BILL ANALYSIS Ó
SB 474
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Date of Hearing: July 7, 2015
ASSEMBLY COMMITTEE ON JUDICIARY
Mark Stone, Chair
SB
474 (Wieckowski) - As Amended April 6, 2015
PROPOSED CONSENT (As Proposed to Be Amended)
SENATE VOTE: 38-0
SUBJECT: AUCTIONS: REAL ESTATE
KEY ISSUE: SHOULD EXISTING LAW, ENACTED LAST YEAR TO PROHIBIT
SHILL BIDDING AT REAL ESTATE AUCTIONS, BE REVISED TO CLARIFY
THAT THE PROHIBITION APPLIES TO BIDS OFFERED BY THE AUCTIONEER
DURING A REAL ESTATE AUCTION, AND NOT TO "CREDIT BIDS" OFFERED
BY CREDITORS IN A FORECLOSURE AUCTION?
SYNOPSIS
This non-controversial bill, sponsored by the California
Association of Realtors, seeks to clarify the application of a
law passed just last year, AB 2039 (Muratsuchi), Ch. 893, Stats.
2014, that restricted the practice of shill bidding in real
estate auctions. Proponents of this bill contend that the new
law created some unintended confusion for consumers and auction
participants because of the way it defined the prohibition and
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also created a statutory exception for credit bids from the
scope of the new law.
This bill effectively seeks to narrow AB 2039's prohibition on
any bids placed on behalf of sellers to cover only those bids
made by an auctioneer. Proponents contend that because the
auctioneer is never the same person as a creditor placing a
credit bid, the bill's narrower prohibition will have no impact
on credit bids made in a foreclosure auction. The California
Bankers Association supports the bill and states that 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." As a result of this
clarification, proponents assert that the existing exclusion of
credit bids is no longer necessary, and the exclusionary
language is deleted by this bill. Proposed author's amendments
to the bill merely revise the facts constituting the necessity
for the urgency clause and delete an obsolete provision
establishing an operative date of July 1, 2015. This bill
previously passed the Senate unanimously and has no known
opposition.
SUMMARY: Revises and recasts the law governing real estate
auctions to make unnecessary a statutory exception for "credit
bids" from the meaning of "shill bids," and deletes the existing
exception. Specifically, this bill:
1)Deletes existing provisions prohibiting any person from
causing or allowing a person to bid at a sale for the sole
purpose of increasing the bid on any real property being sold
by the auctioneer.
2)Provides, instead, that an auctioneer shall not state at an
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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.
3)Clarifies 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 that would
not result in a sale of the real property, if both of the
following are true:
a) 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.
b) 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.
4)Deletes existing language specifically exempting credit bids,
as described, from being subject to these provisions.
5)Contains an urgency clause to cause this bill to take effect
immediately upon being chaptered into law.
EXISTING LAW:
1)Provides 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
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offered by the last highest bidder when, in fact, no person
has made an increased bid. (Civil Code Section 1812.610(b).
All further references are to this code unless otherwise
stated.)
2)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:
a) 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
b) 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. (Id.)
3)Provides 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 the auction when the
credit bid can result in the transfer of title to property to
the creditor. (Section 1812.610(d).)
4)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 (but not including real
property), except as otherwise authorized. Further provides
that a violation of this prohibition includes:
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a) Stating any increased bid greater than that offered by
the last highest bidder when, in fact, no person has made
such a bid; and
b) 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. (Section
1812.608(h).)
FISCAL EFFECT: As currently in print this bill is keyed
non-fiscal.
COMMENTS: This non-controversial bill, sponsored by the
California Association of Realtors, seeks to clarify the
application of law passed just last year, AB 2039 (Muratsuchi),
Ch. 893, Stats. 2014, that restricted the practice of shill
bidding in real estate auctions. Proponents of this bill
contend that the new law created some unintended confusion for
some auction participants because of the way the author of AB
2039 sought to define the prohibition itself and then create a
statutory exception for credit bids from the scope of the new
law. According to the author and sponsor:
Last year, AB 2039 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
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the conduct of real estate transactions - is
eliminated.
Background on real estate auctions. A short sale describes a
type of real estate transaction where a homeowner sells his or
her 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
sellers' lender to agree to accept the proceeds from the sale as
payment in full for the outstanding 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. For example, Auctions.com (also known as
ADC), which conducts many real estate auctions through its
website, states in its Terms of Use: "Except where prohibited by
law, ADC may counter bid on behalf of Seller on any Property up
to the amount of the Reserve Price (and no such bid will result
in a sale of the Property). If the Reserve Price is not met,
Seller is under no obligation to sell the Property; however,
Seller may accept a bid that is below the Reserve Price in its
sole discretion." (See: http://www.auction.com/lp/legal/
auction-terms/)
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AB 2039 enacted last year to regulate short sale transactions.
Last year the Legislature passed AB 2039 (Muratsuchi) to
regulate short sale transactions, including measures to ensure
greater transparency in real estate auctions to protect bidders.
Among other things, the bill prohibits 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 two conditions are met. First, all auction participants
must receive advance notice that such bidding will be allowed
during the auction, and secondly, the auctioneer or other person
placing the bid must contemporaneously disclose to all auction
participants that the bid has been placed on behalf of the
seller.
After these requirements were amended into the bill in the
Senate, the California Bankers Association (CBA) raised concerns
that the bill 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 amended AB 2039 to
expressly exclude credit bids from the scope of the bill'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 clarifies that the existing prohibition on shill
bidding applies only to bids by the auctioneer, eliminating any
need to exempt credit bidding from the scope of prohibition.
This bill effectively seeks to narrow AB 2039's prohibition on
any bids placed on behalf of sellers to cover only those bids
made by an auctioneer. Proponents contend that because the
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auctioneer is never the same person as a creditor placing a
credit bid, the bill's narrower prohibition will 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." As a
result of this clarification, CBA asserts, "the exclusion for
credit bids . . . is no longer necessary."
In short, this bill simplifies the changes enacted by 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.
Proposed author's amendments: At the time this bill was
referred to this Committee, it was the author's intent to seek
to have the bill chaptered into law before July 1, 2015-the day
that AB 2039 was scheduled to take effect. Even though that
particular objective is no longer achievable, the author still
wishes to proceed with the bill as an urgency bill. Proposed
author's amendments to the bill revise the facts constituting
the necessity for the urgency clause and delete the provision
establishing an operative date of July 1, 2015. The amendments
are:
On page 3, delete line 39.
On page 4, delete lines 14 and 15, and insert "In order to
revise and eliminate, as soon as possible, certain
provisions from Civil Code Section 18612.610 that became
operative on July 1, 2015 before they potentially harm
participants in real estate auctions, it is necessary that
this act take effect immediately."
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REGISTERED SUPPORT / OPPOSITION:
Support
California Association of Realtors
California Bankers Association
Opposition
None on file
Analysis Prepared by:Anthony Lew / JUD. / (916)
319-2334
SB 474
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