Tender rule and Credit bid

10 Apr

I. WHERE THE TRUSTEES DEED TRANSFERS BY CREDIT BID TENDER OF THE FULL DEBT IS NOT APPROPRIATE.

A. CREDIT BIDS ARE DISTINGUISHED FROM PURCHASE MONEY BIDS.
California Civil Code 2924h (b) provides:
(b) At the trustee’s sale the trustee shall have the right (1) torequire
every bidder to show evidence of the bidder’s ability todeposit with the
trustee the full amount of his or her final bid incash, a cashier’s
check drawn on a state or national bank, a checkdrawn by a state or
federal credit union, or a check drawn by a stateor federal savings and
loan association, savings association, orsavings bank specified in
Section 5102 of the Financial Code andauthorized to do business in this
state, or a cash equivalent whichhas been designated in the notice of
sale as acceptable to thetrustee prior to, and as a condition to, the
recognizing of the bid,and to conditionally accept and hold these
amounts for the durationof the sale, and (2) to require the last and
highest bidder todeposit, if not deposited previously, the full amount
of the bidder’sfinal bid in cash, a cashier’s check drawn on a state or
nationalbank, a check drawn by a state or federal credit union, or a
checkdrawn by a state or federal savings and loan association,
savingsassociation, or savings bank specified in Section 5102 of
theFinancial Code and authorized to do business in this state, or a
cashequivalent which has been designated in the notice of sale
asacceptable to the trustee, immediately prior to the completion of
thesale, the completion of the sale being so announced by the fall ofthe
hammer or in another customary manner. The present beneficiary ofthe
deed of trust under foreclosure shall have the right to offsethis or her
bid or bids only to the extent of the total amount due thebeneficiary
including the trustee’s fees and expenses.This provision provides for
the purchase options at a trustee’s sale.
The first type of bid at a trustee sale is a purchase money bid.
Purchase money bidders are by definition third parties who pay with cash
or a check. Unless there is a lis pendens or obvious title flaw which
puts them on constructive notice, PMBs are given the status of good
faith purchasers and the sale cannot be undone — even with tender.
Therefore, there can be two types of purchase money bidders:good faith
purchasers for value, and those on constructive notice of clouds or
flaws in title. Either type of purchase money bidder is required under
Civil Code 2924h to pay with cash or check,the actual cost of their
winning bid.
Lastly, the section provides for what is known commonly as a “credit
bid.” In a credit bid, the creditor on the note applies the amount of
indebtedness toward its bid on the property, therebyallowing it to take
title without paying a single dollar out of pocket at the sale. The
rationale is simple: the creditor has already lent the borrower/trustor
a sum of money in exchange for the trust deed For seemingly obvious
reasons, credit bidders are not allowed the status of a “good faith
purchaser for value” because they are deemed to be aware of any
improprieties of title which would undermine their title position.
B. PRINCIPLES OF EQUITY AND FAIRNESS GENERALLY REQUIRE PURCHASE MONEY
TENDER IN FAVOR OF PURCHASE MONEY BIDDERS.
Where a third party shows up to a trustee sale and without any notice of
title issues, comes out of pocket to purchase an auctioned home in good
faith, then simple fairness requires that he be paid back the moneyhe
spent prior to being divested of the title he purchased, prior to the
court allowing an action to proceed against that title, which he would
have to defend or forfeit. Tender is the general rule where it comes to
PMBs.
However, the law also provides exceptions to the tender requirement,
even in cases of PMBs. For instance, where the sale is void because
the trustee holding the sale is not empowered to hold a sale on a
property, then tender is not required to set aside the trustee’s deed
after sale because it is void and good title did not transfer in the
first instance. Bank of America v. LaJolla Group II. Tender is also
excepted in the case offraud, where the equities of the case favor the
victim, even over a good faith purchaser for value. (CITE) Such
exceptions are easily rationalized in light of the need for society to
depend on due process and fairness.
In these cases, the amount of tender required is the amount of the
winning bid.
C. PRINCIPLES OF EQUITY AND FAIRNESS DO NOT REQUIRE FULL DEBT TENDER IN
FAVOR OF CREDIT BIDDERS.
However, where a credit bid is made, the bidder is not a good faith
purchaser. It is the creitor party. The trustee deed is a mere matter
of paperwork, without a penny out of pocket. All the tender that is
required to put a credit bidder in a pre-sale condition is 1) cost of
the trustee sale, 2) interest and fees, and 3) reinstate the preexisting
debt which would still be serviced by the creditor but for the sale.
Especially where it may be shown that a sale was knowingly wrongful,
without right, and carried out in spite of borrower’s preexisting claims
on the validity of the debt or recorded lis pendens, equity weighs
heavily against requiring the borrower to make a full tender of the
challenged debt rather than what is required to put the creditor in a
pre-sale position.
Defendants argue that the tender in these cases should be not the sale
price, not the amount required to put the defendant in a pre-sale
position, but the full amount of the debt! In so doing, Defendants are
conflating the idea of a RESCISSION tender with the concept of a SET
ASIDE TENDER. While sharing a common name, these are two very different
beasts.
III. TENDER IS AN EQUITABLE PROCEDURE SUBJECT TO THE COURT’S EQUITABLE
DISCRETION AND THE COURT MAY FASHION TENDER IN THE APPROPRIATE FORM.
a. Court’s equitable discretion allows it great leeway in fashioning a
remedy appropriate to this case.
Court has equitable discretion (cite) etc. .
b. The creditor does not need tender of the full debt to be put in a
pre-sale condition.
Do the math — What has the creditor actually been displaced from its
pre-sale position?
c. A Credit Bidders Expectations do Not Require the Same Reconciliation
that a PMB’s Expectations Require.
The creditor was not expecting payment in full for 30 more years vs. a
PMB has immediate expectation of title for money and the deal the PMB
gets is title for money; the deal the bank had wasmonthly payments at
interest over 30 years.
d.
In a public policy sense, the imposition of full debt tender on
borrowers as to credit bid grantees by many courts in this state has
caused the floodgates to open for massive abuse of the California
non-judicial foreclosure system. This effect has been caused because
banks view wrongful foreclosure as having no practical recourse where
the only penalty for a wrongful foreclosure is getting a 30-year debt
paid in full 25 years early — which is in reality not a penalty at all,
but rather an incentive to hold more foreclosure sales whether they are
wrongful or not.
CONCLUSION
If the sale was wrongful to begin with, and the title has not passed
beyond the pre-sale parties, no rationale exists for overburdening the
Plaintiff with a full-debt tender where the sale has been a matter of
paperwork rather than payment, and to require a tender bond in the
amount of the cost of the sale and fair marker rent going forward would
adequately protect the creditor from prejudice.

