Legal Question in Real Estate Law in California

First, CCP 580b only applies to foreclosures, and not short-sales. You are not protected and in fact, most lenders will pursue the Short after the sale is completed, unless their right to do so is specifically waived in the short-sale approval. You need to go back and obtain that release from them, or you will be facing collection efforts from them in the future. They may be made whole by the insurer of the loan, in which case the insurer then can subrogate the right of the lender to pursue the short from you.

Second, you need to contact a tax attorney or a CPA to answer your question regarding the tax implications. The tax implications of a short-sale or foreclosure are very complex depending upon a large number of factors, not the least of which is your personal, financial situation. The best person to provide that opinion is the CPA who prepares your tax returns and is familiar with your personal financials. Otherwise, you need to hire someone to review your financial situation and make a determination as to what your tax implications might be. There are very likely taxable events in what you describe unless you fall within one of the exceptions.

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I do not agree with Mr. Gibbs. Code of Civil Procedure section 580b does not require foreclosure, unlike its cousin - section 580d - which only applies after a nonjudicial foreclosure sale. The law is clear that section 580b antideficiency judgment protection is not limited to situations where the underlying trust deed is foreclosed. Otherwise, section 580b would be rendered meaningless, and the lender or seller would never foreclose and would never be concerned that the fair market value of the secured property was the sole means of recovering the loan. (Frangipani v. Boecker (4th Dist. 1998) 64 Cal.App.4th 860, 864-865.)

There is no clear case on point on this issue that I have been able to find as of today (May 11, 2010.) The reason is that short selling is relatively new foreclosure avoidance technique. In a short sale, the lender agrees to sell the property to a new buyer, for the going market rate, which is lower than the amount owed on the note. In a short sale, the new buyer gets a deed, and the lender gets the purchase funds, and reconveys the deed of trust. If the purchaser has arranged financing, his or her lender is now in first position with a new deed of trust. It differs from an older process, known as a deed in lieu of foreclosure, where the borrower simply deeds the property to the lender, which is the beneficiary under the deed of trust.

Short sales are governed by Civil Code section 2943, which does not address your issue. Obviously, a short sale gives the lender what he would have accomplished via foreclosure and resale, without paying the fees. It also obviously creates a deficiency. The purpose behind section 580b is to place the risk of inadequate security on the purchase money lender/ seller. (As used in this analysis, seller means seller carry back situations.) The lender is discouraged from overvaluing the security. The idea is to prevent the aggravation of the dowturn that would result if defaulting purchasers were burdened with large personal liability. Thus the lender is forced at the time of entering the transaction, knowing that it is a purchase money mortgage, into accepting the risk that the security will be inadequate. (Cornelison v. Kornbluth (1975) 15 Cal.3d 590, 601-602 citing Roseleaf v. Chierighino (1963) 59 Cal.2d 35, 40.)

I will have to continue this in another post, due to space limitations.