Magazine article Business Credit

580b or Not to Be

Magazine article Business Credit

580b or Not to Be

Article excerpt

RESPONDING TO THE EFFECTS OF THE GREAT DEPRESSION, THE California legislature enacted anti-deficiency laws to regulate the mortgagee's remedies in recognition of debtors' inability to bargain effectively for their rights in a loan transaction. This legislation greatly limited-and, under various circumstances, even prohibited-sellers and lenders from obtaining deficiency judgments against buyers/borrowers after foreclosing against real property collateral, in some instances regardless of whether the foreclosure sale was conducted through judicial or non judicial means. California is one of only a handful of states with such strict antideficiency legislation.

One of these statutes, Code of Civil Procedure section 580b, as currently worded, simply provides:

No deficiency judgment shall lie in any event after a sale of real property or an estate for years therein for failure of the purchaser to complete his or her contract of sale, or under a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property or estate for years therein, or under a deed of trust or mortgage on a dwelling for not more than four families, given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling occupied entirely or in part, by the purchaser.

Thus, section 580b generally prevents particular types of lenders, including the following, from recovering a deficiency judgment against a defaulting borrower: (1) Sellers of real property who finance all or a portion of the purchase price secured by the real property being purchased; (2) Purchase money lenders who take a security interest in residential properties of not more than four families.

The courts in California have stated several rationales for section 580b, including the prevention of over-valuation of real property, preventing a multiplicity of actions, stabilization of values during a depression, and avoiding the economic downturn which would result if the purchaser would not only be forced to lose the property but also be personally liable for an often large deficiency. Roseleaf Corp. u Chierighino, 59 Cal.2d 35, 42 (1963); Cornelison u Kornbluth, 15 Cal.3d 590, 601 (1975). However, the courts have also held that section 580b covers only standard purchase-money transactions. Spangler v. Memel, 7 Cal.3d 603, 612 (1972) [which has led to numerous creative, albeit often unsuccessful, attempts to transform or disguise ordinary purchase money transactions]. The courts have also carved out exceptions for lenders' claims against borrowers based upon fraud in the inducement of the transaction and waste. Manson v. Reed, 186 Cal.App.3d 1493 (1986). This has led to considerable confusion, particularly over what constitutes a "standard purchase-money transaction." What the legislature has left full of holes, the judiciary has been more than eager to fill, with sometimes unpredictable and inconsistent results.

Two recent California appellate court decisions, DeBerard Properties, Ltd. u Lim, 62 Cal.App.4th 1251, 73 Cal.Rptr.2d 302 (1998) and Guardian Savings & Loan Association u MD Associates, 64 Cal.App.4th 309, 75 Cal.Rptr.2d 151 (1998) add to that confusion while reaffirming California's strong policy of debtor protection under section 580b. However, the Guardian case also provides a narrow loophole through which a careful lender might be able to avoid the adverse effects of the statute.

Deberard Properties, Ltd. V. Lim

In DeBerard, decided in April 1998, the court held that the debtor protections of section 580b are non-waivable even if negotiated as part of a subsequent forbearance agreement. The DeBerard plaintiff was a purchase money lender whose $170,000 loan was secured by a second deed of trust against commercial property. The borrowers fell behind in their payments to the holders of both the first and second deeds of trust and thereafter entered into a forbearance agreement with each. …

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