June 6, 2013
by Kathy Shakibi
Northwest Trustee Services, Inc. – USFN Member (California, Oregon)
For those tracking case law on a trustee’s authority to rescind a sale, the month of May was thrilling. On May 16, 2013, the California Supreme Court issued a ruling in Biancalana v. T.D. Service Co., 2013 Cal. Lexis 4007. The decision not only addressed a trustee’s role and authority to rescind a sale, but also followed two dueling appellate cases, offering some clarity in the mist of existing uncertainty. The Supreme Court ruled that where a trustee discovered it had mistakenly communicated to the auctioneer an incorrect opening bid, which was less than ten percent of the lender’s specified bid, and the trustee had not yet delivered the deed, the trustee had discretionary authority to rescind the sale.
Facts & Procedural History
The facts of Biancalana are straightforward. The trustee took a property to sale in September 2008. The beneficiary communicated the specified opening bid of $219,105 to the trustee. The trustee mistakenly communicated the opening bid of $21,894.17 to its auctioneer. A third party purchaser bought the property for two dollars more than the opening bid. Two days after the sale the trustee informed the purchaser of the error, the need to rescind, and returned the purchase funds. The trustee refused to issue the trustee’s deed. The purchaser sued for quiet title. The trial court ultimately ruled in favor of the trustee. The purchaser appealed and the appellate court reversed and remanded. The trustee petitioned the Supreme Court, and the Supreme Court reversed the judgment of the Court of Appeal.
Existing Law & Dueling Appellate Cases
Ask a trustee counsel about a trustee’s authority to rescind a sale, and they are quick to recite two appellate cases: 6 Angels, Inc. v. Stuart-Wright Mortgage, Inc., 85 Cal. App.4th 1279 (2001), and Millennium Rock Mortgage, Inc. v. T.D. Service Co., 179 Cal. App.4th 804 (2009). There has not been a lack of case law on the topic, but the two contemporary appellate cases have been difficult to reconcile.
Existing law has held that gross inadequacy in price, coupled with irregularity in the sale procedure, is a sufficient basis for setting a sale aside. (See cases cited on page 10 of Biancalana). Difficulty arose because 6 Angels and Millennium interpreted “irregularity in the sale procedure” differently, resulting in uncertainty about the type of error that triggers the authority to rescind.
In 6 Angels the beneficiary submitted an incorrect opening bid to the trustee. Due to clerical error, the beneficiary communicated the bid as $10,000 instead of $100,000. The property sold to a third party for one penny over the mistaken bid. The 6 Angels court ruled that the beneficiary’s error was under the beneficiary’s control and arose from the beneficiary’s own negligence, and for that reason fell outside of the procedural requirements for a trustee sale described in the statutory scheme. The 6 Angels court upheld the sale.
Eight years after 6 Angels, the Millennium ruling issued. In Millennium the auctioneer mixed up two properties. The trustee had submitted the correct opening bid to the auctioneer at $382,544.46. The auctioneer, however, read a script that called out the trustee sale number and legal description for one property and the physical address and opening bid for a different property. Hence the auctioneer announced the incorrect opening bid of $51,447.50, instead of $382,544.46. Upon discovering the error, the trustee promptly informed the purchaser of the need to rescind and refused to issue a deed.
The Millennium court held that, unlike the error in 6 Angels, the auctioneer’s error created a fatal ambiguity as to which property was auctioned since there was inconsistency in the legal description, physical address, and the opening bid that was cried out. The Millennium ruling permitted a sale rescission.
Two years after Millennium, in 2011, the Biancalana appellate ruling sided with 6 Angels. The amount of the mistaken opening bid in both cases was 10 percent of the specified bid, so gross inadequacy in price existed. However, the 6 Angels court did not find that the beneficiary’s mistaken bid instruction constituted “an irregularity in the sale procedure,” and the Biancalana appellate court followed 6 Angels, even though the mistake in Biancalana was made by the trustee, in discharge of its duties, not by the beneficiary. Considering that a trustee needs to conduct the sale fairly and openly, uncertainty arose as to the circumstances under which a trustee could exercise its authority to rescind a sale.
Supreme Court’s Reasoning in Biancalana
The California Supreme Court focused on whether the trustee’s mistake was part of the foreclosure sale process, and decided that it was. Processing a submitted bid pursuant to Civil Code § 2924h is a key function of a trustee within the statutory framework. The error resulted in the auctioneer announcing a mistaken bid, which the court reasoned qualified as an irregularity occurring within the statutory foreclosure sale process. The court refused to impute the trustee’s error to the beneficiary as a trustee is not a true agent and only acts in a limited sense. The court further reasoned that since the trustee’s deed had not issued, the statutory presumptions had not attached, and the purchaser had not been prejudiced in any meaningful way by the trustee’s mistake and prompt rescission of the sale.
While the Supreme Court ruling clarifies to some extent the type of error that falls within the foreclosure sale process, it also offers an incentive for trustees to exercise due diligence in reviewing the sale and identifying any possible irregularity before issuing the trustee’s deed.
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