By Josh Martin
When a borrower defaults on a loan secured by California real property, foreclosure is the most common remedy employed by the lender. In California, there are two ways by which a lender may foreclose: through nonjudicial foreclosure (commonly referred to as a “trustee’s sale”) or through a judicial foreclosure.
Most California deeds of trust contain language allowing the trustee named in the deed to conduct a sale of the real property securing the loan in the event that the borrower defaults on her obligation. This enforcement action is referred to as nonjudicial foreclosure or private sale or “trustee’s sale.” It is much more common than judicial foreclosure primarily because it is far quicker and less expensive than judicial foreclosure. It requires no court supervision and, if conducted properly, constitutes a final adjudication of the borrower’s (and lender’s) rights with regard to the property.
The downside to the lender in a nonjudicial foreclosure is that by foreclosing nonjudicially he gives up his legal right to collect the unpaid balance on the loan from the defaulting borrower. Suppose, for example, that Betty Borrower has defaulted on her $500,000 home loan from Larry Lender. Betty’s loan is secured by a deed of trust upon the beachfront condo she purchased with the loan money, and the condo, lovely as it is, is now worth only $250,000. If Larry Lender forecloses nonjudicially upon Betty, the condo will then be sold at a public auction. There, Larry will either obtain the condo (worth $250,000) by making the highest bid at the auction or he will collect the proceeds from the winning bid– up to the amount owed on Betty’s loan. Either way, by foreclosing nonjudicially Larry forfeits his legal right to collect any unpaid balance, any “deficiency,” owing to him on the loan after the foreclosure sale. This anti-deficiency rule, so-called because it prevents lenders from enforcing collection of unpaid balances (“deficiencies”) on loans subsequent to nonjudicial foreclosure, is codified in the California Code of Civil Procedure. The rule contains numerous exceptions, discussion of which is outside the scope of this brief blog article.
A judicial foreclosure is a lawsuit brought by a lender to foreclose upon the property securing his loan. It is called a judicial foreclosure because it is a formal court action and because the court supervises the foreclosure. If the lender is successful in prosecuting the foreclosure action, he obtains a judgment ordering the sale of the property which is then conducted by a “court-appointed levying officer.”
The major advantage to a judicial foreclosure is that the lender not only receives money from the court-supervised sale of the property–or the property itself if the lender is the high bidder– but also may obtain a judgment against the borrower personally for any deficiency (the balance owed on the loan) after that sale. So, in the example above, if Larry Lender knows that Betty Borrower has $250,000 resting in her bank account but has decided to stop making payments on the loan–pretty as the condo is, it has turned out to be a poor investment– Larry Lender might want to consider a judicial foreclosure as it would allow him to obtain a personal judgment against Betty and obtain proceeds from a court-supervised sale of the property or, alternatively, the property itself if Larry is the high bidder at the sale. The principal disadvantage to judicial foreclosure actions is that they are lawsuits and, as such, they take much longer than trustee’s sales. In addition, after a judicial foreclosure sale the borrower retains the right to regain ownership of the property by paying the foreclosure price plus certain other amounts for one year following the judicial foreclosure sale.
For more information , contact Josh Martin at jmartin@sjmslaw.com.
