SB1079: Current Status of the Law and Strategies

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Post-COVID, new laws were enacted that affected the non-judicial foreclosure process in California. The biggest change came from SB1079, which imposed drastic changes related to the auction process when the property being foreclosed is a 1-4 family property. In this webinar, we discussed the changes brought by SB1079, the current state of the law, foreclosure strategies, and litigation challenges.

The hosts discussed:

1. What is SB1079?

2. What has changed with the law over time?

3. How should a lender approach a foreclosure auction with SB1079 in place?

4.What litigation challenges exist as a result of SB1079?


Melissa C. Martorella:

Welcome everybody to this wonderful Wednesday webinar. Today we will be talking about SB 1079. We'll be going over the current status of the law and related strategies. If you don't already know me, my name's Melissa. I'm the partner and department head of our banking and finance team here at Geraci. I also manage our non-judicial foreclosure team, so I have some experience on the lender side of things as we're foreclosing with SB 1079 and the post-sale bidding strategies and things like that. So I'll be going over that portion of the webinar today with you and then with me today is Jacoby.

Jacoby Perez:

Good morning everyone. I'm Jacoby Perez. I'm an attorney with the litigation team for Geraci. I primarily handle the 1079 issues and cases that come in from the litigation side. Feel free to reach out to me. Our information's on the title slide here and happy to help you guys.

Melissa C. Martorella:

Awesome. Well looking forward to getting started, but before we do a few housekeeping items, I already see the question in the chat. Yes, this webinar is being recorded. It will be circulated later and yes, you'll have the slides later to feel free to have and refer to as a reference circulate to your team, things like that. So it will be available to you, it will be recorded. In addition, there is that chat box. However, if you have any questions for Jacoby or I, we won't be answering them throughout the webinar, but we will answer them at the end and instead of putting them in that chat box, there's another option, a q and a option. Put those questions in there. That way when we go through at the end, we can share the question on the screen with everybody as well so everybody can follow along with us. If you have any questions, feel free to throw it in that q and a. To get started here, what's our agenda today? Big picture, we'll be talking about what is SB 1079 and how has it changed since it was first enacted. Jacoby will be going over more of the litigation challenges for eligible bidders and the lenders that are under the law. I'll go over some foreclosure auction strategies and then we'll have a q and a, so short and sweet, but lots of good information here today and with that Jacoby, take it away.

Jacoby Perez:

Yeah, so one of the main things that we wanted to do today was kind of evaluate where we are. This is the fourth year of 1079, kind of evaluate where we stand with the law. Part of what we're going to be doing is looking at the fundamental tenets that made up 1079 and some of the major changes over the last couple of years that got us to where we're at now. The law, particularly the purpose of the law was to incentivize home ownership by carving out these particular categories of eligible bidders because the legislature was concerned about a waiver of foreclosures that was going to happen in the wake of the COVID-19 pandemic. So the idea was, hey, let's try and make this non-judicial foreclosure process more accessible to the certain categories that we want to favor and we will see that that was more difficult than they thought as far as carving out those categories and what they wanted them to consist of.

But ideally the idea was we didn't want to see the same transfer of ownership of properties from the ownership of individuals to corporate ownership like we did last time with the great recession. So the idea was hey, let's get out in front of it. Let's provide some advantages to these categories that we want to favor and hopefully that encourages the more homeowners, as you'll see with the type of categories rather than corporate entities coming in. It didn't exactly work out like that as we'll see, accessibility, I think it's questionable except for maybe some ideal circumstances. I think there's a much better argument for what 1079 did was add just another layer of complexity to this non-judicial foreclosure process. That is why we're here talking about how to navigate it.

So the first question is, okay, legislature have this bright idea, how do we promote the owner occupancy? What are we going to do to achieve that through 1079? And the first thing that they did, it's limited to one to four residential unit property. The reason being, obviously this isn't about commercial, but we're focused on individual, ideally individual homeowners and as you'll see to an extent, nonprofits that do affordable housing as well, but we're focused on keeping homes for people essentially. So to that extent, the law wasn't meant to overhaul major commercial properties and things beyond one to four residential units. It was specifically tied to the one to four residential. The other major change that they did was that they prevented the bundling of homes and you can see for a similar reason, obviously a individual homeowner isn't looking to buy multiple homes at the same time they're looking for a single property.

So by preventing the bundling, you kind of discourage again that kind of transfer from homeownership to commercial properties because you create more opportunities for the categories of eligible bidders to participate. Now the major change and the major idea to provide the accessibility by the legislature was let's introduce this 45 day period after the foreclosure sale in which eligible bidders will have an opportunity to complete their bids. The notion was, hey, these aren't sophisticated institutional professionals here that know all the ins and out of foreclosure sales, how they get renotice all the time and just the process of showing up at the courthouse steps with cashier's checks in hand. The typical first time home buyer or just regular home buyer doesn't have the level of sophistication to play that game on par with the institutional investors that are out there. So the idea was, well, let's create this period where only the individuals can participate or the favorite categories more specifically of eligible bidders can participate and as we'll see that there's certain requirements and deadlines that apply to that, but the broad notion was, hey, if you're an investor, you have to participate only at the foreclosure sale and even if you are the highest bidder at that foreclosure sale, we're going to allow these certain categories of eligible bidders to match and exceed your bid.

Should they meet specific requirements in order to kind of level the playing field was the idea. As we'll see, that was a lot easier said than done.

