Coker v. JP Morgan Chase Bank, N.A., ___Cal.___
Coker v. JP Morgan Chase Bank, N.A., ___Cal.___, 2015 Westlaw —– (Supreme Court of the State of California, 2015.): The California Supreme Court held that a lender holding a residential purchase money obligation cannot obtain a deficiency from a borrower, even though the property was sold at a short sale and even though the borrower waived her antideficiency protection. Secured lender could not collect the deficiency owed after short sale of residence, from borrower.
FACTS: The owner of a residence encumbered by a purchase money deed of trust arranged for a "short sale," under which the proceeds of the sale would be less than the outstanding balance owed to the purchase money lender. The lender agreed to the sale, but only if the borrower would agree to be liable for any deficiency. She agreed to those terms.
After she went ahead with the sale, the lender sought recovery. The borrower then filed a complaint for declaratory relief to establish that the lender was barred by California Code of Civil Procedure §580b from obtaining a deficiency judgment against her. The trial court dismissed her complaint, but the appellate court reversed, on the ground that the statute prohibited a deficiency after any sale, whether by foreclosure or otherwise.
REASONING: The Supreme Court unanimously affirmed, holding that the California cases interpreting §580b had all adopted a broad reading of the statute in order to protect homeowners from deficiency liability on purchase money obligations, whether or not a foreclosure sale had been held. The lender argued that the pre-2012 version of the statute, which applied to the facts in this case, meant that its protections did not attach unless a foreclosure sale had taken place.
The court recognized that the pre-2012 version of the statute was not perfectly clear, noting that "[i]n 2012, the Legislature reformatted section 580b to expressly parse the text" to provide that a lender cannot collect a deficiency from a residential borrower under a purchase money obligation. But the court looked to its earlier decisions to guide its construction of the former statute.
The lender argued that the borrower had waived the protection of the statute, but the court held that contractual waivers of §580b are unenforceable. As a fallback, the lender argued that the recent enactment of §580e demonstrated that the prior law did not protect homeowners after short sales. (That new statute expressly protects residential borrowers in that situation.) The court reasoned that its construction of §580b was unaffected by the new statute because "the Legislature did not limit or otherwise alter section 580b when it enacted section 580e." The court declined to discuss whether non-residential borrowers would be protected by its reading of §580b, even after the enactment of §580e.
Finally, the court held that although the borrower’s consent to the short sale constituted a de facto waiver of her right under §726(a) (the "one-action rule") to compel the lender to foreclose prior to seeking recovery from her, that did not constitute a valid waiver of her protections under §580b:
[T]he fact that [the borrower] waived her right to insist that [the lender] proceed via foreclosure does not mean that the short sale agreement destroyed the purchase money nature of the loan or that [the lender] became entitled to collect more than the value of its security. Once [the lender] realized and exhausted the full value of its security, section 580b prevented [it] from seeking to obtain [her] other assets. When a borrower waives her rights under section 726 by agreeing to a short sale, section 580b remains a barrier to any deficiency judgment after the lender collects the full value of its security from the sale.
AUTHOR’S COMMENT: This result is not a surprise. Even though newly-enacted §580e and newly-amended §580b were inapplicable to this case, the Legislature provided very strong policy guidance to the court: homeowners are to be protected from deficiency liability on purchase money loans. (Full disclosure: the court mentioned the "reformatted" post-2012 §580b. I was a member of a team of drafters sponsored by the Insolvency Law Committee of the Business Section of the California State Bar that proposed those amendments in order to clarify the earlier version of the statute.) Given the enactment of §580e and the "reformatting" of §580b, I do not think that this opinion will have a major impact in future litigation over the application of §580b, since new §580b and §580e now occupy the field.
The lender raised questions about the policy implications of a broad reading of §580b: Does the statute really protect against overvaluation of residential property, or does it cause borrowers to pay more than the market value, since they know they are insulated from liability? Does the statute really prevent the aggravation of an economic downturn by protecting homeowners from liability, or does it encourage strategic default? The court declined to reach either of those issues, stating that the earlier California cases have "implicitly rejected" both of those arguments. I believe that both of those arguments have merit but that the Legislature will never change the rule protecting homeowners from liability, for obvious political reasons.
For a discussion of the appellate opinion in this case, see 2013-32 Comm. Fin. News. NL 65, Despite Borrower’s Agreement to Remain Liable, Borrower is Protected From Purchase Money Deficiency Liability After Short Sale.
[Note: this case analysis was written by Professor Dan Schechter of Loyola Law School, Los Angeles]
New Proof of Claim and Mortgage Attachment, effective December 1, 2015
New Proof of Claim and Mortgage Attachment, effective December 1, 2015: The national bankruptcy forms were revised as of December 1, 2015. One of the major changes in the national forms is a revision to the form (Form 410) that creditors use to file Proofs of Claims in bankruptcy cases. Effective 12/1/15, the Proof of Claim form (Form 410) and the Mortgage Proof of Claim Attachment form (Form 410A), were revised to require that DOT lenders/ mortgage lenders must now provide a loan payment history from the first date of default as part of the mortgage attachment form, which must include information about payments received and how they were applied, when fees and charges were incurred, when fees and charges were paid from what source, when escrow amounts were disbursed, and whether funds were held in an unapplied or suspense account. Requiring secured DOT/mortgage creditors to supply this information can be a big help to bankruptcy debtors’ attorneys, in the debtors’ attorneys analyzing whether the creditor’s secured Proof of Claim is accurate, or whether the servicer may have misapplied payments or made other servicing errors before the bankruptcy was filed.