John Bilotta - Administrative Offset Decision - HUD

John Bilotta - Administrative Offset Decision - HUD: "DECISION and ORDER

Petitioner was notified by Due Process Notice that the Secretary of the U.S. Department of Housing and Urban Development (HUD) intended to seek administrative offset of any Federal payments due to Petitioner or to seek administrative wage garnishment of Petitioner's pay in satisfaction of a delinquent and legally enforceable debt allegedly owed to HUD. Administrative offset is authorized by 31 U.S.C. § 3720A; administrative wage garnishment is authorized by 31 U.S.C. § 3720D. The claimed debt has resulted from a defaulted loan that was insured against non-payment by the Secretary pursuant to Title I of the National Housing Act. 12 U.S.C. § 1703.

Petitioner has made a timely request for a hearing concerning the existence, amount or enforceability of the debt allegedly owed to HUD. The Administrative Judges of this Board have been designated to conduct a hearing to determine whether the debt allegedly owed to HUD is legally enforceable pursuant to 24 C.F.R. § 20.4(b). As a result of Petitioner's request, referral of the debt for offset or issuance of a wage withholding order was temporarily stayed by the Board.
Discussion

31 U.S.C. § 3720A and 31 U.S.C. § 3720D provide Federal agencies with remedies for the collection of debts owed to the United States Government. The burden of proof is on"

group homes of 6 or fewer equals residential use under California law

California Health And Safety Code Section 1267.8 - California Attorney Resources - California Laws

California Health And Safety Code Section 1267.8

Legal Research Home > California Lawyer > Health and Safety Code > California Health And Safety Code Section 1267.8

(a) An intermediate care facility/developmentally disabled
habilitative or an intermediate care facility/developmentally
disabled --nursing or a congregate living health facility shall meet
the same fire safety standards adopted by the State Fire Marshal
pursuant to Sections 13113, 13113.5, 13143, and 13143.6 that apply to
community care facilities, as defined in Section 1502, of similar
size and with residents of similar age and ambulatory status. No
other state or local regulations relating to fire safety shall apply
to these facilities and the requirements specified in this section
shall be uniformly enforced by state and local fire authorities.
(b) An intermediate care facility/developmentally disabled
habilitative or an intermediate care facility/developmentally
disabled--nursing or a congregate living health facility shall meet
the same seismic safety requirements applied to community care
facilities of similar size with residents of similar age and
ambulatory status. No additional requirements relating to seismic
safety shall apply to such facilities.
(c) Whether or not unrelated persons are living together, an
intermediate care facility/developmentally disabled habilitative
which serves six or fewer persons or an intermediate care
facility/developmentally disabled--nursing which serves six or fewer
persons or a congregate living health facility shall be considered a
residential use of property for the purposes of this article. In
addition, the residents and operators of the facility shall be
considered a family for the purposes of any law or zoning ordinance
which is related to the residential use of property pursuant to this
article.
For the purposes of all local ordinances, an intermediate care
facility/developmentally disabled habilitative which serves six or
fewer persons or an intermediate care facility/developmentally
disabled--nursing which serves six or fewer persons or a congregate
living health facility shall not be included within the definition of
a boarding house, rooming house, institution or home for the care of
minors, the aged, or the mentally infirm, foster care home, guest
home, rest home, sanitarium, mental hygiene home, or other similar
term which implies that the intermediate care
facility/developmentally disabled habilitative or intermediate care
facility/developmentally disabled--nursing or a congregate living
health facility is a business run for profit or differs in any other
way from a single-family residence.
This section does not forbid any city, county, or other local
public entity from placing restrictions on building heights, setback,
lot dimensions, or placement of signs of an intermediate care
facility/developmentally disabled habilitative which serves six or
fewer persons or an intermediate care facility/developmentally
disabled--nursing which serves six or fewer persons or a congregate
living health facility as long as such restrictions are identical to
those applied to other single-family residences.
This section does not forbid the application to an intermediate
care facility/developmentally disabled habilitative or an
intermediate care facility/developmentally disabled--nursing or a
congregate living health facility of any local ordinance which deals
with health and safety, building standards, environmental impact
standards, or any other matter within the jurisdiction of a local
public entity, as long as that ordinance does not distinguish
intermediate care facility/developmentally disabled habilitative
which serves six or fewer persons or an intermediate care
facility/developmenta lly disabled--nursing or a congregate living
health facility from other single-family dwellings and that the
ordinance does not distinguish residents of the intermediate care
facility/developmentally disabled habilitative or intermediate care
facility/developmentally disabled--nursing which serves six or fewer
persons or a congregate living health facility from persons who
reside in other single-family dwellings.
No conditional use permit, zoning variance, or other zoning
clearance shall be required of an intermediate care
facility/developmentally disabled habilitative which serves six or
fewer persons or an intermediate care facility/developmentally
disabled--nursing which serves six or fewer persons or a congregate
living health facility which is not required of a single-family
residence in the same zone.
Use of a single-family dwelling for purposes of an intermediate
care facility/developmentally disabled habilitative serving six or
fewer persons or an intermediate care facility/developmentally
disabled--nursing which serves six or fewer persons or a congregate
living health facility shall not constitute a change of occupancy for
purposes of Part 1.5 (commencing with Section 17910) of Division 13
or local building codes. However, nothing in this section supersedes
Section 13143 to the extent these provisions are applicable to
intermediate care facility/developmentally disabled habilitative
providing care for six or fewer residents or an intermediate care
facility/developmentally disabled--nursing serving six or fewer
persons or a congregate living health facility.

Foreclosure Consultant Law CA

CA Codes (civ:2945-2945.11)

CIVIL CODE
SECTION 2945-2945.11




2945. (a) The Legislature finds and declares that homeowners whose
residences are in foreclosure are subject to fraud, deception,
harassment, and unfair dealing by foreclosure consultants from the
time a Notice of Default is recorded pursuant to Section 2924 until
the time surplus funds from any foreclosure sale are distributed to
the homeowner or his or her successor. Foreclosure consultants
represent that they can assist homeowners who have defaulted on
obligations secured by their residences. These foreclosure
consultants, however, often charge high fees, the payment of which is
often secured by a deed of trust on the residence to be saved, and
perform no service or essentially a worthless service. Homeowners,
relying on the foreclosure consultants' promises of help, take no
other action, are diverted from lawful businesses which could render
beneficial services, and often lose their homes, sometimes to the
foreclosure consultants who purchase homes at a fraction of their
value before the sale. Vulnerable homeowners are increasingly
relying on the services of foreclosure consultants who advise the
homeowner that the foreclosure consultant can obtain the remaining
funds from the foreclosure sale if the homeowner executes an
assignment of the surplus, a deed, or a power of attorney in favor of
the foreclosure consultant. This results in the homeowner paying an
exorbitant fee for a service when the homeowner could have obtained
the remaining funds from the trustee's sale from the trustee directly
for minimal cost if the homeowner had consulted legal counsel or had
sufficient time to receive notices from the trustee pursuant to
Section 2924j regarding how and where to make a claim for excess
proceeds.
(b) The Legislature further finds and declares that foreclosure
consultants have a significant impact on the economy of this state
and on the welfare of its citizens.
(c) The intent and purposes of this article are the following:
(1) To require that foreclosure consultant service agreements be
expressed in writing; to safeguard the public against deceit and
financial hardship; to permit rescission of foreclosure consultation
contracts; to prohibit representations that tend to mislead; and to
encourage fair dealing in the rendition of foreclosure services.
(2) The provisions of this article shall be liberally construed to
effectuate this intent and to achieve these purposes.



