Pena v. PNC Bank CA4/1 ( 2013 )

Filed 7/19/13 Pena v. PNC Bank CA4/1
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
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COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
ANTHONY PENA, D061660
Plaintiff and Appellant,
v. (Super. Ct. No. 37-2011-00070975-
CU-OR-EC)
PNC BANK, N.A.,
Defendant and Respondent.
APPEAL from a judgment of the Superior Court of San Diego County, Joel R.
Wohlfeil, Judge. Affirmed.
Stilwell & Associates and Andrew R. Stilwell for Plaintiff and Appellant.
Wolfe & Wyman, Kelly Andrew Beall and Jennifer J. Maas for Defendant and
Respondent.
Plaintiff Anthony Pena appeals the trial court's judgment against him, issued after
the court granted the motion of defendant PNC Bank, N.A. (PNC Bank) for judgment on
the pleadings. Pena, who sold his residence in a short sale, filed suit for declaratory relief
to prevent PNC Bank from collecting a deficiency he owed on a second mortgage he had
1
obtained on his residence. Pena contends the trial court erred in ruling that he had failed
to state a cause of action under the statutory and common law cited in his complaint. We
conclude there was no error and, accordingly, affirm the judgment.
FACTUAL AND PROCEDURAL BACKGROUND1
Pena purchased his residence in July 1991. In May 2005, he obtained a loan from
Bank of America for $441,000, which he secured with a recorded deed of trust on the
property. A year later, Pena obtained a second mortgage in the amount of $62,900 from
National City Bank, which subsequently sold that loan to PNC Bank. The second
mortgage was also secured by a recorded deed of trust on the property.
Pena thereafter defaulted on one or both of the loans. In May 2010, he entered
into a short sale agreement with a third party. That agreement was designed to alienate
the property for less than the total amount Pena still owed on the mortgages, and thus
required the banks' consent, which Pena obtained in August 2010. PNC Bank, however,
approved the sale on the express conditions that it would receive at least $15,000, and
that it would "continue to pursue collection and [Pena] will remain liable for the
remaining deficiency balance after receipt of the PNC Proceeds of Sale, which will be
approximately $37,729.35."
1 Because Pena appeals from an order granting PNC Bank's motion for judgment on
the pleadings, this factual summary is based on the allegations of Pena's complaint for
declaratory relief and the documents attached to and incorporated in that complaint.
(Alliance Mortgage Co. v. Rothwell (1995) 10 Cal. 4th 1226, 1232 (Alliance Mortgage
Co.) [On motion for judgment on the pleadings "we treat the properly pleaded allegations
of [the] complaint as true."].)
2
Escrow closed on the short sale on August 31, 2010. In connection with the
closing, PNC Bank executed a reconveyance deed to Pena, and Pena then executed a
grant deed to transfer ownership of the residence to the new buyer. Both deeds were
recorded.
By letter dated June 22, 2011, PNC Bank notified Pena that it had accelerated the
deficiency balance on his loan, and demanded payment of $38,153.99. To prevent PNC
Bank's collection of the deficiency, on November 4, 2011, Pena filed this action seeking
declaratory relief under Code of Civil Procedure sections 580d and 580e,2 as well as
under common law antideficiency protections.
PNC Bank answered the complaint on January 26, 2012, and on the same day,
filed a motion for judgment on the pleadings as to all causes of action. The trial court
granted PNC Bank's motion, finding that the statutory and common law antideficiency
protections cited in the complaint did not apply to Pena's short sale.
DISCUSSION
I. Applicable Standards of Review
A motion for judgment on the pleadings serves essentially the same function as a
general demurrer, testing the sufficiency of a complaint to state a cause of action.
(Sprague v. County of San Diego (2003) 106 Cal. App. 4th 119, 127 (Sprague).) Thus, an
appeal from a judgment on the pleadings, as with an appeal from a demurrer dismissal, is
reviewed de novo. (See, e.g., Pardee Construction Co. v. Insurance Co. of the West
2 All further statutory references are to the Code of Civil Procedure unless otherwise
indicated.
3
(2000) 77 Cal. App. 4th 1340, 1361, fn. 25.) We accept as true all properly pleaded
factual allegations, but not contentions, deductions or conclusions of fact or law, and we
must determine whether those alleged facts "support any valid cause of action against
[the] defendant, or if not, whether the complaint could be reasonably amended to do so."
(Kempton v. City of Los Angeles (2008) 165 Cal. App. 4th 1344, 1347, citing Zelig v.
County of Los Angeles (2002) 27 Cal. 4th 1112, 1126; accord, Sprague, supra, at p. 127.)
The trial court's dismissal of a complaint without leave to amend is reviewed for abuse of
discretion. (Blank v. Kirwan (1985) 39 Cal. 3d 311, 318; Sprague, supra, at p. 127.)
To the extent we are called upon to interpret the scope of statutory provisions, we
do so according to well-established principles of statutory construction. "In construing a
statute, a court's objective is to ascertain and effectuate legislative intent. [Citation.] To
determine legislative intent, a court begins with the words of the statute, because they
generally provide the most reliable indicator of legislative intent. [Citation.]" (Hsu v.
Abbara (1995) 9 Cal. 4th 863, 871.) "If the statutory language is clear and unambiguous
our inquiry ends. 'If there is no ambiguity in the language, we presume the Legislature
meant what it said and the plain meaning of the statute governs.' [Citations.] In reading
statutes, we are mindful that words are to be given their plain and commonsense
meaning." (Murphy v. Kenneth Cole Productions, Inc. (2007) 40 Cal. 4th 1094, 1103
(Murphy).) Whenever possible, the court should construe a statute "in harmony with the
whole system of law of which it is a part so that none of its provisions shall be useless or
meaningless." (Kahn v. Kahn (1977) 68 Cal. App. 3d 372, 381 (Kahn).) The proper
construction of a statute is a question of law which the court reviews independently. (See
4
California Teachers Assn. v. San Diego Community College Dist. (1981) 28 Cal. 3d 692,
699.)