There are a number of litigation challenges that ended up being created for a law that they I think kind of a little bit naively perceived to be a simple kind of accessibility framework. For starters, a lack of enforceability is one of the biggest issues. There are no explicit statutory causes of action carved out in 1079, so there still remains this question out there is how exactly do you if you are screwed over as a function of trying to participate in this process? And this goes for whatever spectrum of the bidding process you're at, whether you're the lender who's trying to foreclose, but that's being frustrated by bids that are coming in and there's questions surrounding the legitimacy of those bids. Whether you're an investor who similarly wants to know whether you're going to win the bid or not because there's other competing bids or you're an eligible bidder, even one of the people that are supposedly supposed to be favored by this framework and you're trying to get the property, there's no clear causes of action created within the statute that lays out a framework for how to pursue your rights through the court system.

So I mean that's kind of been left to the lawyers. We're still figuring out what case precedent looks like in this context and there's not a lot of guidance yet because just that's the nature of the court system and the appellate system. A lack of clarity is part and parcel of that. A lot of the definitions and we'll see with respect to some of the major changes that they made too. A lot of the definitions while they sounded fine as far as generally what we were trying to accomplish were a lot more problematic in application. One of the ones that initially rings out was defining what it means to be in the business of affordable housing. I mean there was no clear guidance whatsoever on did you ever have to have any transactions, what filings had to be in place? What if there were an amount of transactions, how many, what does affordable housing even mean?

All of that was major problem early on and that's just one example, a lack of foresight as we'll. See, one of the major things that 1079 did was rather than give preferential accessibility to the categories of eligible bidders, and maybe it did in certain contexts, but it also opened loopholes for individuals that were looking to commit fraud and just as incentives were built in for people that were actually eligible bidders, people that were willing to call themselves eligible bidders but didn't necessarily meet the criteria or were operating in a way taking advantage of the vagueness in the statute, were kind of able to weaponize some of these incentives against both other investors and other eligible bidders as a kind of exploitation of the process, which inevitably leads back to me where we're helping you in the litigation. So we talked a little bit again about the lack of precedent where a lot of the questions that are surrounding this thing we just don't have answers to yet because it takes time to work through the court for the court to give us guidance and similarly, a lack of consistency.

The trial court judges aren't always applying these things, these concepts consistently. Part of that is it's not a perfect fit as far as how property rights and a quiet title claim and an interest in property fits with this kind of quasi interest that you're now created when you bid at a 1079 sale and there's all these exceptions and conditions that are placed on whether you're going to get the property or not. So judges unevenly applying property rights in that context creates all kinds of uncertainty for someone that's looking to assert their rights trying to participate in this process.

So as I touched on, there have been some major changes from where we set out on this 1079 journey by far. The biggest one I'll say is the implementation of this 30 year affordability covenant, which said that if you are an entity bidder, and we'll take a look right after this of what the individual bidders are versus entity bidders, but if you are an entity bidder, meaning you're not an individual, you're one of the types of companies that's allowed to bid on a 1079 property as an eligible bidder, that property is going to be subject to a 30 year what they call affordability covenant, meaning that that property can only be bought and sold for the next 30 years at what they're called affordable housing prices and every time they try and be exact as we're going to see, it's still not quite exact what are affordable housing prices.

They do kind of tie it to a statute, but that said at the very least, that did have a dramatic impact on curbing the fraud that was surrounding entity related bidding on 1079 properties because what you had before was, as I mentioned, what does it mean to be in the business of affordable housing? You had the definition saying that as long as you were in the business of affordable housing, you can bid on one of these properties and you had a lot of entities just being created nominally filing with the secretary of State saying, Hey, this is what I do. I do affordable housing, and instead they're immediately flipping these properties on the market just like any other investor would with a lack of enforcement in the statute and the vagueness around the definition. We have cases still that are going on today trying to litigate whether there's even an ability to challenge those types of actions are not.

So the 30 year affordability covenant did at least very clearly say, Hey, we're going to put a limit on what you can buy and sell that property for and we're going to take away that huge incentive for you to acquire these properties and then turn around and try and flip 'em on the market. The other kind of major change that AB 1837 did which went into effect last year, was they starting to track the fraud related to this thing related to this process. For one, the attorney general, a specific department was created with the Attorney General to begin tracking these things and a cause of action was specifically carved out for the attorney general and for government actors to pursue claims under 1079 and additionally it imposed reporting requirements related to these non-judicial foreclosures. When ineligible bidder was acquiring the property for one, the trustees were now required to record the affidavit when they went and recorded the deed.

We're also required to record the affidavit of eligible bidder along with it, making it a public record, but secondarily now are required to report that information to the attorney general so that the department assigned to do so can be tracking the sales and we'll see why that becomes critically important because there are certain actors in this space that are just using different company names and family members and there's a lot of crossover in this space. The people that are engaging in the type of fraud where you wouldn't necessarily track it, you wouldn't necessarily be following it if you were just participating in the sales, but when you see it laid out as far as when you're tracking these things, the type of fraud becomes abundantly clear.

So I mentioned we were going to talk about what the types of categories of bidders were and because the affordability covenant really curved substantially the fraud surrounding the entity bidders, we're just going to focus here on the individual type bidders. The first is an eligible tenant buyer, which just as it sounds is a tenant that's living on the property that to the non-judicial foreclosure sale. So it's a tenant whose landlord defaults on their loan and there's a foreclosure and that tenant wants to become the owner of the property. When we talk about the purpose of the statute, that seems like a pretty good deal. They're already living there even and they're going to become homeowners rather than it going to some investor.

