In May 2021, Money and Dirt covered a case published by California’s Second Appellate District — Tsasu LLC v. U.S. Bank Trust, N.A. — holding that under Code of Civil Procedure section 764.060 (part of California’s Quiet Title Act), a third party who acts in reliance on a quiet title judgment retains its property rights even if that quiet title judgment is later declared void as long as the third party qualifies as a bona fide purchaser or encumbrancer — i.e., if they have no actual or constructive knowledge of the quiet title judgment’s defects at the time they obtained their interest.  That 2021 post is linked here.

In a case recently published by the same appellate court — Ridec LLC v. Hinkle — the court confronted an appeal of a superior court ruling that refused to follow section 764.060 and the Tsasu opinion, instead holding that the “common law rule” applied, deeming invalid any and all rights deriving from a judgment later declared void.

Was the superior court’s departure from section 764.060 and Tsasu justified?  The Court of Appeal answered that question with a resounding “no.”

Facts: default judgment obtained by fraud; lender obtains deed of trust interest in reliance on the judgment before it is voided

In 2010, Ocie Payne Hinkle was an 89-year old woman who owned several properties in Los Angeles, including property at 1723 Buckingham Road.  While she was hospitalized and medicated, her acquaintance Roi Wilson convinced her to grant him power of attorney over her affairs.  Using that power of attorney, Wilson deeded away much of Ocie’s property, including recording a grant deed for the Buckingham Road property to his “partner in fraud” Edmound Daire in October 2010.

In November 2010, Daire signed a grant deed giving the property back to Ocie.

When Ocie’s adult son, Ocy Hinkle, learned of Wilson’s conduct, he obtained a conservatorship for Ocie.  Ocie passed away in May 2014, and her son Ocy became the administrator of her estate and, as her sole heir, entitled to title to the Buckingham property.

In October 2014, fraudster Daire filed a verified complaint to quiet title to the Buckingham property in his name.  The lawsuit named as defendants Ocie (not her son Ocy), Wilson, and all persons unknown claiming any interest in the property.  The complaint alleged that Daire had title pursuant to the October 2010 grant deed and that the later November 2010 grant deed purporting to reverse the transfer was a “forgery.”  According to a proof of service filed with the court, Daire’s process server personally served Ocie with the complaint in March 2015 — almost a year after she had died.  The court entered default against Ocie, and later entered a default judgment quieting title to the Buckingham property in Daire and expunging the November 2010 grant deed.  Daire recorded the quiet title judgment at the County Recorder’s office a week later.

Daire then obtained substantial loans — one from Ridec LLC in the amount of $650,000 — secured by the Buckingham property.  Ridec’s title insurer ran title reports on the Buckingham property, which confirmed that Daire held title.

Just days after escrow closed on the Ridec loan, Ridec’s title insurer sent a letter and small escrow refund check to Daire at the Buckingham property, but Ocy (Ocie’s son) was living at the property and received the letter, which alerted him to Daire’s fraud.  After further investigation, Ocy learned that Daire had filed a fraudulent proof of service in the quiet title action (stating that his mother had been personally served ten months after her death).  After a one year delay for unknown reasons, Ocy (acting on behalf of Ocie’s estate) filed a motion to vacate the quiet title judgment on the grounds that neither his mother nor her estate were properly served.  The trial court granted Ocy’s motion to set aside the quiet title judgment.

Trial court: Ridec’s interest invalid under “common law;” section 764.060 and Tsasu don’t apply

Once Daire’s egregious fraud came to light, litigation among the parties ensued.  Ridec’s title insurer sued Daire and obtained a court order freezing the disbursed and unspent loan funds in Daire’s bank account.  Ridec joined that lawsuit via a cross-complaint against Daire and Ocy, in which it sought to establish the validity of its deed of trust.  Ridec also filed a complaint in intervention in Daire’s quiet title action, which was reactivated upon the judgment being vacated.  The trial court consolidated these actions.

In the first phase of trial, the trial court quieted title to the Buckingham property in Ocy and declared that Daire had no valid interest in the property.