II. Pena Alleged No Cognizable Legal Theory Supporting Declaratory Relief
A. California's Antideficiency Laws
"California has an elaborate and interrelated set of foreclosure and antideficiency
statutes relating to the enforcement of obligations secured by interests in real property.
Most of these statutes were enacted as the result of 'the Great Depression and the
corresponding legislative abhorrence of the all too common foreclosures and forfeitures
[which occurred] during that era for reasons beyond the control of the debtors.'
[Citation.]" (Alliance Mortgage Co., supra, 10 Cal.4th at p. 1236.) Pursuant to this
statutory scheme, a creditor generally must rely on the security first before looking to the
debtor to recover on a debt. This is the so-called "one form of action" rule. (See
Roseleaf Corp. v. Chierighino (1963) 59 Cal. 2d 35, 38, 39 (Roseleaf); see also § 726,
subd. (a).) If the security is insufficient to make the creditor whole, the creditor's right to
a judgment against the debtor personally for the deficiency may be limited or barred by
specific statutory provisions. (Roseleaf, at pp. 38-39.)
For example, section 580b altogether bars deficiency judgments "after a sale" of
property subject to a purchase money mortgage or deed of trust. (§ 580b, subds. (a), (b);
see Guild Mortgage Co. v. Heller (1987) 193 Cal. App. 3d 1505, 1510-1511 & fn. 7 (Guild
Mortgage Co.).) Sections 580a and 726 concern nonjudicial and judicial foreclosures,
respectively. The Legislature initially allowed the collection of deficiencies under those
provisions (other than in purchase money transactions), but included in both the
5
limitation that any recovery may not exceed the difference between the amount of the
indebtedness and the fair market value at the time of the sale (irrespective of the actual
sale proceeds). (§§ 580a, 726, subd. (b).) The purpose of such "fair value" provisions
was "to prevent creditors from buying in at their own sales at deflated prices and realizing
double recoveries by holding debtors for large deficiencies." (Roseleaf, supra, 59 Cal.2d
at p. 40.) Although the right to obtain a deficiency was the same under both statutes, "it
was to the creditor's advantage to exercise a power of sale rather than to foreclose by
judicial action" because "judicial foreclosure was subject to the debtor's statutory right of
redemption [citation], whereas the debtor had no right to redeem from a sale under the
power." (Id. at p. 43.)
Section 580d was enacted in response to this perceived discrepancy in debtor
protection after nonjudicial foreclosure sales. (Roseleaf, supra, 59 Cal.2d at p. 43 ["It
seems clear . . . that section 580d was enacted to put judicial enforcement on a parity with
private enforcement."].) That provision states in part: "No judgment shall be rendered
for any deficiency upon a note secured by a deed of trust or mortgage upon real property
or an estate for years therein hereafter executed in any case in which the real property or
estate for years therein has been sold by the mortgagee or trustee under power of sale
contained in the mortgage or deed of trust." (§ 580d, italics added.) As a consequence
of section 580d, a creditor has an election of remedies: "If the creditor wishes a
deficiency judgment," he must proceed via a judicial foreclosure, and "his sale is subject
to statutory redemption rights. If he wishes a sale resulting in nonredeemable title," he
may proceed via a nonjudicial foreclosure, but then "he must forego the right to a
6
deficiency judgment. In either case the debtor is protected." (Roseleaf, supra, at pp. 43-
44.) Read together, these antideficiency statutes "embrace a complete legislative scheme
for foreclosure for defaulted debts." (Guild Mortgage Co., supra, 193 Cal.App. 3d at p.
1511, italics added.)
The recession that began in 2008 produced another wave of economic distress,
forcing many thousands of homeowners to lose their homes to foreclosure, or to choose
another option not involving foreclosure that has become more prevalent in recent years:
the short sale. "A 'short sale' is a sale of property for a price that is less than the amount
of debt on the property, resulting in a shortfall of sales proceeds to pay off the existing
loans." (4 Miller & Starr, Cal. Real Estate (3d ed. 2011, 2012-2013 Supp.) Deeds of
Trust and Mortgages, § 10:66.10, p. 16; see Civ. Code, § 2943 [setting forth, inter alia,
requirements pertaining to "short-pay agreement[s]" and related transactions].) A short
sale generally requires the lender's approval. (See Espinoza v. Bank of America, N.A.
(2011) 823 F. Supp. 2d 1053, 1055 (Espinoza).) Although California's antideficiency laws
already limited or barred a creditor's ability to collect a deficiency in a number of
situations, they did not do so expressly with respect to deficiencies arising after short
sales until 2010. That year, the Legislature enacted section 580e, which became effective
on January 1, 2011. In its current version,3 section 580e prohibits the collection of
deficiencies after short sales under specified conditions, as follows:
3 Effective July 15, 2011, section 580e was amended to expand its application to
short sales of property secured by any mortgage or deed of trust, not merely the first
mortgage or deed of trust. (Stats. 2011, ch. 82, § 1.)
7
"No deficiency shall be owed or collected, and no deficiency
judgment shall be requested or rendered for any deficiency upon a
note secured solely by a deed of trust or mortgage for a dwelling of
not more than four units, in any case in which the trustor or
mortgagor sells the dwelling for a sale price less than the remaining
amount of the indebtedness outstanding at the time of sale, in
accordance with the written consent of the holder of the deed of trust
or mortgage, provided that both of the following have occurred: ¶
(A) Title has been voluntarily transferred to a buyer by grant deed
or by other document of conveyance that has been recorded in the
county where all or part of the real property is located. ¶ (B) The
proceeds of the sale have been tendered to the mortgagee,
beneficiary, or the agent of the mortgagee or beneficiary, in
accordance with the parties' agreement."
(§ 580e, subd. (a)(1).)
Still, not all situations fit neatly within the four corners of the foregoing statutes.
