California Senate Bill 1079, which took effect January 1, 2021, fundamentally restructured the non-judicial foreclosure process for residential properties. Designed to promote homeownership and prevent institutional acquisition of foreclosed homes, SB-1079 created a complex bidding system favoring specific categories of purchasers.
Nearly two years into implementation, the statute’s ambiguities and procedural complexities have generated substantial litigation. With appellate courts yet to resolve many critical questions, lenders, trustees, and prospective bidders face significant uncertainty and risk.
This comprehensive guide examines the litigation landmines embedded in SB-1079 and provides strategic guidance for navigating them.
SB-1079: Overview and Legislative Purpose
Why Was SB-1079 Enacted?The California Legislature enacted SB-1079 in anticipation of a COVID-19-related foreclosure wave. Lawmakers feared repeating the 2007-2008 Great Recession pattern, when institutional investors acquired thousands of foreclosed single-family homes, converting owner-occupied properties into rental inventory.
The statute’s primary purpose is simple: promote owner-occupancy of residential housing.
This legislative intent becomes critical when courts interpret ambiguous provisions. Judges faced with unclear statutory language will reference this core purpose to guide their decisions.
How SB-1079 Promotes Owner-OccupancyThe statute employs three primary mechanisms:
1. Residential Property Limitation: SB-1079 applies only to properties containing 1-4 residential units, since only residential property can be owner-occupied.
2. Bundling Prohibition: Trustees cannot bundle multiple properties and sell them to a single buyer. Each property must be sold individually, preventing bulk purchases that screen out individual buyers.
3. 45-Day Bidding Window: After the trustee’s sale, “eligible bidders” have 45 days to submit “eligible bids” that can override the high bid at the auction. This extended window gives individual buyers additional opportunity to acquire the property.
Eligible Bidders: Who Gets Special Rights?
SB-1079 creates several categories of “eligible bidders” entitled to the 45-day post-sale bidding window. The categories range from ideal owner-occupants to entities far removed from the statute’s core purpose.
Category 1: Eligible Tenant BuyerDefinition: A natural person who: – Occupies the property as their primary residence at the time of the trustee’s sale – Has an arms-length tenancy agreement with the borrower predating the Notice of Default – Is not related to the borrower
– No Post-Sale Occupancy Requirement: Unlike prospective owner-occupants, tenant buyers need only occupy the property at the time of sale. No requirement mandates they continue living there or even retain the property.
– No Anti-Straw-Bidder Prohibition: The statute doesn’t explicitly prevent tenant buyers from acting as agents for third parties. This omission creates opportunities for exploitation.
– Arms-Length Agreement Standard: The statute doesn’t require written tenancy agreements. Proving (or disproving) an arms-length relationship can devolve into “he said, she said” disputes, increasing litigation costs.
– Broad Family Exclusion Interpretation: The statute excludes only mortgagors’ children, spouses, and parents. Other relatives may qualify, creating ambiguity.
Category 2: Prospective Owner-Occupant (POO)Definition: A natural person who provides an affidavit stating they will: – Occupy the property as their primary residence within 60 days after deed recordation – Live in the property for at least one year – Not act as an agent for any other person or entity – Not be related to the borrower
– Trustee’s Duty to Require Affidavit: When a POO is the highest bidder at the trustee’s sale (avoiding the 45-day window), the statute states trustees “shall require” the affidavit. But what happens if the trustee fails to request it? Does the POO lose their preferred status? Can the trustee be held liable? These questions remain unresolved.
– 60-Day Occupancy for Uninhabitable Properties: What if the property cannot possibly be occupied within 60 days due to damage, lack of utilities, or required repairs? Should SB-1079 apply at all? Courts haven’t provided clarity.
– One-Year Occupancy Requirement: If a POO sells the property within one year, does that prove the original affidavit was fraudulent? Do losing bidders have standing to challenge the sale? Litigation is likely.
– Subjective Intent: POOs certify their “intent” to occupy and remain for one year. Proving subjective intent is inherently difficult, making enforcement challenging.
