Money and Dirt: A blog on legal issues impacting California real estate investment, development, and secured lending

Even a “Bona Fide Purchaser” Can’t Rely on a Void Judgment

Under California law, “bona fide purchasers” who buy property with no notice (actual, constructive, or otherwise) of a competing claim to the property are generally protected.  The law’s favorable treatment of bona fide purchasers encourages property stakeholders to record their interests under California’s recording statutes, so that the world has notice of their interests in the property.

But being a bona fide purchaser does not make one invincible against competing claims to property.  Nobody — not even a bona fide purchaser — can rely on a void instrument that purports to dispose of competing claims.

In a recently published decision, OC Interior Services, LLC v. Nationstar Mortgage, LLC, the Court of Appeal held that even a bona fide purchaser could not rely on a void default judgment to establish ownership free and clear of a prior deed of trust.

The facts

The loan and default

In 2007, Roger Hart borrowed $2 million from Mirad Financial Group.  The loan was secured by a first deed of trust on property in Silverado, California.

Mirad later sold the loan, which was securitized through a pooling and servicing agreement under which Deutsche Bank was trustee.  In 2008, servicing rights to the loan were transferred to Aurora Loan Services, LLC.

In 2009, Hart defaulted on the loan.

The first lawsuit and default judgment

Hart negotiated with Aurora over a forbearance agreement.  At the same time, Hart filed a lawsuit against Mirad (the original lender) seeking rescission and cancellation of the deed of trust, the loan, and the promissory note based on claims arising from the Truth in Lending Act.

After Mirad failed to respond to the complaint, Hart obtained a default judgment cancelling and nullifying the deed of trust and declaring that Mirad and Mirad’s successors in interest had no interest in the property.

On December 31, 2009, Hart recorded the default judgment.

The sale of the property and voiding of the default judgment

Hart agreed to sell the property, with a closing set just four days after he recorded the default judgment.

Under the purchase and sale agreement, the buyer (OC Interior Services, or “OCI”) paid $750,000 for the property, although it knew that the custom home on the property was worth $1.5 million.

In connection with the purchase of the property, OCI obtained a policy of title insurance from First American Title Insurance Company.  First American’s preliminary title report and title insurance policy did not reference a deed of trust in favor of Mirad or any successor, likely in recognition of the default judgment that Hart had obtained against Mirad.

Meanwhile, Mirad discovered the default judgment and filed a post-judgment motion in that action to have the default judgment set aside under Code of Civil Procedure section 473(d) on the grounds that Hart served the summons and complaint at Mirad’s former place of business and Mirad had no notice of the action.  The trial court granted Mirad’s motion and ordered that the default judgment purporting to cancel Mirad’s deed of trust was void, vacated, and set aside.

The trustee under the restored deed of trust recorded a Notice of Trustee’s Sale.

The second lawsuit

After OCI learned of the impending Trustee’s Sale, it filed a lawsuit seeking to halt the foreclosure and quiet title to the property against the deed of trust.

OCI argued that it qualified as a bona fide purchaser for value that relied on the recorded default judgment showing Mirad’s interest in the property had been cancelled.  Thus, OCI contended, it took title to the property free and clear of the deed of trust.

The defendants (the new trustee, Quality Loans Service Corp., and the new servicer, Nationstar Mortgage, LLC) argued that even if OCI qualified as a bona fide purchaser, it could not claim title based on the void default judgment.

The trial court agreed with OCI, and entered summary adjudication in its favor.  Deutsche Bank and Nationstar appealed.

The Court of Appeal’s opinion

The Court of Appeal reversed, finding against OCI.

The court assumed, without deciding, that OCI was a bona fide purchaser (even though some facts suggested it was not).  Despite its bona fide purchaser status, however, the court found that OCI could not rely on the void judgment in any manner.  The court stated that a void judgment “is, in legal effect, no judgment.  By it no rights are divested.  From it no rights can be obtained.”

The court held that even assuming OCI’s status as a bona fide purchaser for value, OCI took title to the property subject to the deed of trust recorded by Mirad.

Lesson

The main lesson from the OC Interior Services case is simple: No one — not even bona fide purchasers who are otherwise treated very favorably under California law — can rely on a void instrument to defeat competing claims to property.

A second lesson involves the importance of title insurance for any property purchase.  As stated by the Court of Appeal:

Before OCI purchased the property it also asked its title insurer “‘What happens if this [default judgment] gets appealed?”  And they said, “That’s why you have title insurance.”  We agree.

 

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