Repeal Of The California Home Equity Sales Act

The California Supreme court's recent denial of certiorari in Schweitzer v. Westminster Investments (2007) 157 Cal. App.4th 1195 does not have as dramatic and wide-sweeping an effect on the California Home Sales Contract Act (Cal Civil Code Section 1695 et seq.) as California REALTORS(R) might hope.

The California Home Equity Sales Contract Act was enacted to protect defaulting homeowners from being negotiated out of their homes by slick talking foreclosure consultants representing investors. The terms of the act required that in order to represent an investor in a foreclosure equity purchase of a 1-4 unit primary residence in default, you had to have a license and put up a bond twice the amount of the fair market value of the property.

The catch? No insurers in the state offered the required bond, effectively making it illegal for licensees to represent foreclosure investors.

In Schweitzer, a REALTOR(R) did just that, and was slapped with a seller lawsuit on the basis that he failed to post the bond. The REALTOR(R) was protected by the Fourth District Appellate Court's view of the bond requirement as unconstitutionally vague.

On March 26, 2008, the California State Supreme Court denied review of the case - effectively telling the plaintiff to go away and leaving the ruling undisturbed.

What does it all mean? Are REALTORS(R) able to start banking on the foreclosure crisis in lieu of all the business they're missing in this slow market? Not so fast.

For one thing, the Court's denial of review is NOT the same as upholding the decision. In fact, all the ruling actually means is that in the Fourth Appellate District that lower courts will be prevented from following the legislation as drafted due to controlling precedent.

The Appellate Court in the 4th district may still change its own ruling subsequent to this decision. Not to mention, in all five other jurisdictions in the state, the Home Equity Sales Contract Act is still controlling.

Likely the reason the Supreme Court did not hear the case is that currently, there are no conflicting appellate court decisions on the issue. Supreme Courts are in the business of resolving conflicts among departments on the lower level, rather than spending time on undisputed matters of first impression. In short, the fight is far from over.

However, if you are a REALTOR(R) who finds yourself in this position, you have now been given a great defense, with all of the arguments already written for you and an influential appellate decision to boot.

In the long run, if the Supreme Court does rule the law unconstitutional as drafted, the legislature will know the reason is that bond requirement is too vague. Our representatives are apt to simply redraft the bill with a more concrete bond requirement.

The verdict? REALTORS(R) should steer clear of this kind of representation until insurance companies begin offering these bonds or until the law is repealed officially.