There's certain requirements they have to have an arms length lease at the time of the non-judicial foreclosure sale. Now even that I've seen that become an issue where what does arms length mean? Sometimes that tenant might have a partial ownership in the property, but they're paying utilities or something like that. Does that constitute an arm's length lease? So I've seen litigation surrounding that issue. Obviously they have to be occupying the property as a primary residence, so I've seen fraud related to people just claiming that they live in the property and that's why one of the changes that came last year too was now they are required to submit some additional beyond just the affidavit when they're applying, they are required to submit some additional information including either the lease itself or as a secondary substitute proof of payments on utilities and things like that.

The second, and I'd say far more common and kind of typical category of individual eligible bidder is going to be the prospective owner occupant and that's just an individual who wants to purchase this property as their home prospective owner occupant. They certify that they're going to occupy the property as a primary residence within 60 days after the deeds recorded. They're going to live there for at least a year. Again that they're not the borrower or the borrower's family member. So there's an arm length relationship there. The idea is we don't want strawman bidding and bidding when you're just basically an agent of the foreclosed borrower trying to circumvent the foreclosure process and you're not acting as the agent of anybody else, meaning we also don't want you to be circumventing the definitions of the categories of eligible bidder. This is far and away now the most common area of fraud that we see in litigation since the affordability covenant was imposed because now you can't just claim to be some nebulous entity.

Instead we have Joe Smith who is bidding on behalf of the actual investor bidder. Either he's paid $10,000 to put his name on something or it's a family member who doesn't really understand what they're getting into, but the person who is name is going on the deed and going on the affidavit is not the actual person that's intending to acquire the property. So they're functioning directly as an agent acquiring these properties and then again, seeing them flipped on the market within a couple of months rather than being maintained for the year that's actually required under the law.

Melissa C. Martorella:

Awesome, and then I'll just kind of jump in here on the actual foreclosure sales side for a little bit, talking about what is that eligible bid bid. So now we've figured out who the people are that can be bidding, what do they have to do around the foreclosure sale time? As Jacoby was mentioning, because the thought behind this law is that your average person who's a first time home buyer inexperienced with purchasing property generally let alone at a foreclosure auction, they're trying to be more sensitive to allow them more time and a little bit more leeway, especially post-sale to try to get a property that fits their needs. So it creates some issues for the post-sale window and a little bit of a lack of clarity as far as finality of the foreclosure sale process on these certain types of loans, especially for lenders who might have been in a default situation for a long time.

The property's a one to four family and so now it might've been years of foreclosure bankruptcies, things like that, and now they finally complete the auction, but they have to deal with this one last hurdle, which is making sure that there are no eligible bidders after the sale. So in order to do or to make an eligible bid that eligible bidder has to send a written notice of intent to place a bid to the trustee and it has to be given to the trustee no more than 15 days after for our trustees to make note of what the day of the sale is as far as the statute goes. It's just days, it's not business days and things like that. That said, I tend to be a little bit conservative and if the 15th day is on a Saturday, I'll wait and check the mail Monday morning first thing to make sure nothing came in over the weekend just to cross our T's and dot our i's and make sure we never received that notice of intent to bid in this notice of intent to bid the elig, it's such a hard word to say, eligible bidder must also provide an affidavit to the trustee identifying what type of eligible bidder they are and that they meet the criteria for that category, but the trustee can just reasonably rely on that affidavit.

So as long as they've checked boxes and made the representations under the statute, the trustee does not have to do any more due diligence into verifying whether that person truly is an eligible bidder under one of those categories. So as Jacoby was mentioning to you, this is where a lot of that fraud comes in because there's nobody double checking, but if you receive one as a trustee, you have to hold it and follow now the rest of the guidance under SB 1079. So that creates some confusion there. So what will happen after the sale, you have the 15 days and the trustee will wait and see if they receive any of these notices of intent to bid. If they don't receive any after that 15th day, they can proceed as usual and record the trustee's deed upon sale, whether that means the property it was won by the lender or if it sold third party, that person who won at the auction 15 days before will now have the deed recorded in their name so we can finalize the process that way, but if they did receive a notice of intent to bid within that 15 day window, now the window post sale is extended to 45 days and now those eligible bid or the eligible bidders that said, Hey, I'm giving you notice that I'm going to make a bid, they have until 5:00 PM of on the 45th day after the trustee sale to actually submit the bid to the trustee.

So assuming the property sold for $1 million at the auction date, that eligible bidder just has to come up with that million dollars and submit it to the trustee within the 45 day window and then they would win the property and then the trustee would record the trustee's deed in the name of that eligible bidder rather than the lender or the third party winner at the auction. Again, especially for lenders who are going through a long foreclosure or default process, this can be frustrating because you might think you have finality but you're waiting and waiting for up to another month and a half after the sale to see if you even have the property. There are other issues related to this to you as far as insurance and things like that. Normally before SB 1079 a lender if they wanted a foreclosure auction or even if you were a third party bidding at a foreclosure auction, you would do certain things like getting insurance and that kind of stuff, trying to secure the property. It's really unclear who owns that property at that time and what that means. Are you going to go ahead and pay for a full policy right away in that whole thing? We have recommendations and referrals for insurance experts in this area who can help provide guidance there as well, but it does have a lot of questions related to that because there is a lot of uncertainty in this post sale window time.

