While this section appears to give a lender a choice of how to proceed to collect the debt, it has been interpreted to mean that a lender must pursue the secured real estate first (“security first rule”). (Walker v. Community Bank, 10 Cal. 3d 729 (1974).) In other words, suing on the note as the first collection method is not allowed (unless the lender is a sold-out junior, as discussed below).
2. No deficiency judgment is allowed by the foreclosing lender following a non-judicial foreclosure (i.e., trustee's sale), regardless of the type of property foreclosed. (CCP § 580d).
There are two types of foreclosures in California: the first type is “judicial,” in which a lender goes to court, gets an order to foreclose and then seeks to be awarded a judgment for the deficiency, if no waiver or prohibition applies. This process is considered “one action” so it does not violate CCP § 726(a). In addition to this complicated, expensive and slow judicial process, there is period of redemption following the judicial foreclosure for the borrower: three months if sales proceeds sufficiently satisfied indebtedness or one year if sales proceeds were insufficient. (CCP § 790.030). For all these reasons, judicial foreclosures are rare, and subsequent deficiency judgments following such foreclosures are as well.
The second is “non-judicial,” meaning no court action is required. The property is sold by exercise of power of sale as written into a deed of trust. This is also referred to as a trustee’s sale. Due to the lack of judicial involvement, this method is cheaper and faster than its judicial counterpart. Because CCP § 580b prohibits deficiency judgments for owner-occupied purchase money and seller carry-back loans - foreclosing lenders are dis-incentivized to pursue judicial foreclosures in those cases.
Due to this disincentive, cheaper cost and faster pace, trustee’s sales constitute the vast majority of foreclosures in California. And when there is a trustee’s sale, no deficiency judgment shall be rendered. (CCP § 580d).
The key to this rule is that it applies to a trustee’s sale and doesn’t depend on the type of loan or the type of property being foreclosed. For example, for a vacant land property with a refinanced senior loan, if a lender forecloses at a trustee’s sale, then that lender will not be able to claim a deficiency judgment. It simply doesn’t matter what kind of loan it was or what kind of property it is.
There are two things to keep in mind with this rule:
first, it only applies to a foreclosing lender. If there are two loans on the property, and a second (i.e., junior) lienholder forecloses first, it is only that second lender which is affected by this rule.
second, if a junior lender loses its security as a result of a senior lienholder foreclosing first, then any junior lienholder is considered as a “sold-out” junior. The sold-out junior has yet to exercise its one action against the borrower per CCP 726(a) but the security is gone. Only then is the sold-out junior allowed to collect on its now unsecured note by suing on the note.