BILL ANALYSIS
SB 109
Page 1
Date of Hearing: June 23, 2009
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
SB 109 (Calderon) - As Amended: June 8, 2009
SENATE VOTE : 24-13
SUBJECT : AUCTIONEERS: REAL ESTATE
KEY ISSUE : SHOULD SPECIFIED TYPES OF REAL PROPERTY AUCTIONS NO
LONGER BE EXEMPTED FROM EXISTING REQUIREMENTS THAT GOVERN THE
CONDUCT OF AUCTION COMPANIES AND AUCTIONEERS, AND SHOULD
ADDITIONAL REQUIREMENTS BE ENACTED, IN ORDER TO PROTECT
CONSUMERS BIDDING AT AUCTIONS OF BANK-OWNED PROPERTIES?
FISCAL EFFECT : As currently in print this bill is keyed fiscal.
SYNOPSIS
This modest consumer protection bill seeks to require auction
companies and auctioneers, for the first time, to follow many
existing regulations of auction procedures when they conduct
auctions of certain types of real property. The bill revises
the definition of "auction" to remove an exemption under
existing law that previously excused auction companies and
auctioneers from following certain procedural requirements for
auctions of real property. The bill will not affect existing
procedures that apply to auctions held pursuant to judicial or
non-judicial foreclosure proceedings. Instead, the primary
impact of the bill, as intended, is regulation of
(1) auctions of bank-owned properties subsequent to any
foreclosure proceedings, and (2) short-sale auctions by private
owners of properties at risk of foreclosure. In addition, this
bill revises certain notification and disclosure requirements
that benefit potential bidders attending these auctions. This
bill also adds new requirements for the timely return of
deposits and fees to bidders, as specified, participating in
certain "reserve" auctions of real property subject to seller
approval of the high bid amount. This bill is sponsored by the
author and has received no registered support or opposition.
SUMMARY : Revises the definition of "auction" to incorporate
specified types of real estate auctions into those auctions
subject to existing regulations of auction companies, revises
SB 109
Page 2
applicable notification and disclosure requirements, and
requires the return of deposits and fees to bidders within
certain timeframes, as specified. Specifically, this bill :
1)Exempts from the definition of "auction" the following types
of sales of real property:
a) A sale of real property pursuant to a nonjudicial
foreclosure governed by Article 1 (commencing with Section
2920) of Chapter 2 of Title 14 of Part 4 of the Civil Code.
b) A sale of real property under a judicial foreclosure
ordered under a money judgment, pursuant to Article 6 of
Chapter 3 of Division 2 of Title 9 of Part 2 of the Code of
Civil Procedure.
c) A unified sale of real property and personal property or
fixtures, conducted pursuant to Section 9604 of the
Commercial Code, if an obligation secured by a security
interest in personal property or fixtures is also secured
by an interest or an estate in real property.
2)Incorporates real property into the existing definition of
"goods" with respect to regulation of such "goods" sold at an
auction.
3)Provides that, in the case of an auction conducted through
electronic media, the auctioneer may satisfy the usual
requirement of posting a sign stating that the auction is
conducted in compliance with state law by requiring potential
bidders to acknowledge electronically that the auction is
conducted in compliance with state law before they are allowed
to bid.
4)Requires auction companies and auctioneers to post or
distribute to the audience at the auction a description of all
fees, both refundable and nonrefundable, that will be levied
as a condition of bidding, and requires them to announce any
changes to those fees prior to the beginning of the auction.
5)Requires auction companies and auctioneers, when auctioning
real property with a reserve price, to post or distribute to
the audience a clear explanation of the terms "auctioned with
reserve" and "sale subject to seller confirmation, approval,
or acceptance," and the procedures and timelines used in
SB 109
Page 3
connection with sales subject to these requirements.
6)Requires auction companies and auctioneers, after an auction
sale of real property sold subject to seller confirmation,
approval or acceptance, to return all deposits and fees
collected from the bidder in connection with the auction,
either:
a) within five days after the high bidder's offer is
rejected by the seller; or
b) within 15 days after the high bidder's offer is made and
the seller fails to respond to the offer.
