BILL ANALYSIS                                                                                                                                                                                                    Ó






                             SENATE JUDICIARY COMMITTEE
                         Senator Hannah-Beth Jackson, Chair
                              2013-2014 Regular Session


          AB 2039 (Muratsuchi)
          As Amended June 9, 2014
          Hearing Date: June 17, 2014
          Fiscal: Yes
          Urgency: No
          TH


                                        SUBJECT
                                           
                  Real Property Sales: Auction Companies: Liability

                                      DESCRIPTION  

          This bill would render void and unenforceable any condition  
          imposed by a lender or auction company that requires, as a  
          condition of receiving the lender's approval for a transaction,  
          that a homeowner or listing agent defend or indemnify the lender  
          or auction company from liability allegedly resulting from the  
          actions of the lender or auction company.  This bill would also  
          prohibit any person, including the seller, auctioneer, or their  
          agents, from bidding at a real property auction for the sole  
          purpose of increasing the bid on a property being sold by an  
          auctioneer.

                                      BACKGROUND  

          A short sale describes a type of real estate transaction where a  
          homeowner sells their home for less than the balance remaining  
          on a mortgage.  Short sales require sellers to find a buyer  
          willing to purchase their property at its current market value,  
          either with or without the assistance of a real estate agent,  
          and require the seller's lender to agree to accept the proceeds  
          from the sale as payment in full for the outstanding mortgage  
          debt.  Lenders are willing to agree to short sales, particularly  
          for homeowners facing foreclosure, because they receive current  
          market value for the property, which is often more than they  
          would receive when a property is sold through the nonjudicial  
          foreclosure process.  With a short sale, a lender avoids all of  
          the costs associated with the foreclosure process as well as the  
          risk of receiving less than market value at a foreclosure sale,  
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          as well as the costs associated with selling the property should  
          the property revert back to the lender upon foreclosure.  Short  
          sales are often a better alternative than foreclosure for  
          homeowners as well - a seller that avoids foreclosure through a  
          short sale escapes the negative credit impact that comes with  
          being foreclosed upon, and is usually able to eliminate some or  
          all of their mortgage debt.

          Since a lender must typically agree to accept the short sale  
          proceeds in lieu of the amount owed under a mortgage or in lieu  
          of going through nonjudicial foreclosure, lenders often  
          condition the acceptance of a sale offer upon certain terms and  
          conditions.  Some lenders have reportedly started requiring  
          homeowners to agree to have their property put out for bid using  
          an auction company to see if the property fetches a higher price  
          at auction before a short sale offer will be accepted - a  
          process known as validating the sale price.  According to the  
          sponsor, the California Association of Realtors, some lenders  
          impose terms that require the seller to assume liability for  
          damages attributable to the auction company during this  
          validation process as a condition of agreeing to proceed with  
          the short sale.

          This bill would restrict the ability of a lender or an auction  
          company to require, as a condition of receiving the lender's  
          approval for a short sale or other transaction, that a homeowner  
          or listing agent defend or indemnify the lender or auction  
          company from liability allegedly resulting from the actions of  
          the lender or auction company.  Recent amendments to this bill  
          would also modify the process by which real property can be  
          auctioned, including homes in the process of being sold through  
          a short sale, by prohibiting any person from bidding at an  
          auction for the sole purpose of increasing the bid on the  
          property being sold by the auctioneer.

                                CHANGES TO EXISTING LAW
           
           1.Existing law  states 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.  (Civ. Code Sec.  
            2079.23.)

             This bill  would provide that a lender or an auction company  
            retained by a lender to control aspects of a transaction of  
                                                                      



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            real property, including validating the sale price of that  
            property, shall not require, as a condition of receiving the  
            lender's approval of the transaction, 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.  This bill would declare any  
            clause, provision, covenant, or agreement purporting to impose  
            an obligation to defend or indemnify a lender or an auction  
            company in violation of this provision as against public  
            policy, void, and unenforceable.

           2.Existing law  requires every auctioneer and auction company to  
            maintain a $20,000 surety bond, as specified, and to file a  
            copy of the bond with the Secretary of State.  The bond must  
            be in favor of, and payable to, the people of the State of  
            California and shall be for the benefit of any person or  
            persons damaged by any fraud, dishonesty, misstatement,  
            misrepresentation, deceit, unlawful acts or omissions, or  
            failure to provide the services of the auctioneer or auction  
            company in performance of the auction by the auctioneer or  
            auction company or its agents, representatives, or employees  
            while acting within the scope of their employment.  Existing  
            law permits a deposit to be made in lieu of a bond, as  
            specified.  (Civ. Code Sec. 1812.600.)