2945.1. The following definitions apply to this chapter:
(a) "Foreclosure consultant" means any person who makes any
solicitation, representation, or offer to any owner to perform for
compensation or who, for compensation, performs any service which the
person in any manner represents will in any manner do any of the
following:
(1) Stop or postpone the foreclosure sale.
(2) Obtain any forbearance from any beneficiary or mortgagee.
(3) Assist the owner to exercise the right of reinstatement
provided in Section 2924c.
(4) Obtain any extension of the period within which the owner may
reinstate his or her obligation.
(5) Obtain any waiver of an acceleration clause contained in any
promissory note or contract secured by a deed of trust or mortgage on
a residence in foreclosure or contained that deed of trust or
mortgage.
(6) Assist the owner to obtain a loan or advance of funds.
(7) Avoid or ameliorate the impairment of the owner's credit
resulting from the recording of a notice of default or the conduct of
a foreclosure sale.
(8) Save the owner's residence from foreclosure.
(9) Assist the owner in obtaining from the beneficiary, mortgagee,
trustee under a power of sale, or counsel for the beneficiary,
mortgagee, or trustee, the remaining proceeds from the foreclosure
sale of the owner's residence.
(b) A foreclosure consultant does not include any of the
following:
(1) A person licensed to practice law in this state when the
person renders service in the course of his or her practice as an
attorney at law.
(2) A person licensed under Division 3 (commencing with Section
12000) of the Financial Code when the person is acting as a prorater
as defined therein.
(3) A person licensed under Part 1 (commencing with Section 10000)
of Division 4 of the Business and Professions Code when the person
makes a direct loan or when the person (A) engages in acts whose
performance requires licensure under that part, (B) is entitled to
compensation for the acts performed in connection with the sale of a
residence in foreclosure or with the arranging of a loan secured by a
lien on a residence in foreclosure, (C) does not claim, demand,
charge, collect, or receive any compensation until the acts have been
performed or cannot be performed because of an owner's failure to
make the disclosures set forth in Section 10243 of the Business and
Professions Code or failure to accept an offer from a purchaser or
lender ready, willing, and able to purchase a residence in
foreclosure or make a loan secured by a lien on a residence in
foreclosure on the terms prescribed in a listing or a loan agreement,
and (D) does not acquire any interest in a residence in foreclosure
directly from an owner for whom the person agreed to perform the acts
other than as a trustee or beneficiary under a deed of trust given
to secure the payment of a loan or that compensation. For the
purposes of this paragraph, a "direct loan" means a loan of a real
estate broker's own funds secured by a deed of trust on the residence
in foreclosure, which loan and deed of trust the broker in good
faith attempts to assign to a lender, for an amount at least
sufficient to cure all of the defaults on obligations which are then
subject to a recorded notice of default, provided that, if a
foreclosure sale is conducted with respect to the deed of trust, the
person conducting the foreclosure sale has no interest in the
residence in foreclosure or in the outcome of the sale and is not
owned, controlled, or managed by the lending broker; the lending
broker does not acquire any interest in the residence in foreclosure
directly from the owner other than as a beneficiary under the deed of
trust; and the loan is not made for the purpose or effect of
avoiding or evading the provisions of this article.
(4) A person licensed under Chapter 1 (commencing with Section
5000) of Division 3 of the Business and Professions Code when the
person is acting in any capacity for which the person is licensed
under those provisions.
(5) A person or his or her authorized agent acting under the
express authority or written approval of the Department of Housing
and Urban Development or other department or agency of the United
States or this state to provide services.
(6) A person who holds or is owed an obligation secured by a lien
on any residence in foreclosure when the person performs services in
connection with this obligation or lien.
(7) Any person licensed to make loans pursuant to Division 9
(commencing with Section 22000), 10 (commencing with Section 24000),
or 11 (commencing with Section 26000) of the Financial Code, subject
to the authority of the Commissioner of Corporations to terminate
this exclusion, after notice and hearing, for any person licensed
pursuant to any of those divisions upon a finding that the licensee
is found to have engaged in practices described in subdivision (a) of
Section 2945.
(8) Any person or entity doing business under any law of this
state, or of the United States relating to banks, trust companies,
savings and loan associations, industrial loan companies, pension
trusts, credit unions, insurance companies, or any person or entity
authorized under the laws of this state to conduct a title or escrow
business, or a mortgagee which is a United States Department of
Housing and Urban Development approved mortgagee and any subsidiary
or affiliate of the above, and any agent or employee of the above
while engaged in the business of these persons or entities.
(9) A person licensed as a residential mortgage lender or servicer
pursuant to Division 20 (commencing with Section 50000) of the
Financial Code, when acting under the authority of that license.
(c) Notwithstanding subdivision (b), any person who provides
services pursuant to paragraph (9) of subdivision (a) is a
foreclosure consultant unless he or she is the owner's attorney.
(d) "Person" means any individual, partnership, corporation,
limited liability company, association or other group, however
organized.
(e) "Service" means and includes, but is not limited to, any of
the following:
(1) Debt, budget, or financial counseling of any type.
(2) Receiving money for the purpose of distributing it to
creditors in payment or partial payment of any obligation secured by
a lien on a residence in foreclosure.
(3) Contacting creditors on behalf of an owner of a residence in
foreclosure.
(4) Arranging or attempting to arrange for an extension of the
period within which the owner of a residence in foreclosure may cure
his or her default and reinstate his or her obligation pursuant to
Section 2924c.
(5) Arranging or attempting to arrange for any delay or
postponement of the time of sale of the residence in foreclosure.
(6) Advising the filing of any document or assisting in any manner
in the preparation of any document for filing with any bankruptcy
court.
(7) Giving any advice, explanation or instruction to an owner of a
residence in foreclosure which in any manner relates to the cure of
a default in or the reinstatement of an obligation secured by a lien
on the residence in foreclosure, the full satisfaction of that
obligation, or the postponement or avoidance of a sale of a residence
in foreclosure pursuant to a power of sale contained in any deed of
trust.
(8) Arranging or attempting to arrange for the payment by the
beneficiary, mortgagee, trustee under a power of sale, or counsel for
the beneficiary, mortgagee, or trustee, of the remaining proceeds to
which the owner is entitled from a foreclosure sale of the owner's
residence in foreclosure. Arranging or attempting to arrange for the
payment shall include any arrangement where the owner transfers or
assigns the right to the remaining proceeds of a foreclosure sale to
the foreclosure consultant or any person designated by the
foreclosure consultant, whether that transfer is effected by
agreement, assignment, deed, power of attorney, or assignment of
claim.
(f) "Residence in foreclosure" means a residence in foreclosure as
defined in Section 1695.1.
(g) "Owner" means a property owner as defined in Section 1695.1.
(h) "Contract" means any agreement, or any term thereof, between a
foreclosure consultant and an owner for the rendition of any service
as defined in subdivision (e).



2945.2. (a) In addition to any other right under law to rescind a
contract, an owner has the right to cancel such a contract until
midnight of the third "business day" as defined in subdivision (e) of
Section 1689.5 after the day on which the owner signs a contract
which complies with Section 2945.3.
(b) Cancellation occurs when the owner gives written notice of
cancellation to the foreclosure consultant at the address specified
in the contract.
(c) Notice of cancellation, if given by mail, is effective when
deposited in the mail properly addressed with postage prepaid.
(d) Notice of cancellation given by the owner need not take the
particular form as provided with the contract and, however expressed,
is effective if it indicates the intention of the owner not to be
bound by the contract.



2945.3. (a) Every contract shall be in writing and shall fully
disclose the exact nature of the foreclosure consultant's services
and the total amount and terms of compensation.
(b) The following notice, printed in at least 14-point boldface
type and completed with the name of the foreclosure consultant, shall
be printed immediately above the statement required by subdivision
(c):


"NOTICE REQUIRED BY CALIFORNIA LAW
_____________________________ or anyone working
(Name)
for him or her CANNOT:
(1) Take any money from you or ask you for money
until ________________________________________ has
(Name)
completely finished doing everything he or she
said he or she would do; and
(2) Ask you to sign or have you sign any lien,
deed of trust, or deed."

(c) The contract shall be written in the same language as
principally used by the foreclosure consultant to describe his or her
services or to negotiate the contract; shall be dated and signed by
the owner; and shall contain in immediate proximity to the space
reserved for the owner's signature a conspicuous statement in a size
equal to at least 10-point boldface type, as follows: "You, the
owner, may cancel this transaction at any time prior to midnight of
the third business day after the date of this transaction. See the
attached notice of cancellation form for an explanation of this
right."
(d) The contract shall contain on the first page, in a type size
no smaller than that generally used in the body of the document, each
of the following:
(1) The name and address of the foreclosure consultant to which
the notice or cancellation is to be mailed.
(2) The date the owner signed the contract.
(e) The contract shall be accompanied by a completed form in
duplicate, captioned "notice of cancellation," which shall be
attached to the contract, shall be easily detachable, and shall
contain in type of at least 10-point the following statement written
in the same language as used in the contract:


"NOTICE OF CANCELLATION
_____________________________________________
(Enter date of transaction) (Date)

You may cancel this transaction, without any
penalty or obligation, within three business days
from the above date.
To cancel this transaction, mail or deliver a
signed and dated copy of this cancellation notice,
or any other written notice, or send a telegram to
__________________________________________________
(Name of foreclosure consultant)
at
__________________________________________________
(Address of foreclosure consultant's place of
business)
NOT LATER THAN MIDNIGHT OF _______________________.
(Date)
I hereby cancel this transaction
__________________________________________________.

(Date)
________________________________________________"
(Owner's signature)

(f) The foreclosure consultant shall provide the owner with a copy
of the contract and the attached notice of cancellation.
(g) Until the foreclosure consultant has complied with this
section, the owner may cancel the contract.
(h) After the 65-day period following the foreclosure sale, the
foreclosure consultant may enter into a contract to assist the owner
in arranging, or arrange for the owner, the release of funds
remaining after the foreclosure sale ("surplus funds") from the
beneficiary, mortgagee, trustee under a power of sale, or counsel for
the beneficiary, mortgagee, or trustee. However, prior to entering
into that contract, the foreclosure consultant shall do all of the
following:
(1) Prepare and deliver to the owner a notice in 14-point boldface
type and substantially in the form set forth below.
(2) Obtain a receipt executed by each owner and acknowledged
before a notary public, acknowledging a copy of the notice set forth
below.


"NOTICE TO OWNER
____________________ ________________________
(Date of Contract) (Date signed by Owner)
____________________________
(Date of Foreclosure Sale)

You may be entitled to receive all or a portion
of the surplus funds generated from the
foreclosure sale of your real property located
at: __________________________, California on
_________________________without paying any fees
or costs of any kind to a third party. You
should check directly with the trustee or
beneficiary who conducted the foreclosure sale
of your property to determine the name, address,
and telephone number of the party to whom you
can direct inquiries regarding filing a claim
for surplus funds without paying a fee to a
third party. No person or entity may require you
to enter into any agreement requiring the
payment of a fee to that person or entity in
order to receive the surplus funds from
the foreclosure sale to which you may be
entitled during the 65 days after the date of
the trustee's sale."



2945.4. It shall be a violation for a foreclosure consultant to:
(a) Claim, demand, charge, collect, or receive any compensation
until after the foreclosure consultant has fully performed each and
every service the foreclosure consultant contracted to perform or
represented that he or she would perform.
(b) Claim, demand, charge, collect, or receive any fee, interest,
or any other compensation for any reason which exceeds 10 percent per
annum of the amount of any loan which the foreclosure consultant may
make to the owner.
(c) Take any wage assignment, any lien of any type on real or
personal property, or other security to secure the payment of
compensation. That security shall be void and unenforceable.
(d) Receive any consideration from any third party in connection
with services rendered to an owner unless that consideration is fully
disclosed to the owner.
(e) Acquire any interest in a residence in foreclosure from an
owner with whom the foreclosure consultant has contracted. Any
interest acquired in violation of this subdivision shall be voidable,
provided that nothing herein shall affect or defeat the title of a
bona fide purchaser or encumbrancer for value and without notice of a
violation of this article. Knowledge that the property was
"residential real property in foreclosure," does not constitute
notice of a violation of this article. This subdivision may not be
deemed to abrogate any duty of inquiry which exists as to rights or
interests of persons in possession of residential real property in
foreclosure.
(f) Take any power of attorney from an owner for any purpose,
except to inspect documents as provided by law.
(g) Induce or attempt to induce any owner to enter into a contract
which does not comply in all respects with Sections 2945.2 and
2945.3.
(h) Enter into an agreement to assist the owner in arranging, or
arrange for the owner, the release of surplus funds prior to 65 days
after the trustee's sale is conducted, whether the agreement involves
direct payment, assignment, deed, power of attorney, or assignment
of claim from an owner to the foreclosure consultant or any person
designated by the foreclosure consultant.



