BILL ANALYSIS �
SENATE JUDICIARY COMMITTEE
Senator Hannah-Beth Jackson, Chair
2013-2014 Regular Session
AB 2039 (Muratsuchi)
As Amended June 9, 2014
Hearing Date: June 17, 2014
Fiscal: Yes
Urgency: No
TH
SUBJECT
Real Property Sales: Auction Companies: Liability
DESCRIPTION
This bill would render void and unenforceable any condition
imposed by a lender or auction company that requires, as a
condition of receiving the lender's approval for a transaction,
that a homeowner or listing agent defend or indemnify the lender
or auction company from liability allegedly resulting from the
actions of the lender or auction company. This bill would also
prohibit any person, including the seller, auctioneer, or their
agents, from bidding at a real property auction for the sole
purpose of increasing the bid on a property being sold by an
auctioneer.
BACKGROUND
A short sale describes a type of real estate transaction where a
homeowner sells their 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 seller's lender to agree to accept the proceeds
from the sale as payment in full for the outstanding mortgage
debt. Lenders are willing to agree to short sales, particularly
for homeowners facing foreclosure, because they receive current
market value for the property, which is often more than they
would receive when a property is sold through the nonjudicial
foreclosure process. With a short sale, a lender avoids all of
the costs associated with the foreclosure process as well as the
risk of receiving less than market value at a foreclosure sale,
(more)
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as well as the costs associated with selling the property should
the property revert back to the lender upon foreclosure. Short
sales are often a better alternative than foreclosure for
homeowners as well - a seller that avoids foreclosure through a
short sale escapes the negative credit impact that comes with
being foreclosed upon, and is usually able to eliminate some or
all of their 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 reportedly 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. According to the
sponsor, the California Association of Realtors, some lenders
impose terms that require the seller to assume liability for
damages attributable to the auction company during this
validation process as a condition of agreeing to proceed with
the short sale.
This bill would restrict the ability of a lender or an auction
company to require, as a condition of receiving the lender's
approval for a short sale or other transaction, that a homeowner
or listing agent defend or indemnify the lender or auction
company from liability allegedly resulting from the actions of
the lender or auction company. Recent amendments to this bill
would also modify the process by which real property can be
auctioned, including homes in the process of being sold through
a short sale, by prohibiting any person from bidding at an
auction for the sole purpose of increasing the bid on the
property being sold by the auctioneer.
CHANGES TO EXISTING LAW
1.Existing law states that a contract between the principal and
agent may be modified or altered to change the agency
relationship at any time before the performance of the act
which is the object of the agency with the written consent of
the parties to the agency relationship. (Civ. Code Sec.
2079.23.)
This bill would provide that a lender or an auction company
retained by a lender to control aspects of a transaction of
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real property, including validating the sale price of that
property, shall not require, as a condition of receiving the
lender's approval of the transaction, the homeowner or listing
agent to defend or indemnify the lender or auction company
from any liability alleged to result from the actions of the
lender or auction company. This bill would declare any
clause, provision, covenant, or agreement purporting to impose
an obligation to defend or indemnify a lender or an auction
company in violation of this provision as against public
policy, void, and unenforceable.
2.Existing law 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 must
be in favor of, and payable to, the people of the State of
California and shall be for the benefit of any person or
persons damaged by any fraud, dishonesty, misstatement,
misrepresentation, deceit, unlawful acts or omissions, or
failure to provide the services of the auctioneer or auction
company 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. (Civ. Code Sec. 1812.600.)
Existing law provides that if an auctioneer or auction company
fails to perform any of the duties imposed under Title 2.95
(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. (Civ. Code Sec.
1812.600(l), (m).)
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 auction; disclose the existence and amount of any
liens or encumbrances immediately before offering an item for
sale; 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.)
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Existing law prohibits placing or using of any misleading or
untruthful advertising or statements or making any substantial
misrepresentation in conducting auctioneering business.
Existing law also prohibits misrepresenting the terms,
conditions, restrictions, or procedures under which goods will
be sold at auction. (Civ. Code Sec. 1812.608(c), (j).)
Existing law 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, except as
otherwise authorized. Existing law provides that a violation
of this prohibition includes:
stating any increased bid greater than that offered by
the last highest bidder when, in fact, no person has made
such a bid; and
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. (Civ. Code
Sec. 1812.608(h).)
Existing law states that if the auctioneer knowingly receives
a bid on the seller's behalf or the seller makes or procures
such a bid, and notice has not been given that liberty for
such bidding is reserved, the buyer may at his or her option
avoid the sale or take the goods at the price of the last good
faith bid prior to the completion of the sale. (Com. Code
Sec. 2328(4).)