On an interesting note too, there are some special provisions that kind of truncate that post-sale window that may be a little bit helpful. So if the eligible bidder is an eligible tenant buyer, they can submit a bid to purchase the property equal to the full amount of the last and highest bid at the trustee sale so it doesn't have to exceed that last and highest bid and then that will just submit that if they submit that bid that ends the process, they will win and move forward from there. And so that can make it expedited at that side. If it's a prospective owner occupant and they're the highest bid at the actual trustee sale, actual that bidder is the winning bidder and there is none of this post sale wait 15 days, wait 45 days, none of that applies. If they're clearly a prospective owner occupant, then the foreclosure sale would be final at that time, but that prospective owner occupant has to submit an affidavit to the trustee that says that person is one and meets the criteria for that, but again, the trustee can just reasonably rely upon it.

They don't have to do any due diligence or anything like that. So hopefully that's the thing it works out. In this case, the lender might actually like this because that means somebody at the day of the auction has actually provided funds and they can get out of it and have some finality there, but otherwise these are two areas where we could expedite this post-sale kind of process. But in my experience it has been fairly rare to see something like this happen from the foreclosing lenders perspective. I just wanted to talk a little bit about the bidding strategy because this is something that's changed quite a bit since SB 1079 has come into play. If the property is not a one to four family property, you would follow traditional bidding advice and this is what we would've told people on every single property before SB 10 29 for your starting bid.

You probably don't want to start at your loan amount that way if you do have a guarantor, it creates leverage for a breach of guarantee suit. And so instead we would recommend opening at a bid, maybe half of what you're owed or two thirds or something like that, something to entice people to start fitting but not just opening up at that full credit bid and then you would bid an increments. So depending on the upstanding balance, those increments might be a thousand dollars or $50,000 as the bidding goes up and we would be happy to talk with you about that kind of bidding strategy and then you would go up to a maximum bid and that could either be your total outstanding balance, so the credit bid or the amount you would be okay walking away from the property floor and that would be our traditional advice and it's still our advice.

If the property is not a wonderful family property, we would follow this and this tends to lead to good results, but under SB 1079 because we have this ability for people to come in post auction to then bid up either at the amount that the property won for or a penny more and win the property, you don't necessarily want to follow that advice because if you opened at a lower amount than what you're fully owed as a lender, you might not fully recover, especially if you don't have a guarantor or maybe that guarantor is really not worth anything. So you have to think about some other options here I've provided to a peer which we'll go over. There may be other ones. So the first option is simply opening with that credit bid. That credit bid is the total outstanding balance that you are owed under the loan.

That's probably the safest option. So you would open at that amount. Hopefully somebody else bids higher than that at the auction. If they do, then you're paid in full. If they don't, then you've won the property and post auction, if somebody does submit a notice of intent to bid, they would have to pay you off in order to take the property. That's kind of the safest bet to be made full monetarily. And then if you end up winning and nobody bids post sale, you would have the property. That might not make sense though, depending on the value of the property and what's going on there. So your second option is opening with the amount you would be okay walking away from the property for, and this might be a complex thing, it might deal with taxes, other liens, the value of the property, what's happened, did a construction project go awry and it's a mess now and needs a lot of rehab?

What's going on here? What amount would you be okay walking away from it for? So say your total outstanding balance is million dollars, but you've evaluated and you say, Hey, I think based on the market and this property and all these other factors, I think I would be happy walking away for eight 50. You might consider opening with that and then if people do bid higher than that either at the sale or post auction, then it gets you closer to that full recovery of the million. If you do have a guarantor, you have some ability there for a breach of guarantee suit as well, but at least this way it's more realistic and make sure maybe entices other people to bid and start getting you made whole throughout the process. And these are just two options. There could be many, many other bidding strategies in place, but it's something that try to talk to our lenders about now because it's not as, I guess, clear of a bidding strategy as it was prior to SB 1079.

And again, just another little reminder because SB 1079 allows the certain qualified parties to come and post auction to bid on the property, as long as those people pay even one penny more, they'll obtain it. So you really want to make sure you're paying attention to this because it will. Then I put here it removes the possibility of a deficiency strategy. It might if you open with a credit bid or it really reduces its effectiveness if say that guarantor really isn't worth anything. So under the traditional bidding practice where you would open in a much lower amount, you would have that cushion there, which you could proceed against a guarantor, but if you didn't and say that guarantor was worthless, well you still have the property to try to recover the rest of your losses in this situation. You lose the property and now you're just left with that breach of guarantee suit, which may or may not be worth anything. So something to really pay attention to and keep in mind, and if you guys are struggling at all with how to proceed at an auction in your bidding strategy, I'd be more than happy to talk to you about it.

That Jacob?

Jacoby Perez:

Yeah, so Melissa talked a bit about what she's seen on the side of the foreclosure side of things. I just wanted to talk a little bit about my experience, some of the things that I've been seeing in litigation, some of the issues that are coming up surrounding these. We touched earlier on the types of fraud and things like that, so I just wanted to share some examples that I think are interesting and kind of underscore the problems that are somewhat endemic in these statute. Some of 'em have been addressed a little bit, but that we're still going to face going forward. So we talked about what a prospective owner occupant is, kind of that ideal category of individual that's going to put on the property and they're required to submit. We talked about the affidavit under penalty of perjury to the trustee. So Melissa mentioned that when the prospective owner occupant submits an affidavit to the trustee at the foreclosure sale, there is no 45 day window.