A body of common law has developed over the years to address some of those situations.
It is now well established, for example, that notwithstanding the "one form of action"
rule, "when the value of the security has been lost through no fault of the creditor, the
creditor may [immediately] bring a personal action on the debt." (Bank of America v.
Graves (1996) 51 Cal. App. 4th 607, 611; see also Cadlerock Joint Venture, L.P. v. Lobel
(2012) 206 Cal. App. 4th 1531, 1539 (Cadlerock).) Attempting to first foreclose on the
secured property in such an instance would be an "idle" act. (Hibernia Savings & Loan
Society v. Thornton (1895) 109 Cal. 427, 429 (Hibernia).) This exception does not apply,
however, if the creditor is itself responsible for the loss of the security. (Ghirardo v.
Antonioli (1996) 14 Cal. 4th 39, 48 (Ghirardo).) Thus, it has been long established that "a
creditor may not unilaterally divest its security interest without the consent of the debtor."
(Cadlerock, supra, at p. 1539; Hibernia, supra, at p. 429 [the mortgagee "will not be
8
permitted without the consent of the mortgagor to release the mortgage for the purpose of
bringing an action upon the note"].)
In the same vein, the California Supreme Court has interpreted the antideficiency
laws as protecting a debtor from a creditor's use of mechanisms that have the effect of
evading or "thwarting the purpose of [the antideficiency laws] by a subterfuge."
(Freedland v. Greco (1955) 45 Cal. 2d 462, 468 (Freedland), see id. at p. 467 [where
creditor gave debtor two notes covering only a single obligation, it could not, after
default, nonjudicially foreclose on one note and then attempt to collect a deficiency
judgment under the second note: "It is unreasonable to say the Legislature intended that
section 580d could be circumvented by such a manifestly evasive device."].)
We are called upon in this appeal to determine how these various statutes and
common law principles apply to Pena's situation, if at all. The trial court held as a matter
of law that Pena could not rely on the statutory or common law antideficiency protections
outlined above. We agree.
B. Section 580d Does Not Apply to Short Sales
In his first cause of action, Pena alleged he is entitled to declaratory relief by
virtue of section 580d. The trial court determined section 580d does not apply in this
case because Pena's residence was sold by him through a short sale, not on foreclosure by
PNC Bank under the power of sale authorized in the deed of trust. This ruling is legally
sound.
To determine the Legislature's intended scope of section 580d, we look first to the
language of that statute, and if it is plain and unambiguous, we need look no further.
9
(Kirby v. Immoos Fire Protection, Inc. (2012) 53 Cal. 4th 1244, 1250; Murphy, supra, 40
Cal.4th at p. 1103.) Section 580d bars deficiency judgments only when real property
secured by a mortgage or deed of trust "has been sold by the mortgagee or trustee under
power of sale contained in the mortgage or deed of trust." (§ 580d, italics added.) There
is nothing ambiguous about this language. Pena alleged that he sold his residence to a
third party in a short sale—there was no nonjudicial foreclosure sale pursuant to the
power of sale given to the trustee in the PNC Bank deed of trust. These allegations
render section 580d inapplicable.
Pena urges us to look beyond the language of the statute to its underlying policies.
He contends the intent behind the antideficiency laws is to bar the collection of
deficiencies regardless of how the real property is disposed of after a default—except
after a judicial foreclosure—and that allowing PNC Bank to collect the deficiency here
would defeat that legislative purpose. We are required, however, to give effect to all of a
statute's terms according to their ordinary meaning. (See Murphy, supra, 40 Cal.4th at p.
1103 ["[W]e are mindful that words are to be given their plain and commonsense
meaning."].) " 'If there is no ambiguity in the language, we presume the Legislature
meant what it said and the plain meaning of the statute governs.' [Citations.]" (Ibid.)
Pena's interpretation would require us to read out of the statute its specific limitation to
deficiencies arising after a sale by a mortgagee or trustee pursuant to a power of sale.
This we may not do. (Lopez v. Superior Court (2010) 50 Cal. 4th 1055, 1066 ["A reading
of a statute rendering 'some words surplusage is to be avoided.' [Citation.]"].)
10
Moreover, Pena cites no authority for his categorical assertion that at the time he
completed his short sale, the law barred collection of any and all deficiencies save those
arising after a judicial foreclosure sale. On the contrary, the antideficiency laws are an
amalgam of statutes directed at particular types of transactions—nonjudicial foreclosure
sales (sections 580a and 580d); judicial foreclosure sales (section 726); purchase money
transactions (section 580b); and most recently, short sales (section 580e). When the
Legislature began enacting these laws, the underlying purpose "was to protect debtors in
certain situations from personal liability for large deficiency judgments after their
property had been taken by the creditor through foreclosure proceedings, thereby
preventing the aggravation of the economic downturn which would result if defaulting
purchasers lost their land and in addition were burdened with personal liability." (Guild
Mortgage Co., supra, 193 Cal.App.3d at p. 1511, italics added.) Not surprisingly, courts
that have interpreted the scope of the antideficiency provisions generally have done so in
a manner consistent with their specific terms. (See, e.g., Roseleaf, supra, 59 Cal.2d at p.
43 [because section 580d applies only to a deficiency " 'upon a note secured by a deed of
trust or mortgage' " pursuant to a " 'power of sale contained in such mortgage or deed of
trust' " (italics added), that section applies only to the instrument securing the note sued
upon and thus "does not appear to extend to a junior lienor whose security has been sold
out in a senior sale"]; Cadlerock, supra, 206 Cal.App.4th at p. 1549 [holding that section
580d "simply does not apply on its face to a junior lien"]; MDFC Loan Corp. v.
Greenbrier Plaza Partners (1994) 21 Cal. App. 4th 1045, 1053, 1054, fn. 2 [section 580d's
prohibition of deficiencies does not preclude creditor from exhausting its other security;
11
section 580b applies only to two-party transactions under specified circumstances, and
not to a third party purchase money loan to acquire commercial property].)
