Legal Question in Real Estate Law in California

Re: Foreclosure

That is a bizarre hypothetical. It is a hypothetical, because it assumes facts that have not transpired.

Normally, the holder of the second trust deed (we don't really have mortgages in California) can sue for a deficiency judgment when the security is wiped out by the foreclosure of a senior trust deed. "After the security has been lost by the foreclosure sale of the senior lien, the junior lienor can sue the debtor directly on the promissory note, which is then considered unsecured." (Bank of America v. Graves (4th Dist. 1996) 51 Cal.App.4th 607, 612.)

There are two exceptions to this rule, recognized by case law. The first one is that the sold-out junior lienholder exception does not apply where a single lender holds both the junior and senior liens. (Simon v. Superior Court (1st Dist. 1992) 4 Cal.App.4th 63, 66-67.) In other words, a junior cannot sue on a second loan where it sold itself out by foreclosing on its own senior lien. (Evans v. California Trailer Court, Inc. (5th Dist. 1994) 28 Cal.App.4th 540, 551.)

The second exception is where a single debt is secured by several pieces of property and the creditor has already proceeded nonjudicially against on of the other properties. By choosing to conduct a nonjudicial foreclosure sale, the foreclosing creditor has made an election of remedies and is deemed to forgo all judicial remedies. (In re Marriage of Oropallo (2nd Dist. 1998) 68 Cal.App.4th 997, 1005.)

It's not clear whether either of these exceptions apply, but I note from the hypothetical you have given that the loan proceeds secured by the second trust deed were also used to purchase the property. Code of Civil Procedure section 580b prohibits deficiency judgments on deeds of trust securing loans of money to purchase property (less than 4 units)

Of course, the definition of a deficiency judgment in this hypothetical would be subject to some interesting debate among learned attorneys.

Very truly yours,

Re: Foreclosure

The analysis provided by Mr. Roach is excellent and I would agree completely, except I only see one odd thing in the question, where he seems to see something different that seems unusual to him. What I find odd is -- you say "if I foreclose." Since you are the borrower, not the lender, surely you mean "if I am foreclosed upon."

Re: Foreclosure

Attorney Roach's detailed answer might be too good in that a lay person might not understand his conclusion. I take his opinion to be that if the holder of the first deed of trust properly notices and holds a private sale of the deed [calls for bids at a certain locations as opposed to going through the court system to get a judgment, etc.]that would eliminate your debt to the holder of the second deed of trust. If you are in danger of foreclosure, there are several ways to try to avoid it, but that is another question you did not ask.