BILL ANALYSIS Ó
AB 2039
Page 1
Date of Hearing: April 1, 2014
ASSEMBLY COMMITTEE ON JUDICIARY
Bob Wieckowski, Chair
AB 2039 (Muratsuchi) - As Introduced: February 20, 2014
As Proposed to be Amended
SUBJECT : REAL PROPERTY: INDEMNIFICATION AGREEMENTS
KEY ISSUE : SHOULD LENDERS AND THE AUCTION COMPANIES THEY RETAIN
BE PROHIBITED FROM REQUIRING HOMEOWNERS TO INDEMNIFY THEM FROM
RESPONSIBILITY FOR WRONGDOING IN REAL ESTATE TRANSACTIONS?
SYNOPSIS
This bill is sponsored by the California Association of Realtors
to prohibit the imposition of indemnification clauses by real
estate auction companies and the lenders that retain them.
According to the realtors, lenders typically hire auction
companies to take bids in proposed short sales in order to
obtain the highest price for property. The contracts used in
these sales typically require the homeowners (sellers) to hold
the lender and auctioneer harmless for negligence and other
violations of law, and require the homeowner to indemnify the
lender and auction company. Realtors argue that these clauses
are unfairly one-sided, create undesirable disincentives to use
appropriate care, and shift costs and risks to innocent
homeowners and realtors who have no ability to control or
influence the conduct of the lender or auction company. The
bill has no known opposition.
SUMMARY : Regulates certain contracts regarding auction sales of
real property. Specifically, this bill provides that neither a
lender nor an auction company retained by a lender to control
aspects of a transaction of real property subject to this part,
including validating the sales price, may require the homeowner
or listing agent to defend or indemnify the lender or auction
company from any liability alleged to result from the actions of
the lender or auction company as a condition of receiving the
lender's approval of the transaction. Any clause, provision,
covenant or agreement purporting to impose an obligation to
defend or indemnify an auction company in violation of this
subdivision is against public policy, void, and unenforceable.
AB 2039
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EXISTING LAW :
1)Provides that a contract between the principal and agent may
be modified or altered to change the agency relationship at
any time before the performance of the act which is the object
of the agency with the written consent of the parties to the
agency relationship. (Civil Code section 2079.23.)
2)Prohibits indemnification agreements in various contexts as
contrary to public policy. (E.g., Civil Code sections 2782,
2784.5.)
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
COMMENTS : The author explains the reason for the bill as
follows:
This bill would change existing law to address a new
phenomenon where listing agents of short sales are being
required to accept liability over transactions in which
they have no control. Under current law, the lender retains
complete control over the contract, which can have a
provision which requires the selling agent to accept
liability for auction company mistakes and for any damages
arising out of any action taken by the auction company.
These provisions only exclude cases of gross negligence,
willful misconduct, bad faith, an unlawful act or fraud. In
other words, the auction company is held harmless for
mistakes it makes in the regular course of business. This
policy may lead to future lawsuits. This bill ? places the
responsibility for liability with the party whose actions
caused the liability.
According to the sponsor, California Association of Realtors:
Understandably, lenders want to make sure the price they
are being offered in a short sale transaction reflects the
best price they are likely to get for the home. The lender
is contemplating accepting less than is owed on the
mortgage and wants to minimize their loss. To that end,
lenders are sometimes requiring that short sale homes be
put out to bid using an auction company retained for that
purpose. If the bids come in under the original offer, the
original offer is accepted; if not, the new high bidder
AB 2039
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becomes the purchaser of the home.
The lender completely controls the contract under which the
seller agrees to have his or her home put out to bid (if
the seller disagrees with any aspect of the contract, the
lender will simply reject the short sale offer). These
contracts can have a provision that requires the seller to
accept liability for auction company mistakes for any
damages arising out of any action taken by the auction
company. These provisions only exclude cases of gross
negligence, willful misconduct, bad faith, an unlawful act
or fraud. In other words, the auction company is held
harmless for mistakes it makes in the regular course of
business. Needless to say, REALTORS take issue with their
seller having to indemnify the auction company for errors
made by the auction company.
AB 2039 places the responsibility for liability for damages
with the party whose actions are the cause of the
liability.
Information provided to the Committee includes a contract for
short sale auction market validation, drafted by an auction
company, requiring the seller to indemnify the auction company
against any and all liability arising in connection with any
claim for negligence in the conduct of the transaction. The
realtors argue that the effect of agreements such as this may be
to transfer all liability to the listing agent, since the seller
is likely to bring claims against his or her agent if the seller
is required to indemnify the auction company.
Under the bill, neither a lender nor an auction company retained
by a lender to control aspects of a transaction of real property
subject to this part, including validating the sales price, may
require the homeowner or listing agent to defend or indemnify
the lender or auction company from any liability alleged to
result from the actions of the lender or auction company as a
condition of receiving the lender's approval of the transaction.
Any clause, provision, covenant or agreement purporting to
impose an obligation to defend or indemnify an auction company
in violation of this subdivision is against public policy, void,
and unenforceable.
Author's Clarifying Amendment. In order to protect both
homeowners and listing agents from the indemnification clauses
that motivate the bill, the author prudently proposes to clarify
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the bill by revising subdivision (b) to read as follows:
(b) Neither a lender nor an auction company retained by a lender
to control aspects of a transaction of real property subject to
this part, including validating the sales price, may require the
homeowner or listing agent to defend or indemnify the lender or
auction company from any liability alleged to result from the
actions of the lender or auction company as a condition of
receiving a the lender's approval of the transaction. Any
clause, provision, covenant or agreement purporting to impose an
obligation to defend or indemnify an auction company in
violation of this subdivision is against public policy, void,
and unenforceable.
REGISTERED SUPPORT / OPPOSITION :
Support
California Association of Realtors (sponsor)
Opposition
None on file
Analysis Prepared by : Kevin G. Baker / JUD. / (916) 319-2334