Relying on a Void Quiet Title Judgment

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Under 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., “without knowledge” of the quiet title judgment’s defects.  (Code Civ. Proc. §764.060.)

Does the statutory reference to “without knowledge” mean only actual knowledge, or both actual and constructive knowledge?

A recent opinion from California’s Second Appellate District — Tsasu LLC v. U.S. Bank Trust, N.A. — addresses this question.

Facts

The CIT Group made a loan secured by a deed of trust on property in Inglewood, which was recorded in 2007.  Within months, the borrower defaulted.  In 2012, the deed of trust was assigned to U.S. Bank as trustee for SASCO Mortgage Loan Trust, and in 2014 the deed of trust was assigned to DLJ Mortgage.  All of the assignments were duly recorded.  DLJ Mortgage promptly recorded a notice of default.

The borrower sued, attempting to invalidate the deed of trust.  Even though CIT had assigned the deed of trust and recorded the assignment, the borrower named only CIT as a defendant and then failed to even properly serve CIT.  Somehow, the borrower convinced the superior court to enter a default judgment quieting title to the property against CIT “and its successors in interest.”

The Quiet Title Judgment was entered in 2015, and in 2016 the superior court entered an order expunging the deed of trust and declaring it void for all purposes.  Also in 2016, apparently unaware of the borrower’s court proceedings, DLJ Mortgage assigned the deed of trust to U.S. Bank.

Eventually, in 2017, the borrower’s shenanigans were exposed, and the superior court granted a motion to set aside the 2015 Quiet Title Judgment.

But before the Quiet Title Judgment was declared void, the borrower incurred a new loan and the new lender (Tsasu LLC) recorded a deed of trust on the property.  Tsasu’s deed of trust was recorded in 2016 — just one month after the superior court entered its initial Quiet Title Judgment, and a year before the Quiet Title Judgment was declared void.

Litigation erupted between Tsasu and U.S. Bank as to which lien had priority.  Tsasu argued that under section 764.060, it was a bona fide encumbrancer lacking actual knowledge of the Quiet Title Judgment’s invalidity.

After the trial court ruled in favor of U.S. Bank, Tsasu appealed.

Court of Appeal: constructive knowledge counts

The Court of Appeal affirmed the trial court’s judgment in favor of U.S. Bank.

The court held that section 764.060’s requirement of “no knowledge” means “no actual and no constructive knowledge.”  This interpretation, the court held, was consistent with the statute’s plain language, since “knowledge” (unless otherwise limited) generally “encompasses both actual knowledge and constructive knowledge.”

As such, even though Tsasu might have lacked actual knowledge of the Quiet Title Judgment being void, it could not rely on the statute for protection if it had constructive knowledge.

The evidence showed that Tsasu had constructive knowledge.  The record of title for the property showed that the sole named defendant in the borrower’s Quiet Title Judgment was CIT, and that CIT had assigned its deed of trust years earlier.  Based on the recorded documents, the Quiet Title Judgment was flawed on its face.  The court concluded: “Because these documents were recorded, Tsasu had constructive knowledge of the defect or irregularity in the 2015 Quiet Title Judgment.”

As a result, the CIT deed of trust, which was recorded first in time, had priority over the Tsasu deed of trust.

Lesson

Anyone claiming to be a “bona fide purchaser or encumbrancer” in order to rely on a quiet title judgment that is later declared void must show lack of actual and constructive knowledge of the judgment’s invalidity.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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