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California Purchase Money Protections

 

California Code of Civil Procedure §580b

One of California’s strongest anti-deficiency statutes is California Code of Civil Procedure § 580b (the purchase money, anti-deficiency statute). In its present form, CCP § 580b provides the following:

No deficiency judgment shall lie in any event after a sale of real property […] for failure of the purchaser to complete his or her contract of sale, or 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 […], or under a deed of trust or mortgage on a dwelling for not more than four families given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser.

The basic rule of CCP § 580b is that deficiency judgments are prohibited on purchase money loans.

In California, a purchase money loan is NON-RECOURSE from the moment it is originated and there can be no personal liability for a default on such loan (See CCP §580b; Roseleaf Corp. v Chierighino (1963) 59 C2d 35, 27 CR 873; Spangler v. Memel, (1972) 7 Cal.3d 603). Therefore, a lender who advances funds to enable a buyer to purchase real property is barred by CCP §580b from proceeding against the borrower (no matter whether the property is sold in a short sale or lost to foreclosure) (See Bargioni v Hill (1963) 59 C2d 121, 28 CR 321; Frangipani v. Boecker (1998) 64 Cal.App.4th 860).

Further, the protections of CCP §580b cannot be waived by the borrower either in advance, at the time of creation of a mortgage, or as a condition to renegotiate the outstanding obligation (e.g. loan modification, deed-in-lieu or short sale) (See DeBerard Props., Ltd. v Lim (1999) 20 C4th 659, 85 CR2d 292; Palm v Schilling (1988) 199 CA3d 63, 76, 244 CR 600).

The policy objective of the purchase money protection of CCP 580b is to place the risk of inadequate security on the lender, who is in the best position to know its true value and to discourage a seller or lender from overvaluing the collateral above its fair market value. The court in Roseleaf v. Chierighino articulated the policy objectives as follows:

Section 580b places the risk of inadequate security on the purchase money mortgagee. A vendor is thus discouraged from overvaluing the security. Precarious land promotion schemes are discouraged, for the security value of the land gives purchasers a clue as to its true market value. (Citations omitted). If inadequacy of the security results, not from overvaluing, but from a decline in property values during a general or local depression, section 580b prevents the aggravation of the downturn that would result if defaulting purchasers were burdened with large personal liability.

By enacting the anti-deficiency legislation, the California Legislature sought to prevent a secured creditor from selling the property at a foreclosure sale for less than its fair market value and then recovering a personal judgment from the borrower for the difference between the sales proceeds and the balance of the unpaid debt.