7)Requires auction companies and auctioneers, after an auction
sale of real property sold subject to beneficiary or mortgagee
confirmation, approval or acceptance, if the property is
proposed to be sold for less than the full amount owed the
beneficiary or mortgagee (i.e. a "short sale" by the private
homeowner), to return all deposits and fees collected from the
bidder in connection with the auction, either:
a) within five working days after the high bidder's offer
is rejected by the beneficiary; or
b) within five working days after a request by the high
bidder, if the beneficiary or mortgagee fails to respond to
the offer and more than 15 working days have passed since
the date of the auction.
8)Provides that auction companies or auctioneers may satisfy the
requirements to return all deposits and fees collected from
the bidder, as specified in the two scenarios above, by
depositing instructions with the escrow agent that direct the
agent to return all funds deposited by the bidder with that
agent. Authorizes the auction company to act as the agent of
the seller, beneficiary, or mortgagee, as applicable, for this
purpose.
EXISTING LAW :
1)Exempts wholesale motor vehicle auctions and the sale of real
estate or a sale of real estate with personal property or
fixtures or both in a unified sale, as specified, from the
definition of "auction." (Civil Code Section 1812.601(b).)
SB 109
Page 4
2)Requires every auctioneer and auction company to maintain a
$20,000 surety bond, as specified, and to file a copy of the
bond with the Secretary of State. The bond shall be for the
benefit of any person or persons damaged by any fraud,
dishonesty, or other harmful conduct in performance of the
auction by the auctioneer or auction company or its agents,
representatives, or employees while acting within the scope of
their employment. Existing law permits a deposit to be made
in lieu of a bond, as specified. (Civil Code Section
1812.600.)
3)Requires that each auctioneer and auction company, in
conducting the business of auctioneering, to do all of the
following:
a) Follow all lawful requests of the owner or consignor of
the goods being sold at auction with regard to the sale of
the goods;
b) Perform his or her duties so that the highest or most
favorable offer made by a member of the audience is
accepted, except to the extent that any item or sale is
offered with reserve or subject to confirmation by the
seller;
c) Truthfully represent the goods to be auctioned;
d) Otherwise perform his or her duties in accordance with
state law. (Civil Code Section 1812.605.)
4)Requires each auctioneer and auction company to, among other
things, do the following:
a) Disclose their name, telephone number, and bond number
in all advertising;
b) Post a specified sign at the main entrance to each
auction stating that the auction will be conducted in
compliance with relevant state law;
c) Post or distribute the terms, conditions, restrictions,
and procedures whereby goods will be sold at the auction,
and announce any changes to those prior to the beginning of
the auction sale.
d) Disclose the existence and amount of any liens or
encumbrances; and return the blank check or deposit of each
buyer who purchased no goods at the sale. Existing law
imposes specified fines for violation of the above
provisions. (Civil Code Section 1812.607.)
SB 109
Page 5
5)Specifies the rules for bidding, retracting a bid, and
withdrawing goods, in auctions both with and without a reserve
price, that auctioneers and bidders must follow during the
bidding process and prior to the completion of the sale.
(Commercial Code Section 2328.)
6)Provides that if an auctioneer or auction company fails to
perform any of the duties imposed under Title 2.96 (Auctioneer
and Auction Companies), any person may maintain an action for
enforcement of those duties or to recover a civil penalty in
the amount of $1,000, or both, for enforcement and recovery,
and allows a prevailing plaintiff to recover reasonable
attorney's fees and costs. (Civil Code Section 1812.600(l) &
(m).)
7)Provides that a person who obtains any money or property from
another or obtains the signature of another to any written
instrument, the false making of which would be forgery, by
means of any false or fraudulent sale of property or pretended
property, by auction, or by any of the practices known as mock
auctions, is punishable by imprisonment in the state prison,
or in the county jail not exceeding one year, or by fine not
exceeding two thousand dollars ($2,000), or by both such fine
and imprisonment, and, in addition, is disqualified for a
period of three years from acting as an auctioneer in this
state. (Penal Code Section 535.)
