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Calif. App. Court (1st Dist) Holds Homeowner’s Quiet Title Action Against Lienholder Was Not Time-Barred

mortgage lawThe Court of Appeal of the State of California, First Appellate District, recently reversed entry of summary judgment in favor of a lienholder in an action to quiet title brought by homeowners that was rejected by the trial court as time-barred.

In so ruling, the Appellate Court held that the lienholder’s notice of sale pursuant to deeds of trust upon the property which secured loans to its prior owners did not start the running of the three-year statute of limitations period under California Code of Civil Procedure § 38(d) because the sale did not take place as scheduled, and the homeowners maintained undisturbed possession of the land at all relevant times.

A copy of the opinion in Huang v. Wells Fargo Bank, N.A. is available at:  Link to Opinion.

In 2000, prior owners of a property obtained a home equity line of credit (“first HELOC”) secured by a first position deed of trust on the property (“first HELOC DOT”).  In 2003, the prior owners obtained a home loan that was also secured by a deed of trust on the property.  The first HELOC DOT lender agreed to subordinate the first HELOC DOT to the deed of trust that secured the new loan. 

In December 2013, the former owners took out another HELOC (“second HELOC”) secured by a short form deed of trust against the property (“second HELOC DOT”).  In 2004, the prior owners refinanced all three loans with a new lender resulting in a single new loan secured by a deed of trust to pay off the prior loan and the first and second HELOCs.  

The first and second HELOCs were closed, but reopened in December 2004 upon the prior owners’ request.  The lender on the first and second HELOCs (“lienholder”) never issued any reconveyance of the respective first and second HELOC DOTs which secured their balances.  The former owners continued to draw upon both the first and second HELOCs, whose balances totaled over $224,000 by February 2006. In 2007, they refinanced yet again, and eventually defaulted on the latest refinanced loan, resulting in foreclosure.

The property was sold at a foreclosure auction in November 2008.  The next month, the lienholder recorded a notice of default and election to sell the property under the power of sale in the first HELOC DOT.  New buyers (“purchasers”) purchased the property from the purchaser at foreclosure in February 2009, and were issued a policy of title insurance at the time of purchase. 

On Aug. 24, 2009, the lienholder recorded its notice of trustee’s sale at auction to the highest bidder, which the purchasers received when it was posted on the door of the property that month.  The purchasers forwarded the document to their title insurer, who advised that it would investigate and contact the lienholder.

After nearly five years went by, with the purchasers having assumed that the matter had been resolved, in May 2014, the lienholder again threatened to foreclose under its two claimed deeds of trust secured by the property.  The purchasers sued the lienholder to quiet title to the property in September 2014, asserting causes of action for quiet title, declaratory relief, and breach of duty to discharge a secured obligation under Civil Code section 2941.

In June 2017, the trial court granted the lienholder’s motion for summary judgment, concluding all three causes of action were time-barred under California’s three-year statute of limitations in Code of Civil Procedure §338(d). The purchasers’ appealed, and the appellate court stayed a nonjudicial foreclosure sale of the property that was scheduled for November 2018.

On appeal, the parties did not dispute that the three-year statute of limitations period under California Code of Civil Procedure § 338(d) applied, but disputed when the purchasers’ quiet title claim accrued and the statute of limitations began to run.  The lienholder argued the purchasers’ cause of action was barred because the limitations period began no later than August 2009 when the notice of sale was posted on the property’s front door, providing purchasers notice of a hostile claim against their title to the property, despite the fact that the sale did not go forward.

Under California law, “[Q]uiet title actions have special rules for when the limitations period begins to run.” Salazar v. Thomas (2015) 236 Cal.App.4th 467, 477.  “'[A]s a general rule, the statute of limitations [for a quiet title action] does not run against one in possession of land.’” Id. (internal citation omitted).  Even when a party in possession knows there is a potential adverse claim, “there is no reason to put him to the expense and inconvenience of litigation until such a claim is pressed against him.” Muktarian v. Barmby (1965), 63 Cal.2d at pp. 560–561.  “Thus, mere notice of an adverse claim is not enough to commence the owner’s statute of limitations.” Salazar at 478.

Although the cases uniformly hold that more than a threat to one’s title is required to commence the running of the limitations period against an owner in possession, whether a statute of limitations bars an action to quiet title may turn on whether the plaintiff is in undisturbed possession of the land.  Salazar at 477.

Here, it was undisputed that the purchasers maintained exclusive possession of the property at all times, and they argue that their possession was always undisturbed.  The Appellate Court found the Fourth District’s holding in Salazar as instructive on this issue. 

In Salazar, the homeowners received a notice of default and election to sell under a deed of trust they believed was forged by their son, and made payments until eventually entering a forbearance agreement before filing suit to quiet title over seven years after receiving the notice.  After the trial court held that the Salazars’ claims were time-barred based on the date of the initial notice of default, the Fourth District reversed, holding that the notice of default informed the Salazars of an adverse claim or cloud on their title, but did not dispute the Salazars’ possession.  Salazar at 481.

Similarly here, the lienholder’s notice of trustee’s sale did not call into question or disturb the purchaser’s possession of the property, only that their ownership would require them to pay the amount in default. 

Moreover, the Appellate Court reasoned that any challenge to the purchasers’ dominion was eliminated when they took action by transmitting the document to their title insurer.  After the trustee’s sale did not go forward as scheduled in September 2009 and the title insurer sent periodic updates, the purchasers heard nothing about the lienholder’s claims from July 2010 through May 2014 and continued to reside undisturbed in the property.

Because the “imminent sale” never happened and the purchasers remained in exclusive possession of the house for several years before the lienholder renewed its threat to foreclose, the Appellate Court concluded that notice of trustee’s sale did not disturb the purchasers’ possession and commence the running of the limitations period.

Accordingly, the trial court’s entry of summary judgment in the lienholder’s favor was reversed.

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Christopher P. Hahn practices in Maurice Wutscher’s Commercial Litigation, Consumer Credit Litigation and Insurance Recovery and Advisory groups. Prior to joining Maurice Wutscher LLP, he served under the General Counsel at the Florida Office of Financial Regulation. He also obtained extensive experience litigating property insurance claims through all phases of discovery, motion practice and other pre-trial activities. Christopher obtained his Bachelor of Science degree in Business Administration from the University of Southern California, followed by his Juris Doctorate degree from the University of Miami School of Law. He is also a graduate of the University of Miami’s Masters of Business Administration program, completing his degree with an emphasis on finance and mergers and acquisitions. For more information, see https://mauricewutscher.com/attorneys/christopher-p-hahn/