Existing law regulates the activities of auctioneers and auction companies and, on and after July 1, 2015, with respect to an auction that includes the sale of real property, prohibits a person from causing or allowing any person to bid at a sale for the sole purpose of increasing the bid on any real property being sold by the auctioneer, including stating an increased bid greater than that offered by the last highest bidder was made when no person actually made an increased bid. Existing law excepts from the application of these provisions a credit bid made by a creditor with a security interest in the property that is the subject of auction when the credit bid can result in the transfer of title to property to the creditor. Existing law provides that anyone who violates this provision is guilty of a misdemeanor.

This bill would eliminate that prohibition, and would, instead, prohibit an auctioneer from stating an increased bid greater than that offered by the last highest bidder was made when no person actually made an increased bid, as provided. The bill would eliminate the exception for credit bids. By expanding the crime of violating this provision to creditors making credit bids, this bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

This bill would declare that it is to take effect immediately as an urgency statute.

Existing law regulates the activities of auctioneers and auction companies and, on and after July 1, 2015, with respect to an auction that includes the sale of real property, prohibits a person from causing or allowing any person to bid at a sale for the sole purpose of increasing the bid on any real property being sold by the auctioneer, including stating an increased bid greater than that offered by the last highest bidder was made when no person actually made an increased bid. Existing law excepts from the application of these provisions a credit bid made by a creditor with a security interest in the property that is the subject of auction when the credit bid can result in the transfer of title to property to the creditor. Existing law provides that anyone who violates this provision is guilty of a misdemeanor.

This bill would eliminate that prohibition, and would, instead, prohibit an auctioneer from stating an increased bid greater than that offered by the last highest bidder was made when no person actually made an increased bid, as provided. The bill would eliminate the exception for credit bids. By expanding the crime of violating this provision to creditors making credit bids, this bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

This bill would declare that it is to take effect immediately as an urgency statute.

Existing law regulates the activities of auctioneers and auction companies and, on and after July 1, 2015, with respect to an auction that includes the sale of real property, prohibits a person from causing or allowing any person to bid at a sale for the sole purpose of increasing the bid on any real property being sold by the auctioneer, including stating an increased bid greater than that offered by the last highest bidder was made when no person actually made an increased bid. Existing law excepts from the application of these provisions a credit bid made by a creditor with a security interest in the property that is the subject of auction when the credit bid can result in the transfer of title to property to the creditor. Existing law provides that anyone who violates this provision is guilty of a misdemeanor.

This bill would eliminate that prohibition, but and would, instead, prohibit an auctioneer from stating an increased bid greater than that offered by the last highest bidder was made when no person actually made an increased bid, as provided, and would provided. The bill would eliminate the exception for credit bids. By expanding the crime of violating this provision to creditors making credit bids, this bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

This bill would declare that it is to take effect immediately as an urgency statute.

Existing law regulates the activities of auctioneers and auction companies and, on and after July 1, 2015, with respect to an auction that includes the sale of real property, prohibits a person from causing or allowing any person to bid at a sale for the sole purpose of increasing the bid on any real property being sold by the auctioneer, including stating an increased bid greater than that offered by the last highest bidder was made when no person actually made an increased bid. Existing law excepts from the application of these provisions a credit bid made by a creditor with a security interest in the property that is the subject of auction when the credit bid can result in the transfer of title to property to the creditor. Existing law provides that anyone who violates this provision is guilty of a misdemeanor.

Existing law regulates the activities of auctioneers and auction companies and, on and after July 1, 2015, with respect to an auction that includes the sale of real property, prohibits a person from causing or allowing any person to bid at a sale for the sole purpose of increasing the bid on any real property being sold by the auctioneer. Existing law excepts from the application of these provisions a credit bid made by a creditor with a security interest in the property that is the subject of auction when the credit bid can result in the transfer of title to property to the creditor.

This bill would express the intent of the Legislature to enact legislation that would define the term credit bid as that term applies to auctions.

 UNFINISHED BUSINESS  

Bill No: SB 474

Author: Wieckowski (D)

Amended: 7/9/15

Vote: 27 - Urgency

SENATE JUDICIARY COMMITTEE: 7-0, 5/5/15

AYES: Jackson, Moorlach, Anderson, Hertzberg, Leno, Monning, Wieckowski

SENATE APPROPRIATIONS COMMITTEE:  Senate Rule 28.8

SENATE FLOOR: 38-0, 5/22/15 (Consent)

AYES: Allen, Anderson, Bates, Beall, Berryhill, Block, Cannella, De León, Gaines, Galgiani, Hall, Hancock, Hernandez, Hertzberg, Hill, Hueso, Huff, Jackson, Lara, Leno, Leyva, Liu, McGuire, Mendoza, Mitchell, Monning, Moorlach, Morrell, Nguyen, Nielsen, Pan, Pavley, Roth, Runner, Stone, Vidak, Wieckowski, Wolk

NO VOTE RECORDED: Fuller

ASSEMBLY FLOOR: 78-0, 8/27/15 (Consent) - See last page for vote

SUBJECT: Auctions

SOURCE: California Association of Realtors

DIGEST: This bill eliminates the creditor bid exemption to the existing prohibition on announcing or allowing an auction bid offered for the sole purpose of increasing a bid amount, and re-casts the existing prohibition to apply only to increased bids offered by the auctioneer.

Assembly Amendments delete an obsolete delayed enactment provision and change the justification for making this act an urgency statute.

ANALYSIS:

Existing law:

1. States that a person shall not cause or allow a person to bid at a sale for the sole purpose of 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. (Civ. Code Sec. 1812.610(b).)