2945.5. Any waiver by an owner of the provisions of this article
shall be deemed void and unenforceable as contrary to public policy.
Any attempt by a foreclosure consultant to induce an owner to waive
his rights shall be deemed a violation of this article.



2945.6. (a) An owner may bring an action against a foreclosure
consultant for any violation of this chapter. Judgment shall be
entered for actual damages, reasonable attorneys' fees and costs, and
appropriate equitable relief. The court also may, in its
discretion, award exemplary damages and shall award exemplary damages
equivalent to at least three times the compensation received by the
foreclosure consultant in violation of subdivision (a), (b), or (d)
of Section 2945.4, and three times the owner's actual damages for any
violation of subdivision (c), (e), or (g) of Section 2945.4, in
addition to any other award of actual or exemplary damages.
(b) The rights and remedies provided in subdivision (a) are
cumulative to, and not a limitation of, any other rights and remedies
provided by law. Any action brought pursuant to this section shall
be commenced within four years from the date of the alleged
violation.


2945.7. Any person who commits any violation described in Section
2945.4 shall be punished by a fine of not more than ten thousand
dollars ($10,000), by imprisonment in the county jail for not more
than one year, or in the state prison, or by both that fine and
imprisonment for each violation. These penalties are cumulative to
any other remedies or penalties provided by law.



2945.8. If any provision of this article or the application thereof
to any person or circumstance is held to be unconstitutional, the
remainder of the article and the application of such provision to
other persons and circumstances shall not be affected thereby.




2945.9. (a) A foreclosure consultant is liable for all damages
resulting from any statement made or act committed by the foreclosure
consultant's representative in any manner connected with the
foreclosure consultant's (1) performance, offer to perform, or
contract to perform any of the services described in subdivision (a)
of Section 2945.1, (2) receipt of any consideration or property from
or on behalf of an owner, or (3) performance of any act prohibited by
this article.
(b) "Representative" for the purposes of this section means a
person who in any manner solicits, induces, or causes (1) any owner
to contract with a foreclosure consultant, (2) any owner to pay any
consideration or transfer title to the residence in foreclosure to
the foreclosure consultant, or (3) any member of the owner's family
or household to induce or cause any owner to pay any consideration or
transfer title to the residence in foreclosure to the foreclosure
consultant.



2945.10. (a) Any provision in a contract which attempts or purports
to limit the liability of the foreclosure consultant under Section
2945.9 shall be void and shall at the option of the owner render the
contract void. The foreclosure consultant shall be liable to the
owner for all damages proximately caused by that provision. Any
provision in a contract which attempts or purports to require
arbitration of any dispute arising under this chapter shall be void
at the option of the owner only upon grounds as exist for the
revocation of any contract.
(b) This section shall apply to any contract entered into on or
after January 1, 1991.



2945.11. (a) Any representative, as defined in subdivision (b) of
Section 2945.9, deemed to be the agent or employee or both the agent
and the employee of the foreclosure consultant shall be required to
provide both of the following:
(1) Written proof to the owner that the representative has a valid
current California Real Estate Sales License and that the
representative is bonded by an admitted surety insurer in an amount
equal to at least twice the fair market value of the real property
that is the subject of the contract.
(2) A statement in writing, under penalty of perjury, that the
representative has a valid current California Real Estate Sales
License, that the representative is bonded by an admitted surety
insurer in an amount equal to at least twice the value of the real
property that is the subject of the contract and has complied with
paragraph (1). The written statement required by this paragraph
shall be provided to all parties to the contract prior to the
transfer of any interest in the real property that is the subject of
the contract.
(b) The failure to comply with subdivision (a) shall, at the
option of the owner, render the contract void and the foreclosure
consultant shall be liable to the owner for all damages proximately
caused by the failure to comply.

Checklist of Significant California and Federal Consumer Laws: Legal Guide M-1 - California Department Of Consumer Affairs

REAL ESTATE BROKER

License and Regulations - B&P 10130 et seq.

Checklist of Significant California and Federal Consumer Laws: Legal Guide M-1 - California Department Of Consumer Affairs

REAL PROPERTY

Conveyance Law - CC 1091 et seq.

Default (Purchase Contract) - CC 1675 et seq.

Deposit (see Deposits (Real Estate))

Foreclosure Consultants - CC 2945 et seq.

Home Equity Loan Disclosures - CC 2970 et seq.

Home Equity Sales Contracts - CC 1695 et seq.

Home Loan Prepayment Penalty - CC 2954.9, 2954.10, 15 USC 1615, 1639(c)

Homestead Filing Services (see Homestead Filing Services)

Impound Accounts – CC 2954, 2954.1

Late Charges - CC 2954.4

Mechanics Lien (see Mechanics Lien)

Sale Contract - CC 1624, 2985 et seq

Sales Disclosures - CC 1102 et seq.

Timeshares (see Timeshare Contracts)

Transfer Disclosures (Residential) - CC 1102 et seq., 2079 et seq

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Find California Code

Canceled debt and 1099-C

Instructions for Forms 1099-A and 1099-C (2008)

When Is a Debt Canceled

A debt is canceled on the date an identifiable event occurs. An identifiable event is:

1.

A discharge in bankruptcy under Title 11 of the U.S. Code for business or investment debt (see Exceptions on this page).
2.

A cancellation or extinguishment making the debt unenforceable in a receivership, foreclosure, or similar federal or state court proceeding.
3.

A cancellation or extinguishment when the statute of limitations for collecting the debt expires, or when the statutory period for filing a claim or beginning a deficiency judgment proceeding expires. Expiration of the statute of limitations is an identifiable event only when a debtor's affirmative statute of limitations defense is upheld in a final judgment or decision of a court and the appeal period has expired.
4.

A cancellation or extinguishment when the creditor elects foreclosure remedies that by law end or bar the creditor's right to collect the debt. This event applies to a mortgage lender or holder who is barred by local law from pursuing debt collection after a “power of sale” in the mortgage or deed of trust is exercised.
5.

A cancellation or extinguishment due to a probate or similar proceeding.
6.

A discharge of indebtedness under an agreement between the creditor and the debtor to cancel the debt at less than full consideration.
7.

A discharge of indebtedness because of a decision or a defined policy of the creditor to discontinue collection activity and cancel the debt. A creditor's defined policy can be in writing or an established business practice of the creditor. A creditor's practice to stop collection activity and abandon a debt when a particular nonpayment period expires is a defined policy.
8.

The expiration of nonpayment testing period. This event occurs when the creditor has not received a payment on the debt during the testing period. The testing period is a 36-month period ending on December 31 plus any time when the creditor was precluded from collection activity by a stay in bankruptcy or similar bar under state or local law. The creditor can rebut the occurrence of this identifiable event if:
1.

The creditor (or a third-party collection agency) has engaged in significant bona fide collection activity during the 12-month period ending on December 31 or
2.

Facts and circumstances that exist on January 31 following the end of the 36-month period indicate that the debt was not canceled.

Significant bona fide collection activity does not include nominal or ministerial collection action, such as an automated mailing. Facts and circumstances indicating that a debt was not canceled include the existence of a lien relating to the debt (up to the value of the security) or the sale or packaging for sale of the debt by the cred

one action rule - sale

Welcome to the California Mortgage Association: "Section 726(b) provides that the beneficiary must file a motion to determine the fair value of the property, and that this motion must be filed 'within three months of the date of the foreclosure sale.'

In this case, Paykar filed its motion more than three months after the date of the sheriff's sale, but within three months of the date that the sheriff's sale certificate was recorded. The beneficiary argued that the phrase 'within three months of the date of the foreclosure sale' could be interpreted to refer to the date that the sheriff's sale certificate was recorded.

The court of appeal rejected this argument. Section 726(b) makes reference to the 'foreclosure sale'; the court interpreted 'sale' to mean the formation of a binding contract to sell the property, i.e., 'when the hammer falls'. The court found one analogy when it noted that the fair market value of the property must be determined as of the date of the sheriff's sale. (Sao Paolo U.S. Holding Co. v. 816 South Figueroa, supra."

California Code Of Civil Procedure Section 726 - California Attorney Resources - California Laws

California Code Of Civil Procedure Section 726 - California Attorney Resources - California Laws: "There can be but one form of action for the recovery of any debt or the enforcement of any right secured by mortgage upon real property or an estate for years therein, which action shall be in accordance with the provisions of this chapter. In the action the court may, by its judgment, direct the sale of the encumbered real property or estate for years therein (or so much of the real property or estate for years as may be necessary), and the application of the proceeds of the sale to the payment of the costs of court, the expenses of levy and sale, and the amount due plaintiff, including, where the mortgage provides for the payment of attorney's fees, the sum for attorney's fees as the court shall find reasonable, not exceeding the amount named in the mortgage."