Category 3: Nonprofit with POO as Voting Member/DirectorDefinition: A nonprofit organization in which an eligible tenant buyer or prospective owner-occupant serves as a voting member or director.
– Hybrid Structure Complexity: This category blends entity ownership with individual occupancy, raising questions about ongoing compliance. Must the POO/tenant buyer remain a voting member indefinitely? What happens if they resign?
Category 4: Eligible California NonprofitDefinition: A California nonprofit corporation whose primary activity is the development and preservation of affordable rental housing.
Critical Deviation from Legislative Purpose: This category represents a substantial leap from the owner-occupancy ideal. Note three concerning elements:
1. No Actual Owner-Occupancy: The property doesn’t need to be owner-occupied or even used for affordable housing.
2. Primary Activity Standard: The nonprofit’s “primary activity” must be affordable housing development/preservation, but that activity can occur anywhere—not necessarily involving the foreclosed property.
3. Vague “Primary Activity” Definition: What constitutes a “primary activity”? Is it measured by revenue? Time spent? Mission statement language? The statute provides no guidance.
– Qualification Verification: How does a trustee verify a nonprofit’s primary activity? Can they rely solely on articles of incorporation, or must they investigate actual operations?
– Newly Formed Entities: Can someone form a California nonprofit shortly before a foreclosure sale, claim affordable housing as their mission, and qualify without any operational history?
– Property Use Limitations: Must the acquired property actually be used for affordable housing? The statute doesn’t explicitly require it.
Category 5: LLC/Partnership with Eligible Nonprofit as Managing MemberDefinition: A limited liability company or limited partnership in which an eligible California nonprofit (Category 4) is the managing member or general partner.
– Geographic Disconnect: The LLC/partnership itself need not have any California connection—only the managing member must be a California nonprofit.
– Layered Complexity: Verifying eligibility now requires examining both the LLC/partnership structure and the nonprofit’s qualifications.
– Privacy Protections: LLCs formed in states like Wyoming, Delaware, or Nevada may invoke privacy statutes to resist disclosure of ownership structures, making verification nearly impossible.
– Verification Burdens: Can trustees reasonably rely on affidavits when the entity structure itself obscures true ownership and control?
– Out-of-State Entity Exploitation: Does the statute’s failure to require California formation create opportunities for forum shopping and regulatory arbitrage?
Other Eligible Bidder CategoriesSB-1079 also includes: – Community land trusts – Limited equity housing cooperatives – Various government entities (state, local, federal housing agencies)
While more specialized, these categories generally align better with the statute’s affordable housing and occupancy goals.
Eligible Bids: Procedural Requirements and Pitfalls
An “eligible bidder” must follow specific procedures to submit a valid “eligible bid.” Each requirement presents litigation risks.
15-Day Notice of Intent RequirementRequirement: Eligible bidders must send written notice of intent to bid, which the trustee must receive no more than 15 days after the trustee’s sale.
– Non-Binding Nature: Notices of intent are not made under penalty of perjury (unlike affidavits). What weight should trustees give them?
– Timing Disputes: AB-175 clarified the requirement, but causes of action may have accrued under the prior ambiguous version.
Affidavit RequirementsRequirement: Eligible bidders must provide affidavits (under penalty of perjury) certifying: – Which category of eligible bidder they represent – That they meet all statutory requirements for that category
1. Are trustees required to rely on affidavits, or merely permitted to?
2. When can or must trustees reject affidavits that appear fraudulent or contradicted by publicly available evidence?
3. What level of investigation must trustees conduct before accepting affidavits?
4. If trustees wrongfully reject or accept an affidavit, what remedies do affected parties have?
45-Day Bid Submission DeadlineRequirement: Bids must be received by the trustee no later than 5:00 PM on the 45th day after the trustee’s sale.
– Payment Tender Requirement: Must bidders actually tender payment for their bid, or does merely submitting a bid create the cause of action if wrongfully rejected? Courts haven’t definitively ruled.
– Competing Bids: When multiple eligible bids are submitted, what happens if the highest bidder failed to tender payment but a lower bidder did? Who prevails?
