Loans/Foreclosures

The section completely bars any deficiency judgment when the foreclosing lender has elected to foreclose using a non-judicial foreclosure. Regardless of the inadequacy of the foreclosure sale proceeds to cover the debt on the note, there could be no further recovery directly on the note in an action against the borrower. Code of Civil Procedure §580d applies regardless of the type of property that is the subject of the foreclosure. It applies to retail, residential, owner-occupied, rentals, office, industrial, etc.

This is a statute that prevents a lender from collecting a deficiency. In the main, it applies to a loan where the proceeds of the loan are used to purchase a single family residence of four units or less that is owner-occupied.

This is a statute that prevents a lender from collecting a deficiency. This statute applies to short sales. A “short sale” is a term used to describe a sale of real property when a mortgage lender agrees to accept a payoff payment for an amount less than what is owed on the loan in order to facilitate the sale of the property.

In the main, Code of Civil Procedure §580e provides that for a residential real property consisting of four units or less, the lender cannot recover a deficiency on a loan obligation owed by a natural person secured by a deed of trust after a short sale.

California Code of Civil Procedure §726 is frequently referred to as the “One Action Rule,” or “Security First Rule.” This is a complex statute. In the main, it is designed to prevent a lender from receiving a windfall at the borrower’s expense.

Before I attempt to explain the One Action Rule it is important to point out that there are no seller disclosures concerning the condition of the real property at a foreclosure sale. Buyers of real property at foreclosure sales purchase the property and assume the risk of the condition of the property and the risk of senior encumbrances encumbering the property. These risks drive the price down that buyers are typically willing to pay for a property at a foreclosure sale.

Imagine a scenario involving a promissory note secured by a deed of trust. Instead of initially foreclosing on the real property securing the note, the lender sues the borrower on the note and obtains a money judgment against the borrower for the full balance due on the note. After obtaining a money judgment for the full balance due on the note, the lender then forecloses on the property. The property sells for a price substantially below the fair market value of the property. The lender would only offset the balance due by the sale proceeds from the foreclosure sale rather than the fair market value. The lender would proceed to use the money judgment to take other personal and real property belonging to the borrower, even if the property was not collateral for the loan, to pay the money judgment the lender has against the borrower. In this scenario, the lender only credits against the money judgment the actual depressed sales proceeds from the liquidation sales of the borrower’s assets. The windfall to the lender is the difference the liquidation sales proceeds and the fair market value of the property repossessed/foreclosed upon. The One Action Rule/Security First Rule is designed to prevent this windfall and to avoid a multiplicity of actions.

The public policy objective of the one-action rule is to prevent multiple actions and vexatious litigation by lenders against borrowers arising from the same debt. Part of the objective is to encourage competitive bidding to test the value of all the security for the debt and to force the lender to turn to the collateral for a loan as the primary source of payment for the debt before looking to the borrower’s other assets and income. There are consequences to a lender for violating the one-action rule. One such consequence could be the release of the security under the deed of trust that was not included in the underlying action.