Thursday, February 15, 2018

FYI: Cal App (1st Dist) Holds Intent of Parties Determines Priority of Simultaneous Lien Recordings

The Court of Appeals of California, First District, recently concluded that if two deeds of trust are submitted at the same time for recording, the order in which they are indexed is not determinative of priority.  Instead, according the Court, the intent of the parties will determine priority. 

 

In this case, one originating lender extended two loans secured by the same real estate, and it was apparent that the expectation was that the larger mortgage loan would have priority. The trial court had held that the defendant was the senior lienholder even though the defendant's mortgage was indexed after the other mortgage.  The trial court then concluded that as a senior lienholder the defendant's lien would remain on the property, and the defendant was not entitled to any of the sale proceeds from the plaintiff's nonjudicial foreclosure under California Civil Code § 2924k. 

 

The Appellate Court also observed that the second lien was a home equity line of credit as further support that the defendant's lien was intended to have priority.  Accordingly, the Appellate Court affirmed the ruling of the trial court.

 

A copy of the opinion is available at:  Link to Opinion

 

In 2003, a borrower obtained two loans from the same lender, each of which was secured by a deed of trust on certain real property located in California. One loan was a closed-end mortgage in the principal amount of $205,080 and the other loan was a home equity line of credit in the principal amount of $15,000. Both deeds of trust were recorded with the county recorder's office at the same time on the same day.

 

The deed of trust for the equity line received a recorder's instrument number of 2003-0603657, and the deed of trust for the closed-end loan received a recorder's instrument number of 2003-0603058. Through a series of transfers, the HELOC subsequently was assigned to a bank, and the closed-end loan was assigned to another entity and serviced by the defendant.

 

After borrower defaulted on the equity line, the plaintiff trustee for the bank conducted a nonjudicial trustee sale of the property. The plaintiff received $105,000 from the sale. After payment of all funds due the bank and the fees and costs of the sale, a surplus of $73,085.50 remained.

 

Three parties claimed entitlement to the surplus: the borrower, the homeowners association, and the defendant. The trustee deposited the surplus funds with the court and commenced the action to resolve the conflict between the three claimants. The trial court concluded that the parties intended for the defendant's closed-end mortgage lien to have priority over the HELOC lien recorded simultaneously. 

 

Because the defendant's lien had priority, the trial court concluded the defendant closed-end mortgage servicer was not entitled to any of the proceeds from the HELOC lienholder's nonjudicial foreclosure.  Instead, according to the trial court, the property was sold subject to the defendant's senior lien.  The surplus was distributed to the homeowners association and borrower. 

 

The defendant closed-end mortgage lien servicer appealed the trial court's ruling.

 

On appeal, the defendant closed-end mortgage lien servicer argued that the deed of trust on the home equity line was assigned a lower instrument number than its mortgage lien.  According to the defendant, this made its lien junior to the home equity lien. 

 

Which lien had priority was a critical ruling because if defendant's lien was junior to the HELOC trustee's, the defendant would be entitled to some of the surplus proceeds from the trustee's sale of the property. 

 

As the Court of Appeal pointed out, under California Civil Code § 2924k(a), the proceeds of a trustee's sale must be distributed in the following order of priority: (1) to the costs and expenses of exercising the power of sale and of sale; (2) to the payment of the obligations secured by the deed of trust or mortgage which is the subject of the trustee's sale; (3) to satisfy the outstanding balance of obligations secured by any junior liens or encumbrances in the order of their priority; and (4) to the trustor or the trustor's successor in interest.  

 

"When a junior lienholder forecloses on a second deed of trust at a nonjudicial trustee's sale, the senior lienholder is not entitled to any proceeds from the sale because the property is purchased at the sale subject to the first deed of trust."

 

The Court of Appeal acknowledged California followed the "first in time, first in right" system of lien priorities, under which, as a general rule, liens "have relative priorities among themselves according to the time of their creation."  However, when liens are both signed on the same day, like they were in this case, "the time of their creation does not determine their priority."

 

The Court added, "the date of recording also is not determinative in this instance."  Even though liens that are recorded earlier take priority over subsequently recorded liens, both deeds of trust were deposited in the recorder's office at the same time on the same day.

