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Calif. App. Court (5th Dist) Holds Lender’s Action to Remove Prior Lien Was Time-Barred

time-barredThe Court of Appeal of the State of California, Fifth District, recently held a trial court incorrectly applied the statute of limitations on an alleged quiet title claim, where the statute of limitations to foreclose a first deed of trust had already run, and the lien had been extinguished, prior to the filing of the alleged quiet title claim.

A copy of the opinion in Robin v. Crowell is available at:  Link to Opinion.

In 2006, an individual lender loaned the borrowers $450,000, secured by a deed of trust on one parcel of the borrowers’ property. Before the loan was made, the borrowers represented there were no prior encumbrances on the property.

A title report showed there was a 2004 deed of trust on the property securing a $250,000 promissory note from the borrowers to a lien holder. The borrowers represented that the lien holder’s deed was a mistake and obtained from the lien holder a partial reconveyance of that deed of trust to remove his lien.

The lender and the borrowers then modified the promissory note to prohibit the borrowers from encumbering the property again without the lender’s consent while the lender’s loan was unpaid.

Subsequently, the lender executed the promissory note, recorded the deed of trust, and completed the funding of the loan.

In 2007, without the lender’s knowledge, the borrowers and the lien holder recorded a second deed of trust on the property, again securing the lien holder’s 2004 promissory note.

In 2008, the lender exercised its right of acceleration, the borrowers failed to make payment, and the lender initiated a judicial foreclosure which failed to name the lien holder.  In 2011, the trial court entered a judgment in favor of the lender in the foreclosure, ordering the sale of the property and in 2014, the lender purchased the property at the foreclosure sale for a credit bid of $150,000.

After the borrowers’ one-year redemption period expired, the lender attempted to sell the property to the owners of a neighboring property. The title search conducted at that time revealed the lien holder’s recorded deed of trust.

In June 2016, the lender filed a quiet title action to clear title to the property. The lien holder asserted he held an interest in the property superior to the lender and raised defenses, including the expiration of the statute of limitations. The lien holder also filed a cross-complaint for declaratory relief, seeking a declaration regarding the extent to which the foreclosure action or foreclosure sale affected his interest in the property, and whether the lender could prevent him from exercising his rights under his deed of trust.

The trial court entered judgment in favor of the lender on the complaint and the cross-complaint. It exercised its equitable powers to correct a mistake in the prior foreclosure action — the mistake of failing to include the lien holder as a party to that action. The trial court granted the lien holder a three-month redemption right, which it believed would put the lien holder in the same position he would have been in if he had been included in the borrower’s foreclosure action. The judgment provided that, if the lien holder failed to redeem the property within the allowed time, the lender would own the property unencumbered by the lien holder’s deed of trust.

The lien holder appealed the judgment.

On appeal, the lien holder argued that the trial court erred when it concluded the 60-year limitations period set out in Civil Code section 882.020 applied to the lender’s action. The lien holder contends the limitations period applicable to judicial foreclosure actions, either four years under Code of Civil Procedure section 3371 or six years under Commercial Code section 3118, applies.

The lender responded that the trial court chose the correct statute of limitations. Alternatively, the lender asserted that its action was timely, because it was an action to quiet title on the ground of mistake, to which a three-year limitations period applies, commencing upon discovery of the cause of action.

Initially, the Appellate Court noted the principal purpose of the lender’s action appears to be to remove the lien of the lien holder’s deed of trust from the property which is ordinarily done by including the junior lienholder in the foreclosure action. Further, the trial court entered a judgment designed to have the same effect as inclusion of the lien holder in the prior foreclosure.

Accordingly, the Appellate Court concluded the gravamen of the lender’s action was foreclosure of the lender’s senior trust deed against the lien holder and therefore the statute of limitations applicable to foreclosure actions governs this case.

Next, the Appellate Court recognized the general statute of limitations set out in the Code of Civil Procedure for “[a]n action upon any contract, obligation or liability founded upon an instrument in writing” is four years. The Court also noted it need not consider the six-year limitations period contained in the commercial code because in this case, either time period expired before the lender filed this action.

The Appellate Court explained the “limitations period for bringing a judicial foreclosure action begins to run upon maturity of the obligation secured, that is, when the underlying promissory note comes due, but is unpaid.”

