BILL ANALYSIS
AB 1356
Page 1
Date of Hearing: January 15, 2008
ASSEMBLY COMMITTEE ON JUDICIARY
Dave Jones, Chair
AB 1356 (Houston) - As Amended: January 7, 2008
SUBJECT : Real Property: Equity Purchasers
KEY ISSUE : Should the licensed representative of an "Equity
Purchaser" have the option of MEETing FINANCIAL responsibility
requirements by either surety bond or professional liability
coverage?
SYNOPSIS
Existing law requires a representative of an "equity purchaser"
(i.e. one who buys properties facing foreclosure) to possess a
current valid California real estate license and have a surety
bond in an amount at least twice the fair market value of the
subject property. In addition, existing law requires the
representative to provide to all parties to the contract written
proof, including a statement signed under penalty of perjury,
that the representative is in fact licensed and has the
requisite bond. The sponsor of this bill, the California
Association of Realtors, claims that legitimate real estate
agents cannot obtain surety bonds for equity purchases because
such bonds are generally not available in this state. This
bill, therefore, would permit the representative to demonstrate
financial responsibility by either having a surety bond or by
(1) obtaining professional liability insurance in an amount
equal to twice the fair market value of the subject property or
for $1 million, whichever is less, and (2) by having an
"unrestricted" real estate license. The sponsor presumes that
most licensed realtors will opt for the liability coverage
option since surety bonds are reportedly either not available or
only available at impractical rates. The bill is unopposed in
its current form. The analysis alerts the author and Committee
to a recent court opinion holding that the existing surety bond
provision is unenforceable due to vagueness.
SUMMARY : Permits a licensed representative of an "equity
purchaser" to demonstrate financial responsibility by either
surety bond or professional liability coverage. Specifically,
this bill :
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1)Requires the representative of an equity purchaser to provide
written proof to the parties to the contract that he or she
has an unrestricted California Real Estate License and meets
certain financial responsibility requirements, as described
below.
2)Provides that the representative of an equity purchaser shall
demonstrate financial responsibility by providing written
proof (and a statement verifying the same that is signed under
penalty of perjury) that he or she has either of the
following: (a) professional liability coverage in an amount
equal to at least twice the value of the subject property or
$1 million, whichever is less, and an unrestricted real estate
license; or (b) a surety bond in an amount equal to at least
twice the value of the subject property.
EXISTING LAW :
1)Provides generally, under the Home Equity Sales Contract Act,
various measures designed to protect homeowners facing
foreclosure from certain unscrupulous individuals who attempt
to acquire title to such homes by means of fraud, deceit,
misrepresentation, or other forms of unfair dealing. (Civil
Code Section 1695 et seq.)
2)Defines an "equity purchaser" as any person who acquires title
to any residence in foreclosure, unless that person is
acquiring the property as a personal residence or under other
specified conditions. (Civil Code Section 1695.1.)
3)Defines the "representative" of an equity purchaser as any
person who in any manner solicits, induces, or causes any
property owner to transfer title or solicits any member of the
property owner's family or household to induce or cause any
property owner to transfer title to the residence in
foreclosure to the equity purchaser. (Civil Code Section
1695.1.)
4)Requires the representative of an equity purchaser to provide
to the parties of the contract written proof, including a
statement under penalty of perjury that he or she has a valid
current California real estate license and is bonded in an
amount equal to twice the fair market value of the real
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property that is subject to the contract. (Civil Code Section
1695.17(a).)
5)Provides that failure to comply with the above requirements
shall, at the option of the equity seller, render the equity
purchase contract void and the equity purchaser shall be
liable to the equity seller for all damages proximately caused
by the failure to comply. (Civil Code Section 1695.17(b).)
6)Provides that an equity purchaser is liable for all damages
resulting from any statement made or act committed by the
equity purchaser's representative in any manner connected with
the equity purchaser's acquisition of a residence in
foreclosure or receipt of any consideration or property from
or on behalf of the equity seller. (Civil Code Section
1695.15.)
FISCAL EFFECT : As currently in print this bill is keyed
fiscal.
COMMENTS : In 1979 the California Legislature enacted the Home
Equity Sales Contracts Act in order to protect homeowners faced
with foreclosure from unscrupulous individuals who, by means of
fraud or deceit, try to induce owners to sell their homes for a
fraction of the market value and often cause the owners to lose
whatever equity they have built up in their homes. (See e.g.
Boquilon v. Beckwith 49 Cal. App. 4th 1697; see also findings
and declarations in Civil Code Section 1695.) Because the
so-called "equity purchaser" who buys property under threat of
foreclosure often uses an agent or representative, the law was
amended in 1990 (AB 2641, c.1737, Stats. of 1990) to require any
representative of an equity purchaser to provide all parties to
the contract written proof that he or she has a valid California
real estate license and is bonded in an amount twice the fair
market value of the subject property. In addition, the 1990
amendment made the equity purchaser liable for all damages
caused by the purchaser's "representative." (Civil Code Section
1695.15; see also Analysis of AB 2641, Assembly Judiciary
Committee, August 15, 1990.)