Pena's proposed interpretation of section 580d thus is untenable because it cannot
be reconciled with the actual language of that particular provision, and because it cannot
be squared with the Legislature's elaborate statutory scheme of antideficiency protections
as a whole. If Pena were correct, and section 580d properly could be construed to bar a
creditor's collection of any deficiency not arising from a judicial foreclosure sale, then
one might reasonably question why the Legislature did not simply enact that one
antideficiency statute instead of enacting multiple such provisions addressing different
types of transactions. Indeed, section 580e, on which Pena also relies, would appear to
be entirely superfluous under Pena's construction of section 580d. In construing statutory
language, we must harmonize the provision being construed "with the whole system of
law of which [the statute] is a part so that none of its provisions shall be useless or
meaningless." (Kahn, supra, 68 Cal.App.3d at p. 381.) Pena's approach would do
violence to the Legislature's design, rather than promote consistency in interpretation and
application.
Pena offers no persuasive reason why the public policies served by section 580d
and the other provisions of California's antideficiency legislation would be compromised
by enforcing each of those statutes according to their respective, explicit terms, or, put
another way, why those policies should compel us to disregard those explicit terms.
Division Three of the Fourth Appellate District very recently declined to construe section
580d in a manner that, much like the approach urged by Pena here, "ignore[d] the text [of
12
that statute] in favor of vindicating its underlying purposes." (Cadlerock, supra, 206
Cal.App.4th at p. 1548.) In that case, a junior lienor's security was eliminated by a senior
sale, and the court was urged to apply section 580d to prevent the junior lienor from
collecting the deficiency because the junior and senior loans had originated with the same
lender (who had since assigned those two security interests to different entities).
(Cadlerock, supra, at pp. 1546-1547.) The court held that nothing in section 580d barred
the junior lienor's collection of the deficiency, and it declined to expand the reach of
section 580d based on nothing more than the perceived imperatives of the policies
underlying the statute. (Cadlerock, supra, at pp. 1547-1549.) In doing so, the court
specifically criticized or distinguished other decisions (including two relied on by Pena—
Simon v. Superior Court (1992) 4 Cal. App. 4th 63 and Freedland, supra, 45 Cal. 2d 462)
to the extent those cases purported to impose, or were being read as imposing, a
"judicially created prophylactic rule" unsupported by the text of section 580d.
(Cadlerock, supra, at pp. 1548-1549.)
Pena nevertheless urges us to engage in the "free-ranging judicial policy making"
Division Three rejected. (Cadlerock, supra, 206 Cal.App.4th at p. 1548.) To support his
contention that section 580d does not require a nonjudicial foreclosure sale—or indeed,
any sale at all—Pena ignores the language of that provision, and instead, relies on
statements from various decisions outside of their proper context and represents them to
be broad policy pronouncements supporting the interpretation he urges.
For example, Pena maintains certain California Supreme Court decisions have
created a "paradigm" that "personal liability for a deficiency only exists upon judicial
13
foreclosure." He suggests that in Dreyfuss v. Union Bank of California (2000) 24 Cal. 4th
400, the Supreme Court stated that whether a sale occurs pursuant to nonjudicial
foreclosure or a "private sale," the debtor has no personal liability for any deficiency. But
in the section cited by Pena, the Dreyfuss court was noting merely that the debtor is
protected in a number of ways by the laws regulating nonjudicial foreclosures (other than
section 580d), including the right to notice and to postpone the foreclosure in order to
proceed in some other fashion, such as by redeeming the property or finding another
purchaser. (Dreyfuss, supra, at p. 411.) In a section Pena omits, the court went on to
discuss nonjudicial foreclosure proceedings themselves, and it was in that specific
context that the court cited section 580d and made the statement, "Most important, the
borrower is relieved from any personal liability on the debt." (Dreyfuss, supra, at p. 411,
italics in original.) The Dreyfuss court in fact emphasized that section 580d "appl[ies]
only when a personal judgment against the debtor is sought after a foreclosure."
(Dreyfuss, at p. 407, italics added.) Indeed, it specifically rejected the plaintiffs' proposal
that the court "revitalize—i.e., . . . rewrite" the antideficiency laws to expand their
protective reach: "[W]e decline to engraft the proposed additional requirements onto the
law. Such an undertaking is a matter for legislative, not judicial, action." (Id. at p. 412.)
Pena's reliance on Western Security Bank, N.A. v. Superior Court (1997) 15
Cal. 4th 232 (Western Security Bank) is also misplaced. In his appellate briefs, Pena
quotes a statement drawn from that decision for the proposition that "if a lender's action
'has the practical consequences of requiring the debtor to pay additional money on the
debt after default or foreclosure,' it violates the policy behind section 580d." The quoted
14
portion, however, is actually taken from the Court of Appeal's decision in that case,
which the Supreme Court reversed. (Western Security Bank, supra, at p. 250.) Western
Security Bank concerned only whether a creditor may draw upon letters of credit to
satisfy the unpaid portion of a purchase money mortgage after the borrowers' default and
a nonjudicial foreclosure sale. The California Supreme Court specifically held that by
means of a recently enacted statute, the Legislature clarified that creditors have recourse
to such letters of credit because they are a form of obligation independent of the
underlying transaction, and consequently, such recourse is not barred by California's
antideficiency statutes. (Id. at pp. 245-247.) Nowhere in the Supreme Court's opinion
did the court suggest the protections of section 580d applied in any situation other than
where there is a sale by the trustee pursuant to the power of sale in the deed of trust.
