This article discusses a trustee’s statutory duties for publicly conducting a privately agreed-to foreclosure sale…continued from March 2007 Journal.

The location of the sale


A trustee’s sale must be held in the county where the secured real estate is located. [CC §2924g(a)]


If the property or properties being foreclosed are located in two or more counties, the trustee’s sale may take place in any one of the counties where the property, or a portion of the property, is located. [CC §2924g(b)]


For example, consider a trustee who is to conduct a foreclosure sale of two properties which secure the same debt by the same trust deed and are located in different counties.


The trustee can sell both properties at one sale, in either county the trustee chooses. Also, the trustee can hold the sale in any area of the chosen county.


Foreclosing a blanket trust deed


If more than one property is security under one trust deed, and the properties are to be sold at the same trustee’s sale, the trustee may auction off the properties one at a time. The first property will be sold at the time published in the notice of trustee’s sale (NOTS). Each additional property will be sold immediately following completion of the preceding sale(s). [CC §2924g(a)]


If the owner of the property is present at the sale, he may direct the order in which the trustee sells the secured properties, should a certain order of the sales be advantageous to him. [CC §2924g(b)]


Unless the trust deed holder or lienholder foreclosing faces an additional risk of loss, the first properties sold should be those which have not been further encumbered with liens junior to the trust deed being foreclosed. The second and any further properties sold should be encumbered with one junior lien, then two liens junior, etc., a procedure called the inverse order of alienation. [CC §2899]


When two or more properties are being foreclosed under the same trust deed, the price paid by the highest bidder for the first property frequently does not fully satisfy the sums due under the trust deed. Here, the trustee will immediately begin the sale of the second property. The trustee then continues to sell the properties until enough have been sold to fully satisfy the debt. [CC §2924g(b)]


However, a trustee may sell the secured properties as a whole for one price, if he is authorized to do so under the trust deed. [In re Affordable Housing Development Corporation (9th Cir. BAP 1994) 175 BR 324; CC §2924g(b)]


Institutionally created trust deeds typically include language in the power-of-sale provision allowing the trustee to sell the secured properties as a whole or individually in any order determined by the trustee.


Editor’s note — first tuesday Form 450 Long Form Deed of Trust and Assignment of Rents, does not contract away a property owner’s right to direct the order in which his properties are sold or the rule of inverse order of alienation.


Postponing the sale


A trustee’s sale may be postponed by the trustee at any time prior to the completion of the foreclosure sale. The trustees sale may be postponed on the instruction of the beneficiary or by the trustee at his own discretion. [CC 2924g(c)(1)]


Consider a trustee conducting a sale of four parcels of real estate who opens bidding on the first parcel to be sold.


An agent of the beneficiary makes a full credit bid on the first parcel being sold. Before the trustee accepts the bid, the owner, who is present at the sale, disrupts the proceedings and declares the sale is over since the beneficiary made a full credit bid on the first parcel.


In response, the trustee announces the sale is to be postponed to a new date.


In this example, the trustees postponement of the sale is proper since the high bid has not yet been accepted by the trustee. The trustee has discretionary authority to postpone the trustees sale to protect either the owners or the beneficiary’s interest in the properties being foreclosed. [Hatch v. Collins (1990) 225 CA3d 1104]


Also, the postponement of a trustees sale which has been initiated but not completed cancels the last bid. [CC 2924h(e)]


Thus, the beneficiary’s full credit bid on the first parcel of real estate was canceled since the bid had not been accepted by the trustee. For the beneficiary, the agent at the next trustees sale will probably underbid on each parcel until he has used up his entire credit bid or acquired all the properties.


To postpone or reschedule a trustee’s sale, the trustee gives notice of postponement at the time and place stated in the notice of trustee’s sale (NOTS) for the sale by a public declaration of:


·     the reason for the postponement; and


·     the new date and time of the foreclosure sale.


The postponed trustees sale must also be held at the same place originally stated in the recorded NOTS. [CC 2924g(d)]


Editors note — Prior to the legislation which required a postponed trustees sale to be held at the location specified in the recorded NOTS, some lenders and their trustees played chill-bidding games by scheduling sales in locations which were out-of-the-way to ensure the lender was the high bidder on a credit bid. Postponed trustees sales would be rescheduled at distant, purposefully difficult to find locations to discourage other persons from attending and bidding at the sale.


