Must Purchaser of Property in Foreclosure Sale Perfect Title before Eviction?

In the recent decision in Homeward Opportunities Fund I Trust v. Taptelis, the California Court of Appeal ruled that upon purchasing property in a nonjudicial foreclosure sale under a borrower’s deed of trust, the new owner must perfect title under the sale before seeking to evict the trustor/borrower.

Although the recording of a trustee’s deed is typically sufficient to raise a conclusive presumption of title under the sale as to a bona fide purchaser for value without notice, plaintiff Homeward Opportunities Fund I Trust (Homeward), the beneficiary under a deed of trust executed by defendant-borrower Ilias Louie Taptelis, purchased the trust property subject to Taptelis’s duly recorded lis pendens, and its notice of Taptelis’s pending wrongful foreclosure action.

Homeward thereafter served Taptelis with notice to quit the premises and obtained a judgment of unlawful detainer against him, without first expunging the lis pendens.

Because the lis pendens clouded Homeward’s title under the sale, and Taptelis was denied the opportunity to assert it in the unlawful detainer trial as a defense to Homeward’s claim of title, the unlawful detainer judgment was reversed.

Taptelis borrowed $1.24 million from Recovco Mortgage Management to purchase property located at Fennel Court. To secure the loan, he executed a Deed of Trust.

Taptelis defaulted on the loan, a Notice of Default and Election to Sell Under Deed of Trust was recorded.

As stated in the Notice of Default, Taptelis needed to pay $87,221.09 to cure the default.

The Notice of Trustee’s Sale was recorded.

Two weeks later, Taptelis filed a civil action challenging the foreclosure and naming various involved entities as defendants, including Homeward. 

Two days prior to the foreclosure sale, Taptelis had a lis pendens recorded in connection with the wrongful foreclosure action.

The Santa Clara County recorded Quality’s Trustee’s Deed Upon Sale, and the Fennel Court property was sold to Homeward pursuant to the Deed of Trust through a public auction.

Homeward served notice to quit on Taptelis. Taptelis did not vacate the property, so Homeward initiated the unlawful detainer suit.

Homeward filed its verified unlimited civil unlawful detainer complaint, and alleged that it had obtained ownership of the property pursuant to a nonjudicial foreclosure. Homeward sought to wrest possession of the property from Taptelis.

On appeal, Taptelis made a series of contentions ranging from threshold challenges to Homeward’s unlawful detainer action to fallback challenges to the evidence on which the trial court relied.

The appellate court rejected Homeward’s contention that Taptelis’s appeal was moot and concluded that the title under the trustee’s sale had not been duly perfected because Homeward had resolved neither the lis pendens nor the underlying litigation.

As Taptelis noted, even if he could no longer regain possession of the property, his appeal was not moot because a reversal would potentially entitle him to restitution.

Upon default by the trustor, the beneficiary may declare a default and proceed with a nonjudicial foreclosure sale.

The foreclosure process is commenced by the recording of a notice of default and election to sell by the trustee.

After the notice of default is recorded, the trustee must wait approximately three calendar months before proceeding with the sale.

After the specified time period has elapsed, a notice of sale must be published, posted and mailed at least 20 days before the sale and recorded at least 20 days before the sale.

The property must be sold at public auction to the highest bidder.

The trustee’s sale is deemed final upon the acceptance of the last and highest bid, and shall be deemed perfected as of 8 a.m. on the actual date of sale if the trustee’s deed is recorded within 21 calendar days after the sale.

A recital in the trustee’s deed of compliance with all requirements regarding service of the notice of default shall constitute prima facie evidence of compliance and conclusive evidence thereof in favor of bona fide purchasers for value and without notice.

Thus, once a deed reciting that all legal requirements have been satisfied has been transferred to a buyer at a foreclosure sale, the sale can be successfully attacked on the grounds of procedural irregularity only if the buyer is not a bona fide purchaser.

A bona fide purchaser is one who has purchased property for value without notice of any defects in the title of the seller.

