Wednesday, May 30, 2012

FYI: Cal App Holds Mortgage Loan Investor Not Subject to Quiet Title Action Pending Against Originating Lender

The California Court of Appeal, Second District, recently held that a mortgage loan investor which acquired a loan secured by property that was the subject of a quiet title action was not bound by the holding of that action, where the assignor originating lender was dismissed from the action prior to its resolution.  The Court reached that conclusion notwithstanding the fact that a lis pendens was filed prior to the assignment in question.   
A copy of the opinion is available at:
A borrower defaulted on her home loan, and subsequently became involved in a purported fraudulent scheme wherein she was convinced to convey her property to a third party, who obtained a mortgage secured by that property and leased it back to the borrower.  This scheme resulted in the borrower losing both title to her home and all the equity she had built up prior to her default.
The borrower sued the individuals who had purportedly defrauded her, as well as the originating lender from which the mortgage loan was obtained (the "originating lender").  As part of that lawsuit, the borrower brought a quiet title action against all entities who claimed an interest in her home.  She recorded a lis pendens in connection with the same. 
During that litigation, the originating lender filed for bankruptcy, and assigned the note and deed of trust to an asset securitization trust ("Investor").  The borrower was not informed of the assignment, which was not immediately recorded. 
The borrower obtained defaults against the various defendants who were involved in the purported fraudulent scheme.  She elected to dismiss the originating lender, intending to pursue her claim in bankruptcy court.  The court in the bankruptcy action then quieted title in the borrower's favor. 
The borrower also reached a settlement with the liquidating trust in connection with the bankruptcy action, whereby it was agreed that neither the liquidating trust nor the originating lender had any remaining interest in the subject property. 
The Investor then brought a declaratory relief action, seeking a declaration that its deed of trust was valid.  The borrower argued that the Investor had no remaining interest in the property, as it took title subject to the resolution of the previous lawsuit, which quieted title in the borrower alone.  The Investor argued that because the originating lender was dismissed from the quiet title action, the lender's interests were not impacted by the outcome of that litigation. 
The lower court found in favor of the borrower, finding that because the Investor acquired its interest in the property after the borrower recorded a lis pendens, the Investor was bound by the quiet title judgment.  The Investor appealed. 
As you may recall, the relevant California statute provides that a quiet title judgment does not bind non-parties whose interest was of-record prior to the filing of a lis pendens.  See Code Civ. Proc., Sec 764.045, subd. (b). 
The Court relied on the above-referenced statutory provision to hold that "as the interest of [the originating lender] was not resolved in the quiet title action, its assignee [the Investor] is not bound by the quiet title judgment."  To reach that conclusion, the Court noted that the judgment in the quiet title action did not and could not address the validity of the originating lender's deed of trust, as the originating lender was dismissed from the action prior to its resolution.  Therefore, the originating lender was a "non-party" which, under the code provision cited above, was not bound by the quiet title action. 
The borrower argued that the California statute provides that entities holding unrecorded interests in a property at the time a lis pendens is recorded will be bound by a quiet title judgment.  Although the Court acknowledged that "this would appear to describe [the Investor]," it nevertheless concluded otherwise. 
The Court reasoned that because the Investor took title after the lis pendens was recorded, the Investor did so with knowledge that the quiet title action might invalidate its interest -- and if that action had resulted in the invalidation of the originating lender's interest, the Investor's interest would be voided.  However, the Court noted that that risk "never came to fruition," as the originating lender was dismissed from the action prior to any adjudication of its interest. 
Accordingly, the Court reversed and remanded the decision of the lower court, with instructions to determine whether the originating lender's loan was a valid encumbrance on the property.        

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