… Just a rough draft.
Any thoughts on the idea?
Any help in drafting?
I think it may help to go through some of the tender cases and look at
the equities, the status of the parties, and see if we can find some
strong exception cases where the court’s rationale is actually looking
at the equities rather than the word “tender”.

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3 Responses to “Tender rule and Credit bid”

  1. David August 5, 2010 at 1:34 pm #

    Timothy I read in the california civil procedure something regarding title claim when you you use a quite title action regarding tender rule, I like what you posted but can you look that up. I went to the law library and I try to find out regarding that and I got confused. Thanks!

  2. Will Cutlip August 21, 2010 at 2:26 pm #

    I got into an option with Downey savings and soon after my mortgage was originated it was registered to MERS. the FDIC informed me via mail that my loan was sold to Greenwich just before Downey savings was seized it was sucuritized and pooled into the harbor view mortgage loan tust 2007-7 Wells Fargo is the master servicer , US Bank the primary servicer has replied to my request for information stating there are possible hundreds of owner/ investors of my loan . Ocwen is my servicer. I have tried to get a modification from my servicer Ocwen several times but have been unable for reasons not fully explained. and I have supplied full documentation three time for them. Since my loan reset reset I have been making negative amortization payments although technically current on my mortgage and have excellent credit I am adding $799 to the principal every month.I will be reaching the cap on my deferred payments soon and will undoubtedly become a foreclosure statistic if I cant find an avenue of relief..

