Legal Question in Real Estate Law in California

California is different than other states, in that we use deeds of trusts almost exclusively for financing the purchase of real property, and in securing loans against property already owned.

The term nonrecourse is a general legal term, that means that a lender may only look to the secured property to satisfy the loan. In that situation, the promissory note usually states that it is nonrecourse. Under a "nonrecourse" loan, the lender's sole remedy in the event of a default is to foreclose on its collateral. The borrower is not liable for any deficiency between the value of the collateral and the amount of the unpaid debt. Lenders, however, often exempt from nonrecourse provision claims they have against the borrower for fraud, waste, environmental liability or the proceeds of condemnation or insurance.

I have not seen any promissory notes in California that state that they are nonrecourse. They are extremely rare.

With that said, many commentators confuse nonrecourse and recourse with California's Anti-Deficiency laws. These laws, when applied, may turn a note secured by a deed of trust into a nonrecourse obligation, regardless of the terms of the promissory note.

California enacted its anti-deficiency legislation in 1933 in response to the Great Depression. The two key provisions, which are in effect today, are Code of Civil Procedure sections 580b and 580d.

Section 580b contains what is commonly called Purchase Money Mortgage protection. By the terms of the statute, a deficiency judgment is prohibited in three specific situations: 1) When the seller finances the sale of the property by carrying back a note secured by a deed of trust: 2) In a situation involving an installment land sale contract; and 3) when a deed of trust or mortgage is for a dwelling for no more than 4 families given to a lender to secure payment of the balnace of the purchase price of the dwelling, occupied entirely or in party by the purchaser. The courts have carved out a fourth application, which is when an owner of raw land obtains a loan to construct a personal residence. (Prunty v. Bank of America (1st Dist. 1974) 37 Cal.App.3d 430.)

Section 580d is even broader in its sweep. That section prohibits any deficiency judgment after a lender has pursued a nonjudicial foreclosure under the power of sale. (Commonly caled a trustee's sale.) In that situation, if a lender elects to conduct foreclosure by a private trustee's sale, they cannot maintain a subsequent action against the borrower for a deficiency. This applies regardless of whether the property was seller financed, a purchase money mortgage, investment property, or even commercial property.

These sections do not prohibit a lawsuit against the borrower for fraud, waste, or even rent skimming. Determining which of these statutes would apply to a particular transaction, however, is factually intensive.