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SMITH & GARG – LONG BEACH REAL ESTATE ATTORNEYS
Foreclosures: Judicial And Non-Judicial Foreclosure
A Lender may either judicially or non-judicially foreclose on a property in which a Borrower defaulted in payments. However, if the Lender chooses to non-judicially foreclose on a property, §580(d) of the California Civil Code does not allow the Lender to seek a deficiency judgment, even though he has not had his one action. Prior to non-judicial foreclosure, the Lender must give the Borrower three months Notice of Default (NOD). Note that the three (3) month requirement is very specific. Many individuals, including real estate brokers, mistakenly think that the NOD is “90 days.” The Court held that the three-month requirement under Section 580(d) is very specific and if the Lender provides less than the required time, the Lender may have wrongfully foreclosed on a property.
Additionally, three months after providing a NOD, the Lender must provide the Borrower 20 days Notice of Sale (NOS). California Civil Code § 2903 provides the Borrower an opportunity to bring the loan current prior to the sale of the property. This statute if often referred to as “Under Equity of Redemption.” The Borrower can bring the loan current by paying the defaulting amount plus court and administrative costs (including attorney’s costs) anytime five (5) days before the date of foreclosure sale. Within the 5 days of the foreclosure sale date, the Borrower can stop the sale by paying off the entire amount of the loan, principal and interest, plus costs. Notice, the Borrower only needs to bring the loan current by paying the defaulting amount (the amount that has accrued since the Borrower’s last payment) plus court and administrative costs. However, within the 5 days period prior to the sale, the entire loan and costs are due if the Borrower desired to stop the foreclosure sale and maintain ownership of the property. The Statute of Limitations for a non-judicial foreclosure is 10 years from the date of last payment (if known), otherwise the Statute of Limitations is 60 years from the date of the Deed of Trust being transferred.
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On the other hand, § 725 of the California Civil Code allows both the beneficiary of the promissory note, secured by a Deed of Trust, and the trustee have the power to foreclose on the property. If the Lender chooses to judicially foreclose on the property, the Lender must file claims against both the Guarantor and the Borrower in the same cause of action because failing to do so may invoke § 726(a) “one form of action” rule; and the Lender cannot go after the Guarantor or the Borrower subsequent to the judicial action. In a judicial foreclosure, the Statute of Limitations on a note or a mortgage is four (4) years from the date of maturity. That is, the Lender has four years from the date in which the note is called due (the end of the notice of default) or as stipulated under the contract. Under § 726(b), the Lender who seeks deficiency after a judicial foreclosure must hold a Fair Value Hearing within 3 months after the foreclosure sale. The deficiency value is the difference between the outstanding principal at time of the judicial foreclosure and the amount paid by the highest bidder at sale. If there were no bidders, then the difference between the fair value of the mortgaged property and the deficient amount owed to the lender. Subsequent to the fair value hearing, the court will enter a deficiency value against the borrower and any other applicable person, such as the Guarantor. Under § 726(c), a party who is foreclosing on a property is not required to name another lien holder as a party to the suit, who failed to perfect the lien by properly record under the statute, even if they have knowledge that such party exists. If the junior lien holder properly recorded the lien, then a judicial foreclosure that did not name the junior lien as a party, and that foreclosure exhausted the security, then the foreclosure will not affect the junior lien holder’s rights. Thus, the junior lien holder can obtain personal claims against the Borrower because he has not used his “one form of action.” Furthermore, California Civil Code § 727 stipulates that any surplus after the foreclosure will first go to other lien holders, then to the Borrower. Section 730 allows attorney’s fees for judicial foreclosure at a designated amount by the court at the beginning of the action.
It is important to note that a Lender must foreclose judicially even if there is no deficiency when the promissory note does not contain language that allows the Lender to foreclose non-judicially. The note must specifically state that the Lender has the “Power of Sale”. Moreover, if the Borrower shows that the transaction was a sham to avoid Usury Regulations, the Lender must judicially foreclose the property. Thus, in a seller-financed transaction, if the borrower shows that the transaction was a sham so that the high interest rate is not considered usurious, than the Lender must judicially foreclose on the property.
Should you have any questions or concerns, please contact our experienced real estate attorneys at Smith & Garg, LLC. The experienced real estate transaction and litigation attorneys at Smith & Garg, LLC can help.
Call Smith & Garg, LLC today at 1-877-517-4275 or complete our Contact Form and let us assist you.
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