State Appeals Court Hands California Foreclosure Investors Big Win

A California state appeals court in a decision handed down last month held that, under the California Home Equity Sales Contract Act, the bond requirement under Civil Code Section 1695.17 for an equity purchaser's [foreclosure investor's] representative is "void for vagueness under the due process clause and may not be enforced."

The case involved a homeowner facing foreclosure who sued to void a deed in a transaction in which he sold his home to an investor the day before a foreclosure sale. The sale was one that fell within the scope of the California Home Equity Sales Contract Act which, among a slew of other things, requires that a representative acting as intermediary on behalf of a foreclosure investor be bonded for an amount equal to twice the fair market value of the property being sold. The trial court agreed with the homeowner, ruled in favor of voiding the deed, and the foreclosure investor filed an appeal.

In reversing the lower court decision, the California appeals court analyzed the provision in the law requiring the bond, and ultimately ruled as follows:

• We are convinced that the amorphous requirement of section 1695.17, requiring proof the representative is "bonded by an admitted surety insurer in an amount equal to twice the fair market value of the real property which is the subject of the contract," provides no guidance on the amount, the obligee, the beneficiaries, the terms or conditions of the bond, the delivery and acceptance requirements, or the enforcement mechanisms of the required bond. Instead, persons of ordinary intelligence must necessarily guess at what the statute requires for them to comply with its obligations. Under these circumstances, the bond requirement of section 1695.17 is void for vagueness under the due process clause and may not be enforced.

After additional analysis, the appeals court further ruled that its finding of unconstitutionality was limited strictly to the bonding requirement found in Section 1695.17. The other provisions of the statute remain unaffected.

This decision becomes effective on January 14, 2007. However, should the homeowner appeal the decision to the California Supreme Court (and the court decides to hear the case), the decision will not go into effect until the state high court rules on the matter.

To view the court's decision, see Schweitzer v. Westminster Investments (may require free registration; available online courtesy of FindLaw.com)

Editor's Note:

The importance of this decision to those in California can be measured by looking to those who jumped into the litigation as "friends of the court" in this case. The office of the California Attorney General filed a "friend of the court" brief supporting the homeowner's position; on behalf of those intermediaries (ie. real estate agents) who represent foreclosure investors as well as the foreclosure investor itself, the California Association of Realtors filed an amicus brief.

Does this case now mean that it's "open season" on California homeowners facing foreclosure, with licensed real estate agents and unlicensed foreclosure investor "bird dogs" coming out of the woodwork on behalf of investors (both investors who buy property outright with no strings attached, as well as the foreclosure rescue operators who offer the sale leaseback arrangements that the FBI around the country has been quite interested in lately)?

If the California Supreme Court decides to hear an appeal (assuming one is filed), and the state legislature acts quickly enough to correct the perceived constitutional infirmities in the statute while the appeal is pending, then maybe not. Otherwise, ... ???

Thanks to Ontario, California attorney Tim Liebaert, with the firm Ritchie, Klinkert, McCallion & Liebaert for the "heads-up" on this case and his input for this post. For more on Tim Liebaert, see Southern California Woman Alleged Victim Of Home Theft, Mortgage Broker Arrested.