Business Law

Trenk v. Soheili

The following is an update analyzing a recent case of interest:

Summary

In Trenk v. Soheili, 2020 WL 7487825 (12/21/2020), the California Court of Appeal held that a deed of trust securing an underlying debt on which the statute of limitations had run more than ten years earlier could still be non-judicially foreclosed. But unfortunately for the lackadaisical beneficiary, the deed of trust was held to be void anyway, due to the failure of both spouses (who held title as joint tenants) to join in executing the deed of trust. A copy of the opinion may be found here.

Facts

Maryann and Morteza Soheili sued attorney Joseph Trenk for legal malpractice. Pursuant to a settlement in 2003 Mr. Trenk made a $10,000 payment and promised to pay $100,000 in monthly installments over three years. Trenk also executed a $200,0000 promissory note calling for payment in 36 monthly installments, at zero interest. As part of the settlement, Joseph Trenk executed a deed of trust on the California residence which he and his wife Dinah Trenk had purchased in 1988. The note stated that upon payment of 36 installments of $2,500, the “note and trust deed shall be deemed fully satisfied.”

The Trenks had acquired title to their home, and continued to hold title, as joint tenants. Dinah did not sign the deed of trust and later testified that she had no knowledge of it until the foreclosure was commenced.

Trenk made no more payments to the Soheilis after December, 2003. All told, it appears that Trenk paid a total of $25,000 to the Soheilis before defaulting. Mr. Soheili telephoned Trenk in October, 2017, demanding payment. Trenk offered to resume the $2,500 monthly payments, made one $2,500 payment, and tendered the sum of $75,000 as payment in full. The Soheilis refused the tender.

The Soheilis commenced a non-judicial foreclosure under the deed of trust in January, 2018. In March, 2018, the Trenks filed a complaint in Los Angeles County Superior Court, seeking among other things to quiet title to their home and to cancel the deed of trust. The Court issued a preliminary injunction staying the foreclosure.

The Trenks prevailed at trial. In its statement of decision, the trial court held that foreclosure of the deed of trust was barred by a four year statute of limitations. The Court of Appeal affirmed the judgment in favor of the Trenks, but on completely different grounds.

Reasoning

The Court of Appeal held that even though the four year statute of limitations had run over ten years earlier, the deed of trust could still be non-judicially foreclosed. This ruling was based on California’s Marketable Record Title Act, Civil Code sections 880.020-887.090 enacted in 1982. Prior to that enactment, California law was that even when the statute of limitations on enforcement of a secured debt has expired, such that an action for judicial foreclosure would have been barred, the power of sale under a deed of trust never expires. Under the Act, if the maturity date of the secured obligation is “ascertainable from the recorded evidence of indebtedness [e.g., from the deed of trust]” then the lien expires ten years after that maturity date. Until that time, the deed of trust may be non-judicially foreclosed. If the maturity date is not ascertainable from the deed of trust, the lien expires sixty years from the date on which the deed of trust was recorded.

The Court ruled that even though the deed of trust contained language generally referring to the note and the settlement agreement (both of which called for 36 monthly installments), this reference did not make the maturity date “ascertainable” from the recorded deed of trust itself. Accordingly, the sixty year statutory limit had not expired and the trial court was incorrect in concluding that the Soheili trust deed could not be non-judicially foreclosed. That holding was dictum, however, because the Court affirmed the judgment on a completely different ground.

Title to the home was held by Joseph and Dinah Trenk, husband and wife, as joint tenants. California Family Code section 1102(a) provides that “both spouses . . . are required to join in executing an instrument by which . . . community real property or an interest therein is . . . encumbered.” The Soheilis pointed to a finding in the trial court’s statement of decision that “[a]t all relevant times, Plaintiffs Joseph Trenk and Dinah Trenk held title to the property as joint tenants.” The Soheilis cited Raney v. Cerkueira, 36 Cal.App.5th 311, 320–321, 248 Cal.Rptr.3d 426 (2019) which holds that a spouse’s interest in a joint tenancy is separate property that he or she may encumber without the other spouse’s consent. Had the Soheilis prevailed in their argument, the deed of trust would at least have encumbered Joseph Trenk’s undivided one half joint tenancy interest. Under the Court’s ruling, however, the deed of trust was held to be completely void.

