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From Banking and Finance Law Daily, June 14, 2013

Since California Law Protecting Mortgagors Deemed Applicable to “Short Sales,” Consumer’s Debt Collection Claim Recognized

By Thomas G. Wolfe, J.D.

Since a California law protecting purchase-money mortgagors from being held personally liable on a deficiency judgment was deemed applicable to consumers’ “short-sale” situation, the U.S. District Court for the Northern District of California refused to dismiss the consumers’ claim under the California Rosenthal Fair Debt Collection Practices Act (California Act) against a lender and a debt collector. As a result, the California federal district court permitted the consumers’ claim under the California Act—predicated on the federal Fair Debt Collection Practices Act—for a false representation of “the character, amount, or legal status of any debt” to continue. However, the court separately dismissed the consumers’ claim under the California Act alleging a violation of the prohibition against collection of a debt unless the amount is expressly authorized by the agreement creating the debt or permitted by law (Rahoi v. JPMorgan Chase Bank, N.A., June 12, 2013, Koh, United States District Judge).

Background. In 2007, the consumers purchased a residential duplex. The purchase of the property was financed with two mortgage loans, one secured by a deed of trust for $900,000, and the other secured by a deed of trust for $240,000. In early 2011, when the consumers fell behind on their payment obligations on the mortgages, the consumers attempted to sell the property through a short sale.

In keeping with the desired short-sale arrangement, the lender agreed in a letter to the consumers that the lender would release its security interest in the second mortgage loan, in exchange for $8,500 so that the short-sale could close. The lender’s letter also stated that the consumers “were still responsible for the deficiency balance remaining on the loan, per the terms of the original loan documents.”

The parties agreed at a court hearing that the promissory note on the first mortgage loan for $900,000 was satisfied by the short-sale transaction and an $80,000 surplus was applied to the outstanding amount on the separate promissory note for the second mortgage loan. The lender hired a debt collector to collect the remaining unpaid balance on the second note. After the debt collector and the lender sent multiple letters and made multiple phone calls to recover the outstanding amount, the consumers initiated their lawsuit.

California law on deficiency judgments. The consumers maintained that, under the provision of the California Code of Civil Procedure prohibiting deficiency judgments in certain situations (§580b), the lender was precluded from seeking to recover the outstanding balance on the second note because any effort to collect on the second note violated the California Act. Generally, the anti-deficiency statute has been invoked to prohibit a lender from seeking to hold a borrower personally liable for the unpaid amount of a purchase money mortgage following a nonjudicial or judicial foreclosure. The consumers argued that the California provision applied to their type of short-sale situation as well. The court agreed.

The case number is 12-CV-03756-LHK.

Attorneys: Marc Alan Eisenhart and Nicholas Garrett Emanuel (Gates Eisenhart Dawson) for Jon S. Rahoi and Yanling L. Rahoi. Cara Lynne Finan (Keesal, Young & Logan) for JPMorgan Bank, N.A. Andrew M. Steinheimer and Mark Ewell Ellis (Ellis Law Group, LLP) for Professional Recovery Services, Inc.

Companies: JPMorgan Chase Bank, N.A.; Professional Recovery Services, Inc.

MainStory: TopStory CaliforniaNews ConsumerCredit DebtCollection Mortgages

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