Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_11-cv-00894/USCOURTS-casd-3_11-cv-00894-1/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1332 Diversity-Petition for Removal

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UNITED STATES DISTRICT COURT 

SOUTHERN DISTRICT OF CALIFORNIA 

GONZALO ESPINOZA, an individual; and 

ROSALBA ESPINOZA, an individual, 

 Plaintiffs, 

vs. 

BANK OF AMERICA, N.A., a North 

Carolina corporation; and SRA 

ASSOCIATES, INC., a New Jersey 

corporation; and DOES 1-20, inclusive, 

Defendants. 

CASE NO: 11-CV-0894-IEG (CAB) 

ORDER GRANTING 

DEFENDANTS’ MOTION TO 

DISMISS 

[Doc. No. 13] 

Presently before the Court is Defendants’ motion to dismiss Plaintiffs’ first amended 

complaint. [Doc. No. 13.] For the reasons stated below, the Court GRANTS Defendants’ motion. 

BACKGROUND

 The following background is taken from the Plaintiffs’ First Amended Complaint (“FAC”) 

unless otherwise noted. 

 In late 2004, Plaintiffs purchased property located in San Diego County at 397 Camino 

Elevado, Bonita, CA 91902. The purchase was financed with two mortgages, and the mortgages were 

secured by deeds of trust (DOT 1 and DOT 2) that were executed and recorded. 

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 Over the next two years, Plaintiffs engaged in a series of additional finance transactions.1 By 

the end of 2007, Plaintiffs’ property was secured by two deeds of trust, DOT 3 (with Washington 

Mutual Bank) and DOT 5 (with Bank of America); all other deeds of trusts had been terminated. 

 Sometime later, Plaintiffs were unable to make their mortgage payments under DOT 3 and 

DOT 5. In July 2009, California Reconveyance Company, an agent of Chase Home Finance (as 

successor-in-interest to Washington Mutual Bank) filed a Notice of Default (NOD) with the San Diego 

County Recorder, thus initiating the nonjudicial foreclosure process under California Civil Code 

§ 2924. 

 In October 2009, Plaintiffs entered into an agreement with a third party for a “short sale.” 

Because the agreement was designed to alienate the property for less than the full amount owed on the 

property, it was contingent on the approval of the two lien holders, Chase Home Finance (as successorin-interest to Washington Mutual Bank) and Bank of America. Plaintiffs obtained approval for the 

“short sale” from Chase Home Finance and Bank of America and then closed escrow on the “short 

sale.” According to the terms of the approval, “[u]pon the bank’s receipt of the $20,875.53 and a 

signed copy of the final Short Sale HUD-1 Form the bank will release the lien and charge off the 

remaining debt as a collectable balance.” [FAC, Ex. E, at 5.] On March 25, 2010, Plaintiffs’ closed 

escrow on their short sale. [FAC, ¶ 18 & Ex. A.] 

 On April 1, 2010, Bank of America filed a Substitution of Trustee and Full Reconveyance, 

releasing its lien on the property. The reconveyance deed states, in bold letters: 

This Release of Lien does not constitute a satisfaction of the underlying debt 

secured by the Mortgage described above, which remains in full force and effect. 

It serves only to release the lien of the Mortgage upon the above described 

property. 

 1

 In 2006, Plaintiffs refinanced DOT 1 and DOT 2 with Washington Mutual Bank, and a third 

deed of trust (DOT 3) was executed. DOT 3 was recorded on June 5, 2006. As part of the refinance 

with Washington Mutual Bank, full reconveyance deeds were executed and recorded, terminating DOT 

1 and DOT 2. Soon after recording DOT 3, Plaintiffs obtained a home equity line of credit 

(“HELOC”) with Bank of America, which was secured by a fourth deed of trust (DOT 4) and recorded 

on November 14, 2007. Plaintiffs later refinanced DOT 4 with Bank of America, and a fifth deed of 

trust (DOT 5) was recorded on November 14, 2007. As part of the refinancing with Bank of America, 

a reconveyance deed was executed and recorded, terminating DOT 4. 

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[FAC, Ex. G (emphasis in original).] Plaintiffs then transferred ownership of the property to the new 

buyer. 

 In November 2010, Defendant SRA Associates, acting on behalf of Bank of America, sent a 

collection letter to Plaintiffs demanding payment of a $79,652.98 balance. Plaintiffs’ obligation to pay 

the $79,652.98 balance is the subject of this action. 