On the contrary, the Supreme Court in Western Security Bank pointedly criticized
the Court of Appeal's reasoning in that case, as well as that of the cases on which the
intermediate appellate court had relied (including two cases also cited by Pena,
Commonwealth Mortgage Assurance Co. v. Superior Court (1989) 211 Cal. App. 3d 508and Union Bank v. Gradsky (1968) 265 Cal. App. 2d 40, 42-43). In particular, the
Supreme Court observed that the Court of Appeal in the Western Security Bank case—
misinterpreting the reach of these earlier decisions that had "inveighed against
subterfuges that thwart the purposes of" section 580d (Western Security Bank, supra, 15
Cal.4th at pp. 249)—erroneously concluded that the letters of credit at issue in that case
essentially were a " "device' " designed " 'to avoid the limitations of section 580d.' " (Id.
at p. 250.) Pena uses the very same overly broad statements questioned by the Supreme
15
Court to argue that section 580d should be applied here. The fatal flaw in this assertion is
that, just as in Western Security Bank, there was no subterfuge or evasion of section 580d
in this case. As Pena's complaint and the attached documents reveal, Pena voluntarily
undertook to sell his house in a short sale and he sought and obtained PNC Bank's
consent to that sale. PNC Bank expressly conditioned its approval on Pena remaining
liable on the debt for any deficiency, and Pena knowingly proceeded with the short sale
on that basis. Contrary to Pena's claims, the short sale was not a "manifestly evasive
device" designed to thwart the purposes of section 580d. (Freedland, supra, 45 Cal.2d at
p. 467.)
In sum, Pena's contention that section 580d's protections extend to short sales, and
not merely nonjudicial foreclosure sales, rests on a fundamentally unsound legal and
factual foundation. We are unpersuaded that section 580d should be construed to mean
anything other than what it plainly and unambiguously says.
C. Section 580e Does Not Apply Because it Became Effective After Pena's Short Sale
Pena also seeks refuge in section 580e, which prohibits the collection of
deficiencies after a short sale. (§ 580e, subd. (a)(1).) Section 580e became effective on
January 1, 2011, and was amended, effective July 15, 2011, to include short sales of
properties covered not only by a first mortgage or deed of trust, but subsequent
mortgages and deeds of trust as well. (Stats. 2010, ch. 701, § 1; Stats. 2011, ch. 82, § 1.)
It is undisputed that Pena closed escrow on his short sale on August 31, 2010. The
reconveyance deed executed by PNC Bank was recorded in September 2010. PNC Bank
sent its collection letter to Pena in June 2011.
16
Pena contends that applying the recently enacted section 580e to his short sale
would not be a retroactive application because "[t]he legislature was not regulating short
sales in section 580e, but deficiencies," and for that reason, the statute properly may be
applied to any deficiency existing on the day section 580e became effective. We
conclude that the inevitable result of applying section 580e to already-completed short
sales would be to "substantially change the legal consequences of past events" (Western
Security Bank, supra, 15 Cal.4th at p. 243), and thus would constitute a prohibited
retrospective application.
The Code of Civil Procedure, of which section 580e is a part, expressly provides
that "[n]o part of [the Code] is retroactive, unless expressly so declared." (§ 3.)
"[L]egislative provisions are presumed to operate prospectively, and . . . they should be
so interpreted 'unless express language or clear and unavoidable implication negatives the
presumption.' [Citation.]" (Evangelatos v. Superior Court (1988) 44 Cal. 3d 1188, 1208
(Evangelatos).) But a "statute does not operate retrospectively simply because its
application depends on facts or conditions existing before its enactment." (Western
Security Bank, supra, 15 Cal.4th at p. 243.) "A statute has retrospective effect when it
substantially changes the legal consequences of past events." (Ibid.) On the other hand,
a statute that, for example, "merely clarifies, rather than changes, existing law does not
operate retrospectively even if applied to transactions predating its enactment." (Ibid.,
italics in original.)
By its terms, section 580e is not made retroactive, and nothing in the statute gives
rise to a "clear and unavoidable" implication that the Legislature intended its
17
retrospective application. (Evangelatos, supra, 44 Cal.3d at p. 1208.) Pena concedes as
much. Furthermore, Pena does not argue that section 580e merely clarified existing law.
Rather, he attempts to avoid a retroactivity analysis by characterizing the aim of that
statute as preventing creditors from collecting any deficiencies in existence as of the
effective date of the statute, regardless of when the short sale occurred. According to
Pena, the Legislature did not specify in section 580e that the short sale resulting in the
deficiency must have occurred on or after the statute's effective date, although it easily
could have done so.
Pena's counsel made this same argument to the United States District Court in
Espinoza, supra, 823 F.Supp.2d at page 1058. Then-Chief Judge Irma E. Gonzalez
rejected the argument, concluding that "[t]he practical effect [of] interpreting the statute
as Plaintiffs suggest would be to extinguish the rights to deficiency balances negotiated
between parties prior to the enactment of section 580e. In other words, despite Plaintiffs'
attempt to interpret section 580e so that it would apply to this case without also operating
retroactively, applying the statute as Plaintiffs' request would cause the precise harm
courts seek to avoid with the presumption against applying statutes retrospectively:
interference with parties' antecedent rights." (Ibid.)
Although we are not bound by federal district court decisions (see, e.g., Castaneda
v. Department of Corrections and Rehabilitation (2013) 212 Cal. App. 4th 1051, 1074),
we find the federal court's reasoning persuasive and consistent with controlling California
law. " 'A retrospective law is one which affects rights, obligations, acts, transactions and
conditions which are performed or exist prior to the adoption of the statute.' [Citations.]"
18
(Aetna Casualty & Surety Co. v. Industrial Accident Com. (1947) 30 Cal. 2d 388, 391.)
"[T]he retrospective application of a statute may be unconstitutional . . . if it deprives a
person of a vested right without due process of law, or if it impairs the obligation of a
contract." (In re Marriage of Buol (1985) 39 Cal. 3d 751, 756; see also United States v.
Security Industrial Bank (1982) 459 U.S. 70, 79, 82 [holding that lien avoidance statute
was not to be construed to apply retrospectively to liens which attached before the
enactment date, because to do so would raise constitutional concerns about interference
with preexisting property rights].)