Setoff Against Unsecured Deficiency of Debt Owed by Creditor Contravenes Policy Underlying Antideficiency Laws

Setoff Against Unsecured Deficiency of Debt Owed by Creditor Contravenes Policy Underlying Antideficiency Laws: "Section 726 of the California Code of Civil Procedure embodies the 'one form of action' rule. In pertinent part, section 726(a) provides:

There can be but one form of action for the recovery of any debt or the enforcement of any right secured by mortgage upon real property or an estate for years therein, which action shall be in accordance with the provisions of this chapter.

Section 22 of the Code of Civil Procedure defines 'action' as follows: 'An action is an ordinary proceeding in a court of justice by which one party prosecutes another for the declaration, enforcement, or protection of a right, the redress or prevention of a wrong, or the punishment of a public offense.'

The court recognized that a nonjudicial foreclosure is not an 'action' within the meaning of sections 22 or 726; hence, a nonjudicial foreclosure does not violate the one form of action rule embodied in section 726. Nevertheless, the court found that the setoff contravened the 'economic policy considerations' underlying the antideficiency statutes.

The court looked to the policy considerations underlying section 580b of the Code of Civil Procedure. Section 580b precludes a deficiency judgment after foreclosure, judicial or nonjudicial, under a purchase money deed of trust given to the sell"

One action rule under california law

California Lawyer Magazine

No Double Sanctions
The landmark case of Security Pacific Nat'l Bank v. Wozab places limits on using the One Action Rule as a sanction. In Wozab the California Supreme Court held that it would be inequitable to subject a lender to the double sanction of losing both the security and the underlying debt. Indeed, the court held that allowing the Wozabs to evade their debt almost in its entirety would be both a gross injustice to the bank and a corresponding windfall to the Wozabs, allowing them the benefit of their bargain without incurring the burden. (51 Cal. 3d at 1005—06.)
Later decisions by the Ninth Circuit Court of Appeals continue to apply the precedent set in Wozab.

The one action rule under california real estate law and "pre" sold out seconds

Please note the final paragraph of this link which will of interest to homeowners.
You should speak with an attorney if you lender is trying to proceed against you personally while the property is still secured.

We have successfully used this law to force unreasonable seconds to agree to a short pays.

They have a choice negotiate in good faith or sit there with a non performing loan on their books.

Please make sure you understand - if you let the first foreclose a refinanced second may not be blocked by the one action rule.

Before you begin your workout - you should speak with a real estate attorney.


One Action Rule Does Not Preclude Foreclosure Where Lender Amends Complaint Seeking Other Relief Before Trial

In summary, this district court requires that an action, or an event analogous to an action, occur before the doctrine can be invoked. The court explains the application of the sanction effect of the loss of security based on an election of remedies that occurs either through res judicata or through estoppel. To lender clients, this means that you must include a judicial foreclosure action in your lawsuit whenever seeking to enforce claims against borrowers where your debt is secured by real property. You also must make sure that you do not go to judgment before you include that claim. If your lawsuit does not include a foreclosure cause of action, you must amend that cause of action before going to judgment. In addition, you must be sure you do not take any action that can be deemed an election of your remedy to pursue a personal judgment rather than seeking to enforce the security. If you do, the doctrine and its intended sanction effect can be invoked to potentially cause a loss of the security.

discharge of debt non recourse loans

TaxAlmanac - Treasury Regulations, Subchapter A, Sec. 1.1001-2

Sec. 1.1001-2 Discharge of liabilities

(a) Inclusion in amount realized—(1) In general. Except as provided in paragraph (a) (2) and (3) of this section, the amount realized from a sale or other disposition of property includes the amount of liabilities from which the transferor is discharged as a result of the sale or disposition.

(2) Discharge of indebtedness. The amount realized on a sale or other disposition of property that secures a recourse liability does not include amounts that are (or would be if realized and recognized) income from the discharge of indebtedness under section 61(a)(12). For situations where amounts arising from the discharge of indebtedness are not realized and recognized, see section 108 and §1.61–12(b)(1).

(3) Liability incurred on acquisition. In the case of a liability incurred by reason of the acquisition of the property, this section does not apply to the extent that such liability was not taken into account in determining the transferor's basis for such property.

(4) Special rules. For purposes of this section—

(i) The sale or other disposition of property that secures a nonrecourse liability discharges the transferor from the liability;

(ii) The sale or other disposition of property that secures a recourse liability discharges the transferor from the liability if another person agrees to pay the liability (whether or not the transferor is in fact released from liability);

(iii) A disposition of property includes a gift of the property or a transfer of the property in satisfaction of liabilities to which it is subject;

(iv) Contributions and distributions of property between a partner and a partnership are not sales or other dispositions of property; and

(v) The liabilities from which a transferor is discharged as a result of the sale or disposition of a partnership interest include the transferor's share of the liabilities of the partnership.

(b) Effect of fair market value of security. The fair market value of the security at the time of sale or disposition is not relevant for purposes of determining under paragraph (a) of this section the amount of liabilities from which the taxpayer is discharged or treated as discharged. Thus, the fact that the fair market value of the property is less than the amount of the liabilities it secures does not prevent the full amount of those liabilities from being treated as money received from the sale or other disposition of the property. However, see paragraph (a)(2) of this section for a rule relating to certain income from discharge of indebtedness.

(c) Examples. The provisions of this section may be illustrated by the following examples. In each example assume the taxpayer uses the cash receipts and disbursements method of accounting, makes a return on the basis of the calendar year, and sells or disposes of all property which is security for a given liability.

Example 1. In 1976 A purchases an asset for $10,000. A pays the seller $1,000 in cash and signs a note payable to the seller for $9,000. A is personally liable for repayment with the seller having full recourse in the event of default. In addition, the asset which was purchased is pledged as security. During the years 1976 and 1977, A takes depreciation deductions on the asset in the amount of $3,100. During this same time period A reduces the outstanding principal on the note to $7,600. At the beginning of 1978 A sells the asset. The buyer pays A $1,600 in cash and assumes personal liability for the $7,600 outstanding liability. A becomes secondarily liable for repayment of the liability. A's amount realized is $9,200 ($1,600 + $7,600). Since A's adjusted basis in the asset is $6,900 ($10,000 − $3,100) A realizes a gain of $2,300 ($9,200 − $6,900).

Example 2. Assume the same facts as in example (1) except that A is not personally liable on the $9,000 note given to the seller and in the event of default the seller's only recourse is to the asset. In addition, on the sale of the asset by A, the purchaser takes the asset subject to the liability. Nevertheless, A's amount realized is $9,200 and A's gain realized is $2,300 on the sale.

Example 3. In 1975 L becomes a limited partner in partnership GL. L contributes $10,000 in cash to GL and L's distributive share of partnership income and loss is 10 percent. L is not entitled to receive any guaranteed payments. In 1978 M purchases L's entire interest in partnership GL. At the time of the sale L's adjusted basis in the partnership interest is $20,000. At that time L's proportionate share of liabilities, of which no partner has assumed personal liability, is $15,000. M pays $10,000 in cash for L's interest in the partnership. Under section 752(d) and this section, L's share of partnership liabilities, $15,000, is treated as money received. Accordingly, L's amount realized on the sale of the partnership interest is $25,000 ($10,000 + $15,000). L's gain realized on the sale is $5,000 ($25,000 − $20,000).

Example 4. In 1976 B becomes a limited partner in partnership BG. In 1978 B contributes B's entire interest in BG to a charitable organization described in section 170(c). At the time of the contribution all of the partnership liabilities are liabilities for which neither B nor G has assumed any personal liability and B's proportionate share of which is $9,000. The charitable organization does not pay any cash or other property to B, but takes the partnership interest subject to the $9,000 of liabilities. Assume that the contribution is treated as a bargain sale to a charitable organization and that under section 1011(b) $3,000 is determined to be the portion of B's basis in the partnership interest allocable to the sale. Under section 752(d) and this section, the $9,000 of liabilities is treated by B as money received, thereby making B's amount realized $9,000. B's gain realized is $6,000 ($9,000 − $3,000).

Example 5. In 1975 C, an individual, creates T, an irrevocable trust. Due to certain powers expressly retained by C, T is a “grantor trust” for purposes of subpart E of part 1 of subchapter J of the code and therefore C is treated as the owner of the entire trust. T purchases an interest in P, a partnership. C, as owner of T, deducts the distributive share of partnership losses attributable to the partnership interest held by T. In 1978, when the adjusted basis of the partnership interest held by T is $1,200, C renounces the powers previously and expressly retained that initially resulted in T being classified as a grantor trust. Consequently, T ceases to be a grantor trust and C is no longer considered to be the owner of the trust. At the time of the renunciation all of P's liabilities are liabilities on which none of the partners have assumed any personal liability and the proportionate share of which of the interest held by T is $11,000. Since prior to the renunciation C was the owner of the entire trust, C was considered the owner of all the trust property for Federal income tax purposes, including the partnership interest. Since C was considered to be the owner of the partnership interest, C not T, was considered to be the partner in P during the time T was a “grantor trust”. However, at the time C renounced the powers that gave rise to T's classification as a grantor trust, T no longer qualified as a grantor trust with the result that C was no longer considered to be the owner of the trust and trust property for Federal income tax purposes. Consequently, at that time, C is considered to have transferred ownership of the interest in P to T, now a separate taxable entity, independent of its grantor C. On the transfer, C's share of partnership liabilities ($11,000) is treated as money received. Accordingly, C's amount realized is $11,000 and C's gain realized is $9,800 ($11,000 − $1,200).

Example 6. In 1977 D purchases an asset for $7,500. D pays the seller $1,500 in cash and signs a note payable to the seller for $6,000. D is not personally liable for repayment but pledges as security the newly purchased asset. In the event of default, the seller's only recourse is to the asset. During the years 1977 and 1978 D takes depreciation deductions on the asset totaling $4,200 thereby reducing D's basis in the asset to $3,300 ($7,500 − $4,200). In 1979 D transfers the asset to a trust which is not a “grantor trust” for purposes of subpart E of part 1 of subchapter J of the Code. Therefore D is not treated as the owner of the trust. The trust takes the asset subject to the liability and in addition pays D $750 in cash. Prior to the transfer D had reduced the amount outstanding on the liability to $4,700. D's amount realized on the transfer is $5,450 ($4,700 + $750). Since D's adjusted basis is $3,300, D's gain realized is $2,150 ($5,450 − $3,300).

