Legal Question in Real Estate Law in California

There are two layers of anti-deficiency protection and a common misuse of terminology that combined make this confusing. First let's clear up the terminology. Everyone, even we lawyers who practice in the area, use the term "foreclosure" generically in most cases, but when it comes to anti-deficiency it has to be used precisely. When the lender sells the property without court involvement most everyone calls that a "foreclosure." In fact it is technically a "trustee's sale." That is because the mortgage you give when you take out a loan secured by real property is technically a "deed of trust." If you read it closely it grants rights in your property to a trustee, including the right to sell it if you default on the loan. A true foreclosure is when the lender files a lawsuit to enforce the debt and seeks foreclosure of the deed of trust and a judicial sale of the property. Sometimes this is called a "judicial foreclosure" and a trustee's sale is called a "non-judicial foreclosure." Let's stick to "trustee's sale" and "foreclosure action" to be clear on the distinction.

So, now to your questions. First, if a lender sells at a trustee's sale they are prohibited from then seeking recovery of any deficiency. It doesn't matter if the lender buys it on a credit bid, or a bottom feeder real estate investor buys it, the lender cannot do anything after the trustee's sale. If a lender wants to reserve the right to seek a deficiency judgment they must not be a purchase money lender (defined below), and must file a foreclosure action, get an order for sherriff's sale, and then get a judgment for any shortfall. This is called the "one form of action rule." The lender can proceed with both in tandem for a while, but once the sale commences or the case goes to trial, they can no longer continue with the other process. This is all true whether the lender's deed of trust is in first or any other position.

Second, we turn to the junior lein holder(s). If any loan (first or junior) was 1) used entirely for acquisition of a residence for the borrower, 2) at the time of purchase, and 3) no proceeds of the loan being used for any other purpose (this is a "purchase money loan" by a "purchase money lender"), they have no right to a deficiency under any circumstances. It does not matter whether it is labeled as a "second deed of trust," "home equity loan" or anything else. It is the substance of the transaction, not the lable that matters. However, if it is a home equity line of credit that is used 100% for purchase initially, but either has funds remaining in the line that are later drawn, or it is fully drawn for the purchase but paid down and then drawn again, it would no longer qualify as a purchase money loan. The same is true for any loan made after the purchase. Even if it is used 100% to refinance the purchase money loan, the protection is lost. If it is a cash-out refinance it is most definitely not under the anti deficiency protection.

So if your "a)" junior lender is a purchase money lender, they are simply completely out of luck. Their security is gone and they are barred by the purchase money anti-deficiency law from recovering from the borrower. Your "b)" junior lender looses his security but becomes an unsecured creditor with all the rights and remedies available to any creditor to sue on the debt and then enforce the judgment against any non-exempt assets they can find.