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California Amends its Anti-Deficiency Statute

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By:  Ben Reeves

As of January 1, 2014, California amended its anti-deficiency statute to stop mortgage lenders from “collecting” from homeowners on post-foreclosure debts.  Although the amendments were designed to tackle a purely consumer / residential real estate issue, only time will tell if the changes have unintended consequences beyond the consumer / residential realm.

Prior to the amendment, California’s anti-deficiency statute, Cal. Civ. Proc. Code § 580d, only barred lenders from obtaining a judgment against homeowners to recover the difference between the value of the home after foreclosure and the amount of the debt owed on the mortgage (i.e., a “deficiency judgment”).  Despite the prohibition against deficiency judgments, some lenders apparently developed the practice of attempting to coerce homeowners to pay more than the value of their home after a foreclosure.  These lenders argued that the statute only prohibited the entry of a deficiency judgment, but not the “collection” of the debt.  To end this practice, the California legislature amended the anti-deficiency statute to provide that “no deficiency shall be owed or collected” following a foreclosure sale.

To minimize the risk of this language affecting lender’s ability to collect from commercial guarantors and/or other collateral, the legislature added a new subsection to the statute stating that “[t]he fact that no deficiency shall be owed or collected … does not affect the liability that a guarantor, pledger or other surety might otherwise have with respect to the deficiency, or that might otherwise be satisfied in whole or in part from other collateral pledged to secure the obligation that is the subject of the deficiency.”

These amendments may give rise to new arguments from obligors attempting to avoid paying a deficiency judgment.  We will have to wait for the courts to decide if these amendments are as innocuous as intended, or if they will impact existing California law on the liability of guarantors on a deficiency.