Legal Question in Real Estate Law in California

Theoretically, yes, if the short sale was not an arms length transaction for market value. In the real world, probably not an issue at all. The big question is how would the bank even find out? The only way I can imagine would be if the in-law took out a new loan from the same bank as was partially paid off in the short sale, AND that lender is till the lien holder (i.e., no refi has happened), AND the in-law were to direct the payment to your friend be paid directly out of escrow for the sale, AND the bank somehow got ahold of the seller's closing statement, AND the short sale was for less than market value or there was some other collusion between the in-law and your friend that resulted in the bank getting less in the short sale than they otherwise would have. What I would be more concerned about, although it still may not be an issue, would be any tax consequences to your friend from the payment.