IN THE SUPREME COURT OF
CALIFORNIA
BLACK SKY CAPITAL, LLC,
Plaintiff and Appellant,
v.
MICHAEL A. COBB et al.
Defendants and Respondents.
S243294
Fourth Appellate District, Division Two
E064482
San Bernardino County Superior Court
CIVDS1416584
May 6, 2019
Justice Liu authored the opinion of the court, in which Chief
Justice Cantil-Sakauye and Justices Chin, Corrigan, Cuéllar,
Kruger, and Groban concurred.
BLACK SKY CAPITAL, LLC v. COBB
S243294
Opinion of the Court by Liu, J.
Under California law, a creditor can recover a debt
secured by a deed of trust on real property through a nonjudicial
foreclosure action to sell the property at a public auction. Code
of Civil Procedure section 580d provides that a creditor cannot
collect a deficiency judgment — that is, the difference between
the amount of indebtedness and the fair market value of the
property — if the property is sold for less than the amount of the
outstanding debt. (All undesignated statutory citations are to
the Code of Civil Procedure.) Here we consider this question:
Where a creditor holds two deeds of trust on the same property,
can the creditor recover a deficiency judgment on a junior lien
extinguished by a nonjudicial foreclosure on the senior lien? The
trial court applied section 580d to bar such a recovery; the Court
of Appeal disagreed. We affirm and hold that under the
circumstances here, section 580d does not preclude a creditor
holding two deeds of trust on the same property from recovering
a deficiency judgment on the junior lien extinguished by a
nonjudicial foreclosure sale on the senior.
I.
On August 18, 2005, defendants Michael and Kathleen
Cobb borrowed $10,299,250 from Citizens Business Bank by
executing a promissory note secured by a deed of trust, also
dated August 18, 2005, on a parcel of commercial property in
Rancho Cucamonga. On September 13, 2007, the Cobbs
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Opinion of the Court by Liu, J.
borrowed an additional $1.5 million from Citizens Business
Bank by executing a second promissory note secured by a
separate deed of trust, dated September 7, 2007, on the same
property. The second deed of trust said the lien “may be
secondary and inferior to the lien securing payment of an
existing obligation . . . to Citizens Business Bank described as:
First Deed of Trust dated August 18, 2005.” On January 3,
2014, Citizens Business Bank sold both loans to plaintiff Black
Sky Capital, LLC (Black Sky). On June 20, 2014, Black Sky sent
the Cobbs a notice of default and election to sell the property
under the first deed of trust. Black Sky acquired the property
at a public auction for $7.5 million on October 28, 2014. On
November 4, 2014, Black Sky filed a lawsuit to recover the
amount still owed on the second deed of trust extinguished by
the foreclosure sale. Both parties moved for summary
judgment.
Applying Simon v. Superior Court (1992) 4 Cal.App.4th
63, 66 (Simon), which held that section 580d precludes a
deficiency judgment for a junior lienholder who was also the
foreclosing senior lienholder, the trial court concluded that
section 580d bars the monetary judgment sought by Black Sky
and granted the Cobbs’ motion for summary judgment. On
appeal, the Court of Appeal declined to follow Simon in light of
our decision in Roseleaf Corp. v. Chierighino (1963) 59 Cal.2d
35, 43 (Roseleaf), which held that section 580d does not preclude
a deficiency judgment for a nonselling junior lienholder. (Black
Sky Capital, LLC v. Cobb (2017) 12 Cal.App.5th 887, 897 (Black
Sky).) The Court of Appeal observed that although the senior
and junior lienholder are the same, “[a]ny debt owed on the
junior note in this case has no relationship to the debt owed on
the senior note, and by no contortion of the . . . definition [of a
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Opinion of the Court by Liu, J.
deficiency judgment] can the unpaid balance on that note be
deemed a deficiency with respect to the senior note, within the
meaning of section 580d.” (Black Sky, at p. 897.) Rather, “[t]he
unambiguous language in section 580d . . . indicate[s] that
section 580d applies to a single deed of trust” and “does not
apply to preclude Black Sky from suing for the balance due on
the junior note in this case.” (Ibid.) The Court of Appeal
reversed the trial court’s judgment and remanded for further
proceedings. (Ibid.) We granted review.
II.
“California has an elaborate and interrelated set of
foreclosure and antideficiency statutes relating to the
enforcement of obligations secured by interests in real property.
