BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Hannah-Beth Jackson, Chair
2015 - 2016 Regular Session
SB 474 (Wieckowski)
Version: April 6, 2015
Hearing Date: May 5, 2015
Fiscal: Yes
Urgency: Yes
TH
SUBJECT
Auctions
DESCRIPTION
Existing law provides that an auctioneer in an auction for real
property is prohibited from announcing or allowing a bid offered
for the sole purpose of increasing the bid amount unless two
conditions are met: (1) all auction participants receive advance
notice that such bidding will be allowed during an auction; and
(2) the auctioneer or other person placing the bid
contemporaneously discloses to all auction participants that the
bid has been placed on behalf of the seller. Existing law
exempts credit bids made by creditors who hold a deed of trust,
mortgage, or other lien on the property when the credit bid may
result in the transfer of title to the creditor.
This bill eliminates the creditor bid exemption and re-casts the
existing prohibition on announcing or allowing a bid offered for
the sole purpose of increasing the bid amount to, instead, apply
only to increased bids offered by the 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
SB 474 (Wieckowski)
Page 2 of ?
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, the risk of
receiving less than market value at a foreclosure sale, 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 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. In some of these auctions, the
auctioneer will "counter-bid" or place bids on behalf of the
seller when the highest bid fails to meet an auction's set
reserve price, which is the minimum selling price set by the
seller of a property prior to the auction. One such company --
Auctions.com -- states on its auction Web sites for certain
properties that "[u]ntil the seller's reserve price is met,
Auction.com may counter bid on behalf of the seller. . . Counter
bids do not occur after the seller's reserve price is met."
(See
[as of
Apr. 30, 2015].)
Last year, the Legislature passed AB 2039 (Muratsuchi, Ch. 893,
Stats. 2014) which prohibited any person, including the seller,
auctioneer, or their agents, from bidding at a real property
auction for the sole purpose of increasing the bid, unless all
auction participants receive advance notice that such bidding
will be allowed during the auction, and the auctioneer or other
person placing the bid contemporaneously discloses to all
auction participants that the bid has been placed on behalf of
SB 474 (Wieckowski)
Page 3 of ?
the seller. That bill provided an exception to the above
prohibition for credit bids made by a creditor holding a deed of
trust, mortgage, or other lien on the property when the credit
bid could result in the transfer of title to property to the
creditor.
This bill simplifies the changes enacted through AB 2039 by
eliminating the creditor bid exemption and re-casting the
prohibition on placing a bid on behalf of the seller to apply
only to bids offered by an auctioneer.
CHANGES TO EXISTING LAW
Existing law states that a person shall not cause or allow a
person to bid at a sale for the sole purpose 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. (Civ. Code Sec. 1812.610(b).)
Existing law provides that, notwithstanding the above
prohibition, an auctioneer or another authorized person may
place a bid on the seller's behalf during an auction of real
property, if both of the following are true:
notice is given to all auction participants, including all
other bidders, that liberty for that type of bidding is
reserved and that type of bid will not result in the sale of
the real property; and
the person placing that type of bid contemporaneously
discloses to all auction participants, including all other
bidders, that the particular bid has been placed on behalf of
the seller. (Civ. Code Sec. 1812.610(b).)
Existing law states that the prohibition on placing auction bids
on behalf of the seller shall not apply to credit bids made by
creditors holding a deed of trust, mortgage, or other lien on
the property that is the subject of auction when the credit bid
can result in the transfer of title to property to the creditor.
(Civ. Code Sec. 1812.610(d).)
This bill would strike the existing prohibition on placing
auction bids on behalf of the seller and provide, instead, that
an auctioneer shall not state at an auction that an increased
bid greater than that offered by the last highest bidder has
been made when, in fact, no person has made an increased bid.
SB 474 (Wieckowski)
Page 4 of ?
This bill would additionally strike the existing exemption for
credit bids.
This bill would provide that, notwithstanding the foregoing, an
auctioneer or another authorized person may place a bid on the
seller's behalf during an auction of real property that would
not result in a sale of the real property, if both of the
following are true:
notice is given to all auction participants, including all
other bidders, that liberty for that type of bidding is
reserved and that type of bid will not result in the sale of
the real property; and
the person placing that type of bid contemporaneously
discloses to all auction participants, including all other
bidders, that the particular bid has been placed on behalf of
the seller.
