What is the statute of limitations for suing on a promissory note secured by a deed of trust to real property?

By: Daniel E. Katz

Most importantly, why is this even a question when nearly all deeds of trust in California contain a power of sale clause that allow lenders to foreclose on the deed of trust without having to file a lawsuit?  First and foremost, a lawsuit against the borrower may be necessary if the lender wants to seek a deficiency judgment (which cannot be sought after nonjudicial foreclosures).  Also, a foreclosing lender may need to file an action against holders of inferior liens to extinguish them such as in the recent case of Robin v. Crowell (2020) 55 Cal.App.5th 727.

The Robin case discussed three potential limitations period for bringing an action on a promissory note secured by a deed of trust – the 60-year period for liens (CA Civil Code section 882.020), the four-year limitations period for written contracts (CA Code of Civil Procedure section 337), and the six-year period for notes payable (CA Commercial Code section 3118).

Robin involved holders of a first deed of trust (designated collectively as “Robin”) suing the borrower on the underlying promissory note for judicial foreclosure.  The lawsuit was filed timely and the Robin plaintiffs prevailed and were ultimately the purchasers of the subject property at the foreclosure sale by making a credit bid.

A few years later, during their efforts to sell the subject property, the Robin lenders discovered a recorded second trust deed that was encumbering the subject property since before the foreclosure action.  The holder of the second deed of trust (Crowell) was not named in the earlier judicial foreclosure action.  Had Crowell been named, his second deed of trust would have been extinguished by the foreclosure.

After the discovery of the second deed of trust, the lender filed a new action against Crowell to have the trial court extinguish the second deed of trust by quiet title, since the second deed of trust would have been extinguished as a result of the earlier action.

Crowell raised the statute of limitations, contending that either under the four-year limitations period in the Code of Civil Procedure or the six-year limitations period in the Commercial Code, barred the action to extinguish the second deed of trust.

The trial court found that the 60-year period in the Civil Code for liens applied and ruled in favor of the Robin lenders.  The Court of Appeal reversed, finding that the shorter periods of four years or six years applied.  It should be noted that the Robin plaintiffs had no contractual relationship with Crowell.  Notwithstanding this, when the promissory note on the second deed of trust was breached by the borrower (the original defendants in the judicial foreclosure lawsuit) it started the statute of limitations clock on the Robin lenders claim to extinguish Crowell’s second deed of trust.

Although the Court of Appeal did not specify which is the correct period of time in which to file an action, it noted that under either limitations period, Robins’ claim against Crowell to extinguish the second deed of trust was time barred.  The Court of Appeal also correctly noted that the 60-year period for liens only applies to efforts to enforce them by power of sale and did not apply to legal actions to enforce.

The lesson to be learned from Robins is to be vigilant of your rights as a secured lender.  Always obtain a lenders’ policy of title insurance and keep track of the payments so that you know when your rights expire.  If you must decide between the two statutory periods in which to bring a lawsuit, always be governed by the shorter limitations period so that you do not have to litigate the issue when you file your lawsuit.