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Judicial Foreclosure Or Trustee's Sale: Is The Decision A "No-brainer?
Posted by: Kenny Tan
August 14, 2010

Is it always better, and therefore it is a ?no-brainer? decision, to opt for judicial foreclosure over trustee?s sale if you?re the holder of a deed of trust on a recourse loan? You might not think so after you think it through?

Most probably the sole reason why you would want to go for a judicial foreclosure as opposed to trustee?ssale is because you may  get deficiency judgment in the former but not the later.

Here?s an example of why you might not get deficiency judgment even if you opt for judicial foreclosure.

Say you loan $250,000 to a friend. He gave you a note secured by a deed of trust against his rental property. The mortgage is therefore not subject to ant-deficiency laws.

Your friend paid you half ofthe money but defaults on the remaining balance on the loan.

You then hire an attorney to file a lawsuit for judicial foreclosure. You?re out $10,000 in litigation costs and attorney?s fees. The court issues a foreclosure decree and orders the debt due and payable to you is $135,000 and the property sold to satisfy the debt.

However, you didn?t know that there is a first deed of trust from a bank for $290,000 and your deed of trust is in the second position. You found out about this after you commenced judicial foreclosure.

Should you sell the property at the auction? If you do, do you get any deficiency judgment?

The minimum bid is the cost of the sale. Say the cost of sale is $6,000, then $6,000 is the minimum bid.You receive the surplus after deducting the cost of sale. In order for you to recover your $135,000, the bid amount would have to be at least $141,000. Who would bid $141,000 when the property is still subject to the first deed of trust of$290,000 and the fair market value is only $250,000, unless the bidder is unaware of the first deed of trust? If no one bids, the property will be released and you end up with nothing. If you receive nothing from the sale, are you now entitled to deficiency judgment? The answer is no and this is why.

How the court determines deficiency judgment may come as a shock to you. As long as the fair market value is greater than the debt owed, you will never receive any deficiency judgment because it is the amount by which the debt owed is greater than the fair market value. That?s right.

As the judgment creditor,you may do a full credit bid at the auction which means you bid up to the amount owed but you don?t have to put up the cash. As stated earlier, probably no one other than you will bid that amount. So you end up with a property with no equity and without recourse against your friend because of the one-action rule. Under the one-action rule, you can?t go after your friend for personal judgment.

So, is it really a?no-brainer? to pick judicial foreclosure over trustee?s sale?

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