Case Name:   City of Morgan Hill v. Porzio, et al.

Case No.:       1-14-CV-265762

 

This action arises from the alleged transfer of real property commonly known as 15145 Bellini Way in Morgan Hill (the “Property”) in contravention of the City of Morgan Hill’s (the “City”) Below Market Rate (“BMR”) Program.

 

The City alleges that defendant Kim Porzio (“Porzio”) purchased the Property through the BMR Program and thereby promised to abide by the terms of an April 30, 2004 agreement with the City that restricted her ability to encumber or sell the Property (the “Restriction Agreement”).  (Complaint, ¶¶ 16-18.)  Porzio subsequently refinanced her original loan several times in violation of the Restriction Agreement and without notifying the City as required.  (Complaint, ¶¶ 26-32.)  Porzio defaulted on one of the prohibited loans, which had been provided by defendant Provident Funding Associates, LP (“Provident”), and defendant Seaside Trustee, Inc. (“Seaside”) recorded a notice of default and notice of sale, which the City did not receive.  (Complaint, ¶¶ 33-36.)  At the February 26, 2014 trustee sale, Seaside sold the Property to defendants James Doyle (“Doyle”) and Duquette Properties (“Duquette”).  (Complaint, ¶ 37.)  Seaside disbursed the surplus funds to Porzio, and Doyle and Duquette entered into an agreement to sell the Property to an unknown third party, a sale which was pending at the time the complaint was filed.  (Complaint, ¶¶ 38-39.)

 

On May 27, 2014, the City filed this action against Porzio, Provident, Seaside, Doyle, and Duquette (collectively, “Defendants”), asserting claims for: (1) declaratory relief (against all Defendants); (2) wrongful foreclosure (against all Defendants); (3) quiet title (against all Defendants); (4) breach of contract (against Porzio); (5) fraud (against Porzio and Provident); (6) intentional interference with contractual relationship (against Provident); (7) breach of Civil Code sections 2924j and 2924b (against Seaside); (8) constructive trust (against Porzio); and (9) common count for money had and received (against Porzio).

 

At issue are the separate demurrers of (1) Provident and Seaside and (2) Doyle and Duquette.

 

Provident and Seaside’s Demurrer

 

Provident and Seaside demur to the first, second, third, fifth, and sixth causes of action on the ground that they fail to state facts sufficient to constitute causes of action.  (Code Civ. Proc., § 430.10, subd. (e).)

 

Request for Judicial Notice

 

In support of their demurrer, Provident and Seaside request judicial notice of: (1) the original deed of trust recorded in connection with Porzio’s purchase of the Property; (2) the Restriction Agreement; (3) a request for notice recorded by the City in connection with the Property; (4)-(12) subsequent deeds of trust, substitutions of trustee, and reconveyances recorded in connection with the Property; (13)-(15) the notice of default, notice of trustee’s sale, and trustee’s deed upon sale recorded in connection with the foreclosure sale at issue; (16) the grant deed by which Doyle transferred the Property to Astrid Angela Giblin; (17) a deed of trust recorded in connection with a loan to Ms. Giblin; and (18) a notice of pendency of the present action recorded by counsel for the City.

 

The City does not oppose Provident and Seaside’s request, and the request is GRANTED given that the authenticity of these documents is not challenged.  (See Evid. Code § 452, subd. (h) [facts and propositions that are not reasonably subject to dispute and are capable of immediate and accurate determination by resort to sources of reasonably indisputable accuracy are an appropriate subject of judicial notice]; Fontenot v. Wells Fargo Bank, N.A. (2011) 198 Cal.App.4th 256, 264 [“courts have taken judicial notice of the existence and recordation of real property records, including deeds of trust, when the authenticity of the documents is not challenged”].)