But there's this interesting aspect here where if the individual, for one, I think there's an interesting question in the law of whether the individual that's actually at the sale, if they're going to claim to be a prospective owner occupant, they need to be personally present at the sale. And I think that question is raised when you parse the language of the statute. Again, you can't be bidding as the agent of anybody else. So if you're going to claim to be a prospective owner occupant, but somebody else is there at the sale claiming to put a bid in for you, I think that raises a significant question around the legitimacy of that bid. The other thing though is that that prospective owner occupant's not required to actually tender until 5:00 PM the next day. So depending on the procedure, the specific trustee, you kind of have this period where I have seen what looks like an investor that's bidding at the sale being the highest bidder decide by 5:00 PM the next day. Hey, you know what? Actually we are ineligible bidder because this person who puts their name ends up putting their name on the documents and now all of a sudden we don't have to deal with that 45 day window. Obviously whether that's legitimate or not is going to be a concern of other people who intended to bid as eligible bidders in that 45 day window because now that 45 ostensibly is not going to apply.

We talked about the requirement of a prospective owner occupant to have to occupy the properties within 60 days. Well, you can imagine there's a lot of circumstances where that's just not feasible. One question that raises is, well, should 1079 even apply to that property? And that I would say is a question that's not settled by the law as far as is this property even habitable within 60 days? Should we be applying a 1079 process to it or not? And you can imagine certain degrees of habitability that are going to challenge that application more and more. Another question that was partially addressed with one of the amendments is, well, what happens if I can't move into 60 days because there's a tenant there and the most recent iteration to the law did account for that saying that, well, if there's a tenant, then you do have to follow all the applicable laws relating to evicting a tenant, all the UD laws that would apply in that situation.

But what happens when there's other reasons why the property can't be inhabited within 60 days. There's between the D being recorded and you intending to move on there, there's a fire or whatever, whatever the hypothetical is. I've seen a number of excuses and judges look at them differently depending on what they are. My medical circumstances don't allow me to move on to the property. My financial situation changed. I've seen people run into the issue of did not know that there was a first on the property when I bid on, I was bidding on the lien. I didn't realize there was a first, I can't afford that first anymore, so I can't move on to the property. There's not clear guidance in this law about in those situations what the answer is. What I can tell you is what seems to be the primary penal mechanism here, the piece that's supposed to have the teeth is that affidavit when you sign it and submitted to the trustee is being submitted under penalty of perjury.

So inevitably what happens in these litigation cases is you end up looking at circumstantial evidence because we're talking about somebody's intent. There's not typically a loaded gun that says it's an email that says, Hey, I'm out here committing fraud. Sometimes there is and that's nice, but it's rare. You're looking at circumstantial evidence trying to piece together what the person was thinking at the time they submitted that bid. And even if you are a legitimate bidder, that's something to be concerned about if someone's going to challenge your bid down the line. So there's not a lot of clear answers on some of this stuff. What we can and do advise you to as litigation attorneys is make sure you're creating all the possible evidence that you can that should you have an issue down the line, you're going to be able to rebut somebody calling you the fraud.

Yeah, and so we talked about having to live there for a year as well. So if you can't move on within 60 days, well windows of your one year period actually begin to run. There's not really a clear answer in the statute there as well. Even if you do have an excuse for not moving in within 60 days of the D being recorded and how long that excuse does it to the period, does it truncate the period of one year? How long after even if you did have a legitimate excuse, are you able to turn around and sell the property or do something else at the property other than it continuing to be your primary residence? And if you do move within a year, do other bidders who lost out on the property to you have a basis to bring a cause of action to challenge your legitimacy as an eligible bidder? And again, what the lawsuit's going to come down to is they're going to be saying, Hey judge, they said they were going to live there for a year. They obviously didn't because here's the proof that they're living in this new property now that's circumstantial evidence of their intent to not be a prospective owner occupant, but rather to get rid of the property in a year. Now, whether that's true or not, it's expensive to find out that answer through litigation we talked about.

Go ahead. You can go to the next one. That's fine. Sorry. No, no, you're good. What even constitutes an affidavit? I've seen this issue being raised and there were actually two amendments to the 1079. We talked about the big one that went into effect last year, but they did address some of the issues after the first year. They were largely clerical and some of the just very obvious things as far as timing of receiving things and stuff like that. But I've seen cases circle around what even constitutes a legitimate affidavit, what's the format it has to be submitted in? What does it mean to be under penalty of perjury under the state, the laws of the state of California? I do believe the newest iteration of the statute actually cites to the CCP as far as what an affidavit under penalty of perjury is. I'm not a hundred percent certain on that, but there is a statute that we would consider in the civil courts to constitute an affidavit under penalty of perjury.

But additionally just surrounding, in addition to an affidavit and how you submit your bid, I've seen issues about can even on the 45th day, the statute says that it has to be delivered by overnight mail and there was a bid that was delivered on the 45th day in person to the trustee. Is that a legitimate bid or not? I mean, the idea of the statute is, well, we want to be able to verify when bids were actually received. In one particular case, I'm thinking about the spirit of that is all met because the individual delivering the bid on the day of, there's cameras that have been coming in, the receptionist takes down when it was received, it was same day delivery, but the statute explicitly says it's got to be overnight delivery. So there's a question there of is that a legitimate bid that needs to be considered under the law or not? Again, not a clear answer.

