BFP's Purchase At Sheriff's Sale Prevents Restitution

In the recent case of Lee v. Rich, the California Court of Appeal recognized Code of Civil Procedure section 701.680 that provides that a Sheriff's execution sale (aka Trustee's Sale during a foreclosure proceeding), is "absolute and shall not be set aside for any reason", and ruled that because the purchaser of the real property at the Sheriff's sale was not the judgment creditor (i.e, lender, typically a bank) and was a bona fide purchaser ("BFP"), the debtor's remedies were limited to recovery of proceeds of the sale or equitable redemption.

Lee purchased his single family home in a common interest development (Homeowners Association-HOA), and ceased paying the HOA assessments.  The HOA dutifully sent Lee notices of delinquency, intent to record a lien, and recorded a lien on the property.  The HOA then filed a lawsuit against Lee that included foreclosure of the assessment lien.  Lee did not respond to the lawsuit, and after his default was entered, a judgment of foreclosure of the assessment lien was entered. 

Based on the default judgment, the HOA obtained a writ of sale, and a sheriff's deputy posted a notice of the sheriff's sale under foreclosure on Lee's front door that advised the property would be sold at auction to the highest bidder. 

Rich learned of the sheriff's sale, and the bidding opened for the amount of the HOA judgment, and overbids increased in $5,000 increments, until Rich made a bid of $210,000, and the property was sold to him for that amount.  Rich paid the required 10 percent deposit by cashier's check, and paid the balance at the end of the 3 month redemption period.  The property was subject to tax liens and other encumbrances that Rich paid.  Rich received a sheriff's deed to the property, and then filed an unlawful detainer action to evict Lee and obtained a default judgment.

Lee filed a motion to set aside and vacate the HOA's default judgment, arguing that he never received actual notice of the lawsuit because the summons was never mailed to his post office box address, but he did not serve Rich with the motion.  The Court granted Lee's motion to set aside and vacate the HOA's judgment and allowed him to file an answer.  Lee then filed a cross-complaint against the HOA, Rich, and the Orange County Sheriff for restitution of the amount of the judgment of $19,578.32.  Lee next filed a motion for restitution and to cancel the Sheriff's deed, which the court granted.

The Court of Appeal found that Rich was an indispensable party to the motion to set aside and vacate the default judgment because the potential effect of the motion would be to void Rich's title, and he was a party to the sale transaction.  Rich was a BFP at the Sheriff's sale, and the motion to vacate the default judgment impaired and impeded his ability to protect his interest in the property he purchased.

By statute, only the judgment debtor can set aside a Sheriff's sale for irregularity, and only where the purchaser was the judgment creditor.  Therefore, the sale to Rich, who was a BFP, could not be set aside, even if the underlying judgment was vacated.

The historical right of the debtor to exercise equitable redemption is only available where the judgment creditor purchases the property, and for a "grossly inadequate price", and where the purchaser is guilty of unfairness or has obtained an undue advantage.

This case is a good illustration of the steps involved in a Sheriff's sale following a judgment for an HOA against a debtor who fails to pay monthly assessments, and the limited ability of the debtor to recover the property after the sale.

The Lessons:

            1.  A debtor needs to enforce his/her rights before the Sheriff's or Trustee's Sale;

            2. A BFP is protected after purchasing the property at the sale; and

            3.  If the sale is to a BFP, The debtor is limited to recovery of proceeds of the sale or equitable redemption even if the underlying judgment is vacated.