Black Sky Capital, LLC v. Cobb

IN THE SUPREME COURT OF

CALIFORNIA

BLACK SKY CAPITAL, LLC,

Plaintiff and Appellant,

v.

MICHAEL A. COBB et al.

Defendants and Respondents.

S243294

Fourth Appellate District, Division Two

E064482

San Bernardino County Superior Court

CIVDS1416584

May 6, 2019

Justice Liu authored the opinion of the court, in which Chief

Justice Cantil-Sakauye and Justices Chin, Corrigan, Cuéllar,

Kruger, and Groban concurred.

BLACK SKY CAPITAL, LLC v. COBB

S243294

Opinion of the Court by Liu, J.

Under California law, a creditor can recover a debt

secured by a deed of trust on real property through a nonjudicial

foreclosure action to sell the property at a public auction. Code

of Civil Procedure section 580d provides that a creditor cannot

collect a deficiency judgment — that is, the difference between

the amount of indebtedness and the fair market value of the

property — if the property is sold for less than the amount of the

outstanding debt. (All undesignated statutory citations are to

the Code of Civil Procedure.) Here we consider this question:

Where a creditor holds two deeds of trust on the same property,

can the creditor recover a deficiency judgment on a junior lien

extinguished by a nonjudicial foreclosure on the senior lien? The

trial court applied section 580d to bar such a recovery; the Court

of Appeal disagreed. We affirm and hold that under the

circumstances here, section 580d does not preclude a creditor

holding two deeds of trust on the same property from recovering

a deficiency judgment on the junior lien extinguished by a

nonjudicial foreclosure sale on the senior.

I.

On August 18, 2005, defendants Michael and Kathleen

Cobb borrowed $10,299,250 from Citizens Business Bank by

executing a promissory note secured by a deed of trust, also

dated August 18, 2005, on a parcel of commercial property in

Rancho Cucamonga. On September 13, 2007, the Cobbs

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Opinion of the Court by Liu, J.

borrowed an additional $1.5 million from Citizens Business

Bank by executing a second promissory note secured by a

separate deed of trust, dated September 7, 2007, on the same

property. The second deed of trust said the lien “may be

secondary and inferior to the lien securing payment of an

existing obligation . . . to Citizens Business Bank described as:

First Deed of Trust dated August 18, 2005.” On January 3,

2014, Citizens Business Bank sold both loans to plaintiff Black

Sky Capital, LLC (Black Sky). On June 20, 2014, Black Sky sent

the Cobbs a notice of default and election to sell the property

under the first deed of trust. Black Sky acquired the property

at a public auction for $7.5 million on October 28, 2014. On

November 4, 2014, Black Sky filed a lawsuit to recover the

amount still owed on the second deed of trust extinguished by

the foreclosure sale. Both parties moved for summary

judgment.

Applying Simon v. Superior Court (1992) 4 Cal.App.4th

63, 66 (Simon), which held that section 580d precludes a

deficiency judgment for a junior lienholder who was also the

foreclosing senior lienholder, the trial court concluded that

section 580d bars the monetary judgment sought by Black Sky

and granted the Cobbs’ motion for summary judgment. On

appeal, the Court of Appeal declined to follow Simon in light of

our decision in Roseleaf Corp. v. Chierighino (1963) 59 Cal.2d

35, 43 (Roseleaf), which held that section 580d does not preclude

a deficiency judgment for a nonselling junior lienholder. (Black

Sky Capital, LLC v. Cobb (2017) 12 Cal.App.5th 887, 897 (Black

Sky).) The Court of Appeal observed that although the senior

and junior lienholder are the same, “[a]ny debt owed on the

junior note in this case has no relationship to the debt owed on

the senior note, and by no contortion of the . . . definition [of a

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Opinion of the Court by Liu, J.

deficiency judgment] can the unpaid balance on that note be

deemed a deficiency with respect to the senior note, within the

meaning of section 580d.” (Black Sky, at p. 897.) Rather, “[t]he

unambiguous language in section 580d . . . indicate[s] that

section 580d applies to a single deed of trust” and “does not

apply to preclude Black Sky from suing for the balance due on

the junior note in this case.” (Ibid.) The Court of Appeal

reversed the trial court’s judgment and remanded for further

proceedings. (Ibid.) We granted review.

II.

