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In an inflationary estate market, borrowers frequently sign recourse notes with little consideration of the risks involved. Many simply assume that California's anti deficiency legislation will insulate them from personal liability. This legislation consists primarily of C.C.P. Section 580(b), which precludes personal liability as to certain "purchase money" loans, C.C.P. Section 580(d), which prevents a lender which has foreclosed non judicially from seeking a deficiency judgment, and C.C.P. Section 726, which requires a lender to foreclose prior to seeking personal liability. However, these statutes are not all encompassing, as illustrated by two recent cases. One case, DeBerard Properties, Ltd. v. Bun Raymond Lim (April 6, 1998) 98 Daily Journal D.A.R. 3478 , considered whether a borrower could waive the protections of C.C.P. Section 580(b). California law is clear that any such waiver given at the time a loan is made is unenforceable. Freedland v. Greco (1955) 45 Cal 2d 462. However, there is a split in authority as to whether Section 580(b) protections may later be waived. Cm. Russell v. Roberts (1974) 39 Cal. App. 3d 390 with Palm v. Schilling (1988) 199 Cal.App. 3d 63. In DeBerard, the court followed Palm and held that a waiver of C.C.P. Section 580(b) in a forbearance agreement was unenforceable. The other case, San Paolo U.S. Holding Company, Inc. v. 816 South Figueroa Company etc., (March 31, 1998), 98 Daily Journal D.A.R. 3287, dealt with how to compute a deficiency judgment. C.C.P. Section 726(b) provides that the amount of a deficiency judgment is the excess of the indebtedness over the "fair value" of the real property. In San Paolo, the issue was which factors should betaken into account in determining that "fair value". Under existing law, "fair value" is determined by all of the circumstances attending the property at the time of the foreclosure sale, including the state of its title and merchantability. Nelson v. Orosco (1981) 117 Cal.App. 3d 73. However, the possibility of a post sale redemption may not to be taken into account. Rainer Mortgage v. Silverwood Ltd. (1985) 163 Cal.App. 3d 359. The court in San Paolo further refined the definition of "fair value" to exclude any consideration of current real estate conditions, even if the market is greatly depressed. Borrowers who sign recourse notes do so at their peril, as California's anti deficiency laws will not necessarily shield them should their loan go sour.
Copyright © 1998 Richard A. Goodman |