Legal Question in Real Estate Law in California

Re: short sale hardball

The previous answer states a true proposition, but in my opinion it stops short of really answering the question you face. The reason is that when there is both a first and a second on a property, and the first is foreclosed, the holder of the second loses his collateral through no fault of its own, and hence becomes an unsecured creditor referred to as a "sold-out junior." Unsecured creditors are generally NOT subject to the security-first and single-action laws, and can sue the borrower on the underlying obligation in disregard of the now-gone collateral.

Your particular situation sits on a knife edge between the technical distinction that there is now an unsecured junior creditor, and the real-world reality that there was but a single lender and a single package deal in the first place.

I THINK the California courts are refusing to recognize the "second" as being a separate deal, and at least in some cases are denying the semi-phony "second" lender any right to go after a recovery as a sold-out junior.

Before advising anyone, on LawGuru or as a client, to rely on my opinion, I would want to do some research into recent decisions and compare the facts of those cases with yours. So, the only thing I can tell you for semi-sure is that you may have a defense to a suit from the lender claiming it is a bona fide sold-out junior. The loans may be viewed by the court as a single transaction, such that the second is not entitled to the status of a "sold-out junior" loan, but merely as a part of a single integrated loan transaction.

Re: short sale hardball

If the same lender made both loans and they were both purchase money, then a deficiency after foreclosure of either of the loans, first or second, would be prohibited. Note, however, if there was any fraud associated with the transaction such as inflated income, false statements in loan application, a claim that you would reside in property but in fact it was intended to be a rental, etc., then the lender can seek a deficiency judgment--but in order to get a deficiency, the lender must file suit for judicial foreclosure and cannot use the trustee's sale procedure.

Re: short sale hardball

If the lender forecloses by way of a trustee's sale under the Deed of Trust, a deficiency judgment is not available. The lender has to do a judicial foreclosure in order to obtain a deficiency judgment.