The Supreme Court of California has held that distressed homeowners who, with their lender’s approval, arrange a short sale of their property-for less than they owe cannot be sued for the balance of their debt.
The state legislature, in 2012 gave protection to borrowers going forward, but this important Court ruling applies to the estimated 200,000 short sales that occurred before the effective date of the statute. The Plaintiff Carol Coker borrowed $ 452,000 in 2004 to buy a condo. She fell behind in her payments and the lender began foreclosure proceedings. The lender then allowed Coker to sell the condo to another buyer for $ 400,000, collected the proceeds, and release the lien of its deed of trust on the Property. After the sale, Coker received a bill for $ 116,000, the balance due on the loan. In this case, Coker claimed that the anti-deficiency laws, which limit a lender’s recovery on a standard purchase-money loan to the value of the security, passed in the 1930’s during the Great Depression covered short sales. That was no reference to short sales in the statute, probably because short sales were rare until about 15 year ago. The Supreme Court, in a unanimous decision held that the law applies to short sales. Coker vs. JPMorgan Chase.