FYI: Cal App Ct (5th Dist) Reverses Quiet Title Judgment Against Foreclosing Mortgagee

The California Court of Appeals for the Fifth Appellate District recently reversed a trial court's ruling under the California Code of Civil Procedure section 473 to set aside a default and a judgment quieting title against a mortgagee that had foreclosed and acquired title to the subject property.

 

However, in so ruling, the Fifth District also held that the judgment quieting title against the mortgagee was erroneous as a matter of law.

 

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

 

Two occupants of residential real estate petitioned to quiet title based on their alleged adverse possession of the property for a five-year period. Before that period was completed, a mortgagee, as successor in interest of a deed of trust recorded against the property long before the plaintiffs' alleged adverse possession began, foreclosed and acquired title to the property.

 

The mortgagee failed to answer or otherwise respond to the plaintiffs' complaint, and default was entered and the trial court ultimately entered a judgment quieting title in the plaintiffs' favor.

 

The mortgagee moved to set aside both the default and the judgment under the mandatory provisions of the California Code of Civil Procedure section 473, based on the mortgagee's attorney's affidavit of fault. The trial court granted the mortgagee's motion, and the default and judgment quieting title were set aside.

 

The plaintiffs appealed that order on the ground that no basis existed for potential relief under section 473 because the mortgagee's attorney was not retained to handle the case until after the default was entered. In response, the mortgagee filed a protective cross-appeal, arguing that even if relief under section 473 was unavailable, the judgment quieting title in the petitioners' favor was erroneous as a matter of law and should have been reversed.

 

Section 473, subdivision (b), contains two distinct provisions for relief: one is discretionary and is reserved for situations of excusable neglect, while the other is mandatory and applies even to inexcusable neglect of an attorney resulting in his or her client's default provided that the attorney submits an adequate affidavit of fault. See Martin Potts & Associates, Inc. v. Corsair, LLC (2016) 244 Cal.App.4th 432, 438.

 

Here, the trial court rejected discretionary relief from the default and default judgment but found that mandatory relief was available based on the mortgagee's attorney's declaration of fault. The Fifth District thus determined that the issue on appeal was whether grounds for mandatory relief were presented -- i.e., whether the requirements for such relief under the statute were met.

 

The mandatory relief provision of section 473, subdivision (b), states as follows:

 

"Notwithstanding any other requirements of this section, the court shall, whenever an application for relief is made no more than six months after entry of judgment, is in proper form, and is accompanied by an attorney's sworn affidavit attesting to his or her mistake, inadvertence, surprise, or neglect, vacate any (1) resulting default entered by the clerk against his or her client, and which will result in entry of a default judgment, or (2) resulting default judgment or dismissal entered against his or her client, unless the court finds that the default or dismissal was not in fact caused by the attorney's mistake, inadvertence, surprise, or neglect."

 

The Fifth District noted that, when a complying affidavit is filed, relief is mandatory, even if the attorney's neglect was inexcusable. Rodrigues v. Superior Court (2005) 127 Cal.App.4th 1027, 1033.

 

However, relief may be denied if the court finds the default was not in fact the attorney's fault, for example when the attorney is simply covering up for the client's neglect. Rogalski v. Nabers Cadillac (1992) 11 Cal.App.4th 816, 821. Similarly, where a party inexcusably allows default to be entered and then afterwards hires an attorney, the provision does not apply because the default must in fact be caused by the attorney's mistake. Cisneros v. Vueve (1995) 37 Cal.App.4th 906, 908, 910-912.

 

Here, the Fifth District observed that it was undisputed that the mortgagee's default was entered on November 14, 2018, but the mortgagee's attorney was not referred or assigned to act as attorney on the case until January 10, 2019. Because attorney error could not possibly have caused the default in this case, the Court held that mandatory relief was unavailable and that the trial court erred as a matter of law in granting mandatory relief under section 473, subdivision (b).

 

The Fifth District then moved on to address the mortgagee's cross-appeal challenging the judgment quieting title. According to the mortgagee, the judgment must be reversed because the plaintiffs' possession of the property was not hostile and adverse to the mortgagee's title for a full five years.

 

The elements of an adverse possession claim consist of the following: (1) actual possession by the plaintiff of the property under claim of right or color of title; (2) the possession consists of open and notorious occupation of the property in such a manner as to constitute reasonable notice to the true owner; (3) the possession is adverse and hostile to the true owner; (4) the possession is uninterrupted and continuous for at least five years; and (5) the plaintiff has paid all taxes assessed against the property during the five-year period. Hansen v. Sandridge Partners, L.P. (2018) 22 Cal.App.5th 1020, 1032b 1033.