COMMENT
1.Stated need for the bill
The author writes:
Previous legislation, specifically AB 2039 (Mursatsuchi,
Chapter 893, [Statutes of] 2014), has updated regulations on
the aspects of real estate 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.
. . . AB 2039 [intended] to ensure transparency in real estate
auctions, giving consumers a better understanding of who is
bidding and whether a particular bid can constitute a winning
bid. . . . During the stakeholder process of AB 2039, the
banking industry voiced concern [that this bill would
unintentionally impact] the activities of foreclosure and
auction sales of real estate properties.
. . .
SB 474 will recast [these] regulations in . . . relation to
activities of auctioneers and auction companies.
Specifically, this bill will [r]ecast the reference to an
"auctioneer" in relation to auctions under civil code section
1812.610 (a) [and] (b) for purposes of ensuring clarity in its
interpretation [and] remove the reference to the exception of
credit bids . . .
SB 474 (Wieckowski)
Page 5 of ?
According to the California Association of Realtors:
Last year, AB 2039 (Chapter 893, Statutes of 2014) brought
real estate auctions under the state's auction law. That law,
beginning July 1, 2015, now governs the submittal of a "shill
bid" (i.e., a bid intended to increase the bidding above the
last legitimate bid). In order that a "credit bid" (i.e., a
bid submitted by a mortgage note holder at a foreclosure sale)
not be confused with a "shill bid," an exception was made for
"credit bids" in the real estate auction statute. SB 474 will
recast the statute governing real estate auctions so that the
exception for "credit bids" - which are unrelated to the
conduct of real estate transactions - is eliminated.
2.Seller Bidding During Auctions
This bill impacts the controversial practice of placing bids on
behalf of a seller during an auction. 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
attempting to elicit any bids in the room. They enable a bid
or bids to be issued without delay and the auctioneer to use
SB 474 (Wieckowski)
Page 6 of ?
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.)
Bidding on behalf of the seller in an auction juxtaposes several
issues of high public importance, including transparency in
sales, market efficiency, and protecting against exorbitant
pricing. AB 2039 (Muratsuchi, Ch. 893, Stats. 2014) sought to
balance these competing interests by prohibiting this form of
bidding unless auction participants were given prior notice that
bidding of this type would be allowed and a bidder who places a
bid on behalf of the seller contemporaneously discloses that
fact to all participants when placing the bid.
3.Prohibition Narrowed to Auctioneers
While AB 2039 (Muratsuchi, Ch. 893, Stats. 2014) was working
through the legislative process, the California Bankers
Association (CBA) raised concerns that it may impact the
existing practice of creditors who offer credit bids on property
during a foreclosure auction. Unlike a bid placed on behalf of
the seller, a credit bid offered in a foreclosure auction can
result in the transfer of title to property since the bid is
backed by an interest in the property, such as a lien, mortgage,
or deed of trust. In response to CBA's concerns, the author
added express exclusionary language concerning credit bids to
exclude these bids from the scope of AB 2039's general
prohibition on bids placed on behalf of sellers. According to
CBA, this exclusionary language "was offered instead of refining
and clarifying the . . . underlying restrictions on auctioneer
practices."
This bill would now seek to take the alternate approach by
narrowing AB 2039's prohibition on bids placed on behalf of
sellers to cover only those bids made by an auctioneer. Since
the auctioneer is never the same person as a creditor placing a
SB 474 (Wieckowski)
Page 7 of ?
credit bid, this bill's narrower prohibition would have no
impact on credit bids made in a foreclosure auction. According
to CBA, the changes in this bill provide "clarity to the
confusing opening provision found in [existing law] and, as
amended, appropriately [focus] on the actions of the auctioneer,
making it clear that the auctioneer is prohibited from stating
an increased bid during an auction when one does not exist."
Under the new narrower prohibition offered in this bill, "the
exclusion for credit bids . . . is no longer necessary."
Support : California Bankers Association
Opposition : None Known
HISTORY
Source : California Association of Realtors
Related Pending Legislation : None Known
Prior Legislation :
AB 2039 (Muratsuchi, Ch. 893, Stats. 2014) rendered 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 also prohibited 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
property being sold by an auctioneer, except as provided.
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
SB 474 (Wieckowski)
Page 8 of ?
"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.
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.
**************