As explained, at the time Pena defaulted, various statutes restricted a creditor's
ability to collect deficiencies arising in specified circumstances, e.g., after a sale of
property subject to a purchase money mortgage (section 580b), or after a nonjudicial
foreclosure (section 580d). Before section 580e took effect, however, it was permissible
for a creditor to collect a deficiency arising from a short sale (at least one not involving a
purchase money mortgage), because no law prevented it.4 The legislative history of
section 580e indicates that the statute made "changes to existing law," which became
necessary due to the increase in short sales during the recent economic crisis, and the
absence of any statute specifically addressing deficiencies arising after short sales. (Sen.
Com. on Judiciary, Analysis of Sen. Bill No. 931 (2009-2010 Reg. Sess.) as amended
Mar. 25, 2010, pp. 3, 4 ["[s]ince there is no equivalent of Section 580d that is specific to
4 One published federal district court decision holds that section 580b applies to
short sales involving purchase money loans. (See Rex v. Chase Home Finance LLC
(2012) 905 F. Supp. 2d 1111, 1138-1145.) Pena does not contend that the deficiency in
this case is barred by section 580b.
19
short sales, the author asserts that . . . the bill would . . . [ensure] that borrowers do not
have a higher amount of liability after a short sale than [after] a foreclosure sale," and
thus "equalize[] anti-deficiency protection between short sales and foreclosures"] italics
added, capitalization omitted.)
In other words, the effect of section 580e was to deprive creditors of one means of
recourse that previously had been available to them. PNC Bank had a legal right to
collect the deficiency on Pena's loan, and asserted that right as a condition to giving its
consent to the short sale. Pena completed the sale on that basis. Applying section 580e
would deprive PNC Bank of that vested property interest and, hence, "substantially
change the legal consequences of past events." (Western Security Bank, supra, 15
Cal.4th at p. 243.)
Pena maintains that the thrust of the antideficiency laws is, and was at the time of
his default, to permit collection of a deficiency only after a judicial foreclosure. As
explained previously, however, if that were the case there would have been no need for
section 580e. Plainly, the Legislature perceived a gap in the antideficiency laws created
by the absence of any statute specifically addressed to short sales, and it closed that gap
with the enactment of section 580e. But because the very nature of that statute was to
deprive creditors of a substantive remedy previously available to them (and in this case, a
remedy PNC Bank had already begun to enforce), it properly should be construed to
20
apply only to short sales occurring after its effective date, absent a clear and unequivocal
statement by the Legislature to the contrary.5
Finally, we note that the text of section 580e supports this conclusion. As the
Espinoza court observed, the statute prohibits collection of a deficiency "in any case in
which the trustor or mortgagor sells the dwelling for a sale price less than the remaining
amount of the indebtedness outstanding at the time of the sale." (§ 580e, subd. (a)(1),
italics added; see Espinoza, supra, 823 F.Supp.2d at p. 1059.) The use of the term
"sells," as opposed to, for example, "sells or has sold," indicates an intention that the new
law be applied to future sales only. The legislative history of both the original statute and
its 2011 amendment also use forward-looking language. Thus, the 2010 analysis of the
original legislation, in explaining the initial limit of the statute to first mortgages or deeds
of trust, notes that the new law "would not relieve all borrowers of all future liability after
[a] short sale." (Analysis of Sen. Bill 931, at p. 4, italics added.) An analysis of the 2011
amendment explains that the amendment "would apply the protections of [section 580e]
to all mortgages, thus, providing full liability protection for homeowners who receive
approval for the short sale." (Assem. Com. on Judiciary, Analysis of Sen. Bill 458
5 It is telling that after the passage of sections 580a and 580b, courts held that their
antideficiency protections could apply only prospectively—that is, to deeds of trust
executed and sales made after the effective date of those provisions. (See, e.g., Estate of
Farley (1944) 63 Cal. App. 2d 130, 132 [sections 580a and 580b "have been held
inapplicable to deeds of trust executed before their effective date"]; Bechtel v. Nelson
(1935) 10 Cal. App. 2d 66, 67-68 [section 580a held not to apply to deeds of trust executed
prior to, and sales conducted before, the effective date of that provision, because "the
legislature did not so declare it, and a retroactive application would be an impairment of
contractual obligations"].)
21
(2011-2012 Reg. Sess.) as amended May 16, 2011, p. 4, italics added; see id. at pp. 4-5
["By removing the language limiting application to first mortgages, this bill would
provide complete liability protection for owners who successfully complete a short sale."]
italics added.) Again, the use of the present tense indicates the statute was intended to
apply to short sales that had not yet taken place.
We conclude section 580e does not apply to the deficiency created after the short
sale of Pena's residence, as that sale was completed before the effective date of the
statute.
D. The Principles Enunciated in Hibernia and its Progeny Do Not Apply
In his third cause of action, Pena invokes certain common law principles that
protect debtors from collection of a deficiency "after a secured creditor does any act or
omission that causes them to lose or devalue their security interest." Pena alleges that
PNC Bank, by approving the short sale, accepting proceeds from that sale, and executing
a reconveyance deed, "willfully" released and lost its security interest, thus barring it
from collecting the deficiency. We agree with the trial court that this principle has no
application here.
Pena's third cause of action is based on a rule enunciated by the California
Supreme Court over a century ago in Hibernia, supra, 109 Cal. 427. In that case, a
husband and wife had executed a mortgage and promissory note on a homestead that was
the community property of the couple. Upon the wife's death, the bank did not make any
claim against her estate based on the note and mortgage, but rather, sought to hold the
husband personally liable for the debt. (Id. at p. 428.) As a consequence, the trial court
22
held, the mortgage lien was extinguished, but that court rendered a personal judgment for
the amount of the note against the husband. (Ibid.) The Supreme Court held that if the
value of a mortgage property has been lost through no fault of the mortgagee, the
mortgagee "need not go through the idle form of bringing an action for foreclosure before
he can have a judgment on the note." (Id. at p. 429.) But "when the mortgagee, by his
own act or neglect, deprives himself of the right to foreclose the mortgage, he at the same
time deprives himself of the right to an action upon the note. He will not be permitted
without the consent of the mortgagor to release the mortgage for purposes of bringing an
action upon the note." (Ibid., italics added.) The court held the bank in that case had
been obligated to foreclose on the mortgage first. (Id. at pp. 429-430.)
