Legal Alerts

Preservation of California Anti-Deficiency Law Intent Is Key

In the recent case of Cadlerock Joint Venture, L.P., v. William N. Lobel, the Court of Appeal refused to extend the general rule in California that a single lender holding both a senior and junior lien on the same real property cannot conduct a non-judicial foreclosure on the senior lien and, later, pursue a money judgment against the borrower, where the junior loan is sold and assigned to an unaffiliated third-party within a few days of making the loan.

The general rule in California is derived from Code of Civil Procedure Section 580d, part of California’s anti-deficiency laws that are intended to protect borrowers from suffering both loss of their property and a deficiency judgment in a down economy. Cadlerock found no reason to apply the general rule, where there is no indication that any action has been taken to evade the application of California’s anti-deficiency laws. The fact that there were no affiliated business arrangements or collusive activities between the originating lender or the various assignees of the senior or junior loans appears to have been significant to the Cadlerock court.

Cadlerock informs lenders and their assignees that assignments of loans in the secondary mortgage market among un-related entities, without a business arrangement intended to evade California’s anti-deficiency laws, should provide standard lender rights in the event of non-judicial foreclosure. The corollary rule appears to be that assignment of loans in the secondary mortgage market that are, or appear to be, motivated by an intent to evade California’s anti-deficiency laws, will not be tolerated by California courts. Cadlerock does not address purchase money loans or judicial foreclosures, each of which receives different treatment under California’s anti-deficiency laws.

For further information on the Cadlerock decision or other real estate matters, please contact Delmar Williams or an attorney in Best Best & Krieger’s Real Estate group.