Big Bank Buys Worthless Note, Sues Borrower; Borrower Wins and Gets Attorney Fees

Posted on: April 21, 2012

On April 10, 2012, in the case of Bank of America, vs. Michael Mitchell, 2012 WL 1177866, the Court of Appeal, Second District, upheld the lower court’s decision finding that Bank of America was barred from suing Mr. Mitchell and also upheld the the court’s award of attorney fees to Mr. Mitchell in the amount of $8,400.

In 2006, Michael Mitchell borrowed $315,000 from GreenPoint Mortgage to buy a home. The purchase money financing consisted of a $262,000 first and a $63,000 “piggy back” second loan secured by two deeds of trust against the property. In 2009, GreenPoint foreclosed on the senior loan, and then later sold the junior loan to Bank of America in 2010 – more than a year later. BofA then sued Mitchell for the $63,000 loan. BofA took the position that they were a “sold out” junior lien holder.

Mitchell filed a demurrer to attack the complaint on legal grounds – the anti-deficiency statutes preventing lenders from suing for deficiencies after non judicial foreclosure (Code Civ. Proc. 580d). The trial court sustained the demurrer and awarded Mitchell his attorney fees of $8,400.

In affirming the trial court’s judgment, the Appeals Court held that the assignee of a note stands in the shoes of the assignor (original lender), taking its rights and remedies and subject to any defenses the borrower has against the assignor at the time of the assignment; Greenpoint assigned the second loan to BofA after it foreclosed on the first. Since Greenpoint could not have obtained a deficiency judgment against Mitchell after foreclosing on the first deed of trust, BofA was also barred from pursuing an action on the purchase money second loan.

The result here in Mitchell is consistent with prior cases holding that lenders who make multiple purchase money loans (first and seconds) secured by the same property are barred by section 580d from suing for a deficiency judgment on their junior loan after foreclosing on their senior loan. (Simon v. Superior Court (1992) 4 Cal.App.4th 63) The Mitchell case extends this prohibition to the secondary market for junior mortgage liens purchased after the original lender forecloses on the senior deed of trust. The Mitchell case does not conflict with the holding of National Enterprises, Inc. v. Woods (2001) 94 Cal.App.4th 1217, 1233 (a non purchase money case) – In Woods, the Court held that where the original lender who made both a first and a junior loan secured by two separate deeds of trust, sells or assigns the junior loan to a third party and subsequently forecloses on the senior loan, the “sold out” junior lien holder may pursue a deficiency judgment regardless of the fact that the junior loan was made by the holder of the foreclosed senior loan.

[Attorney’s Note: There is no mention in the Court’s opinion in Mitchell whether the “home” securing the subject mortgages qualified as Mitchell’s personal residence. In a purchase money mortgage for personal residence, a deficiency judgment is barred under C.C.P. 580b, which would have disposed of the need to analyze this case under Simon or section 580d.]

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