Legal Update From the Law Firm of Pircher, Nichols & Meeks Los Angeles, Chicago; Waiver of California Purchase Money Anti-Deficiency Statute Held Invalid.

LOS ANGELES--(BUSINESS WIRE)--June 24, 1999--

On June 3, 1999, the California Supreme Court held that a waiver of section 580b of the California Code of Civil Procedure as consideration for a modification of a deed of trust was invalid. DeBerard Properties, Ltd. v. Bun Raymond Lim, 1999 Daily Journal D.A.R. 5353.

BACKGROUND

Section 580b of the California Civil Code of Procedure prohibits, among other matters, a deficiency judgment after the foreclosure sale of real property that secures seller financing provided for the purchase of such real property. Although California Civil Code Section 2953 prohibits waivers of California's one action rule, it applies only at the time the loan is made or renewed and, in any event, does not apply to CCP Section 580b at all. The California appellate courts have reached different conclusions as to whether a subsequent waiver of CCP Section 580b is void as against public policy.

FACTS

In DeBerard Properties, Ltd. v. Bun Raymond Lim, Myo Za Theresa Lim and Bun Raymond Lim entered into a purchase agreement for a shopping center valued at $3,200,000. The Lims paid $1,120,000, assumed a note secured by a first trust deed of approximately $1,920,000 held by a bank, and signed a promissory note for the remaining portion of the purchase price which was secured by a second deed of trust in favor of the seller, DeBerard Properties, Ltd. After several years, the Lim's entered into negotiations to modify their agreements with both the bank and DeBerard. In exchange for the Lims' agreement to waive the protection provided by CCP Section 580b, DeBerard agreed not to foreclose and to subordinate its deed of trust to a modification of the bank's loan. Despite the modified agreements, the Lims were still unable to satisfy their obligations. The bank foreclosed on the first deed of trust, thereby extinguishing DeBerard's junior security interest. DeBerard then filed a claim based on the promissory note.

LOWER COURT RULINGS

The trial court ruled that CCP Section 580b may be waived, that the Lims had effectively waived the statute and that the Lims were liable to DeBerard under the terms of the note. The appellate court reversed the lower court's ruling, stating that CCP Section 580b's protection may not be waived.

DECISION OF THE CALIFORNIA SUPREME COURT

The California Supreme Court affirmed the appellate court's ruling that a waiver of CCP Section 580b in exchange for a modification of the loan documents is invalid. The court acknowledged that CCP Section 580b may not apply to a non-"standard" purchase money transaction (e.g., where the seller subordinates its mortgage to a construction loan that will trigger a major change in the use of the property). However, because the Lims did not obtain a construction loan and were not going to alter the shopping center in any manner, the modification of the loan documents remained a standard purchase money transaction in the eyes of the court, and the Lim's waiver of the CCP Section 580b protection was ineffective.

SIGNIFICANCE OF CASE

Sellers of real property who take back financing should view such transactions strictly as non-recourse in the absence of a non-standard purchase money transaction. Upon a borrower's request for modification of the loan documents, the seller should consider requiring (in lieu of a CCP Section 580b waiver): (1) that a creditworthy person or entity (who is not an alter-ego of the borrower) guaranty the loan, (2) that the aggregate debt encumbering the property be reduced, (3) that additional collateral be provided to the seller, or (4) that substitute collateral be provided and any non-recourse provisions eliminated.

For more information or to arrange an interview, please contact Leeza Hoyt, APR, The Hoyt Organization, at 310/373-0103 or Steve Carey, Esq., Pircher, Nichols & Meeks at 310/201-8904.