Most of these statutes were enacted as the result of ‘the Great
Depression and the corresponding legislative abhorrence of the
all too common foreclosures and forfeitures [which occurred]
during that era for reasons beyond the control of the debtors.’ ”
(Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226,
1236.) Under section 726, “there is only ‘one form of action’ for
the recovery of any debt or the enforcement of any right secured
by a mortgage or deed of trust”; “[t]hat action is foreclosure,
which may be either judicial or nonjudicial.” (Alliance
Mortgage, at p. 1236.) In a judicial foreclosure, a creditor may
seek a deficiency judgment to recover “the difference between
the amount of the indebtedness and the fair market value of the
property” if the property is sold for less than the amount of the
outstanding debt. (Ibid.) But the debtor has a statutory right
of redemption, which provides “an opportunity to regain
ownership of the property by paying the foreclosure sale price,
for a period of time after foreclosure.” (Ibid.) In a nonjudicial
foreclosure, also known as a trustee’s sale, the creditor exercises
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Opinion of the Court by Liu, J.
the power of sale given by the deed of trust, and the debtor has
no statutory right to redemption. (Ibid.) But under section
580d, “the creditor may not seek a deficiency judgment” after a
nonjudicial foreclosure. (Alliance Mortgage, at p. 1236.
In Roseleaf, we considered whether this provision bars
recovery on a junior lien in a circumstance where that lien was
held by a creditor different from the one holding a senior lien on
the same property. The senior lienholder in Roseleaf initiated a
nonjudicial foreclosure sale without any involvement of the
junior lienholder. After the sale, the junior lienholder sued the
debtor to recover the full amount unpaid on the second deed.
(Roseleaf, supra, 59 Cal.2d at p. 38.) We observed that the
antideficiency statutes’ fair value provisions “are designed to
prevent creditors from buying in at their own sales at deflated
prices and realizing double recoveries by holding debtors for
large deficiencies.” (Id. at p. 40.) We also observed that under
these provisions, and even in their absence, “[s]ome courts have
limited deficiency judgments to prevent double recoveries,” but
“they have not limited such judgments when sought by
nonselling junior lienors.” (Ibid.) The reason is that “[t]he
position of a junior lienor whose security is lost through a senior
sale is different from that of a selling senior lienor. A selling
senior can make certain that the security brings an amount
equal to his claim against the debtor or the fair market value,
whichever is less, simply by bidding in for that amount. He need
not invest any additional funds. The junior lienor, however, is
in no better position to protect himself than is the debtor. Either
would have to invest additional funds to redeem or buy in at the
sale. Equitable considerations favor placing this burden on the
debtor, not only because it is his default that provokes the senior
sale, but also because he has the benefit of his bargain with the
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Opinion of the Court by Liu, J.
junior lienor who, unlike the selling senior, might otherwise end
up with nothing.” (Id. at p. 41.
Section 580d, we held, “does not bar [the junior
lienholder’s] action.” (Roseleaf, supra, 59 Cal.2d at p. 43.) At
the time, the text of the statute prohibited a deficiency judgment
“ ‘upon a note secured by a deed of trust or mortgage upon real
property hereafter executed in any case in which the real
property has been sold by the mortgagee or trustee under power
of sale contained in such mortgage or deed of trust.’ ” (Ibid.
“ ‘[S]uch mortgage or deed of trust,’ ” we said, “refers to the
instrument securing the note sued upon. Thus section 580d does
not appear to extend to a junior lienor whose security has been
sold out in a senior sale.” (Ibid.
We went on to explain that section 580d “was enacted to
put judicial enforcement on a parity with private enforcement.”
(Roseleaf, supra, 59 Cal.2d at p. 43.) Before the enactment of
section 580d, a debtor had a statutory right to redemption under
a judicial foreclosure but not under a trustee’s sale. “The right
to redeem, like proscription of a deficiency judgment, has the
effect of making the security satisfy a realistic share of the debt.
[Citation.] By choosing instead to bar a deficiency judgment
after private sale, the Legislature achieved its purpose without
denying the creditor his election of remedies. If the creditor
wishes a deficiency judgment, his sale is subject to statutory
redemption rights. If he wishes a sale resulting in
nonredeemable title, he must forego the right to a deficiency
judgment. In either case the debtor is protected.” (Roseleaf, at
pp. 43–44.
We further explained: “The purpose of achieving a parity
of remedies would not be served by applying section 580d
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Opinion of the Court by Liu, J.
against a nonselling junior lienor. Even without the section the
junior has fewer rights after a senior private sale than after a
senior judicial sale. He may redeem from a senior judicial sale
(Code Civ. Proc., § 701), or he may obtain a deficiency judgment.
