Anti-Deficiency Statutes Prevent Claims of Fraud for Purchase Money Loans

Law Offices of Peter N. Brewer

by Law Offices of Peter N. Brewer on December 2, 2013

in Bankruptcy, Lending/Lender Issues, Litigation, Real Estate Law

In November 2013, in Heritage Pacific Financial, LLC v. Montano, the Bankruptcy Appellate Panel for the Ninth Circuit (“BAP”) held that the one-action rule prevents a lender from seeking a deficiency judgment, even for fraud, for a purchase money loan of $150,000 or less.

Facts of the Case

In 2006, Montano purchased a home in Oakland, California financed by two loans.  The first loan was for $348,750 and the second was for $89,900.  After living in the home for seven months Montano defaulted on both loans and eventually the senior lender foreclosed.  After the foreclosure Heritage purchased the junior (second position) loan from the original lender and filed suit for a deficiency judgment, alleging that Montano submitted fraudulent paperwork to obtain the second loan.  In response Montano filed for bankruptcy protection.  In the bankruptcy proceeding Heritage filed an adversary proceeding for non-dischargeability of the second loan based on the alleged fraud in the inducement to make the loan.


During the adversary proceeding, the bankruptcy court found that California’s foreclosure statutes prohibit a deficiency judgment.  There are two statutes that address when a lender of a purchase money loan is prohibited from obtaining deficiency judgment following foreclosure.  One of those rules is embodied in Code of Civil Procedure 726 (the One Action Rule).  The One Action Rule essentially provides that the lender may only take one form of action to collect on the loan.  The Rule also provides an exception that allows the lender to sue for damages in the event of fraud.  While fraud is an exception to the One-Action rule, there is an exception to the exception that prohibits recovery where the loan is a purchase money loan and is for less than $150,000.

On appeal, the Bankruptcy Appellate Panel agreed with the lower court’s ruling.  The court found that the statute was clear and there was no ambiguity in the language.  The exception to the exception explicitly exempts any purchase money loan, not just first loans.  Given the plain language of the statute, the lender could not prevail on a claim of non-dischargeability.


This case has bucked the recent trend of allowing lenders to seek deficiency judgments in instances of borrower fraud.  Here, the court highlights one of the differences between a purchase money loan and a refinance, namely that a purchase money loan provides substantially more protections to a borrower.

At the Law Offices of Peter N. Brewer, we have had substantial experience with distressed loans.  If you have questions regarding the collection of a judgment, we would be happy to help.  We can be reached at (650) 327-2900 or on the web at

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{ 4 comments… read them below or add one }

avatar Ernest Garcia January 25, 2014 at 11:03 am

As a Creditor:
I have a non-discharge judgment in the Bankruptcy Court
( Montana ) against two individuals ( husband and wife ) where the Court determined that I was defrauded under 523 (A 2)..
This money was given to them via a cashiers check .. I secured a personal loan from a local bank with a personal guarantee, the Loan amount was $73,500.00 ( my judgment is for $98,000.00)

As a Debtor now in my own Chap 13 case: ( due to the fraud from the above case)
Do I have any standing to dispute the unsecured claim the bank has filed in my Chap 13 case? The loan I acquired from the bank was “due to the direct fraud” that was perpetuated on me for the loan? ( I never received any value or property from the Loan proceeds)
Any case law or opinions to support my case would be appreciated..The last day for the filing of claims is Feb 11 2014
Ernest Garcia

avatar Elesi Tuitupou February 17, 2014 at 12:35 pm

I am looking for an attorney in the San Bernardino, County area to view my case of wrongful foreclosure,

I have been in my home since 1999, foreclosed on January 2008
I have evidence of broken chain of title, transfers, and MERS deficincies in my case.

I have an original Promisory Note PAID IN FULL indorsed in my possession.

I would like to have an attorney verify if I have a case or not

Thank you


avatar Henry Chuang March 31, 2014 at 11:39 am

If you would like us to verify if you have a case or not, please schedule an appointment with our office so we can talk about your case.

avatar Henry Chuang March 31, 2014 at 11:40 am

Thank you for writing in. The best way to approach this would be to contact our office to schedule an appointment.

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