Legal Question in Real Estate Law in California

A "recourse loan" is one where the lender has recourse to the borrower and the borrower's other assets and income, as opposed to a "non-recourse loan" where the lender is limited, by law or by contract, to the pledged collateral alone.

There was a period of time when lenders were dividing refinancing loans and income-property loans into a first and a second loan, typically 80%/20%, with the thought that after they foreclosed on the first, the second would become unsecured, and hence the second could be pursued in court as a general liability without regard for the security-first and antideficiency (non-recourse) provisions of law.

In your case, a lawyer would need to know if your loan was a refi or purchase-money, and if the property was your personal residence or income property, an investment, etc. It would also be necessary to look at the terms of your short-sale contract, which probably doesn't discharge the 20% part, which may nevertheless not be collectible by suit at this point.

There is case-law authority holding that when the same lender holds two notes executed at the same time, a court may treat the debt as unified and refuse to permit the creditor to exercise recourse as a "sold-out junior lienholder" after it has foreclosed on its first. See Simon v. Superior Court (Bank of America) (1992) 4 Cal.App.4th 63. I do not know of any cases applying the Simon principle to a short sale rather than a trustee's sale, but it seems reasonable to apply it.

The overriding factor in your situation may be what your short-sale approval or agreement says about the junior debt. If you expressly agreed that it was not discharged, you're probably out of luck. Otherwise, the considerations and defenses mentioned above may act to cut off the lender's right to have recourse against you for any balances.

I agree with all of what Mr. Whipple says. You are going to have to have an attorney review your short sale paperwork, and determine whether you are in a purchase money mortgage situation, or if any other defenses apply to you.