2. Provides that, notwithstanding the above prohibition, an auctioneer or another authorized person may place a bid on the seller’s behalf during an auction of real property, if both of the following are true:

• notice is given to all auction participants, including all other bidders, that liberty for that type of bidding is reserved and that type of bid will not result in the sale of the real property; and

• the person placing that type of bid contemporaneously discloses to all auction participants, including all other bidders, that the particular bid has been placed on behalf of the seller. (Civ. Code Sec. 1812.610(b).)

3. States that the prohibition on placing auction bids on behalf of the seller shall not apply to credit bids made by creditors holding a deed of trust, mortgage, or other lien on the property that is the subject of auction when the credit bid can result in the transfer of title to property to the creditor. (Civ. Code Sec. 1812.610(d).)

This bill:

1. Strikes the existing prohibition on placing auction bids on behalf of the seller and provides, instead, that an auctioneer shall not state at an auction that an increased bid greater than that offered by the last highest bidder has been made when, in fact, no person has made an increased bid. This bill additionally strikes the existing exemption for credit bids.

2. Provides that, notwithstanding the foregoing, an auctioneer or another authorized person may place a bid on the seller’s behalf during an auction of real property that would not result in a sale of the real property, if both of the following are true:

• notice is given to all auction participants, including all other bidders, that liberty for that type of bidding is reserved and that type of bid will not result in the sale of the real property; and

• the person placing that type of bid contemporaneously discloses to all auction participants, including all other bidders, that the particular bid has been placed on behalf of the seller.

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 buyers 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, the lender avoids all the costs associated with the foreclosure process, the risk of receiving less than market value at a foreclosure sale, 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 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. In some of these auctions, the auctioneer will “counter-bid” or place bids on behalf of the seller when the highest bid fails to meet an auction’s set reserve price, which is the minimum selling price set by the seller of a property prior to the auction. One such company – Auctions.com – states on its auction Web sites for certain properties that “[u]ntil the seller’s reserve price is met, Auction.com may counter bid on behalf of the seller. . . Counter bids do not occur after the seller's reserve price is met.” (See <http://www.auction.com/ florida/residential-auction-asset/1897352-18492-30-ridgecroft-lane-safety-harbor-fl-34695-o_556 [as of Apr. 30, 2015].)

Last year, the Legislature passed AB 2039 (Muratsuchi, Chapter 893, Statutes of 2014) which prohibited any person, including the seller, auctioneer, or their agents, from bidding at a real property auction for the sole purpose of increasing the bid, unless all auction participants receive advance notice that such bidding will be allowed during the auction, and the auctioneer or other person placing the bid contemporaneously discloses to all auction participants that the bid has been placed on behalf of the seller. That bill provided an exception to the above prohibition for credit bids made by a creditor holding a deed of trust, mortgage, or other lien on the property when the credit bid could result in the transfer of title to property to the creditor.

This bill simplifies the changes enacted through AB 2039 by eliminating the creditor bid exemption and re-casting the prohibition on placing a bid on behalf of the seller to apply only to bids offered by an auctioneer.

Comments

The author writes:

Previous legislation, specifically AB 2039 (Muratsuchi, Chapter 893, Statutes of 2014), has updated regulations on the aspects of real estate 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. AB 2039 intended to ensure transparency in real estate auctions, giving consumers a better understanding of who is bidding and whether a particular bid can constitute a winning bid. During the stakeholder process of AB 2039, the banking industry voiced concern that this bill would unintentionally impact the activities of foreclosure and auction sales of real estate properties.

SB 474 will recast these regulations in relation to activities of auctioneers and auction companies. Specifically, this bill will recast the reference to an “auctioneer” in relation to auctions under civil code section 1812.610 (a) and (b) for purposes of ensuring clarity in its interpretation and remove the reference to the exception of credit bids.

According to the California Association of Realtors:

Last year, AB 2039 (Chapter 893, Statutes of 2014) brought real estate auctions under the state’s auction law. That law, beginning July 1, 2015, now governs the submittal of a “shill bid” (i.e., a bid intended to increase the bidding above the last legitimate bid). In order that a “credit bid” (i.e., a bid submitted by a mortgage note holder at a foreclosure sale) not be confused with a “shill bid,” an exception was made for “credit bids” in the real estate auction statute. SB 474 will recast the statute governing real estate auctions so that the exception for “credit bids” – which are unrelated to the conduct of real estate transactions – is eliminated.

Prior Legislation

AB 2039 (Muratsuchi, Chapter 893, Statutes of 2014) rendered 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. The bill also prohibited 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 property being sold by an auctioneer, except as provided.

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. The 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, the 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. The bill was vetoed by Governor Schwarzenegger because it would “impose unnecessary restrictions and fees upon real estate auctioneers.”

AB 2331 (Wayne, Chapter 815, Statutes of 2002) added anti-waiver provisions to several consumer protection statutes, including California’s statutes regulating auctioneers and auction companies.

AB 259 (Hannigan, Chapter 1170, Statutes of 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. The 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.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: Yes

According to the Assembly Appropriations Committee, this bill has a negligible fiscal impact.

