The California Court of Appeal, Fourth Appellate District, held in a case of first impression that a section of California law that prohibits a deficiency judgment following a foreclosure on a purchase money loan similarly protects borrowers in short sales.
In this case, the lender approved a short sale subject to several conditions, including that the sale proceeds paid to the lender released the lender’s security interest, but that the borrower still was responsible for any deficiency balance. After the sale closed, the lender sought to collect from the borrower the unsatisfied portion of the loan. The borrower filed suit claiming that state law and common law prevented the lender from collecting. On appeal, the court reversed the trial court’s dismissal and held that a state law that has been applied to prohibit deficiency judgments following foreclosure sales also prohibits deficiency judgments following short sales. The court explained that there is nothing in the statute to modify or limit the term “sale” and no other requirement in the statute that a foreclosure must occur to trigger the deficiency judgment protections. Further, the court rejected the lender’s argument that the borrower waived the protection by agreeing as a condition of the sale to be liable for any deficiency after the sale.
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