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CA: Sale Error by Trustee/Auctioneer; Foreclosure Sale Voided

by Lawrence Dreyfuss,
Litigation Counsel for T.D. Service Company
USFN Member (AZ, CA, NV)

It has long been established in California that a foreclosure sale may be set aside and reheld, if an irregularity central to the sale process results in an inadequate price and the deed has not yet been issued. One aspect that has been unresolved, however, was whether or not an error by a trustee/auctioneer in announcing a lender’s credit bid would be sufficient. That issue has now been resolved in a recent case, which confirmed that it suffices. [Millennium Rock Mortgage, Inc. v. T.D. Service Company, (2009) 179 Cal. App. 4th 804].

T.D. Service Company was retained by the lender to process a nonjudicial foreclosure. It was instructed by the lender to submit a credit bid of $377,710. The auctioneer mixed up the documents with those from another sale, and therefore submitted the bid as $51,447. Millennium was the high bidder at $51,500. The mix-up was discovered on the day of the sale, and no trustee’s deed was issued. The funds were returned, but Millennium sued to enforce the sale. The lower court issued a preliminary injunction against the new sale, and T.D. appealed from that ruling.

Since no trustee’s deed had yet been issued, the conclusive presumption of the validity of the sale, that comes from such a deed, did not arise. The primary question was whether or not this case could be distinguished from the case of 6 Angels v. Stuart-Wright Mortgage, Inc., (2001) 85 Cal. App. 4th 1279, which was very similar on its face. In 6 Angels, the beneficiary itself mistakenly submitted a credit bid for $10,000 instead of the intended $100,000. The court refused to set the sale aside, holding that the beneficiary’s mistake in submitting the credit bid was outside the statutory framework of the foreclosure and, therefore, not the type of irregularity that could render a sale voidable.

On appeal in the Millennium case, the court agreed that 6 Angels was distinguishable because in the instant case it was the auctioneer acting on behalf of the trustee who made the error and, unlike a beneficiary or another bidder, the actions of the trustee “went to the heart of the sale.” The appellate court, therefore, held that the mix-up of the two properties in the sale was an irregularity that resulted in unfairness and gross inadequacy of price, rendering the sale voidable at the option of the trustee. The court also agreed that if the sale were allowed to stand, it would deprive “a blameless beneficiary of its entitlement to the full amount of its credit bid” and result in an unfair windfall for the purchaser. The court found that there was no likelihood that plaintiff would prevail at trial, and it therefore vacated the preliminary injunction, ordering that the new sale may proceed.

With the current boom in foreclosures, mistakes unfortunately are likely to occur from time to time as auctioneers attempt to juggle multiple sales. This case will provide a useful tool in voiding those sales, thus securing to the lender the full benefit of its credit bid. It remains critical that these errors be addressed quickly — particularly before the trustee’s deed is issued with its resulting presumptions of validity.

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