Plaintiffs filed suit in San Diego Superior Court, and Defendants removed the action to this 

Court on April 27, 2011. Shortly thereafter, Defendants moved to dismiss Plaintiffs’ complaint. The 

Court granted Defendants’ motion, dismissing the complaint with leave to amend. On July 27, 2011, 

Plaintiffs filed the FAC, alleging three causes of action: (1) for declaratory relief under the California 

Code of Civil Procedure § 580d; (2) for declaratory relief under the California Code of Civil Procedure 

§ 580e; and (3) for declaratory relief under common law antideficiency protection. [Doc. No. 12.] 

Defendants now move to dismiss the FAC in its entirety. [Doc. No. 13.] 

LEGAL STANDARD

A motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure tests the 

legal sufficiency of the claims asserted in the complaint. Navarro v. Block, 250 F.3d 729, 731 (9th Cir. 

2001). “Dismissal can be based on the lack of a cognizable legal theory or the absence of sufficient 

facts alleged under a cognizable legal theory.” Balistreri v. Pacifica Police Dept., 901 F.2d 696, 699 

(9th Cir. 1990) (citation omitted). Leave to amend should be granted unless the defect is not curable 

by amendment. See Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1108 (9th Cir. 2003). 

The Court must accept all factual allegations pleaded in the complaint as true and construe 

them and draw all reasonable inferences in favor of the nonmoving party. See Cahill v. Liberty Mut. 

Ins. Co., 80 F.3d 336, 337-38 (9th Cir. 1996). The Court need not, however, accept “legal 

conclusions” as true. See Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009). “[A] plaintiff’s obligation 

to provide the ‘grounds’ of his ‘entitle[ment] to relief’ requires more than labels and conclusions, and a 

formulaic recitation of the elements of a cause of action will not do.” Bell Atlantic Corp. v. Twombly,

550 U.S. 544, 555 (2007) (citation omitted). The complaint must contain “enough facts to state a 

claim to relief that is plausible on its face.” Id. at 570. “A claim has facial plausibility when the 

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pleaded factual content allows the court to draw the reasonable inference that the defendant is liable for 

the misconduct alleged.” Iqbal, 129 S. Ct. at 1940. 

DISCUSSION

I. Declaratory Relief Under California Code of Civil Procedure § 580d

Claim one of the FAC alleges section 580d precludes Bank of America from collecting the 

remaining balance under DOT 5. The Court addressed this issue in its previous Order. [See Doc. No. 

11, at 4.] Under California law, if a borrower defaults on a loan secured by a deed of trust containing a 

power of sale clause, the lender may pursue a nonjudicial foreclosure. Benitez v. Recon Trust, CA, No. 

11-CV-510 BEN (WMC), 2011 WL 998327, at *2 (S.D. Cal. Mar. 21, 2011) (citing McDonald v. 

Smoke Creek Live Stock Co., 209 Cal. 231, 236-37 (1930)). A nonjudicial foreclosure is subject to the 

antideficiency statutes, which prevent the foreclosing lender from obtaining a judgment for any 

difference between the debt and the proceeds from the sale: 

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. 

Cal. Civ. Proc. Code § 580d (emphasis added). By its terms, section 580d applies “only when a 

personal judgment against a debtor is sought after a foreclosure.” Dreyfuss v. Union Bank of Cal., 24 

Cal. 4th 400, 407 (2000) (emphasis added). 

Plaintiffs argue that, under § 580d, a secured lender waives its right to a deficiency by initiating

nonjudicial foreclosure proceedings, whether or not a nonjudicial foreclosure sale actually occurs. 

Plaintiffs’ assertion is incorrect under California law. “Mere commencement of nonjudicial 

foreclosure proceedings [is] not an election of remedy.” Bank of Am. v. Graves, 51 Cal. App. 4th 607, 

614-15 (1996) (citing Carpenter v. Title Ins. & Trust Co., 71 Cal. App. 2d 593, 596 (1945)); Griffin v. 

Compere, 114 Cal. App. 2d 246, 247 (1952) (holding that, where a creditor brought a foreclosure 

action but then dismissed it, merely initiating the foreclosure action did not constitute an election of 

remedies that would preclude a later private sale and suit for the deficiency). 