So another issue does the bidder actually submit Tender. Tender is always a huge issue when you talk about foreclosure and wrongful foreclosure in the litigation context, it's one of the most common things that never happens for a borrower that wants to bring a lawsuit and it's because the borrower doesn't have the money to actually tender. They will claim usury and all kinds of other stuff, but the reality is they just never had even the principal amounts that were owed. Similarly, what tender means in the contents of these foreclosures, depending on where you fall in the 45 day window, you may not have the opportunity to actually submit your funds. So there's a serious question of, and we talked about how former property law rights where with this process, there's a serious question of, well, even if there is a cause of action, there can be under 1079, when is that right created because do I have to actually tender the funds to have that standing like I would a borrower setting to set aside a foreclosure sale? What happens when I'm prevented from doing it because the trustee tells me they're not going to accept my bid because of a, for whatever reason that they say they're not going to accept the bid is being excused. Does that give you an excuse from tendering that would allow you to go forward with a cause of action? Again, litigation issues without clear answers.

We talked about quiet title, what property rights are there here? And that kind of feeds into what are the causes of action that you even bring If you are a disappointed bidder because someone else you believe defrauded you, you're a lender that wants to challenge a bidder that's tying up a foreclosure sale or you need to go expunge a li penon. That's a pretty common one that we face where the property gets tied up by no fault of the lender and fraud that goes on by the bidders in the foreclosure sale, well, the lender wants to go expunge that li penances and again, we end up having to analyze these property rights issues because you need to have a cause of action on which a property, right cause of action on which you can prevail in order to sustain a li penance. So again, we face all the same issues of not clear guidance under the law. There's a lot of vagueness surrounding these issues. There's a lack of case precedent and you can have an unevenness of application of legal theories about what property rights are between whatever judges that you get.

We don't need to go deep here. I just wanted to flag real quick, and I touched on it very quickly earlier we talked about the affordable housing and how that truncated or how that did away with a lot of the fraud surrounding entities. It was brought to my attention by a potential client that now there's some ostensible fraud or business practice going on related to what are affordable housing prices even. So even what looks like one of the stronger aspects of this 1079 statute, this affordability covenant, there are entities that it appears are finding ways to make money off of that, and that's by kind of exploiting what the affordable housing affordable pricing formula is in relation to the affordable housing covenant. And ostensibly, it's not even necessarily fraud, it's just a clever use of what's there in the statute that would seem to undermine the entire purpose of the affordability covenant.

Melissa C. Martorella:

Awesome. Well, that's it. Some key takeaways that we have for you here. SB 1079 is here to stay and it'll continue to impact lenders foreclosing and also just in general just residential property foreclosures, whether you're the lender or prospective purchaser, things like that. It'll really be in effect for a long time. Your bidding instructions do matter, so speak with an attorney if you are a lender going to auction. And then the litigation here can be really challenging for many reasons. As Jacoby's pointed out. I mean litigation can be challenging generally, but in this case it seems that it's quite new and maybe a little bit more so based on how vague everything is.

And with that, we will go to the q and a. I have up here our contact information. So again, if you have any questions that we're not able to answer during this q and a session or maybe the question that you have is really fact specific and probably might not be appropriate for this venue, feel free to email either one of us. I'm happy to help out. If you're a lender foreclosing and you have questions about your bidding or auction strategy, feel free to reach out to me if it's other questions related to SB 1079, Jacoby is more than happy to help you out there. So we'll jump into the q and A here. First question, we recently foreclosed and took a property back. I attended the auction and was told by someone there that I could always count on receiving a notice of intent to bid. Lo and behold, our trustee received a notice at the 11th hour on day 15. Our trustee was familiar with the bidder and told me there was no way they would follow through within 30 days. They didn't and she was right. Question, what is the game these bidders are playing? I don't understand this strategy. Same. It is very frustrating. I don't know, maybe Jacoby has a little bit more insight here. Yeah,

Jacoby Perez:

The game is that they're tying up their competitors' funds. For sure. You have investors that, and it goes back to the issue of there's no teeth to the statute. There's nothing binding about a notice of intent to bid. So even if you do sign that affidavit, who cares if you don't win the property? There's no consequences for that. So there's absolutely entities out there that are competing investors competing for the same properties, submitting these notices of intent to bid. And if their investor had bid on the property, well now that money is tied up for 45 days and they can go bid on other properties while their investor doesn't have those funds.

Melissa C. Martorella:

And for what it's worth as well too, on the foreclosing side, on the trustee side, we do see this quite a bit where we will get those notices of intent to bid in that 15 day window, but then it ultimately comes to nothing and it is a really unfortunate thing. I think actually in the entire time of this, I've only actually seen it happen once where somebody came up with the proceeds in the 45 day window. At least on my end, that's what I've seen. Next question for a 1 0 4 family. If you can attend the auction, does it make sense to start with a low opening bid like pre SB 10 29 if bidding stops low, you overbid and get the house and a greater deficiency against the guarantor. If bidding meets the amount that makes you happy, you let the house sell and still see the guarantor, but for less?

Yes, that is definitely an option. It's one of the ones that I talked about in there to kind of figuring out that wiggle room of what you would be okay with walking away for. One of the big considerations in that though is how worth it is your guarantor, how strong is that breach of guarantee suit? You might want to do some due diligence prior to the auction talk with a litigation attorney, maybe get a private investigator, that kind of thing to make sure that that guarantor, that breach of guarantee suit is really worth it because if it turns out you're banking on this breach of guarantee, but that guarantor has nothing, then you might've changed your bidding strategy at auction and in this case you might lose the property as well and not have recourse to fix it up and sell it or have it as an REO or something like that. So it's definitely something that you could do this option, but it takes a little bit more due diligence ahead of time.

Jacoby Perez:

Yeah, I mean this one final note, I know it's a case that we've had is if you get it low at the sale, but you're not an eligible bidder, you're an investor, you have to be concerned that an eligible bidder is going to come in and overbid you. Are you going to be happy with that price if they overbid you by a dollar? If you're not, you need to carefully take that into consideration.

