Legal Question in Real Estate Law in California

Let's be very clear. The Sellers did nothing to "put the home into foreclos[ure]," rather, the lender foreclosed because the payments were not being made. What you should have been advised by any competent real estate agent representing you, is that any money you put up towards your personal "due diligence" (aside from your earnest-money deposit) in the process of buying a short-sale or foreclosure is generally going to be entirely at risk. If the short-sale is not approved by all lenders (as in the case you describe), then there is a good likelihood that you will lose money for appraisals, inspections, etc... Those are all "costs of doing business" when investing in distressed properties. It doesn't sound like you had a real estate agent representing you, so you may have no recourse there.

One rather interesting point you make, however, is that the Realtor apparently told you she was "unaware there were [two] loans going on." That in my mind may be malpractice on the part of the Realtor - they have access to title information that would have told her that there were two loans - however, the only party who probably has recourse against that Realtor is the Seller, unless that same Realtor was also representing you. You may want to have the transaction reviewed by an attorney, but it is likely that you are going to lose the money you put into this. As mentioned above, the cost of your due diligence (inspections, appraisals, etc...) is commonly understood to be a cost of attempting to buy distressed property, and if you lose it - you lose it.

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The sellers didn't foreclose, the lender did. The sellers didn't do anything wrong, based upon your fact statement. You risked any investment you make like this pre-closing, which you should have understood going in. If you had been dealing with a good RE broker, they would have told you of the risk, and your purchase contract probably expressly warns you of the risk.