Existing law exempts the following from the definition of
"auction:" (a) wholesale motor vehicle auction; and (b) 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).)
This bill would provide that notwithstanding the above
exemption, for the purposes of this bill, an auction includes
the sale of real property and an "auctioneer" means any
individual who is engaged in, or who by advertising or
otherwise holds himself or herself out as being available to
engage in, the calling for, the recognition of, and the
acceptance of, offers for the purchase of real property at an
auction.
This bill would also provide that a person shall not cause or
allow a person to bid at a sale for the sole purpose of
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increasing the bid on any real property being sold by the
auctioneer, including but not limited to, stating any
increased bid greater than that offered by the last highest
bidder when, in fact, no person has made an increased bid.
COMMENT
1. Stated need for the bill
The author writes:
This bill addresses short sale transactions, which are sales
where a lender accepts less than what is owed on a property in
order to facilitate the sale of the property. Lenders may
hire auction companies to take bids in proposed short sales in
order to obtain the highest price for property. The contracts
used in these sales typically require the homeowners to hold
the lender and auctioneer harmless for negligence and other
violations of law, and require the homeowner to indemnify the
lender and auction company.
Indemnification clauses unfairly shift the burden of risk to
the homeowner and listing agent, who have no control over the
actions of the auction company. This bill will prohibit
lenders and auction companies from imposing indemnification
clauses on homeowners and listing agents. This places the
responsibility for liability with the party whose actions
caused the liability, thereby imposing accountability on the
lender and the auction company.
2. Public Policy on Liability Shifting
When the Legislature adopted California's original Civil Code on
March 21, 1872, it included a statutory "maxim of jurisprudence"
stating that laws established for public benefit "cannot be
contravened by private agreement." (Civ. Code Sec. 3513.)
This section, in general terms, prohibits an individual from
entering into a contract that waives his or her protections
under law, so long as the laws in question are found by a court
to be established for public benefit. Although the Legislature
has subsequently allowed parties to waive through contract
various rights and obligations provided by the consumer
protection and public benefit statutes in the Civil Code, it has
repeatedly conditioned that a waiver is allowed "unless such
waiver would be against public policy." (Civ. Code Sec. 3268.)
When the Legislature repealed the Auctioneer and Auction
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Licensing Act and replaced it with the current statutory scheme
regulating auctioneers and auction companies, it determined that
liability for damages resulting from the conduct of auctioneers
and auction companies should rest with those entities. (See
Civ. Code Sec. 1812.606 ["Every auctioneer . . . and every
auction company . . . shall be responsible for all violations
committed by the auctioneer or by any company employee in the
conduct of auction business."].) Further amendments to this
statutory scheme added a provision declaring "any waiver of [its
provisions] is contrary to public policy, and is void and
unenforceable." (Civ. Code Sec. 1812.609.)
The policy rationale for disallowing parties to waive liability
protections established for public benefit under the law is
twofold: first, it disincentivizes the party seeking a waiver of
liability from exercising due care in the conduct of its
affairs; and second, it shifts liability for the acts of others
to a party who neither committed the harmful act nor is in the
best position to prevent harm from occurring in the first
instance. This bill, by prohibiting mandatory liability
shifting as a condition of certain sales of real property, will
help ensure that liability for damages rests with the party
whose actions caused the harm and who is in the best position to
mitigate or avoid that harm before it occurs. Staff notes that
while auctions of real property are not presently regulated by
the existing statutory scheme, there is no policy rationale for
treating this class of auctions differently with regard to
restricting waivers of liability.
3. Seller Bidding During Auctions
Recent amendments to this bill would additionally prohibit any
person, including the seller, auctioneer, or their agents, from
bidding at a real property auction for the sole purpose of
increasing the bid on a property being sold by an auctioneer.
According to the author, these amendments are intended to
address the practice of "shill bidding" - the act of bidding on
one's own goods or on behalf of other bidders in order to raise
the selling price of an item at auction.
Auction.com, writing in opposition, argues that the scope of
this amendment would prohibit "counter bidding" by a seller or
their agent, which, "when properly disclosed, is a common,
globally-accepted auction practice through which a mutually
acceptable price consensus between a seller and a buyer is
developed." Auction.com further states that "[t]he proposed
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amendment would treat real estate auctions inconsistently with
other types of auctions in California, the United States and
around the world," and "[e]liminating this practice would reduce
the efficacy of the auction model in general, ultimately leading
to lower market values for real estate and a higher rate of
foreclosures."