Example 7. In 1974 E purchases a herd of cattle for breeding purposes. The purchase price is $20,000 consisting of $1,000 cash and a $19,000 note. E is not personally liable for repayment of the liability and the seller's only recourse in the event of default is to the herd of cattle. In 1977 E transfers the herd back to the original seller thereby satisfying the indebtedness pursuant to a provision in the original sales agreement. At the time of the transfer the fair market value of the herd is $15,000 and the remaining principal balance on the note is $19,000. At that time E's adjusted basis in the herd is $16,500 due to a deductible loss incurred when a portion of the herd died as a result of disease. As a result of the indebtedness being satisfied, E's amount realized is $19,000 notwithstanding the fact that the fair market value of the herd was less than $19,000. E's realized gain is $2,500 ($19,000 − $16,500).

Example 8. In 1980, F transfers to a creditor an asset with a fair market value of $6,000 and the creditor discharges $7,500 of indebtedness for which F is personally liable. The amount realized on the disposition of the asset is its fair market value ($6,000). In addition, F has income from the discharge of indebtedness of $1,500 ($7,500 − $6,000).

[T.D. 7741, 45 FR 81744, Dec. 12, 1980]

Deed in Lieu Case law

From the briarpark ltd case previously cited

The Commissioner of Internal Revenue asserts that "Congress intended the words `sale or exchange' to have a broad meaning, not to be limited to the standard transfer of property by one person to another in exchange for a stated consideration in money or money's worth." Freeland v. Commissioner , 74 T.C. 970, 980 (1980); see Helvering v. Hammel , 311 U.S. 504 (1941). For example, it has long been established that a foreclosure sale constitutes a "disposition of property" within the meaning of § 1001(b). Id . at 506-511; Cox , 68 F.3d at 133. A nonjudicial foreclosure sale is also a transaction that triggers taxable gain. Chilingirian v. Commissioner , 918 F.2d 1251, 1253 (6th Cir. 1990). It is also well settled that the transfer of property by deed in lieu of foreclosure is the functional equivalent of a "sale or exchange" for federal income tax purposes. Allan v. Commissioner , 856 F.2d 1169, 1172 (8th Cir. 1988); see Laport v. Commissioner , 671 F.2d 1028 (7th Cir. 1982); see Millar v. Commissioner , 67 T.C. 656 (1977), aff'd , 577 F.2d 212 (3d Cir.), cert denied , 439 U.S. 1046 (1978).

tax cases, short sale cases, non recourese debt

UNITED STATES COURT OF APPEALS For the Fifth Circuit
__________________________________________

No. 97-60850

_________________________________________


2925 BRIARPARK, LTD., JAMES C. MOTLEY,

TAX MATTERS PARTNER,


Petitioners-Appellants,

VERSUS

COMMISSIONER OF INTERNAL REVENUE,

Respondent-Appellee.


__________________________________________


Appeal from the Decision of the

United States Tax Court

__________________________________________

January 6, 1999


Before REYNALDO G. GARZA, STEWART, and PARKER, Circuit Judges.


PER CURIAM:



I. FACTUAL AND PROCEDURAL BACKGROUND



In 1981, Briarpark was organized as a Texas limited partnership ("the partnership"). James C. Motley ("Motley") was a general partner. During 1983 and 1984, the partnership acquired a three-acre parcel of land at 2925 Briarpark Road, Houston, Texas ("the property") and constructed a 12-story office building on it. On September 27, 1983, the partnership borrowed $21,600,000 from InterFirst Bank Houston, N.A. ("InterFirst") to finance the acquisition of the property and the construction of the building. Motley personally guaranteed the principal, interest, penalties and fees on the loan.

By December 31, 1986, the outstanding principal and accrued interest due on the loan was $24,700,000. On May 28, 1987, the partnership and InterFirst modified and extended the original loan pursuant to a modified loan agreement. At the time, InterFirst estimated that the fair market value of the property was approximately $17,000,000. The original loan was converted from a recourse to a nonrecourse obligation, and accrued but unpaid interest in the amount of $3,100,000 was capitalized. Motley's personal obligation under his guarantee was limited to $5,000,000. Also on May 28, 1987, Briarpark obtained a $1,500,000 loan for tenant improvements ("build- out loan") on a nonrecourse basis.

By January 21, 1988, First Republic Bank Houston, N.A. ("First Republic") became the successor in interest to InterFirst. The Federal Deposit Insurance Corporation, as receiver for First Republic, assigned the modified loan and the built-out loan to NCNB Texas National Bank ("NCNB").

During March of 1989, Briarpark submitted an application to NCNB seeking to modify the loans to allow a cash sale of the building. In the summer of 1988, at the suggestion of the bank, Motley placed the building on the market, and in March of 1989, he brought to the bank several similar proposals for the sale of the property. At that time, the bank considered as available options: (1) liquidation in the event of a default (but at that time there was no default); (2) refinancing (which was not an "easily obtained alternative at the level of the debt"); and (3) a sale/settlement, the loan officer expressing the view that "the bank will realize the highest value if the building is sold in 1989." In NCNB's view, the best proposal was a $12,700,000 cash sale offer.

As of July 1989, Briarpark was in default on the loans. On July 21, 1989, the partnership signed a sale agreement to sell the property to Dan Associates. The gross purchase price for the property was $12,200,000. Dan Associates conditioned the purchase of the property upon the partnership's arranging the satisfaction or removal of the encumbrances for consideration paid to NCNB not in excess of $11,490,000. On July 31, 1989, NCNB agreed to release its liens to allow the sale of the property to Dan Associates for $12,200,000, with the proceeds being assigned to NCNB.

On October 5, 1989, Briarpark and Dan Associates amended the sale agreement, reducing the gross sale price to $11,600,000 . Under the amended agreement, Briarpark was required to arrange for the satisfaction of the loans and removal of the encumbrances for consideration not exceeding $11,036,000 plus a $175,000 payment by Motley in settlement of his guarantee.

On October 11, 1989, Motley's liabilities exceeded his assets by $13,497,675. On October 16, 1989, NCNB agreed to allow the cash sale of the property for $11,600,000 and to settle with Motley on his guarantee for $175,000.

On November 3, 1989, Briarpark, Motley, Dan Associates, and NCNB entered into a conditional release agreement. NCNB agreed to release the property from all liens and security interests upon satisfaction of the following conditions: (1) the sale of the property to Dan Associates for a minimum gross sales price of $11,600,000; (2) the assignment of the greater of the net sale proceeds or $11,036,000 sale proceeds to the bank, to be applied against the partnership's cash notes; (3) the transfer of the partnership's cash reserves to the bank; and (4) Motley's payment of $175,000 to the bank.

On December 27, 1989, the outstanding balances of the modified and the build-out loan were $24,562,763 and $1,019,418, respectively. Briarpark sold the property to Dan Associates for $11,600,000. Briarpark incurred selling expenses of $554,901. Dan Associates paid the net sales proceeds of $10,936,532 to NCNB. The adjusted basis of the property was $11,105,733.

Also on December 27, 1989, NCNB released the liens against the property and released Motley from his guarantee of the modified loan, in return for his payment of $175,000 in cash. The partnership transferred its cash reserves of $177,495 to NCNB. As of December 31, 1989, Briarpark had no assets and ceased business operations.

On its income tax return for 1989, Briarpark reported cancellation of indebtedness income for $14,468,154 as a result of the November 3, 1989, conditional release agreement. The reported amount was calculated as follows:


Modified loan balance $24,562,763
Build-out loan balance

1,019,418


Total loan Balance

$25,582,181


Less sale proceed from

Dan Associates <10,936,532>
Less cash reserves paid to NCNB

<177,495>

Net cancellation of indebtedness

income $14,468,154


The partnership also reported a net loss on the sale of the property in the amount of $61,245.

Upon audit, the Commissioner determined that the property incorrectly reported discharge of indebtedness income under I.R.C. § 61(a)(12) on its return. The Commissioner asserts that the partnership realized a gain from dealings in property under I.R.C. § 61(a)(3) because the amount of the discharged debt that had encumbered the property was includable in the amount realized. The Internal Revenue Service mailed to the partnership a Notice of Final Partnership Administrative Adjustment ("FPAA") proposing adjustments to the partnership's return to reflect realized gain from the sale of $13,920,936, rather than the reported loss of $61,245 and to eliminate the reported cancellation of indebtedness income. 1 Pursuant to the parties' stipulation, the Commissioner calculated the partnership's capital gain as follows:


Original loan balance

$24,562,763.35


Build-out loan balance

1,019,417.65
Total loan balance $25,582,181.00 Less classing proceeds <10,936,531.90>
Less cash reserves

<177,495.07>
Total amount of debt discharged $14,468,154.03

Selling price $11,600,000.00
Total amount of debt discharged

$14,468,154.03
Total amount realized $26,068,154.03

Total amount realized $26,068,154.03
Adjusted Basis and selling expenses

<11,660,633.31>
Capital Gain $14,407,520.72


The Tax Court agreed with the Commissioner that the partnership had realized gains from dealings in property under I.R.C. § 61(a)(3) rather than discharge of indebtedness income under § 61(a)(12). The court noted that, for purposes of §§ 61(a)(3) and 1001(b), "the amount realized from a sale or other disposition of property includes the amount of liabilities from which the transferor is discharged as a result of the sale or disposition." The court found that the sale of the property and the assignment of sale proceeds and transfer of the partnership's cash reserves to NCNB "has the same practical effect as several other transactions which have been held to be a `sale or exchange.'" According to the court, the transaction at issue "is the functional equivalent of a foreclosure, reconveyance in lieu of foreclosure, abandonment, or repossession" because "the mortgagor in each case is relieved of debt encumbering property and also is relieved of the obligation to pay taxes and assessments against the property."