             Existing law  provides that if an auctioneer or auction company  
            fails to perform any of the duties imposed under Title 2.95  
            (Auctioneer and Auction Companies), any person may maintain an  
            action for enforcement of those duties or to recover a civil  
            penalty in the amount of $1,000, or both, for enforcement and  
            recovery, and allows a prevailing plaintiff to recover  
            reasonable attorney's fees and costs.  (Civ. Code Sec.  
            1812.600(l), (m).)
          
             Existing law  requires every auction company and auctioneer to,  
            among other things: disclose their name, telephone number, and  
            bond number in all advertising; post a specified sign at the  
            main entrance to each auction; post or distribute the terms,  
            conditions, restrictions, and procedures whereby goods will be  
            sold at auction; disclose the existence and amount of any  
            liens or encumbrances immediately before offering an item for  
            sale; and return the blank check or deposit of each buyer who  
            purchased no goods at the sale.  Existing law imposes  
            specified fines for violation of the above provisions.   (Civ.  
            Code Sec. 1812.607.)

                                                                      



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             Existing law  prohibits placing or using of any misleading or  
            untruthful advertising or statements or making any substantial  
            misrepresentation in conducting auctioneering business.   
            Existing law also prohibits misrepresenting the terms,  
            conditions, restrictions, or procedures under which goods will  
            be sold at auction.  (Civ. Code Sec. 1812.608(c), (j).)

             Existing law  prohibits causing or allowing any person to bid  
            at a sale for the sole purpose of increasing the bid on any  
            item or items being sold by the auctioneer, except as  
            otherwise authorized.  Existing law provides that a violation  
            of this prohibition includes:
                 stating any increased bid greater than that offered by  
               the last highest bidder when, in fact, no person has made  
               such a bid; and
                 allowing the owner, consignor, or agent thereof, of any  
               item or items to bid on the item or items, without  
               disclosing to the audience that the owner, consignor, or  
               agent thereof has reserved the right to so bid.  (Civ. Code  
               Sec. 1812.608(h).)

             Existing law  states that if the auctioneer knowingly receives  
            a bid on the seller's behalf or the seller makes or procures  
            such a bid, and notice has not been given that liberty for  
            such bidding is reserved, the buyer may at his or her option  
            avoid the sale or take the goods at the price of the last good  
            faith bid prior to the completion of the sale.  (Com. Code  
            Sec. 2328(4).)

             Existing law  exempts the following from the definition of  
            "auction:" (a) wholesale motor vehicle auction; and (b) a sale  
            of real estate or a sale of real estate with personal property  
            or fixtures or both in a unified sale in accordance with  
            Section 9604 of the Commercial Code.  (Civ. Code Sec.  
            1812.601(b).)
             This bill  would provide that notwithstanding the above  
            exemption, for the purposes of this bill, an auction includes  
            the sale of real property and an "auctioneer" means any  
            individual who is engaged in, or who by advertising or  
            otherwise holds himself or herself out as being available to  
            engage in, the calling for, the recognition of, and the  
            acceptance of, offers for the purchase of real property at an  
            auction.

             This bill  would also provide that a person shall not cause or  
            allow a person to bid at a sale for the sole purpose of  
                                                                      



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            increasing the bid on any real property being sold by the  
            auctioneer, including but not limited to, stating any  
            increased bid greater than that offered by the last highest  
            bidder when, in fact, no person has made an increased bid.
          
                                        COMMENT
           
          1.  Stated need for the bill  
          
          The author writes:
          
            This bill addresses short sale transactions, which are sales  
            where a lender accepts less than what is owed on a property in  
            order to facilitate the sale of the property.  Lenders may  
            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 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.

            Indemnification clauses unfairly shift the burden of risk to  
            the homeowner and listing agent, who have no control over the  
            actions of the auction company.  This bill will prohibit  
            lenders and auction companies from imposing indemnification  
            clauses on homeowners and listing agents.  This places the  
            responsibility for liability with the party whose actions  
            caused the liability, thereby imposing accountability on the  
            lender and the auction company.

