I am often asked by borrowers whether of not a lender can sue the borrower for any amount that is owed on the loan, over and above the sale price received at a private sale. Well, there are many, "it depends." The first depend is, "it depends what state the property is located in." First and foremost, you have to be aware that each state has different rules and procedures and I am not qualified to advise in any state other than Califonia, so this post is limited to property and laws in California. However, while I am only referening certain laws and rules in California, the are many similarities from state-to-state.
In very short summary, if the lender proceeds with a NJF, (non-judicial foreclosure), a procedure provided by California law and the property is sold as a result, the lender cannot proceed against the borrower if there is any deficiency. By deficiency, I mean that the property sold for less then what was owing on the secured loan.
In California there are two procedures generally used by lenders and trustees when foreclosing on the collateral given by a defaulting borrower, (1) judicial foreclosure, and (2) non-judicial foreclosure. In a commercial context, in California both procedures are used.
Often, the lender proceeds with a non-judicial foreclosure to begin the statutory process allowing the lender to foreclose on the property, usually without the involvment of an attorney. The non-judicial foreclosure process is relatively quick and inexpensive as compared to a judicial foreclosure and is also typically used in residential foreclosures.
Concurrently with or a short time after the commencemnet of the non-judicial foreclosure process, a lender will often file with the court, a judicial foreclosure lawsuit, seeking an immediate appointment by the court of a receiver. Usually, the main purpose of the receiver is to manage the property and collect rents during the pendency of and until the sale of the property as a result of the non-judicial foreclosure. This will preserve and protect the lender's collateral, to the extent possible. Usually, the judicial foreclosure lawsuit remains open and active for a period of time beyond the sale of the property at a non-judicial foreclosure in order to allow the receiver to finalize the administration of the property while the receiver was responsible for managing the property and upon the final report of the receiver, the lawsuit is usually dismissed.
However, there are some occassions where the judicial foreclosure lawsuit is not dismissed and the lender can continue to proceed with a lawsuit, seeking damages against the borrower and, in some cases, a guarantor. A lender will continue to proceed against the borrower and/or the guarantor including instances in which the lender believes that the borrower or its principal was involved in some sort of fraud relating to the loan or missapropriation of rents that part of the lenders collateral. Continuing actions may also include action against guarantors who fully or partially guaranteed the loans or were otherwise subject to certain carve-out rules.t
Following posts will address The Bird Rule and carve-out exceptions to limited guarantees.
Please take care when using the above information. As in most cases, the devil is in the details and the exceptions are what keeps lawyers employed. A thorough analysis by your attorney should be done before you act on any of the advice contained herein.
These blogs and matters should always be updated for the people to know the currents.
Posted by: Tom Henry | June 01, 2012 at 10:53 PM