The Court of Appeal in the Second District ( Los Angeles) said in a published decision issued on August 1, 2012 that modifaction of a note does not affect the limtation on the “Bank” from collecting more that the house is worth (i.e. no deficiency judgment.)

The court held:

“No deficiency judgment shall lie in any event after a sale of real property　.　.　.　under a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property.” (Code Civ. Proc., § 580b.) Section　580b was “drafted in contemplation of the standard purchase money mortgage transaction, in which the vendor of real property retains an interest in the land sold to secure payment of part of the purchase price.” (Roseleaf Corp. v. Chierighino (1963) 59　Cal.2d 35, 42.) It also acts as a “stabilizing factor in land sales” and “prevents the aggravation of [a] downturn that would result if defaulting purchasers were burdened with large personal liability.” (Ibid.) The purpose of the statute causes it to be applied liberally and broadly. (DeBerard Properties, Ltd. v. Lim (1999) 20　Cal.4th 659, 663.)

Section 580b applies to the Promissory Note because Rocha retained an interest in the property being sold with the ability to foreclose on it upon nonpayment by the Weinsteins-albeit with lower priority than the first deed of trust. Because the property being purchased was used as security, this clearly falls within the definition of a　”deed of trust　.　.　.　given to the vendor to secure payment of the balance of the purchase price” to which section　580b applies.

“[I]n no event shall there be a deficiency judgment,　.　.　.　because the security has become valueless or is exhausted　.　.　.　after a sale under [a senior] trust deed.” (Brown v. Jensen (1953) 41 Cal.2d 193, 198.) In Brown, a property vendor who held a secondary deed of trust was denied relief outside of foreclosure even though the security had already been exhausted. One who issues a trust deed “assumes the risk that it may become inadequate.” (Id. at p. 197.) This is especially true “where he takes　.　.　.　a　second trust deed.” (Ibid.)

Here, the fact that a previous sale exhausted the security of the Promissory Note makes section 580b applicable. In this case, like in Brown, the holder of the first trust deed exhausted the security in a foreclosure sale. The statute places the risk of the devaluation or exhaustion of the security on Rocha, because he “[took]　.　.　.　a　second trust deed.” In short, section 580b applies to the Promissory Note because the transaction is a seller financed transaction, and the security was exhausted by a senior foreclosure sale.

For more information contact David DiJuliomailto:rdj@dijuliolaw.com .

DiJulio Law Group: Los Angeles real estate attorneys with more than 35 years of experience. Call 888-519-1613 or emal rdj@dijuliolaw.com.