 

Based on its review of the undisputed facts and applicable law, the Fifth District concluded that the plaintiffs had not established that their possession of the property was adverse or hostile to the bank for the required five-year period. Rather, the plaintiffs' possession of the property did not become adverse or hostile to the mortgagee's rights until the mortgagee actually took title under the trustee's deed in April of 2018, only a few months before the plaintiffs' complaint was filed.

 

The Fifth District noted that the trustee's deed was based upon the foreclosure of the 2005 deed of trust, a deed of trust that was executed and recorded as a lien or encumbrance on the property long before the plaintiffs' adverse possession began.

 

Under such facts, the Court held that, during the time period when the mortgagee's interest was merely that of beneficiary of the 2005 deed of trust (i.e., a lienholder), the plaintiffs' possession of the property would not be considered hostile to the mortgagee's rights. See Comstock v. Finn (1936) 13 Cal.App.2d 151, 155-158. "A mortgagor or his grantee in possession of mortgaged property may not set up the [adverse possession] statute of limitations against the mortgagee since such possession is b presumed to be amicable and in subordination to the mortgage."  Laubisch v. Roberdo (1954) 43 Cal.2d 702, 706.

 

Additionally, the Fifth District determined that the plaintiffs could gain no greater title than that of the original owners they had dispossessed; namely, title subject to the 2005 deed of trust. See Williams v. Sutton (1872) 43 Cal. 65, 73. Consequently, the Court held that the plaintiffs' adverse possession claim was subject to and eliminated by the mortgagee's foreclosure of the 2005 deed of trust.

 

Based on the record and title documents before it, the Court concluded that the bank, and not the plaintiffs, held the rightful title and ownership of the property under the 2018 trustee's deed.

 

Accordingly, on the plaintiffs' appeal, the Fifth District reversed the trial court's order under section 473 to set aside the default and judgment. However, on the mortgagee's cross-appeal, the Court reversed the judgment quieting title, and the matter was remanded to the trial court to enter a new judgment in favor of the mortgagee.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th 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   |   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

 

Webinars

  

 

 

 

FYI: 7th Cir Upholds Stay of Federal Lawsuit By Borrower With Parallel State Court Foreclosure Litigation

The U.S. Court of Appeals for the Seventh Circuit recently affirmed a trial court's ruling to stay federal court proceedings brought by a litigious borrower, noting their practical identity to a pending state contested foreclosure action involving the same parties.

 

The Seventh Circuit also concluded that it had appellate jurisdiction because the stay order was entered with the expectation that the state litigation would "largely" resolve the federal litigation.

 

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

 

The borrowers defaulted on their home mortgage, and in the ensuing foreclosure litigation, the borrowers pursued procedural delay tactics, and remained in possession of their home despite not having made a mortgage payment in nine years.

 

With their state court foreclosure litigation more than seven years old, the borrowers accused the mortgagee and its counsel of committing fraud in the course of those proceedings. Months later, the borrowers went to federal court, with a complaint that copied and pasted large swaths of text from their state court filings.

 

The mortgagee responded to the federal complaint by moving to stay the action pending the outcome of the state foreclosure proceedings. It also moved to dismiss the complaint under Rule 12(b)(6), arguing that the borrowers failed to state a claim for fraud because the complaint and relevant documents showed that, under Illinois law, the mortgagee was the legal holder of the  note by virtue of the transfer of the note to a common law trust and the mortgagee's physical possession of the note as a trust custodian.

 

The trial court granted the mortgagee's motion to stay. Given this decision, it did not rule on the Rule 12(b)(6) motion. The borrowers timely appealed.

 

The Seventh Circuit noted that, under Idlewild Bon Voyage Liquor Corp. v. Epstein, 370 U.S. 713 (1962), and Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1 (1983), appellate jurisdiction over stay orders is not limited to situations in which the state court would finally decide the federal court claims with preclusive effect. Rather, jurisdiction under 28 U.S.C. § 1291 extends to cases in which there remains some chance that the case would return to federal court to dispose of residual issues.

 

The key question for jurisdictional purposes is whether the "object of the stay order is to require all or an essential part of the federal suit to be litigated in a state forum."  Moses Cone, 460 U.S. at 10-11 n.11.

