Black Sky Capital, LLC v. Cobb

Facts:  A property owner obtains two mortgages secured by the same commercial property. The mortgages are owned by the same mortgage holder. The property owner defaults [which one?] and the mortgage holder nonjudicially forecloses on the property, recovering only the amount of the senior mortgage.

Claim: The mortgage holder seeks to recover the amount owed on the junior mortgage, claiming they may recover directly from the owner since the nonjudicial foreclosure wiped out the security for the junior mortgage, rendering them a “sold-out” junior lienholder.

Counterclaim: The property owner claims they do not have to pay the remaining balance of the [junior?] mortgage since the fact that the mortgage holder owns both mortgages renders the payment a deficiency judgment, which is prohibited.

Holding: A California court of appeals holds the mortgage holder may recover the unpaid balance on the junior mortgage since a “sold-out” junior lienholder is entitled to obtain the amount owed on the junior mortgage after a nonjudicial foreclosure whether or not they also own the senior mortgage.  [Black Sky Capital, LLC v. Cobb (June 13, 2017)_CA4th_]

Editor’s note — Previous courts have ruled both that deficiency judgments do not apply to “sold-out” junior lienholders (Roseleaf Corp. v. Chierighino), and that a junior mortgage may not be recovered when the same mortgage holder possesses both the junior and senior mortgages (Simon v. Superior Court). However, the latter decision was widely regarded as a reaction to an attempt to circumvent California’s anti-deficiency statute, being that the two mortgages were originated mere days apart. [Roseleaf Corp. v. Chierighino (January 22, 1963) 59 CA2nd 35; Simon v. Superior Court (March 3, 1992) 13 CA3rd 866]

The basis for the decision in Black Sky rests partly on the length of time between the origination of the junior and senior mortgages — more than two years. In this case, the court decided there was no attempt to get around the law, rendering the mortgages separate and thus recoverable by the mortgage holder. 

As the California Supreme Court has granted review of this case, we will soon be hearing an opinion to clarify the murkiness of this concept. Stay tuned for further updates.

Read the case text.