SB 931 goes far beyond its intended purpose, according to Rubenstein. “By its terms, it applies to any note secured by a first deed of trust or first mortgage for a dwelling of not more than four units, except when the trustor or mortgagor is a corporation or political subdivision of the state. It is not limited to consumer transactions, nor is it limited to situations in which the dwelling is the residence of the obligor,” he says. Furthermore, it goes beyond the scope of Code of Civil Procedure Section 580d, he explains, “since it not only bars a deficiency judgment against the obligor, but states that a lender’s written consent to the sale ‘for less than the remaining amount of the indebtedness due at the time of the sale’ shall obligate that holder to accept the sale proceeds as full payment and to fully discharge the remaining amount of the indebtedness on the first deed of trust or first mortgage.”

Read literally, according to Rubenstein, SB 931 could be construed to mean that a sale of one item of the pledged residential real estate for less than the outstanding loan balance would amount to “full payment” of the debt and preclude recovery from the other collateral or from guarantors. “California courts have historically taken the position that the anti‐deficiency laws were established for a public reason and, under many circumstances, cannot be contravened by a private agreement,” he says. “Accordingly, even if the lender and its borrower agree that it is preferable for the pledged residential real property to be sold to pay down the debt—with the lender retaining its rights against other collateral and against guarantors—they might be precluded from doing so.”

Another ambiguity in the statute, he says, is that it states that it applies when the owner “sells the dwelling for less than the remaining amount of the indebtedness due at the time of sale.” The word “due,” he says, has different meanings. “Sometimes it is interpreted to mean the amount owed on the debt, even if the debt has not matured. Other times, it is interpreted to mean a debt that has matured. Under the former interpretation, the statute would apply even if the loan has not matured and is not in default.”

The statute, in its current form, creates significant risks for lenders who consent to a short sale under the circumstances described above, says Rubenstein. “Although the courts might interpret the statute in such a way as to avoid those problems, there is no certainty that they will do so,” he says. “The ideal way to address this situation is for the Legislature to amend the statute so that it more clearly expresses the Legislature’s intent. In the absence of such a clarification, it will often be in the lender’s interest to foreclose on its deed of trust in those circumstances rather than incurring the risk of agreeing to a short sale.”