed of trust on parcel Z owned by the purchaser. The purchaser defaulted on the three $30,000 notes but not on the $50,000 note.   Foreclosure sales held by the holder of the first deed of trust on parcels X, Y, and Z sold out the seller's subordinate deeds of trust on each of those parcels. We know from Savings Bank v. Central Market Co. that the security first rule does not apply to sold out juniors.   But does Cal. Code Civ. Proc. 580b bar seller from obtaining a judgment against purchaser for the $90,000.00 due on the three notes?  See Roseleaf v. Chierighino (a case that has been the subject of much scholarly criticism).

     I. Altering the facts in Part H, above, suppose that the purchaser did not own any parcels of real property on which it could give a deed of trust. The purchase price of the hotel is $200,000 and the buyer paid $60,000 down.  The seller agreed to take one note in the amount of $50,000, secured by a first deed of trust on the Sleep Inn and a second unsecured note in the amount of $90,000. If purchaser defaults on the $90,000 note and seller brings an action seeking a judgment on the note, would the purchaser have a defense to the action under either Cal. Code Civ. Proc. 726 or Cal. Code Civ. Proc. 580b? Suppose, instead, that the seller had taken two notes representing the balance due on the purchase price of the Sleep Inn, each in the amount of $140,000, one of which was secured by a first deed of trust on the Sleep Inn and one of which was unsecured. What would be your advice to the seller about its remedies in the event the purchaser defaulted on either or both of the notes?

     J. Assume seller agreed to carry back $75,000 of the purchase price of real property and that she agreed to subordinate the deed of trust securing her note to a construction loan that the buyer intended to obtain. The buyer obtained a $400,000 construction loan, the proceeds of which were used to demolish the existing residence and construct an office building on the property. The buyer later defaulted on both loans, the construction lender foreclosed, and the seller's junior deed of trust was sold out.  Once again, we know from Savings Bank v. Central Market Co. that the security first rule does not apply to sold- out juniors. Will Cal. Code Civ. Pro. 580b preclude the seller from recovering on her note? See Spangler v. Memel. What if the seller agreed to subordinate but the buyer never actually obtained a construction loan? For example, assume the real property was sold for  $400,000, with $50,000 down, a $300,000 loan from Bev's Bank secured by a first deed of trust, and a note for $50,000 carried back by the seller, secured by a second deed of trust. In the contract, both Bev's Bank and the seller agreed to subordinate to a new first for $450,000, the proceeds of which were to be used to construct an office building. The buyer never took out the construction loan but defaulted on both Bev's Bank's note and the seller's note. If Bev's Bank foreclosed and the seller was sold out, should the seller be allowed to collect on her note?

     K. You have been approached by Beth Almond to advise her about a contemplated real estate transaction involving a long time friend and business associate Al Chestnut. Beth and Al own two pieces of real estate, worth $400,000 and $300,000, respectively, as tenants-in-common. Both parcels are unencumbered. Beth and Al want to go their separate ways and have discussed the following possibility: Al is to take an undivided fee simple absolute in the parcel of real property worth $400,000; Beth is to take an undivided fee simple absolute in the parcel of real property worth $300,000; Al is to give Beth a $50,000 promissory note, secured by a deed of trust on the $400,000 real property, to equalize the division. Al also wants to borrow against the $400,000 parcel of property to fund a business venture and has asked Beth if she would be willing to subordinate her deed of trust to the extent of a $300,000 loan from an institutional lender. In advising Beth about this transaction, need you caution her about Cal. Code Civ. Pro. 580b?