 

The Court relied on prior rulings with similar facts to establish it is the intent of the parties that is determinative of the priority.  First, in Phelps v. American Mtg. Co. (1936) 6 Cal.2d 604, 609 [59 P.2d 95], overruled in part on other grounds, two deeds were both executed and recorded on the same day.  Although one of the trust deeds specifically stated it was to be the first lien trust deed, it was indexed by the recorder with a higher number than the other trust deed. 

 

The California Supreme Court rejected the trial court's finding that the priority of the deeds of trust was established based on the sequence in which the two documents were indexed. The Phelps court explained that if the deeds of trust "were filed at the same time or in their proper order and the reverse order of recordation was an inadvertence, that mistake should not be permitted to alter the intended relations of the parties when an examination of the recorded documents would provide notice of the true priorities."

 

Next, in First Bank vs. East West Bank, 199 Cal.App.4th 1309 [132 Cal. Rptr. 3d 267] (2011), two banks granted loans to a borrower and secured them with trust deeds on the same property.  Both deeds were executed and recorded on the same day.  Both banks sought a declaratory judgment on whose lien had priority.  The trial court concluded that both liens were recorded concurrently and, as a result, the liens had equal priority. The Court of Appeal in First Bank affirmed, holding that "because both trust deeds were executed on the same day and are deemed recorded simultaneously, neither bank is a subsequent [encumbrancer]."  The First Bank court further explained that it "would disrupt the statutory scheme to make priority turn on the random act of indexing, as defendant advocates, especially where banks and title insurers have no influence over when the recorder indexes trust deeds."

 

Relying on this precedent, the Court of Appeal here concluded that it is the intent of the parties that determines the priority of the two liens.  In this case, because the originating lender was the same on both loans, "the reasonable expectation is that it would secure the much larger mortgage loan in the primary position."  The Court stated that the usual understanding of the relationship between a closed-end mortgage and an equity line of credit also supports its conclusion. 

 

Finally, the First District rejected the defendant's argument that the borrower was given a windfall by receiving approximately $60,000 on the loss of her property. 

 

The defendant argued it should be entitled to those proceeds because it had no recourse against the party who purchased the property in the trustee's sale.  The Court, however, concluded that the record appears to give the purchaser notice of the defendant's lien. 

 

Moreover, the title report showed the two liens recorded simultaneously which, according the Appellate Court, gave the purchaser notice and he could have taken additional steps to determine their priority. The Court stopped short of concluding that the purchaser had actual notice he was purchasing the property subject to the defendant's lien.

 

Accordingly, the Court of Appeal affirmed the trial court's findings that the intent of the parties will determine the priority of liens that are recorded simultaneously.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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Tuesday, February 13, 2018

FYI: Cal App (1st Dist) Holds Assignee May Sue Title Company for Erroneous Release

The Court of Appeals of California, First District, recently held that an assignee of the original beneficiary of a deed of trust, as the current holder of an obligation, has the right under California Civil Code § 2941(b)(6) to prove damages against the title company that allegedly recorded a release of the deed of trust in error.

 

A copy of the opinion is available at:  Link to Opinion

 

In 2004, a bank made a business loan to an investment company.  The loan was guaranteed by the investment company's principals ("Guarantors") and secured by a second deed of trust on the real property the Guarantors owned. 

 

In 2011, the bank assigned the note and deed of trust to the plaintiff.  The plaintiff, the investment company, and the Guarantors later executed a forbearance agreement reciting that the loan was in default and agreed that the plaintiff would not exercise its right under the note, guaranty and deed of trust as long as the investment company made payments according to a schedule set forth in the agreement.

 

The investment company failed to make the required payment.  In 2014, the plaintiff began to initiate foreclosure when it learned that in 2007, without the knowledge of the bank, the defendant title company had executed and recorded a release of the obligation secured by the deed of trust. The release stated that it was prepared under the provisions of California Civil Code § 2941(b)(3).

 

The plaintiff alleged that the title company had no authority to prepare and record the release, and that contrary to the language in the release, the obligation secured by the deed of trust had not been paid, satisfied, or discharged.

 

The plaintiff sued the investment company, the Guarantors and the title company, seeking payment of the loan and a declaration that the release was void.  As an alternative, in the event the release was determined to be valid, in its fourth cause of action the plaintiff sought damages for the title company's negligence in executing and recording the release without complying with the provisions of California Civil Code § 2941(b)(3).