Special Rules for Eligible Tenant BuyersMatching Privilege: Eligible tenant buyers can submit bids equal to (not exceeding) the highest bid at the trustee’s sale.
POO as Highest Bidder at Trustee’s SaleSpecial Provision: If a prospective owner-occupant is the highest bidder at the actual trustee’s sale, they are deemed the winning bidder immediately—no 45-day window applies.
AB-175: Statutory Clarifications
Assembly Bill 175, enacted in late 2021, attempted to address ambiguities and litigation issues that emerged during SB-1079’s first year.
This distinction matters for assessing liability for actions taken under the pre-AB-175 regime. If AB-175 merely clarified existing intent, parties who didn’t comply with its requirements may have violated the law even before the amendment passed.
Key AB-175 Changes1. Affidavit Timing for POO as Highest Bidder: Must be submitted at auction or by 5:00 PM the next business day.
2. Notice of Intent Components: Must include the statutory affidavit, not just informal notice.
3. 15-Day Deadline: Notice of intent must be received by 5:00 PM on the 15th day (not just postmarked).
4. Contact Information: Notices and bids must include phone numbers and mailing addresses.
5. Collective Tenant Buyer Representatives: Must state representative capacity and provide contact information.
6. One Tenant Buyer Exception: If eligible tenant buyers are bidding collectively, only one need submit a notice of intent (but the representative must ultimately submit the bid).
7. Limited Trustee Information Duties: Trustees must provide only sale date, sale result, and contact information—not additional details about the post-sale process.
8. POO Exclusion: Prospective owner-occupants cannot include borrower-related trusts or related parties acting on behalf of entity borrowers.
9. Trustee Deed Recording Deadlines: Extended from 18 to 21 days for standard sales, and 45 to 60 days when a notice of intent has been received.
Litigation Issues: Eligible Bidders
Does SB-1079 Even Apply?Issue: SB-1079 applies only to properties containing “one to four residential units.”
– Properties Under Construction: If the property had residential units when the deed was recorded but is now just a frame, does SB-1079 apply?
– Properties Under Renovation: If significant remodeling renders the property temporarily uninhabitable, is it still “residential”?
– Incomplete Construction: If the property was supposed to become residential but construction stopped before completion, does SB-1079 apply?
– Destroyed Properties: If a fire, flood, or natural disaster destroys the residential units between the Notice of Default and the sale, does SB-1079 still apply?
Eligible Tenant Buyer Verification ChallengesIssues:
– Primary Residence Proof: What evidence proves the property was the tenant buyer’s primary residence at the time of sale? Utility bills? Driver’s license address? Voter registration?
– Arms-Length Agreement: Without a written lease, how can arms-length nature be proven or disproven?
– Straw Bidder Suspicion: If a third party approaches an eligible tenant buyer to bid on their behalf, is there a violation? The statute doesn’t explicitly prohibit it for tenant buyers (unlike POOs).
Prospective Owner-Occupant EnforcementIssues:
– Subjective Intent: POOs certify their intent to occupy. Proving or disproving intent at the time of certification is inherently difficult.
– Changed Circumstances: If a POO sells within one year, is that conclusive evidence of fraudulent intent, or could legitimate circumstances (job loss, illness, family emergency) justify the sale?
– Standing to Challenge: Who can challenge a POO’s failure to occupy or early sale? Losing bidders? The borrower? Only the trustee?
– Remedies: If a POO violates their affidavit, what remedies exist? Unwinding the sale? Damages? To whom?
Nonprofit Qualification IssuesIssues:
– Primary Activity Determination: How is “primary activity” measured? IRS Form 990 allocations? Budget percentages? Mission statements? Actual project counts?
– New Entities: Can a nonprofit be formed shortly before a foreclosure sale and immediately qualify?
– Verification Burden: Must trustees investigate beyond articles of incorporation to verify actual operations?
– Property Use: Must the acquired property actually be used for affordable housing, or just the nonprofit’s other activities?