SUPPORT: (Verified 8/28/15)

California Association of Realtors (source)

California Bankers Association

OPPOSITION: (Verified 8/28/15)

None received

ASSEMBLY FLOOR: 78-0, 8/27/15

AYES: Achadjian, Alejo, Travis Allen, Baker, Bigelow, Bloom, Bonilla, Bonta, Brough, Brown, Burke, Calderon, Campos, Chang, Chau, Chávez, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle, Daly, Dodd, Eggman, Beth Gaines, Gallagher, Cristina Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez, Gordon, Gray, Grove, Hadley, Harper, Roger Hernández, Holden, Irwin, Jones, Jones-Sawyer, Kim, Lackey, Levine, Linder, Lopez, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Nazarian, Obernolte, O'Donnell, Olsen, Patterson, Perea, Quirk, Rendon, Ridley-Thomas, Rodriguez, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Wagner, Waldron, Weber, Wilk, Wood, Atkins

NO VOTE RECORDED: Frazier, Williams

Prepared by: Tobias Halvarson / JUD. / (916) 651-4113

8/29/15 11:09:58

**** END ****

 UNFINISHED BUSINESS  

Bill No: SB 474

Author: Wieckowski (D)

Amended: 7/9/15

Vote: 27 - Urgency

SENATE JUDICIARY COMMITTEE: 7-0, 5/5/15

AYES: Jackson, Moorlach, Anderson, Hertzberg, Leno, Monning, Wieckowski

SENATE APPROPRIATIONS COMMITTEE:  Senate Rule 28.8

SENATE FLOOR: 38-0, 5/22/15 (Consent)

AYES: Allen, Anderson, Bates, Beall, Berryhill, Block, Cannella, De León, Gaines, Galgiani, Hall, Hancock, Hernandez, Hertzberg, Hill, Hueso, Huff, Jackson, Lara, Leno, Leyva, Liu, McGuire, Mendoza, Mitchell, Monning, Moorlach, Morrell, Nguyen, Nielsen, Pan, Pavley, Roth, Runner, Stone, Vidak, Wieckowski, Wolk

NO VOTE RECORDED: Fuller

ASSEMBLY FLOOR: 78-0, 8/27/15 (Consent) - See last page for vote

SUBJECT: Auctions

SOURCE: California Association of Realtors

DIGEST: This bill eliminates the creditor bid exemption to the existing prohibition on announcing or allowing an auction bid offered for the sole purpose of increasing a bid amount, and re-casts the existing prohibition to apply only to increased bids offered by the auctioneer.

Assembly Amendments delete an obsolete delayed enactment provision and change the justification for making this act an urgency statute.

ANALYSIS:

Existing law:

1. States that a person shall not cause or allow a person to bid at a sale for the sole purpose of 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. (Civ. Code Sec. 1812.610(b).)

2. Provides that, notwithstanding the above prohibition, an auctioneer or another authorized person may place a bid on the seller’s behalf during an auction of real property, if both of the following are true:

• notice is given to all auction participants, including all other bidders, that liberty for that type of bidding is reserved and that type of bid will not result in the sale of the real property; and

• the person placing that type of bid contemporaneously discloses to all auction participants, including all other bidders, that the particular bid has been placed on behalf of the seller. (Civ. Code Sec. 1812.610(b).)

3. States that the prohibition on placing auction bids on behalf of the seller shall not apply to credit bids made by creditors holding a deed of trust, mortgage, or other lien on the property that is the subject of auction when the credit bid can result in the transfer of title to property to the creditor. (Civ. Code Sec. 1812.610(d).)

This bill:

1. Strikes the existing prohibition on placing auction bids on behalf of the seller and provides, instead, that an auctioneer shall not state at an auction that an increased bid greater than that offered by the last highest bidder has been made when, in fact, no person has made an increased bid. This bill additionally strikes the existing exemption for credit bids.

2. Provides that, notwithstanding the foregoing, an auctioneer or another authorized person may place a bid on the seller’s behalf during an auction of real property that would not result in a sale of the real property, if both of the following are true:

• notice is given to all auction participants, including all other bidders, that liberty for that type of bidding is reserved and that type of bid will not result in the sale of the real property; and

• the person placing that type of bid contemporaneously discloses to all auction participants, including all other bidders, that the particular bid has been placed on behalf of the seller.

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 buyers 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, the lender avoids all the costs associated with the foreclosure process, the risk of receiving less than market value at a foreclosure sale, 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 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. In some of these auctions, the auctioneer will “counter-bid” or place bids on behalf of the seller when the highest bid fails to meet an auction’s set reserve price, which is the minimum selling price set by the seller of a property prior to the auction. One such company – Auctions.com – states on its auction Web sites for certain properties that “[u]ntil the seller’s reserve price is met, Auction.com may counter bid on behalf of the seller. . . Counter bids do not occur after the seller's reserve price is met.” (See <http://www.auction.com/ florida/residential-auction-asset/1897352-18492-30-ridgecroft-lane-safety-harbor-fl-34695-o_556 [as of Apr. 30, 2015].)

Last year, the Legislature passed AB 2039 (Muratsuchi, Chapter 893, Statutes of 2014) which prohibited any person, including the seller, auctioneer, or their agents, from bidding at a real property auction for the sole purpose of increasing the bid, unless all auction participants receive advance notice that such bidding will be allowed during the auction, and the auctioneer or other person placing the bid contemporaneously discloses to all auction participants that the bid has been placed on behalf of the seller. That bill provided an exception to the above prohibition for credit bids made by a creditor holding a deed of trust, mortgage, or other lien on the property when the credit bid could result in the transfer of title to property to the creditor.

This bill simplifies the changes enacted through AB 2039 by eliminating the creditor bid exemption and re-casting the prohibition on placing a bid on behalf of the seller to apply only to bids offered by an auctioneer.

Comments

The author writes:

Previous legislation, specifically AB 2039 (Mursatsuchi, Chapter 893, Statutes of 2014), has updated regulations on the aspects of real estate 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. AB 2039 intended to ensure transparency in real estate auctions, giving consumers a better understanding of who is bidding and whether a particular bid can constitute a winning bid. During the stakeholder process of AB 2039, the banking industry voiced concern that this bill would unintentionally impact the activities of foreclosure and auction sales of real estate properties.

SB 474 will recast these regulations in relation to activities of auctioneers and auction companies. Specifically, this bill will recast the reference to an “auctioneer” in relation to auctions under civil code section 1812.610 (a) and (b) for purposes of ensuring clarity in its interpretation and remove the reference to the exception of credit bids.

