Black Sky not so Black for Lenders: Cal Supreme Court Strengthens Lender’s Rights to a Deficiency Judgement or Sold out Junior Judgment Where Multiple Loans.

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Date:  May 7, 2019
To: All Scheer Law Group Clients and Affiliates
From: Spencer Scheer
Subject:  Black Sky not so Black for Lenders:  Cal Supreme Court Strengthens Lender’s Rights to a Deficiency Judgement or Sold out Junior Judgment Where Multiple Loans.

The California Supreme Court issued a ruling yesterday that upsets 25 years of precedent prohibiting a lender with multiple deeds of trust on real property from obtaining a deficiency judgment against the borrower when the lender forecloses its senior lien. In Black Sky Capital, LLC v. Cobb (Cal., May 6, 2019, No. S243294) 2019 WL 1984289, the court overruled the holding in Simon v. Superior Court (1992) 4 Cal.App.4th 63, 66, 5 Cal.Rptr.2d 428 (Simon ) to come to this result.

Impact of the Holding:

For lenders secured by multiple deeds of trust on the same property:  If your collateral is not worth the amount of the loans you have made on it, foreclosing on the senior lien and seeking a deficiency may now be a more attractive consideration under the holding in the Black Sky case. In many instances, lenders foreclose the junior lien.[1]

The facts are relatively simple:

Citizens Bank originated two loans with 1^st and 2^nd deeds of trust taken as security.  The loans were assigned to Black Sky, LLC (“BSL”) which non-judicially foreclosed the 1^st trust deed, and submitted an underbid (bid $7.5 Million on its total 1^st loan of over $10 Million) and was the successful bidder at the sale.BSL sued for a deficiency judgment on its 2^nd Trust deed loan, which was wiped out by its foreclosure of its senior lien.  The lower court would not allow entry of judgment and the Supreme Court reversed on appeal.

Ruling:

The court held that the Simon case and its progeny wrongfully interpreted and read non-existent language into the  anti-deficiency statute (CCP § 580 (d)) by applying it to multiple deeds of trust. Instead, the Court found that the anti-deficiency statute applies only to a creditor seeking a deficiency on the loan that was foreclosed, not to separate junior loans, even if held by the same creditor.  The court held:

“Section 580d … cannot be contorted into a rule that section 580d somehow does apply to preclude a lienholder from seeking damages under the junior note if it, in its capacity as the senior lienholder, has exercised its right to conduct a private sale of the property rather than seeking a judicial foreclosure.” (Ibid.) “Section 580d simply does not …, by its express terms, encompass a lien that has not been foreclosed.” Black Sky Capital, LLC v. Cobb at 2.

The Court distinguished the impact of the One Action Rule (CCP § 726) and confirmed that its holding in Black Sky was not intended to override that statutory bar on obtaining  a personal judgment without use of a judicial action (as opposed to a non-judicial foreclosure) Black Sky Capital, LLC v. Cobb *4[2]  However, the Court found no equitable reason to extend the purview of the anti-deficiency statute to reach the result in cases like Simon, but left open the possibility that a more restrictive interpretation of the statute could occur if facts evidencing “gamesmanship” showing manipulating of the foreclosure sale process,  and justifying treating two separate loans as one Black Sky Capital, LLC v. Cobb, at *5  [3]

Please call or email if you have questions about this seminal case.

Spencer Scheer

[1] This is never a hard and fast rule.  Review of the  value of the collateral and liens on the collateral,  ability to collect on a judgment and impact of a bankruptcy, must always occur.

[1] The distinction between seeking a deficiency judgement against a borrower via a judicial foreclosure action and suing for a judgement as a sold out junior lienor, should be noted and understood. They are separate and distinct processes, allowing interactions of both anti-deficiency and One Action Rule defenses.

[1] Citing a case where a lender imposed a suspect 2^nd chattel mortgage on real property to allow manipulation of the foreclosure process to be able to seek a deficiency.