BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Ellen M. Corbett, Chair
2009-2010 Regular Session
SB 1223 (Calderon)
As amended April 8, 2010
Hearing Date: April 13, 2010
Fiscal: Yes
Urgency: No
JR/SK:jd
SUBJECT
Escrow Agents: Auctions
DESCRIPTION
With regard to an auction sale of real property that has been
the subject of a foreclosure sale, this bill would require an
escrow agent to give back all deposits and fees to a bidder once
the escrow agent receives escrow instructions from the
auctioneer or auction company directing the return of such
funds. This bill would apply to all escrow agents, including
those required to be licensed pursuant to the Escrow Law and
those granted exemptions from licensure under the Escrow Law.
BACKGROUND
California ranks fourth in foreclosures in the nation, following
Nevada, Florida, and Arizona, with one in every 195 housing
units receiving a foreclosure filing in February of this year.
(Lazo, Alejandro, "Fewer homes enter foreclosure process in
February," Los Angeles Times, March 11, 2010.) According to a
recent article in the Los Angeles Times, foreclosures make up
approximately 42.3 percent of the housing market in southern
California noting that the "foreclosure factor will likely
remain strong in the housing market and experts have long feared
that a new wave of them is coming." (Alejandro Lazo, "Southern
California home prices rise 10 percent in February," Los Angeles
Times, March 17, 2010.) In addition, according to statistics
by RAND California, the number of foreclosed homes statewide
totaled 189,788 in 2009. As foreclosed homes have inundated the
real estate market, the method of using auctions to sell this
type of property has become more commonplace.
(more)
SB 1223 (Calderon)
Page 2 of ?
Selling a foreclosed house typically involves the financial
institution listing the property through a multiple listing
service or using other traditional real estate marketing means.
However, after a house fails to be purchased within a few months
through these traditional means, financial institutions are
increasingly turning to auction companies to help sell a
bank-owned property. Auctions may benefit financial
institutions looking to unload a foreclosed home in several
ways, including stimulating interest in a given property to a
wider audience, potentially increasing the final sale price by
an auctioneer stirring multiple bidders to increase their bids
during an auction, or, helping to facilitate or encourage the
sale of a piece of residential real estate that would either
otherwise not sell on the open market or that would probably
sell for far less than it could be sold at auction.
However, at auction, a winning bid on a foreclosed home may not
always result in the property actually being sold to that
bidder. For example, a seller may have a reserve price on the
property which is an unpublished minimum dollar amount that is
essentially the lowest offer the seller is willing to accept. A
seller maintains the right to reject the winning bid if that bid
is below the reserve price. If a seller chooses not to accept
the bid, then the bidder should be refunded his or her deposit.
According to the author, some bidders have reported having
difficulty recouping their refundable deposits after an auction
when the seller has rejected their bid. The deposit funds are
not held by the auctioneer or auction company but rather are
held by an escrow agent. In order to release the funds back to
the bidder, the escrow agent must receive instruction to do so
by both the property buyer and seller. After an auction, if the
seller cannot be located or contacted to give such instruction,
then the escrow agent cannot give back the deposit to the
bidder.
This bill is intended to address this issue by allowing
auctioneers and auction companies to act as the agent of the
seller for purposes of directing an escrow agent to return
deposits and fees to a bidder.
This bill was approved by the Senate Committee on Banking,
Finance, and Insurance on April 7, 2010, by a vote of 9 to 0.
SB 1223 (Calderon)
Page 3 of ?
CHANGES TO EXISTING LAW
Existing law regulates the activities of auctioneers and auction
companies pursuant to the Auctioneer and Auction Companies Law.
(Civ. Code Sec. 1812.600 et seq.)
Existing law requires every auction company and auctioneer to,
among other things: disclose their name, telephone number, and
bond number in all advertising; post a specified sign at the
main entrance to each auction; post or distribute the terms,
conditions, restrictions, and procedures whereby goods will be
sold at the auction; 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.
(Civ. Code Sec. 1812.607.)
Existing law exempts the following from the definition of
"auction": (1) wholesale motor vehicle auction; and (2) a sale
of real estate or a sale of real estate with personal property
or fixtures or both in a unified sale in accordance with Section
9604 of the Commercial Code. (Civ. Code Sec. 1812.601(b).)
Existing law regulates the business of escrow under the Escrow
Law and defines "escrow" as a transaction in which one person,
for the purpose of effecting the sale, transfer, encumbering, or
leasing of real or personal property to another person, delivers
any written instrument, money, evidence of title to real or
personal property to a third person to be held by that third
person until the happening of a specified event or the
performance of a prescribed condition, when it is then to be
delivered by that third person to a specified person. (Fin. Code
Sec. 17000 et seq.)
Existing law exempts a variety of entities from Escrow Law
including depository institutions; a person licensed to practice
law in California as specified; title insurance companies
regulated by the Department of Insurance; and real estate
brokers performing 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 (Fin. Code Sec. 17006.)
This bill would require an escrow agent to return all deposits
and fees received from a bidder in connection with an auction of
real property that has been the subject of a foreclosure sale,
SB 1223 (Calderon)
Page 4 of ?
upon receipt of escrow instructions from the auctioneer or
auction company directing the return of all funds placed on
deposit by the bidder with that agent.
This bill would provide that for purposes of this bill, an
escrow agent may recognize an auctioneer or auction company as
the agent of the property seller.
This bill would clarify that this 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. This bill would not apply to foreclosure sales.
This bill would clarify that provisions of this bill apply to
all escrow agents, including those required to be licensed
pursuant to the Escrow Law and those granted exemptions from
licensure under the Escrow Law pursuant to Financial Code
Section 17006.
COMMENT
1. Stated need for the bill
The author writes:
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 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
SB 1223 (Calderon)
Page 5 of ?
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.
2. Narrower version of SB 109 (Calderon, 2009)
This bill is a follow-up to last year's SB 109 (Calderon) which
was vetoed by the Governor. Senate Bill 109 was a more
comprehensive bill than this bill and would have done the
following: 1) removed the exemption for sales of real property
from the Auctioneer and Auction Company Law for sales of real
property; 2) established specific rules for auction sales of
foreclosed real estate, including requiring notification to an
auction audience of all fees that would be levied as a condition
of bidding and an explanation of specified terms relating to the
auction; and 3) required the return of deposits and fees in a
specified time if the high bidder's offer was rejected or if the
seller did not respond to the offer. Governor Schwarzenegger
vetoed SB 109, stating:
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 impose unnecessary
restrictions and fees upon real estate auctioneers, I am
unable to sign this bill.
This bill is narrower in focus than SB 109 and is intended to
make certain that refundable deposits at auctions are returned
to a bidder of a foreclosed property in a timely manner if his
or her bid is ultimately rejected by the seller of the property.
SB 1223 (Calderon)
Page 6 of ?
Support : None Known
Opposition : None Known
HISTORY
Source : Author
Related Pending Legislation : None Known
Prior Legislation : SB 109 (Calderon, 2009) (See Comment 2.)
Prior Vote : Senate Committee on Banking, Finance and Insurance
(Ayes 9, Noes 0)
**************