Legal Question in Real Estate Law in California

Re: Foreclosure

Mr. Whipple has given (in my opinion) a very thorough and comprehensive answer.

I would follow his advice, and retain a real estate attorney ASAP. Because of the current real estate and foreclosure marketplaces, you and your wife are at great risk.

Re: Foreclosure

There are several sets of relationships here, and several sets of rights to think about.

First, the lender's rights are probably going to be only against the collateral, as it looks like it is using foreclosure under a power of sale in a deed of trust. If the lender chose to foreclose in court, it's more likely it would be able (and intending) to seek a deficiency judgment for the shortfall from the foreclosure sale. So, neither you nor your partner seem to be at risk.

If the lender were entitled to get a deficiency judgment because it went to court to foreclose and the loan was not a purchase-money loan (the rules are a little complex), the judgment would probably be against your partner alone, assuming he signed the note in his individual capacity and not as a partner of your partnership. If he signed in his capacity as a partner, you might find that the suit and the judgment would include you (or your wife) as defendants and judgment debtors.

Finally, if the partner gets stuck with a partnership liability that he thinks your wife, or the two of you, ought to share under the partnership agreement, he or she is likely to sue you to compel you to bear your share of the partnership's losses. That's the danger of operating a business as a general partnership.

If there were junior loans (e.g., a second DofT) on the investment property, the potential problems are greater. The juniors will lose their collateral and can come after the borrower directly.

Due to the fairly high loss the bank is about to suffer, you should probably take your loan and partnership documents to a real estate or business lawyer who can review them and give you personalized advice.