“California has an elaborate and interrelated set of

foreclosure and antideficiency statutes relating to the

enforcement of obligations secured by interests in real property.

Most of these statutes were enacted as the result of ‘the Great

Depression and the corresponding legislative abhorrence of the

all too common foreclosures and forfeitures [which occurred]

during that era for reasons beyond the control of the debtors.’ ”

(Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226,

1236.) Under section 726, “there is only ‘one form of action’ for

the recovery of any debt or the enforcement of any right secured

by a mortgage or deed of trust”; “[t]hat action is foreclosure,

which may be either judicial or nonjudicial.” (Alliance

Mortgage, at p. 1236.) In a judicial foreclosure, a creditor may

seek a deficiency judgment to recover “the difference between

the amount of the indebtedness and the fair market value of the

property” if the property is sold for less than the amount of the

outstanding debt. (Ibid.) But the debtor has a statutory right

of redemption, which provides “an opportunity to regain

ownership of the property by paying the foreclosure sale price,

for a period of time after foreclosure.” (Ibid.) In a nonjudicial

foreclosure, also known as a trustee’s sale, the creditor exercises

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Opinion of the Court by Liu, J.

the power of sale given by the deed of trust, and the debtor has

no statutory right to redemption. (Ibid.) But under section

580d, “the creditor may not seek a deficiency judgment” after a

nonjudicial foreclosure. (Alliance Mortgage, at p. 1236.)

In Roseleaf, we considered whether this provision bars

recovery on a junior lien in a circumstance where that lien was

held by a creditor different from the one holding a senior lien on

the same property. The senior lienholder in Roseleaf initiated a

nonjudicial foreclosure sale without any involvement of the

junior lienholder. After the sale, the junior lienholder sued the

debtor to recover the full amount unpaid on the second deed.

(Roseleaf, supra, 59 Cal.2d at p. 38.) We observed that the

antideficiency statutes’ fair value provisions “are designed to

prevent creditors from buying in at their own sales at deflated

prices and realizing double recoveries by holding debtors for

large deficiencies.” (Id. at p. 40.) We also observed that under

these provisions, and even in their absence, “[s]ome courts have

limited deficiency judgments to prevent double recoveries,” but

“they have not limited such judgments when sought by

nonselling junior lienors.” (Ibid.) The reason is that “[t]he

position of a junior lienor whose security is lost through a senior

sale is different from that of a selling senior lienor. A selling

senior can make certain that the security brings an amount

equal to his claim against the debtor or the fair market value,

whichever is less, simply by bidding in for that amount. He need

not invest any additional funds. The junior lienor, however, is

in no better position to protect himself than is the debtor. Either

would have to invest additional funds to redeem or buy in at the

sale. 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

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Opinion of the Court by Liu, J.

junior lienor who, unlike the selling senior, might otherwise end

up with nothing.” (Id. at p. 41.)

Section 580d, we held, “does not bar [the junior

lienholder’s] action.” (Roseleaf, supra, 59 Cal.2d at p. 43.) At

the time, the text of the statute prohibited a deficiency judgment

“ ‘upon a note secured by a deed of trust or mortgage upon real

property hereafter executed in any case in which the real

property has been sold by the mortgagee or trustee under power

of sale contained in such mortgage or deed of trust.’ ” (Ibid.)

“ ‘[S]uch mortgage or deed of trust,’ ” we said, “refers to the

instrument securing the note sued upon. Thus section 580d does

not appear to extend to a junior lienor whose security has been

sold out in a senior sale.” (Ibid.)

We went on to explain that section 580d “was enacted to

put judicial enforcement on a parity with private enforcement.”

(Roseleaf, supra, 59 Cal.2d at p. 43.) Before the enactment of

section 580d, a debtor had a statutory right to redemption under

a judicial foreclosure but not under a trustee’s sale. “The right

to redeem, like proscription of a deficiency judgment, has the

effect of making the security satisfy a realistic share of the debt.

[Citation.] By choosing instead to bar a deficiency judgment

after private sale, the Legislature achieved its purpose without

denying the creditor his election of remedies. If the creditor

wishes a deficiency judgment, his sale is subject to statutory

redemption rights. If he wishes a sale resulting in

nonredeemable title, he must forego the right to a deficiency

judgment. In either case the debtor is protected.” (Roseleaf, at

pp. 43–44.)

