Foreclosure trustee not liable for canceling foreclosure sale and returning the highest bidder's money with interest after discovering that borrower and lender had agreed to postpone the sale
by Earl R. Wallace, Esq.*
Residential Capital, LLC v. Cal-Western Reconveyance Corp
(2003) 108 Cal.App.4th 807, 134 Cal.Rptr.2d 162
The Court of Appeal rejected the claims of the highest bidder in a nonjudicial foreclosure sale for breach of contract, negligence and negligent misrepresentation, where the trustee returned the bidder's money with interest instead of delivering the trust deed after discovering that the borrower and lender had agreed to postpone the sale.
The day before a foreclosure sale, the lender's servicing agent sent an e-mail to the trustee, Cal-Western Reconveyance Corp. ("trustee") instructing it to postpone the sale. After reading the e-mail the day after bidding (oops), the trustee realized that there had been an agreement between the borrower, Arzivus and lender to postpone the sale. The trustee advised Residential Capital, LLC, the highest bidder, that it did not have the authority to conduct the sale and the trustee's deed would not be issued, and returned the bidder's checks, with a trustee check for three days of interest, accrued on the amount tendered. The bidder sued Bank One, the lender, and the trustee.
The trial court ruled in favor of the trustee and lender. According to the court, "Under the facts of this case, including that the deed was never delivered to the plaintiff, the sale...was void. Because the sale was void, the appropriate remedy for any damage to the plaintiff was the return of the purchase price, plus accrued interest.
The Court of Appeal affirmed.
As to the breach of contract claim, the court of appeal noted that both parties attempted to apply common law contract principles of voidness, voidability, unenforceability and illegality to the nonjudicial foreclosure procedure. The court observed that this approach was unhelpful. It was difficult to apply two party contract principles to a transaction involving the rights of many parties affected by the sale. More importantly, nonjudicial foreclosure sales are comprehensively regulated by a detailed statutory scheme set forth in Civil Code section 2924 et seq., which is not based on common law breach of contract principles. The court concluded that, although the plaintiff's bid was accepted at the nonjudicial sale, the discovery of the agreement to postpone the sale by the trustor and beneficiary before the trustee's deed was issued limited the bidder's relief to the return of its money, plus interest.
The court further rejected the bidder's negligence claims on the grounds that the trustee did not owe a legal duty to the bidder. The duty of the trustee is to ensure that the foreclosure sale is fairly conducted to achieve the highest possible price. As to bidders, the duty only applies to the extent that the trustee may not unfairly exclude the bidder from participation in the bidding process. The court concluded that if it recognized the negligence claim, it would be engaging in judicial legislation by grafting a remedy onto a comprehensive statutory scheme in the absence of a compelling justification for doing so.
Finally, as to the negligent misrepresentation claim, the bidder argued that the trustee's failure to discover and disclose information unknown to it about the postponement of the sale rendered its representations about the sale's timing to be an "implied assertion." The bidder also alleged that the beneficiary was negligent for not correcting its instructions to the trustee. The court concluded that the failure to correct the error was unfortunate. However, once again, the court declined to recognize a new remedy in an area of law governed by a comprehensive statutory scheme.
The moral to the story - read your e-mail!
* Earl R. Wallace is a partner with the law firm of Ruzicka & Wallace, LLP, which serves as legal counsel to REOMAC and specializes in representing lenders with regard to California foreclosures, evictions, receiverships, civil litigation and motions for relief from the automatic stay.
