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California Law Does Not Prevent a Junior Lienholder From Obtaining a Deficiency Judgment, As Long As the Senior And Junior Liens Were Not Created As an Artifice To Evade The Law
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California Law Does Not Prevent a Junior Lienholder From Obtaining a Deficiency Judgment, As Long As the Senior And Junior Liens Were Not Created As an Artifice To Evade The Law

California Code of Civil Procedure Section 580d precludes a judgment for “any loan balance left unpaid after the lender’s nonjudicial foreclosure under a power of sale in a deed of trust … on real property.”  However, section 580d contemplates a single loan, and is generally inapplicable to junior lienholders who pursue deficiency judgments after being “sold out” by senior lienholders.[1]

In Cadelrock Joint Venture, L.P. v. William Lobel, the senior and junior liens at issue were created contemporaneously in a “piggyback” refinancing transaction.  Soon thereafter the originator assigned the smaller loan and accompanying junior lien to a buyer in the secondary mortgage market, and ultimately assigned the senior lien to yet another assignee. Upon Lobel’s default on both loans, the assignee of the senior lien conducted a nonjudicial foreclosure, extinguishing the junior lien.

The Court had to decide whether the junior lienholder, who was “sold out” by the senior lienholder, could pursue the borrower for a deficiency judgment in the amount of the debt owed on the junior lien, despite section 580d, when both the senior and junior liens were created in the same transaction.

The Court decided in favor of the junior lienholder, reasoning that the factual circumstances did not suggest the two loans were created as an artifice to evade section 580d.  The Court expressly rejected the proposition that the moment of loan origination is controlling for purposes of applying the anti-deficiency restrictions of section 580d.

If your portfolio includes junior liens, be aware of your option to obtain a deficiency judgment against the borrower in the event of default and sell out by a senior lienholder.    The attorneys at Glass & Goldberg provide high quality, cost-effective legal services and advice for clients in all aspects of business litigation and transactional law.  Call us at (818) 888-2220, email us at info@glassgoldberg.com, or visit us on the web at www.glassgoldberg.com to learn more about the firm and to sign up for future newsletters.


[1] See Western Security Bank v. Superior Court (1997) 15 Cal.4th 232, 237; Roseleaf Corp. v. Chierighino (1963) 59 Cal.2d 35, 43-44; and Bank of America v. Graves (1996) 51 Cal.App.4th 607, 611-616 (Graves). Section 580b is inapplicable because the loans at issue were not used as purchase money.

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