CA COURT STRIKES DOWN BOND REQUIREMENT FOR HOME EQUITY SALES CONTRACT

Monday, December 17, 2007
Brought to you by the CALIFORNIA ASSOCIATION OF REALTORS®

CA COURT STRIKES DOWN BOND REQUIREMENT FOR HOME EQUITY SALES CONTRACT

The bond requirement for buyers' agent under the home equity sales contract law is unconstitutionally vague and unenforceable. That was the decision of a recent appellate case Schweitzer v. Westminster Investments, 2007 WL 4340853 (filed December 13, 2007).This case involved a homeowner who sued to reclaim real property that he voluntarily sold to an investor the day before a scheduled foreclosure sale. That sales agreement fell within the scope of the home equity sales contract law which has certain requirements for investors who buy owner-occupied residential property of one-to-four-units after a notice of default has been filed. One of the statutory requirements is for the buyer's agent to be bonded by an admitted insurer in an amount equal to twice the fair market value of the subject property.The plaintiff in this case tried to reclaim the property by arguing that his sales contract was voidable because the buyer's agent failed to comply with the bond requirement. The trial court agreed and awarded the title of the property to the plaintiff. The buyer appealed that decision.On appeal, C.A.R. filed an amicus curiae or friend of the court brief supporting the buyer's position.

The appellate court took judicial notice of C.A.R.'s Legal Q&A advising REALTORS® we are unaware of any insurer currently offering the requisitebond. In striking down the bond requirement, the court ruled as follows: "[The bond requirement] 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 [of the California Civil Code] is void for vagueness under the due process clause and may not be enforced."The appellate court, however, pointed out that the other requirements of home equity sales contract law are valid.Real estate practitioners involved in home equity sales contracts are encouraged to maintain status quo for the time being, and to continue using C.A.R.'s standard-form Notice of Default Purchase Agreement (NODPA) on applicable transactions where a notice of default has been filed against an owner-occupied residential property of one-to-four units and the buyer is an investor.

The Schweitzer decision does not become final and controlling authority on lower courts until January 14, 2008, and the plaintiff's deadline to file a petition for review to the California Supreme Court is ten days thereafter. If the Supreme Court grants review, this opinion is not binding until the Supreme Court rules on the case.