Sold-out, nonpurchase money junior lienholders are generally able to sue the borrower on their note once their security has been rendered valueless by a senior lienholder’s nonjudicial foreclosure sale. A judicially created exception to this rule is when the same lender is both the senior lienholder and the junior lienholder. In that circumstance, it has generally been held that Code of Civil Procedure section 580d precludes a deficiency judgment and, therefore, the lender cannot sue the borrower on the junior note. Moreover, a single lender cannot avoid the application of section 580d by assigning the junior loan to a different entity after the trustee’s sale on the senior lien.
But, what about the circumstance when a single lender contemporaneously makes two nonpurchase money loans secured by two deeds of trust referencing a single real property and soon thereafter assigns the junior loan to a different entity, can the assignee of the junior loan, who is subsequently sold-out by the senior lienholder’s nonjudicial foreclosure sale, pursue the borrower for a money judgment in the amount of the debt owed?
In Candlerock Joint Venture v. Lobel the court answered the question in the affirmative. The court reasoned that no distinction should be made between: (1) a piggyback transaction with a single lender in which the junior lien is immediately assigned to a third party; and (2) a two-lender piggyback transaction in which two loans are made contemporaneously by two separate lenders, each maintaining ownership of their respective loans until the senior lien is nonjudicially foreclosed.
In the second circumstance, the sold-out junior is clearly allowed to sue the borrower on the note. Applying different rules of law to junior liens originated under these two scenarios would elevate form over substance by treating two separate loans as a single loan based on the happenstance of the two loans having been originated by the same lender.
The court found it important to note that there was no suggestion in the record that the loan originator and any of the various assignees of the senior and junior loans were affiliated in any way or conspired in any way to evade the anti-deficiency laws. Although the loan originator provided both loans to the borrower at the same time, soon thereafter the junior loan and accompanying DOT were assigned to a third party and ultimately the senior loan was assigned to yet another entity. The factual circumstances do not suggest two loans were created, when one would have sufficed, as an artifice to evade section 580d.
Lastly, the case reminds us of the importance of reading footnotes. Prior to the last concluding sentence of the opinion is footnote 10. At footnote 10 the court recognizes that if the originator had not immediately sold the junior lien, but instead had sold the junior lien after default on the senior, the date of default, rather than the date of the trustee’s sale, might be the proper triggering event for purposes of determining the junior lienholder’s right to sue the borrower on the note.