The California Supreme Court recently issued two opinions resulting from the aftermath of the 2009 real estate crash. It addressed both the statutory protections for a homeowner after a short sale (i.e., a sale for less then what is owed on the mortgage) and their ability to sue for wrongful foreclosure. In both cases, the Court ruled in favor of the homeowner (or former homeowner), although on sometimes narrow grounds.
In Coker v. JP Morgan Chase Bank, N.A., S213137, the unanimous Court confirmed the protective scope of Code of Civil Procedure § 580b. It was previously well established that homeowners are protected by § 580b from a deficiency judgment by the mortgagee if the property sells for less than the balance of the mortgage in a foreclosure sale. Here, Coker bought a condominium in 2004, but fell behind in her payments in 2010. As Chase began the foreclosure process, Coker found a buyer and asked Chase to release its security interest to allow a short sale. Chase conditionally approved the sale, if (1) all net proceeds went to Chase, (2) Coker would take nothing from the sale, and (3) she would be subject to a deficiency balance. When Chase sent a demand letter for the remaining balance, Coker brought a declaratory relief action claiming protection under § 580b. The trial court sustained Chase’s demurrer, but the Court of Appeal reversed. The Supreme Court, after a detailed discussion of statutory interpretation and previous applications of § 580b, held that the anti-deficiency protection of § 580b “applies to short sales just as it does to foreclosure sales.” The Court recognized that there were virtually no short sales in 2007, much less when § 580b was originally passed, while there were 90,000 in 2009 and 110,000 in 2010. It concluding that the prior absence of short sales was irrelevant, since the same legislative policy goals of discouraging lenders from overvaluing property and helping to soften the blow to borrowers in a depressed housing market applied equally to short sales. Moreover, short sales fall within the statutory language so long as the mortgagee retains an actual security interest in the property. Finally, because § 580b supports a public policy goal it cannot be waived, and therefore remains effective despite Chase’s stated conditions.
In Yvanova v. New Century Mortgage Corp., S218973 a former homeowner sought an action for wrongful foreclosure based on allegations that a purported assignment of the note and deed of trust to the foreclosing party was defective, rendering the assignment void. The Court of Appeal held that the homeowner lacked standing to raise the issue, since she was not a party to the assignment. The unanimous Supreme Court reversed, noting that the foreclosing party in a nonjudicial foreclosure must have a valid deed of trust or assignment in order to proceed. As a result, the Court held that a homeowner has standing to claim that a nonjudicial foreclosure was wrongful based on allegations that the assignment relied upon was void, not merely voidable, thus depriving the foreclosing party of any legitimate authority to order a trustee‘s sale. In doing so, the homeowner is enforcing her own right not to have her home unlawfully foreclosed upon. Explaining that it intended a narrow decision, the Court stated that it was not addressing whether a homeowner could preempt a threatened nonjudicial foreclosure by a suit questioning the foreclosing party‘s right to proceed and that it was not addressing the merits of the pending claim. Thus, the Court resolved a conflict between the lower court decisions in Glaski and Jenkins and joined the growing majority rule among its sister states on this issue.