Litigation Issues: Eligible Bids
Affidavit Enforceability and Trustee LiabilityUnresolved Questions:
1. Trustee’s Discretion: May trustees reject affidavits they believe are false, or must they accept all affidavits at face value?
2. Contradictory Evidence: If public records (Secretary of State filings, property records) contradict affidavit statements, can trustees rely on that evidence to reject bids?
3. Liability for Acceptance: If a trustee accepts a questionable affidavit and another bidder loses, does that bidder have a claim against the trustee?
4. Liability for Rejection: If a trustee rejects an affidavit and the bidder claims wrongful exclusion, is the trustee liable?
Payment Tender RequirementIssue: Must an eligible bidder actually tender payment for their bid, or does submitting the bid paperwork alone create a cause of action if the trustee wrongfully rejects it?
Trustee’s Information ObligationsPre-AB-175 Issue: Bidders demanded extensive information from trustees beyond what the statute required (escrow details, property condition reports, title information).
Other Litigation Landmines
Rescinded Trustee SalesIssue: Trustees sometimes must rescind sales due to procedural errors or grossly inadequate sale prices (pursuant to established case law).
POO Affidavit Requirement at Trustee’s SaleStatutory Language: “The trustee shall require a prospective owner-occupant who is the high bidder at a trustee’s sale to provide [the affidavit]…”
Strategic Guidance
For Lenders– Monitor Trustee Performance: Ensure trustees follow SB-1079 requirements meticulously to avoid litigation that could delay or derail sales.
– Property Type Analysis: Determine early whether properties contain 1-4 residential units and whether they’re habitable. Document your analysis.
– Budget for Extended Timelines: SB-1079 adds minimum 45 days to foreclosure timelines, and litigation can add months or years.
– Consider Alternatives: In some cases, buying out senior liens, negotiating with borrowers, or pursuing alternative exit strategies may be preferable to foreclosure.
For Trustees– Document Everything: Maintain meticulous records of all communications, affidavits, and decisions.
– Legal Review: Have counsel review questionable affidavits before acceptance or rejection.
– Clear Communication: Provide required information promptly and clearly to minimize disputes.
– Bond Insurance: Consider errors and omissions coverage specifically addressing SB-1079 risks.
For Prospective Eligible Bidders– Be the Highest Bidder at Sale: If you qualify as a POO, bidding successfully at the actual trustee’s sale eliminates the 45-day window’s uncertainties.
– Submit Complete Documentation: Include all required elements in notices of intent and bids—don’t rely on trustees to request missing items.
– Tender Payment: Be prepared to actually fund your bid to avoid disputes about whether you had a valid bid.
– Understand Your Category: Ensure you truly meet all requirements for your claimed eligible bidder category.
Conclusion
SB-1079 represents a dramatic restructuring of California’s foreclosure process for residential properties. While its purpose—promoting homeownership and preventing institutional acquisition—is clear, its implementation has created substantial ambiguity and litigation risk.
Key takeaways:
1. Appellate Guidance Is Lacking: Most litigation questions remain unresolved, forcing participants to navigate without clear precedent.
2. Statutory Purpose Matters: When arguing ambiguous provisions, reference SB-1079’s core purpose of promoting owner-occupancy.
3. Categories Matter: The closer an eligible bidder category aligns with actual owner-occupancy, the stronger its legal position when disputes arise.
4. Trustees Face Impossible Choices: Without clear standards for evaluating affidavits, trustees risk liability regardless of their decisions.
5. Affidavit Enforcement Is Uncertain: The statute’s deterrent effect depends on enforcement mechanisms that remain largely untested.
6. Creative Solutions Required: Many SB-1079 issues involve situations the statute’s drafters didn’t anticipate, requiring creative legal arguments.
Until appellate courts provide authoritative guidance, participants in California residential foreclosures must expect continued litigation and uncertainty. The minefield is real—careful navigation and experienced legal counsel are essential.
For questions about SB-1079 compliance, foreclosure strategy, or litigation defense, contact the Geraci LLP Litigation Team.
