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

A Void Default Judgment Is No Way To Establish Title

In a post from March of this year — Even a “Bona Fide Purchaser” Can’t Rely on a Void Judgment — we reviewed the recent decision from California’s Fourth District Court of Appeal, OC Interior Services, LLC v. Nationstar Mortgage, LLC, which held that even a party who qualifies as a “bona fide purchaser” who has no notice of competing claims to title cannot rely on a void default judgment to establish ownership free and clear of a prior deed of trust.

Now, the same Court of Appeal has issued another decision — Deutsche Bank National Trust Company v. Pyle — addressing the problems with relying on a void default judgment to establish title.

Facts

The loan, default, and foreclosure

In 2005 Denise Saluto obtained a $517,000 loan from Long Beach Mortgage Company (LBMC), which was secured by a deed of trust on property in Rancho Mirage.  LBMC later merged with Washington Mutual Bank (WaMu), which then became the beneficiary on the loan and deed of trust.

In early 2007, Saluto defaulted on the loan.

Deutsche Bank National Trust Company, the trustee, acquired the property at a trustee’s sale in July 2007.  Deutsche Bank recorded its trustee’s deed upon sale in August 2007.

Saluto’s lawsuit seeking cancellation of the trustee’s deed

In 2009, Saluto sued Deutsche Bank and others seeking to cancel the trustee’s deed.  After the defendants failed to respond, the trial court entered a default judgment in Saluto’s favor.  The default judgment cancelled Deutsche Bank’s trustee’s deed.

Upon learning of the default judgment, Deutsche Bank filed a motion to set aside the default judgment based on Saluto’s fraud.  Deutsche Bank argued that the proofs of service filed by Saluto were falsified, and that Deutsche Bank had never been properly served with Saluto’s summons or complaint.

The trial court granted Deutsche Bank’s motion, finding that Saluto’s proofs of service had been falsified.  The order setting aside the default judgment was recorded in December 2013.

Saluto’s fraud and sale of the property

Both before and after Deutsche Bank purchased the property at the trustee’s sale, Saluto recorded various documents purporting to convey interests in the property.  Most of these conveyances involved entities in which Saluto appeared to play some role.  None of the conveyances were authorized by Deutsche Bank.

In 2012 (before the default judgment against Deutsche Bank had been vacated), one of Saluto’s entities entered into a purchase and sale agreement to sell the property to Cora Broadhurst and Alan Pyle.  The disclosures indicated “no” lawsuits that would affect the property.

The transaction closed in October 2012, with Broadhurst and Pyle obtaining a grant deed to the property and their loan from FirstBank recorded as a lien against the property.  Deutsche Bank did not consent to the grant deed or FirstBank’s new deed of trust.

Deutsche Bank’s lawsuit

After obtaining its order setting aside the default judgment in the Saluto action in December 2013, Deutsche Bank filed its own lawsuit against Broadhurst, Pyle, and FirstBank to quiet title to the property.

The trial court granted Deutsche Bank’s motion for summary judgment, concluding that Broadhurst and Pyle did not qualify as bona fide purchasers as a matter of law since they relied on a void default judgment.  The court entered judgment for Deutsche Bank, and the defendants appealed.

The Court of Appeal’s opinion

The Court of Appeal affirmed the judgment in Deutsche Bank’s favor.

Agreeing with its prior decision in OC Interior Services, the court held that “a void judgment does not pass title free of the lien purportedly cancelled by the void judgment; rather, a void judgment in the chain of title has the effect of nullifying a subsequent transfer, including a transfer to a purported bona fide purchaser.”

The court noted that the order voiding the default judgment, in legal effect, left Deutsche Bank’s trustee’s deed in the property’s chain of title.  Thus, Broadhurst and Pyle could not claim bona fide purchaser status.

The defendants contended that they were entitled to bona fide purchaser status under the quiet title statutes, including Code of Civil Procedure section 764.060.  The court recognized that under that statute, a party who purchases property in reliance on a quiet title judgment without notice of any defects in the judgment will not have their rights impaired even if the quiet title judgment is later successfully attacked.

However, the court observed that Saluto’s lawsuit never sought a quiet title decree — it only sought the cancellation of instruments.  A quiet title action, the court noted, has extra procedural safeguards protecting those who may have an interest in the property.  For example, under Code of Civil Procedure section 764.010, the court in a quiet title action “shall not enter judgment by default.”  In short, Saluto’s default judgment did not quiet title, and defendants were therefore not entitled to rely on the quiet title statutory scheme.

Finally, the court held that the equities favored Deutsche Bank and weighed against Broadhurst and Pyle.  Deutsche Bank obtained the property through a valid trustee’s sale, and had no knowledge of Saluto’s fraudulent activity.  Broadhurst and Pyle, on the other hand, were aware of the default judgment and had specifically asked about it when obtaining title insurance.  The title insurer told them that “because the default judgment had been entered about three years earlier they could rely on it and the title insurer was prepared to issue title insurance.”  As such, the court held that Broadhurst’s and Pyle’s remedy was through their title insurer.

Lesson

In light of this decision and the earlier OC Interior Services decision, it is clear that relying on a void default judgment is no way to defeat competing claims to title.

Title insurers should also take note.  The court here observed that the insurer “made a business decision to issue title insurance” knowing that Saluto’s default judgment, on its face, did not grant quiet title relief.  The court went on:

The title insurer could have reviewed the court file for the Saluto action and easily ascertained that Deutsche Bank was attempting to have the default judgment set aside and the litigation was ongoing.  Instead, the title insurer apparently relied on the age of the default judgment in deciding to issue title insurance.  A void judgment, however, can be set aside at any time.

Title insurers should take note, and adjust their due diligence processes accordingly.

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