Other decisions since Hibernia and the enactment of the antideficiency laws have
reaffirmed the basic rule that a mortgagee may sue to collect on the debt directly if the
security is lost through no fault of its own and foreclosure would thus be a futile act, but
if the mortgagee destroys or devalues its security interest in the subject property through
its own willful or negligent act, it may not then proceed directly against the mortgagor to
collect the underlying debt—at least not without the debtor's consent. (See, e.g.,
Ghirardo, supra, 14 Cal.4th at p. 48 [lender who made a payoff demand, received the
payment, and then reconveyed the deed of trust is barred from seeking under section 726
an additional sum he allegedly inadvertently failed to include in the payoff demand];
Pacific Valley Bank v. Schwenke (1987) 189 Cal. App. 3d 134 [bank could not sue
Schwenke, a comaker of a promissory note, to collect on the debt when it had agreed with
23
O'Brien, the other maker of the note, to release and reconvey the security without
Schwenke's knowledge or consent].)
This line of authority does not apply here. As the trial court observed, although
PNC Bank did execute a reconveyance deed and thus lost its security interest, it did so
while expressly continuing to hold Pena liable for any unpaid balance, with Pena's
knowledge and consent (the latter evidenced by the fact that the short sale was
completed).6 In fact, nothing in the complaint suggests that Pena's decision to do a short
sale was anything but voluntarily, and the allegations of the complaint certainly
demonstrate that Pena knew the sale would require PNC Bank's consent and
reconveyance of the trust deed. Pena himself was thus a willing and knowing participant
in the sale, and by seeking PNC Bank's consent to the sale, Pena effectively invited PNC
Bank to give up its security interest in exchange for the sale proceeds plus Pena's promise
to pay any deficiency.
In Security Pacific National Bank v. Wozab (1990) 51 Cal. 3d 991 (Wozab), the
court determined that even if a creditor takes steps that result in the loss or waiver of the
security interest under section 726's "one form of action" rule, that does not necessarily
6 We also observe that the Hibernia line of case law appears directed more at the
application of the "one form of action" rule embodied in section 726, and the
circumstances under which a creditor may proceed immediately and directly against the
debtor instead of foreclosing on the security first. This case, however, concerns whether
a creditor, having already received partial repayment of a loan from a short sale of the
real property, may proceed to collect the deficiency balance. (Cf. Cadlerock, supra, 206
Cal.App.4th at p. 1549 ["In our view, courts purporting to interpret section 580d have
conflated the analysis of section 580d with the one form of action rule."].)
24
mean the creditor loses the right to sue to recover the debt—i.e., the security may be
extinguished, but the debt is not. (Wozab, supra, at p. 1004.) In Wozab, the bank lost its
security interest by immediately taking setoffs against the debt from the debtors' bank
accounts instead of foreclosing first. (Id. at p. 1001-1002.) But the court held that
because the debtors acquiesced in the bank's decision not to foreclose, and accepted
reconveyance of the trust deed, they could not be heard to complain, under section 726,
that the bank failed to properly proceed against the security first, in an effort to prevent
the bank from suing them on the underlying debt. To rule otherwise, the court observed,
"would be to encourage gamesmanship," would constitute a "gross injustice" and would
result in a windfall to the debtors. (Wozab, supra, at p. 1005.)
Similarly, here, Pena voluntarily conducted a short sale, which he knew would
result in a reconveyance of the trust deed, and also sought and obtained the lender's
consent to that sale, which he obtained on the express condition that he remain liable for
any remaining balance on the loan. Pena now seeks to avoid liability for that deficiency,
arguing that PNC Bank waived its right to collect it by giving up its security interest. In
the absence of a statute requiring a different result, we reject Pena's argument since it was
Pena himself who acquiesced in the elimination of PNC Bank's security interest. 7
7 Pena also argues that he did not, and could not, waive the protections of the
antideficiency statutes because legally they cannot be waived. But we do not believe
"waiver" is the dispositive concept here. Sections 580d and 580e do not protect Pena
from collection of the deficiency at issue here, as previously explained, so there can be no
"waiver" of the protections of those statutes. In the absence of any applicable
antideficiency statute, Pena is bound by his agreement to pay the deficiency, which was
part of the consideration he gave for PNC Bank's approval of the short sale.
25
III. The Trial Court Properly Decided the Motion for Judgment on the Pleadings and
Properly Denied Leave To Amend
Finally, we address Pena's argument that the trial court erred in granting PNC
Bank's motion for judgment on the pleadings without leave to amend (thus, effectively
concluding Pena could not state a claim), instead of determining on the merits whether
Pena was entitled to declaratory relief.
California law permits the courts to grant declaratory relief "in cases of actual
controversy relating to the legal rights and duties of the respective parties." (§ 1060.)
Furthermore, dismissal of a claim for declaratory relief—as opposed to a declaration
denying such relief—is disfavored where an actual controversy has been alleged:
"It is the general rule that in an action for declaratory relief the
complaint is sufficient if it sets forth facts showing the existence of
an actual controversy relating to the legal rights and duties of the
respective parties . . . and requests that the rights and duties be
adjudged. [Citation.] If these requirements are met, the court must
declare the rights of the parties whether or not the facts alleged
establish that the plaintiff is entitled to a favorable declaration."
