Key Decisions

August 2013 – The Anti-Deficiency Law Applies To A Short Sale

(filed under: Key Decisions Archive | August 16, 2013)

The Anti-Deficiency Law Applies To A Short Sale

Coker v. JP Morgan Chase Bank, N.A.
(Cal. Ct. of App., 4th Dist.), filed July 23, 2013, published July 23, 2013

Carol Coker owned a house. To purchase it, she obtained a $452,000 loan that was secured by a deed of trust.

Coker stopped paying on the loan and Chase Bank, the original lender’s successor in interest, filed a notice of default and election.

To avoid a foreclosure, Coker negotiated a sale of the property to a third party, but the sale price was less than the outstanding balance under the loan. Coker asked Chase Bank to agree to the sale.

Chase Bank approved the sale subject to several conditions, one of which stated that the amount of the sale proceeds paid to Chase Bank was for the release of Chase Bank’s security interest only, and Coker was still responsible for any deficiency balance remaining on the loan after application of the proceeds received by Chase Bank.

The sale closed and Chase Bank received the agreed upon proceeds from the sale. After the sale closed, Chase sought payment of $116,686.89, which was the unsatisfied portion of the loan. In response, Coker filed a complaint for declaratory relief. In it she sought an adjudication that, under Code of Civil Procedure, Sections 580b and 580e, Chase Bank was prohibited from collecting a deficiency based on the loan.

The trial court sustained Chase Bank’s demurrer without leave to amend. It found that the protections of Section 580b applied only to foreclosures, not to agreed sales.

The Court of Appeal reversed, concluding Section 580b’s protections did apply in the particular situation.

The court reasoned that Section 580b advances public policy by preventing a deficiency judgment in connection with a loan that is used to purchase real property. It does so by shifting the risk of falling property values to the lenders. In particular, it prevents sellers from overvaluing their properties and at the same time minimizes the impact of a general economic decline by preventing buyers whose economic circumstances cause them to lose their homes from also becoming personally indebted on top of that.

Against this background, nothing in Section 580b requires that it only be applied in the context of a foreclosure or precludes it from being applied to a short sale.