Local Attorney Scores Major Win for Lenders and Borrowers in State Supreme Court
Posted Monday, May 6, 2019 - 4:43 pm
Local Beverly Hills attorney Ronald Richards scored a major victory today in the Supreme Court of California that will have broad implications for borrowers and banking in the landmark case of Black Sky Capital, LLC V. Michael Cobb, et al.
“Since 1992, California lenders have been subject to a judge-made rule that has restricted, rather than expanded credit to existing borrowers,” said Richards. “The rule was not supported by the text of the law nor any legislative history. Our office, with the support of our client, set out to change 27 years of intermediate court rulings that did not adhere to the Supreme Court’s stare decisis (to stand by things decided) in its seminal opinion on the subject, pronounced in 1963.”
According to Richards, who has argued at the State Supreme Court twice this year which is extremely rare for any attorney, for nearly three decades a borrower could not seek a second loan on a property from the same bank without the bank running the risk of having its second lien wiped out if it foreclosed on its first lien.
Since the 1992 decision in Simon v. Superior Court, lenders in California holding senior and junior liens on the same real property were barred from both non-judicially foreclosing pursuant to the senior lien and also seeking a deficiency judgement on the junior lien.
According to the National Law Review, “the decision opens the door for lenders to enforce two liens on the same property in this manner for the first time in more than 25 years [without risking their second lien getting extinguished]. Lenders in the right circumstances would have the option to sue the borrower for collection of the ‘sold-out’ junior lien debt following the foreclosure of the senior lien.”
“With the assistance of a great team, I did what attorneys should never be afraid to do: challenge existing precedent with new policy arguments, extrapolation of dicta from other courts, and take your case all the way to the Supreme Court if you have to. This is precisely what happened here and I am grateful to the Court and our client for allowing this injustice on the credit markets to be corrected.”
“It is a new day for California lenders and borrowers who are now free to contract without a prophylactic rule that was inhibiting additional loans to the same borrower by the same lender,” he said.
“For two decades… the court held that ‘where a creditor makes two successive loans secured by separate deeds of trust on the same real property and forecloses under its senior deed of trust’s power of sale, thereby eliminating the security for its junior deed of trust, section 580d… bars recovery of any ‘deficiency’ balance due on the obligation the junior deed of trust secured,” reads the court’s opinion, written by the Honorable Goodwin H. Liu.
“There is no evidence to suggest that the two notes in this case arose from intentional loan splitting: they were executed in separate transactions more than two years apart.” There is no evidence that Black Sky’s purchase of the property for $7.5 million at public auction was “a lowball bid designed to ‘effect an excessive recovery by obtaining a deficiency judgement’ on the junior lien.”
“Equitable considerations favor placing this burden on the debtor, not only because it is his default that provokes the senior sale, but also because he has the benefit of his bargain with the junior lienor who, unlike the selling senior, might otherwise end up with nothing,” according to the opinion. “There is no purpose in denying the junior his single remedy after a senior private sale… The junior’s right to recover should not be controlled by the whim of the senior…”
“Because no sale occurred under the deed of trust securing the junior note in this case section 580d does not bar deficiency judgement on the junior note.”
“This holding is an apex case in my career,” said Richards. “This was one of the most influential as it overturned four different appellate decisions. It effects millions and millions of loans. This effects people in Beverly Hills who have equity trapped in their property and need options on how to get it out.”