A Lis Pendens Recorded Before a Trustee’s Sale is a “Cloud on Title” that Might Thwart an Unlawful Detainer Claim
In a December 2018 post, Money and Dirt covered a California Supreme Court case — Dr. Leevil, LLC v. Westlake Health Care Center — in which the Court held: “an owner that acquires title to property under a power of sale contained in a deed of trust must perfect title before serving the three-day written notice to quit required by Code of Civil Procedure section 1161a(b).”
In a recent opinion published by California’s Sixth Appellate District — Homeward Opportunities Fund I Trust 2019-2 v. Taptelis — the court followed the reasoning of the Dr. Leevil opinion in evaluating the impact of a lis pendens recorded on property that was sold at a trustee’s sale, where after the sale the buyer pursued unlawful detainer proceedings against the prior owner.
Facts: borrower sues for wrongful foreclosure and records lis pendens; lender obtains property at a trustee’s sale and sues for unlawful detainer
Ilias Taptelis borrowed $1.24 million to purchase residential property in Santa Clara County. The loan was secured by a deed of trust.
Taptelis defaulted on the loan. The lender recorded a Notice of Default, and later, a Notice of Trustee’s Sale (aka nonjudicial foreclosure).
Before the trustee’s sale, Taptelis filed a civil action challenging the impending foreclosure, naming as a defendant Homeward Opportunities Fund, to whom the deed of trust had been assigned. Taptelis’ claims included a cause of action for Quiet Title. Two days before the trustee’s sale, Taptelis had a lis pendens recorded in connection with his lawsuit.
The trustee’s sale went forward, with Homeward buying the property with a credit bid.
A few months after the sale, Homeward served a notice to quit on Taptelis. Taptelis did not vacate the property, so Homeward filed an unlawful detainer action seeking to take possession of the property from Taptelis.
Trial court: lis pendens excluded from evidence as irrelevant during the unlawful detainer trial
At a bench trial on Homeward’s unlawful detainer action, Homeward introduced several recorded documents — including the Deed of Trust, Assignment, Notice of Default, Notice of Trustee’s Sale, and Trustee’s Deed — to establish that it had “perfected title” to the property before initiating the unlawful detainer action in compliance with Code of Civil Procedure section 1161a(b)(3). The trial court sustained Homeward’s relevance objections to Taptelis’ efforts to introduce his recorded lis pendens into evidence.
The trial court ruled in favor of Homeward. Taptelis appealed.
Court of Appeal: reversed; lis pendens was a cloud on title that barred the unlawful detainer claim
The Court of Appeal reversed, following the logic of the Dr. Leevil opinion.
The court first cited the general rule that a “lis pendens clouds title until the litigation is resolved or the lis pendens is expunged[.]” Turning to the unlawful detainer statute at setion 1161a, the court stated “a plaintiff seeking a judgment of unlawful detainer must establish that the title under the sale has been duly perfected. … Title is duly perfected when all steps have been taken to make it perfect, i.e., to convey to the purchaser that which has has purchased, valid and good beyond all reasonable doubt … which includes good record title….”
The court concluded:
we hold that the trial court abused its discretion by excluding evidence of the lis pendens, in that it was both relevant and sufficient to defeat Homeward’s unlawful detainer claim. Homeward needed to either expunge the lis pendens or resolve the underlying wrongful foreclosure suit to perfect title. Because it did neither, its notice to quit was premature and void.
The court explained that it was following the Supreme Court’s instructions in the Dr. Leevil case, under which “the new owner must perfect title before serving the three-day written notice to quit.” Because Tatpelis’ lis pendens was recorded before the trustee’s sale and constituted a cloud on title, Homeward was required to “either expunge the lis pendens or resolve the wrongful foreclosure litigation before it could serve the notice to quit necessary to initiate an unlawful detainer action.”
The court acknowledged the potential for “abusive recordation of lis pendens” but determined that the statutory scheme contained appropriate “guardrails to deter potential abuse,” including procedures for bonding and a motion to expunge with attorney fee recovery.
Lesson
Under the Homeward Opportunities opinion, a lis pendens recorded before a trustee’s sale constitutes a cloud on title, and must be removed before the trustee’s sale purchaser initiates unlawful detainer proceedings by serving a notice to quit.
Post-Script
The Court of Appeal later granted rehearing, which depublished the case.