[Citations.] After a senior private sale, the junior has no right
to redeem. This disparity of rights would be aggravated were he
also denied a right to a deficiency judgment by section 580d.
There is no purpose in denying the junior his single remedy after
a senior private sale while leaving him with two alternative
remedies after a senior judicial sale. The junior’s right to
recover should not be controlled by the whim of the senior, and
there is no reason to extend the language of section 580d to
reach that result.” (Roseleaf, supra, 59 Cal.2d at p. 44; see
Bargioni v. Hill (1963) 59 Cal.2d 121, 122 [citing Roseleaf’s
holding that section 580d “bars recovery only on a note secured
by a trust deed or mortgage that has been rendered valueless by
a sale under a power of sale contained in the trust deed or
mortgage securing the note sued upon” (italics added)].
Does our construction of section 580d in Roseleaf limit the
application of section 580d where, as here, the senior and junior
lienholders are the same entity? For two decades, the leading
decision on this issue was Simon, supra, 4 Cal.App.4th 63. The
court there held that “where a creditor makes two successive
loans secured by separate deeds of trust on the same real
property and forecloses under its senior deed of trust’s power of
sale, thereby eliminating the security for its junior deed of trust,
section 580d . . . bars recovery of any ‘deficiency’ balance due on
the obligation the junior deed of trust secured.” (Id. at p. 66.
The court explained that allowing a senior lienholder to pursue
a trustee’s sale, terminate the right of redemption, and obtain a
deficiency judgment on a junior lien whose security the senior
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lienholder made the choice to eliminate would not further the
parity of remedies described in Roseleaf. (Simon, at p. 77.
Further, “[u]nlike [a situation involving] a true third party sold-
out junior, [the] right to recover as a junior lienor which is also
the purchasing senior lienor is obviously not controlled by the
‘whim of the senior.’ We will not sanction the creation of
multiple trust deeds on the same property, securing loans
represented by successive promissory notes from the same
debtor, as a means of circumventing the provisions of section
580d.” (Ibid.) Finally, Simon noted that “[t]he antideficiency
statutes are to be ‘liberally construed to effectuate the specific
legislative purpose behind them. . . . The courts have exhibited
a very hospitable attitude toward the legislative policy
underlying the anti-deficiency legislation and have given it a
broad and liberal construction that often goes beyond the
narrow bounds of the statutory language.’ ” (Id. at p. 78.
Over the next 20 years, several Courts of Appeal cited
Simon’s reasoning with approval. (See Bank of America, N.A. v.
Mitchell (2012) 204 Cal.App.4th 1199, 1207; Ostayan v. Serrano
Reconveyance Co. (2000) 77 Cal.App.4th 1411, 1422; Evans v.
California Trailer Court, Inc. (1994) 28 Cal.App.4th 540, 552.
However, the Court of Appeal in Cadlerock Joint Venture, L.P.
v. Lobel (2012) 206 Cal.App.4th 1531 (Cadlerock) questioned
this line of cases, observing that “[c]onspicuously absent from
Simon . . . is a close examination of the text of section 580d.”
(Cadlerock, at p. 1548.) According to Cadlerock, “Simon . . . and
its progeny . . . created an equitable exception to the text of
section 580d” by misreading Roseleaf’s equitable considerations
into section 580d. (Cadlerock, at p. 1549.) The court observed
that although “[p]erhaps Simon and its progeny have come to
the right result under the one form of action rule, assuming that
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Opinion of the Court by Liu, J.
it is a proper sanction for a violation of section 726 under these
circumstances to bar the junior lienor from obtaining any
recovery,” the one form of action rule should not be “conflated
[with] the analysis of section 580d.” (Cadlerock, at p. 1549.) But
unlike Simon, Cadlerock involved a creditor that issued two
deeds of trust on the same real property and then assigned the
junior lien to a different creditor before foreclosing on the senior
lien. Cadlerock’s criticism of Simon was therefore dicta, and the
court acknowledged that Simon and its progeny were
distinguishable because “the junior lienor and senior lienor [in
Cadlerock] were different entities at the time of the senior
trustee’s sale.” (Cadlerock, at p. 1546.
