Sheriff’s Sales to Third Parties Cannot be Set Aside

Bankruptcy, Foreclosure, and Legal Update by Peter N. Brewer, Esq.

Howard Rich (“Buyer”) purchased a single-family residence at a sheriff’s sale in July 2011. The prior owner, Yung-Shen Steven Lee (“Debtor”), had a judgment against him. The judgment holder, Spyglass Hill Community Association (“HOA”), sought and completed the execution sale in order to collect on its judgment. In February 2012, Debtor filed a motion to set aside the original judgment obtained by the HOA on the grounds that the HOA never properly served the lawsuit on him. The Court granted Debtor’s motion and set aside the judgment. After the default was set aside, Debtor then filed a motion to cancel the sheriff’s deed and Buyer’s purchase of the property. The court granted Debtor’s motion as the original judgment was void and had been set aside. Buyer then filed an appeal.

THE DECISION:
In Lee v. Rich, the California Court of Appeals, Fourth Circuit, reversed the trial court’s decision and held a sheriff’s sale cannot be set aside for any reason if the purchaser is a bona fide third party. The Appellate Court found that the statute explicitly stated that the sheriff’s sale could not be set aside unless the purchaser was the judgment creditor. Here, since Buyer was a third party, Debtor could not set aside the sale. The Appellate Court noted that the statute allowed for the Debtor to redeem the property, but once the redemption period ended, there was no way for sale to be set aside even if the underlying judgment was void. However, while Debtor could not set aside the sale, he was entitled to seek damages from the Creditor. In addition, the Appellate Court went on to note that the debtors, in some instances, have a right to equitable redemption. However, in order for that to apply, the purchaser must be guilty of unfairness and the property had to be sold at a grossly inadequate price. Here, since Buyer did not do anything wrong, equitable redemption did not apply.

WHY THIS DECISION IS IMPORTANT:
This case is relatively strange. The Appellate Court does not dispute that the underlying judgment that led to the sale was void as a matter of law. However, although the judgment was void, the Appellate Court found that it was not void as to Buyer because Buyer did not participate in the lawsuit. It is unclear how a sale based on a judgment that was void because the court did not have jurisdiction over Debtor could still be effective be sufficient to allow the sale of Debtor’s home. It seems that the sale would be in violation of Debtor’s due process rights. Given these facts, it seems unlikely that a court would ever set aside a sheriff’s sale with a third party buyer.

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