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

Creditor-Side Bankruptcy, Mortgage & Lending Law, Real Estate Law, and Real Estate Law Litigation by Peter N. Brewer, Esq.

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 Brewer Offord & Pedersen LLP, 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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