The Court of Appeal here found Cadlerock’s criticism of
Simon persuasive and concluded that Roseleaf “cannot be read
to support the rule created by Simon.” (Black Sky, supra, 12
Cal.App.5th at p. 894.) “Roseleaf’s holding that section 580d
does not apply to nonselling junior lienholders cannot be
contorted into a rule that section 580d somehow does apply to
preclude a lienholder from seeking damages under the junior
note if it, in its capacity as the senior lienholder, has exercised
its right to conduct a private sale of the property rather than
seeking a judicial foreclosure.” (Ibid.) “Section 580d simply does
not . . . , by its express terms, encompass a lien that has not been
foreclosed,” and to the extent that Simon could be justified as
preventing a bank from “issuing nearly simultaneous loans
secured by the same property . . . to circumvent the
antideficiency statutes,” that justification fails in this case
where “the second loan was issued two years after the first, and
the default did not occur until seven years later.” (Id. at p. 895.
The Court of Appeal concluded that “Black Sky’s suit to enforce
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Opinion of the Court by Liu, J.
the debt on the junior note is not barred by section 580d or by
section 726.” (Id. at p. 897
The question here is whether section 580d bars a
deficiency judgment on a junior lien held by a senior lienholder
that sold the property comprising the security for both liens. We
do not consider whether section 726 or any other statute bars or
limits such a deficiency judgment; the question before us
concerns only section 580d.
III.
Section 580d, subdivision (a) provides that “no deficiency
shall be owed or collected, and no deficiency judgment shall be
rendered for a deficiency on a note secured by a deed of trust or
mortgage on real property or an estate for years therein
executed in any case in which the real property or estate for
years therein has been sold by the mortgagee or trustee under
power of sale contained in the mortgage or deed of trust.” Black
Sky contends that section 580d does not apply because it is
seeking a deficiency on the note secured by the September 7,
2007 deed of trust and no sale occurred under power of sale
contained in that deed of trust.
The plain language of section 580d, subdivision (a) bars a
deficiency judgment on a note secured by a deed of trust on real
property when the trustee has sold the property “under power
of sale contained in the . . . deed of trust.” (Italics added.) The
definite article in the phrase “the . . . deed of trust” makes clear
that the statute applies where sale of the property has occurred
under the deed of trust securing the note sued upon, and not
under some other deed of trust. (Ibid.) We reached the same
conclusion in Roseleaf at a time when section 580d used the
phrase “such . . . deed of trust” instead of “the . . . deed of trust”:
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Opinion of the Court by Liu, J.
The phrase “refers to the instrument securing the note sued
upon.” (Roseleaf, supra, 59 Cal.2d at p. 43.) Roseleaf was not a
case in which the senior and junior lienholders were the same
entity. But nothing in the text of section 580d indicates that the
statute applies where no sale has occurred under the trust deed
securing a junior lien, even if the lien is held by a creditor who
has foreclosed on a senior lien on the same property.
We have “consistently looked to the purposes of the statute
and to the substance rather than the form of loan transactions
in deciding the . . . applicability” of antideficiency statutes.
(Coker v. JPMorgan Chase Bank, N.A. (2016) 62 Cal.4th 667,
676; id. at pp. 676–681 [discussing our case law applying this
approach].) The Cobbs contend that allowing a junior lienholder
to collect a deficiency judgment in this scenario would be at odds
with the purpose of section 580d insofar as a creditor could
structure what is functionally a single loan as two separate
notes in order to recover under the junior note what it could not
recover if it had issued a single note on the same property. In
Simon, the junior and senior loans were issued just four days
apart, and the deeds of trust securing the loans were recorded
on the same date. (Simon, supra, 4 Cal.App.4th at p. 66.) Simon
treated the two loans as one, distinguishing the lender from “a
true third party sold-out junior.” (Id. at p. 77.) It was in that
context that Simon said courts “will not sanction the creation of
multiple trust deeds on the same property, securing loans
represented by successive promissory notes from the same
debtor, as a means of circumventing the provisions of section
580d.” (Ibid.
Where there is evidence of gamesmanship by the holder of
senior and junior liens on the same property, a substantial
question would arise whether the two liens held by the same
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Opinion of the Court by Liu, J.
creditor should — in substance, if not in form — be treated as a
single lien within the meaning of section 580d. (Cf. Freedland
v. Greco (1955) 45 Cal.2d 462, 467 [“It is unreasonable to say the
Legislature intended that section 580d could be circumvented
by such a manifestly evasive device [where the creditor issued
two notes, one secured by a deed of trust and another by a
chattel mortgage, for the same obligation of $7,000]. In such a
situation the legislative intent must have been that the two
notes are, in legal contemplation and under section 580d, one,
secured by a trust deed.”]; Simon, supra, 4 Cal.App.4th at p. 66.
