Memorandum of Decision Re: Validity of Foreclosure Sale

In re ROBERT and ELLYN SINNICKSON,                                       No. 1-87-01740      Debtors. ____________________________/ ROBERT and ELLYN SINNICKSON,      Plaintiffs,    v.                                                                                                A.P. No. 1-87-0223 BANK OF AMERICA, et al.,      Defendants. ______________________________/
Memorandum of Decision

     During 1986, debtors and plaintiffs Robert and Ellyn Sinnickson began to experience severe financial problems due to the serious illness of their daughter. They borrowed a considerable sum from Mr. Sinnickson's employer, and found themselves unable to make their house payments when the employer began deducting large amounts from Mr. Sinnickson's pay in order to recover the loan.      Defendant Bank of America held both the first and second deeds of trust to the Sinnickson home. Because of the large size of Bank of America, the two loans were handled by two different departments of the bank at different geographic locations.      In March, 1987, a trustee's sale was noticed by the trustee under the first deed of trust. Mr. Sinnickson contacted the bank official in charge of the loan and requested that the sale be cancelled, explaining the circumstances surrounding his financial difficulties. Subsequent to this conversation the sale was in fact cancelled, but not pursuant to Mr. Sinnickson's request; the Bank of America department handling the loan secured by the second deed of trust paid the department handling the first deed of trust enough to bring the first current.      In July, 1987, the Sinnicksons received a notice of trustee's sale pursuant to the second deed of trust. The sale was set for July 21, 1987. Mr. Sinnickson called the Bank of America employee identified as handling the loan secured by the second. She was on vacation, and Mr. Sinnickson instead spoke with her supervisor, Ms. Lou James, who did not handle many homeowner inquiries herself.      Mr. Sinnickson told Ms. James that he needed more time and requested that the sale be cancelled, just as he had done when he received the notice of sale regarding the first deed of trust. Ms. James told him that she would see what she could do about giving him more time. She called another bank officer, who gave her authorization to give the Sinnicksons a 30-day continuance of the sale.      Ms. James called Mr. Sinnickson back and told him that he had thirty days to propose a means of bringing his obligation current. Although she did not tell him that the sale had been cancelled, neither did she make it clear that the sale would be held on the 31st day without further notice. Because of his previous experience with the default under the first deed of trust, Sinnickson mistakenly believed that the sale would be cancelled and a new foreclosure commenced at the end of thirty days.      Pursuant to the continuance announced at the time was first set, the actual trustee's sale was held on August 21, 1987. Only one potential buyer, defendant Herman Lee, qualified to bid. Lee was a professional speculator in foreclosed properties. He had learned of the sale from Homer Shepard, who was also a professional speculator in foreclosed properties. Lee had met Shepard at a foreclosure sale, and they had bid against each other many times in the past. In this case, however, Lee and Shepard had an agreement whereby Shepard would not bid and Lee would pay Shepard 15% of whatever equity he realized on the property if he purchased it and sold it at a profit.      Lee qualified to bid by showing the auctioneer a cashier's check for $140,000.00. Shepard showed up a few minutes later but made no attempt to qualify to bid. Lee bid $108,062.65, which was seven cents more than Bank of America's opening bid, and the property was sold to him.      When Lee started to pay the purchase price with his $140,000.00 cashier's check, Shepard suggested that instead Lee pay with cashier's checks and cash in Shepard's briefcase, so that Lee's funds would not be tied up. Lee agreed, and gave Shepard's checks and cash to the auctioneer. Lee repaid Shepard the same day for this loan.      At Shepard's suggestion, Lee immediately encumbered the property with a deed of trust in favor of defendant V. V. Florida, a widow whose funds were used and controlled by Alvin Florida, a business partner of Shepard's. The deed of trust secured loans of up to $250,000.00; Lee actually borrowed $38,037.00. Before the deed of trust was recorded or any funds were actually lent to Lee, Florida went to look at the Sinnickson home and noticed that there was a car in the driveway and other signs of the Sinnicksons' occupancy.      The Sinnicksons only learned that their home had been sold when a notice to quit was served on them. Mr. Sinnickson called Bank of America in a panic, but was told that they could do nothing as they had not promised to cancel the sale and it had been held. Through counsel, the Sinnicksons offered to repay Lee the purchase price, his expenses, and interest. Although the Sinnicksons did not have the cash to do so at the time, their mothers were willing and able to loan them what they needed to save their home. Lee did not respond to the Sinnickson offer.      The home was clearly worth at least $400,000.00, even on a quick sale basis, at the time the foreclosure sale was held. Lee's purchase price, figuring in the senior deed of trust, taxes, etc., was less than $235,000.00. The sale rendered the Sinnicksons insolvent; their only non-exempt asset of any substance was a condominium in Florida purchased in 1980 mostly with money put up by Mr. Sinnickson's mother in return for a life tenancy. The property would be worth about $85,000.00 if not burdened by a life tenancy, and is subject to a $33,000.00 mortgage. Without the voluntary abandonment of her interest by the mother, there is no way that the Sinnicksons' estate could realize even a portion of the $57,000.00 needed to pay the unsecured indebtedness.      The Sinnickson home is located in the City of Sausalito. Although there is a newspaper of general circulation printed and published in Sausalito, the notice of sale was published in a county-wide newspaper printed and published in another city.      The Sinnicksons filed their Chapter 11 petition on October 7, 1987. By this action, they seek to have the trustee's sale of their home declared void pursuant to California law or avoided pursuant to section 548 of the Bankruptcy Code.
