## Facts

- The LaForgia investor group loaned $35,000 to Alan Williams, secured by a second deed of trust on Williams’s residence; California First Bank held the first deed of trust.
- The Kolsky investor group later loaned Williams $35,000, secured by a third deed of trust on the same property.
- After the bank recorded a notice of default, Williams filed Chapter 11 bankruptcy.
- Through a bankruptcy stipulation negotiated with a broker acting for both investor groups, the property was removed from bankruptcy and sold to Kolsky.
- As part of the transaction:
  - Kolsky gave LaForgia a new promissory note for $44,360 (principal balance plus interest) secured by a new second deed of trust.
  - Kolsky also arranged new obligations to the bank and gave Williams a $10,000 note secured by a third deed of trust.
- The restructuring replaced Williams with Kolsky as obligor to LaForgia and the bank, each holding new notes and security interests.
- The parties could not sell the property for enough to satisfy encumbrances; the bank foreclosed under its first deed of trust via private sale, extinguishing junior liens.
- LaForgia sued Kolsky for a deficiency on Kolsky’s note after the senior foreclosure; the trial court granted summary judgment for LaForgia.

## Issues

1. Whether Code of Civil Procedure § 580b barred LaForgia from obtaining a deficiency judgment because, by taking a new note and deed of trust from the purchaser in the sale, LaForgia became the functional equivalent of a vendor in a purchase-money transaction.

## Decision

- The Court of Appeal reversed the summary judgment for LaForgia and directed entry of summary judgment for Kolsky.
- The court held that the restructured sale-and-financing arrangement made LaForgia the equivalent of a vendor for purposes of § 580b.
- Because § 580b applied, LaForgia was statutorily barred from obtaining a deficiency judgment on the note after the senior lienholder’s foreclosure.

## Legal Principles

- Code of Civil Procedure § 580b bars deficiency judgments on obligations that are purchase-money in substance, including seller “carry-back” financing secured by real property.
- Courts characterize transactions by substance rather than form; a junior lienholder can become the functional equivalent of a vendor when it enables a sale and takes a new note and deed of trust from the purchaser as part of the purchase arrangement.
- When a creditor assumes vendor-like purchase-money risk by restructuring and accepting purchaser financing to preserve its position, § 580b allocates the risk of inadequate security to that creditor, even if a senior lienholder forecloses and extinguishes junior liens.

## Conclusion

By participating in a bankruptcy workout that sold the property to Kolsky and accepting a new purchaser-issued note and second deed of trust as part of that sale, LaForgia functioned as a purchase-money vendor under § 580b and was barred from recovering a deficiency after the senior lender’s foreclosure.


LaForgia v. Kolsky, 196 Cal. App. 3d 1103 (Cal. Ct. App. 1987)