Business Law

ILC E-Bulletin: Robin v. Crowell (Cal. App.)

The following is a case update prepared by Michael J. Gomez analyzing a recent case of interest:

Summary

In Robin v. Crowell, 55 Cal.App.5th 727, 270 Cal. Rptr.3d 25 (2020), a California Court of Appeal ruled that the holder of a first deed of trust that had judicially foreclosed on its real estate collateral, but which had failed to name a junior lienholder in its judicial foreclosure action, was time barred from trying to extinguish the junior lien in a subsequent quiet title action.  To read the full published decision, click here.

Facts

Steve and Marta Weinstein owned several vacant parcels of land that they hoped to develop.  Plaintiffs planne d to loan the Weinsteins $450,000 to be secured by one of the Weinsteins’ parcels.  Marta Weinstein represented to the plaintiffs that the parcel was unencumbered.  From reviewing a title report, the plaintiffs learned the parcel was actually encumbered by a deed of trust securing a 2004 promissory note for $250,000 in favor of Al Crowell.  Marta Weinstein represented that the Crowell deed of trust was a mistake and obtained a partial reconveyance of Crowell’s deed of trust to remove the lien from the parcel. Plaintiffs and the Weinsteins modified the promissory note to prohibit the Weinsteins from further encumbering the property.  Plaintiffs and the Weinsteins executed a promissory note and a deed of trust, and recorded the deed of trust against the parcel.  After plaintiffs funded the loan and without their knowledge, the Weinsteins and Crowell recorded a second deed of trust on the property, once again securing the 2004 Crowell note.

Plaintiffs’ note allowed them to accelerate the maturity date of the loan if a tentative subdivision map for the property was not approved by January 1, 2008.  Using that right, the due date of the note was accelerated to April 5, 2008, and the Weinsteins defaulted.  Plaintiff Cathleen Robin then filed a judicial foreclosure action under the deed of trust, but failed to name Crowell as a defendant.  Plaintiffs obtained a judgment in 2011, and an order for a sale of the property.  In 2014, plaintiffs purchased the property at a foreclosure sale for a credit bid of $150,000.

After the expiration of the Weinsteins’ one-year redemption period, plaintiffs tried selling the property to the owners of a neighboring property.  A title search at that time revealed Crowell’s deed of trust.  In June 2016, plaintiffs filed a quiet title action against Crowell.  Crowell answered, raising the statute of limitations as a defense, among others, and cross-complained for declaratory relief, seeking a declaration as to the extent to which the prior judicial foreclosure action affected him.

Following a trial, the court entered judgment in favor of plaintiffs and used its equitable powers to correct a mistake in the prior foreclosure action, making Crowell subject to the action.  The trial court granted Crowell a three-month redemption right, which it believed Crowell would have had if he had been included in the prior action.  If Crowell failed to redeem the property within those three months, plaintiffs would own the property free and clear of Crowell’s deed of trust.  Crowell appealed.

Reasoning

The Court of Appeal reversed.  The appellate court first noted the standard of review to be applied.  The use of a trial court’s equitable powers are reviewed under an abuse of discretion standard.  The abuse of discretion standard is deferential.  Findings of fact are reviewed for substantial evidence and the application of the facts to the law is reversible only if it is arbitrary and capricious.  Conclusions of law, however, are reviewed de novo.  And, the appellate court added, the determination of the statute of limitations applicable to a cause of action is a question of law reviewed de novo.

Crowell argued the statute of limitations for judicial foreclosure actions should either be four years under Code of Civil Procedure (CCP) section 337 or six years under Commercial Code section 3118, not the 60 year limitation the trial court used from CCP section 882.020.  Conversely, plaintiffs argued the trial court used the correct limitations period or, alternatively, the trial court should have used the three year limitations period applicable to mistakes from CCP section 338(d), based on the discovery of the cause of action, namely, when they actually learned that there was a junior of deed of trust which should have been included in the original action.  Since the plaintiffs first learned of the Crowell deed of trust after purchasing the property in 2014, they asserted their quiet title action filed in mid-2016 was timely under their three-year discovery rule for mistakes.  Crowell, on the other hand, contended that the statute of limitations expired by no later than April 5, 2014, two years before the case was filed.  Since the parties were arguing about the statute of limitations, the appellate court decided to review the matter de novo.

