When the Workout Doesn’t Work — Executing Commercial Mortgages in California (Part 2: Foreclosures) | Seyfarth Shaw LLP
As discussed in Part 1 of this series, the vast majority of commercial mortgage foreclosures in California are carried out non-judicially. Therefore, this legal update will not address court foreclosures. Part 2 will give a brief overview of trustee sales deferrals, trustee sale auctions, bid cooling, and the effect of onsite accommodation or stay at home orders on trustee sales.
Prior to the completion of the sale, foreclosure may be postponed (other than by operation of law, for example, due to automatic stay, in accordance with the agreement or court order) at the discretion of the trustee or on the instructions of the lender. If the sale is deferred for one or more periods totaling more than 365 days, a new notice of sale must be published. Notice and reason for postponement must be given at the time and place of the scheduled sale. If an adjournment is due to legal action or an injunction, the sale may not take place earlier than 7 days after the dismissal of the action or the termination or expiration of the injunction. This 7-day period does not apply in the event of a postponement due to bankruptcy following the expiration or lifting of the automatic suspension. Postponing the sale will also reactivate the borrower’s reinstatement right if a new notice of sale is registered. If the sale is postponed for less than 5 working days, the postponement will extend the period during which the property can be redeemed.
The sale of the trustee
A non-judicial foreclosure sale may be arranged by the trustee at a public auction at a public place in the county in which the real estate is located and at a time specified in the notice of sale. Anyone can bid on the foreclosure sale. The garnishing lender may credit the offer up to the amount of the secured claim. The trustee may require any other bidder to provide proof of his ability to deposit the full amount of the final bid in cash, cashier’s check drawn on a state or national bank, check drawn by a credit union or a savings and credit association authorized to do business in California or the cash equivalent which was designated in the notice of sale as a condition of auction. Anyone (other than the foreclosure lender) who is a successful bidder in a foreclosure sale, including any junior lien holder, must pay the bid amount in cash or by cashier’s check upon closing. foreclosure sale. Competitive tendering is not common in commercial mortgage foreclosures largely due to this cash or cash equivalent requirement and the fact that third parties generally may not perform an adequate due diligence of assets. before the sale.
The credit offer
A foreclosure lender should be careful in formulating the amount of the credit offer. The amount of any credit offer will reduce the amount of any shortfall and, therefore, the amount of any potential recovery against, for example, a guarantor. In particular, care must be taken to ensure that the foreclosure lender does not make a full credit offer or an overbid.1 without a full understanding of the consequences and a valid reason to do so. A full credit offer (1) will prevent the lender from seeking a default judgment from a guarantor or possibly from seeking damages against the borrower (for example, for fraud or waste) or a third party (for example, for waste or other damage to property, fraud or negligence), (2) may expose the lender to liability to the debtor for rents previously collected by the lender and not applied to reduce the secured debt prior to foreclosure, and (3) may prevent the lender from receiving the proceeds of risk insurance after foreclosure for a loss that occurred before foreclosure. An overbid by the foreclosed lender may engage the liability of the lender to any junior lien holder and the borrower for amounts offered in addition to a full credit offer.
Formulating the amount of the credit offer can be a complex process that may require considering a wide range of factors, including the following: (1) the value of the property (taking into account the condition of the property and everything and taking into account any appropriate reserves or foreclosures that the lender may hold), (2) any fraud, waste or other potentially compensable factors, whether caused by the borrower or a third party affecting the value of the property, (3) all rents previously collected and held by a receiver, (4) any damage to the property in respect of which there may be insurance proceeds, (5) the amount of any prime loan rank, (6) any overdue tax lien, (7) any junior lien holder and the possibility that a portion of the loan from the foreclosed lender may be legally or equitably subordinate to the holder of the subordinate lien, and (8) any question of Applicability relating to mo amounts which constitute part of the guaranteed obligation. In addition to taking these factors into account in formulating the amount of credit supply, some lenders have an institutional policy of reducing the amount of credit supply by a predetermined loss reserve amount.
A lower offer (that is, an offer for an amount less than the secured debt) should not normally void the foreclosure sale. The price bid in a non-collusive foreclosure sale conducted in accordance with the requirements of state law conclusively establishes “reasonably equivalent value” and, therefore, the sale is not subject to dispute. as a fraudulent transfer. However, if there is even a slight irregularity or unfairness in the sale process and the sale price is clearly insufficient, this may justify canceling the sale. An unrealistic lower offer can also result in adverse tax consequences for the foreclosing lender.
It is illegal for the foreclosure lender or any other person (1) to accept or offer to accept any consideration of any kind not to bid, or (2) to fix or restrict bids from any way. The prohibition on restriction is broad enough to be interpreted to prevent a lender from disclosing its proposed offer to a third party. Whether a pre-foreclosure foreclosure lender’s agreement to sell the property to a third party after foreclosure may also constitute a supply restriction and therefore the cooling of offers has been called into question.
Potential effect of shelter orders on non-judicial foreclosures
Under Executive Order N-33-20 (the “SIP Order”), all persons living in the State of California have been ordered to remain in their homes or residences, except those who work. in critical federal infrastructure sectors or in essential services. Some financial services are listed as essential services, but it is not clear whether the sales of the trustee or the proceedings relating to the sales of the trustee are included. Nonetheless, some institutional foreclosure trustees refrain from making trustee sales for two reasons. First, the SIP Order may, by its terms, prohibit sales by the Trustee. Second, even though the SIP Order does not prohibit trustee sales, the SIP Order effectively prevents trustee sales from being public auctions in public places, and if a trustee’s sale is not a public auction, the sale may be subject to invalidation. Similar local commands can have the same effect. In these circumstances, if a notice of sale has been registered, the lender will have to postpone the sale of the trustee until the applicable orders cease to be in effect; if the time since the notice of default has been registered has elapsed and a lender has the right to register a notice of sale, the lender may wish to postpone doing so to avoid having to postpone the sale for the duration of the SIP order. It is not clear whether title insurers will insure title ceded by a lender who foreclosed during the coming into force of the SIP ordinance or a similar local ordinance.
1 A full credit offer is a credit offer of the full amount of the secured obligation, plus attorney’s fees and foreclosure fees and expenses, and an overbid is an offer in excess of the total amount of the secured obligation, plus attorney fees and foreclosure fees and expenses.