Saturday, November 21, 2020

FYI: Cal App Ct (5th Dist) Holds Lender's Action to Remove Prior Lien Was Time-Barred

The 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 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.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, Suite 603
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, November 17, 2020

FYI: 9th Cir Holds Mere Reliance on Contract Provision Not Enough for FDCPA "Bona Fide Error" Defense

The U.S. Court of Appeals for the Ninth Circuit recently held that a debt collector cannot use the "bona fide error" defense to shield itself from liability under the Fair Debt Collection Practices Act ("FDCPA") by merely:

 

(1)  Requiring its creditor clients to provide accurate account information, and

(2)  Requesting verification of the account information from its creditor client, but not waiting to receive a response before trying to collect the debts.

 

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

 

A debt collection company (the "debt collector") entered into an agreement with a medical clinic pursuant to which the clinic assigned its debts for collection to the debt collector. The agreement required the creditor to provide "only accurate data and that the balances reflect legitimate, enforceable obligations of the consumer."

 

When a client referred a debt for collection, the debt collector's routine practice was to "generate[] an automatic response listing the account name and number, the total amount due, and the date of last payment." It would also "request that its clients notify [it] if they recognize any errors in any of the accounts listed."

 

The plaintiff was treated at the clinic and failed to pay the full amount owed. The clinic gave notice that she owed $614.52. When the plaintiff failed to respond, the clinic referred the account to the debt collector. The debt collector sent a letter to the clinic asking that it verify the amount owed. The next day, without waiting for a response from the clinic, the debt collector sent the plaintiff a collection letter "seeking payment of $614.52 plus $29.07 interest."

 

The plaintiff filed suit alleging that the debt collector violated the FDCPA by miscalculating the amount of interest owed.

 

The plaintiff moved for summary judgment. In opposing the plaintiff's motion, the debt collector "argued that it was entitled to the benefit of the FDCPA's bona fide error defense."

 

The trial court denied plaintiff's motion for summary judgment and entered summary judgment for the debt collector, finding that while the debt collector violated the FDCPA by miscalculating the amount of interest owed, the bona fide error defense applied.

 

On appeal, the plaintiff argued that the bona fide error defense did not apply to the debt collector "because it did not have adequate procedures in place to prevent errors of the type that occurred here." The debt collector argued that it "reasonably relied on [the clinic's] promise to provide accurate information … [and that] it followed its standard practice" after the account was assigned for collection "by requesting that [the clinic] notify it of any inaccuracies in the record of the delinquent account."

 

The Ninth Circuit began by explaining that "[t]o avoid liability, debt collectors may raise the limited affirmative defense that their conduct was 'not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error.' … The burden is on the debt collector to prove this defense by a preponderance of the evidence."

 

"The bona fide error defense requires a showing that the debt collector: (1) violated the FDCPA unintentionally; (2) the violation resulted from a bona fide error; and (3) the debt collector maintained procedures reasonably adapted to avoid the violation."

 

Regarding the third element, the Ninth Circuit explained that "we have said that '[a] debt collector is not entitled under the FDCPA to sit back and wait until a creditor makes a mistake and then institute procedures to prevent a recurrence.' … Instead, the debt collector has an affirmative obligation to maintain procedures designed to avoid discoverable errors, including, but not limited to, errors in calculation and itemization.' Debt collectors … must explain 'the manner in which [their procedures] were adapted to avoid the error,'; the bona fide error defense does not shield debt collectors who unreasonably rely on creditors' representations."

 

The Court went on to note that "[w]e have previously rejected the contention that unquestioned reliance on a creditor's information can suffice as a bona fide defense."

 

Citing the Supreme Court of the United States' 2010 opinion in Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich, which held that "a debt collector who made a legal error interpreting the FDCOA did not qualify for the bona fide error defense[,]" the Ninth Circuit noted that "Jerman reasoned that 'the broad statutory requirement of procedures reasonably designed to avoid 'any' bona fide error indicates that the relevant procedures are ones that help to avoid errors like clerical or factual mistakes.'

 

The Eleventh Circuit followed this lead [in Owen v. I.C. Sys., Inc.] when it denied a debt collector's claim, nearly identical to [the debtor collector's] here, that an engagement contract obligating a creditor-client 'to present only accurate information on debts' qualified as a procedure reasonably adapted to avoid erroneous interest calculations."

 

After discussing cases from the Seventh, Eighth and Tenth Circuits as examples of procedures that qualified for the bona fide error defense, the Ninth Circuit held that "the contract the Eleventh Circuit found insufficient qualify for the bona fide error defense" was similar to the contract in the case before it, and that "[t]he procedures that have qualified for the bona fide error defense were consistently applied by collectors on a debt-by-debt basis; they do not include one-time agreements committing creditor-clients to provide accurate information that are later acted upon without question."

 

The Ninth Circuit distinguished the two cases relied upon by the trial court and rejected the debt collectors "fallback argument … that even if its collection service contract was insufficient to qualify for the bona fide error defense, it separately qualified because it send its creditor-clients follow up requests seeking verification of the accuracy of their information[,]" reasoning that while "[t]his is closer to the mark, … it still falls short because it is uncontested that [the debt collector] did not wait for a response from [the clinic] before it attempted to collect from [the plaintiff]."

 

Because the debt collector "does not argue that it routinely waits for creditor-clients to respond before sending collection notices to debtors," the Ninth Circuit concluded that the debt collector failed "to show that its practice of requesting account verification from its clients is genuinely calculated to catch errors of the sort that occurred here[]".

 

Accordingly, the Ninth Circuit reversed the trial court's grant of summary judgment in the debt collector's favor and remanded the case for further proceedings.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, Suite 603
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   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Tennessee   |   Texas   |   Washington, DC

 

 

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

 

and

 

The Consumer Financial Services Blog

 

and

 

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