According to the California Association of Realtors:

Last year, AB 2039 (Chapter 893, Statutes of 2014) brought real estate auctions under the state’s auction law. That law, beginning July 1, 2015, now governs the submittal of a “shill bid” (i.e., a bid intended to increase the bidding above the last legitimate bid). In order that a “credit bid” (i.e., a bid submitted by a mortgage note holder at a foreclosure sale) not be confused with a “shill bid,” an exception was made for “credit bids” in the real estate auction statute. SB 474 will recast the statute governing real estate auctions so that the exception for “credit bids” – which are unrelated to the conduct of real estate transactions – is eliminated.

Prior Legislation

AB 2039 (Muratsuchi, Chapter 893, Statutes of 2014) rendered 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. The bill also prohibited 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 property being sold by an auctioneer, except as provided.

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. The 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, the 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. The bill was vetoed by Governor Schwarzenegger because it would “impose unnecessary restrictions and fees upon real estate auctioneers.”

AB 2331 (Wayne, Chapter 815, Statutes of 2002) added anti-waiver provisions to several consumer protection statutes, including California’s statutes regulating auctioneers and auction companies.

AB 259 (Hannigan, Chapter 1170, Statutes of 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. The 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.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: Yes

According to the Assembly Appropriations Committee, this bill has a negligible fiscal impact.

SUPPORT: (Verified 8/28/15)

California Association of Realtors (source)

California Bankers Association

OPPOSITION: (Verified 8/28/15)

None received

ASSEMBLY FLOOR: 78-0, 8/27/15

AYES: Achadjian, Alejo, Travis Allen, Baker, Bigelow, Bloom, Bonilla, Bonta, Brough, Brown, Burke, Calderon, Campos, Chang, Chau, Chávez, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle, Daly, Dodd, Eggman, Beth Gaines, Gallagher, Cristina Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez, Gordon, Gray, Grove, Hadley, Harper, Roger Hernández, Holden, Irwin, Jones, Jones-Sawyer, Kim, Lackey, Levine, Linder, Lopez, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Nazarian, Obernolte, O'Donnell, Olsen, Patterson, Perea, Quirk, Rendon, Ridley-Thomas, Rodriguez, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Wagner, Waldron, Weber, Wilk, Wood, Atkins

NO VOTE RECORDED: Frazier, Williams

Prepared by: Tobias Halvarson / JUD. / (916) 651-4113

8/28/15 17:11:54

**** END ****

Date of Hearing: August 19, 2015

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Jimmy Gomez, Chair

SBPCA Bill Id:SB 474

Author:(Wieckowski) – As Amended Ver:July 9, 2015

Urgency: Yes State Mandated Local Program: Yes Reimbursable: No

SUMMARY:

This bill revises and recasts recently enacted law governing real estate auctions to make unnecessary a statutory exception for "credit bids" from the meaning of "shill bids," and deletes the existing and hence unnecessary exception.

FISCAL EFFECT:

Negligible fiscal impact.

COMMENTS:

1. Background. Last year, the Legislature passed AB 2039 (Muratsuchi) to regulate short sale transactions, including measures to ensure greater transparency in real estate auctions to protect bidders. Among other things, the bill prohibits any person, including the seller, auctioneer, or their agents, from bidding at a real property auction for the sole purpose of increasing the bid, unless two conditions are met. First, all auction participants must receive advance notice that such bidding will be allowed during the auction, and secondly, the auctioneer or other person placing the bid must contemporaneously disclose to all auction participants that the bid has been placed on behalf of the seller.

After these requirements were amended into the bill in the Senate, the California Bankers Association (CBA) raised concerns that the bill may impact the existing practice of creditors who offer credit bids on property during a foreclosure auction. Unlike a bid placed on behalf of the seller, a credit bid offered in a foreclosure auction can result in the transfer of title to property since the bid is backed by an interest in the property, such as a lien, mortgage, or deed of trust. In response to CBA’s concerns, the author amended AB 2039 to expressly exclude credit bids from the scope of the bill’s general prohibition on bids placed on behalf of sellers. According to CBA, this exclusionary language “was offered instead of refining and clarifying the . . . underlying restrictions on auctioneer practices.”

2. Purpose. This bill seeks to narrow AB 2039’s prohibition on any bids being placed on behalf of sellers to cover only those bids made by an auctioneer. Proponents contend that because the auctioneer is never the same person as a creditor placing a credit bid, the bill’s narrower prohibition will have no impact on credit bids made in a foreclosure auction. According to CBA, the changes in this bill provide “clarity to the confusing opening provision found in [existing law] and, as amended, appropriately [focus] on the actions of the auctioneer, making it clear that the auctioneer is prohibited from stating an increased bid during an auction when one does not exist.” As a result of this clarification, CBA asserts, “the exclusion for credit bids . . . is no longer necessary.”

In short, this bill simplifies the changes enacted by AB 2039 by eliminating the creditor bid exemption and re-casting the prohibition on placing a bid on behalf of the seller to apply only to bids offered by an auctioneer.

Analysis Prepared by: Chuck Nicol / APPR. / (916) 319-2081

Date of Hearing: July 7, 2015

ASSEMBLY COMMITTEE ON JUDICIARY

Mark Stone, Chair

SBPCA Bill Id:SB 474

Author:(Wieckowski) – As Amended Ver:April 6, 2015

PROPOSED CONSENT (As Proposed to Be Amended)

SENATE VOTE: 38-0

SUBJECT: AUCTIONS: REAL ESTATE

KEY ISSUE: SHOULD EXISTING LAW, ENACTED LAST YEAR TO PROHIBIT SHILL BIDDING AT REAL ESTATE AUCTIONS, BE REVISED TO CLARIFY THAT THE PROHIBITION APPLIES TO BIDS OFFERED BY THE AUCTIONEER DURING A REAL ESTATE AUCTION, AND NOT TO "CREDIT BIDS" OFFERED BY CREDITORS IN A FORECLOSURE AUCTION?