We further explained: “The purpose of achieving a parity

of remedies would not be served by applying section 580d

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against a nonselling junior lienor. Even without the section the

junior has fewer rights after a senior private sale than after a

senior judicial sale. He may redeem from a senior judicial sale

(Code Civ. Proc., § 701), or he may obtain a deficiency judgment.

[Citations.] After a senior private sale, the junior has no right

to redeem. This disparity of rights would be aggravated were he

also denied a right to a deficiency judgment by section 580d.

There is no purpose in denying the junior his single remedy after

a senior private sale while leaving him with two alternative

remedies after a senior judicial sale. The junior’s right to

recover should not be controlled by the whim of the senior, and

there is no reason to extend the language of section 580d to

reach that result.” (Roseleaf, supra, 59 Cal.2d at p. 44; see

Bargioni v. Hill (1963) 59 Cal.2d 121, 122 [citing Roseleaf’s

holding that section 580d “bars recovery only on a note secured

by a trust deed or mortgage that has been rendered valueless by

a sale under a power of sale contained in the trust deed or

mortgage securing the note sued upon” (italics added)].)

Does our construction of section 580d in Roseleaf limit the

application of section 580d where, as here, the senior and junior

lienholders are the same entity? For two decades, the leading

decision on this issue was Simon, supra, 4 Cal.App.4th 63. The

court there 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.” (Id. at p. 66.)

The court explained that allowing a senior lienholder to pursue

a trustee’s sale, terminate the right of redemption, and obtain a

deficiency judgment on a junior lien whose security the senior

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lienholder made the choice to eliminate would not further the

parity of remedies described in Roseleaf. (Simon, at p. 77.)

Further, “[u]nlike [a situation involving] a true third party sold-

out junior, [the] right to recover as a junior lienor which is also

the purchasing senior lienor is obviously not controlled by the

‘whim of the senior.’ We will not sanction the creation of

multiple trust deeds on the same property, securing loans

represented by successive promissory notes from the same

debtor, as a means of circumventing the provisions of section

580d.” (Ibid.) Finally, Simon noted that “[t]he antideficiency

statutes are to be ‘liberally construed to effectuate the specific

legislative purpose behind them. . . . The courts have exhibited

a very hospitable attitude toward the legislative policy

underlying the anti-deficiency legislation and have given it a

broad and liberal construction that often goes beyond the

narrow bounds of the statutory language.’ ” (Id. at p. 78.)

Over the next 20 years, several Courts of Appeal cited

Simon’s reasoning with approval. (See Bank of America, N.A. v.

Mitchell (2012) 204 Cal.App.4th 1199, 1207; Ostayan v. Serrano

Reconveyance Co. (2000) 77 Cal.App.4th 1411, 1422; Evans v.

California Trailer Court, Inc. (1994) 28 Cal.App.4th 540, 552.)

However, the Court of Appeal in Cadlerock Joint Venture, L.P.

v. Lobel (2012) 206 Cal.App.4th 1531 (Cadlerock) questioned

this line of cases, observing that “[c]onspicuously absent from

Simon . . . is a close examination of the text of section 580d.”

(Cadlerock, at p. 1548.) According to Cadlerock, “Simon . . . and

its progeny . . . created an equitable exception to the text of

section 580d” by misreading Roseleaf’s equitable considerations

into section 580d. (Cadlerock, at p. 1549.) The court observed

that although “[p]erhaps Simon and its progeny have come to

the right result under the one form of action rule, assuming that

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Opinion of the Court by Liu, J.

it is a proper sanction for a violation of section 726 under these

circumstances to bar the junior lienor from obtaining any

recovery,” the one form of action rule should not be “conflated

[with] the analysis of section 580d.” (Cadlerock, at p. 1549.) But

unlike Simon, Cadlerock involved a creditor that issued two

deeds of trust on the same real property and then assigned the

junior lien to a different creditor before foreclosing on the senior

lien. Cadlerock’s criticism of Simon was therefore dicta, and the

court acknowledged that Simon and its progeny were

distinguishable because “the junior lienor and senior lienor [in

Cadlerock] were different entities at the time of the senior

trustee’s sale.” (Cadlerock, at p. 1546.)

