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Ninth Circuit BAP Rules California Law Bars Nondischargeability Action by Sold Out Junior on Purchase Money Residential Loan Under $150,000 Notwithstanding Fraud

In Heritage Pacific Financial, LLC v. Montano (In re Montano), 13 C.D.O.S. 12820, NC-12-1579-PaDJu (9th Cir. BAP November 27, 2013), the Bankruptcy Appellate Panel of the United States Court of Appeals for the Ninth Circuit ruled that California's statutory one-action rule and anti-deficiency judgment scheme barred an action under Bankruptcy Code Section 523(a)(2)(B) brought by the purchaser of a sold-out junior purchase money mortgage formerly secured by a residence for less than $150,000 regardless of any fraudulent conduct.  

While California Civil Code Section 580b generally prohibits the recovery of a deficiency judgment after foreclosure, Section 726(f) provides an exception such that certain lenders may bring an action "based on fraud" where the borrower's fraudulent conduct induced the original lender to make the loan.  However, Section 726(g) provides an exception to the exception, barring such an action if the loan is secured by a single-family, owner-occupied residence, actually occupied as represented to the lender in obtaining the loan, and the loan is for $150,000 or less (adjusted annually with the Consumer Price Index as published by the United States Department of Labor).

Although certain facts were disputed, the court found that the original lender made both the senior and junior loan to the borrower in connection with his purchase of the home, and the junior loan was for less than $150,000 (the amount demanded was $89,990).  The court dismissed arguments that the $150,000 limit should apply to the aggregate of all purchase money loans, holding that the statute is plain on its face.  

The court also analyzed and affirmed the bankruptcy court's award of attorney's fees and costs to the borrower under Bankruptcy Code Section 523(d), which generally provides for such an award where a creditor brings a nondischargeability action on a consumer debt without substantial justification.  Specifically, the claim buyer could not submit competent evidence that the original lender actually relied on the alleged misrepresentations as to income in the borrower's loan application as the original lender was defunct.

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