Pursuant to Code of Civil Procedure section 580b no deficiency judgment shall follow a foreclosure of a “purchase-money mortgage” – even if lender forecloses judicially.Code of Civil Procedure section 580b provides that, ““No deficiency judgment shall lie in any event after a sale of real property . . . for failure of the purchaser to complete his or her contract of sale, or under a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property . . . .”
In Comstock v. Fiorella (1968) 260 Cal. App. 2d 262, two partners sought to dissolve their partnership. Upon dissolution, one partner (“Partner A”) received the partnership’s real property, and the other partner (“Partner B”) received a note secured by a junior priority deed of trust on the same real property. Thereafter, the senior trust deed holder initiated a nonjudicial foreclosure and acquired the property by means of a full credit bid.
Partner B then brought an action against Partner A as a sold-out junior creditor. Partner A argued that Partner B was precluded from such an action pursuant to Brown v. Jensen (1953) 41 Cal. 2d 193 which held that a sold-out junior priority purchase-money mortgagee is precluded from suing on its note following a foreclosure by the senior encumbrancer.
The court in Comstock held that the junior deed of trust given by Partner A to Partner B was not a purchase-money mortgage within the meaning of Section 580b, and that therefore, Partner B could maintain an action on the note as a sold-out junior.
Comstock involved the distribution of partnership property to a partner. No California court has ever extended the reasoning of Comstock to tenants-in-common.[1] This is not surprising because the reasoning of Comstock was premised almost exclusively upon the fact partners are different from tenants-in-common.
The court explained that a partnership interest held by a partner is not an interest in the assets of the partnership, but is a personal property interest in the partnership’s net equity. Accordingly, “the interest of each partner in the real property was joint and personal and not within the purview of [Section 580b].” Id. at 266. Unlike tenants-in-common, partners do not have an undivided interest in the real property. Id. at 265. To underscore the difference between partners and tenants-in-common, the court cited Dupuy v. Leavenworth (1861) 17 Cal. 262, where that court “rejected the proposition that copartners are tenants in common.” Id.
But even if a transaction is not a “standard” purchase-money mortgage transaction, the analysis does not end. As explained by commentators Miller and Starr:
In determining whether a secured obligation is a purchase-money deed of trust subject to antideficiency limitations, there is a two part analysis. Where the secured loan was created in a “standard” purchase-money transaction, the antideficiency limitations apply automatically. If it was not a “standard” transaction, the court analyzes the factual setting of the transaction to determine whether it is within the purposes of the purchase-money limitations. Miller & Starr, California Real Estate (3d) §10:236.
There are several purposes of the Section 580b purchase-money limitation. “The primary purpose of section 580b is ‘in the event of a depression in land values, to prevent the aggravation of the downturn that would result if defaulting purchasers lost the land and were burdened with personal liability.’” Cornelison v. Kornbluth (1975) 15 Cal. 3d 590, 603 (quoting, Bargioni v. Hill (1963) 59 Cal. 2d 121, 123). Other purposes are to “compel[] a purchase money mortgagee to assume the risk that the security is inadequate” and to “discourage land sales that are unsound because the land is overvalued.” Bargioni v. Hill (1963) 59 Cal. 2d 121, 123.
[1] The case of Nickerman v. Ryan (1979) held that a note given by a husband to his wife in exchange for wife’s tenancy in common interest did not fall within the purview of Section 580b. However, the court found that the note “was not given to secure the balance of the purchase price of that parcel, but to equalize the division of all of the [couple’s community] property.” Indeed, by rejecting the husband’s argument that the note and deed of trust were given as security for the wife’s sale of her one-half interest in the real property, the Nickerman decision, by negative implication, actually supports application of Section 580b to the present transaction.