The Court of Appeal here found Cadlerock’s criticism of

Simon persuasive and concluded that Roseleaf “cannot be read

to support the rule created by Simon.” (Black Sky, supra, 12

Cal.App.5th at p. 894.) “Roseleaf’s holding that section 580d

does not apply to nonselling junior lienholders cannot be

contorted into a rule that section 580d somehow does apply to

preclude a lienholder from seeking damages under the junior

note if it, in its capacity as the senior lienholder, has exercised

its right to conduct a private sale of the property rather than

seeking a judicial foreclosure.” (Ibid.) “Section 580d simply does

not . . . , by its express terms, encompass a lien that has not been

foreclosed,” and to the extent that Simon could be justified as

preventing a bank from “issuing nearly simultaneous loans

secured by the same property . . . to circumvent the

antideficiency statutes,” that justification fails in this case

where “the second loan was issued two years after the first, and

the default did not occur until seven years later.” (Id. at p. 895.)

The Court of Appeal concluded that “Black Sky’s suit to enforce

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the debt on the junior note is not barred by section 580d or by

section 726.” (Id. at p. 897)

The question here is whether section 580d bars a

deficiency judgment on a junior lien held by a senior lienholder

that sold the property comprising the security for both liens. We

do not consider whether section 726 or any other statute bars or

limits such a deficiency judgment; the question before us

concerns only section 580d.

III.

Section 580d, subdivision (a) provides that “no deficiency

shall be owed or collected, and no deficiency judgment shall be

rendered for a deficiency on a note secured by a deed of trust or

mortgage on real property or an estate for years therein

executed in any case in which the real property or estate for

years therein has been sold by the mortgagee or trustee under

power of sale contained in the mortgage or deed of trust.” Black

Sky contends that section 580d does not apply because it is

seeking a deficiency on the note secured by the September 7,

2007 deed of trust and no sale occurred under power of sale

contained in that deed of trust.

The plain language of section 580d, subdivision (a) bars a

deficiency judgment on a note secured by a deed of trust on real

property when the trustee has sold the property “under power

of sale contained in the . . . deed of trust.” (Italics added.) The

definite article in the phrase “the . . . deed of trust” makes clear

that the statute applies where sale of the property has occurred

under the deed of trust securing the note sued upon, and not

under some other deed of trust. (Ibid.) We reached the same

conclusion in Roseleaf at a time when section 580d used the

phrase “such . . . deed of trust” instead of “the . . . deed of trust”:

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The phrase “refers to the instrument securing the note sued

upon.” (Roseleaf, supra, 59 Cal.2d at p. 43.) Roseleaf was not a

case in which the senior and junior lienholders were the same

entity. But nothing in the text of section 580d indicates that the

statute applies where no sale has occurred under the trust deed

securing a junior lien, even if the lien is held by a creditor who

has foreclosed on a senior lien on the same property.

We have “consistently looked to the purposes of the statute

and to the substance rather than the form of loan transactions

in deciding the . . . applicability” of antideficiency statutes.

(Coker v. JPMorgan Chase Bank, N.A. (2016) 62 Cal.4th 667,

676; id. at pp. 676–681 [discussing our case law applying this

approach].) The Cobbs contend that allowing a junior lienholder

to collect a deficiency judgment in this scenario would be at odds

with the purpose of section 580d insofar as a creditor could

structure what is functionally a single loan as two separate

notes in order to recover under the junior note what it could not

recover if it had issued a single note on the same property. In

Simon, the junior and senior loans were issued just four days

apart, and the deeds of trust securing the loans were recorded

on the same date. (Simon, supra, 4 Cal.App.4th at p. 66.) Simon

treated the two loans as one, distinguishing the lender from “a

true third party sold-out junior.” (Id. at p. 77.) It was in that

context that Simon said courts “will not sanction the creation of

multiple trust deeds on the same property, securing loans

represented by successive promissory notes from the same

debtor, as a means of circumventing the provisions of section

580d.” (Ibid.)

Where there is evidence of gamesmanship by the holder of

senior and junior liens on the same property, a substantial

question would arise whether the two liens held by the same

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creditor should — in substance, if not in form — be treated as a

single lien within the meaning of section 580d. (Cf. Freedland

v. Greco (1955) 45 Cal.2d 462, 467 [“It is unreasonable to say the

Legislature intended that section 580d could be circumvented

by such a manifestly evasive device [where the creditor issued

two notes, one secured by a deed of trust and another by a

chattel mortgage, for the same obligation of $7,000]. In such a

situation the legislative intent must have been that the two

notes are, in legal contemplation and under section 580d, one,

secured by a trust deed.”]; Simon, supra, 4 Cal.App.4th at p. 66.)

