State high court considers lender’s rights in foreclosures

SACRAMENTO -- The state Supreme Court heard arguments Tuesday in a case that could change the balance of power between borrowers and lenders.

In 2017, the 4th District Court of Appeal ruled a lender holding both a senior and junior loan on foreclosed property can sue to recover the junior loan. This overturned a 25-year old precedent governing cases in which the subsequent resale of the property did not cover the loan amount.

Those who praised the appellate ruling have focused on the idea that allowing the same lender to recover on both loans would make banks more likely to offer second loans to ease borrowers through tough times. "The current lender is incentivized to try to maintain the borrower relationship," argued Ronald N. Richards of the Law Offices of Ronald Richards & Associates, representing Black Sky.

But borrowers could become less apt to take on second loans. The attorney for the borrowers, Eric M. Schiffer, said the new rule creates the possibility for manipulation by lenders -- particularly those who buy up loans secondhand as Black Sky did.

Justice Goodwin H. Liu asked Schiffer if he "could point to" evidence of manipulation in the case. Schiffer replied that Liu and other justices were setting up "too difficult of a standard" and that "a unity of interests" between the holder of the junior and senior loans was enough.

"I don't know if it's manipulation as much as choreography," said the co-founder of Schiffer & Buus APC in Costa Mesa. "There is nothing in the record about what they paid for these loans. It was certainly less than the face value."

The case involves a couple, the Cobbs, who borrowed $10.2 million in 2005 to buy a commercial property then another $1.5 million on the same property two years later. Black Sky bought both loans but only netted $7.5 million in a 2014 trustee's sale after they defaulted. Black Sky Capital LLC v. Cobb, S243294 (State Sup. Ct., filed July 20, 2017).

Black Sky then sought to recoup the value of the junior loan. But a San Bernardino County Superior Court judge dismissed the case on summary judgment, citing Simon v. Superior Court, 4 Cal. App. 4th 63 (1992).

Under Simon, state laws protecting junior lienholders from the "whims" of senior lienholders did not apply when the same party held both loans. It interpreted the state civil code to find that the junior loan could not be enforced as a deficiency judgment, the difference between the amount owed and a sale price.

Black Sky appealed, arguing Simon and subsequent decisions improperly built on an earlier decision, Roseleaf Corp. v. Chierghino (1963), 59 Cal.2d.35., which found a junior lienholder's rights were not extinguished by a sale conducted by a senior lienholder.

They suggested a more recent case, Cadlerock Joint Venture, L.P. v. Lobel 206 Cal. App. 4th 1531,1539 (2012) , which found Simon violated the "plain meaning" of the underlying law.

During oral argument, Liu suggested Schiffer was "moving the deck chairs." He noted Black Sky could sell the loan to a third party, which could then sue for the unpaid value.

Under questioning from Chief Justice Tani Cantil-Sakauye, Richards argued a "unity of interests" meant little without "evidence of subterfuge." He said financial institutions often buy up many loans at once, sometimes ending up with junior and senior liens without intending to do so.

He also suggested the "optimistic view of Roseleaf" taken by some debtors' attorneys was overdue for scrutiny.

"Your court has never reviewed or examined Roseleaf in 56 years, which is extraordinary," Richards said.