The Court of Appeal next observed that there is no specific statute of limitations for actions to quiet title.  Instead, courts refer to the underlying theory of relief to determine the applicable statute of limitations.  In determining which limitations period to apply, the appellate court reasoned the plaintiffs were not really seeking to quiet title to the property, i.e., to have legal title declared as it really is, but rather to obtain a judgment changing the title by removing Crowell’s lien.  In a footnote, the court dispatched the plaintiffs three year CCP section 338(d) argument based on the mistake of failing to include a defendant in a prior action because it would effectively convert CCP section 338(d) into a method for extending an expired statute of limitations by simply claiming a defendant had been mistakenly omitted—which is not the mistake CCP section 338(d) was intended to correct.  Because the plaintiffs, holders of a senior deed of trust, sought to remove a junior lien, the Court of Appeal concluded the gravamen of their quiet title action was foreclosure and the statute of limitations applicable to foreclosures governed.

The appellate court then noted that there are two methods to enforce a deed of trust: (1) an action for judicial foreclosure; or (2) nonjudicial foreclosure (or trustee’s sale).  A judicial foreclosure is an action brought against all parties with a recorded interest in the property.  Following a judicial foreclosure, all subordinate liens to the deed of trust being foreclosed upon are extinguished, unless the lien was recorded at the time the action was commenced and the lienholder was not made a party to the action.  By not naming a junior lien, the senior lienholder fails to extinguish the junior lienholder’s right of redemption, that is, the right to pay off the senior lien and step into the senior lienholder’s shoes.  To remove a junior lien that was not named in a prior judicial foreclosure action, the senior lienholder (or the buyer standing in the shoes of the senior lienholder) may file a second action to foreclose the junior’s equity of redemption or to quiet title seeking the same effect.

By contrast, in a nonjudicial foreclosure sale, the trustee exercises the power of sale in a deed of trust.  The sale is governed by a comprehensive set of statutory provisions and there is no right of redemption following the sale.  Prior to 1982, there was no time bar to a power of sale in a deed of trust.  The power of sale could be exercised by the trustee even after the statute of limitations barred judicial foreclosure.  Courts construed Civil Code section 2911 as applying narrowly to “liens,” not to a power of sale.  In 1982, however, the Legislature enacted the Marketable Record Title Act (Civil Code §§ 880.020-887.090), which limited the time period for exercising a power of sale to make real property more freely alienable.  The Act provides that unless the “lien of a . . . deed of trust . . . has earlier expired pursuant to § 2911, the lien expires at, and is not enforceable by action for foreclosure commenced, power of sale exercised, or any other means asserted after, the later of” 10 years after the maturity of the secured debt, if that date is ascertainable from the recorded instrument, or 60 years after the recordation of the instrument if the maturity date is not ascertainable from the recorded instrument.  (Civil Code § 882.020(a).)  Because courts interpret Civil Code section 2911 as applying narrowly to liens, they correspondingly interpret the phrase “[u]nless the lien of a . . . deed of trust . . . has earlier expired pursuant to § 2911” in Civil Code section 882.020(a) to the expiration of the statute of limitations on a judicial action to enforce the lien.

The Court of Appeal determined that because plaintiffs’ deed of trust did not reflect the maturity date of the note, the 60-year period of Civil Code section 882.020(a) applied.  Nevertheless, the court ruled, the 60-year period did not govern because the time to bring a judicial foreclosure action had earlier expired under Civil Code section 2911.  The maturity date was on April 5, 2008, and the quiet title action was filed more than eight years later on June 29, 2016.  Whether using CCP section 337 or Commercial Code section 3118, the statute of limitations expired prior to June 29, 2016.  Further, plaintiffs did not claim that the four or the six-year statute of limitations was tolled or extended for any reason.  Moreover, since plaintiffs had already foreclosed judicially, they could not later conduct a nonjudicial foreclosure sale.  Once the sale was completed, the appellate court reasoned the trustee no longer holds title to convey through a subsequent trustee’s sale.  In addition, following the judicial foreclosure sale, neither the trustee nor the beneficiary under the deed of trust can comply with the procedural requirements of a trustee’s sale.  After the judgment became final, the sale was completed and the time for taking a deficiency judgment against the Weinsteins lapsed, there was no further obligation under plaintiffs’ deed of trust to which the Weinsteins could be in default to list in a notice of default to commence a nonjudicial foreclosure sale process.  In short, the power of sale in plaintiffs’ deed of trust did not survive the judicial foreclosure sale and could not be exercised.  Accordingly, the Court of Appeal concluded the trial court erred in applying the 60-year period of Civil Code section 882.020(a).

