After the Great Depression, California, by legislation, expressly provided there is no "deficiency judgment" liability on a any obligation in many situations.  In short, California Code of Civil Procedure ("CCP") § 726, provides that if any obligation is secured by any interest in real property (no matter what the document is called), the secured creditor cannot just sue for payment on the note. Rather, the creditor must cause the real property to be legally foreclosed upon and sold.  This is often called the "one action" and "one form of action" and "security first" rules. Then, and only then, if allowed by law, may the creditor sue for any money still owed on the note, less recovery, if any, from the forced sale of the property, if any.

 CCP § 580b says there can never be any deficiency judgment liability for any "seller take-back" financing (from buyer back to seller/vendor), or, for any debt incurred for the purchase price of the debtor’s personal residence (1 to 4 units.)  This protection is determined at the moment the loan is created, and cannot be waived by the debtors.

CCP § 580d provides that there can never be a deficiency judgment on any obligation which has been the basis for a foreclosure sale by the  non-judicial, "power of sale" procedure.


"Foreclosure" can occur one of two ways: 1. by a judicial action, or 2. by a private sale, pursuant to a "power of sale" in the original mortgage ("deed of trust") document (Civil Code §2925 et seq.)

Judicial Foreclosure: In the first trial, the court determines the validity of the debt and the amount of the debt.  The court orders the Sheriff to cause the property to be sold in a sheriff’s sale.  Then, within three months, if the creditor is still owed money on the note, he can ask for a second trial for an additional "deficiency judgment" against the debtor(s) on the note, if the original note was not a "CCP § 580b" loan. However, the money judgment cannot exceed the amount of the original debt with interest and costs of levy and sale and action, less the fair value of the real property as the date of sale.  In other words, even after a judicial action, sheriff’s sale, and second trial, it is virtually impossible for the creditor to obtain a money judgment against the debtor on the note, no matter what kind of loan (even business property loans.)  If the value of the property is high, the creditor causes a quicker, cheaper "power of sale" foreclosure sale.  If the value of the property is low, the judgment he can get is limited to the "fair value" of the property at the time of sale.

   If the possibility of a deficiency was reserved in the first decree, the property will be sold subject to a post-sale "right of redemption."  The length of redemption period will depend upon the actual bidding at the time of sale.  If a bid is received which is sufficient to pay off the amount specified in the decree, the property will be sold subject to a three-month post-sale period of redemption.  If a bid less than the amount specified in the decree is the high bid, the property will be sold subject to a one-year post-sale right of redemption (CCP § 729.030.)  Only the debtor and its successor in interest (and not the junior interest holders) have a post-sale right of redemption (CCP § 729.020.)

In "Plain English," no savvy creditor in California ever sues for judicial foreclosure to try to get a money judgment on a CCP § 580b loan used to buy a personal residence in California, and even if the loan is not a CCP § 580b loan, the expenses, procedures, and protections for the debtors are so onerous, the creditor normally sells the property by non-judicial "power of sale" procedure and gets paid, or resells the property with no further suit on the note.  Recall that the amount of a judgment possible on a note is limited to the "fair value" of the property at the time of the foreclosure sale (CCP § 580a.) 

A major exception is for actions for "actual fraud" by debtor, but proof of "actual fraud" is difficult and rarely done.  Occasionally, an out-of-state creditor tries to do so, especially in bankruptcy court, but the bankruptcy law and courts apply California law in this area.  Not even an action for fraud can be brought against the debtor on loans secured by single-family, owner-occupied residential real property where the loan is for $150,000 or less (CCP § 726(f) and (g).)

Non-Judicial, "Power Of Sale" Foreclosure: Instead, the lenders developed, and California courts and legislature approved, the "Deed Of Trust" security agreement, which contains three parties: the owner/debtor/trustor, who conveys "bare legal title with power of sale" to the Trustee (usually a title insurance company, but could be any person over 18 years old), for the benefit of the beneficiary/lender/bank.  If the loan is paid off, the lender directs the trustee to record a "full reconveyance" of the title to whoever is entitled to it.  If there is a default, the lender directs the trustee (and often records a "Substitution Of Trustee" to name their own, chosen foreclosure company, or even the lender itself as trustee), to comply with the statutes for a "power of sale" foreclosure, found in Civil Code §§ 2924 et seq.  

In essence, the trustee records, mails, and posts a "NOTICE OF DEFAULT," which starts a three-month period in which the debtor has the statutory right to "reinstate," that is, get caught up, by paying late monthly payments and trustee costs; after the three months has passed, the trustee records, mails, and posts a "NOTICE OF SALE."  The Notice Of Sale gives notice to the debtor and the world that there will be a private auction sale of the legal title securing the obligation at a place, date, and time certain at least 20 days in the future.   Whoever bids with cash or the equivalent at the sale, buys the property "subject to" all senior liens, with all junior liens extinguished.  The owner in possession becomes a tenant to be evicted by the new owner after a 60-day notice to move out.  The debtor can never be sued for anything arising out of the obligation, per CCP §§ 726 and 580d.  The owner moves out, sustains a "bad mark" on credit, but suffers no further liability.  Under new law, the debtor who loses a home in foreclosure does not even suffer any imputed income for federal or state income tax purposes.


The debtor protections summarized above do not protect those who sign a personal guaranty of the debt of another.

Note each situation is different, and general articles do not substitute for legal advice from an experienced California real estate lawyer.



         Re: Mandatory Paid Sick Leave - July 16, 2015

        Just a note to remind you that California law changed July 1, 2015 to require all employers, no matter how small, to provide a minimum of three days paid sick leave to all of their employees starting July 1, 2015. That is, at least one hour for every 30 hours worked.

         All employers should have a clear policy, and all employees should know and understand the policy, going forward.  

         Please note the Governor already signed an amendment to law on July 13, 2015, and new regulations will be coming from the state Department of Industrial Relations.


 “Law Of The Land” is a periodic newsletter of new and interesting developments in the law.


M. Dean Sutton


Sutton Law Firm

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