Taking out a loan on property can leave you exposed to liability. However, certain laws offer protection in various circumstances. Usually taking out a loan is done for the purposes of a mortgage which is recorded in a document called a deed of trust. Like with all loans, failure to make regular payments results in consequences. Failing to make payments on a deed of trust may result in foreclosure, where the sale of the property may not fully satisfy the amount on the loan. Anti-deficiency laws offer some protections for borrowers for that remaining amount.
What is California’s Anti-Deficiency Law?
California anti-deficiency law is rooted in California’s Code of Civil Procedure section 580. Subsections a and b provide a list of instances where a deficiency judgment is not permitted against a borrower. A deficiency judgment is not allowed after a sale of property even if the purchaser does not complete the contract of sale. (CCP § 580(a)(1).) A deficiency judgment is not allowed under a deed of trust or mortgage given to a vendor as a security. (CCP § 580(a)(2).) A deficiency judgment is also not allowed under a deed of trust or mortgage on a dwelling of four or fewer families for a purchase money mortgage. (CCP § 580(a)(3).) Finally, a deficiency judgment is not allowed on a refinancing of a loan unless new principal is advanced. (CCP § 580(b).)
Subsections c and d are the primary anti-deficiency provisions. Subsection c considers lenders and does not exempt the buyer from any other liability they may have under the loan that would otherwise be satisfied with other collateral under the loan. Subsection d provides that where a chattel mortgage and a deed of trust/mortgage have been given to secure payment of a combined purchase of real and personal property there can be no deficiency judgment if a deficiency judgment would not be permitted under the deed of trust or mortgage on the property. This provision favors the borrower by extending any protection they have under the loan on the real property to a loan that reaches other property.
Importantly these protections cannot be waived at the time the loan is made or at a later time. (DeBerard Properties, Ltd. v. Lim (1999) 20 Cal.4th 659, 667-668.) For example, if a junior (later) loan was taken out at the same time as the senior loan and was used to purchase property, that loan may have the same protections under CCP § 580. (Brown v. Jensen (1953) 41 Cal.2d 193, 197.) If there is evasive conduct like loan splitting or recovery that seems to be excessive, that may also bar deficiency judgment on a junior loan. (Black Sky Capital, LLC v. Cobb (2019) 7 Cal.5th 156, 165.)
Just because anti-deficiency laws exist, however, does not mean borrowers are entirely protected. A lender can still sue the borrower for fraud if they improperly persuaded the lender to make the loan. (Birman v. Loeb (1998) 64 Cal.App.4th 502, 516.) Additionally, even if a deficiency judgment is not permissible, the lender can still collect for “bad faith” waste or damages to the property. (Evans v. California Trailer Court, Inc. (1994) 28 Cal.App.4th 540, 551.)
Where do California Anti-Deficiency Laws Come From?
The section of the Code of Civil Procedure dedicated to anti-deficiency laws was enacted during the Great Depression to help protect debtors in transactions secured on real property, usually homes. Originally, vendors who held purchase money trust deeds (also known as purchase money mortgages) could not obtain deficiency judgments. This was amended in 1963 to include lenders who hold purchase money trust deeds on owner-occupied residential property.
The California Supreme Court created an exception allowing certain subordinate loans like construction loans to obtain deficiency judgments after the senior loan foreclosed. (Spangler v. Memel (1972) 7 Cal.3d 603, 614-615.) Since then, the legislature has broadly extended the law to apply to borrowers while reserving some exceptions in the case of fraud or other misconduct.
What is a Deficiency Judgment?
In California, usually a nonjudicial foreclosure will occur on a deed of trust. (Cal. Civ. Code §§ 2924 et seq.) This is because the transaction at issue is between private entities or individuals, the lender and borrower, not with the state. California’s civil code offers a comprehensive framework in regulating nonjudicial foreclosure sale. A deed of trust will usually offer power of sale (by foreclosure) in the event of default. This legal framework does not just provide the creditor or beneficiary of the loan with a remedy against the debtor but also protects the debtor from wrongful loss of property. (Moeller v. Lien (1994) 25 Cal.App.4th 822, 830.)
When a foreclosure happens, the property is sold to satisfy the debt. If an amount remains, the creditor of the loan may have a deficiency judgment against the debtor. A deficiency judgment is a personal judgment against a debtor for the difference between the debt and the net proceeds from the foreclosure sale. (Dreyfuss v. Union Bank of California (2000) 24 Cal.4th 400, 407.) Because this allows for monetary recovery past the foreclosure sale court proceedings are necessary to establish that the debtor is still liable to the creditor. This higher threshold of proof is the type of protection anti-deficiency laws offer to debtors and borrowers.
What is an Example of Anti-Deficiency Laws in Practice?
For example, Julie takes out a mortgage to purchase her home. She defaults on payments and the lender forces a foreclosure sale. This would likely be a non-judicial foreclosure as both Julie and the lender and non-state entities. By having the property sold via foreclosure the lender is using the power of sale granted to it by the deed of trust. As such, anti-deficiency laws apply. At a base level, the lender would not be able to get a deficiency judgment against Julie. Having the foreclosure sale go through clears her of liability.
Julie is also protecting against waiver of these rights. The loan documents could not waive Julie’s protections under anti-deficiency law when she signed for the loan. If the lender had tried to get her to waive her rights in exchange for a different payment plan that would also be unenforceable.
Alternatively, if the lender felt there was a need for a deficiency judgment, the lender could bring a judicial foreclosure action which would allow for a deficiency to be collected.
However, if Julie engaged in deceptive tactics to get the loan or otherwise attempted to defraud the lender, the lender would not be barred from obtaining recovery on those grounds.
Conclusion
Debts on a piece of property are an important thing to be aware of in a real estate sale. If the sale is a foreclosure sale you may be protected from further liability under anti-deficiency laws in California. Deficiency judgment concerns may arise whether you bought property from a foreclosure sale or if you were on the receiving end of a deficiency judgment following foreclosure. This may complicate future sales and interests in property. If you are experiencing a dispute regarding your interest or liability on property, partition may be a solution. At Underwood Law, our partition attorneys can help you navigate your partition action efficiently and with care. We are here to help.
