On January 21, 2016, the California Supreme Court ruled that the state’s anti-deficiency statute enumerated under California Code of Civil Procedure Section 580b applied to short sales in addition to foreclosures. Coker v. JPMorgan Chase Bank, N.A., S213137, 2016 WL 240901 (Cal. Jan. 21, 2016). Section 580b states that no deficiency judgment may be obtained by the lender against the borrower when he/she defaults on a purchase money loan and the lender exhausts its security via sale under the deed of trust or mortgage.
In Coker, the borrower negotiated a short sale of her property with JP Morgan Chase Bank (“Chase”) in 2010 and agreed to remain personally liable for the deficiency ($116,000) caused by the difference in the sale price and loan balance. Even though the current short sale anti-deficiency statute, California Code of Civil Procedure Section 580e, was not enacted until 2011, the Court found that California’s long standing consumer protection provisions could not be waived in this transaction.
The Coker decision affirmed the California Court of Appeal’s ruling that Chase’s effort to recover the deficiency owed by the borrower was not enforceable since Section 580b applied to any sale and not just a (judicial or non-judicial) foreclosure sale. Additionally, the Court also affirmed the Court of Appeal’s holding that Section 580b applies even if a borrower waives their right under California’s one-action rule, California Code of Civil Procedure Section 726.
Guided by the themes of determining the “purpose” and “intent” of Section 580b, the Court held that “…a law established for a public reason cannot be contravened by a private agreement.” Coker at *14; Cal. Civ. Code § 3513. In the ruling, it was noted that the purpose of the state’s anti-deficiency statutes were to (1) prevent lenders from overvaluing homes and (2) prevent aggravation of the economic decline which could stem from saddling borrowers with significant personal liability.
Here, the Court applied the test it fleshed out in DeBerard Properties, Ltd. v. Lim 20 Cal. (1999) to determine the applicability of Section 580b. Under the DeBerardtest, the Court asked two questions: “(1) [D]oes the sale vary from a standard purchase money transaction, and (2) if so, does applying section 580b’s anti-deficiency protection comport with the Legislature’s intent? Section 580b applies unless the answer to the first question is yes and the answer to the second question is no.” Id. at 665.
Finding that the borrower in Coker did nothing more than buy a home to live in using purchase money as her financing, the Court held that the sale did not vary from a standard purchase money transaction and that Section 580b applied automatically in this case. Chase’s argument that the short sale agreement changed the purchase money loan from a secured to unsecured transaction was rejected by the Court as it held that Chase always had a possessory interest in its security because it still could have foreclosed if the short sale transaction was unsuccessful.
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