(Bennett v. Hibernia Bank (1956) 47 Cal. 2d 540, 549-550; citing Maguire v. Hibernia
Savings & Loan Society (1944) 23 Cal. 2d 719, 728-729; see 5 Witkin, Cal. Procedure
(5th ed. 2008) Pleading, § 877, p. 294 (Witkin) ["the rule is now established that
the . . . complaint is sufficient if it shows an actual controversy; it need not show that the
plaintiff is in the right"].)
A number of cases have held, however, that claims for declaratory relief may be
determined on demurrer or motion for judgment on the pleadings where the complaint on
its face shows such relief is not available as a matter of law. "A motion for judgment on
26
the pleadings is an appropriate means of obtaining an adjudication of the rights of the
parties in a declaratory relief action if those rights can be determined as a matter of law
from the face of the pleading attacked, together with those matters of which the court
may properly take judicial notice." (Allstate Insurance Co. v. Kim W. (1984) 160
Cal. App. 3d 326, 330; accord, Silver v. City of Los Angeles (1963) 217 Cal. App. 2d 134,
141-142 (Silver) ["Where plaintiff makes no case on the merits and a declaratory relief
action would merely produce a useless trial, a dismissal is proper."].)
The Code of Civil Procedure expressly provides that the court "may refuse to
exercise the power granted by this chapter in any case where its declaration or
determination is not necessary or proper at the time under all the circumstances."
(§ 1061.) This provision permits the trial court to dismiss declaratory relief allegations
that do not state a cause of action. (See, e.g., Orloff v. Metropolitan Trust Co. (1941) 17
Cal. 2d 484, 489 [affirming dismissal after order sustaining demurrer as to declaratory
relief count; where plaintiff's allegations did "not measure up to the requirements of an
action for declaratory relief," the trial court "properly refused to exercise its power to
entertain the complaint upon that count"]; Silver, supra, 217 Cal.App.2d at pp. 141, 142
[trial court's dismissal of the complaint after sustaining defendant's demurrer was proper
under section 1061: "[W]here the complaint is devoid of facts showing the necessity or
propriety of a declaration it is not reversible error per se to refuse declaratory relief by an
order sustaining a general demurrer without leave to amend," and, indeed, "[a] trial on the
purported issues alleged would be a useless formality."].)
27
Even accepting all the allegations of Pena's complaint as true (including the
allegation that there existed an actual, justiciable controversy between the parties), it was
entirely proper, under the foregoing authorities, for the trial court to grant PNC Bank
judgment on the pleadings when Pena had failed to state a cause of action as a matter of
law. Assuming without deciding that the better course would have been simply to deny
Pena declaratory relief rather than grant PNC Bank's motion, we are not required to
reverse because doing so would be pointless. "Even though a dismissal order is
erroneous, reversal would be an idle act if the plaintiff's substantive claim is legally
untenable, and the only result would be the entry of a declaratory judgment adverse to the
plaintiff." (Witkin, supra, § 878, p. 296, citing Haley v. Los Angeles County Flood
Control District (1959) 172 Cal. App. 2d 285, 294 [appellate court's ruling "that plaintiff
cannot recover upon the cause of action which he attempts to state" achieves "[t]he object
of declaratory relief"].) Put another way, Pena was not prejudiced by the trial court's
ruling, which effectively, albeit perhaps not literally, denied him declaratory relief. (See,
e.g., Cassim v. Allstate Insurance Co. (2004) 33 Cal. 4th 780, 800 [court will reverse only
on a showing of prejudicial error resulting in a miscarriage of justice].)
We also conclude that the trial court did not abuse its discretion in denying Pena
leave to amend the complaint to add an estoppel theory. 8 At best, Pena made only a
cursory request for leave to amend in his opposition to the motion for judgment on the
pleadings. Significantly, he never intimated to the trial court, either in his opposition or
8 The trial court did not specifically address the amendment issue in its order
granting the motion for judgment on the pleadings.
28
at the hearing, that his claim for declaratory relief would be cognizable under an estoppel
theory. A central rule of appellate practice is that legal theories not presented to the trial
court may not be urged for the first time on appeal. (Greenwich S.F., LLC v. Wong
(2010) 190 Cal. App. 4th 739, 767 (Greenwich) [appellant waives argument by failing to
raise it in the trial court]; Richmond v. Dart Industries, Inc. (1987) 196 Cal. App. 3d 869,
874 [" 'The rule is well settled that the theory [of liability] upon which a case is tried must
be adhered to on appeal. A party is not permitted to change his position and adopt a new
and different theory on appeal. [Citation.]' "].)
In any event, the trial court was within its discretion in not granting leave to
amend because Pena cannot allege facts sufficient to state a claim for estoppel. Pena has
admitted by alleging in his complaint (and by incorporating relevant documents therein)
that he elected to proceed via short sale, he sought and obtained PNC Bank's consent, and
he completed the sale with knowledge that PNC Bank expressly retained its ability to
collect from Pena any unpaid balance remaining on the underlying loan after the sale.
Pena therefore cannot now allege, let alone prove, that PNC Bank ever promised that it
would not pursue the deficiency, or that he ever relied on such a promise. (See, e.g.,
Setliff v. E. I. Du Pont de Nemours & Co. (1995) 32 Cal. App. 4th 1525, 1534 [on
demurrer, "[p]laintiff is bound by an admission in his pleadings" and the admission
negates any attempt to allege facts to the contrary].) He therefore cannot establish at least
two essential elements of a promissory estoppel claim. (See, e.g., US Ecology, Inc. v.
State of California (2005) 129 Cal. App. 4th 887, 901 [elements of promissory estoppel
cause of action include a clear and unambiguous promise and reliance by the party to
29
whom promise is made].) Pena's insistence that PNC Bank essentially promised never to
attempt to collect a deficiency except in the case of judicial foreclosure ignores the
alleged and undisputed facts and is based on legal arguments we already have rejected.
IV. DISPOSITION
The judgment is affirmed. Respondent may recover its costs of appeal.
HALLER, J.
WE CONCUR:
HUFFMAN, Acting P. J.
NARES, J.
30