 

The plaintiff argued that as the successor to the bank, who was the original beneficiary of the deed of trust, it was entitled to damages, including attorney's fees, under California Civil Code § 2941(b)(6).

 

The title company demurred to the fourth case of action, and argued that the plaintiff failed to allege that the tort claims included in the cause of action were assigned to the plaintiff with the loan and deed of trust.

 

The trial court agreed and issued an order sustaining the title company's demurrer without leave to amend, and dismissed the title company from the case.

 

On appeal, the plaintiff argued that the trial court erred in sustaining the title company's demurrer to the damages claim and dismissing the title company from the case. 

 

Specifically, the plaintiff alleged that the title company prepared and recorded the release, which represented that the obligation secured by the deed of trust was paid in full and that the release was deemed the equivalent of a reconveyance under California Civil Code § 2941(b)(3).  Also, the plaintiff alleged that the title company was negligent in preparing the release without authorization from any person having the authority to authorize the release.

 

The plaintiff argued that these allegations stated a cause of action for damages under California Civil Code § 2941(b)(6). 

 

As you may recall, California Civil Code § 2941(b)(3) sets forth the procedure by which a title insurance company may prepare and record a release of a mortgage obligation:

 

(3)  If a full reconveyance has not been executed and recorded pursuant to either paragraph (1) or paragraph (2) within 75 calendar days of satisfaction of the obligation, then a title insurance company may prepare and record a release of the obligation. However, at least 10 days prior to the issuance and recording of a full release pursuant to this paragraph, the title insurance company shall mail by first-class mail with postage prepaid, the intention to release the obligation to the trustee, trustor, and beneficiary of record, or their successor in interest of record, at the last known address.

(A)  The release shall set forth:

(i)  The name of the beneficiary.

(ii)  The name of the trustor.

(iii)  The recording reference to the deed of trust.

(iv)  A recital that the obligation secured by the deed of trust has been paid in full.

(v)  The date and amount of payment.

(B)  The release issued pursuant to this subdivision shall be entitled to recordation and, when recorded, shall be deemed to be the equivalent of a reconveyance of a deed of trust.

 

See California Civil Code § 2941(b)(3).

 

Additionally, section 2941 provides that a title insurance company that prepares or records a release under Civil Code § 2941(b)(3) is "liable to any party for damages, including attorney's fees, which any person may sustain by reason of the issuance and recording of the release."  California Civil Code § 2941(b)(6).

 

Noting the broad language of the statute, the Appellate Court concluded that the plaintiff alleged facts sufficient to state a claim against the bank, as the beneficiary of the deed of trust.  And, the plaintiff alleged that the obligation secured by the deed of trust was released in error by the title company, which in the Appellate Court's view, presented a dispute as to whether the release was valid and whether the plaintiff will have lost security for the loan and will therefore have been damaged.

 

Accepting these allegations as true for purposes of the demurrer, the Appellate Court held that the plaintiff's allegations stated a claim for damages under California Civil Code § 2941(b)(6), and therefore the trial court error in sustaining the title company's demurrer to the plaintiff's cause of action for damages.

 

The title company argued that there was nothing in the statute to suggest that the bank, which held the loan and deed of trust at the time the title company filed the release, had any claim against the title company under section 2941, and therefore the bank had no claim to assign to the plaintiff with the note and deed of trust.

 

The title company also argued that, even assuming that section 2941 gave rights to the bank, it would be "unconscionable" if the bank could sue the title company for damages sustained by the release, and then assign the loan and deed of trust to the plaintiff, which could in turn sue the title company for damages it suffered by the release, and then assign the loan and deed of trust to some third party which could also sue the title company for damages it sustained by reason of the release.

 

The Appellate Court rejected these arguments.  First, the title company offered no authority to support its positions, which was contrary to the explicitly statutory language.  The Court noted that section 2941(b)(6) imposed broad liability on any title company that issues and records a release under Civil Code § 2941(b)(3).  And, under Civil Code § 2941(b)(6), the plaintiff, as the holder of an obligation, had the right to prove damages against the title company that recorded a release of that obligation. 

 

The title company relied on the Appellate Court's ruling in Heritage Pacific Financial, LLC v. Monroy (2013) 215 Cal. App. 4th 972, to argue that as a matter of law, the assignment of the bank's contractual rights to the plaintiff did not include the assignment of the bank's tort claim against the title company under section 2941.