Notice of a pending action, or a lis pendens, may be recorded in an action which would, if meritorious, affect title to, or the right to possession of, specific real property.

Although the pendency of the action does nothing to confer any rights in the property in and of itself, the recording of the lis pendens provides constructive notice of the litigation, such that any judgment later obtained in the action relates back to the filing of the lis pendens.

A lis pendens clouds title until the litigation is resolved or the lis pendens is expunged, and any party acquiring an interest in the property after the action is filed will be bound by the judgment.

In other words, a party obtaining an interest in the property subsequent to the lis pendens takes with constructive notice of the pending action and will be bound by the judgment in that action.

If the pleading filed by the claimant does not properly plead a real property claim, the lis pendens must be expunged upon motion.

On such motions, the court shall direct that the prevailing party be awarded the reasonable attorney’s fees and costs of making or opposing the motion unless the court finds that the other party acted with substantial justification or that other circumstances make the imposition of attorney’s fees and costs unjust.

Unlawful detainer actions are authorized and governed by Code of Civil Procedure section 1161 et seq. The statutory scheme is intended and designed to provide an expeditious remedy for the recovery of possession of real property.

Unlawful detainer actions are of limited scope, generally dealing only with the issue of right to possession and not other claims between the parties, even if related to the property.

As a result, an unlawful detainer judgment usually has limited res judicata effect and will not prevent one who is dispossessed from bringing a subsequent action to resolve questions of title.

Where the property has been sold under a power of sale contained in a deed of trust executed by the holdover possessor, or a person under whom such person claims, 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 he has purchased, valid and good beyond all reasonable doubt which includes good record title, but is not limited to good record title, as between the parties to the transaction. The court in an unlawful detainer action has jurisdiction to determine the validity of such defenses.

However, an unlawful detainer action does not permit the defendant to litigate every possible issue related to the plaintiff’s claim of ownership. Matters affecting the validity of the trust deed or primary obligation itself, or other basic defects in the plaintiff’s title, are neither properly raised in this summary proceeding for possession, nor are they concluded by the judgment.

The parties disputed whether anything beyond recordation of the trustee’s deed was necessary for Homeward to duly perfect title under the sale, clearing the way for the service of the notice to quit.

In Taptelis’s view, Homeward needed to at least expunge each lis pendens he had noticed (or else resolve the wrongful foreclosure litigation altogether) to duly perfect title. The trial court effectively rejected this view, precluding Taptelis from introducing evidence of the lis pendens or the pending wrongful foreclosure litigation.

The new owner must perfect title before serving the three-day written notice to quit.

A notice to quit served before the condition is satisfied is premature and void.

As Homeward acknowledged, Taptelis’s lis pendens clouded title. Because the lis pendens was recorded prior to the foreclosure sale (a sale in fact conducted for Homeward’s benefit), Homeward was on notice of that cloud on title before it nominally purchased the property from Quality, the trustee Homeward had selected.

Insofar as the propriety of Taptelis’s lis pendens could not be litigated in the unlawful detainer action itself, Homeward was required to, at its option, 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.

It was undisputed that Homeward did not resolve Taptelis’s lis pendens at any time prior to entry of judgment in this unlawful detainer action.

Accordingly, Homeward improperly prosecuted and prevailed on its unlawful detainer action while Taptelis’s lis pendens continued to cloud Homeward’s title.

LESSONS:

1.         Where the property has been sold under a power of sale contained in a deed of trust executed by the holdover possessor, or a person under whom such person claims, a plaintiff seeking a judgment of unlawful detainer must establish that the title under the sale has been duly perfected.

2.         Upon default by the trustor, the beneficiary may declare a default and proceed with a nonjudicial foreclosure sale. The foreclosure process is commenced by the recording of a notice of default and election to sell by the trustee. After the notice of default is recorded, the trustee must wait approximately three calendar months before proceeding with the sale.

3.         Because the lis pendens clouded Homeward’s title under the sale, and Taptelis was denied the opportunity to assert it in the unlawful detainer trial as a defense to Homeward’s claim of title, the unlawful detainer judgment was reversed.