Black Sky Capital, LLC v. Cobb

Facts:  A property owner obtains a mortgage secured by a trust deed on a commercial property. Years later, the owner obtains a second mortgage from the same lender on the same property secured by a second trust deed. The property owner defaults on both mortgages and the mortgage holder nonjudicially forecloses on the senior lien then separately seeks to recover the amount owed on the junior lien.

Claim: The property owner claims they are not liable for the balance of the junior mortgage since the fact that the mortgage holder owns both mortgages renders the payment a deficiency judgment, which is prohibited.

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

Holding: The California Supreme Court 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 (May 6, 2019)_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]

A prior appellate decision in Black Sky rested partly on the length of time between the origination of the junior and senior mortgages — more than two years. The lower court decided there was no attempt to get around the law, rendering the mortgages separate and thus recoverable by the mortgage holder. Here, the California Supreme Court affirmed that decision, arguing the mortgage holder displayed no effort to subvert anti-deficiency statutes, and thus the mortgage holder is entitled to recover the amount owed by the owner.

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