SYNOPSIS

This non-controversial bill, sponsored by the California Association of Realtors, seeks to clarify the application of a law passed just last year, AB 2039 (Muratsuchi), Ch. 893, Stats. 2014, that restricted the practice of shill bidding in real estate auctions. Proponents of this bill contend that the new law created some unintended confusion for consumers and auction participants because of the way it defined the prohibition and also created a statutory exception for credit bids from the scope of the new law.

This bill effectively seeks to narrow AB 2039’s prohibition on any bids placed on behalf of sellers to cover only those bids made by an auctioneer. Proponents contend that because the auctioneer is never the same person as a creditor placing a credit bid, the bill’s narrower prohibition will have no impact on credit bids made in a foreclosure auction. The California Bankers Association supports the bill and states that the changes in this bill provide “clarity to the confusing opening provision found in [existing law] and, as amended, appropriately [focus] on the actions of the auctioneer, making it clear that the auctioneer is prohibited from stating an increased bid during an auction when one does not exist.” As a result of this clarification, proponents assert that the existing exclusion of credit bids is no longer necessary, and the exclusionary language is deleted by this bill. Proposed author's amendments to the bill merely revise the facts constituting the necessity for the urgency clause and delete an obsolete provision establishing an operative date of July 1, 2015. This bill previously passed the Senate unanimously and has no known opposition.

SUMMARY: Revises and recasts the law governing real estate auctions to make unnecessary a statutory exception for "credit bids" from the meaning of "shill bids," and deletes the existing exception. Specifically, this bill:

1. Deletes existing provisions prohibiting any person from causing or allowing a person to bid at a sale for the sole purpose of increasing the bid on any real property being sold by the auctioneer.

2. Provides, instead, that an auctioneer shall not state at an auction that an increased bid greater than that offered by the last highest bidder has been made when, in fact, no person has made an increased bid.

3. Clarifies that, notwithstanding the above prohibition, an auctioneer or another authorized person may place a bid on the seller’s behalf during an auction of real property that would not result in a sale of the real property, if both of the following are true:

   1. Notice is given to all auction participants, including all other bidders, that liberty for that type of bidding is reserved and that type of bid will not result in the sale of the real property.

   2. The person placing that type of bid contemporaneously discloses to all auction participants, including all other bidders, that the particular bid has been placed on behalf of the seller.

4. Deletes existing language specifically exempting credit bids, as described, from being subject to these provisions.

5. Contains an urgency clause to cause this bill to take effect immediately upon being chaptered into law.

EXISTING LAW:

1. Provides that a person shall not cause or allow a person to bid at a sale for the sole purpose of 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. (Civil Code Section 1812.610(b). All further references are to this code unless otherwise stated.)

2. Provides that, notwithstanding the above prohibition, an auctioneer or another authorized person may place a bid on the seller’s behalf during an auction of real property, if both of the following are true:

   1. Notice is given to all auction participants, including all other bidders, that liberty for that type of bidding is reserved and that type of bid will not result in the sale of the real property; and

   2. The person placing that type of bid contemporaneously discloses to all auction participants, including all other bidders, that the particular bid has been placed on behalf of the seller. (Id.)

3. Provides that the prohibition on placing auction bids on behalf of the seller shall not apply to credit bids made by creditors holding a deed of trust, mortgage, or other lien on the property that is the subject of the auction when the credit bid can result in the transfer of title to property to the creditor. (Section 1812.610(d).)

4. 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 (but not including real property), except as otherwise authorized. Further provides that a violation of this prohibition includes:

   1. Stating any increased bid greater than that offered by the last highest bidder when, in fact, no person has made such a bid; and

   2. 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. (Section 1812.608(h).)

FISCAL EFFECT: As currently in print this bill is keyed non-fiscal.

COMMENTS: This non-controversial bill, sponsored by the California Association of Realtors, seeks to clarify the application of law passed just last year, AB 2039 (Muratsuchi), Ch. 893, Stats. 2014, that restricted the practice of shill bidding in real estate auctions. Proponents of this bill contend that the new law created some unintended confusion for some auction participants because of the way the author of AB 2039 sought to define the prohibition itself and then create a statutory exception for credit bids from the scope of the new law. According to the author and sponsor:

Last year, AB 2039 brought real estate auctions under the state’s auction law. That law, beginning July 1, 2015, now governs the submittal of a “shill bid” (i.e., a bid intended to increase the bidding above the last legitimate bid). In order that a “credit bid” (i.e., a bid submitted by a mortgage note holder at a foreclosure sale) not be confused with a “shill bid,” an exception was made for “credit bids” in the real estate auction statute. SB 474 will recast the statute governing real estate auctions so that the exception for “credit bids” – which are unrelated to the conduct of real estate transactions – is eliminated.

Background on real estate auctions. A short sale describes a type of real estate transaction where a homeowner sells his or her 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 sellers' lender to agree to accept the proceeds from the sale as payment in full for the outstanding 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 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. In some of these auctions, the auctioneer will “counter-bid” or place bids on behalf of the seller when the highest bid fails to meet an auction’s set reserve price, which is the minimum selling price set by the seller of a property prior to the auction. For example, Auctions.com (also known as ADC), which conducts many real estate auctions through its website, states in its Terms of Use: "Except where prohibited by law, ADC may counter bid on behalf of Seller on any Property up to the amount of the Reserve Price (and no such bid will result in a sale of the Property). If the Reserve Price is not met, Seller is under no obligation to sell the Property; however, Seller may accept a bid that is below the Reserve Price in its sole discretion." (See: http://www.auction.com/lp/legal/ auction-terms/)

AB 2039 enacted last year to regulate short sale transactions. Last year the Legislature passed AB 2039 (Muratsuchi) to regulate short sale transactions, including measures to ensure greater transparency in real estate auctions to protect bidders. Among other things, the bill prohibits any person, including the seller, auctioneer, or their agents, from bidding at a real property auction for the sole purpose of increasing the bid, unless two conditions are met. First, all auction participants must receive advance notice that such bidding will be allowed during the auction, and secondly, the auctioneer or other person placing the bid must contemporaneously disclose to all auction participants that the bid has been placed on behalf of the seller.

