California Supreme Court protects lenders foreclosing multiple mortgages on the same property
In Black Sky Capital, LLC v. Cobb, the California Supreme Court ruled that Cal. Civ. Proc. Code §580d (better known as California's "anti-deficiency" statute) does not bar a creditor from collecting the deficiency on a junior debt after the non-judicial foreclosure of its own senior loan secured by a separate deed of trust on the same property. The decision resolves a split among lower courts applying California's anti-deficiency law to a lender or other creditor attempting to enforce multiple interests in the same real estate collateral.
In 2005, a bank made a $10.3 million loan secured by a deed of trust on the borrowers' commercial real property. In 2007, the bank made an additional $1.5 million loan to the borrowers secured by a different deed of trust encumbering the same property. The bank sold both loans to Black Sky Capital, LLC. Black Sky began a non-judicial foreclosure of the senior deed of trust in 2014 after the borrowers' default. It acquired the property at a trustee's sale later that year for $7.5 million. About a week later, Black Sky sued the borrowers to recover the unpaid junior debt. The trial court resolved the action by granting summary judgment against Black Sky. Relying on the California First District Court of Appeal's decision in Simon v. Superior Court, the trial court held that the lawsuit was an attempt to collect a deficiency judgment in violation of §580d even though Black Sky did not foreclose the deed of trust securing the junior obligation. The Fourth District Court of Appeal reversed. The California Supreme Court accepted the case for review.
The Supreme Court affirmed the Fourth District's decision. The court rejected the rule in Simon prohibiting a creditor from obtaining a deficiency judgment on a junior debt when it forecloses a senior lien against the same property. The court instead explained that its own precedent protecting an unrelated junior lienholder (a "sold-out junior") and the plain language of §580d limit the anti-deficiency protection to actions arising only under the same deed of trust (Roseleaf Corp. v. Chierighino (1963)). The mere fact that a creditor holds two deeds of trust secured by the same property does not mean the deeds of trust must be treated as a single obligation under § 580d. The court acknowledged that the anti-deficiency statute still applies if there is evidence of "gamesmanship" when issuing or enforcing multiple loans secured by the same property. Actions that could trigger §580d include:
Structuring a single obligation as separate loans to preserve the right to obtain a deficiency judgment on the junior debt (loan splitting). For example, the creditor in Simon made its loans only four days apart and recorded the related deeds of trust on the same date.
Underbidding at the trustee's sale to obtain an excessive recovery when foreclosing the senior deed of trust (bid rigging).The court found no indication in Black Sky that the bank engaged in loan splitting (the loans were two years apart) or that there was an irregularity in the trustee's sale.
Black Sky clarifies a creditor's enforcement rights when it holds more than one interest in the same real property. Although the decision removes the prohibition against a deficiency action on a junior debt after a creditor forecloses its own senior lien, lenders making multiple loans secured by the same real property collateral should still:
Mitigate against any allegation of loan splitting by ensuring each loan is handled as an independent transaction from the application process through approval.
A party acquiring multiple loans affecting the same property should conduct reasonable due diligence to ascertain potential issues in the origination process. Every creditor should also follow all required procedures when conducting a non-judicial foreclosure, including avoiding any appearance of impropriety at the trustee's sale.
The full opinion may be read here.