Lenders Get A Win With Foreclosure

 In Real Estate

1. Supreme Court Considers Changing Balance of Power Between Borrowers and Lenders in an Important Foreclosure Case

In the case of Black Sky Capital LLC v. Cobb, S243294, the California Supreme Court is considering the ruling of the 4th District Court of Appeal that held that the owner of both the senior and junior loan on a foreclosed property could sue to recover on the note on the junior loan after the senior loan foreclosed. This ruling in the Court of Appeal overturned a 25-year-old precedent governing case.

This case involves a couple, the Cobbs, who borrowed $10.2 Million Dollars in 2005 to buy a commercial property. Then they borrowed another $1.5 Million Dollars on the same property two years later. Black Sky bought both loans, but only netted $7.5 Million Dollars in a 2014 trustee’s sale.

Black Sky then filed a lawsuit on the sold-out junior lien note. The San Bernardino County Superior Court dismissed the case in favor of the borrower on a summary judgment citing the 1992 case of Simon v. Superior Court, 4 Cal.App.4th63.

Under Simon, the ruling was that state laws that protected junior lien holders from the “whims” of senior lien holders does not apply when the same party owns both loans. It interpreted the civil code to find that the junior loan lender could not enforce its loan as a deficiency judgment, the difference between the amount owed and the sale price.

Black Sky appealed, arguing Simonwas bad law and all subsequent decisions based on Simonviolate Roseleaf Corp. v. Chierghino, 59 Cal.2d 35, which found a junior lienholder’s right were not extinguished by a sale conducted by a senior lienholder.

The theory argued to the Supreme Court was that allowing the same lender to sue and recover on both loans would make banks more likely to offer second loans to ease borrowers in tough times.

Cobbs’ attorney argued that borrowers would be less likely to take out second loans and that any new rules adopted by the Supreme Court would create a possibility for manipulation by lenders, particularly for those who buy up loans, such as Black Sky, at a discount.

This is the first time in over 56 years that the Roseleafcase is being reviewed and conflicting rules/cases are being defined clearly when it comes to foreclosures and junior lienholders’ right where both loans are owned by the same entity/person. The arguments were just made last Tuesday at the Supreme Court. When the Supreme Court makes a decision, I will obviously report.

About the Author

  • Scott Souders
    Scott Souders Attorney & Author


Scott Souders is a real estate attorney who has practiced real estate law in excess of 42 years in Southern California. The Real Estate Law Update cites cases or statutes which are summarized and should not be relied upon without fully reading the cases or statute in the advance sheets and shepardizing the same and consulting with your own attorney.

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