 

Because the stay order in the current case was entered with the expectation that the state litigation would "largely" resolve the federal litigation, the Seventh Circuit held that the test was met.

 

The Seventh Circuit then recognized that, in a limited number of circumstances, federal courts may decline to hear cases that otherwise fall within their jurisdiction. The Court acknowledged one such situation in Colorado River Water Conservation District v. United States, 424 U.S. 800 (1976) where the Supreme Court of the United States held that it may dismiss a federal suit in favor of a concurrent state court action if "exceptional circumstances" merit abstention, and deference to the state court action would promote "wise judicial administration."  Id. at 813, 818.

 

The Seventh Circuit then stated its intent to use a two-step inquiry in its assessment of whether Colorado River abstention was appropriate for this matter.

 

First, the Court asked "whether the concurrent state and federal actions [were] ... parallel."  DePuy Synthes Sales, Inc. v. OrthoLA, Inc., 953 F.3d 469, 477 (7th Cir. 2020) (quoting LaDuke v. Burlington N. R.R. Co., 879 F.2d 1556, 1559 (7th Cir. 1989)).  If so, then the Court would consider "whether the necessary exceptional circumstances exist to support a stay or dismissal."  DePuy, 953 F.3d at 477.

 

Courts have developed a checklist of ten exceptional circumstances that support stay or dismissal:

 

1. Whether the case concerns rights in property, and if so, whether the state has assumed jurisdiction over that property;

 

2. The inconvenience of the federal forum;

 

3. The desirability of consolidating litigation in one place: that is, the value in avoiding "piecemeal" litigation;

 

4. The order in which jurisdiction was obtained in the concurrent fora;

 

5. The source of governing law: federal or state;

 

6. The adequacy of the state court action to protect the federal plaintiffs' rights;

 

7. The relative progress of the state and federal proceedings;

 

8. The presence or absence of concurrent jurisdiction;

 

9. The availability of removal; and

 

10. Whether the federal action is vexatious or contrived.

 

DePuy, 953 F.3d at 477; see also Lumen Constr. Corp. v. Brant Const. Co., 780 F.2d 691, 694b 95 (7th Cir. 1985).

 

Turning to the first step of the inquiry, the Seventh Circuit agreed with the trial court that the borrower's federal and state foreclosure actions were parallel. It is not necessary for concurrent suits to be "formally symmetrical."  Freed v. J.P. Morgan Chase Bank, N.A., 756 F.3d 1013, 1019 (7th Cir. 2017). It is enough if the state and federal suits involve "substantially the same parties ... contemporaneously litigating substantially the same issues."  Huon v. Johnson & Bell, Ltd., 657 F.3d 641, 646 (7th Cir. 2011).

 

At the heart, the "critical question" is whether there is a "substantial likelihood that the state litigation will dispose of all claims presented in the federal case."  Id.

 

Because the state and federal actions were deemed parallel, the Seventh Circuit next considered whether the trial court abused its discretion in reaching its decision to abstain. DePuy, 953 F.3d at 480. In summary, the Court held that trial courts have discretion to stay proceedings in federal suits that substantially duplicate litigation that was well underway in state court when the federal case was filed.

 

With regard to the ten exceptional circumstances to support a stay or dismissal, the Seventh Circuit held that:

 

1. The first inquiry is whether the state court has assumed jurisdiction over the property at issue. It is relevant only if there is property at issue in both the federal and the state proceedings, but that was not the case here. While the state foreclosure action concerned property rights, the borrower's federal suit concerned fraud and misconduct.

 

2. The convenience (or lack thereof) of the federal forum did not support abstention here. The state and federal courts here were in close geographical proximity to one another and equally convenient.

 

3. The interest in avoiding piecemeal litigation supported the stay. As the trial court noted, the state action would likely "dispose of a majority of the factual and legal issues presented in this case", and thus a stay would save judicial resources.

 

4. The order in which the two courts obtained jurisdiction strongly favored the stay. The state foreclosure action began in 2011 and the federal action did not begin until May 2019.

 

5. The source of the governing law neither favored nor disfavored abstention, because the federal action involved both federal and state law claims.

 

6. The federal rights of the borrowers would be adequately protected because the trial court stayed rather than dismissed the federal action.

 

7. The relative progress of the two proceedings also supported the stay because, at the time of the trial court's order, the state court proceedings were well advanced, while the federal action had not progressed beyond the motion to dismiss stage.

