BILL ANALYSIS
SENATE COMMITTEE ON BANKING, FINANCE,
AND INSURANCE
Senator Ronald Calderon, Chair
SB 1223 (Calderon) Hearing Date: April 7, 2010
As Amended:March 22, 2010
Fiscal: Yes
Urgency: No
SUMMARY Would require an escrow agent to return all deposits
and fees received from a bidder in connection with an auction
sale of real property that has been the subject of a foreclosure
sale, upon receipt of escrow instructions directing the return
of deposits placed on deposit with that agent by the bidder.
DIGEST
Existing law
1. Provides for the Auctioneer and Auction Companies Law (Civil
Code Section 1812.600 et seq.), but provides an express
exemption from that law for sales of real estate;
2. Regulates the business of escrow under the Escrow Law
(Financial Code Sections 17000 et seq.), but provides an
exemption from that law for a variety of different entities
(Financial Code Section 17006). Among the entities exempt from
regulation under the Escrow Law are depository institutions; any
person licensed to practice law in California, as specified;
title insurance companies regulated by the Department of
Insurance, and real estate brokers performing acts in the course
of, or incidental to a real estate transaction in which the
broker is an agent or a party to the transaction and is
performing an act for which a real estate license is required.
This bill
1. Would require an escrow agent to return, or cause to be
returned, all deposits and fees received from a bidder in
connection with an auction sale of real property that has
been the subject of a foreclosure sale, upon receipt of
escrow instructions from the auctioneer or auction company
directing the return of all funds placed on deposit by the
SB 1223 (Calderon), Page 2
bidder with that agent;
2. Would provide that an escrow agent may recognize an
auctioneer or auction company as the agent of the property
seller for this purpose;
3. Would clarify that the bill does not apply to sales of real
property pursuant to a judicial or nonjudicial foreclosure
(i.e., the bill would apply to auction sales of real
property that have previously been foreclosed upon and are
now the subject of a subsequent, post-foreclosure auction
sale; the bill would not apply to foreclosure sales).
COMMENTS
1. Purpose of the bill To ensure that bidders at auctions of
foreclosed properties receive a return of their refundable
deposits in a timely manner, if their bid is ultimately
rejected by the seller of the property on which the bid was
placed.
2. Background Auction sales of foreclosed properties have
become increasingly common in California, as foreclosed
homes have flooded the real estate market. When a financial
institution forecloses on a home, it commonly tries to
market that property through the multiple listing service or
other traditional means. However, if a financial
institution is unable to sell a bank-owned property within a
few months, using traditional methods of marketing, it has
become increasingly common for that institution to seek the
assistance of an auction company. Auctions can help a
financial institution stimulate interest in the property;
draw multiple potential bidders, who are encouraged by the
auctioneer to bid up their offers during the auction; and
can help facilitate the sale of properties that would not
otherwise sell on the open market, or which would sell for
far less than they could fetch at auction.
Auction sales of foreclosed properties are commonly conducted as
"reserve" auctions, in which the seller of the property
(typically a financial institution or a government-sponsored
enterprise) establishes an unpublished reserve price, above
which it is willing to sell the property, but below which it
may be unwilling to agree to a sale. When an auction is
conducted and the high bid is below the unpublished reserve
price, the auctioneer typically announces that the sale is
made, subject to seller confirmation, approval, or
SB 1223 (Calderon), Page 3
acceptance. The high bidder is instructed to open escrow on
the property, and is asked to place a deposit on hold with
the escrow agent, pending a decision by the property owner
regarding whether to accept the bid.
If a seller does not accept a bidder's bid (likely because it is
too far below the reserve price to warrant acceptance), the
bidder is entitled to receive a refund of his or her
deposit. However, some bidders have reported having trouble
obtaining refunds of their refundable deposits following
auctions. The problem they encounter is circular: The
auction company doesn't hold the money so has no ability to
return the deposit. The escrow agent holds the money, but
requires instructions from both parties to the real estate
contract (the property buyer and the property seller) before
it will release the funds. If the property seller has
rejected the bid that formed the basis for a bidder's
deposit, it often has no further interest in the
transaction, and can be difficult to reach for purposes of
obtaining escrow instructions. Yet, without escrow
instructions from the property seller, the escrow agent is
unable to release the deposit to the bidder.
This bill solves the Catch-22, by allowing auctioneers and
auction companies to act as the agent of the property
seller, for the purpose of directing an escrow agent to
return deposits and fees received from a bidder in
connection with an auction sale of foreclosed real property.
3. Veto of SB 109 (Calderon) SB 1223 contains a provision
similar to one contained in a much more comprehensive bill
from 2009. SB 109 (Calderon) would have removed the
exemption for sales of real property from the Auctioneer and
Auction Company Law for sales of real property, established
specific rules for auction sales of foreclosed real estate,
and would have included a provision similar to the one
contained in SB 1223. Governor Schwarzenegger vetoed SB
109, saying "While the goals of SB 109 are laudable, this
bill adds additional unnecessary regulatory burdens on
business. Existing law provides consumers with civil
remedies should a seller fail to release a deposit in a
timely fashion. In addition, auctions of real property by
third parties often involve a real estate broker whose
improper conduct would already be subject to discipline by
the Department of Real Estate. Since this measure would
SB 1223 (Calderon), Page 4
impose unnecessary restrictions and fees upon real estate
auctioneers, I am unable to sign this bill."
Senator Calderon has introduced SB 1223 as a much narrower
measure, intended to address only the return of bidder's
deposits. By making a simple change to existing law, SB
1223 will eliminate the need for bidders to pursue a civil
remedy, in order to return a refundable deposit. There
should be no need to incur the time and cost of a judicial
proceeding, if a solution to the problem can be obtained
simply and inexpensively through a statutory change.
4. Support None received.
5. Opposition None received.
6. Prior and Related Legislation
a. SB 109 (Calderon), 2009-2010 Legislative
Session: Would have removed the exemption for sales
of real estate from the Auctioneer and Auction Company
Law and required escrow agents who received deposits
from bidders in connection with an auction sale of
real property to return those deposits to the bidders,
upon receipt of escrow instructions from the
auctioneer or auction company directing the return.
Vetoed by the Governor.
POSITIONS
Support
None received
Oppose
None received
Consultant: Eileen Newhall (916) 651-4102