Foreclosure - When Winning Bidder Fails to Pay - June 2014

Terry Jessop & Bitner Newsletter

Issue 10, June 2014

You are a lender. You foreclose on a property. You sell the property at a trustee's sale. The trustee announces the property will be sold to the highest bidder. The property is worth $1,500,000. Bidder 1 offers $1,500,003. Bidder 2 offers $1,500,002. You, the lender, offer a credit bid of $1,500,001. Because Bidder 1 is the highest bidder, you agree to sell to him, but he fails to make the required 25% down payment. What are your options?

Damage to the Lender

Utah law allows you to either: 1) re-notice the sale and go through the process again; or 2) sell the property to the next-highest bidder (Bidder 2 in this case). But what if Bidder 2 is no longer willing to buy the property? Each bid at a trustee's sale is an "irrevocable offer" under Utah law, meaning once made, it cannot be retracted - at least not until the lender accepts the highest bid. (See UCA § 57-1-27(1).)

In our example, when the lender accepts Bidder 1's offer, the lender automatically rejects Bidder 2's offer. In contract law, the acceptance of one offer acts as a rejection of all other offers. So Bidder 2's offer is now off the table. The only way the lender can sell to Bidder 2 is if she puts her offer back on the table.

Now the plot thickens. After Bidder 1 backs out, the trustee approaches Bidder 2 two days after the auction, and Bidder 2 still wants to buy the property. She resubmits her original bid. Her bid is now irrevocable. If you accept the bid, a contract is formed.

But say Bidder 2 then refuses to pay the purchase price, so the deal falls through. You, as lender, get the property because your credit bid is next in line. Six months later you sell the property. After deducting expenses of the sale, you net $1,410,002, which is $90,000 less than you would have received had Bidder 2 honored her bid. So, due to Bidder 2's breach, you lost $90,000, right? You can sue her for at least $90,000, plus interest and attorneys fees, right? Not so fast.

Calculating the Loss

The Utah Court of Appeals recently considered this issue in Antion Financial v. Christensen, 2013 UT App 60, 298 P.3d 681. The Court observed that Utah allows a lender to recover "any loss occasioned" by the bidder's refusal to pay. (See UCA § 57-1-27(1).) The "loss occasioned by the refusal" is NOT the amount that would return you, the lender, to the position you would have been in had Bidder 2 performed. Rather, it is the difference between Bidder 2's offer of $1,500,002 and the amount for which the property actually sold, i.e., your credit bid of $1,500,001, as long as the sale price exceeds the fair market value. Thus, under the Antion Financial case, your damages are $1, plus any incidental expenses.

This method of calculating the "loss occasioned by the refusal" is a harsh reality for lenders. However, as reasoned by the Court of Appeals, it is in harmony with the statutory intent of calculating deficiencies by using the fair market value, or the credit bid, whichever is higher, as the baseline. The fact that a lender may sell the property six months later at a loss is not relevant to the calculation.

If you have any questions about foreclosures, trustee's sales, or deficiency actions, please let us know. We can help.

©Terry Jessop & Bitner June 2014