Author’s Commentary

For practitioners, this decision has a good, short summary of judicial and nonjudicial foreclosure with a useful collection of cases.  There are three unfortunate aspects about the decision though.

First, this is an unfortunate result for the senior lienholder that will likely leave them with no ability to recover on their debt.  A footnote in the decision indicates that plaintiffs did not timely pursue a deficiency judgment against the Weinsteins and, even if they had, who knows how collectible it would have been.  The fact that there was a three-year gap between when the plaintiffs obtained their judgment of foreclosure and when the foreclosure sale actually occurred suggests that there were other delaying events transpiring behind the scenes.  These ultimately worked to plaintiffs’ detriment since they only learned of the junior lien after completing the foreclosure sale.  Though it was not argued, one has to wonder if there was some tolling occurring during that three-year period.

Second, given that it was one of plaintiffs’ two main arguments, it is also unfortunate that the appellate court did not expound on its reasoning for rejecting the plaintiffs’ CCP section 338(d) argument and simply relegated it to a short footnote. 

Third, the Court of Appeal’s decision rests on two alternative premises, one of which appears to be weak, and they are that: (1) Civil Code section 2911 earlier terminated the lien created by the deed of trust and, hence, the 60-year statute of limitations under Civil Code section 882.020(a) did not apply; and (2) once the deed of trust had been judicially foreclosed upon, there was no power of sale left under the deed of trust by which to conduct a nonjudicial foreclosure sale.  The conclusion section in the decision focuses on the second premise and does a good job of reinforcing it.  The first premise is weak though because as the court noted early in its opinion, but avoided addressing entirely, there is some tension between Civil Code section 2911 and Commercial Code section 3118.  The former only incorporates limitations periods set forth in the Code of Civil Procedure, not the Commercial Code.  If Commercial Code section 3118 did govern the statute of limitations for plaintiffs’ promissory note and if the lien extinguishment provision in Civil Code section 2911 does not incorporate the Commercial Code, how could Civil Code section 2911—which is expressly referenced in Civil Code section 882.020(a)—cap the limitations period in Civil Code section 882.020(a) when it does not apply?  Early in the opinion, the court artfully dodged the Commercial Code section 3118 versus Code of Civil Procedure section 337 question by observing that whichever period governed both had expired, but it then assumed for purposes of its reasoning under Civil Code section 882.020(a), without any explanation whatsoever, that either: (a) Civil Code section 2911 incorporated Commercial Code section 3118; or (b) Code of Civil Procedure section 337, and not Commercial Code section 3118, applied to the note.

The opinion also provides some guidance for future litigants facing the same problem.  In the first instance, they should look for an agreement extending the statute of limitations or a basis for tolling.  Next, Civil Code section 3412 permits the cancellation of an instrument that clouds title, if the instrument is void or voidable, but the plaintiffs did not assert this cause of action here or claim that defendant’s deed of trust was void or voidable.  It is possible that senior lienholders can use this provision to challenge a junior lien as an alternative theory should they be time barred from foreclosing on the lien, but they will need to uncover some colorable defect with the lien as to them.

These materials were written by Michael J. Gomez of Frandzel Robins Bloom & Csato, L.C. in Fresno, California (mgomez@frandzel.com).  Editorial contributions were provided by members of the ILC’s publications subcommittee. Mr. Gomez is a member of the Insolvency Law Committee.

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