ForeclosureA piece of real property in Watsonville, CA was subject to a non-judicial foreclosure sale. The foreclosing trustee represented that the delinquency amount was about $22,000. Actually, this was about one-tenth the true amount of about $220,000. The trustee did not know that it had made this error and the property went to foreclosure sale for the lower amount. There was only one bidder at the foreclosure sale and he bought the property for that lower amount.

The foreclosing trustee discovered its error within a day or two and refused to issue the trustee’s deed to the buyer and attempted to refund the buyer’s money. The buyer refused the money, demanded the trustee’s deed, then sued when the foreclosing trustee continued to refuse to issue the deed.

The trial court ruled for the foreclosing trustee on the ground that it would be unfair to allow the buyer to obtain a huge windfall at the expense of the foreclosing beneficiary, the foreclosing trustee’s principal. The trial court seemed to place some weight on the fact that no trustee’s deed had been recorded, so it would be equitable to conduct the foreclosure sale again.

In Biancalana v. T.D. Service Company (Oct. 31, 2011) No. H035400, the California Court of Appeal, Sixth Appellate District, reversed on the ground that the error was not a “procedural irregularity” entitling anyone to set aside the sale.

Implicit in this ruling is a finding that if the error caused monetary damage to the beneficiary, that’s the trustee’s problem. What is the measure? If the beneficiary had made a full credit bid, would it have ended up with the property? At what value – more or less than the amount of the debt? Or, would someone have bid above the amount owed, so that the beneficiary would have ended up with the amount of the debt? Will the beneficiary and the trustee end up in court? Given the amount in controversy, the lawyers’ and experts’ fees could eat up the value. Is there an applicable attorneys’ fee clause or statute? Will foreclosing trustees’ insurance premiums rise (yes)? Will one or more trade associations seek a legislative expansion of the definition of “procedural irregularity”?

Given the sharp uptick in foreclosures in California, expect more reported opinions and more legislative action in the months to come.

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