The so-called “Simon Rule”, among the most potent weapons available to distressed homeowners in negotiating short sales, and protecting themselves from financial liability following foreclosure, has been significantly weakened as a result of a new California court of appeals decision. That decision, Cadlerock Joint Venture, LP v. Lobel (2012) 203 Cal.App.4th 1531, will change the landscape to the detriment of many struggling California mortgage holders.
How Does This Impact Homeowners Considering a Short-Sale?
Cadlerock now requires a court to look at who owns the loans at the time of the foreclosure by the senior lienor. If the senior lienor has assigned/sold its junior lien to a third party prior to the foreclosure, that third party will now be able to sue the homeowner for the full amount of the junior loan after the foreclosure. To summarize, following Cadlerock, in most situations the homeowner will lose the home and also have to repay the balance of the non-purchase money second loan. (The court left a small amount of “wiggle room” for cases where the senior lienor assigns/sells its junior lien after the foreclosure. There, Simon will still apply.)
Simon Rule Background
As discussed in previous articles, for the last twenty years many Californians with non-purchase money second loans have been able to protect themselves from claims brought by certain “junior” lenders after a foreclosure by the “senior” lender. This protection originated in a landmark case called Simon v. Bank of America (1992) 4 Cal.App.4th 1537.
The Simon decision created an exception to the old rule that applies where a homeowner has two separate loans on a single property, and where the first mortgage holder (aka the “senior lienor”) forecloses on the property. Before Simon, the second loan (aka the “junior lienor”) could collect the balance still owing on that loan after the senior foreclosed (and so long as the second loan was not a “purchase money” loan; i.e., part of the loan “package” used to buy the house). (“Purchase money” second loans were, and still are, barred from collection under a separate rule not discussed here.)
What Simon said was that where the first and second loans were issued by the same bank (in that case, Bank of America), the bank could not collect on its second loan after foreclosing on its first loan; thus, the “Simon Rule”. An equally important part of the rule was that a bank could not avoid this restriction by “assigning”, or selling, its second loan to another bank or investor. In other words, courts would look to who owned the loans when they were issued. If the same bank issued the two loans, the “Simon Rule” would apply.
In recent years, Simon became an invaluable tool in negotiating short sales involving non-purchase money second loans. (See my January 2012 blog post, Playing the Simon Card in Short Sale Negotiations.) Cadlerock now renders that tool virtually useless.
All homeowners considering short sales should consult with competent legal counsel to determine the impact of Cadlerock on their situation. Failure to do so may result in enormous financial consequences and long-term hardship.