 

8. The presence or absence of concurrent jurisdiction did not push the needle either way.

 

9. The borrowers, as Illinois citizens being sued in Illinois, could not have removed the foreclosure action to federal court. See 28 U.S.C. § 1441(b)(2). Thus, the unavailability of removal favored a stay, because the purpose of this factor is to prevent litigants from circumventing the removal statute. See Freed, 756 F.3d at 1023.

 

10. The trial court was entitled to infer from the borrower's litigation strategy to date that the federal suit was another in a long line of delay tactics meant to buy time before foreclosure.

 

In sum, the Seventh Circuit held that the trial court did not abuse its discretion in staying the proceedings before it, in deference to the ongoing state court litigation.

 

The Court concluded that, at its core, the borrower's federal suit accused the parties involved in their foreclosure action of engaging in misconduct during state court proceedings and that the borrowers were asking the federal judiciary to monitor and discipline how parties conduct themselves in state court. The Court held that this is a task that extends beyond its role. See Harold v. Steel, 773 F.3d 884, 885b 87 (7th Cir. 2014).

 

Accordingly, the Seventh Circuit affirmed the decision of the trial court to stay the federal court proceedings.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th 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   |   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

 

Webinars

  

 

 

 

FYI: Ill App Ct (2nd Dist) Refuses to Undo Foreclosure Based on Alleged Non-Compliance With Sale Notice Rule

The Appellate Court of Illinois, Second District, recently affirmed a trial court's rulings (1) granting summary judgment in favor of the mortgagee, (2) approving a judicial sale, and (3) denying the borrower's motion to reconsider.

 

Because the mortgagee's affidavit of amounts due and owing was properly executed, and because the borrower received notice of the foreclosure sale and did not allege any prejudice, the Appellate Court determined that the borrower had not shown good cause to reverse the trial court's rulings or to undo the foreclosure sale.

 

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

 

A mortgagee filed a foreclosure action alleging that the borrower was in default.  The mortgagee filed a motion for summary judgment and a motion for judgment for foreclosure and sale. In support of its motions, the mortgagee attached an affidavit of amounts due and owing.

 

The borrower's response to the mortgagee's motion for summary judgment consisted of 15 paragraphs of boilerplate language from various legal authorities, ending with a statement that "[t]he current affidavits attached to this motion are not foundationally sound, and the affiant does not have the requisite personal knowledge."  The borrower did not file a counteraffidavit.

 

The trial court granted summary judgment in favor of the mortgagee, finding that no issue of material fact existed, entered an order for judgment for foreclosure and sale, and appointed a selling officer.

 

The mortgagee published notice of the sale as required by law, and the selling officer sent notice of the sale to the borrower's attorney. At auction, the property was sold to the mortgagee as the highest bidder. The mortgagee then requested an order approving the sale.

 

The borrower argued that the notice of sale he received was defective, as it was sent by the selling officer rather than an attorney for the mortgagee, as required by Illinois Supreme Court Rule 113(f). Specifically, the borrower noted that the Rule mandates that, "[n]ot fewer than 10 business days before the sale, the attorney for the plaintiff shall send notice by electronic service pursuant to Illinois Supreme Court Rule 11(c) to all defendants appearing of record and shall send notice by mail to all defendants not appearing of record."  Ill. S. Ct. R. 113(f)(1).

 

The trial court approved the sale, finding that the notice was proper and that the terms of the sale were not unconscionable. The borrower filed a motion to reconsider, which the trial court denied. The borrower timely appealed.

 

The borrower first argued on appeal that the trial court erred in granting the mortgagee's motion for summary judgment because the affidavit of amounts due and owing was deficient because it did not provide specific details about: (1) the affiant's qualifications to testify, (2) how the affiant acquired the documents she relied upon, and (3) the mortgagee's computer system.

 

The borrower also requested that the Second District reverse the current standards for evaluating the sufficiency of affidavits of amounts due and owing in mortgage foreclosure proceedings, as the "current framework allows rote, general and conclusory statements to describe an affiant's training, responsibilities and competence in reviewing potentially complex payment information."

 

The mortgagee, in turn, argued that, because the borrower failed to raise before the trial court the argument regarding specific defects in the affidavit, the issue was forfeited. See Hatch v. Szymanski, 325 Ill. App. 3d 736, 741 (2001). Instead, the mortgagee insisted, the borrower did nothing more than provide 15 paragraphs of boilerplate language, followed by a conclusory assertion that "[t]he current affidavits attached to this motion are not foundationally sound, and the affiant does not have the requisite personal knowledge."