 

First Cause of Action for Declaratory Relief

 

Provident and Seaside contend that the first cause of action fails because it does not seek to determine a present controversy between the parties and is moot considering the loan and deed of trust associated with the Provident loan no longer exist following the trustee sale.  The City contends that there is a present controversy over the validity of the Provident deed and the subsequent conveyances of the Property.  However, the City’s argument does not address the point that Provident and Seaside have no present claim of right to or involvement with the Property.  Further, the City’s claim for declaratory relief is duplicative in light of its claims for wrongful foreclosure and to quiet title.  Under these circumstances, the Court agrees that declaratory relief is improper.  (See Cal. Ins. Guar. Ass’n v. Super. Ct. (Jakes at the Shore, Inc.) (1991) 231 Cal.App.3d 1617, 1624 [the object of the declaratory relief statute is to afford a new form of relief where needed and not to furnish a litigant with a second cause of action for the determination of identical issues]; Cardellini v. Casey (1986) 181 Cal.App.3d 389, 396 [claim for declaratory relief inappropriate where the rights of the complaining party “have crystallized into a cause of action for past wrongs” and “no continuing relationship exists to justify a declaration of future rights”]; Otay Land Co. v. Royal Indem. Co. (2008) 169 Cal.App.4th 556, 562-563 [on demurrer, courts will evaluate whether the factual allegations of a complaint for declaratory relief reveal that an actual controversy exists between the parties; determination that declaratory relief is not necessary or proper under the circumstances is discretionary]; Mangindin v. Wash. Mut. Bank (N.D. Cal. 2009) 637 F.Supp.2d 700, 707-708 [district court dismissed declaratory relief claim as duplicative and unnecessary where plaintiffs sought declaration that defendants did not have the right to foreclose in addition to bringing a variety of claims challenging foreclosure].)

 

Provident and Seaside’s demurrer to the first cause of action is consequently SUSTAINED WITH 10 DAYS’ LEAVE TO AMEND.

 

Second Cause of Action for Wrongful Foreclosure

 

Provident and Seaside argue that the City’s claim for wrongful foreclosure fails because (1) the sale was perfected pursuant to Civil Code section 2924, et seq., (2) the sale is conclusively valid since the Property was sold to consecutive bona fide purchasers for value, (3) the loan and sale were valid under the terms of the Restriction Agreement, (4) the City fails to allege facts demonstrating that the sale was illegal, fraudulent, or willfully oppressive, (5) it is undisputed that Porzio failed to make payments on the loan at issue, (6) the City has not pled a valid tender of the amount owed, and (7) the City fails to allege it was prejudiced by the foreclosure.

 

“[T]he elements of an equitable cause of action to set aside a foreclosure sale are: (1) the trustee or mortgagee caused an illegal, fraudulent, or willfully oppressive sale of real property pursuant to a power of sale in a mortgage or deed of trust; (2) the party attacking the sale (usually but not always the trustor or mortgagor) was prejudiced or harmed; and (3) in cases where the trustor or mortgagor challenges the sale, the trustor or mortgagor tendered the amount of the secured indebtedness or was excused from tendering.”  (Lona v. Citibank, N.A. (2011) 202 Cal.App.4th 89, 104.)  Courts have the power to vacate a foreclosure sale where the trustee did not have the power to foreclose or the deed of trust was void.  (Id. at pp. 104-105.)

 

Here, the City alleges that the deed of trust was void pursuant to the terms of the Restriction Agreement and Seaside did not have the power to foreclose.  (Complaint, ¶ 32.)  The Restriction Agreement provides that any refinancing or encumbrancing of the Property must be approved by the City or is otherwise voidable, and that a notice of default triggers the City’s preemptive right to purchase the Property.  (Complaint, ¶¶ 20-25.)  Provident and Seaside note that paragraph 16 of the Restriction Agreement indicates that the agreement is “subordinate to any deed of trust or mortgage on the premises made by or held by an institutional lender or investor.  Any party … receiving title to the Premises through a trustee’s sale … and any conveyance or transfer thereafter, shall receive title free and clear of the provisions of this Agreement.”  (Provident and Seaside’s Request for Judicial Notice, Ex. 2, Restriction Agreement, ¶ 16.)  However, as urged by the City, the Restriction Agreement is clear that paragraph 16 applies only where the City declines its right of first refusal, which did not happen here.  (Id. at ¶ 10.)  Accordingly, nothing on the face of the Restriction Agreement undermines the City’s allegations that it renders the deed of trust and the foreclosure sale void.  Provident and Seaside’s third and fourth arguments consequently fail.[1]

 