After these requirements were amended into the bill in the Senate, the California Bankers Association (CBA) raised concerns that the bill may impact the existing practice of creditors who offer credit bids on property during a foreclosure auction. Unlike a bid placed on behalf of the seller, a credit bid offered in a foreclosure auction can result in the transfer of title to property since the bid is backed by an interest in the property, such as a lien, mortgage, or deed of trust. In response to CBA’s concerns, the author amended AB 2039 to expressly exclude credit bids from the scope of the bill’s general prohibition on bids placed on behalf of sellers. According to CBA, this exclusionary language “was offered instead of refining and clarifying the . . . underlying restrictions on auctioneer practices.”

This bill clarifies that the existing prohibition on shill bidding applies only to bids by the auctioneer, eliminating any need to exempt credit bidding from the scope of prohibition. This bill effectively seeks to narrow AB 2039’s prohibition on any bids placed on behalf of sellers to cover only those bids made by an auctioneer. Proponents contend that because the auctioneer is never the same person as a creditor placing a credit bid, the bill’s narrower prohibition will have no impact on credit bids made in a foreclosure auction. According to CBA, the changes in this bill provide “clarity to the confusing opening provision found in [existing law] and, as amended, appropriately [focus] on the actions of the auctioneer, making it clear that the auctioneer is prohibited from stating an increased bid during an auction when one does not exist.” As a result of this clarification, CBA asserts, “the exclusion for credit bids . . . is no longer necessary.”

In short, this bill simplifies the changes enacted by AB 2039 by eliminating the creditor bid exemption and re-casting the prohibition on placing a bid on behalf of the seller to apply only to bids offered by an auctioneer.

Proposed author's amendments: At the time this bill was referred to this Committee, it was the author's intent to seek to have the bill chaptered into law before July 1, 2015—the day that AB 2039 was scheduled to take effect. Even though that particular objective is no longer achievable, the author still wishes to proceed with the bill as an urgency bill. Proposed author's amendments to the bill revise the facts constituting the necessity for the urgency clause and delete the provision establishing an operative date of July 1, 2015. The amendments are:

On page 3, delete line 39.

On page 4, delete lines 14 and 15, and insert "In order to revise and eliminate, as soon as possible, certain provisions from Civil Code Section 18612.610 that became operative on July 1, 2015 before they potentially harm participants in real estate auctions, it is necessary that this act take effect immediately.”

REGISTERED SUPPORT / OPPOSITION:

Support

California Association of Realtors

California Bankers Association

Opposition

None on file

Analysis Prepared by: Anthony Lew / JUD. / (916) 319-2334

 CONSENT  

Bill No: SB 474

Author: Wieckowski (D)

Amended: 4/6/15

Vote: 27 - Urgency

SENATE JUDICIARY COMMITTEE: 7-0, 5/5/15

AYES: Jackson, Moorlach, Anderson, Hertzberg, Leno, Monning, Wieckowski

SENATE APPROPRIATIONS COMMITTEE:  Senate Rule 28.8

SUBJECT: Auctions

SOURCE: California Association of Realtors

DIGEST: This bill eliminates the creditor bid exemption to the existing prohibition on announcing or allowing an auction bid offered for the sole purpose of increasing the bid amount, and re-casts the existing prohibition to apply only to increased bids offered by the auctioneer.

ANALYSIS:

Existing law:

1. States that a person shall not cause or allow a person to bid at a sale for the sole purpose of 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. (Civ. Code Sec. 1812.610(b).)

2. Provides that, notwithstanding the above prohibition, an auctioneer or another authorized person may place a bid on the seller’s behalf during an auction of real property, if both of the following are true:

• notice is given to all auction participants, including all other bidders, that liberty for that type of bidding is reserved and that type of bid will not result in the sale of the real property; and

• the person placing that type of bid contemporaneously discloses to all auction participants, including all other bidders, that the particular bid has been placed on behalf of the seller. (Civ. Code Sec. 1812.610(b).)

3. States that the prohibition on placing auction bids on behalf of the seller shall not apply to credit bids made by creditors holding a deed of trust, mortgage, or other lien on the property that is the subject of auction when the credit bid can result in the transfer of title to property to the creditor. (Civ. Code Sec. 1812.610(d).)

This bill:

1. Strikes the existing prohibition on placing auction bids on behalf of the seller and provide, instead, that an auctioneer shall not state at an auction that an increased bid greater than that offered by the last highest bidder has been made when, in fact, no person has made an increased bid. This bill additionally strikes the existing exemption for credit bids.

2. Provides that, notwithstanding the foregoing, an auctioneer or another authorized person may place a bid on the seller’s behalf during an auction of real property that would not result in a sale of the real property, if both of the following are true:

• notice is given to all auction participants, including all other bidders, that liberty for that type of bidding is reserved and that type of bid will not result in the sale of the real property; and

• the person placing that type of bid contemporaneously discloses to all auction participants, including all other bidders, that the particular bid has been placed on behalf of the seller.