It is unclear that the Legislature, in enacting section 580d,
intended to permit such gamesmanship to affect the amount of
recovery under a junior lien.
But we have no occasion here to decide the applicability of
section 580d in these or other gamesmanship scenarios. The
Cobbs do not allege, and there is no evidence to suggest, that the
two notes in this case arose from intentional loan splitting; they
were executed in separate transactions more than two years
apart. And the bare assertion by the Cobbs that Black Sky’s
purchase of the property for $7.5 million at a public auction in
October 2014 was “substantially less than the appraised value
of the Subject Property as of August 1, 2013” — with no evidence
of irregularity at the public auction or price stability between
the appraisal and auction — is not enough to suggest that $7.5
million was a lowball bid designed to “effect an excessive
recovery by obtaining a deficiency judgment” on the junior lien.
(Simon, supra, 4 Cal.App.4th at p. 78.) Indeed, counsel for the
Cobbs acknowledged at oral argument that the Cobbs have
“never taken the position” that “anything untoward” occurred in
the origination of the loans or the public auction.
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Opinion of the Court by Liu, J.
To be sure, when a single creditor holds senior and junior
liens on the same property, the right to recover on the junior lien
“is obviously not controlled by the ‘whim of the senior.’ ” (Simon,
supra, 4 Cal.App.4th at p. 77, quoting Roseleaf, supra, 59 Cal.2d
at p. 44.) But it does not follow that section 580d’s purpose of
achieving parity of remedies between judicial and nonjudicial
foreclosures would be served by interpreting the statute to
categorically bar a deficiency judgment on the junior lien.
Where, as here, there is no allegation of evasive loan splitting or
recovery in excess of what any junior lienholder would be able
to recover, we see no reason to depart from a straightforward
reading of section 580d. Because no sale occurred under the
deed of trust securing the junior note in this case, section 580d
does not bar a deficiency judgment on the junior note. We
disapprove Bank of America, N.A. v. Mitchell (2012) 204
Cal.App.4th 1199; Ostayan v. Serrano Reconveyance Co. (2000
77 Cal.App.4th 1411; Evans v. California Trailer Court, Inc.
(1994) 28 Cal.App.4th 540; and Simon v. Superior Court (1992
4 Cal.App.4th 63, to the extent they are inconsistent with this
opinion.
CONCLUSION
We affirm the judgment of the Court of Appeal.
LIU, J.
We Concur:
CANTIL-SAKAUYE, C. J.
CHIN, J.
CORRIGAN, J.
CUÉLLAR, J.
KRUGER, J.
GROBAN, J.
12
See next page for addresses and telephone numbers for counsel who argued in Supreme Court.
Name of Opinion Black Sky Capital, LLC v. Cobb
Unpublished Opinion
Original Appeal
Original Proceeding
Review Granted XXX 12 Cal.App.5th 887
Rehearing Granted
Opinion No. S243294
Date Filed: May 6, 2019
Court: Superior
County: San Bernardino
Judge: Bryan Foster
Counsel:
Law Offices of Ronald Richards & Associates, Ronald N. Richards; Wilson, Elser, Moskowitz, Edelman &
Dicker, Robert Cooper; Law Offices of Geoffrey Long and Geoffrey S. Long for Plaintiff and Appellant.
Horvitz & Levy, Jeremy B. Rosen and Eric S. Boorstin for D-Day Capital, LLC, as Amicus Curiae on
behalf of Plaintiff and Appellant.
Levitt Law, Scott L. Levitt; Lex Opus, Schiffer & Buus, Eric M. Schiffer and William L. Buus for
Defendants and Respondents.
Arthur D. Levy and Noah Zinner for Housing and Economic Rights Advocates as Amicus Curiae on behalf
of Defendants and Respondents.
Counsel who argued in Supreme Court (not intended for publication with opinion):
Ronald N. Richards
Law Offices of Ronald Richards & Associates
P.O. Box 11480
Beverly Hills, CA 90213
(310) 556-1001
Eric M. Schiffer
Schiffer & Buus
959 South Coast Drive, Suite 385
Costa Mesa, CA 92626
(949) 825-6140
Opinion Information
| Date: | Docket Number: |
| Mon, 05/06/2019 | S243294 |