 

As you may recall, Heritage Pacific concerned a promissory note that a borrower executed with a mortgage company.  Id., at 980.  The plaintiff in Heritage acquired the note from the mortgage company and then determined that the borrower had made false representations in her original loan application.  Id., at 982.  The plaintiff in Heritage sued the borrower based on representations she made in the original loan application with the mortgage company.  Id.  The trial court in Heritage sustained the borrower's demurrer, and the Appellate Court affirmed, concluding that the transfer of the promissory note to Heritage gave Heritage contractual rights, but not fraud rights, which were as a matter of law not incidental to the transfer of the promissory note.  Id., at 991.

 

However, the Appellate Court explained that it reached this conclusion based on the legal principal set forth in National Reserve Co. of America v. Metropolitan Trust Co. of California (1941) 17 Cal. 2d 827 -- that is, if the accrued cause of action can be asserted by the assignor independent of ownership of the contract, and if that that of action is not essential to continued enforcement of the contract, then the cause of action did not pass under the assignment as incidental to the contract unless the assignment specifically or impliedly designated the cause of action. 

 

In Heritage Pacific, the Appellate Court found that the language of the assignment did not specifically or impliedly designate tort claims.  The fraud claims that Heritage alleged against the borrower would pass under the assignment as incidental to the note if they could not be asserted by the mortgage company apart from the promissory note, or if they were essential to the enforcement of the contract.  However, the Appellate Court held that the fraud claims failed on both counts because they could be asserted by the mortgage company independently of its continued ownership of the promissory note, and they were not essential to the enforcement of the promissory note.

 

Relying on Heritage Pacific, the title company argued that the section 2941 claim was not assigned to the plaintiff with the deed of trust because the language of the assignment did not specifically or impliedly designate tort claims, because the bank could assert a claim against title company under section 2941 independent of its ownership of the deed of trust, and because the section 2941 claim was not essential to the enforcement of the deed of trust.

 

The Appellate Court distinguished Heritage Pacific, where it considered whether a lender's pre-existing fraud claims, arising from misrepresentations made to the lender in a loan application, were incidental to the transfer of the loan, and concluded that as a matter of law they were not. 

 

In contrast, the issue in this case is not whether the bank's pre-existing tort claim against title company was transferred from the bank to the plaintiff with the assignment of the note and deed of trust.  By virtue of holding the deed of trust by assignment from the bank, the plaintiff had its own potential claim against the title company under California Civil Code §  2941(b)(6), regardless of any claims that the bank may have been or may still be able to assert. 

 

In sum, the Appellate Court concluded that under California Civil Code § 2941(b)(6), the plaintiff, as the holder of an obligation had the right to prove damages against the title company that recorded a release of the obligation.

 

Accordingly, the Appellate Court reversed the trial court's order sustaining the demurrer and dismissing the title company from the case.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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Sunday, February 11, 2018

FYI: 10th Cir Holds Borrower's FDCPA and Other Claims Not Barred by Rooker-Feldman After Non-Judicial Foreclosure

The U.S. Court of Appeals for the Tenth Circuit recently held that the Rooker-Feldman doctrine did not bar the trial court from considering the plaintiff's claims because she was not challenging or seeking to set aside underlying non-judicial mortgage foreclosure proceeding under Colorado law.

 

Accordingly, the Tenth Circuit remanded to the trial court to determine what effect, if any, the non-judicial proceeding had under the doctrines of issue and claim preclusion.

 

A copy of the opinion is available at:  Link to Opinion

 

The borrower signed a note secured by a deed of trust.  The borrower defaulted and in late 2014, a non-judicial foreclosure proceeding was filed under Colorado Rule 120.

 

Prior to the sale, the borrower filed suit in the U.S. District Court for the District of Colorado, seeking an injunction barring the sale, an accounting, damages for alleged violation of the federal Real Estate Settlement Procedures Act ("RESPA") and the federal Fair Debt Collection Practices Act ("FDCPA"), and cancellation of the note and deed of trust.

 

The sale took place and thereafter the borrower filed a second amended complaint that dropped the claim for an injunction to prevent the sale.

 

The trial court dismissed the RESPA count for failure to state a claim, and dismissed the other claims without prejudice under the Rooker-Feldman doctrine because the borrower "effectively ask[ed] the court to unwind the results of the Rule 120 proceedings." The borrower appealed.