Melissa C. Martorella:

Next question. If two people bid as prospective, do both have to live in the property or does one satisfy the law? Does vesting affect this situation? I'm assuming this means if Jacoby and I together went to the auction kind of as one bidder, I think that might be what you are asking. I haven't seen something like that. Perhaps we can get a little bit more clarity on that one. Jacoby, does this one make sense to you at all?

Jacoby Perez:

No, I mean if you're saying that they bid together and they both bid as perspective owner occupants, I would go back to, okay, well you're both submitted an affidavit ostensibly saying you're going to meet the requirement. So ostensibly you would have to do so under the law. Granted, I've never seen that, so

Melissa C. Martorella:

I haven't either, but you never know. Next question, what happens if the qualified purchaser doesn't bring in the funds by the time they're due? So if they don't do that, then would the sale results would happen. So if it went back to the lender at the auction date, you would record the trustees beat upon sale in favor of the lender. If it sold third party, it would go to the third party so you'd finally have some resolution of the sale that occurred. What happens if the bidder signs an affidavit that he will live in the property for the next 12 months? And it's not true that same bidder has filed multiple affidavits in eight months period?

Jacoby Perez:

Yeah, I mean I have that case multiples of 'em. What happens is, I mean depending on who you are in relation to the sale, I'm going to assume you're a disappointed bidder who lost to that person. Your option is to bring a lawsuit and let that play out. Kind of as we talked about it around the tenants that we talked about, it's a little bit easier to prove because of the recording requirements now where those affidavits get recorded so early on you can go to a judge and say, judge, how's it possible that they're occupying as a primary residence, eight separate properties for a year within the last eight months? It's not possible, but that's your option is to file a lawsuit.

Melissa C. Martorella:

Next question, can the lender rescind the sale? There are options for a lender to rescind a sale, but they can't just do it because say their bidding strategy didn't go the way they wanted. There's usually some other circumstance at play. We've had them recently where last minute bankruptcies happened, but it was right up to the time of the auction and so we didn't get the notice in time. So then you'd have to redo the sale, that kind of thing. There's many different factors that can go into that. You can rescind a sale, but it can't just be on a whim because you didn't like the results. So it's really fact specific and if you have a scenario, feel free to reach out to us and we can let you know if that makes sense for you.

Jacoby Perez:

And we didn't even touch on it here, but bankruptcy is now thrown a whole new wrinkle into this where as before you'd have a bankruptcy that gets filed before the foreclosure sale. Well then there's an automatic stay and that's that. But now depending on which deadline applies and which window you're at and when the deed gets recorded is another important part. A bankruptcy that gets filed in the interim, potentially the stay applies, potentially it doesn't. It's a huge emergent issue that's working its way through the courts right now.

Melissa C. Martorella:

Yeah, and definitely a lack of clarity as far as

Jacoby Perez:

Or an explicit divide even between circuits.

Melissa C. Martorella:

Next question. We have a loan that is collateralized by a combination of adjacent lots consisting of one to four unit SFR and commercial properties. Is there any way to allow bundling of these lots for foreclosures since they were purchased with the intention of combining and developing for multifamily? I don't think you can. I think you could probably bundle some of the commercial properties as you would typically, but I think now those sfr, I don't think you would be able to bundle those. I think under 3 1079 you have to sell them individually. Next question. If the foreclosing loan is a second, can the first require their loan to be paid via balloon by the winner of the auction now? So everything that is junior to the foreclosing lien will be wiped out. So the first would remain on title because of that. The first cannot force anybody at the foreclosure auction or the winner of the auction to get their loan paid.

In theory, you could say it's a default under your loan that first because title has transferred because of foreclosures out and that kind of thing. And so you could accelerate that way, but it's probably also in your better interest to work with that purchaser rather than just putting it in another straight default. But also usually if a foreclosing loan is a second, I very rarely see the winner of that option being a random third party. I usually see it reverting back to the lender of the second and then that second position lender has likely already been talking with the first to say, Hey, let me foreclose and take this over, fix it up and deal with it and sell it. So we can both be made whole. There's usually some agreement in place between those lenders rather than just no communication between that first and second.

In these situations, if an eligible bidder bids at the trustee sale auction, can the lender that bid, so the lender can only bid what they are owed? So say your total outstanding balance is a million dollars and you open up at 700,000 and then the eligible bidder comes and is at the actual sale auction and bid 700,000 and a penny. Well then you can bid an increment assuming you've given the auctioneer those instructions and now go to 725,000 and you could bid up until whatever that amount is that you've decided to either walk away from or up to that million dollars that you're owed on the property. So you can do that, but you can't counter the bid to say you're owed that million, you open with a million and the eligible bid are at the auction bids for a million and a penny. Unless you are there in person, the lender with additional cashier's checks to bid above that million, you can't contest that bid. So you'd have to be there in person doing that.

Is the winning bid by price only or is there hierarchy based on the qualified bidder status? I actually don't know this. I believe it's just the price. And that's why it's a weird post auction thing where you also have no idea who's bidding what. And so if there are multiple eligible bidders submitting notices of intent to bid, it's kind of like, okay, well do you bid a penny more? Do you pay $5,000 more? How much more do you bid over that auction price to make sure you actually win it if there are multiple people considering?

Jacoby Perez:

But yeah, the one exception to that is the representative for all the eligible tenant buyers. If they submit a bid, then that ends everything. They kind of get a little bit of preference over everyone else.