The trustee may postpone the sale multiple times, postponing it to occur at any time prior to 365 days from the sale date set in the original recorded NOTS. Should the sale be postponed to a date later than the 365 days following the date set in the NOTS, the trustee must renotice the sale by recording, publishing, posting and serving a new NOTS. [CC 2924g(c)(1), (2)]


Postponements of the sale must be made in accordance with any of the following:


·     a mutual agreement, written or oral, between the trustor (owner) and the beneficiary;


·     a court order;


·     a stay caused by operation of law; or


·     at the discretion of the trustee. [CC 2924g(c)(2)]


Additionally, the sale may be held no sooner than the seventh day after the earlier of:


·     the dismissal of an action; or


·     the termination or expiration of an injunction, restraining order, or stay. [CC 2924g(d)]


The sale may be held prior to the expiration of the seven day period only if directed by the court. If the sale is scheduled to occur during the seven day period without a court order, the sale must be postponed and a new notice of postponement must be given. [CC 2924g(d)]


The trustee is required to keep records of all postponements and the reason for each postponement. [CC 2924g(d)]


Sold to the highest bidder


A trustees sale is essentially a public auction by private agreement (the trust deed) where the property is sold to the highest bidder. [CC 2924h]


Before the actual trustees sale begins, the trustee can:


·     demand all prospective bidders to show evidence of their financial ability to pay as a precondition to recognizing their bids; and


·     hold the prospective bidders’ amounts to be bid. [CC 2924h(b)(1)]


A bidder can tender his bid amount in U.S. dollars in the form of:


·     cash;


·     a cashiers check drawn on a state or national bank;


·     a check issued by a state or federal thrift, savings and loan association (S&L), savings bank or credit union; or


·     a cash equivalent designated by the trustee in the notice of trustee’s sale (NOTS), such as a money order. [CC 2924h(b)(1)]


Each bid made at a trustees sale is an irrevocable offer to purchase the property. However, any subsequent higher bid cancels a prior bid. [CC 2924h(a)]


The trustees sale is considered final and completed on the trustees acceptance of the last and highest bid. [CC 2924h(c)]


Once the highest bid has been accepted by the trustee, the trustee can require the highest bidder to immediately deposit the full amount of the final bid with the trustee, if the trustee is not already holding all the bidders’ funds. [CC 2924h(b)(2)]


If the highest bidder tenders payment by a check issued by a credit union or a thrift, the trustee can refrain from issuing the trustees deed until the funds become available. [CC 2924h(c)]


Failure to deliver payment of a bid


If a high bidder tenders payment by check and the funds are not available for withdrawal:


·     the trustees sale is automatically rescinded; and


·     the trustee will send the highest bidder a notice of rescission for failure of consideration, provided the trustee has the bidder’s address. [CC 2924h(c)]


Additionally, the trustee must set a new trustee’s sale date and record, serve and publish a new notice of trustee’s sale (NOTS), following all statutory requirements.


The highest bidder who fails to tender payment when demanded or cancels the check is liable to the trustee for all damages resulting from the refusal to tender payment, including court costs, reasonable attorney fees and the costs for recording and serving the new NOTS. [CC 2924h(d)]


In addition, the bidder who fails to tender payment or cancel the check will be guilty of a misdemeanor punishable by a fine up to $2,500. [CC 2924h(d)]


Bids by the beneficiary


The beneficiary is frequently the only bidder, and thus the highest bidder, at a trustees sale. The beneficiary may bid, without tendering funds, up to an amount equal to the debt secured by the property being sold, plus trustees fees and foreclosure expenses, called a full credit bid. [CC 2924h(b)]


If the beneficiary is the highest bidder under a full credit bid, the trustee retains possession of the beneficiary’s note (or other evidence of the secured debt) in exchange for the trustees deed to the property.


However, the beneficiary is not required to bid the full amount of the indebtedness to acquire the property at the trustee’s sale. The beneficiary can bid an amount below the full amount of the debt, called an underbid.


For example, a beneficiary commences foreclose on three properties encumbered by a trust deed in default. The balance due on the trust deed note is $90,000. The beneficiary, being the sole bidder at the trustees sale, bids in each property for $30,000.


As a result, the lender acquires each parcel of secured real estate sold at the trustee’s sale.


By underbidding on two or more properties being sold, the beneficiary can continue to “bid in” the secured properties until:


·     the high bids have satisfied the debt; or


·     all secured properties have been sold.


Conveyance by a trustees deed


On the completion of a trustee’s sale, the trustee uses a trustees deed to grant title to the property to the highest bidder.


When a buyer other than the beneficiary purchases the property at a trustee’s sale for value and without notice of any title or trustees sale defects, the buyer is considered a bona fide purchaser (BFP).


