Setting aside a non-judicial foreclosure sale
Occasionally, a party may wish to set aside a non-judicial foreclosure sale. For example, a subordinate lienholder or a trustee in bankrutpcy may believe that the sale should have generated more funds, to be applied, in the case of a complaining subordinate lienholder, to reduction of the debt secured by the subordinate lien or, in the case of a complaining bankruptcy trustee, to dividends to be paid to unsecured creditors of the debtor. Or a debtor, in a state which allows a deficiency following non-judical foreclosure (not California), may believe that the sale should have generated more funds and thus reduced the potential amount of the deficiency. Non-judicial foreclosure sales may be set aside in a lawsuit by an aggrieved party for some irregularities in the sale procedure, including collusion or fraud in the bidding process, or for some failures to disclose information about the property being sold. On rare occasions a court may set aside a foreclosure sale if the high bid is so low (in comparison to a perceived value of the property) as to shock the conscience. But in both the non-bankruptcy and the bankruptcy context, a non-judicial foreclosure will normally not be set aside merely because of a perceived inadequacy of the amount of the high bid. Bidding would be further chilled if non-judicial foreclosure sales could be set aside for inadequacy of price or for other insubstantial reasons. Reasonably expecting the possibility of a lawsuit, who would want to bid high?
Upon a non-judicial foreclosure sale, the trustee conducting the sale will complete and deliver a Trustee's Deed Upon Sale to the purchaser. Such a deed may recite compliance with applicable procedures for a non-judicial foreclosure sale. See our sample Trustee's Deed Upon Sale. State law may provide that such recitals establish either a rebuttable presumption of compliance with foreclosure procedures or, in the case of a bona fide purchasers or encumbrancers for value and without notice of defects in the sale procedure, a conclusive presumption of compliance.
Deeds of trust frequently contain language regarding the conclusiveness of the sale procedure. Look at the sample Deed of Trust to see if such provisions exist. Is a trustor bound by such recitals because he or she signed the deed of trust?
Collusion in bidding
Potential bidders might be tempted to huddle before the foreclosure and conspire to reduce the amount to be bid at the foreclosure sale. The conspirators could agree that only one will bid at the foreclosure sale, that after the foreclosure sale the parties will auction the property amongst themselves, and that the proceeds of this second sale will be divided among the members of the group after reimbursement of the person who was the high bidder at the foreclosure sale. Such behavior would be grounds for setting aside a non-judicial foreclosure sale. In addition, such behavior might be a crime. See Cal. Civ. Code 2924h(g). Professional bidders are aware of these sanctions and are very careful not to do anything that may appear improper.
Postponement of sale
A foreclosing creditor might consider an attempt to chill bidding by repeatedly instructing the trustee to postpone a scheduled sale if a bidder other than the foreclosing creditor attends the sale. If this occurs repeatedly, other bidders may eventually become too frustrated to attend rescheduled sales. Such behavior, if proven, would constitute grounds for setting aside a non-judicial foreclosure sale.
There are, however, several legitimate reasons for postponing non-judicial foreclosure sales. For example, the trustor (the debtor) may be in the process of refinancing the property or arranging a sale and may need but a few more days to complete the process. Under such circumstances, a beneficiary may well honor the trustor's request for postponement of the sale. In addition, sales must be postponed if subject to a temporary restraining order obtained by a party in interest in state court or will be halted by the automatic stay resulting from the filing of a bankruptcy petition by or against the debtor. Cal. Civ. Code 2924g(c), (d) regulates postponement of foreclosure sale
Failure to disclose material information
Foreclosure sales are not accompanied by either express or
implied warranties about the condition of the property being sold. However, a third party
purchaser at a foreclosure sale may seek to rescind the sale on the grounds of failure of
a trustee or beneficiary to disclose material information. In Karoutas v. HomeFed Bank
, 232 Cal.App.3d 767 (1991), a buyer at a foreclosure sale sought to rescind the sale upon
allegations that a foreclosing lender had failed to disclose known unstable soil
conditions to prospective bidders at the time of the foreclosure sale. The buyer alleged
that repairs costs would exceed $250,000. The court found a common law duty to disclose.
Finally, we reject HomeFed's contention that the imposition of a duty to disclose under the facts of this case runs afoul of the public interest in speedy disposition of property under deeds of trust. There is also a public interest in the prevention of fraud. Moreover, the doctrine of caveat emptor does not apply to non-judicial foreclosure sales. Thus, '[i]t is the general rule that courts have power to vacate a foreclosure sale where there has been fraud in the procurement of the foreclosure decree or where the sale has been improperly, unfairly or unlawfully conducted, or is tainted by fraud, or where there has been such a mistake that to allow it to stand would be inequitable to purchaser and parties.' We cannot believe that the Legislature, in enacting section 2924 et seq., intended to immunize beneficiaries from liability for deceit, or to expand the risks borne by purchasers to include the assumption of damages resulting from a beneficiary's fraud.
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In sum, we find that neither the statutes nor public policy prohibits us from finding that a beneficiary under a deed of trust selling property pursuant to a power of sale may owe a common law duty to prospective bidders to disclose known facts materially affecting the value of the property. Because the Karoutases' complaint alleges facts sufficient to raise such a duty in HomeFed, the trial court erred in sustaining HomeFed's general demurrer. Id. @ 814.
Unanswered questions remain. What disclosure methods are acceptable? Will a lender fear that disclosures will generate allegations that it is inappropriately chilling bidding?