Monday, May 27, 2013

California Supremes Reverse Foreclosure Sale Where $200K Error In Announcing Credit Bid Attributable To Trustee's Mistake, Not Lender's Negligence; Winning Bidder Loses Out On Big Windfall, Parties Entitled To A 'Do-Over'

From a Opinion Summary:

  • Plaintiff filed an action to quiet title to a parcel of real property, alleging he owned the property because he had been the highest bidder at a trustee's sale.

    After Plaintiff gave the auctioneer his cashier's check at the sale, the trustee told Plaintiff the sale was void. The trustee based its refusal on its discovery that it had mistakenly communicated to the auctioneer an incorrect opening bid by the lender that was less than ten percent of the actual amount of the bid.

    After the trustee refused to tender the deed to Plaintiff, Plaintiff filed this action.

    The trustee moved for summary judgment on the ground that it had properly set aside the foreclosure sale due to a significant procedural irregularity in the statutory foreclosure process coupled with an inadequate sales price.

    The trial court ultimately granted the motion. The court of appeals reversed, holding that the trustee's error was not a procedural irregularity in the statutory foreclosure process and that the trustee therefore had no discretionary authority to void the foreclosure sale.

    The Supreme Court reversed, holding that, under the circumstances here, the trustee acted within its discretion authority in declaring the sale void.(1)
Source: Opinion Summary - Biancalana v. T.D. Serv. Co..

For the ruling, see Biancalana v. T.D. Service Company, S198562 (Calif. May 16, 2013).

(1) For those who make a living or otherwise buy real estate at foreclosure sales in California, this court ruling, as well as the cases cited therein, make for must reading in understanding when a screw-up involving a foreclosure sale auction resulting in a windfall for a foreclosure investor may call for the sale to be voided and when it won't.

In a nutshell, whether or not a California court should exercise its discretion and void a foreclosure sale infected with some type of mistake will depend in large part on the following issues:
  • Was the mistake attributable to the trustee and/or auctioneer conducting the sale while carrying out its statutory-definined duties (probably allowed to void the sale), or
  • Was the mistake wholly under the control of the beneficiary/lender seeking foreclosure and arose solely from the beneficiary/lender's own negligence, thereby falling outside the procedural requirements for foreclosure sales described in the statutory scheme (probably not allowed to void the sale)?
If the mistake was attributable to the trustee and/or auctioneer conducting the sale while carrying out its statutory-defined duties, a further question must be addressed:
  • Was the mistake caught before or after the trustee issued the deed to the winning bidder and did the error result in a grossly inadequate purchase price?
In this regard, the California Supreme Court made the following observation:
  • Our holding is premised on the trustee discovering its mistake before it issues the deed.

    After the deed is issued, a bona fide purchaser is entitled to conclusively presume that the sale was conducted regularly and properly. (Moeller, supra, 25 Cal.App.4th at pp. 831–832.) The trustee thus has an incentive to exercise diligence in promptly reviewing the sale and identifying any irregularity before issuing the deed.

    In the present case, the trustee discovered its error within two days of the auction, and the error resulted in a grossly inadequate purchase price.

    Under such circumstances, we do not think the balance of public policy objectives weighs in favor of allowing the buyer to enjoy a substantial windfall while leaving the beneficiary to collect whatever remedy it can from the trustee. The more efficient course is to permit the trustee to quickly correct its mistake and hold a proper sale.

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