    With recent decisions regarding MERS and the information I have regarding my loan being sold to Greenwich but never assigned do you think I have any angle to either force a modification or show improper assignment . Once the deed has been split from the note is there any legal ramification to this and can MERS transfer or assign the deed out of its name without recourse I pray that someone will have a suggestions or advise that could allow me to keep my home. If I could refinance at today’s rate it would be lower than I currently paying for negative amortization.

  3. Athina k. Powers February 7, 2014 at 5:23 am #

    Page 489 48 Cal.Rptr.2d 489 41 Cal.App.4th 277, 95 Cal. Daily Op. Serv. 9821, 95 Daily Journal D.A.R. 16,987 PACIFIC INLAND BANK, Plaintiff and Appellant, v. Charles AINSWORTH et al., Defendants and Respondents. No. G016526. Court of Appeal, Fourth District, Division 3, California. Dec. 21, 1995. Review Denied March 14, 1996.
    [41 Cal.App.4th 279] Steven C. Smith and Jeffrey S. Sinek, Santa Ana, for Plaintiff and Appellant.
    Callahan, McCune & Willis, Robert W. Thompson and Elizabeth L. Kolar, Tustin, for Defendants and Respondents, Charles Ainsworth and Ainsworth Appraisal Services.
    OPINION
    SONENSHINE, Acting Presiding Justice.
    Pacific Inland Bank (PIB) appeals from a judgment granting Charles Ainsworth and Ainsworth Appraisal Services’ (Ainsworth) motion for summary judgment and dismissal of its complaint. The court concluded the full credit bid rule barred PIB from maintaining a negligence action against Ainsworth, a third party nonborrower. We agree and affirm.
    Page 490 I
    Santiago Investors, wishing to develop two vacant parcels, approached PIB for a $300,000 loan. PIB retained Ainsworth to appraise the properties and determine, inter alia, whether applicable zoning restrictions permitted the proposed construction of a shopping center on one parcel and a gas station on the other.
    The appraisals indicated the properties were zoned for commercial use and valued the shopping center site at $1,500,000 and the gas station site at $225,000. Based on this information, PIB loaned Santiago $300,000 secured by a first deed of trust.
    [41 Cal.App.4th 280] All did not proceed as planned. Contrary to Ainsworth’s appraisals, the properties were not zoned for commercial use.
    Santiago defaulted on the loan and PIB foreclosed on the lien, eventually acquiring both parcels at a nonjudicial foreclosure sale after tendering a full credit bid of $335,615.82.
    PIB’s attempts to resell the properties were unsuccessful; the highest offer it received for both parcels was $185,000. PIB filed the underlying suit alleging Ainsworth’s breach of contract and its negligence in preparing the appraisals resulted in the loan being undersecured. The trial court granted Ainsworth’s motion for summary judgment, concluding PIB’s full credit bid established as a matter of law it had not suffered any damages.
    II
    Two appellate courts recently addressed a similar issue. In GN Mortgage Corp. v. Fidelity Nat. Title Ins. Co. (1994) 21 Cal.App.4th 1802, 27 Cal.Rptr.2d 47 and Western Fed. Savings & Loan Assn. v. Sawyer (1992) 10 Cal.App.4th 1615, 13 Cal.Rptr.2d 639, the courts concluded a full credit bid lender cannot establish damages resulting from a defendant’s alleged fraud in seeking a loan because the credit bid conclusively establishes lack of impairment to the security. 1 However, in Alliance Mortgage Co. v. Rothwell, supra, 10 Cal.4th 1226, 44 Cal.Rptr.2d 352, 900 P.2d 601, our Supreme Court held otherwise. Lenders’ “full credit bids do not as a matter of law bar [their] fraud claims….” (Id. at p. 1251, 44 Cal.Rptr.2d 352, 900 P.2d 601.) In this appeal, we consider whether the Supreme Court intended that a full credit bid should bar other tort actions. For reasons we now explain, we conclude Alliance is limited to fraud claims and does bar the causes of action stated here.
    III FULL CREDIT BID
    -1-