California law does not squarely address the practice of shill
bidding. Existing law does, however, implicitly authorize an
auctioneer to place bids on behalf of a seller in certain
circumstances. Under existing law, for example, a buyer at
auction has the option to avoid a sale "if the auctioneer
knowingly receives a bid on the seller's behalf or the seller
makes or procures such a bid, and notice has not been given that
liberty for such bidding is reserved." (Com. Code Sec.
2328(4).) Similarly, it is unlawful under existing law for an
auctioneer to allow "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." (Civ. Code Sec.
1812.608(h)(2).)
According to one scholar, the convention of permitting an
auctioneer, upon notice, to place bids on behalf of the seller
up to the confidential reserve price of an item is "widespread"
but "highly contentious," noting "there is a long-standing
debate regarding whether it is legitimate for auctioneers to
place bids on behalf of the vendor." (Christian Heath, The
Dynamics of Auction: Social Interaction and the Sale of Fine Art
and Antiques (Cambridge University Press, 2013) pg. 88.) That
scholar continues:
These concerns are exacerbated by accusations that a few
unscrupulous auctioneers 'bid on behalf of the vendor' beyond
the reserve and or where there is no reserve at all in order
to maximize the price that goods achieve. These bids are
sometimes known as 'phantom bids' or more colloquially as
'bids off the wall' or 'bids from the chandelier.' [However,]
bids on behalf of the [vendor] provide an important resource
for auctioneers. They enable auctioneers to initiate bidding
and to escalate the price of the lot when only one participant
in the room is willing to bid and indeed, in some cases, when
no one is willing to bid at the beginning of the sale.
. . .
[Bids against] the reserve enable the auctioneer to create an
impression of interest in a particular lot before receiving or
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attempting to elicit any bids in the room. They enable a bid
or bids to be issued without delay and the auctioneer to use
only one bidder, and in some cases, no bidders at all, to
initiate the proceedings and escalate the price of the goods.
The way in which bids . . . against the reserve are announced,
revealed and, in some cases, animated is critical to giving an
impression of interest and demand and in encouraging others to
actively participate in the sale. Indeed, it is argued that
the absence of . . . the opportunity to bid on behalf of the
vendor, for example in circumstances where there is no
reserve, can severely undermine the auctioneer's ability to
attract contributions from prospective buyers and depress
demand, not only for the lot in question, but subsequent lots
put up for sale during the auction. (Id., pgs. 88-89.)
This recent amendment juxtaposes several issues of high public
importance, including transparency in sales, market efficiency,
and protecting against exorbitant pricing. The author has
offered to balance these competing interests by adding an
amendment to allow seller-behested bidding upon proper notice:
Author's Amendment :
On page 2, line 14, following "bid." insert: However, an
auctioneer or another person may place a bid on the seller's
behalf during an auction of real property, provided prior
notice has been given that liberty for such bidding is
reserved, and that the person placing such a bid
contemporaneously discloses to all auction participants,
including all other bidders, that the particular bid has been
placed on behalf of the seller.
Staff notes that this amendment will help increase transparency
in real estate auctions, giving consumers a better understanding
of who is bidding and whether a particular bid can constitute a
winning bid.
Support : Orange County Association of Realtors
Opposition : Auction.com
HISTORY
Source : California Association of Realtors
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Related Pending Legislation : None Known
Prior Legislation :
SB 109 (Calderon, 2009) would have removed the exception
provided for real estate from the definition of "auction" in
California's statutes regulating auctioneers and auction
companies (Civ. Code Sec. 1812.600 et seq.), thereby bringing
real property auctions within those provisions, with specified
exceptions. This bill would have also required an auction
company and auctioneer to post or distribute to the audience a
description of all fees, both refundable and nonrefundable, that
would be levied on bidders, as well as any changes to those
fees. With respect to auctions of real property, this bill
would have required an auction company and auctioneer 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 to be used in connection with sales that are subject
to those requirements. This bill was vetoed by Governor
Schwarzenegger because it would "impose unnecessary restrictions
and fees upon real estate auctioneers."
AB 2331 (Wayne, Ch. 815, Stats. 2002) added anti-waiver
provisions to several consumer protection statutes, including
California's statutes regulating auctioneers and auction
companies (Civ. Code Sec. 1812.600 et seq.).
AB 259 (Hannigan, Ch. 1170, Stats. 1993) repealed the Auctioneer
and Auction Licensing Act, which provided for the licensing and
regulation of auctioneers and auctions under the jurisdiction of
the California Auctioneer Commission. This bill instead
required every auctioneer and auction company to maintain a
$20,000 surety bond with the Secretary of State, and also
enacted provisions related to the conduct of auctions and
prohibited certain acts.
Prior Vote :
Assembly Floor (Ayes 74, Noes 0)
Assembly Committee on Judiciary (Ayes 9, Noes 0)
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