Effective January 1, 2011, SB 931 adds Section 580(e) to the California Code of Civil Procedure.  This new law is great news for most borrowers and sellers of real property involved in a short sale. The new California law provides that when the seller of a one to four unit residential property sells the property at a short sale, the first trust deed holder who consents in writing to the short sale cannot seek a deficiency judgment.

             A deficiency judgment is a judgment against the borrower for the difference between the unpaid balance of the secured debt and the amount produced by the sale of the security, whichever is greater. See CCP 726(b).  In plain English, we are addressing the shortfall between what is owed and the property’s final selling price.

             The new law applies only to loans secured by dwellings of one to four units. The new law does not apply to second or other junior lines against the property.  Section 580(e) also does not apply if the trustor is a corporation or a political subdivision of the state.

             Just as important, are two exceptions to the antideficiency protection, which have been heavily litigated and on which ample case law is available. The first is if the trustor commits “fraud” and the second is if the trustor commits “waste”.  The requisite elements of both exceptions are worthy of separate discussions as California case law has shaped the analysis and debate in both.  Beware that if the facts of your case fall under either of these two situations, Section 580(e) does not limit the ability of the lender to seek damages.

             In 2010, given the dismal state of California’s real estate market, the legislature passed additional antideficiency protections. Governor Schwarzenegger, however, did not let all the new protections through. He vetoed antideficiency protection made applicable to refinanced purchase money loans (SB 1178), which would have redefined “purchase money” to include “subsequent loans, mortgages, or deeds of trust that refinance or modify the original loan” and would have extended the protection to refinance loans.

             Section 580(e) protects homeowners as well as investors, as it is not limited to consumer transactions, nor limited to homeowner occupied dwellings. 

              Antideficiency rules are complex, and many exceptions from the rules exist for junior lenders.

             The first part of the bill is nearly word for word from Code of Civil Procedure Section 580(d) which provides” “No judgment shall be rendered for any deficiency upon a note secured by a deed of trust or mortgage upon real property or estate for years therein” when the property is sold by the mortgagee or trustee under a power of sale contained in the mortgage or deed of trust (i.e., California’s nonjudicial foreclosure) it bars a personal judgment against the homeowner for the difference between the debt and the amount of the foreclosure sale and the amount owed by the homeowner. But it specifically states that it doesn’t matter if it was refinanced or not and is not limited to owner-occupied dwellings.

             The new 580(e) provides:

            580e. (a) No judgment shall be rendered for any deficiency under a note secured by a first deed of trust or first mortgage for a dwelling of not more than four units, in any case in which the trustor or mortgagor sells the dwelling for less than the remaining amount of the indebtedness due at the time of sale with the written consent of the holder of the first deed of trust or first mortgage. Written consent of the holder of the first deed of trust or first mortgage to that sale shall obligate that holder to accept the sale proceeds as full payment and to fully discharge the remaining amount of the indebtedness on the first deed of trust or first mortgage.

            (b) If the trustor or mortgagor commits either fraud with respect to the sale of, or waste with respect to, the real property that secures the first deed of trust or first mortgage, this section shall not limit the ability of the holder of the first deed of trust or first mortgage to seek damages and use existing rights and remedies against the trustor or mortgagor or any third party for fraud or waste.

            (c) This section shall not apply if the trustor or mortgagor is a corporation or political subdivision of the state.


Source: http://www.kermanilaw.com/Blog.html