A. Technical Defect
     The evidence clearly established that the notice of sale was published in the wrong newspaper; California Civil Code section 2924f required that the Sausalito city newspaper be used. The issue here is whether the sale can be set aside as to Lee because of this defect.      Civil Code section 2924 provides that if the trustee's deed recites that all notices have been properly complied with, the recital is conclusive evidence of compliance in favor of bona fide purchasers for value without notice. While the validity of this provision was questioned by the California Supreme Court in Garfinkle v. Superior Court (1978) 21 Cal.3d 268, 279n16, it has not been expressly invalidated. The Court need not grapple with this issue, however, because it finds that Lee was not a bona fide purchaser for value.      Civil Code section 2924h(g) makes it unlawful for any person to offer any consideration to another not to bid, or to restrain bidding in any manner. Lee's agreement to pay Shepard 15% of the profits appears to violate this statute, especially when coupled with the facts that Lee and Shepard had bid against each other many times in the past, Shepard and his partner were still in the business of bidding on foreclosures, and Shepard was at the sale with sufficient cash to bid and did not seek to do so, instead loaning Lee the purchase price. From the agreement itself and these additional facts, the Court concludes that Lee was not a good faith purchaser. The Court can make him whole by giving him a lien on the property for his expenses, while preserving the equity in the property for the debtors' estate.      As to all but bona fide purchasers for value, a trustee's sale can be set aside upon a showing that the presale foreclosure process was defective. Bernhardt, California Mortgage and Deed of Trust Practice (CEB 1979), sec. 6.60. Since the Court finds that Lee was not a bona fide purchaser for value, the foreclosure must be set aside solely for failure of the trustee to publish the notice in the correct newspaper.
2. Unfairness and Inadequate Price
     Even if the foreclosure sale is not set aside due to improper notice, it cannot withstand attack due to the gross inadequacy of the sales price and the abundant evidence of mistake, unfairness and collusion. While sales price alone is not grounds for vacating a foreclosure sale, the sale must be vacated if there is attendant mistake, accident, surprise, misconduct, fraud, or irregularity. Odell v. Cox (1907) 151 Cal. 70, 74. Very slight evidence of such factors need be shown where the sale price is greatly disproportionate to the actual value of the property. Whitman v. Transstate Title Co. (1985) 165 Cal.App.3d 312, 323. In re Worchester (9th Cir.1987) 811 F.2d 1224, 1228; 3 Witkin, Summary of California Law (9th ed.), Security Transactions in Real Property, sec. 149, p. 647. As the cases cited therein show, there may be unfairness without a violation of statutory foreclosure procedure.      Unfairness, mistake and surprise are present everywhere in this case. There would have been no foreclosure sale at all if the bank's officer had fully explained to Sinnickson that he was getting only a continuance to a date certain for sale, and not a cancellation of the sale. Sinneckson's confusion was entirely justified based on his prior experience with the first deed of trust when (as it appeared to him) a sale was cancelled on his request. Sinnickson cannot be faulted for not knowing that Bank of America is so big that it has to pay itself in order to protect its interests from itself.      Lee's agreement with Shepard constitutes additional misconduct which, together with the inadequate sale price, mandates setting aside the sale. Even in the absence of a statutory prohibition, the sale could not be allowed to stand where the property is the subject of an agreement between potential bidders. That Shepard was present at the sale with enough cash to purchase is just more grounds for invalidating the sale as collusive.      An offer to pay the indebtedness is a prerequisite to a judgment vacating a foreclosure sale. Foge v. Schmidt (1951) 101 Cal.App.2d 681, 683. While the Sinnicksons made such an offer, which was not responded to by Lee, defendants attack the offer on grounds that the Sinnicksons did not have the cash in hand at the time they made the offer.      There is no requirement that the victim of a wrongful foreclosure prove cash on hand before his offer to pay the indebtedness is acceptable. In Foge the naked offer to repay made in the complaint was deemed sufficient. In more recent cases, mere ability to borrow has been deemed sufficient. In re Wooster, supra, at 1231; Backus v. Sessions (1941) 17 Cal.2d 380, 389-90.      In Karlsen v. American Sav. & Loan Assn (1971) 15 Cal.App.3d 112, upon which defendants rely, the court found the offer insufficient because nothing "even remotely suggested" that the property owner had the ability to comply. Here, the undisputed testimony was that the mothers of both Sinnicksons were willing and able to loan the Sinnicksons whatever they needed to save their home, and there was sufficient equity in the home to protect them from loss had they done so. Where the defendants have refused to discuss the sufficiency or acceptabilty of the offer, the Court must resolve the question of sufficiency of the offer in favor of the offerors. California Civil Code sections 1501, 2076; Noyes v. Habitation Resources, Inc. (1975) 49 Cal.App.3d 910, 913.
