Full credit bid at foreclosure sale
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The First District Court of Appeal in San Francisco has ruled that a secured lender lost most of her damages claims against an escrow agent, when she purchased her real property security with a full credit bid at a foreclosure sale. She may pursue a claim for payment of an unauthorized broker's commission, because that was a loss beyond the unpaid loan.
Endolio Romo sold her home. She received cash, the proceeds of a loan secured by a first deed of trust, and second and third deeds of trust. After the buyer defaulted, Romo foreclosed on her third deed of trust. She repurchased the home at the foreclosure sale by bidding the full amount owed to her on
the loan secured by that deed of trust-a "full credit" bid. She did not keep current the loan secured by the first deed of trust. That lender foreclosed, and Romo lost the property. Romo sued Stewart Title, which was the escrow agent on the original sale transaction. She claimed that Stewart Title participated in fraud and forgery accompanying the original sale of her home.
Stewart Title argued that all Romo's claims were barred by the full credit bid rule, as explained in Cornelison v. Kornbluth, 15 Cal. 3d 590 (1975). In Cornelison, the Supreme Court ruled that a trust deed holder who purchased her real property security with a full credit bid could not sue for waste. The full credit bid established that her security interest had not been impaired. Therefore, she could not prove any damages in a waste action.
After Cornelison, the courts of appeal extended the full credit bid rule to bar other claims aimed at recovering any difference between the amount owed and the amount realized on the real property security. See, e.g., Commonwealth Mortgage Assurance Co. v. Superior Court, 211 Cal. App. 3d 508 (1989) (fraud). Other decisions upheld claims that did not seek to recover the benefit of the bargain in the original loan transaction. See, e.g., Sumitomo Bank v. Taurus Developers, Inc., 185 Cal. App. 3d 211 (1986) (negligent construction).
In Romo's action, the Court of Appeal applied the full credit bid rule to five separate items of damage. (1) She could not recover the amount of the loan secured by the third deed of trust, because that represented the benefit of the loan bargain. (2) She could not recover the amount of the loan secured by the second deed of trust, because her bid at the foreclosure sale established the value of all indebtedness. (3) She could not recover emotional distress damages for worrying about the buyers' failure to pay, because she had established no compensable financial injury. (4) She could seek recovery of a commission that Stewart Title paid to a real estate broker who Romo claimed was unlicensed. That was not part of the loan transaction. (5) If she proved intentional fraud or concealment, she could recover punitive damages.
Romo v. Stewart Title of California, 35 Cal. App. 4th 1609 (1995).
Practice Tip The Romo case illustrates the need for a secured creditor to evaluate all possible sources of recovery before submitting a bid at the foreclosure sale. A full credit bid may also extinguish a secured lender's claims to insurance proceeds and to any rents collected prior to the foreclosure sale. Since there is no legal requirement to bid the full amount of the indebtedness, the lender should usually reduce its bid by any amount that could be recovered from such sources.
By-Calvin House
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