Legal Question in Real Estate Law in California

Actually the reason the seller could not pursue a deficiency after exercising the power of sale in the Note and Deed of Trust has nothing to do with 580b. Any time a secured creditor conducts a trustee's sale to foreclose on the property, the creditor has elected its "action" on the debt. This is regardless of whether section 580(b) applies or not. Having had its action, the creditor cannot thereafter proceed with another action to collect any balance on the debt due to section 726(a) of the Code of Civil Procedure, which provides: There can be but one form of action for the recovery of any debt, or the enforcement of any right secured by mortgage upon real property. That provision has always been interpreted by the courts as creating an election of remedies that precludes collecting anything more on the debt once a power of sale has been exercised. The other option the creditor has, however, is to file a judicial foreclosure action. As long as it is not a purchase money loan for a buyer occupied 1 to 4 unit residential property (subject to section 580(b)), in a judicial foreclosure the property will be sold by the court, and then trial will go forward to judgment on the balance owed.

Now there are some serious disadvantages to the judicial foreclosure option. It is far slower and more expensive. In addition, the sale is subject to much broader rights of redemption and other rules that make it less appealing to buyers. So unless the defaulting buyer/borrower is wealthy enough to answer for the judgment it may not be worth the time and expense. In addition, it may drive a buyer into bankruptcy which could discharge the underlying debt. It would not affect the security, but that would leave the seller/lender in the same place as if they had just exercised the power of sale.

I have extensive experience with these kinds of cases, both on the plaintiff and defense sides, as well as representing trustees in sale contests. If you would like a free half hour consultation about your specific situation to explore your options further, I would be happy to see you in my Walnut Creek, Oakland or downtown San Jose office.

I disagree somewhat with Mr. McCormick. A deficiency judgment cannot be obtained when the lender forecloses by exercise of the power of sale, without regard to the purchase-money (or not) nature of the loan, or the use of the property. See Code of Civil Procedure section 580d.

Further, the "one form of action" or "one action" rule has no applicability to trustee's sales, because trustee sales are not an "action" as meant in the codes. See "Mortgage and Deed of Trust Practice" (CEB, 2008) section 4.9, page 260.

Be careful when dealing with these foreclosure-related code sections; the numbering can be confusing. There is both a 580(b) and a 580b, for example, and they deal with very different matters.

580b provides another limitation on deficiency judgments, different from the one in 580d. Read them carefully and you'll see which applies to your situation.

I agree with Mr. Whipple. If the seller forecloses under the power of sale, through what is known as a trustee's sale (commonly called non-judicial foreclosure), the seller is prohibited from filing an action to obtain a deficienty judgment, pursuant to Code of Civil Procedure section 580d.

In fact, the only way to obtain a deficiency judgment, meaning a personal money judgment for the difference between the amount of the debt, and what was obtained at a foreclosure sale, would be to file an action for foreclosure.

At that point, however, Code of Civil Procedure section 580b is implicated. I don't feel, however, that Mr. Whipple fully answered your question. Section 580b is written in three clauses.

The first clause - no deficiency judgment shall lie in any event after a sale of real property or an estate for years therein for failure of the purchaser to complete his or her contract of sale - applies in an installment land sale contract. (See Venable v. Harmon (2nd Dist. 1965) 233 Cal.App.2d 297. That is a rare, specialized contract in which the buyer takes possession of the property, but does not receive title until all the installment payments are made. That clause does not apply to you, based on the facts you have provided.

The second clause - no deficiency judgment shall lie ... under a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property or estate for years therein - is what is commonly called an owner carry back, or seller financing. That clause clearly applies to you. Under this clause, any deed of trust or mortgage given to secure payment of the balance of the purchase price, is a purchase money mortgage. It does not matter that the property is residential, commercial, industrial, or even owner occupied. (See Crookall v. Davis, Punelli, Keathley & Willard (2nd Dist. 1998) 65 Cal.App.4th 1048.)

You are obviously asking about the third clause - No deficiency judgment shall lie ....under a deed of trust or mortgage on a dwelling for not more than four families given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser. Thus loans from third parties, such as institutional lenders, used to purchase a dwelling of no more than four units, and for which the borrower will occupy entirely or in part, are considered purchase money loans, and come under the purchase money mortgage prohibitions of Code of Civil Procedure section 580b.

It is clear to me from the facts you have given that your situation meets the second clause - seller financing - so the third and first clauses are irrelevant. This means that if the seller filed an action for judicial foreclosure, and the buyer timely and properly raised Code of Civil Procedure section 580b as a defense, a deficiency judgment would be prohibited.