California Appellate Court Affirms Lack of Constructive Knowledge Required for Protection Under Quiet Title Act

By Michael R. O’Donnell, Michael Crowley, Desiree McDonald and Andrew Raimondi

Reprinted with permission. © Riker Danzig Scherer Hyland & Perretti LLP 2021

The Court of Appeal of California, Second Appellate District, Division Two, recently upheld a trial court’s finding that a later purchaser or encumbrancer for value seeking protection under the Quiet Title Act from the invalidation of an earlier quiet title judgment may only do so if it lacked constructive knowledge of some “defects or irregularities in [the earlier quiet title] judgment or proceedings” at the time it obtained its interest in the property. Tsasu LLC v. U.S. Bank Tr., N.A., 2021 WL 1220171 (Cal. Ct. App. Apr. 1, 2021). The Court also, crucially, found that as it pertained to constructive knowledge in this regard, a title company’s knowledge of such facts are imputed to the purchaser/encumbrancer.

In this case, the borrower at issue originally filed a quiet title action against the listed beneficiary of the deed of trust on her property. However, borrower failed to serve the beneficiary properly, and she also did not join the record assignee of the deed of trust as a party to the action, despite the assignee holding the deed of trust at the time of the quiet title action. Borrower initially obtained a judgment against the beneficiary quieting title to the property, but the assignee who had not been joined in the action later obtained an order vacating the quiet title judgment. After the original quiet title judgment was entered but prior to its vacation, a new lender, Tsasu, issued a loan to borrower, which was secured with a properly recorded deed of trust on the property. After borrower stopped making payments on the property, Tsasu sued the current holder of the original deed of trust, US Bank, seeking to quiet title to the property and obtain a declaratory judgment stating that the Tsasu deed of trust had priority over the original deed of trust. Tsasu and US Bank filed cross-motions for summary judgment, and the trial court granted summary judgment in favor of US Bank, resulting in an appeal from Tsasu.

The appellate court affirmed summary judgment in favor of US Bank and the denial of summary judgment for Tsasu. The Court examined section 764.060 of California’s Quiet Title Act, which insulates the lien priority of a person who has “act[ed] in reliance” on a quiet title judgment from the effects of a subsequent invalidation of that judgment if that person was a “purchaser or encumbrancer for value of the property . . . without knowledge of any defects or irregularities in the [quiet title] judgment or the quiet title proceedings.” The Court affirmed that according to the statute’s plain language as well as cases defining “knowledge” in the quiet title context, a party must not only lack actual knowledge as to defects or irregularities concerning the quiet title judgment in order to be insulated under the Act, but also constructive knowledge. After making this finding, the Court found that there was a “defect or irregularity” in the initial quiet title judgment, that the borrower had failed to join or serve the current owners of its original deed of trust. “Tsasu,” the Court further held, “had constructive knowledge of this defect or irregularity in two different ways.”

First, the record of title contained both the recorded assignments of the original deed of trust as well as the quiet title judgment itself, which set forth that the sole defendant was the deed’s original holder. Taken together, these documents showed a defect in the quiet title judgment.

Second, the Court held that because Tsasu’s title insurer prepared a preliminary report of title which laid out the status of the assignments and quiet title judgment as stated above, and Tsasu had “treated its title insurer as its agent when [its] CEO relied on the insurer’s preliminary report . . . Tsasu also had constructive knowledge of the defect and irregularity in the 2015 Quiet Title judgment by virtue of its insurer’s awareness of these circumstances that is imputed to Tsasu.” Given the forgoing, the Court stated that Tsasu indeed had constructive knowledge of defects or irregularities in the 2015 quiet title judgement at the time it acquired its interest in the property, and that therefore, the Act does not insulate Tsasu” from the judgment’s subsequent invalidation and expungement. Therefore, “the [original] Deed of Trust—as the lien recorded first-in-time—[had] priority over the Tsasu Deed of Trust.”