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No Deficiency on Settlement Agreement for a Note

Breach of Contract, Foreclosure Litigation, and Mortgage & Lending Law by Peter N. Brewer, Esq.

Recently, in Weinstein v. Rocha, a California appellate court held that if a deficiency is barred by the anti-deficiency statute, a creditor cannot circumvent that protection by pursuing a settlement agreement modifying the terms of the loan.

Facts of the Case

The Weinsteins were purchasers of a commercial property.  As part of the purchase, they made a $200,000 down payment, took a loan of $820,000 from a bank, and borrowed the remainder from the seller, Juan Rocha.  Two years after purchasing the property, the Weinsteins sued Rocha due to Rocha’s failure to disclose certain problems with the building.  The parties agreed to settle the suit.  As part of the settlement, Rocha agreed to reduce the amount owed on the loan instead of paying the Weinsteins.  However, the settlement also provided that if payments were not made on the loan, Rocha could collect the full loan amount owed, rather than the reduced settlement value.

After the settlement, the Weinsteins defaulted on both the first and second loans.  Accordingly, the senior lender foreclosed on the property.  Two months after the foreclosure, Rocha notified the Weinsteins that the entire amount of the junior loan was due.  When the Weinsteins did not pay, Rocha filed suit to enforce the settlement agreement.

Holding

At the trial court level, the court agreed with Rocha and found that the settlement agreement was a judgment for the amount of the loan.  As Rocha was seeking to enforce the agreement and not the loan, the court found that the anti-deficiency statute did not apply.  However, on appeal, the court reversed the lower court’s decision and concluded that the agreement only modified the note, and did not replace it.  While the settlement agreement was like a judgment, it was only to enforce the modification of the loan, not to allow collection on the loan.  Accordingly, the only thing that Rocha could enforce was the loan, which was not collectible due to the anti-deficiency statute.

Takeaway

In this case, the court focused heavily on party intent.  The court seemed to suggest that if the parties had intended for the original loan and security to be replaced by the settlement agreement, then they could have explicitly stated so and the anti-deficiency statute could have been avoided.  However, the obvious risk of taking that step is the loss of the security instrument and the lender’s priority.

If you are a creditor and think you may need legal representation involving such matters, don’t hesitate to contact our firm at www.BrewerFirm.com or call us at (650) 327 – 2900.

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