COMMENTS : This modest consumer protection bill seeks to require
auction companies and auctioneers, for the first time, to follow
many existing regulations of auction procedures when they
conduct auctions of certain types of real property. The bill
revises the definition of "auction" to remove an exemption under
existing law that previously excused auction companies and
auctioneers from following certain procedural requirements for
auctions of real property. In addition, this bill revises
certain notification and disclosure requirements, and adds new
requirements for the timely return of deposits and fees to
bidders, as specified, participating in certain auctions of real
property.
Author's statement : According to the author, the present lack
of regulation over large auctions of bank-owned properties and
other real estate is an area needing greater consumer
protections in law. In support of the bill, the author writes:
SB 109
Page 6
California has a law intended to establish rules for
auctioneers who auction most other types of property,
but sales of real estate are explicitly exempted from
existing law requirements. As a result, there are no
laws that protect consumers who bid at these auctions.
Frustrated bidders have reported "winning" the
auction of property, only to be informed after the
auction that their bid did not meet the bank's reserve
[price], and for that reason, they may not purchase
the property for the amount of the winning bid. Other
bidders have reported having trouble obtaining refunds
of refundable deposits they placed with auction
companies, even after complying with the companies'
rules for claiming these refunds.
SB 109 will plug the holes in existing law with the
aim of protecting Californians who bid on real estate
during real property auctions, such as those that have
become popular among banks to dispose of foreclosed
homes.
The Reason for the Exemption for Real Estate Auctions is Unclear
From Available Legislative History . Existing rules governing
auction companies and auctioneers have been part of the Civil
Code since 1993, when AB 259 (Hannigan), Chapter 1170 of the
1993 Statutes, became law. That statute specifically exempted
auctions of real property from those auctions subject to the new
regulations, an exemption that remains to this day. The
available legislative history of AB 259 reveals that the real
estate exemption was a late amendment to the bill, but does not
state any reason why the exemption was thought desirable or
necessary.
According to several people interviewed by the Committee
familiar with the 1993 legislation, it is likely that the
exemption was intended to simplify the credentials a person
needed to auction real property under then-existing law. Prior
to 1993, an auctioneer's license was required of a person to
legally conduct an auction, and a real estate license was
required of any person who "for compensation . . . sells or
offers to sell (or) solicits prospective sellers or purchasers
of . . . real property." (Business & Professions Code Section
10131.) Therefore, a person arguably needed to possess both
licenses to legally conduct an auction of real estate. By
SB 109
Page 7
divorcing real estate auctions from the emerging new
requirements of auctioneers (which eventually replaced the
previous state licensing scheme), lawmakers may have intended to
allow a person to conduct auctions of real estate without having
to follow competing sets of regulations for the credentialing of
real estate brokers and auctioneers.
This bill would, as previously stated, eliminate the general
exemption for real property auctions that has been in place
since 1993, but maintain some exemptions from auction law for
specified vehicles and real property auctions.
The Primary Impact of the Bill, As Intended, is Regulation of
Auctions of Bank-Owned Properties Subsequent to Any Foreclosure
Proceedings . In order to understand the scope of the real
estate auctions that will be brought within existing auction
regulations by this bill, it is helpful to know some background
information about the sale of real estate as it relates to the
home foreclosure process.
(A) Judicial Foreclosure . In a judicial foreclosure, the lender
will commence a civil action to foreclose the mortgage or deed
of trust securing the loan that the borrower failed to repay.
If the court orders the sale of real property pursuant to
judicial foreclosure to satisfy a money judgment, then the sale
must comply with specific procedural requirements set forth in
the Code of Civil Procedure (commencing with Section 701.540.)
Because judicial foreclosure is a legal action, banks and
lenders typically opt for the alternative process-non judicial
foreclosure-presumably to avoid the costs of litigation.
( B) Non-Judicial Foreclosure . Non-judicial foreclosure
(sometimes referred to as a "private trustee's sale") is the
preferred method used by lenders in California to exercise the
remedy of foreclosure when the loan is not repaid by the
borrower according to the terms of a mortgage agreement. The
procedural requirements for non-judicial foreclosure are set
forth in Civil Code Sections 2924 to 2924h.
