A recent California appeals court decision in Alborzian v. JPMorgan Chase Bank, N.A. not only illustrates the common perils a junior lienholder faces if a borrower defaults, but also shows how the situation can be made even worse if the junior lienholder pursues the borrower following a foreclosure sale.
The Alborzians purchased their California home in 2005 with two loans, each of which were secured by a deed of trust on the home. Wells Fargo was the senior lienholder and JPMorgan Chase was the junior lienholder. The couple defaulted on the loans and their home was sold at a foreclosure auction; the proceeds were not sufficient to cover the Chase loan.
One year after the foreclosure sale, Chase sent a letter to the Alborzians that stated the amount still owed on the junior debt with an offer to settle for a much lower amount. After receiving no response, Chase sent another letter offering to settle for an even lower amount. The bank then followed up the letters with debt collection calls to the Alborzians.
The Alborzians filed suit against Chase on behalf of themselves and a potential class, alleging that Chase had violated Section 580b of the California Code of Civil Procedure. Section 580b states that if a loan is used to purchase real property and is secured by that property, a junior lienholder is prohibited from pursuing a borrower if the senior lienholder’s foreclosure sale proceeds are not sufficient to satisfy the junior lienholder’s debt.
The plaintiffs also sought recovery under the Rosenthal Fair Debt Collection Practices Act, the Consumer Legal Remedies Act (“CLRA”) and the Unfair Competition Law (“UCL”).
A trial court sustained Chase’s demurrer and dismissed the case. On appeal, the California Court of Appeal for the Second District restored the plaintiff’s claims under the Rosenthal Act, the CLRA and the UCL, finding that while Chase had no legal right to enforce its debt under Section 530b, language expressly barring the collection of a legally unenforceable debt was not added to Section 530b until 2013, well after the loans were made.
The appellate court found that from the perspective of the “least sophisticated debtor,” the Chase letters were actionable because the “unspoken but unmistakable premise of these letters is that plaintiffs’ debt is still valid, due, and owing — in a word, enforceable.”
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