The following is a case update written by Hon. Meredith A. Jury (United State Bankruptcy Judge, C.D. Cal., Ret.), analyzing a recent decision of interest:
The common law contract principle of unilateral mistake of fact will not save a trust deed buyer at a nonjudicial foreclosure sale from grossly overpaying for the property because he mistakenly thought the trust deed he was purchasing was in the first priority position based on information in a private software application when public records and a title report he had ordered both showed the trust deed was junior to a first trust deed. Matson v. S.B.S. Trust Deed Network, 2020 WL 1060245 (Cal. Court of Appeal, 4th Dist. 3/5/20).
To view the opinion, click here.
Matthew Matson purchased a deed of trust at a nonjudicial foreclosure sale. S.B.S. Trust Deed Network (SBS) was the trustee and Bank of Southern California, N.A. (BSC) was the beneficiary of the deed of trust. Relying on a software application called PropertyRadar, Matson believed the deed of trust was in the first position on the property and paid $502,000 with cashier’s checks for it after active bidding at the sale. Prior to the auction, Matson had received a 94-page profile on the property from a title company, but he did not read it all. Instead, he relied on PropertyRadar’s notice of sale which showed the foreclosing loan as being in position “1,” despite its user agreement stating no party should rely on the site. The notice itself even showed the other trust deed with an earlier recording date.
After he tendered the funds, Matson received and executed a receipt of funds by which he agreed there were no warranties with respect to the real property being purchased and that it was being sold “AS IS.” The receipt also stated all funds received by the trustee were nonrefundable. Later on the same day, Matson learned that the trust deed he purchased was in the second position. He immediately tried, unsuccessfully, to stop payment on the cashier’s checks and attempted to rescind the sale, claiming fraud, also unsuccessfully. He refused the tender of the trustee’s deed upon sale; upon its return, SBS recorded the deed and a preliminary change of ownership.
Matson sued SBS, BSC, and others, seeking rescission based on “irregularities in the notice or procedure of the sale,” fraud, and unilateral mistake. The trial court granted summary judgment for all defendants, finding no facts in dispute and rejecting all Matson’s legal theories for rescission. Matson appealed and the Court of Appeal affirmed.
The appellate court decisively concluded there were no irregularities in the notice or procedures, because Matson had not factually supported that claim. That a BSC representative at the sale was surprised by the high bid was of no consequence because the after-the-fact surprise had no effect on the bidding. The court concluded that the recording of the deed by SBS was merely a ministerial act, which also occurred after the sale had been completed and thus was not an irregularity. Statutory and public policy presumptions regarding the finality of nonjudicial foreclosure sales weighed heavily against Matson.
The court spent more time analyzing the common law unilateral mistake of fact theory as applied to a nonjudicial foreclosure. Although it recognized that California case law had determined that the statutory scheme governing such foreclosures was not the exclusive remedy for wrongdoing and there was no immunity for fraudulent or felonious conduct of parties to the sale, it noted Matson was not relying on wrongdoing. Instead, he wanted to be relieved of his own mistake which arose because of his own neglect of a legal duty. The court concluded that when a party bids on property at a procedurally proper nonjudicial foreclosure sale, that party bears the risk of his own mistakes. It observed that Matson did not act as a “cautious businessperson in deciding to bid at a nonjudicial foreclosure sale in full reliance on a private software application without his own thorough investigation of the liens on the property.” He took the risk; unilateral mistake would not save him.
This has to be the right result and should not have been a close question for the appellate court. I believe the court chose to publish because the concept of rescission due to unilateral mistake is rarely analyzed in recent case law. The policy behind the decision is clear: courts cannot upend the public policy which supports the quick, inexpensive nonjudicial foreclosure remedy set forth in detailed statutes, when the procedures were flawlessly followed and only the negligence of the bidder at auction caused him to pay too much – way too much. The authorized credit bid was a flat amount of $71,000, deemed by the beneficiary to be the protectable value of its junior lien. Matson knew that more than $400,000 was owed on that lien. He had one last opportunity to wake up and recognize that something was flawed in his thinking when the trustee stopped overbidding immediately and only other parties drove up the price. Yet, as with his own property profile, he ignored that obvious sign and, despite disclaimers and lack of warranty, dove ahead seeking a windfall. I am tempted to say he got what he deserved for his carelessness. Courts do not exist to bail us out from our foolishness. The key to the court’s decision is that he had a legal duty to investigate the conditions of the sale. When he failed in that duty, unilateral mistake provided no relief.
These materials were written by the Hon. Meredith A. Jury (United State Bankruptcy Judge, C.D. Cal., Ret.) a member of the ad hoc group with editorial contributions by Monique D. Jewett-Brewster, an attorney with Hopkins & Carley, ALC, a member of the ad hoc group and 2018-19 Chair of the CLA Business Law Section. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.