In the second phase of trial, the trial court determined that Ridec’s deed of trust was invalid and did not encumber Ocy’s interest in the Buckingham property.  Despite having been alerted to section 764.060 and the Tsasu case, the court held it was preferable on grounds of “public policy” to use the pre-Quiet Title Act common law rule, under which any rights in property deriving from a void judgment are invalid, even if the party acquiring those rights had acted in good faith and without knowledge of any defect in the judgment.  As an alternative ground for its holding, the trial court held that even if section 764.060 applied, Ridec was not a bona fide encumbrancer because it had constructive and actual knowledge “of facts which Ridec chose to disregard.”

Ridec appealed.

Court of Appeal: reversed; section 764.060 and Tsasu control

The Court of Appeal reversed, holding the trial court had no justification for refusing to apply section 764.060 and the holding from Tsasu.  Under those authorities, Ridec’s deed of trust was valid.

The court emphasized the special purposes and procedures of the Quiet Title Act, under which quiet title judgments “are binding not only against the parties to the quiet title proceeding, but also against all the world.”  The Act’s procedural requirements for obtaining judgments are more stringent than the requirements for other cases, including filing a verified complaint, recording a lis pendens, and establishing evidence of the plaintiff’s title.  Due to these stringent requirements, “the resulting quiet title judgment is more resilient to subsequent challenges.”

Under section 764.060 and the Tsasu case, a person who relies on the quiet title judgment when subsequently acquiring rights in the property retains those rights even if the quiet title judgment is later invalidated as long as that person obtained their rights without actual or constructive knowledge of any defects or irregularities in the quiet title judgment or proceedings.

Here, Ridec acquired its deed of trust rights in the Buckingham property after the quiet title judgment and did so in reliance on that judgment.  There was no evidence that Ridec had any actual or constructive knowledge of the quiet title judgment’s defects.  As such, Ridec’s rights “could not be impaired and its deed of trust remained valid.”

The court chastised the trial court’s application of the pre-Act common law rule in place of section 764.060 on “public policy” grounds:

Determining what best serves public policy is the job of our Legislature, not individual judges. This is especially true where, as here, the Legislature has already come to a different public policy determination on precisely the same issue….  By effectively rewriting section 764.060, the trial court not only transgressed the fundamental maxim that courts may not rewrite statutes … but also anointed itself a super-legislature imbued with the power to second-guess the public policy determinations of our Legislature.

The court noted that the common law rule would still apply in cases not governed by the Quiet Title Act, and there was nothing inconsistent about this result.  The Act’s purpose was to replace the common law version of a quiet title action — which was typically only binding on the parties to the action — with an “in rem” quiet title action that was “good against all the world” and hence more resilient when later attacked.  A party wishing to avail itself of the Act’s greater protections for quiet title judgments “must take all the extra steps to obtain a quiet title judgment under the Act.”

The court scoffed at the trial court’s suggestion that section 764.060 might be unconstitutional.  To the contrary, the statute “furthers our Legislature’s goal of increasing the marketability of title” and is thus “sufficiently rational to withstand constitutional scrutiny.”

Last, the court rejected the trial court’s conclusion that Ridec had constructive knowledge of the quiet title judgment’s flaws due to the availability of court records in the underlying case and Ridec’s failure to investigate.  The court held that while a party is charged with knowledge of facts stated in a properly recorded document (which revealed nothing here), a party “is not otherwise obligated to ‘go behind’ the judgment and independently verify its validity.”  On its face, the quiet title judgment in favor of Daire was proper, and “the law does not require a subsequent lender to second-guess” the judgment.

Lesson

Under section 764.060, the Tsasu case, and now the Ridec case, a party acquiring an interest in property in reliance on a quiet title judgment retains its rights in that property even if the judgment is subsequently invalidated as void, as long as the party lacked actual or constructive knowledge of defects or irregularities in the proceedings.  The Ridec holding emphasizes that trial courts cannot decline to apply section 764.060 to a judgment obtained under the Quiet Title Act in favor of the “common law” rule regarding void judgments.

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