This bill would allow the representative another option for
meeting the financial security requirements. In addition to
meeting this requirement by surety bond, the representative
under this bill could alternatively meet the requirement by
providing proof of professional liability coverage equal to
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twice the property value or $1million, whichever is less. In
addition, if the representative meets the financial
responsibility requirement through liability coverage, as
opposed to a surety bond, then he or she must possess an
"unrestricted" real estate license pursuant to regulations
promulgated by the Real Estate Commissioner and the Real Estate
Recovery Program. (If the requirement is met by a surety bond,
then the representative, under existing law and under this bill,
need only have a valid California real estate license, without
necessarily meeting the additional requirement of being
"unrestricted." Pursuant to Business & Professions Code
Sections 10156.5 through 10156.7, the Real Estate Commissioner
may issue restricted licenses for various reasons - for example,
where the agent has violated some provision of the law or has
only partially met general licensing requirements.)
ARGUMENTS IN SUPPORT : According to the sponsor, the California
Association of Realtors (CAR), this bill is needed because
surety bonds are not available in California. According to CAR,
this means that "legitimate" real estate agents cannot bring
offers from legitimate equity purchasers because they cannot
possibly comply with existing law due to the lack of available
surety bonds. CAR claims that this bill helps home owners under
threat of foreclosure by giving them "the broadest possible pool
of potential buyers for their properties." According to CAR,
the home owner has a much better chance of preserving the
remaining equity in his or her home by selling it prior to the
foreclosure sale. Not only may the foreclosure sale bring a
lower price, it leaves the owner with no control over
determining that price.
Because existing law only requires the representative of the
equity purchaser to meet the financial responsibility
obligations, CAR maintains that the bill mainly affects real
estate agents who make offers on property on behalf of a
third-party purchaser. If legitimate real estate agents with
unrestricted licenses and professional liability coverage do not
perform this service, CAR reasons, then the homeowner is more
likely to become the victim of less responsible individuals who
prey upon persons facing foreclosures. CAR believes that
professional liability insurance is an adequate substitute for
the existing surety bond requirement, especially in light of the
additional requirement that a representative that chooses the
coverage options must also have an unrestricted real estate
license.
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Implications of Schweitzer v. Westminster Investments : On
December 13, 2007, after the current version of the bill had
been drafted and submitted for printing, the Fourth District of
the California Court of Appeal ruled that the surety bond
provisions of Civil Code Section 1695.17 are void and
unenforceable due to vagueness. (Schweitzer v. Westminster
Investments, 2007 Cal App. LEXIS 2018.)
The court noted a number of ambiguities, but stressed in
particular questions about the required amount of the bond. The
existing provision requires that the bond be "equal to twice the
fair market value of the real property that is the subject of
the contract." The court noted that this language did not
clearly specify whether the bonding requirement applies to each
transaction or if it requires that the representative be so
bonded only as a "blanket" amount. The appellate court
concluded that the statute lends itself to two plausible and
contrary interpretations, and held therefore that the
requirement was void and unenforceable for vagueness. (Id. at
18-23, 30.)
Possible Future Author's Amendment : It is not entirely clear
how the court's ruling affects this proposed bill. On the one
hand, the court specified that while the bond requirement could
not be enforced, the bonding requirement was severable from the
remainder of the statute. (Id. at 30-31.) On the other hand,
the proposed liability coverage alternative similarly requires
"an amount equal to at least twice the value of the property
that is subject to the contract, or one million dollars
($1,000,000), whichever is less." Would the court read this as
requiring a separate policy for each transaction? The
Committee may wish to recommend to the author that the language
relating to the liability coverage be clarified so as to leave
no question as to whether the coverage amount is a blanket
requirement, or if the specified level of coverage is required
for each transaction. Otherwise, the liability coverage
provision could meet the same fate as the surety bond provision.
In addition to the amount, the court also noted other sources
of ambiguity, including the intended obligee and beneficiary and
unidentified delivery and posting requirements. (Id. at 23-30.)
In another way, the Westminster Investments case may offer two
points of support for this bill. First, if it is true that the
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surety bond provision is no longer enforceable, then it may be
all the more important to provide an alternative means of
demonstrating financial responsibility - which, according to
CAR, the liability coverage accomplishes. Second, in a
footnote, the court appears to support CAR's basic contention
that no surety carriers were willing to issue such bonds. The
court noted, from evidence submitted to the lower court, that
the vice president of a surety company stated that he would
"consider" issuing bonds that would meet the requirements of
Section 1695.17. But he added, however, that his company had
never issued such a bond since, as a practical matter, it would
only do so if the principal on the bond "posted cash collateral
equal to the penalty amount of the bond." (Id. at 17, fn. 5.)
Given the lateness of the court's ruling it may be unfair at
this time to ask the author to amend the language of the
liability coverage requirement so that it does not suffer the
same fate as the surety bond provision. But the Committee may
wish to seek assurances from the author that, as this bill moves
forward, any potential vagueness issues will be addressed in
response to the court's concerns.
REGISTERED SUPPORT / OPPOSITION :
Support
California Association of Realtors (sponsor)
Conference of Delegates of California Bar Associations
Opposition
None on file
Analysis Prepared by : Thomas Clark / JUD. / (916) 319-2334