Melissa C. Martorella:

Thank you. Next question, can you talk more about what documents are being recorded with the deeds or owner occupant declarations being recorded with the T DDoS and post foreclosure REO purchases and the first 30 days on market? As far as on my end, the only things that I'm recording would be the trustee fees. I don't know Jacoby, if you're working with eligible fitters, if there's something that they're recording post auction and that sort of thing. But on our end, we are just recording the trustee deed.

Jacoby Perez:

Yeah, I think I missed the first part of the question there.

Melissa C. Martorella:

Can you talk more about what documents are being recorded with the deeds? Are owner occupant declarations being recorded with the T and post foreclosure REO purchases in the first 30 days on market?

Jacoby Perez:

Oh yeah. The affidavits are being recorded as well. And then there's that reporting requirement as well to the attorney general. That was effective as of this year.

Melissa C. Martorella:

Thank you. Next question. How are first trustee lenders to a second trustee SB 1079 sale business? As usual or maybe more cautious? I would say it's probably business as usual. As I was saying, I think it's pretty rare for second position liens that are going to sale in general to have people bidding because unless there's so much value in this property that between the first and the second, it's worth it for somebody to come in and try to take over this property and pay off the senior and all of that. It's just very rare that somebody new is going to want to walk into that mess. And as Jacoby said, especially with these eligible bidders, they might not understand that there's a first and have all the be like, I can't afford that. I can't pay for that first and that whole thing. So to me, it's kind of business as usual. You're first position lien holder, you're safe. If a second is foreclosing, let them figure out the mess down there. Your lien position is still in place. And at the end of the day, if things aren't working out the way that you want them to is maybe that junior lender taking the property over and fixing it and dealing with it. Well then you just foreclose yourself. And so I think that's honestly, you're in a great position if you're in first in that scenario.

Next question. Can the owner place a bid and pay off the whole loan at that time. I'm confused by the question a little bit.

Jacoby Perez:

Yeah. The owner, I'm assuming you mean the borrower that's being foreclosed on and if that's the case, they have their own rights as far as reinstating the loan and voiding the foreclosure, but they can't bid. That's why there are all these requirements about an arm's length transaction. You can't be an agent of anyone else. It can't be the foreclosed borrower that's bidding.

Melissa C. Martorella:

Thank you. A great question here. Who is liable for property damage and injuries during the 15 or 45 day post foreclosure notice of intent to bid period? This is the big question that I have because technically after the foreclosure sale, the lender, if the property reverted or that third party purchaser, if they wanted the auction, they would technically be the owner of the property and just the recording of that trustee's deed is the formality conveying it over and I'd say the trustee's holding the property still entrust, assuming that it's going to go to that party. So in general, what we have advised is for those lenders or the winners at the auction, even though there's this window after the fact, you should still get insurance. Pretend like this doesn't exist and that you own it and try to take action to cover yourself in these scenarios because that's the last thing that you want is you went at auction, you're in the middle of waiting for the notice of intent to bid, to come back and seeing if people are submitting a bid and on day 45, God forbid, the property burns down and you didn't have insurance coverage on it and then nobody bids and then now you've got a burnt down property.

It's probably better to be safe than sorry in that kind of a scenario. But it is definitely something that I think, as Jacoby was mentioning throughout the statute and this law, it had good intentions but really didn't think through this entire process and it feels like they really didn't consult about what you actually need to do at a foreclosure sale and how it actually works, especially with things like this, if I bid and win on a foreclosing second, can the first require a payoff or does law, is it up to the first? The first can require a payoff? It's probably an event of default under their loan documents that say if the property has transferred from the borrower and it's not to a family trust and certain things that are protected under the garnet, that's usually an event of default, and so they could require a payoff. So that's also why it's something that's important. If you are a junior lender foreclosing or if you are going to be bidding on a property in the lien that's foreclosing is a junior, to make sure you talk to that first and try to get a strategy in place and an agreement with them about what's going to happen post auction.

The last question I have here, how does it work if there are multiple bids from eligible bidders within the 15 day period after the trustee's sale? Does the highest bidder get the property or the bidder who delivered their bid to the trustee first? Also, if the winning bidder fails to tender payment within the 30 day period following the bid, does a backup bidder get a chance to tender payment for the property and does a 30 day clock start over? So the first 15 day period, you just have to submit the notice of intent to bid, and so we're just collecting those. If we get any after that 15 day period, we can disregard those. And so say we get three notice of notices of intent to bid. They might say what they are planning to bid for, but they might change those amounts, that kind of thing.

All they have to do is within the 45 day window for the next 30 days is then submit that money. The trustee might get three wires. They might get a wire for a million dollars, a million dollars in a penny and $1,000,005, and whoever bids the most is going to win that, even if the one with the highest amount bid loss or submitted their wire loss. It's not who does it first. It's going to be whoever actually submits the money then in the 45 days and whoever does the most. And if nobody bids or nobody submits the wire, then it would just go to whoever wanted the actual auction. There's no restarting the talk on that Jacoby. I dunno if you have any other insight on that.

Jacoby Perez:

No, you're dead on there.

Melissa C. Martorella:

Well, with that, we don't have any more open questions. Thank you all for joining us today. As we said, if you have any questions for us, either about the foreclosure process and bidding strategies, that kind of thing, feel free to email me if you have any questions about SB 1079. In general, if you're an eligible bidder or you think you are or you have an issue with one, Jacoby is the person you can reach out to for help. Thank you all so much. Looking forward to chatting again soon.

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