State high court overturns precedent, siding with lender

The state Supreme Court overturned a 27-year-old precedent on Monday, siding with a creditor holding both junior and senior liens on the same property.

In a unanimous opinion written by Justice Goodwin H. Liu, the court held Black Sky Capital LLC could seek to collect a deficiency judgment on the junior lien, even though it is barred from doing so on the senior lien. Black Sky Capital LLC v. Michael Cobb, 2019 DJDAR 3843.

During oral arguments in February, attorneys clashed over whether protections granted to junior lienholders should apply when the same company owns both loans. Under a nonjudicial foreclosure, the senior creditor can only recoup the sale price of the property, but the less powerful junior lienholder can pursue "the difference between the amount of indebtedness and the fair market value of the property," as noted in Liu's ruling.

The case involved a couple who borrowed $10.3 million to buy a commercial property in 2005 then borrowed an additional $1.5 million against the property from the same bank in 2007. The bank sold both loans to Black Sky in 2014, which also bought the property at public auction for just $7.5 million months later.

The company then sued to recover the amount owed on the junior loan. The trial court denied the claim, but a 4th District Court of Appeal panel disagreed.

The Cobbs' attorney, Eric M. Schiffer, the co-founder of Schiffer & Buus APC in Costa Mesa, argued to the high court that letting Black Sky recoup on the second loan would invite market manipulation by lenders.

But Liu wrote the defendants failed to show Black Sky engaged in practices such as "evasive loan-splitting" or "irregularity" at the public auction.

The ruling effectively overturns Simon v. Superior Court (1992), 4 Cal.App.4th 63 in favor of a more recent case, Cadlerock Joint Venture, L.P. v. Lobel (2012) 206 Cal.App.4th 1531, 1539.