The lender can sue for fraud

The lender can sue the borrower for fraud in persuading the lender to make the loan in the first instance. Birman v. Loeb (1998) 64 Cal. App. 4th 502.

The lender can sue for waste

If the borrower, in bad faith, deliberately damages the collateral of the lender, then the lender can sue for “waste”, i.e. for damaging the lender’s collateral. Evans v. California Trailer Court, Inc. (1994) 28 Cal. App. 4th 540.

The lender can sue in non-standard transactions

In the landmark case, Spangler v. Memel (1972) 7 Cal. 3rd 603, the California Supreme Court created a major exception to the protections of 580b. In that case, a residence had been sold for $90,000, with the buyer paying $26,100 and the seller taking back a $63,900 deed of trust. The parties agreed that the buyer was going to tear down the house, and build an office building on the site. In order to finance the office building, the buyer took out a construction loan of $450,000. The original seller agreed to subordinate its purchase money loan to the construction loan.

The buyer defaulted to the construction lender, who foreclosed, which wiped out the purchase money junior loan. Since there was no question that the junior loan was purchase money, under Brown v. Jensen 1953) 41 Cal. 2d 193, 197, the original seller ordinarily would not have been able to sue on her sold-out note.

The Supreme Court, however, held that 580b only applied to the “standard transaction” where the seller “sells the property to a purchaser who is going to continue the same or similar use of the property.” In the standard transaction, the Court reasoned, it is fair to put the risk of loss until the seller, since the seller knows how much the property is worth. When, however, the buyer plans to radically alter his or her use of the property, it is not fair to put the risk of loss until the seller. The Court thus held that the seller, in this case, could sue under sold-out junior note.

Using similar logic, the Court of Appeal in Nickerman v. Ryan (1979) 93 Cal. App. 3rd 564, held that 580b did not apply to a transaction in which a note and deed were given to an ex-wife to equalize a division of former community property.