 

In the alternative, the mortgagee argued that, pursuant to the current standards under Illinois law for evaluating affidavits of amounts due and owing, the affidavit was sufficient. Further, the mortgagee noted that the borrower failed to file a counteraffidavit in opposition to the mortgagee's motion for summary judgment.

 

First, the Second District held that even if the borrower failed to raise the argument at the trial level, and therefore forfeited the argument, an appellate court may still choose to address the merits. In re Marriage of Piegari, 2016 IL App (2d) 160594, B6 10. 

 

The Second District then noted that, in her affidavit, the mortgagee's agent identified herself as an officer for the mortgagee. She averred that she had personal knowledge of the amounts due and owing by virtue of her access to and review of the records as a function of her employment. She identified the specific records that she relied upon and attached copies of them to her affidavit. She proclaimed that she had knowledge that the records kept with respect to mortgage loans were comprised of entries made at or near the time of the event, by persons trained and authorized to make such entries.

 

She further certified that the mortgagee, in the regular course of its business, uses "MSP/LPS", a program that is standard in the industry, to automatically record and track mortgage payments. She detailed the procedure by which entries are made and described the personnel authorized to make such entries. She then declared that she could competently testify to the facts contained in her affidavit.

 

The Second District determined that the affidavit tracked the requirements of Illinois Supreme Court Rules 191(a) and 236(a). The Court also concluded that the borrower offered no convincing reason to depart from prior case law and that it had no authority to add requirements to the Supreme Court rules.

 

Therefore, the Appellate Court held that the affidavit attesting to amounts due and owing had been properly executed. The Court also noted that there had been no counteraffidavit or other evidence that tended to contravene the facts in the affidavit. Therefore, there was no genuine issue of material fact precluding summary judgment.

 

The borrower also argued that the trial court erroneously approved the sale of the property and erroneously denied the borrower's motion to reconsider the approval order. The borrower's basis for appealing was that the selling officer, and not an attorney for the mortgagee, sent the notice of sale.

 

Section 15-1507(c) of the Illinois Mortgage Foreclosure Law (Foreclosure Law) provides that "[t]he mortgagee, or such other party designated by the court, ... shall give public notice of the sale."  735 ILCS 5/15-1507(c). The party providing notice "shall also give notice to all parties in the action who have appeared and have not theretofore been found by the court to be in default for failure to plead." 735 ILCS 5/15-1507(c)(3).

 

According to section 15-1508(c) of the Foreclosure Law, a court may set aside a sale where a party who was entitled to notice of the sale failed to receive notice. 735 ILCS 5/15-1508(c). However, where there was merely a defect in the notice, the complaining party must demonstrate good cause for invalidating the sale. 735 ILCS 5/15-1508(d). 

 

The Appellate Court noted that Rule 113(f) supplements sections 15-1507 and 15-1508 of the Foreclosure Law. Ill. S. Ct. R. 113, Committee Comments. As previously noted, the relevant portion of Rule 113(f) provides that, "[n]ot fewer than 10 business days before the sale, the attorney for the plaintiff shall send notice by electronic service pursuant to Illinois Supreme Court Rule 11(c) to all defendants appearing of record and shall send notice by mail to all defendants not appearing of record." Ill. S. Ct. R. 113(f)(1).

 

However, the Second District pointed out that the purposes behind Rule 113(f), as explained by the committee comments, are to ensure that defaulted parties receive notice of the foreclosure action and to increase judicial efficiency. Ill. S. Ct. R. 113, Committee Comments.

 

In this case, the borrower conceded that he received notice. The Second District therefore held that it would not increase judicial efficiency to vacate the sale just so that the borrower might receive another notice from the mortgagee's attorney as opposed to the mortgagee's agent.

 

The Court also concluded that the borrower did not argue that he suffered any resulting prejudice by any technical defect in the notice that he received and that he had not demonstrated good cause for setting aside the sale. See Cragin Federal Bank for Savings v. American National Bank & Trust Co. of Chicago, 262 Ill. App. 3d 115, 120-21 (1994).

 

Thus, the Second District held that the trial court properly approved the sale and denied the borrower's motion to reconsider.

 

Accordingly, the Appellate Court affirmed the trial court's rulings.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th 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   |   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

 

Webinars