Ordinarily, the borrower will execute a deed of trust in favor
of the lender which makes the real property the security for the
loan and names someone to act as trustee. The function of this
trustee under a deed of trust is either to initiate foreclosure
at the lender's direction in the event of a breach, or to
reconvey the trust deed once the obligation has been satisfied
SB 109
Page 8
in full. The trustee initiates the foreclosure process by
preparing, executing, and recording the Notice of Default. For
the next three months, there is a redemption period in which the
borrower may attempt to cure the default. If the borrower is
unsuccessful, then a Notice of Sale is recorded and the process
culminates in a trustee's sale where the property is sold to the
highest bidder.
The auctioneer conducts this sale as instructed by the trustee
and reports the results back to the trustee. The trustee will
notify the beneficiary and prepare the Trustee's Deed, which
will vest title into the name of the successful bidder. If
there are no bids for the property which exceed the opening bid,
the property reverts to the beneficiary (in this case, the bank
or lender) who will then take title to the property under the
Trustee's Deed. Because there is no statutory right of
redemption following a non-judicial foreclosure under California
law, at this point the property officially becomes "bank-owned."
Press accounts indicate that in California there are an
estimated 80,000 bank-owned properties that those lenders may
wish to list for sale or auction off at a later time, depending
on market conditions. (See "Banks Aren't Reselling Many
Foreclosed Homes," San Francisco Chronicle, April 8, 2009.)
It is important to note that this bill specifically exempts the
sale of real property pursuant to judicial foreclosure as well
as the private trustee's sale (non-judicial foreclosure)
described above from the definition of "auction" for the purpose
of regulating the conduct of auctioneers and auction companies.
It is the subsequent auction sales of bank-owned properties,
which are most often obtained through completion of the
foreclosure process, that this bill seeks to regulate for the
protection of consumers who may be bidding at these auctions.
(C) Short-Sale Auctions by Private Homeowners . Under this bill,
the auction regulations would also apply to a so-called
"short-sale" auction by a private homeowner of his or her
property at risk of entering foreclosure. In order to avoid
defaulting on a loan subject to a mortgage on real property, the
private owner may elect to hold a short-sale auction of the
property in which he or she desires to raise as much money as
possible for the benefit of the mortgagee (generally, the
lending bank) in satisfaction of the loan. In this situation,
the auction sale of the property typically is subject to the
SB 109
Page 9
confirmation or approval of the beneficiary or mortgagee. For
example, if the total debt is $100,000 and a short-sale auction
yields a high bid of $95,000, the bank/mortgagee may decide to
approve the sale and accept the $95,000 amount, even though the
proposed sale is less than the full amount owed by the private
owner.
The author has recently made technical amendments to the bill to
reflect the difference between an auction of a bank-owned
property obtained through foreclosure, and a short-sale auction
of a privately owned property that has not yet entered but is at
risk of foreclosure. In the former example, the bank is
referred to as the "seller." In the latter example, the bank is
more properly referred to as the "beneficiary or mortgagee."
These amendments, as will be described later, relate to the
return of the high bidder's deposited funds in both types of
auctions when the seller or mortgagee declines to accept the
high bid because it is less than the auction reserve price.
Finally, the bill preserves the existing exemptions for
wholesale motor vehicle auctions, which are regulated by the
Department of Motor Vehicles, and so-called "unified sales" of
real property and personal property or fixtures, which are
regulated by Section 9604 of the Commercial Code.
The Bill Applies Existing Consumer Protection Measures to
Auctions of Real Property. By removing the general exemption of
real estate auctions under auction law, auctioneers and auction
companies will now have to comply with existing surety bond,
notification, and other procedural requirements when they
conduct auctions of specified real property. To ensure that
aggrieved consumers will be able to recover some amount for
injuries resulting from misconduct in a real estate auction,
this bill will require auction companies to post a $20,000
surety bond when they auction real estate, as they already must
when they auction other kinds of property. To ensure that
consumers are informed about the rules of the auction before
they participate, this bill will require auction companies to
post or distribute to the audience the terms, conditions,
restrictions, and procedures whereby goods will be sold at the
auction, and require the announcement of any changes to those
terms, conditions, and procedures before the auction.