In the present matter, the lender accelerated the maturity date of the promissory note, making payment due on April 5, 2008; the borrowers failed to make payment by that date. The lender filed its action for foreclosure against the borrowers within four years after that date. However, the lender did not file the action to foreclose against the lien holder until more than eight years after maturity of the note.

Accordingly, whether a four-year or a six-year limitations period applies, the statutory period expired before the lender filed the action.

The Appellate Court next examined foreclosure actions against junior lienholders. The Court explained a junior lienholder is not affected by the foreclosure of a senior lien, if the junior lien existed prior to the foreclosure and the junior lienholder was not made a party to the senior lienholder’s foreclosure action.

To remove a junior lien, the holder of the senior lien or the buyer at the senior sale (standing in the shoes of the senior lienholder) may file a second action to foreclose the omitted party’s equity of redemption or a quiet title action having the same effect.

Additionally, the junior lienholder may raise the statute of limitations as a defense to the senior lienholder’s foreclosure action.

Moreover, the Appellate Court provided, under Civil Code section 2911, the lien of the deed of trust is extinguished when the statute of limitations has run on the underlying debt. Once the statute of limitations has run on the underlying obligation, i.e., the promissory note, the lienholder “cannot, by any affirmative proceedings on his part, invoke the aid of the court for the collection of his debt.”

As a result, the expiration of the statute of limitations bars both an action on the debt and an action to foreclose the lien of the deed of trust. The expiration of the statute of limitations on a senior lien also bars the senior lienholder from asserting the priority of its lien in answer to the foreclosure complaint of a junior lienholder.

Here, the Appellate Court held that the limitations period on any judicial action to enforce the lender’s rights under the deed of trust expired prior to the filing of their quiet title action.

The Appellate Court reasoned that by filing a quiet title action seeking to complete their prior judicial foreclosure and eliminate the lien holder’s lien on the property, the lender has affirmatively invoked the court’s assistance to foreclose the lien holder’s interest in the property. The time for doing so lapsed prior to commencement of the action, and any judicial action for that purpose, including the quiet title action, is barred.

The Appellate Court added the lender’s recorded deed of trust did not reflect the maturity date of the underlying promissory note. Accordingly, the 60-year period of Civil Code section 882.020, subdivision (a)(2), applied to it, rather than the 10-year period of Civil Code section 882.020, subdivision (a)(1). The 60-year period did not govern the lender’s time for commencing the quiet title action to complete their foreclosure, however, because the time for bringing a judicial foreclosure action had “earlier expired pursuant to Section 2911” before the action was filed.

Consequently, the Appellate Court held the trial court erred in concluding a 60-year statute of limitations applied to this action to judicially enforce the lender’s rights under the deed of trust.

The Appellate Court further explained, once the judgment was final, the sale was complete, and the time for seeking a deficiency judgment had lapsed, there was no further obligation under the lender’s deed of trust as to which the borrowers could be in default. Consequently, after the foreclosure action was complete, the lender could not record a notice of default containing “a correct statement of some breach” that warranted a sale of the property.

As a result, the Appellate Court found no support for the proposition that the power of sale in the lender’s deed of trust survived the judicial foreclosure sale and may still be exercised despite the previous sale of the property to satisfy the borrowers’ obligation under the lender’s promissory note and deed of trust.

Accordingly, the Appellate Court concluded the trial court cannot exercise the trustee’s power of sale and the statute of limitations bars any judicial action, including the quiet title action, to enforce the lender’s rights under their deed of trust against the lien holder.

The Appellate Court concluded, the lender did not, and could not, pursue a trustee’s sale. Title to the property was transferred to the buyer at the judicial foreclosure sale, and the trustee did not retain any title that could be transferred in a subsequent trustee’s sale. Hence, the Court held, the lender’s action was barred by the statute of limitations.

Accordingly, the Appellate Court reversed the judgment of the trial court and directed it to vacate its judgment and enter a new judgment in favor of the lien holder on the complaint and the cross-complaint.

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The attorneys of Maurice Wutscher are seasoned business lawyers with substantial experience in business law, financial services litigation and regulatory compliance. They represent consumer and commercial financial services companies, including depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, financial asset buyers and sellers, loss mitigation companies, third-party debt collectors, and other financial services providers. They have defended scores of putative class actions, have substantial experience in federal appellate court litigation and bring substantial trial and complex bankruptcy experience. They are leaders and influencers in their highly specialized area of law. They serve in leadership positions in industry associations and regularly publish and speak before national audiences.

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