Oscar Wilde is quoted for saying—“To expect the unexpected shows a thoroughly modern intellect.”
This advice certainly holds true for a senior deed of trust lienholder contemplating foreclosure on real property security. A careless senior lienholder may be in for an unpleasant surprise if they fail to account for junior liens on the property pre-dating the foreclosure, even those they may not initially be aware of.
These are the lessons taught by a recent opinion published by California’s Fifth Appellate District — Robin v. Crowell.
Facts of Robin v. Crowell
Steve and Marta Weinstein owned several parcels of vacant land, which they anticipated developing. Plaintiffs, including Cathleen Robin, loaned the Weinsteins $450,000 secured by a deed of trust on one of the properties. Later, without Plaintiffs’ knowledge, the Weinsteins and Defendant Al Crowell recorded a second deed of trust on the property securing a $250,000 promissory note for a loan from Crowell.
The note between Plaintiffs and the Weinsteins permitted Plaintiffs to accelerate their loan in the event a tentative subdivision map for the development of the property was not approved by January 1, 2008. Indeed, after the deadline passed without approval of a tentative subdivision map, Plaintiff Robin accelerated the loan due date to April 5, 2008, and the Weinsteins failed to pay the loan by that accelerated due date.
Robin initiated a judicial foreclosure action; however, the complaint failed to name Crowell as a defendant, despite his recorded junior deed of trust. The trial court entered a judgment in favor of Plaintiffs in the foreclosure action in 2011, and in 2014 Plaintiffs purchased the property at the foreclosure sale for a credit bid of $150,000.
A year later, Plaintiffs attempted to sell the property to a neighbor, but a title search revealed Crowell’s recorded deed of trust. Plaintiffs then filed a quiet title action to clear title to the property. Crowell asserted the statute of limitations as a defense.
Trial court: OK to fix “mistake” in the judicial foreclosure
The trial court sided with Plaintiffs and concluded that it would exercise its equitable powers to correct a “mistake” in the original judicial foreclosure action—Plaintiffs’ mistake of failing to name Crowell as a defendant.
The trial court granted Crowell a three-month redemption right, which it believed would put him the same position as if he had been properly named in the judicial foreclosure action.
Court of Appeal: reversed
The appellate court reversed the trial court’s judgment and held that omission of a junior lienholder from a judicial foreclosure cannot be corrected by a quiet title action years later.
The court recognized that a junior lienholder’s interest in the security property, as against a foreclosing senior lienholder, is in effect a right of redemption. The junior lienholder may pay the obligation secured by the senior lien before the foreclosure, at which time he would then become the senior lienholder on the property. Or, after a foreclosure sale by the senior lienholder, the junior has a right to claim upon the surplus of the proceeds — he has a “right to be paid out of the excess.”
A judicial foreclosure action, as against the junior lienholder, is one of the senior lienholder’s tools to cut off the right of redemption. (Lienholders more typically pursue non-judicial foreclosure, which is a simpler process but does not allow for recovery of any deficiency.) However, as proved critical in the Robin case, a judicial foreclosure action that fails to name a junior lienholder has no impact whatsoever on the junior lienholder’s rights if the junior lien pre-dated the foreclosure.
While ordinarily Robin may have been able to correct the mistake omitting Crowell from the judicial foreclosure action by bringing a quiet title action, Crowell was correct in asserting the statute of limitations had expired. The limitations period began to run from the date the accelerated note became due (April 5, 2008); therefore, the quiet title action filed more than 8 years later in June 2016 was barred.
The court also held that Robin could not correct her mistake through a non-judicial foreclosure under the deed of trust. Although typically a trustee can exercise a power of sale even after the statute of limitations has run on a judicial foreclosure action, in this instance Robin’s deed of trust no longer existed because the judicial foreclosure sale had satisfied the underlying obligation.
The obvious takeaway from the Robin v. Crowell case is the importance of a senior lienholder properly naming all junior lienholders as part of any judicial foreclosure action. A senior lienholder should conduct due diligence in completing a thorough title search before proceeding with a judicial foreclosure. The fact that Robin was unaware of Crowell’s junior lien until 8 years after Robin’s accelerated loan became due provided no saving grace in correcting her mistake omitting Crowell from the judicial foreclosure action.