A California homeowner whose home was underwater asked her bank to approve a short sale of their home and the bank agreed… but under one condition. The borrower would have to agree to waive her anti-deficiency protection, which means that she would be responsible to pay the difference between the sales price of the home and what was owed.
The homeowner agreed… the home was sold for less than the amount owed on the mortgage… and the bank moved to recover the amount of the deficiency. And were that all there was to the story, it would seem like just another day of the foreclosure crisis and I’d hardly have noticed it, let alone have written about it.
This time, however, the homeowner turned to the courts, filing a complaint that asked the court to rule that the bank could not obtain a deficiency judgment against her based on California Code of Civil Procedure §580b. That statute, while it would protect a borrower from a deficiency judgment in the case of a foreclosure, was less clear as to whether the protection would extend to short sales.
The homeowner’s lawsuit was subsequently dismissed by the trial court, but the appellate court reversed the lower court’s decision, ruling that §580b did in fact prohibit deficiency judgments after ANY kind of sale… assuming it was a purchase money obligation. [Coker v. JP Morgan Chase Bank, N.A., 2015 Westlaw —– (Cal.).]
The bank, of course, also argued that the homeowner had agreed to waive any such protection against deficiency judgments, but the high court responded by stating that contractual waivers of §580b are simply unenforceable.
Frankly, I can’t imagine that ruling happening several years ago, so all I can say about it now is… WOW. It really does show that things do change, perhaps not as quickly as we’d like them to, but in time.
Next, the bank took the case to the California Supreme Court, arguing that since the facts of the case applied to the pre-2012 version of §580b, the anti-deficiency protections should only apply in cases where a foreclosure sale had taken place. However, just a few days ago, the California Supreme Court unanimously ruled against the bank’s arguments… and ruled in favor of the homeowner.
The court apparently based its ruling on earlier decisions, determining that in order to protect homeowners from deficiency liability on purchase money obligations, regardless of whether a foreclosure sale had been held, or not… they had all broadly interpreted California Code of Civil Procedure §580b.
So, that’s that. Assuming we’re talking about a purchase money mortgage, as opposed to a Home Equity Line of Credit used for other purposes, for example, California homeowners don’t have to worry about a lender coming after them to collect amounts not recouped from the sale of their homes… whether the sale occurred as a result of a foreclosure or short sale.
It seems to me that this is an important victory for California’s homeowners, especially since the foreclosure crisis is nowhere near over in this state… but not all legal experts agree.
This week, Professor Dan Schechter of Loyola Law School, who was involved in the drafting of proposed amendments to clarify earlier versions of the statute, writing for his Commercial Finance Newsletter, published each week on Westlaw, had the following to say about the net effect of the decision…
“Given the enactment of §580e and the ‘reformatting’ of §580b, I do not think that this opinion will have a major impact in future litigation over the application of §580b, since new §580b and §580e now occupy the field.”