California Family Code section 760 provides that “all property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in this state is community property.” This section has been held by California courts to create a statutory presumption which may be overcome by a preponderance of the evidence. The Trenk opinion cites to a line of cases culminating in In re Brace  9 Cal.5th 903, 266 Cal.Rptr.3d 298, 470 P.3d 15 (2020), a case certified to the California Supreme Court by the Ninth Circuit Court of Appeals. Brace held that as to third parties, the “titling of a deed” as a joint tenancy is not sufficient to show that the spouses intended that writing to convert community property into two separate property estates.

The Court held that the finding in the trial court’s statement of decision, that the Trenks held title to the property as joint tenants, “does not show that the court found that the Residence in fact was separate property. At best, it is ambiguous on the point.” The Court concluded that the doctrine of implied findings, under which a trial court is presumed to have made the findings necessary to support its judgment, did not apply because the trial court’s ruling was based on its erroneous conclusion that the statute of limitations barred enforcement of the deed of trust.

Author’s Comment

First off, one must wonder why the Soheilis, who were suing their former lawyer Mr. Trenk for legal malpractice, did not obtain better legal assistance with respect to the bizarre settlement documents under which they were to be paid $200,000 (or was it $100,000 or $300,000?), secured by a void trust deed. But nevertheless –

Under California law the holder of a promissory note secured by a deed of trust may be barred from judicially foreclosing by the expiration of the statute of limitations, but retains the right to foreclose non-judicially for sixty years after the deed of trust was recorded. Sometimes a trust deed beneficiary will choose to judicially foreclose in order to resolve some legal difficulty such as an ambiguity in the loan documents, a faulty legal description or a title discrepancy. These types of problems are made well-nigh insoluable in a case where the statute of limitations on judicial foreclosure has run. In such a case, non-judicial foreclosure may not convey marketable title to the successful bidder (including the beneficiary after a successful credit bid) and may also expose the beneficiary to a claim of wrongful foreclosure.

California law preserves a lien on real property while depriving the lienholder of the ability to foreclose by judicial action (you might call it a “Trussed-Up Trust Deed”). In contrast, under New York law, for example, mortgage liens are simply extinguished by the expiration of limitations. See, NY RP Act & Pro §1501(4).

The Trussed-Up Trust Deed raises a series of novel questions. For example, can the beneficiary raise issues relating to the validity, extent or priority of a Trussed-Up Trust Deed via a quiet title or declaratory relief action, pre- or post- foreclosure? The recent case of Robin v. Crowell, 270 Cal. Rptr. 3d 25 (2020), review denied (Jan. 13, 2021), suggests not. Does an action to enjoin the foreclosure of a Trussed-Up Trust Deed open the door to judicial foreclosure as a counterclaim? How does the inability to enforce the Trussed-Up Trust Deed affect entitlement to any surplus proceeds of a senior lien foreclosure?

California’s Marketable Record Title Act solved the problem of stains on title created by trust deeds more than sixty years old (which were, due to a mistake perhaps, never reconveyed). In doing so, it created legal problems relating to Trussed-Up Trust Deeds of much more recent vintage.

The Commercial Finance Newsletter is written by an ad hoc group of the California Lawyers Association’s (CLA) Business Law Section. These materials were written by Dean T. Kirby, Jr. a member of the firm of Kirby & McGuinn, A P.C., located in San Diego, California. Mr. Kirby is a member of the ad hoc group and a member of the Commercial Transactions Committee of the Business Law Section. Editorial contributions were made by the Honorable Meredith Jury (United States Bankruptcy Judge, C.D. Cal, Ret.), also a member of the ad hoc group. The opinions expressed herein are solely those of the author. Thomson Reuters holds the copyright to these materials and has permitted the Commercial Transactions Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.

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