    Pacific Inland Bank v. Ainsworth, 48 Cal.Rptr.2d 489, 41 Cal.App.4th 277 (Cal.App. 4 Dist., 1995)
    When a debtor defaults on a secured real property loan, the lender-beneficiary may institute nonjudicial foreclosure proceedings triggering a trustee’s sale of the property to satisfy the obligation. (Civ.Code, § 2924 et seq.) The beneficiary, like any other party, may bid cash for the property, offering more or less than the balance on the debt. However, unlike other buyers, a lender-purchaser may credit bid all or any portion of the outstanding debt because it would be useless to require the lender to tender cash to [41 Cal.App.4th 281] itself. (Central Sav. Bank of Oakland v. Lake (1927) 201 Cal. 438, 447- 448, 257 P. 521.) Once made, there is no distinction between lender-purchasers’ credit bids and other buyers’ cash bids. (Civ.Code, § 2924h, subd. (b).)
    A cash or credit bid extinguishes the debt owing on the property by the amount bid. Therefore, when a lender acquires the property either by cash or on a credit bid, for the full amount due by terms of the note and deed of trust, it is no longer the creditor or mortgagor of the borrower because there is no longer any debt to be enforced. As explained by our Supreme Court almost 100 years ago, “whatever interest [it] had[,] … ceased with the extinguishment of the indebtedness.”
    Page 491
    (Reynolds v. London etc. Ins. Co. (1900) 128 Cal. 16, 22, 60 P. 467.)
    “Real property, as security, affords a mortgagee … primary, and in many cases … sole, means of repayment of a debt should the mortgagor default. Generally speaking, impairment of security is that circumstance where the mortgaged property’s value no longer assures satisfaction of the debt…. [Therefore, a full credit bid lender] is precluded from recovering for this impairment of security because it has been established, by [the] full credit bid, that [the] security was sufficient to satisfy the debt.” (Brown v. Critchfield (1980) 100 Cal.App.3d 858, 869, 161 Cal.Rptr. 342.)
    Like any other purchaser, a lender has no obligation to bid any particular amount. It should assess the property’s value at the time of the trustee’s sale and bid accordingly. (Cornelison v. Kornbluth (1975) 15 Cal.3d 590, 608, 125 Cal.Rptr. 557, 542 P.2d 981; Sumitomo Bank v. Taurus Developers, Inc (1986) 185 Cal.App.3d 211, 225, 229 Cal.Rptr. 719.) Any subsequent decrease in the property is deemed
    the result of the purchaser’s bad business judgment or a severe market downturn. (GN Mortgage Corp. v. Fidelity Nat. Title Ins. Co., supra, 21 Cal.App.4th 1802, 1809, 27 Cal.Rptr.2d 47.) “[A]fter full credit bid, [a] lender cannot pursue any other remedy regardless of [the] actual value of the property on the date of sale[.]” (Alliance Mortgage Co. v. Rothwell, supra, 10 Cal.4th 1226, 1238, 44 Cal.Rptr.2d 352, 900 P.2d 601.)
    THE SUPREME COURT AND THE FULL CREDIT BID
    Our Supreme Court discussed the effect of a lender’s full credit bid in a nonjudicial foreclosure sale in Cornelison v. Kornbluth, supra, 15 Cal.3d 590, 125 Cal.Rptr. 557, 542 P.2d 981. There, the plaintiff sold a single family dwelling, taking back a promissory note secured by a first deed of trust on the property. (Id. at p. 594, 125 Cal.Rptr. 557, 542 P.2d 981.) After the property was condemned as unfit for human habitation and the purchasers defaulted on the note, the plaintiff purchased the property at the trustee’s sale by making a full credit bid. (Id. at pp. 594, 606, 125 Cal.Rptr. 557, 542 P.2d 981.) Plaintiff then sued a third party nonborrower for waste. (Id. at p. 594, 125 Cal.Rptr. 557, 542 P.2d 981.)
