Friday, January 22, 2016
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S.C. Says Anti-Deficiency Law Applies to Short Sales
By KENNETH OFGANG, Staff Writer
California’s anti-deficiency statute applies to short sales of houses whose mortgages are in default, as well as to foreclosures, the state Supreme Court held yesterday in a unanimous decision.
The court agreed with Div. One of the Fourth District Court of Appeal that Code of Civil Procedure §580b applies to cases in which lenders agreed to release their lien so that the defaulting borrower could sell the property for a fair market price that is short of the outstanding loan balance.
Because the statute applies, the appellate courts found, a borrower’s agreement to remain liable for a deficiency in return for the lender’s approval of the short sale is unenforceable.
The ruling reinstates Carol Coker’s San Diego Superior Court 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. She defaulted in 2008.
Short sales were virtually unknown in California until 2007, but more than 200,000 have occurred since, Justice Goodwin H. Liu noted in his opinion for the high court.
In Coker’s case, she 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.
Bank’s Demand
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 §§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 §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. He also ruled that §580e—barring a deficiency judgment in the case of a short sale of a residence, regardless of whether the loan was for purchase money—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.
The Court of Appeal, however, rejected Vargas’s interpretation of §580b and found it unnecessary to address any other issues. Liu wrote yesterday that the Court of Appeal’s ruling better reflected the statute’s language.
He noted that the Legislature, in 2012, amended the statute, so that it now provides that “[n]o deficiency judgment shall lie in any event. . . under a deed of trust,” eliminating the requirement of a “sale.” But although the amendment does not apply to the sale of Coker’s home, which occurred in 2010, Liu said the “reformatted” language reflects what lawmakers intended all along.
The high court, he noted, has long opted for a “broad construction,” and its decisions “have consistently looked to the purposes of the statute and to the substance rather than the form of loan transactions in deciding the statute’s applicability.” At no time, he added, did the Legislature repudiate this approach.
Policy Reasons
Applying the law to short sales, he added, serves the twin purposes behind the Depression-era legislation—deterring overvaluation of property and stabilizing the economy in times of distress.
Chase argued that applying §580b to short sales is no longer necessary, in light of the enactment of §580e. But that contention, Liu said, does not address “whether section 580b’s applicability to short sales would have deterred overvaluation before section 580e came into existence, when Coker obtained her loan and bought her home.”
The fact that the borrower has always had the option of insisting on foreclosure rather than trying to arrange a short sale does not, as Chase contended, establish that it is unnecessary to apply anti-deficiency protection to short sales, Liu wrote.
The statute, he explained, “is not merely concerned with the welfare of individual borrowers,” but with the protection of homebuyers as a class so as to benefit the economy during periods of decline.
No Waiver
The justice went on to conclude that allowing borrowers to waive their anti-deficiency protection as an inducement to the lender to approve a short sale would be contrary to public policy. He cited DeBerard Properties, Ltd. v. Lim (1999) 20 Cal.4th 659 where the court held unenforceable a defaulting borrower’s waiver of §580b’s protection given as consideration for the vendor’s agreement to ease the terms of a purchase money loan.
The case is Coker v. JPMorgan Chase Bank, N.A., 16 S.O.S. 439.
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