In Coker v. JP Morgan Chase Bank, N.A., the California Supreme Court considered whether the anti-deficiency protections of Civil Procedure section 580b apply to a borrower who, with the permission of her lender, sold her residence to a third party for less than was owed on her loan. The Court concluded that the protections of Section 580b are applicable in such a scenario. Plaintiff Coker obtained a loan to purchase her home in San Diego. Chase ultimately held the loan. Coker stopped paying on her mortgage and Chase initiated a nonjudicial foreclosure. To avoid foreclosure, Coker sold the property in a short sale. Chase consented to the sale, but on the condition that Coker was responsible for any remaining deficiency (this was before the Legislature enacted Section 580e). After the sale, Chase tried to collect the deficiency. Coker responded with a complaint for declaratory relief, alleging that Chase was prohibited from collecting the deficiency based on Sections 580b and 580e, and the common law. Chase demurred. The trial court sustained the demurrer, without leave to amend, on the basis that Section 580b applied only after a foreclosure, Section 580e did not apply because it could not apply retroactively, and there were no common law antideficiency protections. Coker appealed. The Court of Appeal concluded that Section 580b was applicable, reversing the judgment of the superior court. Chase petitioned for review by the California Supreme Court. The Supreme Court affirmed.
The Court explained that in construing Section 580b, it has consistently held that the statute restricts the lender’s recovery on a standard purchase money loan to the value of its security, regardless of whether the security has been exhausted and regardless of whether there is an actual sale. The Court acknowledged that in non-standard scenarios, Section 580b would not apply, but noted that the Coker loan was a typical purchase money loan as she purchased the property to live in and never refinanced the loan. Chase argued that the short sale agreement changed the nature of the loan to an unsecured loan such that Section 580b did not apply. The Court rejected this reasoning as the amount paid to Chase in the sale was expressly for the purpose of Chase’s release of its security interest. The Court concluded that because Section 580b automatically applies to a purchase money loan and because Coker’s short sale did not change the purchase money character of the loan, Section 580b applied to bar collection of the deficiency. The protection also could not be waived in connection with approval of the short sale.
Chase raised two additional arguments. It claimed that Section 580b could not apply to short sales because such sales did not exist at the time the statute was enacted. The Court rejected this argument, reiterating that it is the nature of the loan and whether it is purchase money that governs the issue of applicability of the statute, not whether or not short sales existed at the time the statute was enacted. Chase also argued that the passage of 580e confirmed that Section 580b did not apply to short sales. The Court likewise rejected this argument as the enactment of Section 580e did not alter the previous decisions interpreting the applicability of Section 580b to purchase money loans.
Hannah M. Shafsky, Attorney, firstname.lastname@example.org