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California’s Supreme Court Allows Trustee to Void Foreclosure Sale Sold Too Cheaply.

Debt Collection and Real Estate Law by Peter N. Brewer, Esq.

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What happens if the trustee is instructed by the lender to have a minimum bid of $219k but misses a digit and sets and sells the property at the foreclosure sale for a minimum bid of $21.9k?  You end up with a lawsuit that goes all the way up to the California Supreme Court!

That’s exactly what happened in the case of Biancalana v. T.D. Services. (May 16, 2013).

Ruling: The case has had a long history and finally, California’s Supreme Court ruled that the gross inadequacy of the price, coupled with the trustee’s mistake, gave the trustee discretion to void this sale.

Facts: Here, there had been no delivery of the trustee’s deed and so the Court reasoned that under Moeller v. Lien, no presumption had arisen that the sale was conclusively final to the bona fide purchaser.  Instead, following the line of reasoning in the cases of Bank of Seoul, Whitman v. Transtate Title, Little v. CFS Service Corp and Millennium Rock, the Court noted:  “gross inadequacy of price coupled with even slight unfairness or irregularity is a sufficient basis for setting the sale aside.”‘

The Court reasoned:  “Although T.D.’s mistake in the present case did not create an ambiguity as to which property was being sold, the error — like the error by the trustee’s agent in Millenium Rock — 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.” (Bank of Seoul,  198 Cal.App.3d at p. 118; [trustee’s duty is to “obtain the highest possible price” in order to “satisfy the indebtedness owed the beneficiary and recover for the trustor as much equity as possible”].) T.D.’s mistake “went to the heart of the sale” (Millennium Rock,  179 Cal.App.4th at p. 811) because it resulted in the announcement at the sale of an opening credit bid that set an erroneously low floor for subsequent bidding.”

What is “gross inadequacy” of price? In this case, the sale price was just under 10% of the minimum bid.  The opinion seemed to conclude that the intended minimum bid was the value of the property based on the fact that if no bidders had appeared, that property would have reverted to the lender for that price.  The Court also noted that in Millennium Rock, the sale price was 1/7 of the value of the property—which was considered to be an inadequate price.  Certainly 1/10 the value, as occurred in Biancalana, would be grossly inadequate.   Accordingly foreclosure investors can take note that bid amounts at these fractions of value would be considered grossly inadequate or otherwise constitute a windfall to the foreclosure purchaser due to the trustee’s error.

Author’s Comment: What is also interesting about this case is that the bidder, Biancalana, made the very valid argument that the trustee was an agent of the beneficiary and so under California’s agency laws, the error of the agent would be inputed to the principal.  This means that T.D. Service’s mistake should have been inputed to the lender and the lender would have an indemnity claim against T.D. Service for its negligence.  The Court declined to apply that broader agency theory and concluded that a trustee had only a “limited” duty to carry out the terms of the deed of trust and the statute.  This is a huge win for trustees, although the Court’s rationale seems to be heavily based on the fact that the beneficiary in this case was blameless and the error was the trustee’s alone.  Thus, if the lender had given any instruction that was erroneous, the trustee in carrying out that erroneous instruction would be deemed the agent of the beneficiary, the error would be “outside” the trustee’s sale proceeding and thus not voidable under the reasoning of the 6 Angels case.

Takeaway -> the trustee has an obligation to review the transaction carefully before issuing the trustee’s deed because its error is only voidable until the deed has been issued.

If you have a real estate matter that you feel needs legal representation, please contact our office at (650) 327 – 2900 or finds us on the web at www.BrewerFirm.com. We would be happy to help you.

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