Legal Question in Real Estate Law in California

Generally, if a piece of real property is foreclosed upon in California, the lenders cannot seek a deficiency judgment, so long as the proceeds of the loan were used to purchase the property. However, if one or more loans were made to refinance, or pull equity out of the property, then the lenders may have the ability to obtain a deficiency judgment for the difference between the price paid at the foreclosue sale and the amont owed on the note and deed of trust. If you signed a note and deed of trust when the HELOC was originally created, then you remain responsible to the lender for repayment of the loan whether you knew it had been used by your girlfriend or not. While you might otherwise have some cause of action against your former girlfriend, the fact that she has filed bankruptcy may prevent you from ever collecting from her. Depending upon your specific situation, you may want to consult an attorney about the possibility of filing bankruptcy yourself.

#1. If the debt is still enforceable (see below) you are responsible to the lender, although you may have rights to full or partial reimbursement from other parties.

#2 Mr. Hoffman has given you incomplete and misleading information. While it is correct that there is a no-recourse statute for purchase money loans, that is not the end of the story. His statement that "if one or more loans were made to refinance, or pull equity out of the property, then the lenders may have the ability to obtain a deficiency judgment for the difference between the price paid at the foreclosue sale and the amont owed on the note and deed of trust" is misleading at best. That statement implies that the lender can foreclose and then sue for the difference. That is simply WRONG. What most people consider a "foreclosure" is actually a trustee's sale under the deed of trust. California gives lenders that alternative to filing a lawsuit on the debt and and conducting a court ordered sheriff's sale. With a trustee's sale, the lender engages a private party to post and record notices of default, give notice of the sale, and conduct the sale of the property for the lender's benefit, all without any court action required and taking barely more than six months from the first missed payment. In addition, the sale is final and not subject to legal attack in all but a few rare circumstances of serious misconduct. The price lenders pay for using this private form of "foreclosure" is that they give up the right to any deficiency. If they want to collect the deficiency, then they must file a lawsuit to collect the debt, win, have the property sold by the sheriff, and then go back to court for entry of a judgment of any deficiency. In addition to taking a year or more, the sale can be attacked on many more grounds, AND the borrower, in the unlikely event they can raise the money, can buy back the house for up to a year. So it is just short of unheard of for a lender to go that route.

What I suspect has happened in your case is one of two things. The one that would be good for you is if the HELOC lender foreclosed and is an out of state lender who does not understand that the prohibition against collecting after trustee's sale extends to you, or maybe they hope YOU don't know. The other thing that may have happened is bad news for you. If you had a HELOC, I presume you had a regular first mortgage too. If the FIRST mortgage foreclosed, then the HELOC lender is what is called a "sold out junior lender." What that means is that their junior deed of trust securing the HELOC was wiped out by the foreclosure of the senior deed of trust. In that case, the HELOC lender is now an unsecured creditor who never foreclosed on anything. Therefore, they can go after anyone who was a borrower on the loan and has not obtained bankruptcy relief.

Even in the second situation, however, I'm not so sure you need to run to a bankruptcy lawyer just yet. Without knowing a LOT more about the transaction(s) between you and the ex, I am not at all sure you do not have some other remedies available. You should consult with an attorney who can discuss the transactions with you and review the documentation, and then plan a course of action.

The second is a HELOC, which is a Home Equity Line of Credit. Those are not purchase money loans, meaning they are not loans used to purchase the property. Rather they are loans secured by the equity in your property, and are usually subordinate the the purchase money security, a second deed of trust.

The law you refer to is set forth in Code of Civil Procedure section 580d. It states that a lender cannot obtain a deficiency judgment after having foreclosed nonjudicially, by exercising the power of sale through a trustee's sale. If the holder of the first deed of trust foreclosed, however, that rule does not apply the the holder of the second deed of trust. As Mr. McCormick points out, the second is what is known as a frozen out junior lienholder, who has lost the security by the first's foreclosure, and the second can then sue on the promissory note. The frozen out junior lienholder rule, however, does not apply if the foreclosing lender was also the holder of the second, and if the lenders are the same, the lender cannot sue on the note.

I generally agree with Mr. McCormick's analysis, but I think two points need to be made. The first is in the way of a clarification: it's important to know whether the first mortgage and the HELOC were from the same lender. If so, a foreclosure by trustee sale on the first mortgage would prevent it from pursuing the HELOC balance, at least under most conditions. If, however, the lenders are different, the holder of the HELOC note is indeed a "sold-out junior," can sue and probably will. The second thing to note is that fraud, unlike ordinary debts, is not forgiven in a bankruptcy. If your bankruptcy lawyer (and the trial court?) believe that the ex-girlfriend's use of the HELOC and subsequent events amounted to a fraud, she's potentially still liable despite the bankruptcy, and should be named as a cross-defendant if you are sued.