Supreme Court Finds California’s Anti-Deficiency Statute Protects Borrowers After a Short Sale

Debt Collection and Mortgage & Lending Law

THE DECISION:  The Supreme Court of California held that Code of Civil Procedure Section 580b prevents lenders from pursuing borrowers after approving the borrower’s short sale.

Previously, the case law had been clear that after a foreclosure sale, the lender was deemed to have taken their “one action” in collecting on the loan and therefore barred from seeking a deficiency for the shortfall.  However, short sales were a gray area that were not expressly covered by the statute in that lenders could argue, as J.P. Morgan Chase did here that the borrower forfeited the protection of the “one action” rule by requesting the lender accept a short sale rather than conducting the foreclosure sale—thereby allowing multiple collection avenues.

Carol Coker defaulted on her home loan with JP Morgan Chase Bank.  The loan had been a purchase money loan, which would normally protect Ms. Coker from a deficiency judgment if Chase foreclosed.  In 2010, Ms. Coker’s house was underwater.  She owed $452k to Chase but the house was only going to net $375k after a sale.  Chase approved the short sale and required Coker to waive the protections of CCP 726 (the “One Action” Rule) as a condition of her short sale, among other terms.

A year later, a collection company came after Coker for the $116k deficiency Chase was owed after the short sale.  Years of litigation ensued with this final victory on the borrower’s part.

Why this case is important: This case effectively shuts down the lender’s attempt at multiple collection efforts after having accepted the short sale proceeds on a purchase money loan.  The anti-deficiency protection of Section 580b is clarified, and the Court also explained that this protection is not reduced or limited by the recent enactment of Section 580(e) which also applies to short sales.

COMMENT:  This is a lengthy opinion, with a very good explanation of the court’s spectrum of decisions regarding California’s anti-deficiency statutes over the years.  This particular result was not surprising, as the cases have continually stated the public policy behind California’s anti-deficiency statutes, which is to prevent deepening a financial crisis and to instead keep the burden of the risk of underwriting to the lender.

In fact, for years, we have taken this very position in defending our borrower clients when collection agencies came knocking after the short sale.  Similarly, we advised our lender clients that anti-deficiency protection is not waivable by the borrower, and void as against public policy.

Coker v. JPMorgan Chase Bank (Supreme Court Opinion filed Jan. 21, 2016)

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