3. Avoidance of Foreclosure Sale as Fraudulent Transfer.
     Pursuant to section 548(a)(2) of the Bankruptcy Code, the debtors may avoid a transfer made within one year before they filed their bankruptcy petition if the transfer was for less than a reasonably equivalent value and the debtors were thereby rendered insolvent. The leading case in applying this section of the Code to foreclosure sales is In re Madrid (9th Cir.1984) 725 F.2d 1197, which may or may not be still good lawin light of the 1984 amendments to the Bankruptcy Code.      In Madrid, the Bankruptcy Appellate Panel had ruled that as a matter of law any sale at a noncollusive and regularly conducted nonjudicial foreclosure sale is deemed to be for the reasonable equivalent value of the property, regardless of what the market value of the property is. The Ninth Circuit affirmed, but for a different reason, finding that a foreclosure sale was not a "transfer" within the meaning of section 548.      Soon after the Ninth Circuit ruling in Madrid, Congress amended the definition of "transfer" in section 101(48) of the Bankruptcy Code. At least one court has found that the 1984 amendments overruled Madrid. In re Verna (Bkrtcy.C.D.Cal.1986) 58 B.R. 246, 251. While the court in Verna found that Congress did not reinstate the Appellate Panel's decision, it nonetheless found the reasoning of the Appellate Panel persuasive and re-adopted it.      The controversy as to the effect of Bankruptcy Law on foreclosure sales is now raging nationwide. See, e.g., In re Bundles (DC S.D.Ind.1987) 78 B.R. 203 (following the BAP Madrid reasoning) and In re General Industries, Inc. (Bkrtcy.D.Mass.1987) 79 B.R. 124 (foreclosure sale for 53% of market price avoided as not for reasonably equivalent value).      This Court need not wade into the thick of the battle in order to make a ruling in this case. The agreement between Lee and Shepard made the foreclosure in this case a collusive sale and therefore outside the presumption announced by the Appellate Panel in Madrid.      Even if collusion were not present here, however, the Court would follow the excellent reasoning in General Industries and avoid the sale. As this case demonstrates, foreclosure sales often do not generate fair values. The Court does not see the justification in law nor the compelling policy behind a court-made fiction that all foreclosure sales generate fair values. It seems properly a matter for Congress, and not the courts, to determine that foreclosure sales should be exempted from the literal wording of the Bankruptcy Code.
4. Rights of Florida
     Having determined that the sale should be set aside, there is no question that defendant Florida is left with no rights in the Sinnickson home, either under California law or the Bankruptcy Code.      Alvin Florida admitted that prior to the recordation of the deed of trust or the advance of any funds to Lee he went to the property and noticed signs of the Sinnicksons' occupancy. Thus, he had both actual knowledge of their continued assertion of ownership and constructive notice of all their rights and claims which would have been disclosed by inquiry. Asisten v. Underwood (1960) 183 Cal.App.2d 304, 309. In Asisten, the subsequent transferee's interest was avoided without any knowledge on their part that the initial transferee had obtained title by fraud. In this case Florida, as a business partner of Shepard, could not be found to be a good faith encumbrancer even if the Sinnicksons had not been in possession.      Likewise, section 550(b) protects only subsequent transferees who take in good faith and without knowledge of the voidability of the transfer. Florida's involvement with Shepard and the continued possession of the Sinnicksons defeat Florida's claim to protection under section 550(b).
     The foreclosure sale must be set aside under California law, and the transfer to Lee avoided as fraudulent pursuant to section 548 of the Bankruptcy Code. The Sinnicksons are therefore entitled to a judgment declaring the trustee's deed a nullity and declaring that neither Lee nor Florida have any right, title, or interest in their home except that Lee has a lien on the home for his out-of-pocket expenses in the sum of $111,583.38. The Sinnicksons shall recover their costs of suit from all defendants.      The Court feels that abstention is appropriate as to any damage claims, as these issues are best handled by the state courts and are not central to the debtors' reorganization. However, it will reserve a final decision on abstention until after a hearing noticed by any of the parties unless all parties stipulate to have the remaining issues heard in state court.      This memorandum constitutes findings and conclusions pursuant to FRCP 52(a) and Bankruptcy Rule 7052. Counsel for the Sinnicksons shall submit a form of judgment in accordance with this decision.
Dated: February 9, 1988                                                                              ______________________                                                                                                                      ALAN JAROSLOVSKY                                                                                                                      U.S. BANKRUPTCY