BILL ANALYSIS                                                                                                                                                                                                    



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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













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