Daily Development for Friday, January 5, 2001

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

Our "guest reporter" for today is Burt Rush, writing for the First American Title email list, LandSakes. The editor has done some editing, and so is responsible for any inaccuracies.

MORTGAGES; FORECLOSURE; PRIVATE FORECLOSURE; FINALITY; INADEQUATE PRICE: : A successful bidder at a regularly conducted nonjudicial foreclosure sale may enforce its right to receive a trustee's deed, over objections by the foreclosing beneficiary that the sale price was inadequate due to erroneous communication of the opening bid.

6 Angels, Inc. v. Stuart Wright Mortgage, Inc., ___ Cal.App.4th ___ (2nd D.C.A. 2001).

Prior to March 1997, Stuart Wright Mortgage was beneficiary under a deed of trust on property owned by Marvin Salazar and Maria Carmen Ruiz. The loan secured by the deed of trust was serviced by Dovenmuehle Mortgage, and the trustee under the deed of trust was Mortgage Default Service.

The loan went delinquent and a nonjudicial foreclosure was begun. Following standard procedure, on February 25, 1997, a notice of trustee's sale was recorded showing an indebtedness of $144,656 and scheduling the trustee's sale for March 21, 1997.

The day before the sale, Dovenmuehle Mortgage sent a letter to trustee Mortgage Default Service setting the opening bid at $10,000. But this letter contained a typographical errorthe intended opening bid was $100,000.

On the sale date, the trustee dutifully made an opening bid of $10,000. 6 Angels, a corporation in the business of buying properties at foreclosure sales, countered with a bid of $10,000.01 that went uncontested.

After the sale, Dovenmuehle Mortgage announced there had been a mistake, and instructed the trustee to return the bid funds to 6 Angels and reschedule the trustee's sale. Again, the trustee dutifully followed its instructions.

At the second trustee's sale, the property was acquired by an affiliate of StuartWright Mortgage for $100,000.01.

But, even before the second sale, 6 Angels filed suit to enforce its right to purchase the property for $10,000.01. On a motion for summary judgment, the trial court ruled in favor of 6 Angels on its cause of action to quiet title. StuartWright Mortgage, et al., appealed.

The Court of Appeal affirmed, upholding "legislative intent that a (foreclosure) sale which is properly conducted 'constitutes a final adjudication of the rights of the borrower and lender. (Cite.)'"

In so holding, the Court found support in common law, state statutes and, finally, public policy.

First, the Court noted the common law rebuttable presumption that a completed foreclosure sale has been conducted regularly and fairly. To overcome this presumption, an objecting party must show failure to comply with "procedural requirements for the foreclosure sale that caused prejudice to the person attacking the sale. (Cite.)"

Here, the Court said mere inadequacy of price is not a "procedural irregularity," and the erroneous communication of the opening bid was "dehors the sale proceedings" (meaning, it was unconnected with the procedural requirements for the sale). In California, as elsewhere, these procedural requirements are spelled out by statute.

Next, the Court considered appellants' argument that summary judgment was improper because of evidence that 6 Angels was not a bona fide purchaser. This argument was based on a 1994 California Court of Appeal decision (Estate of Yates, 25 Cal.App.4th 511), holding a nonjudicial foreclosure sale inadequate for failure to give notices to the personal representative of the deceased trustor, and that the successful bidder was chargeable with notice of the defect (and not entitled to the status of a bona fide purchaser) due sixteen years' experience in purchasing properties at foreclosure sales and "gross inadequacy" of the sales price.

The Court distinguished the Yates case, first saying that in this case 6 Angel's status as a bona fide purchaser is "immaterial" because no trustee's deed was issued. The Court explained that where a trustee's deed has been issued, statutory presumptions are created in favor of validity of the sale which can be overcome (and the sale set aside) only if the successful bidder is not a bona fide purchaser. On the other hand, where no trustee's deed has been issued, the sale may be challenged "regardless of whether the buyer is a bona fide purchaser, provided that there is a procedural irregularity. (Cites.)"

And, said the Court, "(u)nlike Yates, there was no procedural irregularity in the sale at issue here."

The Court also made short work of appellants' arguments the sale should be set aside on grounds of public policy, and on theories of unilateral mistake, unjust enrichment, and lack of consideration. Instead, the Court cited strong public policy favoring certainty of the finality of foreclosure sales, which it said could be undermined if a sale could be attacked due to unilateral mistake of the complaining party. Said the Court

"The alleged error in price was within appellants' discretion and control, and they were solely responsible for it. Unless beneficiaries assume the risk of such errors, a low opening bid at a foreclosure sale will invariably trigger suspicion about the sale's finality, deterring buyers and impairing the efficacy of foreclosure sales."

Reporter's Comment: The correct result, I think, and in line with laws of most jurisdictions.

Editor's Comment 1: Aside from protecting bona fide purchasers or the interests of the debtor, is there a good reason to treat private foreclosure sales as any different from other auction proceedings ? The editor can think of none. The editor hasn't checked as to whether a party bidding at an auction who knows that the "reserve bid" is erroneously low can nevertheless prevail, but if the rule as to ordinary auctions would not permit the bidder to win in such circumstances, the editor sees no reason for a "presumption of regularity" to apply in a trustee's sale.

Further, let's keep in mind that the ultimate outcome here may be that the borrower is faced with a substantial deficiency judgment (in California's bizarre thicket of anti-deficiency protections, it's hard to know with certainty based upon the facts reported here - but the principle is supported for application in deficiency producing sales in any event.)

Perhaps the answer could be that the trustor (the debtor) could attack the process, but not the beneficiary. But this is a somewhat silly outcome, since the trustor in many challenge situations would then simply be a cipher for the beneficiary's position.

Editor's Comment 2: At some point, of course, all processes must have finality. The editor has no quarrel with treating the foreclosure process as the same as every other auction. But in the situation posited here, the editor sees no reason to elevate the foreclosure process to some greater level of protection.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

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