Thursday, April 11, 2002
Lender Cannot Rescind Foreclosure Sale to Correct Trustee’s Mistake, Court of Appeal Rules
By a MetNews Staff Writer
A lender had no right to rescind a foreclosure sale because its agent had mistakenly made a full credit bid that extinguished the lender’s right to collect insurance proceeds, the Fourth District Court of Appeal has ruled.
In a March 18 ruling, certified yesterday for publication, Div. One affirmed San Diego Superior Court Judge William C. Pate’s ruling granting summary judgment to State Farm Fire and Casualty Company in a suit brought by Norwest Mortgage, Inc.
The panel, in an opinion by Justice Judith McConnell, agreed with Pate that the lender’s right to receive payment under its borrower’s insurance policy was limited to its security interest, and that there was no legal basis on which it could obtain relief from the rule that the right to payment is extinguished one a full credit bid is made and the sale is concluded.
The suit stemmed from Norwest’s foreclosure upon a home in Palmdale. The dwelling was used as a rental unit, and the owners had a State Farm policy identifying Norwest as the mortgagee.
The owners defaulted and filed for bankruptcy. Three days after the Bankruptcy Court lifted the automatic stay, a fire severely damaged the property.
The owners reported the loss to the insurer, but said they had no interest in pursuing the claim as the property was in foreclosure. Norwest also learned of the fire, and noted it in the company’s file.
The trustee hired by Norwest proceeded with the sale, Norwest—the sole bidder—made a full credit bid of nearly $82,000 and obtained the property. State Farm later notified Norwest it was denying the insurance claim because there had been a “full value foreclosure” on the property.
Norwest promptly notified State Farm that it was rescinding the sale. It hired a new trustee and instructed it to bid $11,500 for the property. The trustee, however, went ahead and made a full credit bid, resulting in another rescission by Norwest.
At the third trustee sale, Norwest bid $11,500, obtained a trustee’s deed to the property, recorded it, and demanded payment from State Farm on the fire claim. State Farm refused, leading to the lawsuit.
McConnell, writing for the Court of Appeal, said there was no “mistake” exception to a California Supreme Court ruling that a full credit bid is “a total satisfaction of the secured obligation” and extinguishes any claim for waste. The rule includes a claim for insurance proceeds, the justice said.
Norwest, she said, is bound as a matter of law by the actions of the trustees because they were its agents.
The case is Norwest Mortgage, Inc. v. State Farm Fire and Casualty Company, 02 S.O.S. 1714.
Copyright 2002, Metropolitan News Company