    [41 Cal.App.4th 282] The Supreme Court recognized a lender’s claim for bad faith was not precluded by the antideficiency statutes. However, it “further concluded that even assuming that defendant is liable on such basis, nevertheless plaintiff cannot recover since she purchased the subject property at the trustee’s sale by making a full credit bid[ ] … [because] the measure of damages for waste is the amount of the impairment of the security, that is the amount by which the value of the security is less than the outstanding indebtedness and is thereby rendered inadequate. [Citation.] … [T]he mortgagee’s purchase of the property securing the debt by entering a full credit bid establishes the value of the security as being equal to the outstanding indebtedness and ipso facto the nonexistence of any impairment of the security…. [p] [Therefore,] [w]here an indebtedness secured by a deed of trust covering real property has been satisfied by the trustee’s sale of the property on foreclosure for the full amount of the underlying obligation owing to the beneficiary, the lien on the real property is extinguished. [Citations.]” (Cornelison v. Kornbluth, supra, 15 Cal.3d 590, 606, 125 Cal.Rptr. 557, 542 P.2d 981, fn. omitted.)
    The Supreme Court in Alliance revisited the full credit bid issue but this time in a slightly different
    -2-
    Pacific Inland Bank v. Ainsworth, 48 Cal.Rptr.2d 489, 41 Cal.App.4th 277 (Cal.App. 4 Dist., 1995)
    context. The court limited its consideration to whether such a bid “bars the lender [as a matter of law] from maintaining a fraud action [against] … third part[y nonborrowers] who fraudulently induced the lender to make the loans.” (Alliance Mortgage Co. v. Rothwell, supra, 10 Cal.4th 1226, 1241, 44 Cal.Rptr.2d 352, 900 P.2d 601, original italics.) The court concluded it did not, rejecting contrary holdings in GN Mortgage Corp. v. Fidelity Nat. Title Ins. Co., supra, 21 Cal.App.4th 1802, 27 Cal.Rptr.2d 47 and Western Fed. Savings & Loan Assn. v. Sawyer, supra, 10 Cal.App.4th 1615, 13 Cal.Rptr.2d 639.
    Alliance held the full credit bid is not a bar to a fraud cause of action against a third party nonborrower when the lender can establish it was “intentionally and materially
    Page 492
    misled by its own fiduciaries or agents as to the value of the property prior to even making the loan….” (Alliance Mortgage Co. v. Rothwell, supra, 10 Cal.4th 1226, 1246, 44 Cal.Rptr.2d 352, 900 P.2d 601, fn. omitted.) “Thus, to the extent Alliance’s full credit bids were proximately caused by defendants’ fraudulent misrepresentations, and this reliance without independent or additional inquiry was either appropriate given the context of the relationship or was not otherwise manifestly unreasonable, Alliance’s bids cannot be deemed an admission of the properties’ value…. Hence, the full credit bid rule would not apply.” (Alliance Mortgage Co. v. Rothwell, supra, 10 Cal.4th at p. 1247, 44 Cal.Rptr.2d 352, 900 P.2d 601.)
    FULL CREDIT BID RULE STILL BARS NONFRAUD CLAIMS AGAINST THIRD PARTY NONBORROWERS
    The Supreme Court in Alliance made its intentions very clear from the inception of its opinion. “We here determine whether a lender’s acquisition [41 Cal.App.4th 283] of security property by full credit bid at a nonjudicial foreclosure sale bars the lender as a matter of law from maintaining a fraud action against third party nonborrowers who fraudulently induced the lender to make the loans. The Courts of Appeal are in conflict on this issue. We granted review to resolve the conflict, and now conclude that such an action is not precluded.” (Alliance Mortgage Co. v. Rothwell, supra, 10 Cal.4th 1226, 1231, 44 Cal.Rptr.2d 352, 900 P.2d
    601, italics added.) The court again expressed that its holding was limited to fraud claims and included third party nonborrowers at the conclusion of the opinion. “We conclude that Alliance’s full credit bids do not as a matter of law bar its fraud claims against [these third party nonborrower] defendants.” (Id. at p. 1251, 44 Cal.Rptr.2d 352, 900 P.2d 601.) Indeed, each of the court’s many references to the issue being considered includes that it is a claim of fraud. (E.g., “The issue here is the effect of a lender’s full credit bid at a nonjudicial foreclosure sale on its claim of fraud….” (Id. at p. 1235, 44 Cal.Rptr.2d 352, 900 P.2d 601.).)