          2.  Public Policy on Liability Shifting  

          When the Legislature adopted California's original Civil Code on  
          March 21, 1872, it included a statutory "maxim of jurisprudence"  
          stating that laws established for public benefit "cannot be  
          contravened by private agreement."  (Civ. Code Sec. 3513.)    
          This section, in general terms, prohibits an individual from  
          entering into a contract that waives his or her protections  
          under law, so long as the laws in question are found by a court  
          to be established for public benefit.  Although the Legislature  
          has subsequently allowed parties to waive through contract  
          various rights and obligations provided by the consumer  
          protection and public benefit statutes in the Civil Code, it has  
          repeatedly conditioned that a waiver is allowed "unless such  
          waiver would be against public policy."  (Civ. Code Sec. 3268.)   
          When the Legislature repealed the Auctioneer and Auction  
                                                                      



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          Licensing Act and replaced it with the current statutory scheme  
          regulating auctioneers and auction companies, it determined that  
          liability for damages resulting from the conduct of auctioneers  
          and auction companies should rest with those entities.  (See  
          Civ. Code Sec. 1812.606 ["Every auctioneer . . . and every  
          auction company . . . shall be responsible for all violations  
          committed by the auctioneer or by any company employee in the  
          conduct of auction business."].)  Further amendments to this  
          statutory scheme added a provision declaring "any waiver of [its  
          provisions] is contrary to public policy, and is void and  
          unenforceable."  (Civ. Code Sec. 1812.609.)

          The policy rationale for disallowing parties to waive liability  
          protections established for public benefit under the law is  
          twofold: first, it disincentivizes the party seeking a waiver of  
          liability from exercising due care in the conduct of its  
          affairs; and second, it shifts liability for the acts of others  
          to a party who neither committed the harmful act nor is in the  
          best position to prevent harm from occurring in the first  
          instance.  This bill, by prohibiting mandatory liability  
          shifting as a condition of certain sales of real property, will  
          help ensure that liability for damages rests with the party  
          whose actions caused the harm and who is in the best position to  
          mitigate or avoid that harm before it occurs.  Staff notes that  
          while auctions of real property are not presently regulated by  
          the existing statutory scheme, there is no policy rationale for  
          treating this class of auctions differently with regard to  
          restricting waivers of liability.

          3.  Seller Bidding During Auctions  

          Recent amendments to this bill would additionally prohibit any  
          person, including the seller, auctioneer, or their agents, from  
          bidding at a real property auction for the sole purpose of  
          increasing the bid on a property being sold by an auctioneer.   
          According to the author, these amendments are intended to  
          address the practice of "shill bidding" - the act of bidding on  
          one's own goods or on behalf of other bidders in order to raise  
          the selling price of an item at auction.

          Auction.com, writing in opposition, argues that the scope of  
          this amendment would prohibit "counter bidding" by a seller or  
          their agent, which, "when properly disclosed, is a common,  
          globally-accepted auction practice through which a mutually  
          acceptable price consensus between a seller and a buyer is  
          developed."  Auction.com further states that "[t]he proposed  
                                                                      



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          amendment would treat real estate auctions inconsistently with  
          other types of auctions in California, the United States and  
          around the world," and "[e]liminating this practice would reduce  
          the efficacy of the auction model in general, ultimately leading  
          to lower market values for real estate and a higher rate of  
          foreclosures."

          California law does not squarely address the practice of shill  
          bidding.  Existing law does, however, implicitly authorize an  
          auctioneer to place bids on behalf of a seller in certain  
          circumstances.  Under existing law, for example, a buyer at  
          auction has the option to avoid a sale "if the auctioneer  
          knowingly receives a bid on the seller's behalf or the seller  
          makes or procures such a bid, and notice has not been given that  
          liberty for such bidding is reserved."  (Com. Code Sec.  
          2328(4).)  Similarly, it is unlawful under existing law for an  
          auctioneer to allow "the owner, consignor, or agent thereof, of  
          any item or items to bid on the item or items, without  
          disclosing to the audience that the owner, consignor, or agent  
          thereof has reserved the right to so bid."  (Civ. Code Sec.  
          1812.608(h)(2).)

