Legal Question in Real Estate Law in California

Let's start with foreclosure first. California has a set of what are known as anti-deficiency statutes. A deficiency is the difference between what the property that forms the security sells for, and the outstanding debt. In California, a deficiency is prohibited after a lender completes a non-judicial foreclosure sale, which is conducted by the trustee at a private auction. Once that sale is complete, a lender who has chosen this method of foreclosure is prohibited from obtaining a deficiency judgment for the balance. (Code Civ. Proc., sect. 580d.) (This rule does not apply to actions for fraud, waste, or rent skimming.)

In order to obtain a deficiency judgment, the lender must sue to foreclose, in action governed by Code of Civil Procedure section 726. But another anti-deficiency provision comes into play. The lender who chooses judicial foreclosure cannot obtain a deficiency judgment if the subject loan is considered a purchase money loan within the meaning of Code of Civil Procedure section 580b. That protection extends to different categories of property, such as installment land sale contracts, any owner carry back (including commercial property) and residential property of 4 units or less, occupied by the borrower, and purchased with funds from a third party lender.

A junior lender, however, can sue directly on the note once a senior lender has foreclosed. This is also subject to some exceptions. A junior lender cannot sue on the note if they also held the senior loan that was foreclosed on. And a junior lender cannot sue on the note if the loan would still be considered a purchase money loan.

Short sales were not subject to anti-deficiency legislation until recently. Deficiency judgments are now prohibited when a lender consents to a short sale of a dwelling 4 units or less. (Code Civ. Proc., sect. 580e.)

If you would like a more in depth analysis of your particular situation, please feel free to contact me at my private e-mail address.

Mr. Roach's answer is clearly stated and generally accurate. 99%-plus of all foreclosures are handled by trustee's sales, which as he points out, preclude deficiency judgments.

One other aspect of your question requires an answer. You indicate that you may not be the borrower yourself, but perhaps a surety or guarantor for someone else. Since you are out-of-state, that makes it more likely that you guaranteed the loan obligation on behalf of, say, your son or daughter.

A surety or guarantor may be personally liable after a nonjudicial foreclosure sale, i.e., after a trustee's sale, when the debt that is guaranteed was a purchase-money loan. See Bauman v. Castle (1971) 15 Cal.App.3d 990. The general law of suretyship is found in the Civil Code at sections 2787 through 2856.

Finally, you mention "short sale or foreclosure" together. These two methods for terminating a real estate loan and loss of ownership by the borrower are rather different in their legal aspects. Short sales are negotiated between the borrower/owner and lender, plus a buyer, who is often also the lender. These are private deals, at last glance not much regulated, and how a guarantor or surety will be treated is pretty much up to the parties that negotiate the shart sale. I would not expect that most short sale deals would take a surety off the hook since the lender usually will be doing most of the deal drafting, but one can ask or even insist.