    The Alliance court in limiting its holding to fraud-based claims, left Cornelison intact. “[T]o the extent [a] full credit bid[ ] [is] not proximately caused by defendants’ fraudulent misrepresentations, … the full credit bid rule applies….” (Alliance Mortgage Co. v. Rothwell, supra, 10 Cal.4th 1226, 1247, 44 Cal.Rptr.2d 352, 900 P.2d 601.) As the court acknowledged, its holding is not a new statement of law. “[T]he antideficiency statutes do not preclude an action against a borrower for fraud in the inducement of a loan.” (Alliance Mortgage Co. v. Rothwell, supra, 10 Cal.4th at p. 1237, 44 Cal.Rptr.2d 352, 900 P.2d 601.) “Nothing in [the full credit bid rule] negates the well-established fraud exception in California to the finality of a foreclosure, or indeed any, property sale.” (Id. at pp. 1250-1251, 44 Cal.Rptr.2d 352, 900 P.2d 601.) Conversely, absent a fraud claim, a full credit bid estops a plaintiff from establishing damages.
    We are unpersuaded by PIB’s arguments to the contrary. It maintains because the full credit bid rule and anti-deficiency legislation result from the same public policy concern, if the former is inapt, so is the latter. PIB misreads applicable legal history. Our Supreme Court recognized the full credit bid rule long before anti-deficiency legislation was enacted or Cornelison was decided. (Reynolds v. London etc. Ins. Co., supra, 128 Cal. 16, 20-22, 60 P. 467.) While the rule and the legislation may relate to some of the same public policy concerns, they stand independent of one another. Indeed, the rule, unlike the legislation, is a legal conclusion unmotivated by public policy.
    We are sympathetic to PIB’s position Ainsworth should not be allowed to escape liability. However, PIB was not precluded from acquiring the property at an amount far less than that owed, thus preserving its rights to seek damages from Ainsworth. Moreover, it
    -3-
    Pacific Inland Bank v. Ainsworth, 48 Cal.Rptr.2d 489, 41 Cal.App.4th 277 (Cal.App. 4 Dist., 1995)
    could have taken appropriate steps to [41 Cal.App.4th 284] ascertain the actual value of the properties before the trustee’s sale. As noted in Alliance, “The lender, perhaps more than a third party purchaser with fewer resources with which to gain insight into the property’s value, generally bears the burden and risk of making an informed bid.” (Alliance Mortgage
    Page 493
    Co. v. Rothwell, supra, 10 Cal.4th 1226, 1246, 44 Cal.Rptr.2d 352, 900 P.2d 601.) PIB has offered no explanation, nor can we think of any, why it should receive greater protection from its own carelessness than does an ordinary purchaser. This is particularly true in these situations where a lender-purchaser’s full credit bid may discourage other cash bidders. PIB controlled the timing of the sale and was in the best position to discover the actual value of the properties. If the property increased in value, PIB would have been entitled to the benefit of its bid. It is reasonable for it to bear the burden. (See 4 Miller & Starr, Cal. Real Estate (2d ed. 1989) § 9:158, pp. 544-545.) 2
    The judgment is affirmed. Respondents shall recover their costs on appeal.
    CROSBY and WALLIN, JJ., concur. —————
    1 We also note Romo v. Stewart Title of California (1995) 35 Cal.App.4th 1609, 42 Cal.Rptr.2d 414, which was decided in June 1995. The remittitur was issued on August 24, 1995. Romo holds, inter alia, a full credit bid precludes a lender’s subsequent action against a third party nonborrower for fraud. (Id. at p. 1616, 42 Cal.Rptr.2d 414.) Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226, 44 Cal.Rptr.2d 352, 900 P.2d 601, which was decided on August 28, does not overrule or cite Romo.
    2 “It is astounding that beneficiaries still enter full credit bids without consideration of their effect. The full credit bid rule is so clearly established that it would be apparent malpractice for an attorney who conducts a foreclosure sale to fail to advise a client of its effect prior to the sale.” (4 Miller & Starr, Cal. Real Estate (2d ed., 1995 pocket supp.) § 9:158, com., p. 92.)
    -4-

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