          According to one scholar, the convention of permitting an  
          auctioneer, upon notice, to place bids on behalf of the seller  
          up to the confidential reserve price of an item is "widespread"  
          but "highly contentious," noting "there is a long-standing  
          debate regarding whether it is legitimate for auctioneers to  
          place bids on behalf of the vendor."  (Christian Heath, The  
          Dynamics of Auction: Social Interaction and the Sale of Fine Art  
          and Antiques (Cambridge University Press, 2013) pg. 88.)  That  
          scholar continues:

            These concerns are exacerbated by accusations that a few  
            unscrupulous auctioneers 'bid on behalf of the vendor' beyond  
            the reserve and or where there is no reserve at all in order  
            to maximize the price that goods achieve.  These bids are  
            sometimes known as 'phantom bids' or more colloquially as  
            'bids off the wall' or 'bids from the chandelier.'  [However,]  
            bids on behalf of the [vendor] provide an important resource  
            for auctioneers.  They enable auctioneers to initiate bidding  
            and to escalate the price of the lot when only one participant  
            in the room is willing to bid and indeed, in some cases, when  
            no one is willing to bid at the beginning of the sale.
            . . .
            [Bids against] the reserve enable the auctioneer to create an  
            impression of interest in a particular lot before receiving or  
                                                                      



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            attempting to elicit any bids in the room.  They enable a bid  
            or bids to be issued without delay and the auctioneer to use  
            only one bidder, and in some cases, no bidders at all, to  
            initiate the proceedings and escalate the price of the goods.   
            The way in which bids . . . against the reserve are announced,  
            revealed and, in some cases, animated is critical to giving an  
            impression of interest and demand and in encouraging others to  
            actively participate in the sale.  Indeed, it is argued that  
            the absence of . . . the opportunity to bid on behalf of the  
            vendor, for example in circumstances where there is no  
            reserve, can severely undermine the auctioneer's ability to  
            attract contributions from prospective buyers and depress  
            demand, not only for the lot in question, but subsequent lots  
            put up for sale during the auction.  (Id., pgs. 88-89.)

          This recent amendment juxtaposes several issues of high public  
          importance, including transparency in sales, market efficiency,  
          and protecting against exorbitant pricing.  The author has  
          offered to balance these competing interests by adding an  
          amendment to allow seller-behested bidding upon proper notice:

             Author's Amendment  :

            On page 2, line 14, following "bid." insert: However, an  
            auctioneer or another person may place a bid on the seller's  
            behalf during an auction of real property, provided prior  
            notice has been given that liberty for such bidding is  
            reserved, and that the person placing such a bid  
            contemporaneously discloses to all auction participants,  
            including all other bidders, that the particular bid has been  
            placed on behalf of the seller.

          Staff notes that this amendment will help increase transparency  
          in real estate auctions, giving consumers a better understanding  
          of who is bidding and whether a particular bid can constitute a  
          winning bid.


           Support  :  Orange County Association of Realtors

           Opposition  :  Auction.com

                                        HISTORY
           
           Source  :  California Association of Realtors

                                                                      



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           Related Pending Legislation  :  None Known

           Prior Legislation  :

          SB 109 (Calderon, 2009) would have removed the exception  
          provided for real estate from the definition of "auction" in  
          California's statutes regulating auctioneers and auction  
          companies (Civ. Code Sec. 1812.600 et seq.), thereby bringing  
          real property auctions within those provisions, with specified  
          exceptions.  This bill would have also required an auction  
          company and auctioneer to post or distribute to the audience a  
          description of all fees, both refundable and nonrefundable, that  
          would be levied on bidders, as well as any changes to those  
          fees.  With respect to auctions of real property, this bill  
          would have required an auction company and auctioneer to post or  
          distribute to the audience a clear explanation of the terms  
          "auctioned with reserve" and "sale subject to seller  
          confirmation, approval, or acceptance," and the procedures and  
          timelines to be used in connection with sales that are subject  
          to those requirements.  This bill was vetoed by Governor  
          Schwarzenegger because it would "impose unnecessary restrictions  
          and fees upon real estate auctioneers."

          AB 2331 (Wayne, Ch. 815, Stats. 2002) added anti-waiver  
          provisions to several consumer protection statutes, including  
          California's statutes regulating auctioneers and auction  
          companies (Civ. Code Sec. 1812.600 et seq.).

          AB 259 (Hannigan, Ch. 1170, Stats. 1993) repealed the Auctioneer  
          and Auction Licensing Act, which provided for the licensing and  
          regulation of auctioneers and auctions under the jurisdiction of  
          the California Auctioneer Commission.  This bill instead  
          required every auctioneer and auction company to maintain a  
          $20,000 surety bond with the Secretary of State, and also  
          enacted provisions related to the conduct of auctions and  
          prohibited certain acts.

           Prior Vote  :

          Assembly Floor (Ayes 74, Noes 0)
          Assembly Committee on Judiciary (Ayes 9, Noes 0)

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