Legal Question in Civil Litigation in California

If there is enough equity, the simplest thing for the Jr. lien holder to do is foreclose on the jr. lien. If there is not enough equity, then yes, the Jr. can sue on the debt unless the Jr. loan was a purchase money loan. In order to qualify as a purchase money non-recourse loan, it had to be made at the time the borrower originally purchased the property, the property was and is the borrowers' personal residence, and 100% of the loan proceeds were used to purchase the property, and it has never been refinanced. If it does not meet all those qualifications, the Jr. lender can sue on the debt, and may as well include a cause of action for judicial foreclosure. That way he gets to sell the property, get whatever he can out of it, and then get a breach of contract judgment for the balance.

If you are interested in more information about filing a non-judicial foreclosure, I would be happy to point you to some resources and services to help you with that. If you think the way to go is a judical forclosure and breach of contract lawsuit, I would be happy to provide a half hour telephone consultation at no obligation. I handle cases in Orange County regularly and maintain a facility in Carlsbad. I have over twenty years of real estate litigation experience and have prosecuted judicial foreclosures regularly throughout my career. Feel free to call or email me if you would like further information.

The junior lienholder can sue for breach of contract, but the issue is whether the debtor would raise the defense of Code of Civil Procedure section 726. This is known as the one action rule. If it is not raised by the debtor, and the lender obtains a judgment, however, the lender is deemed to have waived the security interest by obtaining a money judgment on the note. This waiver of the security interest, however, does not mean that the lender is out. The lender can still execute on the judgment, including the original property that formed the security, but the lender may have lost priority. This may also hurt the lender if the debtor files bankruptcy.

The junior trust deed holder only loses its security when the senior forecloses.

There are other issues, including a more extensive discussion of the purchase money mortgage protection that what was set forth by Mr. McCormick.