Beware the “Security Side Deal” in Multi-Debtor Real Estate Secured Obligations

First published in the California Real Property Journal, a quarterly publication of the Real Property Law Section of the State Bar of California.

The article explores the intricacies of obtaining a deficiency judgment under California foreclosure law with loans involving multiple borrowers, focusing on the Fifth District Court of Appeal’s recent opinion in First California Bank v. McDonald, which was initially published but then superseded by the California Supreme Court’s grant of review on February 25, 2015.

In the Court of Appeal’s opinion, the Court held that under Code of Civil Procedure section 726, a lender lost its right to pursue a deficiency judgment against co-borrower A when the lender agreed with only co-borrower B on the private short sale of real estate security property.  In order to obtain a deficiency judgment, the Court held, a lender must include all real property collateral in a single action for judicial foreclosure.

The Supreme Court granted review on a “grant and hold” basis, with briefing deferred until after the Supreme Court renders its decision in Coker v. JP Morgan Chase Bank, N.A., a case involving a different type of anti-deficiency based challenge to a short sale.

The article recaps the Court of Appeal’s opinion in McDonald, summarizes the existing state of the law on deficiency judgments in the context of multi-debtor obligations, and explores the potential outcomes and tactical considerations relating to the Supreme Court’s review of the case.

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