The court rejected the partnership's argument that NCNB should be regarded as having forgiven, independently of the sale, the excess of the $25,582,181 debt over the $11,114,027 in cash received. Thus, the court disagreed with the partnership's assertion that amount realized on the sale of the property to Dan Associates was only $10,936,532, or less than the partnership's adjusted basis in the property. Far from being "two independent events," as the partnership argued, the court found the record to be "replete with evidence" that the sale and the loan discharges were the "result of a single transaction involving the sale of encumbered property." The court reasoned as follows:



NCNB conditioned the discharge of the loans upon the sale of the property, and Dan Associates conditioned the purchase upon that discharge. At the end of the day, NCNB had proceeds from the sale, Dan Associates had the property, and Briarpark was relieved of the entire balance of the loans. In the foregoing context, the arrangements among NCNB, Dan Associates, and Briarpark embodied a single transaction to sell the property securing the loans.



This appeal followed.


II. STANDARD OF REVIEW


The Tax Court's fact findings are reviewed for clear error because they were based on documentary evidence presented to the court. See Pacific Employers Ins. Co. v. M/V Gloria , 767 F.2d 229, 235 (5th Cir. 1985)(citing Anderson v. Bessemer City , 470 U.S. 564, 574 (1985)). A finding is clearly erroneous when the reviewing court, upon reviewing all of the evidence, is left with a firm conviction that a mistake has been committed. Daniels Towing Service, Inc. v. Nat Harrison Associates, Inc. , 432 F.2d 103, 105 (5th Cir. 1970)(citing McAllister v. United States , 348 U.S. 19, 20 (1954)). In reviewing the Tax Court's characterization of the transaction, this Court must determine whether its decision was based on a reasonable interpretation of "sale or exchange." Yarbro v. Commissioner , 737 F.2d 479, 483, 486 (5th Cir. 1984). Finding that the transaction constitutes a sale or exchange would support the Tax Court's conclusion that the transaction was a gain from dealing in property under § 61(a)(3).

III. DISCUSSION


The question on appeal is whether the Tax Court erred by holding that the partnership realized a gain from dealings in property in the amount of $14,407,520.72, rather than cancellation of indebtedness income in the amount of $14,468,154.


A. Internal Revenue Code Section 61.

Gross Income



Section 61(a) of the Internal Revenue Code provides that gross income includes all income from whatever source derived, including "gains derived from dealing in property" under § 61(a)(3) and "income from discharge of indebtedness" under § 61(a)(12). Section 1001(a), which governs the computation of gains from dealings in property, provides that "the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided." Section 1001(b) defines "amount realized" as "the sum of any money received plus the fair market value of the property (other than money) received." The amount realized on a sale or disposition of property includes the amount of the liabilities from which the transferor is discharged as a result of the sale or disposition. Treas. Reg. § 1.1001-2(a)(1); Commissioner v. Tufts , 461 U.S. 300, 306 (1983); Cox v. Commissioner , 68 F.3d 128, 134 (5th Cir. 1984); Yarbro , 737 F.2d at 484.

In the case of a property encumbered by nonrecourse indebtedness, the amount realized on disposition includes the entire amount of the mortgage on the property. Tufts , 461 U.S. at 312 ; Yarbro , 737 F.2d at 484; See also Treas. Reg. §§ 1.1001-2(c) Example(7) . The fact that the fair market value of the security at the time of sale or disposition is less than the amount of the liabilities it secures "does not prevent the full amount of these liabilities from being treated as money received from the sale or other disposition of the property." Treas. Reg. § 1.1001-2(b); Tufts , 461 U.S. at 310 .

There is a distinction between what constitutes income realized from the "discharge of indebtedness" under § 61(a)(12) and income realized from "gains derived from dealing in property" under § 61(a)(3). Under § 61(a)(12), a debtor may realize income from the discharge of indebtedness where his debt is canceled, forgiven or otherwise discharged for less than the full amount of the debt. The Supreme Court has held that when a nonrecourse debt is forgiven, the debtor's basis in the securing property is reduced by the amount of debt canceled, and realization of income is deferred until the sale of the property. United States v. Kirby Lumber Co. , 284 U.S. 1, 3 (1931); Fulton Gold Corp. v. Commissioner , 31 B.T.A. 519, 520 (1934). This interpretation attributes income only when assets are freed, therefore, an insolvent debtor realizes income just to the extent his assets exceed his liabilities after the cancellation. Tufts , 461 U.S. at 310 n. 11.

Section 61(a)(3) applies when a taxpayer agrees to surrender the property in exchange for the cancellation of a debt. Under this scenario, the transaction may be characterized as a sale or exchange of property giving rise to income under § 61(a)(3) with the whole amount of the canceled nonrecourse indebtedness being includable in the amount realized under § 1001. Therefore, § 61(a)(3) applies if the court determines that the transaction: (1) relieved the tax payer-owner of his obligation to repay the debt 2 ; and (2) the tax payer is relieved of title of the property. Yarbro 737 F.2d at 486.



B. Whether Briarpark's Transaction Constitutes a Sale or Exchange for Tax Purposes.



The Commissioner of Internal Revenue asserts that "Congress intended the words `sale or exchange' to have a broad meaning, not to be limited to the standard transfer of property by one person to another in exchange for a stated consideration in money or money's worth." Freeland v. Commissioner , 74 T.C. 970, 980 (1980); see Helvering v. Hammel , 311 U.S. 504 (1941). For example, it has long been established that a foreclosure sale constitutes a "disposition of property" within the meaning of § 1001(b). Id . at 506-511; Cox , 68 F.3d at 133. A nonjudicial foreclosure sale is also a transaction that triggers taxable gain. Chilingirian v. Commissioner , 918 F.2d 1251, 1253 (6th Cir. 1990). It is also well settled that the transfer of property by deed in lieu of foreclosure is the functional equivalent of a "sale or exchange" for federal income tax purposes. Allan v. Commissioner , 856 F.2d 1169, 1172 (8th Cir. 1988); see Laport v. Commissioner , 671 F.2d 1028 (7th Cir. 1982); see Millar v. Commissioner , 67 T.C. 656 (1977), aff'd , 577 F.2d 212 (3d Cir.), cert denied , 439 U.S. 1046 (1978).

The Commissioner asserts that the Tax Court followed the teaching of Yarbro and similar cases by considering the "practical effect" of Briarpark's transaction. Under the conditional release agreement, the bank agreed to release the property from all liens and security interests upon satisfaction of the following conditions: (1) the sale of the property to Dan Associates for a minimum gross sales price of $11,600,000; (2) the assignment of the sale proceeds to the bank; (3) the transfer of Briarpark's cash reserves to the bank; and (4) the payment of $175,000 by Motley to the bank. There was no indication that the bank was willing to forgive any part of the partnership's debt except as a condition of sale to Dan Associates. At the end of the transaction NCNB released all liens against the property, released Motley from his guarantee, and Briarpark had no assets and ceased business operations. Unlike § 61(a)(12) cases, where debt forgiveness occurs as a single transaction and the realization of the property income occurs in a later and separate transaction, the debt forgiveness in the case herein was closely intertwined with the terms of the agreement. Therefore, this was a single transaction governed by § 61(a)(3). See Fulton , 31 B.T.A. at 519.

The partnership correctly asserts that the determination of whether a transaction is governed by § 61(a)(3) or § 61(a)(12) depends on the particular facts of the case. Danenberg v. Commissioner , 73 T.C. 370, 381 (1979). The petitioners assert that in Gershkowitz v. Commissioner , 88 T.C. 984 (1987), the taxpayer's nonrecourse debt settlement was characterized as § 61(a)(12) income and that the divestment of the property, just three months later, was characterized separately as § 61(a)(3) income. The partnership argues that the fact that Briarpark, NCNB, and Dan Associates accomplished both tasks in a single transaction, rather than in two transactions, should not cause the entire transaction to be categorized as § 61(a)(3) income. The partnership also argues that because the purchaser did not assume the debt, the partnership must be treated as having received discharge of indebtedness income.

The Tax Court properly distinguished Gershkowitz from this case. In Gershkowitz , the debts were not discharged in connection with the disposition of the property. Since there was no disposition of property upon the discharge of the debts, the Tax Court held that there was no amount realized upon disposition that could be regarded as flowing from the discharge of indebtedness, and, hence, no gain or loss on disposition to be computed . Id . at 1016. The Tax Court properly found that the partnership's disposition of the property was conditioned upon the relief of its debt and was therefore the functional equivalent of a foreclosure sale. See Yarbro , F.2d at 485-86.

The partnership's argument, that the purchaser did not assume the debt, is also without merit. The language of § 1001-2(a)(1) provides that "the amount realized from a sale or other disposition of property includes the amount of liabilities from which the transferor is discharged as a result of the sale or disposition," and does not consider for its purposes whether the purchaser assumes the debt or not. See also § 1001-2(c) Example(7) .

Congress has determined that different tax consequences shall flow from different methods by which the shareholders of a closely held corporation may dispose of corporate property. United States v. Cumberland Public Service Co. , 338 U.S. 451, 456 (1959). Also, it is for the trial court, upon consideration of an entire transaction, to determine the factual category in which a particular transaction belongs. Id .


IV. CONCLUSION

Upon reviewing the factual findings of this case, this Court agrees with the Tax Court's characterization of this transaction. Therefore, we AFFIRM the Tax Court's decision.


