More on Judicial Foreclosures in California

Judicial foreclosure is generally available in California:  it is the "one form" of judicial action allowed by statute for recovery of a debt or enforcement of a right that is secured by a mortgage or deed of trust on real property.   In addition, if the California property is worth less than the loan balance and the lender seeks a judgment against its borrower for the difference (referred to as a "deficiency") between the unpaid balance of the secured debt (plus certain expenses) and the greater of (a) the amount produced by the sale of the collateral or (b) the fair value of the collateral, the lender must judicially foreclose.  (Note, however, that some sorts of real estate loans cannot be judicially foreclosed, as discussed below.)No separate action against the borrower to enforce the debt without foreclosing on the real property is allowed for loans secured by California real property.  In fact, California courts will severely penalize a lender for attempting to collect a debt secured by real estate by means other than foreclosure on the real property collateral.  This can be a significant trap for lenders seeking to collect or work out loans.  In a judicial foreclosure, the secured lender brings an action to have the court (i) determine that the loan is in default, (ii) order that the security (the California real estate) be sold to satisfy the loan balance, (iii) declare that the borrower is liable for any deficiency arising from an insufficient sale price at the foreclosure sale, and (iv) enter a deficiency judgment against the borrower.While judicial foreclosure allows most lenders to obtain deficiency judgments against their defaulting borrowers (see below, however, for a significant exception), such foreclosures are time-consuming and expensive.  In addition to the delays inherent in any civil proceeding, in California the borrower/judgment debtor or its successor in interest has a significant period of time after the property is sold to "redeem" it (to buy it back for the amount paid at the foreclosure sale), up to three months if the proceeds are sufficient to satisfy the secured indebtedness with interest and the costs of the action and the foreclosure sale, and up to one year if the proceeds are not sufficient.   Obviously this right of redemption makes reselling the recovered collateral difficult, which is one reason the judicial foreclosure procedure is not commonly completed in California. In a major exception to the general rule that deficiency judgments are available in judicial foreclosure actions in California, a deficiency judgment may not be pursued after a judicial foreclosure of a "purchase money" loan, which is defined as either (1) a loan to borrower from the seller of the real property securing payment of the balance of the purchase price of that real property, or (2) a loan given by any lender to a borrower used to pay all or part of the purchase price of a dwelling for not more than four families occupied entirely or in part by the borrower.Under recently enacted legislation, certain additional requirements apply to foreclosures involving California residential real property.Judicial foreclosure proceedings almost always take longer than nonjudicial trustee's sales.  The timetable for notice in a judicial foreclosure depends on whether a deficiency judgment is available.  If a deficiency judgment has been waived or is prohibited, the notice of levy must be served at least 120 days before the notice of sale.   After the 120-day period has run, the levying officer gives an additional 20 days' notice of sale.   Thus, when a deficiency judgment is not available, the borrower is entitled to 140 days' notice before the foreclosure sale.  When a deficiency judgment is available, the notice of sale may be recorded and served with the writ of sale immediately on the entry of the foreclosure judgment.   As with nonjudicial foreclosures, these timetables can be significantly delayed if the borrower files for bankruptcy protection, triggering the automatic stay to preclude foreclosure, or if the borrower brings an action challenging a judicial foreclosure.More on nonjudicial foreclosures and related topics in later posts.