Plaintiffs, citing no authority on this point, argue that, because Bank of America secured a deed 

of trust with a power of sale provision, it effectively enforced the power of sale provision by approving 

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Plaintiffs’ short sale. A power of sale provision in a deed of trust grants a lender the right to conduct a 

nonjudicial foreclosure sale. See Gomes v. Countrywide Home Loans, Inc., 192 Cal. App. 4th 1149, 

1158 (2011). But no foreclosure sale occurred in this case. Section 580d does not apply here, because 

it only applies to protect a debtor from a deficiency judgment after a foreclosure sale. Dreyfuss, 24 

Cal. 4th at 407. 

Plaintiffs’ allegations do not entitle them to relief under section 580d. Thus, the Court 

DISMISSES WITH PREJUDICE Plaintiffs’ first cause of action. 

II. Declaratory Relief Under California Code of Civil Procedure § 580e

 California Civil Procedure Code Section 580e provides, in relevant part: 

(a)(1) 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. 

In short, section 580e prevents a lender that consents to a short sale from pursuing the post-sale 

deficiency.2

 However, because section 580e became effective on January 1, 2011, and the amendment 

in July 2011, well after Plaintiffs executed their short sale, Plaintiffs are not protected by section 580e. 

 Plaintiffs closed escrow on their short sale on March 25, 2010, and Bank of America executed 

the reconveyance deed on April 1, 2010. [FAC, ¶¶ 18-19.] Title was transferred to the new buyer 

shortly thereafter, and by November 3, 2010, Bank of America sought payment of the balance of 

Plaintiffs’ debt—$79,652.98. [Id. ¶¶ 20-21.] But section 580e was not enacted until January 1, 2011. 

 2

 Enacted on January 1, 2011, section 580e initially protected a debtor engaging in a creditorapproved short sale from liability for any deficiency owed on the first deed of trust only. See 2010 Cal. 

Stat., ch. 701 (S.B. 931). As amended on July 15, 2011, section 580e now applies to any lender that 

consents to a short sale, whether or not the lender is in the first position. See Cal. Civil Proc. Code 

§ 580e; 2011 Cal. Stat., ch. 82. 

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 The general rule is that statutes operate prospectively unless the statute includes a provision 

expressly stating otherwise. See United States v. Sec. Indus. Bank, 459 U.S. 70, 79-80 (1982) (“‘[A] 

retrospective operation will not be given to a statute which interferes with antecedent rights . . . unless 

such be the unequivocal and inflexible import of the terms, and the manifest intention of the 

legislature’” (quoting Union Pac. R. Co. v. Laramie Stock Yards Co., 231 U.S. 190, 199 (1913) 

(internal quotation marks omitted)). Moreover, California’s Civil Procedure Code includes a provision 

stating that “[n]o part of [this code] is retroactive, unless expressly so declared.” Cal. Civ. Proc. Code 

§ 3; see also Evangelatos v. Superior Court, 44 Cal. 3d 1188, 1207-08 (1988) (“[L]egislative 

provisions are presumed to operate prospectively, and that they should be so interpreted ‘unless 

express language or clear and unavoidable implication negatives the presumption.’” (quoting Glavinich 

v. Commonwealth Land Title Ins. Co., 163 Cal. App. 3d 263, 272 (1984))). 

 Nothing in section 580e indicates that it should apply retroactively. Because it was enacted 

after Plaintiffs conducted their short sale, Defendants argue that section 580e does not preclude them 

from seeking the remaining balance of Plaintiffs’ loan. 

 Plaintiffs attempt to avoid the retroactivity issue by reframing the focus of section 580e. They 

argue section 580e regulates deficiencies stemming from short sales, not the short sales themselves. 

Under Plaintiffs’ theory, once enacted, section 580e extinguished any then-existing deficiencies. 

Because there remained a deficiency balance on Plaintiffs’ loan at the time the new law took effect, 

Plaintiffs argue that section 580e bars Defendants from seeking the deficiency. [Pls.’ Mot., at 11 (“The 

legislature could have easily put that no deficiency should lie after the effective date of this bill[;] 

however, they did not. Plaintiffs assert that this was intentional.”).] 

 The practical effect 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. See Nat’l Collection Agency, Inc. v. Fabila, 93 Cal. App. 3d Supp. 1, 

*3 (1979) (“It is well settled that no law impairing the obligations of contracts may be passed.” (citing 

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U.S. Const. art. I, § 10; Cal. Const. art. I, § 9)); In re Rauer’s Collection Co., 87 Cal. App. 2d 248, 253 

(1946) (“The rule that a statute is presumed to operate prospectively only, unless an intent to the 

contrary clearly appears, is especially applicable to cases where retroactive operation of the statute 

would impair the obligations of contracts or interfere with vested rights.”). 