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, the risk of receiving less than market value at a foreclosure sale, 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 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. In some of these auctions, the auctioneer will “counter-bid” or place bids on behalf of the seller when the highest bid fails to meet an auction’s set reserve price, which is the minimum selling price set by the seller of a property prior to the auction. One such company– Auctions.com– states on its auction Web sites for certain properties that “[u]ntil the seller’s reserve price is met, Auction.com may counter bid on behalf of the seller. . . Counter bids do not occur after the seller's reserve price is met.” (See <http://www.auction.com/ florida/residential-auction-asset/1897352-18492-30-ridgecroft-lane-safety-harbor-fl-34695-o_556> [as of Apr. 30, 2015].)

Last year, the Legislature passed AB 2039 (Muratsuchi, Chapter 893, Statutes of 2014) which prohibited any person, including the seller, auctioneer, or their agents, from bidding at a real property auction for the sole purpose of increasing the bid, unless all auction participants receive advance notice that such bidding will be allowed during the auction, and the auctioneer or other person placing the bid contemporaneously discloses to all auction participants that the bid has been placed on behalf of the seller. That bill provided an exception to the above prohibition for credit bids made by a creditor holding a deed of trust, mortgage, or other lien on the property when the credit bid could result in the transfer of title to property to the creditor.

This bill simplifies the changes enacted through AB 2039 by eliminating the creditor bid exemption and re-casting the prohibition on placing a bid on behalf of the seller to apply only to bids offered by an auctioneer.

Comments

The author writes:

Previous legislation, specifically AB 2039 (Mursatsuchi, Chapter 893, Statutes of 2014), has updated regulations on the aspects of real estate 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. AB 2039 intended to ensure transparency in real estate auctions, giving consumers a better understanding of who is bidding and whether a particular bid can constitute a winning bid. During the stakeholder process of AB 2039, the banking industry voiced concern that this bill would unintentionally impact the activities of foreclosure and auction sales of real estate properties.

SB 474 will recast these regulations in relation to activities of auctioneers and auction companies. Specifically, this bill will recast the reference to an “auctioneer” in relation to auctions under civil code section 1812.610 (a) and (b) for purposes of ensuring clarity in its interpretation and remove the reference to the exception of credit bids.

According to the California Association of Realtors:

Last year, AB 2039 (Chapter 893, Statutes of 2014) brought real estate auctions under the state’s auction law. That law, beginning July 1, 2015, now governs the submittal of a “shill bid” (i.e., a bid intended to increase the bidding above the last legitimate bid). In order that a “credit bid” (i.e., a bid submitted by a mortgage note holder at a foreclosure sale) not be confused with a “shill bid,” an exception was made for “credit bids” in the real estate auction statute. SB 474 will recast the statute governing real estate auctions so that the exception for “credit bids” – which are unrelated to the conduct of real estate transactions – is eliminated.

Related/Prior Legislation

AB 2039 (Muratsuchi, Chapter 893, Statutes of 2014) rendered 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. The bill also prohibited 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 property being sold by an auctioneer, except as provided.

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. The 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, the 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. The bill was vetoed by Governor Schwarzenegger because it would “impose unnecessary restrictions and fees upon real estate auctioneers.”

AB 2331 (Wayne, Chapter 815, Statutes of 2002) added anti-waiver provisions to several consumer protection statutes, including California’s statutes regulating auctioneers and auction companies.

AB 259 (Hannigan, Chapter 1170, Statutes of 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. The 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.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: Yes

SUPPORT: (Verified 5/5/15)

California Association of Realtors (source)

California Bankers Association

OPPOSITION: (Verified 5/5/15)

None received

Prepared by: Tobias Halvarson / JUD. / (916) 651-4113

5/19/15 15:50:31

**** END ****

SENATE JUDICIARY COMMITTEE

Senator Hannah-Beth Jackson, Chair

2015 - 2016 Regular Session

Bill No: SB 474 (Author:Wieckowski)

Amended: Version: April 6, 2015

Hearing Date: May 5, 2015

Fiscal: Yes

Urgency: Yes

Consultant: TH

SUBJECT

Auctions

DESCRIPTION

Existing law provides that an auctioneer in an auction for real property is prohibited from announcing or allowing a bid offered for the sole purpose of increasing the bid amount unless two conditions are met: (1) all auction participants receive advance notice that such bidding will be allowed during an auction; and (2) the auctioneer or other person placing the bid contemporaneously discloses to all auction participants that the bid has been placed on behalf of the seller. Existing law exempts credit bids made by creditors who hold a deed of trust, mortgage, or other lien on the property when the credit bid may result in the transfer of title to the creditor.

This bill eliminates the creditor bid exemption and re-casts the existing prohibition on announcing or allowing a bid offered for the sole purpose of increasing the bid amount to, instead, apply only to increased bids offered by the 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, the risk of receiving less than market value at a foreclosure sale, 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 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. In some of these auctions, the auctioneer will “counter-bid” or place bids on behalf of the seller when the highest bid fails to meet an auction’s set reserve price, which is the minimum selling price set by the seller of a property prior to the auction. One such company -- Auctions.com -- states on its auction Web sites for certain properties that “[u]ntil the seller’s reserve price is met, Auction.com may counter bid on behalf of the seller. . . Counter bids do not occur after the seller's reserve price is met.” (See <http://www.auction.com/florida/residential-auction-asset/1897352-18492-30-ridgecroft-lane-safety-harbor-fl-34695-o_556> [as of Apr. 30, 2015].)

Last year, the Legislature passed AB 2039 (Muratsuchi, Ch. 893, Stats. 2014) which prohibited any person, including the seller, auctioneer, or their agents, from bidding at a real property auction for the sole purpose of increasing the bid, unless all auction participants receive advance notice that such bidding will be allowed during the auction, and the auctioneer or other person placing the bid contemporaneously discloses to all auction participants that the bid has been placed on behalf of the seller. That bill provided an exception to the above prohibition for credit bids made by a creditor holding a deed of trust, mortgage, or other lien on the property when the credit bid could result in the transfer of title to property to the creditor.

