The life of a debt secured by a second deed of trust has been subject to a great deal of inconsistent holdings in California and particularly, when the senior lien was made by the same lender. There is a big secondary market in paper secured by second deeds of trust. This type of paper has been hard to collect because of the inconsistencies between the ‘Northern and Southern’ California divide.
In Roseleaf Corp. v Chierighino (1963) 59 C2d 35, the California Supreme Court held that CAL. CCP Code section 580d does not apply to junior lien holders whose security has been rendered valueless by the foreclosure sale. Thus, a junior lien holder whose security has been rendered valueless by a non-judicial foreclosure sale, known as a “sold-out junior lien holder,” may sue the debtor for the amount of the debt. Roseleaf has since been applied with varying results when the two loans were made by the same lender.
Appellate Courts in Southern California have generally allowed creditors holding junior deeds of trust that were extinguished by a foreclosure by the senior lien holder, to sue as a sold-out junior lien holder as long as the senior loan and the junior loan were not held by the same lender at the time of the foreclosure (See, Cadlerock Joint Venture v. Lobel (2012) 206 Cal.App.4th 153, finding that when a single lender makes two non-purchase money loans secured by two deeds of trust referencing a single real property and then assigns the junior loan to a different entity, the assignee of the junior loan, who is subsequently “sold out” by the senior lien holder’s non-judicial foreclosure sale, can pursue the borrower as a sold-out junior lien holder for a money judgment in the amount of the debt).
In contrast, Appellate Courts in Northern California have opined that any loan split between the same lender into a first and a second loan violates California anti-deficiency protections (See, Simon v Superior Court (1992) 4 Cal.App.4th 63, holding that a lender who made two loans on the same property could not foreclose on its senior deed of trust and thereafter sue to recover on its other note as a sold-out junior whose security had been rendered valueless without its fault). While the narrow facts in Simon make sense (you don’t get to create your own sold out junior lien holder status), much of the opinion sets forth that any time the same lender splits a loan into a first and a second loan it will always run afoul of the protections of CCP Section 580d.
Which brings us to the recent California Supreme Court holding in Bank of America, NA v. Caulkett. While this case is not related to litigating on a sold out junior lien, this holding shows a legal shift back towards the creditor whose rights for the last few years have generally been subordinate to the rights of the borrower. Many debtors have used the benefits of a Chapter 7 bankruptcy filing to strip off a second mortgage that while secured when made is now underwater.
The US Supreme Court reversed and remanded a bankruptcy court decision, holding that a debtor in a Chapter 7 bankruptcy proceeding may not void a junior mortgage lien under 11 U.S.C. § 506(d) when the debt owed on a senior mortgage lien exceeds the current value of the collateral if the creditor’s claim is both secured by a lien and allowed under Section 502 of the Bankruptcy Code. Essentially, the Court held that for purposes of § 506(d) a claim is a secured claim regardless of whether the collateral value is less than the lien amount.
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