Trustee Empowered To Void Foreclosure Sale Where Error Discovered Before Delivery Of Trustee’s Deed


Biancalana v. T.D. Service Co., — Cal.App.4th — (May 16, 2013)

California’s Supreme Court affirmed a trustee’s right to void a non-judicial foreclosure sale based on mistakes in the foreclosure process discovered before delivery of a trustee’s deed to the successful bidder. The case affirms existing California law that there is a conclusive presumption that the foreclosure sale was conducted properly and regularly, but only after the sale has concluded and the trustee’s deed has been delivered to the buyer.

Background: At a foreclosure of property in Santa Cruz County, the Trustee accepted the winning bidder’s cashier’s check for $21,895. The only event that had not yet occurred was delivery of the trustee’s deed. The trustee returned the check to the winning bidder two days later after discovering that the trustee had mistakenly communicated to the auctioneer an incorrect opening bid that was too low: rather than submitting the specified credit bid of $219,105 by the lender beneficiary, the trustee mistakenly submitted an opening bid of $21,894.17, which was less than 10% of the lender’s credit bid. The trustee declared the sale void. The winning bidder brought a quiet title action to enforce the foreclosure sale and his successful bid.

Holding: The California Supreme Court reversed judgment in favor of the bidder. There were three key factors evaluated by the Court in reaching this conclusion.

1.  No delivery of the Trustee’s Deed. The Court acknowledged California’s rule: If a “trustee’s deed recites that all statutory notice requirements and procedures required by law for the conduct of the foreclosure have been satisfied, a rebuttable presumption arises that the sale has been conducted regularly and properly; this presumption is conclusive as to a bona fide purchaser.” Biancalana, supra, Cal.App.4th at *4 (quoting Moeller v. Lien, 25 Cal.App.4th 822, 831 (1994)). The presumption of a properly-held sale is not conclusive until the trustee’s deed is delivered. Id. This means that, if there is a defect in the process that is discovered after a winning bid is accepted, but before delivery of the trustee’s deed, the trustee may void the sale—even to a bona fide purchaser—return the price paid, and restart the foreclosure process. Id. (citing Moeller, supra, 25 Cal.App.4th at 832.) That is what occurred here: “[T]he trustee discovered its error before it delivered the deed, so the conclusive presumption [of a properly conducted sale] does not apply.” Id. at *4 (citations omitted).

2.  Inadequate Price. The California Supreme Court noted that “ample cases have stated the applicable rule as follows:  gross inadequacy of price coupled with even slight unfairness or irregularity is a sufficient basis for setting the sale aside.” Id. (citations omitted). Inadequacy of price was clear from the fact that the winning bid of $21,896 was less than 10% of the true opening bid of $219,105 that the lender beneficiary had submitted to the trustee. Id. (citing Millennium Rock Mortgage, Inc. v. T.D. Service Co., 179 Cal.App.4th 804 (2009)). But for the trustee’s mistake, the property would have sold for $219,105. Because a trustee bears the duty to secure the highest possible price for the borrower and the lender beneficiary (see id. at *3), it is consistent with such goals to void a foreclosure sale that results in an unfair price due to discovered error.

3.  Irregularity Within Foreclosure Process. The third factor requires the trustee’s mistake to be part of the foreclosure sale process because of a trustee’s statutory “duty to conduct the sale fairly and openly, and to secure the best price for the trustor’s benefit.” Id. at *7 (citations omitted). The Court held that processing a duly-submitted credit bid pursuant to California Civil Code § 2924h is a key function of a trustee within the statutory framework regulating foreclosure sales. A point of a non-judicial foreclosure sale is to allow the lender beneficiary to make a credit bid through the trustee. Id. at *5 (citations omitted). Because of the trustee’s error, the opening bid given at the auction did not reflect the $219.105 credit bid to which the lender was entitled. “This qualifies as an irregularity occurring within the statutory foreclosure sale process.” Id.

Negligence by Trustee Not Imputed to the Beneficiary. While a trustee is considered an agent of the beneficiary and trustor, it is only an agent in a limited sense and its negligence cannot be imputed to the beneficiary. The Court analogized a trustee (under a deed of trust) as “a kind of common agent for the trustor and the beneficiary,” with “neither the powers nor the obligations of a strict trustee….” Id. at *7. Such a trustee’s duties are defined by contract—the deed of trust. Id.

Comments: This case does not change existing law that provides for a conclusive presumption of propriety where the sale price is within the ballpark of fairness and the trustee’s deed has been delivered to the winning bidder without the discovery of mistakes in the process. The winning bidder at an unfair foreclosure sale will, no doubt, be unhappy about losing the windfall he would have obtained if the sale were upheld. However, such a buyer is hardly prejudiced by rescission of the sale when “[v]oiding the sale and then conducting a proper sale would put the bidder in no worse position than if the trustee had made no mistake in the first place.” Id. at *9. The end result is to protect both the goals and effects of the conclusive presumption of a bona fide sale once a trustee’s deed is delivered, promoting the finality sought in real estate transactions.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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