It is unclear that the Legislature, in enacting section 580d,

intended to permit such gamesmanship to affect the amount of

recovery under a junior lien.

But we have no occasion here to decide the applicability of

section 580d in these or other gamesmanship scenarios. The

Cobbs do not allege, and 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. And the bare assertion by the Cobbs that Black Sky’s

purchase of the property for $7.5 million at a public auction in

October 2014 was “substantially less than the appraised value

of the Subject Property as of August 1, 2013” — with no evidence

of irregularity at the public auction or price stability between

the appraisal and auction — is not enough to suggest that $7.5

million was a lowball bid designed to “effect an excessive

recovery by obtaining a deficiency judgment” on the junior lien.

(Simon, supra, 4 Cal.App.4th at p. 78.) Indeed, counsel for the

Cobbs acknowledged at oral argument that the Cobbs have

“never taken the position” that “anything untoward” occurred in

the origination of the loans or the public auction.

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To be sure, when a single creditor holds senior and junior

liens on the same property, the right to recover on the junior lien

“is obviously not controlled by the ‘whim of the senior.’ ” (Simon,

supra, 4 Cal.App.4th at p. 77, quoting Roseleaf, supra, 59 Cal.2d

at p. 44.) But it does not follow that section 580d’s purpose of

achieving parity of remedies between judicial and nonjudicial

foreclosures would be served by interpreting the statute to

categorically bar a deficiency judgment on the junior lien.

Where, as here, there is no allegation of evasive loan splitting or

recovery in excess of what any junior lienholder would be able

to recover, we see no reason to depart from a straightforward

reading of section 580d. Because no sale occurred under the

deed of trust securing the junior note in this case, section 580d

does not bar a deficiency judgment on the junior note. We

disapprove Bank of America, N.A. v. Mitchell (2012) 204

Cal.App.4th 1199; Ostayan v. Serrano Reconveyance Co. (2000)

77 Cal.App.4th 1411; Evans v. California Trailer Court, Inc.

(1994) 28 Cal.App.4th 540; and Simon v. Superior Court (1992)

4 Cal.App.4th 63, to the extent they are inconsistent with this

opinion.

CONCLUSION

We affirm the judgment of the Court of Appeal.

LIU, J.

We Concur:

CANTIL-SAKAUYE, C. J.

CHIN, J.

CORRIGAN, J.

CUÉLLAR, J.

KRUGER, J.

GROBAN, J.

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See next page for addresses and telephone numbers for counsel who argued in Supreme Court.

Name of Opinion Black Sky Capital, LLC v. Cobb

__________________________________________________________________________________

Unpublished Opinion

Original Appeal

Original Proceeding

Review Granted XXX 12 Cal.App.5th 887

Rehearing Granted

__________________________________________________________________________________

Opinion No. S243294

Date Filed: May 6, 2019

__________________________________________________________________________________

Court: Superior

County: San Bernardino

Judge: Bryan Foster

__________________________________________________________________________________

Counsel:

Law Offices of Ronald Richards & Associates, Ronald N. Richards; Wilson, Elser, Moskowitz, Edelman &

Dicker, Robert Cooper; Law Offices of Geoffrey Long and Geoffrey S. Long for Plaintiff and Appellant.

Horvitz & Levy, Jeremy B. Rosen and Eric S. Boorstin for D-Day Capital, LLC, as Amicus Curiae on

behalf of Plaintiff and Appellant.

Levitt Law, Scott L. Levitt; Lex Opus, Schiffer & Buus, Eric M. Schiffer and William L. Buus for

Defendants and Respondents.

Arthur D. Levy and Noah Zinner for Housing and Economic Rights Advocates as Amicus Curiae on behalf

of Defendants and Respondents.

Counsel who argued in Supreme Court (not intended for publication with opinion):

Ronald N. Richards

Law Offices of Ronald Richards & Associates

P.O. Box 11480

Beverly Hills, CA 90213

(310) 556-1001

Eric M. Schiffer

Schiffer & Buus

959 South Coast Drive, Suite 385

Costa Mesa, CA 92626

(949) 825-6140