 Plaintiffs’ interpretation of section 580e also ignores the most plausible reading of the statutory 

text. Section 580e provides that a lender cannot collect a deficiency “in any case in which the trustor 

or mortgager sells the dwelling for a sale price less than the remaining amount of the indebtedness 

outstanding at the time of the sale.” Cal. Civ. P. Code § 580e(a)(1) (emphasis added). The word 

“sells” is prospective in nature; it suggests the legislature intended section 580e’s antideficiency 

protections to apply to future short sales, not to extinguish deficiencies remaining from short sales that 

occurred before the statute was enacted. 

 The legislative history also indicates that section 580e was intended to apply to short sales 

occurring after the statute took effect. Analyzing the July 2011 amendment to section 580e, the 

Assembly Committee on Judiciary stated: 

SB 458 [codified as amended at Cal. Civ. Proc. Code § 580e] . . . adds additional 

protections against post-short sale deficiency liability to junior note holders (seconds) 

when those lenders approve a short sale. It is important to note that the short sale process 

remains voluntary on every participant’s part—only lenders that actually agree to the sale 

will be affected, and sellers that cannot put together an acceptable sale may still go to 

foreclosure and even bankruptcy. 

Assembly Committee Bill Analysis of SB 458, June 28, 2011, available at ftp://www.leginfo.ca.gov/ 

pub/11-12/bill/sen/sb_0451-0500/sb_458_cfa_20110627_113447_asm_comm.html (last accessed 

Sept. 30, 2011). As in the statute itself, the Committee’s use of forward-looking language—“when 

those lenders approve a short sale,” “only lenders that actually agree to the sale,” “sellers that cannot 

put together an acceptable sale”—suggests the legislature intended section 580e to apply to future short 

sales, not those that had already occurred. 

 Section 580e applies only to short sales occurring after the statute was enacted. Here, the 

parties negotiated the terms of the short sale, and the short sale occurred, before section 580e was 

enacted. Accordingly section 580e does not apply to this case. Thus, the Court DISMISSES WITH 

PREJUDICE Plaintiffs’ second cause of action. 

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III. Declaratory Relief Under Common Law Antideficiency Protection

Defendants correctly argue that California’s antideficiency protections are creatures of statute, 

not the common law. See Roger Bernhardt, California Mortgages, Deeds of Trust, and Foreclosure 

Litigation § 5.1 (4th ed. 2009); see also In re Kearns, 314 B.R. 819, 822-23 (9th Cir. 2004) (discussing 

the interplay of the several statutes that comprise “California’s complex web of foreclosure and 

antideficiency laws” (citing Western Sec. Bank v. Superior Court, 15 Cal. 4th 232, 237 (1997))). 

Absent an applicable statutory provision, California law does not provide antideficiency protection. 

See Dreyfuss, 24 Cal. 4th at 412 (declining to expand the scope of antideficiency statutes because the 

breadth of their protections “is a matter for the Legislature to consider”). 

Plaintiffs argue that the common law “Hibernia Rule,” named for The Hibernia Sav. & Loan 

Soc’y v. R.S. Thornton, 109 Cal. 427, 429 (1895), precludes Bank of America from seeking the 

deficiency in this case. [FAC, ¶ 43, Pls.’ Opp’n, at 13-14.] The Hibernia Rule is not itself an 

antideficiency protection, but it does prevent secured lenders from circumventing antideficiency 

protections for debtors. 

Generally, “[i]n California, a creditor secured by a trust deed on real property must rely on the 

security before enforcing the underlying debt.” Bank of Am. v. Graves, 51 Cal. App. 4th 607, 611 

(1996) (citing Cal. Civ. P. Code §§ 580a, 725a, 726); Cal. Civ. P. Code § 726; see In re Kearns, 314 

B.R. at 820 (discussing section 726 as “California’s so-called ‘one-action/security-first’ real estate 

foreclosure statute). “Even if the security is insufficient, the antideficiency statutes (§§ 580a, 580b, 

580d) may limit or bar a judgment against the debtor for a deficiency.” Id. (citing Roseleaf Corp. v. 

