Real Estate/Development
Jun. 20, 2017
Appellate ruling could help lenders in foreclosures
In a ruling that could change real property law, a state appellate court has ruled that lenders who use a trustee's sale to foreclose on a defaulted superior loan now have the power to also recoup a second mortgage on the same property.
"This is definitely a sea change case," said Ronald Richards of the Law Offices of Ronald Richards & Associates, who represented winning appellant Black Sky Capital.
Under previous law, when a lender used a trustee's sale to foreclose on a property whose owner had defaulted on a senior loan, and the sale of the property did not cover the loan, the lender could not sue to recover any junior loan as well. Simon v. Superior Court (1992), 4 Cal.App.4th 63.
With the 4th District Court of Appeal's decision last week, a lender who made a senior and junior loan at different times on the same property can now sue for the amount owed on the junior loan. Black Sky Capital LLC v. Cobb et al., 2017 DJDAR 5644.
"The effect is, I think, lenders could be more comfortable in making second loans some time after making a first loan without fear that they're going to lose their rights on the second loan if they close on the first loan non-judicially," said Howard Madris of the Law Office of Howard N. Madris P.C. who is not involved in the case. "That could possibly encourage more follow-up lending."
But Karl Geier, a shareholder in Miller Starr Regalia and editor of the California Real Estate, 4th treatise, said borrowers now may be wary.
"Under the Simon case, if a lender who held the first and second foreclosed on the first, the second became uncollectable. Under the Black Sky decision, the second becomes an unsecured note ... that's fully collectible."
In Black Sky, Michael and Kathleen Cobb borrowed $10.2 million from Citizens Business Bank in 2005 and $1.5 million two years later. Black Sky purchased both loans. After the Cobbs defaulted on the senior loan, Black Sky held a trustee's sale that netted only $7.5 million. The Cobbs then defaulted on the junior loan.
The trial court ruled Simon applied and Black Sky could not sue for the $1.5 million.
Eric M. Schiffer of Schiffer Buus APC, who represented the Cobbs, said the 4th District's decision puts it at odds with Simon and a later decision in the 2nd District that developed from a key case, Roseleaf Corp. v. Chierighino (1963), 59 Cal.2d.35. "I think there's a very good chance we'll file a petition for review with the California Supreme Court," he said.
"They're saying it doesn't matter if the same lender has the first and second [loans], and that's contrary to way law has evolved," Schiffer said, characterizing Simon as an evolution of Roseleaf.
Geier called Schiffer's view "a fair statement," saying case law had developed an underlying policy of protecting the debtor against a lender's claim that might be more than the value of the property. Like Schiffer, he sees a district split.
Richards and Madris see no split, saying courts applied Simon too broadly - to any two loans by the same lender.
"Black Sky Capital is better reasoned and exploits numerous deficiencies with Simon, including the fact that a senior's foreclosure simply has nothing to with the junior lien," Richards said.
James Getz
james_getz@dailyjournal.com
For reprint rights or to order a copy of your photo:
Email
Jeremy_Ellis@dailyjournal.com
for prices.
Direct dial: 213-229-5424
Send a letter to the editor:
Email: letters@dailyjournal.com