In addition, under the revised auction law, auction companies
will also be liable for existing penalties for violation of
SB 109
Page 10
specific requirements, and any person may bring a civil action
to enforce the companies' statutory responsibilities. This
private right of action includes reasonable attorney's fees and
costs for the prevailing plaintiff.
The Bill Adds New Consumer Protection Measures to the Auction
Law. To ensure that consumers know how their funds will be
handled by the auctioneer or auction company, this bill would
also require a description of all fees, both refundable and
nonrefundable, that will be levied as a condition of bidding, to
be included in the posting, distribution, and announcement
requirements that apply to auctions of all property, not just
real property.
In addition, the bill would add two new requirements that apply
only to auctions of real property. These requirements are
prudent because auctions of real property, unlike typical
auctions of less valuable or less unique property, are almost
always conducted with the extra condition of a seller's
"reserve" price in effect. "Reserve" refers to the unpublished
minimum amount set by the seller that, if not satisfied or
exceeded by the high bid amount, enables the seller to refuse to
consummate the transaction with the high bidder. In this case,
the sale is said to be "subject to seller confirmation,
approval, or acceptance."
As previously noted, the author reports that "[f]rustrated
bidders have reported 'winning' the auction on a property, only
to be informed after the auction that their bid did not meet the
bank's reserve, and that, for that reason, they may not purchase
the property for the amount of their winning bid." To address
this concern, the bill would require, for auctions of real
property with reserve, the posting or distribution of a clear
explanation of the terms "auctioned with reserve" and "sale
subject to seller confirmation, approval, or acceptance," and
the procedures and timelines to be used in connection with sales
subject to those requirements. The requirement is intended to
ensure that borrowers do understand those terms and the
procedures and timelines that will be used in connection with
sales that are not immediately finalized because they are
subject to seller approval.
The author has also reported accounts of bidders "having trouble
obtaining refunds of refundable deposits they placed with
auction companies, even after complying with the companies'
SB 109
Page 11
rules for claiming these refunds." To address this concern,
this bill would require, after an auction sale of real property
sold subject to seller confirmation, approval, or acceptance,
the return of all deposits and fees collected from the bidder in
connection with the auction within five working days after the
high bidder's offer is rejected, or within other specified time
periods as applicable. The requirement is intended to ensure
the timely return of the bidder's funds when the seller of the
property has exercised his right to not go through with the sale
because the high bid did not meet the predetermined reserve
price.
Recent Amendments Clarify the Roles of Auction Companies and
Escrow Agents in the Return of the Bidder's Funds. In an
auction of real property sold subject to seller confirmation,
the high bidder, before leaving the auction site, typically: (1)
signs and completes the sale contract and other paperwork, under
the guidance of a licensed real estate broker; and (2) deposits
funds in the amount of his or her bid with a licensed escrow
agent. These types of property auctions are routinely attended
by multiple real estate brokers and escrow agents.
The author has recently amended the bill to provide that an
auction company or auctioneer may satisfy the requirement to
return all deposits and fees collected by the bidder "by
depositing escrow instructions with the escrow agent that direct
the escrow agent to return all funds placed on deposit by the
bidder with that agent." In addition, the bill allows an
auction company to act as the agent of the seller (or
beneficiary) for this purpose.
This language accounts for the fact that the funds are not
actually in the possession of the auction company at the time
the law requires the company to return the funds to the bidder,
but are held by the escrow agent during the time that seller
confirmation is pending. Because the auction company is not in
a position to return the money itself, the bill instead allows
the auction company to satisfy the requirement by instructing
the escrow agent to return all deposited funds to the bidder.
The author reasonably contends there is little reason to believe
that the escrow agent will fail to comply with properly
deposited instructions from the auction company in these
situations.
REGISTERED SUPPORT / OPPOSITION :
SB 109
Page 12
Support
None on file
Opposition
None on file
Analysis Prepared by : Anthony Lew / JUD. / (916) 319-2334