Seeking a money judgment under a judicial foreclosure

When a loan is in default, the mortgage holder’s collection efforts are limited to judicial or nonjudicial activities, both of which are very structured. If the note evidences a recourse debt, the mortgage holder may recover against both the property and the owner as the named borrower, but only if a judicial foreclosure sale takes place.

To initiate a collection effort, the mortgage holder needs to first exhaust the security by foreclosing on the security, i.e., the real estate. The mortgage holder’s security interest in a property is exhausted when the mortgage holder completes a foreclosure sale on the property. Alternatively, the mortgage holder’s security interest may have been wiped out — exhausted — by a senior trust deed holder’s foreclosure sale. Thus, the note is now unsecured and the noteholder unable foreclose.

Only when the note evidences a recourse debt may the mortgage holder pursue a money judgment against the property owner for any deficiency in the property’s value to fully satisfy the debt. To obtain a money judgment, the holder of a recourse mortgage is limited to using the judicial foreclosure process, or if their security interest has otherwise been exhausted suing directly on the now unsecured recourse note. [Calif. Code of Civil Procedure §726(b)]

Recall that a mortgage holder may foreclose on a property and sell it to exhaust their security interest in one of two ways:

  • judicial foreclosure, under mortgage law, also called a sheriff’s sale [CCP §725a]; or
  • nonjudicial foreclosure, under the power-of-sale provision in the trust deed or other security device, also called a trustee’s sale. [ Civil Code §2924]

Judicial foreclosure

is the court-ordered sale by public auction of the secured property. It can take eight months to multiple years to complete a judicial foreclosure.

Alternatively, when a mortgage holder nonjudicially forecloses by a trustee’s sale, the property is sold as authorized by the trust deed provisions at a public auction, called a trustee’s sale. Trustee’s sales can be completed on property other than a one-to-four unit residential property within four months after a property owner defaults. On average, it takes approximately nine months to nonjudicially foreclose on a one-to-four unit residential property.

Unlike a judicial foreclosure sale, the completion of a trustee’s sale bars the foreclosing mortgage holder from obtaining a money judgment for any unpaid balance remaining after the foreclosure sale due to insufficient value in the secured property. [CCP §580d]

Trustee’s sales are considerably less expensive and quicker than judicial foreclosures. Alternatively, a judicial sale requires the filing of a lawsuit, which includes:

  • litigation expenses;
  • appraisals; and
  • attorney fees.

However, when the value of a mortgaged property drops below the balance owed on a recourse debt, the mortgage holder may elect to foreclose by judicial action. A judicial foreclosure sale allows the holder of a recourse mortgage to obtain a money judgment against the property owner for any deficiency in the value of the mortgaged property at the time of the sale to fully satisfy the recourse debt. [CCP §580d]

Judicial sales and sheriff’s deed

Deeds executed by agents of the court, such as a receiver or sheriff to transfer title under a court-ordered sale, are similar to quitclaim deeds. Neither deed carries with them the implied covenants of a grant deed.

Only an owner’s interest in a property, if any exists, which was subject to the judicially ordered sale is conveyed. Likewise, any after-acquired title later acquired in the property sold by judicial order does not later pass to the buyer.

A sale is considered judicial when the property is conveyed by an order of the court to carry out a judgment, such as a sale on the execution of a money judgment or a judicial foreclosure sale. [In re Backesto’s Estate (1923) 63 CA 265]

Additionally, a buyer and broker at a judicial foreclosure sale have the responsibility to investigate and determine the condition of the property. They also need to investigate the ownership interest and condition of the owner’s title being conveyed by order of the court, since no warranties exist. [Mains, supra]