As to Provident and Seaside’s first and second arguments, pursuant to Civil Code section 2924, et seq., “there is a conclusive statutory presumption created in favor of a bona fide purchaser who receives a trustee’s deed that contains a recital that the trustee has fulfilled its statutory notice requirements.”  (Lona v. Citibank, N.A., supra, 202 Cal.App.4th 89 at pp. 105-106.)  However, bona fide status, which is generally a question of fact, is defeated by actual or constructive notice of an adverse interest, and buyers are deemed to have constructive knowledge of previously recorded documents.  (612 South LLC v. Laconic Limited Partnership (2010) 184 Cal.App.4th 1270, 1278-1279.)  Here, the City alleges that the Restriction Agreement was recorded prior to Seaside’s sale of the Property (Complaint, ¶ 18), which could be found to give subsequent buyers constructive notice of the City’s interest and defeat their claim to bona fide status.  Provident and Seaside’s first and second arguments thus lack merit.

 

Provident and Seaside’s fifth and sixth arguments also fail, because the tender requirement and the asserted requirement that a plaintiff must establish the borrower made required payments on the loan apply only to the mortgagor, not the City.[2]  (See Lona v. Citibank, N.A., supra, 202 Cal.App.4th at p. 104; Parcray v. Shea Mortg., Inc. (E.D. Cal., Apr. 23, 2010, No. CV-F-09-1942 OWW/GSA) 2010 U.S. Dist. LEXIS 40377, *35 [“[a]n action for the tort of wrongful foreclosure will lie [only] if the trustor or mortgagor can establish that at the time the power of sale was exercised or the foreclosure occurred, no breach of condition or failure of performance existed on the mortgagor’s or trustor’s part which would have authorized the foreclosure or exercise of the power of sale”], quoting Roque v. Suntrust Mortg., Inc. (N.D. Cal., Feb. 10, 2010, No. C-09-00040 RMW) 2010 U.S. Dist. LEXIS 11546, citing Nevada law.)  Finally, the seventh argument fails because the City’s allegations that it was denied its right of first refusal and its right to surplus funds clearly demonstrate prejudice to the City.

 

Provident and Seaside’s demurrer to the second cause of action is thus OVERRULED.

 

Third Cause of Action for Quiet Title

 

Provident and Seaside contend that the third cause of action fails, among other reasons, because California does not recognize a challenge to title by an owner of a merely equitable interest in property, and the City does not even have an equitable claim to title.  The City concedes that the general rule in California is that an owner of an equitable interest may not maintain a quiet title action against an owner of legal title, but argues that it can quiet title against Provident and Seaside, who also have only equitable interests (if any) in the Property.  This argument has merit (Dement v. Pierce (1932) 122 Cal.App. 254, 257 [equitable owner may seek to have his interest declared paramount to that of the holder of an equitable claim against the property]), and the City adequately alleges an equitable claim to the Property.

 

Provident and Seaside also argue that they are improper parties to a quiet title action because they have no current adverse claim to the Property.  The City argues that a quiet title action against these defendants is authorized by Code of Civil Procedure section 762.020, subdivision (b).  This action provides that a plaintiff shall state in the complaint if the claim or share or quantity of the claim of a person with an adverse interest in property is unknown, uncertain, or contingent, and thus indicates that it is permissible to quiet title against a person with such an interest.  The City has adequately pleaded a claim against Provident and Seaside based on their former claims to the Property, although their current claims are uncertain.

 

Provident and Seaside further contend that the City has failed to allege it paid the debt owed on the Property.  However, as discussed above, the City is not required to include such allegations because it is not the mortgagor.  Finally, Provident and Seaside argue that the City’s complaint fails because it is unverified, but the City correctly responds that a public entity need not verify its complaint.  (Code Civ. Proc., § 446, subd. (a) [city need not verify its complaint]; Murrieta Valley Unified School Dist. v. County of Riverside (1991) 228 Cal.App.3d 1212, 1223 [section 446 exempts public entities from verification requirements that are not specifically made applicable to public entities].)

 

In light of the above, Provident and Seaside’s demurrer to the third cause of action is OVERRULED.

 

Fifth Cause of Action for Fraud

 

Provident and Seaside contend that the fifth cause of action for fraud, which is alleged against Provident and Porzio only, fails for a number of reasons.