FOOTNOTES


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[1]

Generally, where the taxpayer is insolvent immediately after the discharge of a debt, the resulting cancellation of the indebtedness income, ordinarily taxable under I.R.C. § 61(a)(12), is excludable under § 108. Gains from the disposition of property under §§ 61(a)(3) and 1001, however, are not excludable under § 108. Generally, debt-discharge income is recognized at the partnership level, while the exclusion of such income under I.R.C. § 108(a) and the concomitant attribute reduction under § 108(b) are applied at the partner level. See Gershkowitz v. Commissioner , 88 T.C. 984 (1987). The tax consequences to an insolvent partner of a partnership's realizing discharge of indebtedness income would therefore become apparent only on the application of such a partnership item to the individual partner's circumstances. However, it bears noting that Motley's distributive share of partnership income and loss was 83 percent, and, while there is no snapshot of the financial standing immediately after the discharge took place in December of 1989, the record does reflect that he had become insolvent by October of 1989, before the sale took place.


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[2]

An essential point to remember is that the debt herein is "nonrecourse debt." Nonrecourse debt and recourse debt are treated differently by certain sections of the Code. Case law firmly establishes that when a taxpayer is relieved of nonrecourse debt, his obligation is canceled and he realizes a value. Tufts , 461 U.S. at 312 . Determining whether that value falls under § 61(a)(3) or § 61(a)(12) will further determine whether the insolvent petitioner herein will have to pay taxes on that value or be absolved under § 108. With a recourse debt, a debtor remains liable for the unpaid balance after a foreclosure sale. Therefore, the unpaid portion is not used to calculate "amount realized" under § 1001(b). Furthermore, if the recourse debt is subsequently forgiven, or the judgement is permitted to lapse uncollected, the recourse debt would then fall under § 61(a)(12). Therefore, if this Court determines that the transaction constituted a "sale or exchange," the value from the nonrecourse debt herein would be governed by § 61(a)(3) and included to calculate "amount realized" under § 1001(b).

tax cases on non recourse debt

REVENUE RULE 91-31

1991-1 C.B. 19, 1991-20 I.R.B. 1.

Internal Revenue Service
Revenue Ruling

DISCHARGE OF INDEBTEDNESS

Published: May 6, 1991

Section 61. Gross Income Defined, 26 CFR 1.61-12: Income from discharge of indebtedness.

Discharge of indebtedness. The reduction of the principal amount of an undersecured nonrecourse debt who was not the seller of the property securing the debt results in the realization of discharge of indebtedness income. Rev. Rul. 82-202 amplified.

ISSUE

If the principal amount of an undersecured nonrecourse debt is reduced by the holder of the debt who was not the seller of the property securing the debt, does this debt reduction result in the realization of discharge of indebtedness income for the year of the reduction under section 61(a)(12) of the Internal Revenue Code or in the reduction of the basis in the property securing the debt?

FACTS

In 1988, individual A borrowed $1,000,000 from C and signed a note payable to C for $1,000,000 that bore interest at a fixed market rate payable annually. A had no personal liability with respect to the note, which was secured by an office building valued at $1,000,000 that A acquired from B with the proceeds of the nonrecourse financing. In 1989, when the value of the office building was $800,000 and the outstanding principal on the note was $1,000,000, C agreed to modify the terms of the note by reducing the note's principal amount to $800,000. The modified note bore adequate stated interest within the meaning of section 1274(c)(2).

The facts here do not involve the bankruptcy, insolvency, or qualified farm indebtedness of the taxpayer. Thus, the specific exclusions provided by section 108(a) do not apply.

LAW AND ANALYSIS

Section 61(a)(12) of the Code provides that gross income includes income from the discharge of indebtedness. Section 1.61- 12(a) of the Income Tax Regulations provides that the discharge of indebtedness, in whole or in part, may result in the realization of income.

In Rev. Rul. 82-202, 1982-2 C.B. 35, a taxpayer prepaid the mortgage held by a third party lender on the taxpayer's residence for less than the principal balance of the mortgage. At the time of the prepayment, the fair market value of the residence was greater than the principal balance of the mortgage. The revenue ruling holds that the taxpayer realizes discharge of indebtedness income under section 61(a)(12) of the Code, whether the mortgage is recourse or nonrecourse and whether it is partially or fully prepaid. Rev. Rul. 82-202 relies on United States v. Kirby Lumber Co., 284 U.S. 1 (1931), X-2 C.B. 356 (1931), in which the United States Supreme Court held that a taxpayer realized ordinary income upon the purchase of its own bonds in an arm's length transaction at less than their face amount.

In Commissioner v. Tufts, 461 U.S. 300 (1983), 1983-1 C.B. 120, the Supreme Court held that when a taxpayer sold property encumbered by a nonrecourse obligation that exceeded the fair market value of the property sold, the amount realized included the amount of the obligation discharged. The Court reasoned that because a nonrecourse note is treated as a true debt upon inception (so that the loan proceeds are not taken into income at that time), a taxpayer is bound to treat the nonrecourse note as a true debt when the taxpayer is discharged from the liability upon disposition of the collateral, notwithstanding the lesser fair market value of the collateral. See section 1.1001-2(c), Example 7, of the Income Tax Regulations.

In Gershkowitz v. Commissioner, 88 T.C. 984 (1987), the Tax Court, in a reviewed opinion, concluded, in part, that the settlement of a nonrecourse debt of $250,000 for a $40,000 cash payment (rather than surrender of the $2,500 collateral) resulted in $210,000 of discharge of indebtedness income. The court, following the Tufts holding that income results when a taxpayer is discharged from liability for an undersecured nonrecourse obligation upon the disposition of the collateral, held that the discharge from a portion of the liability for an undersecured nonrecourse obligation through a cash settlement must also result in income.

The Service will follow the holding in Gershkowitz where a taxpayer is discharged from all or a portion of a nonrecourse liability when there is no disposition of the collateral. Thus, in the present case, A realizes $200,000 of discharge of indebtedness income in 1989 as a result of the modification of A's note payable to C.

In an earlier Board of Tax Appeals decision, Fulton Gold Corp. v. Commissioner, 31 B.T.A. 519 (1934), a taxpayer purchased property without assuming an outstanding mortgage and subsequently satisfied the mortgage for less than its face amount. In a decision based on unclear facts, the Board of Tax Appeals, for purposes of determining the taxpayer's gain or loss upon the sale of the property in a later year, held that the taxpayer's basis in the property should have been reduced by the amount of the mortgage debt forgiven in the earlier year.

The Tufts and Gershkowitz decisions implicitly reject any interpretation of Fulton Gold that a reduction in the amount of a nonrecourse liability by the holder of the debt who was not the seller of the property securing the liability results in a reduction of the basis in that property, rather than discharge of indebtedness income for the year of the reduction. Fulton Gold, interpreted in this manner, is inconsistent with Tufts and Gershkowitz. Therefore, that interpretation is rejected and will not be followed.

HOLDING

The reduction of the principal amount of an undersecured nonrecourse debt by the holder of a debt who was not the seller of the property securing the debt results in the realization of discharge of indebtedness income under section 61(a)(12) of the Code.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 82-202 is amplified to apply whether the fair market value of the residence is greater or less than the principal balance of the mortgage at the time of the refinancing.

DRAFTING INFORMATION

The principal author of this revenue ruling is Alan R. Peregoy of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Mr. Peregoy on (202)-566-4430 (not a toll-free call).


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Rev. Rul. 91-31, 1991-1 C.B. 19, 1991-20 I.R.B. 1.

Reverse mortgages and the new law

How the Housing Law Affects Reverse Mortgages - US News and World Report

Here's how the new law affects reverse mortgages and what you still need to be wary of.

Instant cash—with strings. A reverse mortgage is a loan against your home if you're generally age 62 and over that doesn't have to be paid back as long as you live in that house. Tapping home equity to finance your golden years is growing in popularity, with 107,367 reverse-mortgage loans made in fiscal year 2007, up from 6,600 loans in 2000, but they still account for only about 1 percent of older households, according to the AARP. After you pay a variety of fees on the loan, you can get a lump sum, monthly payments, a credit line, or a combination of these options based on the value of your house. If the home is sold, the loan must be repaid with the proceeds, and any equity that remains after that is distributed to the borrower.

Know the limits. Most reverse mortgages are home equity conversion mortgages, which are backed by the Federal Housing Administration, so you'll still get your money even if the lender goes under. (The other two types are private loans and single-purpose reverse mortgages offered by some state and local government agencies and nonprofit organizations.) FHA limits the amount you can borrow with a HECM, which ranges from $200,160 to $362,790, depending on the county you live in. The new housing law, which will take approximately 60 to 90 days to implement, creates a single national loan limit of $417,000 that can increase to as much as $625,500 in high-cost areas.

California Real Estate, recourse vs non recourse, mortgage forgiveness debt act

ceb.com: Reflections on the Mortgage Forgiveness Debt Act of 2007

The problem arises, however, when a taxpayer refinances an original purchase money mortgage and uses the "refi" proceeds for purposes other than (or in addition to) the acquisition or substantial improvement of the principal residence. Most lenders believe that any refinancing of a home mortgage removes the "purchase money mortgage" protection under California law and results in recourse liability against the borrower. Although this remains unclear, if such is the case, then debt discharged on a refinanced home mortgage would cause a California borrower to have cancellation of indebtedness income that might be excluded under the Act. Furthermore, to the extent a borrower has pulled out cash from a refinanced mortgage and used it, say, to pay off credit cards or other debts, the loan obligation is recourse under California law. But in that case, if part of the loan is discharged or forgiven by the lender, the borrower will have cancellation of indebtedness income that is not excluded under the new law because it was not used as "acquisition indebtedness." This is a trap for the unwary, and will require taxpayers and their advisors to keep accurate records of all home loan borrowings and the use of such proceeds.

