Legal Question in Real Estate Law in California

If the lender foreclosed nonjudicially, through a trustee's sale, then you would not be liable for a deficiency judgment, by operation of Code of Civil Procedure section 580d. That section prohibits a deficiency judgment after the exercise of the power of sale contained in a deed of trust.

If you go through a short sale, Code of Civil Procedure section 580e would not protect you, because that section applies to short sales of residential property, containing four or less units. It would not apply to a short sale of commercial property. The only way to protect yourself in a short sale would be to have the lender agree in writing to waive the outstanding balance.

If this was an SBA "504" program loan, the SBA will ordinarily have received personal guarantees of the loan from anyone having at least a 20% interest in the borrower. The guarantees will contain wiavers of the California antideficiency laws, including CCP 580d. The material below is cut and pasted from an SBA manual of contract boilerplate that its lenders must follow and use:

"The following paragraphs must appear if any guarantor, any Borrower or

any real estate is located in California

"California Mandatory Provision�The following language must appear in a guarantee if the

guarantor, any Borrower or any real estate is located in California:

" 'Guarantor waives its rights of subrogation, reimbursement, indemnification, and contribution

and any other rights and defenses that are or may become available to the guarantor by reason of California Civil Code Sections 2787 to 2855, inclusive.

"The guarantor waives all rights and defenses that the guarantor may have because the debtor's debt is secured by real property. This means, among other things:

(1) The creditor may collect from the guarantor without first foreclosing on any real or

personal property collateral pledged by the debtor.

(2) If the creditor forecloses on any real property collateral pledged by the debtor:

SBA Loan Number: [Loan Number]

SBA Loan Name: [Loan Name] (7a Wizard 2009.4)

(A) The amount of the debt may be reduced only by the price for which that collateral is

sold at the foreclosure sale, even if the collateral is worth more than the sale price.

(B) The creditor may collect from the guarantor even if the creditor, by foreclosing on the

real property collateral, has destroyed any right the guarantor may have to collect

from the debtor.

"This is an unconditional and irrevocable waiver of any rights and defenses the guarantor may

have because the debtor's debt is secured by real property. These rights and defenses include, but are not limited to, any rights or defenses based upon Section 580a, 580b, 580d, or 726 of the Code of Civil Procedure.

"The guarantor waives all rights and defenses arising out of an election of remedies by the

creditor, even though that election of remedies, such as a nonjudicial foreclosure with respect

to security for a guaranteed obligation, has destroyed the guarantor's rights of subrogation and reimbursement against the principal by the operation of Section 580d of the Code of Civil

Procedure or otherwise."

So, I think you should expect a post-foreclosure sale collection effort based on the guarantees.

I disagree with Mr. Whipple's analysis as applied to you, if you are the actual borrower.

You're not a true guarantor if you are the borrower, and the borrower cannot waive California's

anti-deficiency legislation at the inception of the secured land transaction.

In fact, the California Supreme Court already rule on this issue in 1955.

"In Brown v. Jensen, supra, 41 Cal.2d 193, 197, we held: 'These provisions [Code Civ. Proc., 580-580d, 726] indicate a considered course on the part of the Legislature to limit strictly the right to recover deficiency judgments, that is, to recover on the debt more than the value of the security.' Moreover, those provisions may not be waived in advance by the debtor as the courts have held with respect to section 726 of the Code of Civil Procedure (Winklemen v. Sides, 31 Cal.App.2d 387) and section 580a (California Bank v. Stimson, 89 Cal.App.2d 552) and, see generally, Salter v. Ulrich, 22 Cal.2d 263 and Morello v. Metzenbaum, 25 Cal.2d 494. Because of the strong reasons of policy expressed in the Winklemen and California Bank cases the same rules should apply to section 580d. The section would have little effect if the prospective creditor could compel the prospective debtor to waive it in advance."

(Freedland v. Greco (1955) 45 Cal.2d 462.)

The only exception to this rule prohibiting waivers of anti-deficiency protection in advance is where the loan documents contain a choice of law provision for a different state that does not have deficiency protection. (Guardian Sav. & Loan Association v. MD Assocs. (1998) 64 Cal.App.4th 309, 323.)