Home Equity Loans and California’s Anti-deficiency Laws

I recently defended a client who was being pursued by a large national bank based upon a “sold-out”  home equity loan claim. The client, like many Californians, had been forced to relinquish his home due to an unanticipated financial reverse. Although the client attempted to arrange a “short-sale” of the home, the holder of the second mortgage declined to accept a discounted cash-out at the last minute. This resulted in a foreclosure by the first lienholder. Based upon its sold-out status, the second lienholder contended that it was not bound by California’s anti-deficiency laws, and could seek direct recourse on the note.

The case was tried on stipulated facts before the Superior Court in a bifurcated trial and the Superior Court rejected my contention that the claim was barred by both Section 580(b) and (d) of the California Code of Civil Procedure. Based upon this ruling, I filed a petition for a writ of mandate. After reviewing the petition, the Court of Appeal issued an order staying further proceedings in the trial court and ordered the bank to file a brief explaining why the Court of Appeal should not issue the writ in my favor overturning the trial court’s ruling.

At this juncture, the bank offered to dismiss the underlying case with prejudice – an offer the client accepted. The bank clearly did not want to risk an adverse ruling on what is now a critical issue in California. Although this was a favorable result for my client, it leaves the law of California unclear on a very important issue, at least in my humble assessment. Worse, it leaves what I consider to be the erroneous ruling in Union Bank v. Wendland, (1976) 54 Cal.App.3d 393, now three decades old, as a reference point for lenders seeking recourse on sold-out junior home loans.

Since I spent a considerable amount of time working on this matter and was, I believe, on the brink of persuading another Court of Appeal to set the law aright, I would like to make available to any interested party my work-product on this subject area. Accordingly, below is the legal analysis that supported the writ and the reply that I filed with respect to the bank’s opposition. The names of the parties have been changed.

PLEASE NOTE, this firm undertook the above representation as an accommodation to a friend. The firm will not undertake further representation in this area. Accordingly, borrowers facing similar challenges should seek the assistance of other law firms.

PLEASE TAKE FURTHER NOTE that the arguments and legal analysis set forth in the below pleadings were made on behalf of a client to protect the client’s interests. I believe they are well-reasoned and further believe the law should be so interpreted. However, these pleadings present only one position. There are authorities to the contrary, most notably the ruling in the Wendland case cited above. Accordingly, any party facing a claim should seek legal counsel (other than this firm) and NOT rely upon the below analysis as a basis for making any decision prior to such a consultation.

Legal analysis supported the writ- PDF

Reply filed with respect to the bank's opposition - PDF