 

On appeal, the Tenth Circuit affirmed the trial court's dismissal of the RESPA claim, but reversed the dismissal based on the Rooker-Feldman doctrine.

 

The Court first explained that Colorado's non-judicial foreclosure regime, pursuant to which "[n]onjudicial foreclosure is available only if the deed of trust, which authorizes sale of the property to pay a debt, names the county's public trustee as trustee … [a]nd the beneficiary of the trust must obtain an order from a court under Colorado Rule 120 before selling the property."

 

Under Rule 120, the court confirms that the borrower is not in the military, the existence of a default, and "the existence of other facts or circumstances authorizing, under the terms of the deed of trust described in the motion, the exercise of a power of sale contained therein. … Other issues that might affect the validity of the foreclosure, however, are not to be considered."  Upon finding that the sale was conducted properly, the court enters an order approving the sale.

 

The Court cautioned, however, that "[a]lthough the applicable Colorado statute provides that after the sale the title to the property vests in the purchaser, subject to rights of redemption, … the Rule 120 decision is not definitive on other matters. The court determines only whether there is 'a reasonable probability' of the existence of the alleged circumstances justifying the sale. … And the decision is without prejudice to claims in an independent action seeking an injunction to prohibit the sale or other relief."

 

"The gist of a Rule 120 decision is therefore simply that the sale of the property can proceed unless some other court, which need pay no attention to the findings by the Rule 120 court, decides to halt or otherwise modify the sale."

 

The Court then turned to the Rooker-Feldman doctrine, which "provides that only the Supreme Court has jurisdiction to hear appeals from final state court judgments."

 

After tracing the history of the doctrine, the Court reasoned that "[t]hese precedents establish that Rooker-Feldman does not deprive a federal court of jurisdiction to hear a claim just because it could result in a judgment inconsistent with a state-court judgment. … What is prohibited under Rooker-Feldman is a federal action that tries to modify or set aside a state-court judgment because the state proceedings should not have led to that judgment. … Seeking relief that is inconsistent with the state-court judgment is a different matter, which is the province of preclusion doctrine. Thus, there would be a Rooker-Feldman issue if the federal suit alleged that a defect in the state proceeding invalidated the state judgment. … But 'attempts merely to relitigate an issue determined in a state case are property analyzed under issue or claim preclusion principles rather the Rooker-Feldman.'"

 

The Tenth Circuit concluded that the borrower's claims, which sought "title to her home and compensation for damages caused by the defendants' alleged misconduct[,]" were not barred by the Rooker-Feldman doctrine because the borrower was not claiming that her damages were caused by the Rule 120 proceeding.

 

The Court also noted that the borrower was not seeking to set aside either the order authorizing the non-judicial sale or the order approving the sale. Instead, her claims were "based on events predating the Rule 120 proceedings." 

 

The Tenth Circuit added that the borrower "could certainly obtain damages from the defendants without setting aside the foreclosure sale. To be sure, the relief she seeks includes obtaining title to her home, a result that would be inconsistent with the Rule 120 order approving sale. But inconsistent judgments are the province of preclusion doctrine, which can sort out what happens if one court says Plaintiff owns the home while another says she does not. The province of Rooker-Feldman is solely challenges to judgments. Within the federal judicial system, the authority to set aside state-court judgments is the exclusive province of the United States Supreme Court. The preclusive effect of state-court judgments, in contract, is part of the lower courts' bread and butter."

 

Because the borrower was not challenging the Rule 120 proceeding, but complained of facts that predated it, the Tenth Circuit could not find that "'an element of the claim' is that the Rule 120 order was 'wrongful.'"

 

The Court therefore concluded that the trial court's Rooker-Feldman dismissal of all of Plaintiff's claims except the RESPA claim (which was dismissed on the merits) was incorrect.  This left "to the district court in the first instance to determine whether the Rule 120 proceedings and sale of Plaintiff's home have any effect (preclusive, equitable, or otherwise) on the resolution of her claims or the relief to which she is entitled."

 

Accordingly, the trial court's dismissal on the RESPA claim on the merits was affirmed. The trial court's dismissal of the other claims on jurisdiction grounds was reversed and the case remanded to the trial court for further proceedings.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Indiana   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC   |   Wisconsin

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.


Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

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and

 

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