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Why Lenders Should Beware the Full Credit Bid in California

By: Julia M. Wei and Josue Uribe Fonseca

gavelForeclosure filings were initially down nation wide for COVID-related reasons but as we head into fall, those moratoriums are all lifting. That means it’s time to talk about bid instructions to the trustee and why lenders should beware of the full credit bid.

Lenders Lose Rights When They Take a Property Back With a Full Credit Bid.

After the Notice of Default has been recorded, and the borrower fails to reinstate the loan, the foreclosing trustee will ask the beneficiary to provide bidding instructions for the trustee’s sale. The trustee will ask what the opening bid amount is.

If the lender merely puts the full amount they are owed in as the opening bid, they have made a full credit bid. Unless there is a significant equity cushion in the property, it is unlikely a third party bidder will bid. This property will revert to the lender as real estate owned (REO) and the law will deem the lender to have been paid in full.

Specifically, a full-credit bid by the beneficiary of the full amount of all principal, interest, costs, and fees due by the terms of the secured note extinguishes the debt and the lien. All. Mortg. Co. v. Rothwell, 10 Cal. 4th 1226, 1238 (1995). Since the debt is satisfied, the full-credit bid conclusively establishes that the value of the property was equal to the amount of the bid, the lien is extinguished, and the beneficiary is precluded from claiming that the property was worth less than the debt. Id.

Following a full-credit bid, the beneficiary is precluded from pursuing any other remedy based on the recovery of any part of the secured debt, or recover from any other security, regardless of the actual value of the property on the date of the sale.

If the lender finds out that the borrower has burned down the property, the lender has no right to the fire insurance proceeds because the lender has zero damages due to its full credit bid.

In California, the beneficiary's full-credit bid bars an action against the trustor or a grantee for:

  1. breach of contract;

Sumitomo Bank v. Taurus Developers, Inc., 185 Cal. App. 3d 211, 217-222 (Ct. App. 1986)

2. bad faith waste;

Cornelison v. Kornbluth, 15 Cal. 3d 590, 606 (1975)

3. usury; or

Wheeler v. Superior Mortg. Co., 196 Cal. App. 2d 822, 831–32 (Ct. App. 1961)

4. recovery from a guarantor of the debt.

White v. Seitzman, 230 Cal. App. 2d 756, 765(Ct. App. 1964)

Additionally, the full-credit bid rule precludes the beneficiary from recovering any part of the debt from any additional security. Bank of Am. v. Quackenbush, 56 Cal. App. 4th 1167, 1171, (1997). This includes the rents held by a receiver. Eastland Sav. & Loan Ass'n v. Thornhill & Bruce, Inc., 260 Cal. App. 2d 259, 262 (Ct. App. 1968). This also includes recovering any part of the debt from any substituted security such as:

1. insurance proceeds;

Armsey v. Channel Assocs., Inc., 184 Cal. App. 3d 833, 836(Ct. App. 1986)

2. a condemnation award; or

People Ex Rel Dep't of Transportation v. Redwood Baseline, Ltd., 84 Cal. App. 3d 662, 676 (Ct. App. 1978)

3, damages award paid by a third party for injury to the premises by a third party.

Duarte v. Lake Gregory Land & Water Co., 39 Cal. App. 3d 101, 104–05 (Ct. App. 1974)

Federal foreclosure moratoriums are lifting. California’s eviction moratoriums will lift soon as well short of legislative relief. As Trustee’s Sales rise, lenders will need to evaluate the bid strategy that allows them to recover their principal without waiving their right to recover from other sources.

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