Friday, April 25, 2014

FYI: Cal Sup Ct Rules Foreclosure Sale Properly Voided, When Trustee Submitted Incorrect Bid and Voided Sale Before Issuing Deed

Tuesday, June 4, 2013

Reversing the appellate court, the California Supreme Court recently ruled that a foreclosure trustee properly declared a non-judicial foreclosure sale void where, prior to issuing the foreclosure deed to the purported successful bidder, the trustee discovered that it had erroneously provided incorrect information to the auctioneer as to the opening bid amount and informed the bidder of its error.  

In so ruling, the Court reasoned that a grossly inadequate sales price, coupled with irregularity in the foreclosure sale process, was a sufficient basis to set aside the foreclosure sale, and that the bidder was not meaningfully prejudiced by the trustee's rescission as he could still participate in a proper sale of the property at a later date.

A copy of the opinion is available at:

After a residential mortgage loan went into default, the foreclosure trustee ("Trustee") scheduled a foreclosure sale of the property that secured the loan.  The notice of trustee's sale stated that the property would be sold at public auction to the highest bidder and that the total indebtedness was roughly $435,000.00.  The notice also indicated that the opening bid at the foreclosure sale could be less than the total indebtedness due.  Prior to the sale, the beneficiary under the deed of trust ("Beneficiary") submitted a credit bid of almost $220,000, which Trustee accepted. 

In addition, the buyer at the sale previously called Trustee to learn the expected opening bid, and was informed that the opening bid on the property would be almost $22,000.00, despite the credit bid submitted for almost ten times that amount.  After confirming with Trustee the amount of the opening bid, the buyer obtained a cashier's check for $22,000.00 and attended the auction the next day.

On the morning of the foreclosure sale, Trustee's auctioneer verified with Trustee that the amount of the opening bid was almost $22,000 and later opened the bidding based on that number.  Trustee, however, had incorrectly informed the auctioneer that the opening bid was the amount of the delinquency, rather than the actual credit bid Trustee had accepted.  With the buyer's bid supposedly the highest, the auctioneer announced the buyer as the purchaser of the property and accepted the buyer's cashier's check. 

Two days later, after discovering its mistake, Trustee informed the buyer that the sale was void because the buyer's bid was in fact not high enough.  Trustee returned the buyer's cashier's check to him.  The buyer responded by demanding the deed to the property.  Trustee refused.  The buyer then filed a quiet title action.

Trustee moved for summary judgment, arguing that it had properly set aside the foreclosure sale. The trial court ultimately granted summary judgment in favor of Trustee. The buyer then appealed.  The Court of Appeal reversed, ruling that Trustee's error was not a procedural irregularity in the foreclosure process and that Trustee thus lacked discretion to void the foreclosure sale.   Trustee petitioned the California Supreme Court, which reversed the judgment of the Appellate Court.

As you may recall, California's Civil Code Sections 2924-2924k define a trustee's duties in carrying out non-judicial foreclosures, and courts interpreting California's non-judicial foreclosure scheme have ruled in part that a trustee has a duty to secure the best price for the benefit of the trustor-debtor.  See Cal. Civ. Code § 2924-2924k; Bank of Seoul & Trust Co. v. Marcione, 198 Cal. App. 3d 113, 118 ((1988); Residential Capital v. Cal-Western Reconveyance Corp., 108 Cal.App. 4th 807, 825 (2003); Baron v. Colonial Mortgage Service Co., 111 Cal.App.3d 316, 322 (1980).

In addition, a rebuttable presumption arises that a foreclosure sale has been conducted regularly and properly if the trustee's deed recites all statutory notice requirements, and the procedures for the conduct of the foreclosure have been satisfied.  Moeller v. Lien, 25 Cal. App.4th 822, 830 (1994).   This presumption becomes conclusive as to a bona fide purchaser, but the conclusive presumption does not apply until the trustee's deed is actually delivered.  Moreover, if the trustee discovers a defect in the procedure after accepting the bid but before delivery of the trustee's deed, the trustee may cancel the sale to the bona fide purchaser, return the purchase price, and start the foreclosure process over.  Id. at 832.

Pointing out that in this case the conclusive presumption did not apply because Trustee discovered its error before the delivery of the deed, the California Supreme Court concluded that Trustee properly declared the foreclosure sale void.  See, e.g., Bank of Seoul, 198 Cal. App. 3d at 119.   In so ruling, the Court applied the common law rule that gross inadequacy of price, coupled with irregularity in the foreclosure process, was sufficient grounds for setting aside a foreclosure sale.

Rejecting the buyer's argument that the bidding price was not grossly inadequate, the California Supreme Court noted that gross inadequacy of price was demonstrated by the fact that his bid of almost $22,000 was less than 10% of the Beneficiary's credit bid of over $200,000.  See Millennium Rock Mortgage, Inc. v. T.D. Service Co., 179 Cal. App.4th 804, 810 (2009)(finding gross inadequacy of price where the accepted bid was one-seventh of the opening credit bid that should have been announced).

Having thus established gross inadequacy of price, the Court then focused on whether Trustee's mistake constituted a procedural error within the statutory foreclosure sale process and thus entitled Trustee to rescind the sale.   Noting that Trustee's error caused the auctioneer to announce a mistaken opening bid, the Court reasoned that even though the error occurred before the actual start of the sale, the error nevertheless constituted an irregularity within the statutory foreclosure sale process and therefore entitled Trustee to rescind the sale to the buyer.  As the Court explained, the error "was an irregularity in the trustee's discharge of its statutory 'duty to conduct the sale fairly and openly, and to secure the best price for the trustor's benefit'" and "'went to the heart of the sale' . . . because it resulted in the announcement at the sale of an opening credit bid that set an erroneously low floor for subsequent bidding." 

In so concluding, the California Supreme Court also rejected Plaintiff's assertions that Trustee's error should be imputed to the Beneficiary because Trustee acted as its agent, and that allowing Trustee to rescind the sale opened the door to manipulation and fraud. Observing that there was no evidence of fraud or price manipulation, and that Trustee served as a common agent for both the debtor and Beneficiary, the Court stressed that Trustee actually deviated from Beneficiary's instructions when it mistakenly communicated incorrect information to the auctioneer.  

Finally, while recognizing the inconvenience in re-starting the sale process, the Court emphasized the importance of securing the best price for the trustor's (debtor's) benefit, noting that the buyer was not prejudiced in any meaningful way by Trustee's mistake since Trustee could hold a proper sale at a later date, and that allowing the buyer to keep the property under the circumstances would allow him to reap a huge windfall from Trustee's error.

The California Supreme Court thus reversed the judgment of the Court of Appeal and remanded.

Eric Tsai
McGinnis Wutscher Beiramee LLP
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