This bill simplifies the changes enacted through AB 2039 by eliminating the creditor bid exemption and re-casting the prohibition on placing a bid on behalf of the seller to apply only to bids offered by an auctioneer.

CHANGES TO EXISTING LAW

Existing law states that a person shall not cause or allow a person to bid at a sale for the sole purpose of 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. (Civ. Code Sec. 1812.610(b).)

Existing law provides that, notwithstanding the above prohibition, an auctioneer or another authorized person may place a bid on the seller’s behalf during an auction of real property, if both of the following are true:

• notice is given to all auction participants, including all other bidders, that liberty for that type of bidding is reserved and that type of bid will not result in the sale of the real property; and

• the person placing that type of bid contemporaneously discloses to all auction participants, including all other bidders, that the particular bid has been placed on behalf of the seller. (Civ. Code Sec. 1812.610(b).)

Existing law states that the prohibition on placing auction bids on behalf of the seller shall not apply to credit bids made by creditors holding a deed of trust, mortgage, or other lien on the property that is the subject of auction when the credit bid can result in the transfer of title to property to the creditor. (Civ. Code Sec. 1812.610(d).)

This bill would strike the existing prohibition on placing auction bids on behalf of the seller and provide, instead, that an auctioneer shall not state at an auction that an increased bid greater than that offered by the last highest bidder has been made when, in fact, no person has made an increased bid. This bill would additionally strike the existing exemption for credit bids.

This bill would provide that, notwithstanding the foregoing, an auctioneer or another authorized person may place a bid on the seller’s behalf during an auction of real property that would not result in a sale of the real property, if both of the following are true:

• notice is given to all auction participants, including all other bidders, that liberty for that type of bidding is reserved and that type of bid will not result in the sale of the real property; and

• the person placing that type of bid contemporaneously discloses to all auction participants, including all other bidders, that the particular bid has been placed on behalf of the seller.

COMMENT

1. Stated need for the bill

The author writes:

Previous legislation, specifically AB 2039 (Mursatsuchi, Chapter 893, [Statutes of] 2014), has updated regulations on the aspects of real estate 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. . . . AB 2039 [intended] to ensure transparency in real estate auctions, giving consumers a better understanding of who is bidding and whether a particular bid can constitute a winning bid. . . . During the stakeholder process of AB 2039, the banking industry voiced concern [that this bill would unintentionally impact] the activities of foreclosure and auction sales of real estate properties.

. . .

SB 474 will recast [these] regulations in . . . relation to activities of auctioneers and auction companies. Specifically, this bill will [r]ecast the reference to an “auctioneer” in relation to auctions under civil code section 1812.610 (a) [and] (b) for purposes of ensuring clarity in its interpretation [and] remove the reference to the exception of credit bids . . .

According to the California Association of Realtors:

Last year, AB 2039 (Chapter 893, Statutes of 2014) brought real estate auctions under the state’s auction law. That law, beginning July 1, 2015, now governs the submittal of a “shill bid” (i.e., a bid intended to increase the bidding above the last legitimate bid). In order that a “credit bid” (i.e., a bid submitted by a mortgage note holder at a foreclosure sale) not be confused with a “shill bid,” an exception was made for “credit bids” in the real estate auction statute. SB 474 will recast the statute governing real estate auctions so that the exception for “credit bids” – which are unrelated to the conduct of real estate transactions – is eliminated.

2. Seller Bidding During Auctions

This bill impacts the controversial practice of placing bids on behalf of a seller during an auction. 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 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.)

Bidding on behalf of the seller in an auction juxtaposes several issues of high public importance, including transparency in sales, market efficiency, and protecting against exorbitant pricing. AB 2039 (Muratsuchi, Ch. 893, Stats. 2014) sought to balance these competing interests by prohibiting this form of bidding unless auction participants were given prior notice that bidding of this type would be allowed and a bidder who places a bid on behalf of the seller contemporaneously discloses that fact to all participants when placing the bid.

3. Prohibition Narrowed to Auctioneers

While AB 2039 (Muratsuchi, Ch. 893, Stats. 2014) was working through the legislative process, the California Bankers Association (CBA) raised concerns that it may impact the existing practice of creditors who offer credit bids on property during a foreclosure auction. Unlike a bid placed on behalf of the seller, a credit bid offered in a foreclosure auction can result in the transfer of title to property since the bid is backed by an interest in the property, such as a lien, mortgage, or deed of trust. In response to CBA’s concerns, the author added express exclusionary language concerning credit bids to exclude these bids from the scope of AB 2039’s general prohibition on bids placed on behalf of sellers. According to CBA, this exclusionary language “was offered instead of refining and clarifying the . . . underlying restrictions on auctioneer practices.”

This bill would now seek to take the alternate approach by narrowing AB 2039’s prohibition on bids placed on behalf of sellers to cover only those bids made by an auctioneer. Since the auctioneer is never the same person as a creditor placing a credit bid, this bill’s narrower prohibition would have no impact on credit bids made in a foreclosure auction. According to CBA, the changes in this bill provide “clarity to the confusing opening provision found in [existing law] and, as amended, appropriately [focus] on the actions of the auctioneer, making it clear that the auctioneer is prohibited from stating an increased bid during an auction when one does not exist.” Under the new narrower prohibition offered in this bill, “the exclusion for credit bids . . . is no longer necessary.”

Support: California Bankers Association

Opposition: None Known

HISTORY

Source: California Association of Realtors

Related Pending Legislation: None Known

Prior Legislation:

AB 2039 (Muratsuchi, Ch. 893, Stats. 2014) rendered 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 also prohibited 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 property being sold by an auctioneer, except as provided.

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.

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.

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