Chieringino, 59 Cal. 2d 35, 38-39 (1963)). Where, however, a creditor is secured by a trust deed on 

real property, and “the value of the security has been lost through no fault of creditor, the creditor may 

bring a personal action on the debt.” Id. (citing Hibernia, 109 Cal. at 429). The theory underlying 

this avenue for a secured creditor to bring an action against the debtor is “that if the security is lost or 

has become valueless at the time the action is commenced, the debt is no longer secured.” Id. (quoting 

Brown v. Jensen, 41 Cal. 2d 193, 195 (1953)). So, for example, where two creditors hold liens on one 

parcel of property, and one lienholder forecloses on that parcel, the second lienholder can initiate a 

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personal action against the debtor because, at the time of that action, the security no longer has value.3 

See id. 

But under the Hibernia Rule, where a secured creditor itself has extinguished the security, the 

creditor cannot then initiate a personal action against the debtor. See id. at 613. In Hibernia, for 

example, the secured creditor failed to file a timely claim with the estate of a deceased debtor, and the 

superior court assigned the security—a parcel of real property—to the decedent’s husband. 109 Cal. at 

428. The California Supreme Court held that, by neglecting to file a timely claim, the creditor 

“deprive[d] himself of the right to foreclose the mortgage,” and, therefore, he had also “deprive[d] 

himself of the right to action upon the note.” Id. at 429. 

Similarly, in Pacific Valley Bank v. Schwenke, the secured creditor, without the debtor’s 

consent, released the security through a separate transaction with a third party (the debtor’s business 

partner). See 189 Cal. App. 3d 134, 137-38 (1987). The Court of Appeal held that “a creditor is not 

allowed to circumvent [section 726] by divesting himself of his security without the consent of the 

debtor.” Id. (citing Cooper v. Burch, 3 Cal. App. 470, 471 (1906)). “If he does so, he has waived his 

right to proceed on the note.” Id. at 140. 

And in Simon v. Superior Court, one bank held two trust deeds on a single parcel of real 

property. The bank foreclosed on the first trust deed, and then attempted to sue the debtor directly on 

the second trust deed, arguing that, with regard to that deed, it was a sold-out junior lienholder. 4 Cal. 

App. 4th 63 (1992). The Court of Appeal held the bank was not a sold-out junior lienholder because, 

“[a]s the holder of both the first and second liens, Bank was fully able to protect its secured position.” 

Id. at 72. By foreclosing on the first deed, the bank itself eliminated the security for the second deed. 

Thus, the court held that a deficiency action was barred. Id.

While Plaintiffs do not expressly state as much, their attempt to apply the Hibernia Rule in this 

case rests on the following premise: by consenting to a short sale, a secured lender causes the security 

to lose value, and therefore forfeits its rights to collect any deficiency. But Plaintiffs point to no 

 3

 Under such circumstances, the second lienholder is often referenced as a “sold-out junior 

lienholder.” See Graves, 51 Cal. App. 4th at 611-12. 

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authority supporting that premise. Moreover, Hibernia, Pacific Valley Bank, and Simon make clear 

that the Hibernia Rule prevents secured creditors from acting, without the debtors’ knowledge, to 

extinguish a security in order to circumvent the requirements for secured creditors to “rely on the 

security before enforcing the underlying debt.” See Graves, 51 Cal. App. 4th at 611. Unlike Hibernia, 

Pacific Valley Bank, or Simon, Bank of America did not do anything that affected the security without 

Plaintiffs’ knowledge. Indeed, Plaintiffs themselves sought the short sale, and they actively negotiated 

with Bank of America to obtain its consent. Additionally, the deed by which Bank of America 

reconveyed the property to Plaintiffs so they could execute the short sale expressly states—in bold 

print—that it did not satisfy Plaintiffs’ debt. 

The Hibernia Rule does not apply to this case. Plaintiffs have not identified any common law 

rule that prevents Bank of America from seeking the deficiency in this case. Accordingly, the Court 

DISMISSES WITH PREJUDICE Plaintiffs’ third cause of action. 

CONCLUSION

For the reasons stated above, the Court GRANTS Defendants’ motion and DISMISSES 

Plaintiffs’ claims WITH PREJUDICE. The Clerk shall terminate this case. 

IT IS SO ORDERED. 

DATED: October 13, 2011 _______________________________ 

 IRMA E. GONZALEZ, Chief Judge 

 United States District Court 

 

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