The BFPs interest in the property sold is perfected as of 8 a.m. on the date of the trustees sale, so long as the trustees deed conveying the property to the BFP is recorded:


·     within 15 calendar days after the date of the trustees sale; or


·     the next business day following the fifteenth day after the sale if the county recorder in the county where the property is located is closed on the fifteenth day. [CC 2924h(c)]


The title received by the BFP at the trustee’s sale is clear of any interest claimed by the owner, lienholders or tenants whose interests are junior to the foreclosed trust deed. [Hohn v. Riverside County Flood Control and Water Conservation District (1964) 228 CA2d 605]


More importantly, the title is taken clear of any unrecorded prior interests or claims in the property held by persons not in possession of the real estate, if the highest bidder is a BFP with no constructive notice or actual knowledge of those priority claims when acquiring the property. [CC 1107; 1214]


Additionally, a lis pendens recorded against the real estate prior to the trustees sale places bidders on constructive notice of a lawsuit involving a claim to a right in title or to possession of the real estate. The claim may have priority to the trust deed being foreclosed. If so, the lis pendens destroys the BFP status of the highest bidder as to the person asserting the claim, called a claimant.


The buyer of real estate, whether or not purchased at a trustees sale, takes title to the property subject to the claimant’s rights disclosed by the lis pendens if the claims have priority to the trust deed being foreclosed.


Additionally, unlike other tax liens, property tax liens and improvement district bond liens are not extinguished by the trustees sale since they have priority over the trust deed being foreclosed. [Sohn v. California Pacific Title Ins. Co. (1954) 124 CA2d 757]


Surplus funds


The price paid for property by the highest bidder at a trustee’s sale occasionally exceeds the amount of debt and costs due under the foreclosed trust deed. The excess amounts are called surplus funds. The trustee has a duty to distribute the surplus funds to the junior lienholders and the owner(s).


The gross proceeds from the trustees sale are distributed in the following order:


·     to pay the costs and expenses of the trustees sale, including trustees fees or attorney fees;


·     to pay the indebtedness secured by the property which is in default, including advances made by the beneficiary;


·     to satisfy the outstanding balance of junior lienholders of the property, distributed in the order of their priority; and


·     to the owner, the owners successor-in-interest or the vested owner of record at the time of the trustees sale. [CC 2924k(a)]


When surplus funds remain after payment of foreclosure costs and satisfaction of the secured debt, the trustee must either:


·     send a notice of surplus funds by registered or certified first-class mail to all parties who were entitled to receive a notice of default (NOD); or


·     file an interpleader action and deposit the funds with the court within 30 days after the execution of the trustees deed. [CC 2924j(a)]


The notice of surplus funds will state:


·     the property has been sold at a trustees sale;


·     the party receiving the notice may have a claim to the sale proceeds;


·     any claim made must be in writing, signed under penalty of perjury and submitted to the trustee within 30 days of the date of the notice; and


·     the claim must include the amount of the claim and an itemized statement of principal, interest and other charges. [CC 2924j(a)]


If, after exercising due diligence to determine the priority of written claims, the trustee is unable or uncertain how to distribute the sale proceeds, the trustee:


·     files a declaration of the unresolved claims with the applicable court in the county where the sale occurred; and


·     deposits the proceeds with the clerk of the court. [CC 2924j(c)]


Trustees fees


On completion of the trustees sale, the maximum fee the trustee is authorized to charge for his services provided during the entire foreclosure process is limited to the greater of:


·     $425; or


·     1% of the unpaid principal sum secured by the foreclosed real estate on the date of the notice of default (NOD). [CC 2924d(b)]


Thus, if the unpaid debt secured by the real estate is $200,000, the trustee is entitled to charge the beneficiary no more than $2,000 on completion of the services rendered by the trustee during the foreclosure process.


Any fee paid by a trustee to an agent employed by the trustee to perform services may not, when combined with other trustees fees, exceed the total amount the trustee is authorized to receive as payment. [CC 2924d(d)]


Costs and expenses recoverable by the trustee, in addition to the trustee’s fee, are limited to the costs incurred for recording, mailing, publishing and posting notices. The trustee may also charge up to $50 per postponement of the sale, and an insurance premium, the amount of which is not limited, for obtaining a trustees sale guarantee. [CC 2924c(c)]


Any kickbacks, rebates or referral fees to others involving the services provided by the trustee are prohibited. A person who violates this rule is liable to the trustor for three times the amount of the kickback, rebate or referral fee, in addition to any other remedies provided by law. [CC 2924h(g)]


The trustee named in the trust deed often refers foreclosure requests to other persons who act as professional foreclosure trustees. For this referral, the named trustee cannot legally collect a referral fee. The same prohibition would apply to beneficiaries who appoint a trustee based on a kickback of a portion of the trustees fee should a third-party bidder acquire the property at the trustees sale.


Additionally, the trustee may charge a fee for any costs and expenses incurred in distributing the sale proceeds, including investigating the priority and validity of junior claims. The trustee may charge a fee of no more than $125 for performing the distribution services. [CC 2924k(b)]