Thursday, September 6, 2012

Modified Seller 2nd Note Wiped Out

Modified Seller Held Note Subject to Anti-Deficiency Statutes.

Appellant buyers purchased a multi-unit parcel from the seller for $1,265,000.00. The purchase price consisted of a cash down payment, a purchase money first trust deed financed by an independent lender, and a purchase money second trust deed in favor of the seller securing a promissory note for $245,000.00.

A few years later, the buyers sued the seller for non-disclosure of housing code violations in the original transaction. In settlement of that lawsuit, the parties agreed to reduce the amount of the seller’s note. The note was also modified to extend its term and reduce the monthly payments to interest only

Sometime thereafter, the buyers defaulted on both first and second promissory notes. The holder of the first trust deed foreclosed on the property, wiping out the second trust deed.

The seller, thereafter, filed a motion to enforce the settlement agreement as a separate judgment under the provisions of section 664.6 of the Code of Civil Procedure, claiming the full amount of the note plus interest and attorneys’ fees. The buyer opposed the motion on the grounds that the anti-deficiency statute (section 580b of the Code of Civil Procedure) precluded the seller from recovering a deficiency judgment and limited the seller’s recovery to the note’s security, which had been exhausted. The trial court entered judgment in favor of the seller for $215,615.00 for the principal amount, unpaid interest, and attorneys’ fees.

The Second District Court of Appeal reversed the judgment in Weinstein v. Rocha B235931, filed August 1, 2012. The DCA held that the settlement agreement, “… did not create a separately enforceable independent obligation…” for the buyer to pay the seller $200,000.00. The settlement agreement was tied to the promissory note as a modification of the terms of the note, which was a seller financed note secured by a deed of trust. As such, the seller’s sole remedy was limited to his note’s security, which was exhausted by the foreclosure of the first trust deed.