Calfornia Case Law Discussion CCP 580

Memorandum Decision re: Waiver of Anti-deficiency Provision of C.C.P. § 5806 | United States Bankruptcy Court

The plaintiffs, Minoru and Marianne Togami, commenced this adversary proceeding after Fresno Apartment Holders foreclosed on its interest in the real property located at 1544 East Fedora Avenue, Fresno, California, which is a 93 unit apartment building. The Togamis originally acquired the Fresno apartment building in 1982 from Joyce Kakinami pursuant to a tax deferred real estate exchange. The purchase price was $1,920,000. To finance the purchase, the Togamis assumed various notes and deeds of trust against the property, including a purchase money promissory note executed by Kakinami (the "Note"). The Note included an obligation by the maker to refinance the Note on or before April 1987. The lender, Fresno Investors, a Limited Partnership, also agreed to subordinate the obligation under the 1982 Note to new financing and to accept a new note in the principal amount of $325,000. The Togamis were unable to acquire a new loan by April 1987 and defaulted on the original purchase money Note.

In August 1987, the Togamis were able to refinance the 1982 purchase money Note through a loan from Imperial Thrift and Loan Association ("Imperial"). Fresno Apartment Investors agreed to reconvey the deed of trust in exchange for a new secured promissory note. The Togamis executed a new note to Fresno Apartment Holders in the principal amount of $350,421, which includes arrearages that accrued as a result of the default. The new note contains the provision, "This note is not a purchase money note and there is full recourse to the Maker."

The Togamis filed a voluntary chapter 11 petition on January 12, 1990. Imperial, the holder of the first deed of trust, sought and obtained relief from the automatic stay and conducted a foreclosure sale on April 24, 1991. No proceeds of the foreclosure sale were available for distribution to Fresno Apartment Holders, the holder of the third deed of trust. From the time of acquisition, the Togamis operated the property as an apartment complex and made no modifications or alterations to the property. DISCUSSION A. Transactions Subject to Anti-Deficiency Protection

California Code of Civil Procedure § 580b provides in pertinent part:

No deficiency judgment shall lie in any event after a sale of real property or an estate for years therein for failure of the purchaser to complete his or her contract of sale, or under a deed of trust, or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property or estate for years therein, or under a deed of trust or mortgage on a dwelling for not more than four families given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser.

C.C.P. § 580b precludes purchase money lenders and vendors from obtaining a deficiency judgment against the borrower after foreclosure. The issue is whether the Togamis have waived the anti-deficiency protection of C.C.P. § 580b under the 1987 refinance by the language in the new note, which indicates that the anti-deficiency provision does not apply to the transaction.

In general, a purchase money loan acquires its character at the time the loan is made and retains its character absent subsequent waiver. Brown v. Jensen, 41 Cal. 2d 193, 197, 259 P.2d 425 (1953), cert. denied, 347 U.S. 905 (1954). A purchase money loan retains its character notwithstanding subsequent assignment of the mortgage and note. Ziegler v. Barnes, 200 Cal. App. 3d 224, 231 fn. 6, 246 Cal. Rptr. 69 (Cal. Ct. App. 1988).

The anti-deficiency provision of § 580b applies only to standard transactions. The traditional standard purchase money transaction involves the purchase of property where the buyer gives the seller a promissory note for the balance of the purchase price secured by a deed of trust on the property. The second standard purchase money transaction involves the purchase of property where the buyer gives a third-party lender a promissory note for the balance of the purchase price secured by a deed of trust on the property, which is an owner-occupied residential property containing four or fewer units.

It is undisputed that the Togamis assumed the Kakinami Note, which is a purchase money note, in connection with their acquisition of the apartment building. A subsequent assignee of a purchase money note is subject to the protections of the anti-deficiency provisions of § 580b. Ziegler v. Barnes, 200 Cal. App. 3d at 231. On that basis, the court concludes that the transaction in question is a standard transaction to which the anti-deficiency provisions of § 580b would normally apply. B. Policy Underlying § 580b

California historically has had a strong public policy against deficiency judgments. The policy objective of the anti-deficiency legislation is to place the risk of inadequate security on the lender, who is in the best position to know its true value and to discourage a seller or lender from overvaluing the collateral above its fair market value. Roseleaf v. Chierighino, 59 Cal. 2d 35, 42, 27 Cal. Rptr. 873 (1963). The Roseleaf court articulated the policy objectives as follows:

Section 580b places the risk of inadequate security on the purchase money mortgagee. A vendor is thus discouraged from overvaluing the security. Precarious land promotion schemes are discouraged, for the security value of the land gives purchasers a clue as to its true market value. (Citations omitted). If inadequacy of the security results, not from overvaluing, but from a decline in property values during a general or local depression, section 580b prevents the aggravation of the downturn that would result if defaulting purchasers were burdened with large personal liability. Section 580b thus serves as a stabilizing factor in land sales.

Id. By enacting the anti-deficiency legislation, the California Legislature sought to prevent a secured creditor from selling the property at a foreclosure sale for less than its fair market value and then recovering a personal judgment from the borrower for the difference between the sales proceeds and the balance of the unpaid debt. Id.

Because of its strong public policy objective, the anti-deficiency protection cannot be altered or waived at the time the purchase money obligation is created or renewed. Palm v. Schilling, 199 Cal. App. 3d 63, 69, 244 Cal. Rptr. 600 (Cal. Ct. App. 1988). A seller's lien remains subject to the anti-deficiency protection even when it is subordinated to a subsequent refinance loan. Thompson v. Allert, 233 Cal. App. 3d 1462, 1466-67, 285 Cal. Rptr. 367 (Cal. Ct. App. 1991). After the lender has received the secured note, the lender can alter or modify its terms, extend or renew the terms of the note, or substitute other or additional security for the note. As long as the obligation is secured by the same property and remains substantially the same as when it was originally created, the purchase money limitations continue to protect the borrower. Jackson v. Taylor, 272 Cal. App. 2d 1, 5, 76 Cal. Rptr. 891 (Cal. Ct. App. 1969).

A transaction which does not serve the public policy objectives of the anti-deficiency statute is non-standard, and the anti-deficiency provisions generally do not apply to the non-standard transaction. Spangler v. Memel, 7 Cal. 3d 603, 612, 102 Cal. Rptr. 807 (1972); Union v. Anderson, 232 Cal. App. 3d 941, 946, 283 Cal. Rptr. 823 (Cal. Ct. App. 1991). However, even in transactions that vary from the standard, the anti-deficiency statute applies if the factual circumstances come within the purposes of the statute. Roseleaf, 59 Cal. 2d at 41. C. Exceptions To Anti-Deficiency Protection

Under certain circumstances, the anti-deficiency protection of § 580b can be waived. For example, the seller's voluntary subordination of the purchase money deed of trust to a subsequent lien to secure a construction loan for commercial development constitutes an effective waiver of the anti-deficieny protection. Spangler v. Memel, 7 Cal. 3d at 614. The reason the buyer becomes personally liable is that the risk of deterioration of the property's value shifts because the use of the property has changed. The substitution of collateral may also provide the basis for the waiver of the anti-deficiency statute. Goodyear v. Mack, 159 Cal. App. 3d 654, 658, 205 Cal. Rptr. 702 (Cal. Ct. App. 1984). Although some courts have held that a material and substantial modification to the terms of a purchase money note may also constitute a waiver of the protection of § 580b, Russell v. Roberts, 39 Cal. App. 3d 390, 114 Cal. Rptr. 305 (Cal. Ct. App. 1974), the majority position is that subsequent events do not alter the effect of § 580b. Brown v. Jensen, 41 Cal. 2d 193, 259 P.2d 425; Paramount Savings & Loan Ass'n v. Barber, 263 Cal. App. 2d 166, 69 Cal. Rptr. 390; Roger Bernhardt, California Mortgage and Deed of Trust Practice § 4.24 (2d ed. 1990 & Supp. 1992).

Fresno Apartment Holders argues that Russell v. Roberts, 39 Cal. App. 3d 390, which holds that Cal. Civ. Code § 2953(1) does not prevent the waiver of the anti-deficiency provision of C.C.P. § 580b in connection with the making or renewing of a purchase money loan, is controlling and that a subsequent waiver of the anti-deficiency protection of C.C.P. § 580b may constitute consideration for the renewal of a purchase money loan. However, since Russell v. Roberts, another California appellate court has clarified that the protection against a deficiency cannot be waived, stating that Cal. Civ. Code 2953's prohibition against waivers of privileges is consistent with § 580b. Palm v. Schilling, 199 Cal. App. 3d 63. The court finds that Russell v. Roberts is an aberration from those cases that hold that a subsequent waiver of the anti-deficiency protection is contrary to the public policy objectives underlying § 580b. Thompson v. Allert, 233 Cal. App. 3d 1462; Palm v. Schilling, 199 Cal. App. 3d 63. To hold otherwise would be against the weight of the authority and would be contrary to the policies underlying the anti-deficiency statute. CONCLUSION

Based upon the foregoing reasons, the Court concludes that the debtors cannot waive the anti-deficiency provision of C.C.P. § 580b, and the subsequent refinance of the 1982 purchase money note did not operate as such a waiver. Accordingly, judgment is granted for the debtors, and the note to Fresno Apartment Holders remains subject to the California anti-deficieny provisions in C.C.P. § 580b.

Good cause appearing, it is SO ORDERED.
1Any express agreement made or entered into by a borrower at the time of or in connection with the making of or renewing of any loan secured by a deed of trust, mortgage or other instrument creating a lien on real property, whereby the borrower agrees to waive the rights, or privileges conferred upon him by sections 2924, 2924(b), 2924(c) of the Civil Code or by sections 580(a) or 726 of the Code of Civil Procedure, shall be void and of no effect . . . . Cal. Civ. Code § 2953.

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