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, (more) AB 2039 (Muratsuchi) Page 2 of ? 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 AB 2039 (Muratsuchi) Page 3 of ? 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.) AB 2039 (Muratsuchi) Page 4 of ? 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 AB 2039 (Muratsuchi) Page 5 of ? 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 AB 2039 (Muratsuchi) Page 6 of ? 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 AB 2039 (Muratsuchi) Page 7 of ? 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 AB 2039 (Muratsuchi) Page 8 of ? 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 AB 2039 (Muratsuchi) Page 9 of ? 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) ************** AB 2039 (Muratsuchi) Page 10 of ?