May 21, 2001

The California Court of Appeal for the Second Appellate District allowed a foreclosure sale to be overturned after two prospective bidders combined their efforts and bought a property with a joint bid. Lo v. Jensen (May 3, 2001).

FACTS
Two individuals were experienced competitors in the business of buying properties at foreclosure sales. Each of them was interested in bidding on a particular condominium. The condominium was valued at between 0,000 and 0,000, and each of the individuals originally planned to bid around 0,000. The day before the sale, one of them approached the other and “suggested that they join together in one bid … [so] they could get the property cheaply.” He suggested a partnership in which he would help make repairs and the other would handle legal matters. They agreed to share expenses and profits equally. Their plan succeeded; they had a winning bid for the property of ,412. The lower court found, however, that the individuals’ primary motive was to restrict competition and not to carry on as co-owners of a business venture. Consequently, the court overturned the trustee’s sale.

COURT OF APPEALS
The appellate court agreed with the trial court. A California statute prohibits anyone “acting alone or . . . with others, (1) to offer to accept, or accept from another, any consideration of any type not to bid or (2) to fix or restrain bidding in any manner, at a [foreclosure sale].” The purpose of this law, as noted by the court, is “to protect property owners in default by ensuring fair and open bidding and the benefits of competition.”

The two bidders in Lo v. Jensen “barely knew each other before the sale, … had agreed on few details for their venture, and would have entered into the joint bid even if there was no possibility of sharing expertise”. The appellate court agreed with the lower court that “[t]he purpose of [their] agreement was not to combine skills and expertise for mutual benefit, but to hold down the sales price of the subject property.” The appellate court therefore found that the individuals violated California’s prohibition on the restraint of bidding at foreclosure sales and that the sale was properly overturned. Other possible penalties under California law, including a ,000 fine and a year in jail, were not mentioned.

SIGNIFICANCE
The line separating lawful joint bidding and unlawful collusion at a foreclosure sale is not always clear. California’s policy of discouraging restraints on bidding was too much to overcome in this case, where there was a last minute agreement to jointly bid with very few details for the purported joint venture. Would the court have reached the same conclusion had there been a detailed partnership agreement well in advance of the sale? Perhaps a title company would be willing to provide title insurance based on such an agreement.

This case also reminds lenders to be cautious when dealing with prospective buyers prior to completing a foreclosure sale. Entering into an REO sales contract (or even steps short of entering into a binding contract) could be similarly viewed as an unlawful chilling of the bidding at a subsequent foreclosure sale.

For more information or to arrange an interview, please contact Leeza Hoyt, APR or Vanessa Amin, The Hoyt Organization, 310-373-0103 or the following attorney at Pircher, Nichols & Meeks: David L. Packer 310-201-8973.

Founded in 1983, Pircher, Nichols & Meeks is a national real estate law firm with a diversified real estate practice that includes litigation, bankruptcy, corporate, tax and public finance matters. Based in Los Angeles, the 45-attorney firm also maintains a full-service office in Chicago. The Los Angeles office is located at 1925 Century Park East, Suite 1700, Los Angeles, CA 90067; phone: (310) 201-8900.