Metropolitan News-Enterprise


Friday, November 22, 2013


Page 1


State Supreme Court Agrees to Review Ruling That Applied Anti-Deficiency Statute to Short Sales




The California Supreme Court has agreed to decide whether the anti-deficiency protections of Code of Civil Procedure Sec. 580b apply to a lender’s agreement to allow a homeowner to sell his or her residence for less than the outstanding balance of the loan.

The justices, at their weekly conference in San Francisco Wednesday, voted 6-0—Justice Joyce L. Kennard was recused and did not participate—to grant review in Coker v. JP Morgan Chase Bank, N.A. (2013) 218 Cal. App. 4th 1. Div. One of the Fourth District Court of Appeal held there that the statute protects the defaulting borrower following a short sale, and that the lender could not enforce an agreement that purported to allow it to hold the borrower liable for a deficiency.

In what it said was a case of first impression, the court reversed a San Diego Superior Court judgment dismissing Carol Coker’s declaratory action against JPMorgan Chase Bank.

Coker purchased a San Diego home with a $452,000 loan from a now-defunct mortgage company, whose interest was succeeded to by Chase. After the housing bubble burst in 2008, she defaulted.

Coker found a willing buyer and asked Chase to approve a short sale. Chase agreed to release its security interest on condition that Coker remain liable for any deficiency.

After the sale closed, the bank sent a letter demanding that Coker pay more than $116,000 to satisfy the loan. Coker responded by filing the declaratory action, asking the court to determine that Secs. 580b and 580e, as well as common law, barred the bank from collecting any deficiency.

Superior Court Judge Luis Vargas dismissed the action, finding that Sec. 580b—barring any deficiency judgment “after a sale of real property…under a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price”—does not apply to short sales, and that Sec. 580e—barring a deficiency judgment in the case of a short sale of a residence—does not apply if the sale took place before that section became operative in July 2011. He also rejected the argument that deficiency judgments in such cases violate the common law.

But Justice Richard Huffman, in his July 23 opinion for the Court of Appeal, said the trial judge’s interpretation of Sec. 580b was incorrect, that the bank’s demurrer should have been overruled, and that there was no need to reach the other issues.

The language of Sec. 580b, the justice noted, applies to “a sale” and does suggest any legislative intent to limit its application to foreclosures. Applying the law to short sales, he added, serves the twin purposes behind the Depression-era legislation—stabilizing home prices and encouraging home purchases by protecting buyers against the risk of losing assets, other than the home itself, if values drop.

The Legislature, he said, recognized this three years ago when it enacted Sec. 580e, the purpose of which—according to legislative history—was to clarify that a deficiency judgment is not permissible following a short sale, even if the loan was not for purchase money.

Huffman went on to say that because Sec. 580b applies, Coker’s agreement to remain liable for any deficiency is unenforceable. Allowing a borrower to waive anti-deficiency protection, he explained, would be contrary the statute and to public policy.


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