BILL ANALYSIS                                                                                                                                                                                                    





                             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  








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          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  







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          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.   







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          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 . . .







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          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  







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            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  







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          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  







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          "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.

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