In Enloe v. Kelso, 2013 WL 3357884 (2d Dist. 2013), the Second District Court of Appeal wrote a (characteristically) “short and sweet” opinion holding that the prohibition on obtaining a deficiency judgment under a deed of trust securing the purchase price applies even if the deed of trust is given to the sellers after the close of escrow. The dispositive question is not when the deed of trust was given, but whether or not it secures purchase money. As Popeye was fond of singing, “I yam what I yam . . . .” Similarly, a purchase money obligation “is what it is” for purposes of anti-deficiency protections.
The Enloes (“Sellers”) sold their house to the Kelsos (“Buyers”) for $1.9 million. Sellers agreed to carry back a second deed of trust in the amount of $93,000. However, the primary lender, Washington Mutual, refused to fund its loans if there was a junior deed of trust in favor of the Sellers. Accordingly, the Sellers and Buyers agreed that the Sellers would carry back a junior deed of trust to record “immediately after” the close of escrow, and they deleted any reference to this junior deed of trust in the escrow instructions. On the day that escrow closed, the purchase funds were disbursed to Sellers and Sellers issued a cashier’s check to the Buyers in the amount of $93,750. The deed of trust securing this obligation was recorded a few days later. The Sellers conceded that the money they “loaned” to Buyers came out of the purchase funds.
Some years later, the Buyers (now owners) entered into a short sale agreement with a third party, which the Sellers consented to. The Sellers received $22,500 in exchange for the release of their deed of trust, and then brought an action against the Buyers personally to recover the balance of the $93,700 obligation.
California Code of Civil Procedure section 580b(a)(2) prohibits any deficiency judgment under a deed of trust given to secure payment of the balance of the purchase price of the real property. A “deficiency judgment” is a judgment by which the borrower is personally liable for the amount secured by the deed of trust, above and beyond the value of the security given. The purpose of this and other anti-deficiency protections, which arose out of the Great Depression, are to discourage sellers from overvaluing property, and prevent the aggravation of economic downturns by imposing personal liability on owners as a result of the decrease in value of property. These anti-deficiency protections are a linchpin of secured transactions inCalifornia, and are interpreted broadly by the courts.
In this case, the only question was whether the trust deed given to the Sellers was to secure payment of a portion of the purchase price. The court found that indeed it was. Buyers and Sellers had agreed that a part of the purchase price would be financed through a note/deed of trust given to Sellers. The $93,750 check from the Sellers to the Buyers was funded out of the purchase price, and the deed of trust securing its repayment therefore secured a portion of that purchase price. The court found that even if Buyers had the means to pay the entire purchase price, the fact that they elected to borrow a portion of the purchase price from the Sellers, which obligation was secured by a deed of trust, made the obligation purchase money in character. Section 580b, according to the Court, has no requirement that the purchase money transaction be completed simultaneously with the close of escrow. Accordingly, section 580b barred any effort to obtain a deficiency against the borrower for that amount because, well, “I yam what I yam.”
But is it that clear? At what point does a purported purchase money obligation lose that character? A seller carryback obligation is really a deferred purchase money obligation, not a loan – i.e., the seller agrees that payment of some portion of the purchase price is deferred into the future. Yet here, no portion of the purchase price was deferred. Rather, the purchase was fully funded, and out of those funds a new “loan” obligation was created. Nonetheless, placing particular importance on evidence of the parties’ intent, the court held this new loan obligation was, in reality, a seller carryback obligation, equivalent to deferral of a portion of the purchase price.