The attorney told them to STOP making payments immediately on grounds of fraud and deceit. They followed his advice and when the home was sold at auction they were given a very attractive "Cash For Keys" settlement. Hold your ground. You may not even need to hire an attorney. Just Pack and be ready..
The banker refuses to give you your deposit?
DISCLAIMER: The following is not legal advice, I am not an attorney. My comments about violation of law are those of a citizen with first amendment rights to state my opinion about a matter of political, economic and social importance.
The former landlord owes you the deposit. Unless you are in arrears on the rent owed to him during his ownership, or if he incurred some other expense caused by you during his ownership such as unpaid utility bills, property damage, etc.
If the ex-landlord has no legitimate claim on your deposit, then you could sue the man in small claims court and obtain a judgement against him. You could then use that judgement to try to collect the sums owed to you by garnishing his paycheck or attaching his bank account.
The banker does not have your deposit, so he can't and won't give it. Instead, he has a carrot he told you about "cash for keys" Taking the bankers cash for keys, should not affect your claim against deadbeat landlord.
As for the ex-landlord telling you from the start, "Live there as long as you want" It is a loose enough promise that you would probably have a hard time proving that statement was fraudulent unless he made it to and rented the house to you when the house was in imminent proceedings to be foreclosed upon. If he disclosed that he was "trying to work something out with the bank" that could have been enough information for you to figure out that a foreclosure was a strong possibility. Again, making fraud hard to prove.
You chose to put money in to the house so it would look better for your own pride of occupancy, not because he asked you to do it, or because you had an ownership interest in the house. It is nice to have a tenant to take pride in their rental home and be willing to spend very small sums in sprucing it and maintaining it, but major redecorating should only be done in full cooperation and with the support and contribution of the landlord.
Even if the landlord is solvent, a tenants improvements may be in conflict with the owners vision for the property.
Sorry to hear of your dilemma.
Please review the following blog post that has a few facts you should be aware of regarding your situation:
CA's "Protecting Tenants at Foreclosure Act" - need to know info!