 

Provident and Seaside argue that the City fails to allege reliance on any misrepresentation or concealment by Provident, as opposed to Porzio.  The City counters that it would have disapproved of the Provident loan had Porzio disclosed the loan as required, and Provident is liable for Porzio’s omission because it knew of it and nonetheless agreed to provide Porzio with a loan.  (See McClung v. Watt (1922) 190 Cal. 155, 161 [“one who accepts the fruits of a fraud, with knowledge of the misrepresentations or concealments by which the fraud was perpetrated, thereby inferentially ratifies the fraud complained of and will be liable therefor even though he did not personally participate in the fraud”].)  This theory has merit and is adequately alleged in the complaint.  (See Complaint, ¶¶ 67-74.)

 

Provident and Seaside also contend that the gravamen of this claim is based in contract, so a tort claim should be disallowed.  However, the courts recognize that a claim for fraudulent concealment may arise from a contractual relationship.  (See Kovich v. Paseo Del Mar Homeowners’ Assn. (1996) 41 Cal.App.4th 863, 870 [duty to disclose for purposes of a fraudulent concealment claim may arise from contract].)  The case cited by Provident and Seaside, which deals with the propriety of recognizing a claim for tortious breach of the implied covenant of good faith and fair dealing in the employment context, is inapposite.  (See Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654.)

 

Finally, Provident and Seaside contend that the City’s fraud claim is not pleaded with adequate specificity.  This argument has merit given that the City fails to allege, for example, the details of who at Provident knew of and ratified Porzio’s concealment and when this ratification occurred.  (See Charnay v. Cobert (2006) 145 Cal.App.4th 170, 185, fn. 14 [fraud must be pleaded with particularity and by facts that show how, when, where, to whom, and by what means the representations were tendered].)

 

Provident and Seaside’s demurrer to the fifth cause of action is consequently SUSTAINED WITH 10 DAYS’ LEAVE TO AMEND.

 

Sixth Cause of Action for Intentional Interference with Contractual Relationship

 

Provident and Seaside demur to the sixth cause of action, which is alleged against Provident only, on the basis that the City fails to plead each element of such a claim with factual specificity.  As an initial matter, to the extent that Provident and Seaside contend that a heightened pleading requirement applies to a claim for intentional interference with a contractual relationship, there is no support for this position.  Here, the City adequately alleges that Provident knew of the Restriction Agreement and induced Porzio to breach it by issuing her a loan without the City’s approval.  (See Complaint, ¶¶ 80-85.)

 

While Provident and Seaside further contend that the existence of four prior unauthorized loans shows that Provident did not intend to interfere with the Restriction Agreement, this argument goes to a factual issue inappropriate for resolution on demurrer.  Provident and Seaside’s related argument that the prior loans, as opposed to its loan, disrupted the Restriction Agreement also lacks merit, given that the Provident loan encumbered the Property just as the prior loans did and it was the Provident loan that was ultimately foreclosed upon.

 

Finally, Provident and Seaside argue that the independent wrongfulness requirement is not satisfied here, but the City correctly contends that this requirement does not apply to a claim for interference with an existing contract.  (See Quelimane Co. v. Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, 55 [“Because interference with an existing contract receives greater solicitude than does interference with prospective economic advantage [citation], it is not necessary that the defendant’s conduct be wrongful apart from the interference with the contract itself.”].)

 

Provident and Seaside’s demurrer to the sixth cause of action is consequently OVERRULED.

 

Doyle and Duquette’s Demurrer

Doyle and Duquette demur to the first, second, and third causes of action on the ground that they fail to state facts sufficient to constitute causes of action.  (Code Civ. Proc., § 430.10, subd. (e).)

 

Request for Judicial Notice

 

Like Provident and Seaside, Doyle and Duquette seek judicial notice of: (1) the trustee’s deed upon sale associated with the foreclosure sale of the Property; (2) the grant deed transferring the Property to Ms. Giblin; and (3) the notice of pendency of action recorded by the City’s counsel.  The City does not oppose this request, and the request is GRANTED for the reasons discussed with respect to Provident and Seaside’s request.

 

First Cause of Action for Declaratory Relief

 

Doyle and Duquette contend that the first cause of action fails because they no longer own the Property, among other arguments.  The Court agrees, and Doyle and Duquette’s demurrer to the first cause of action is SUSTAINED WITH 10 DAYS’ LEAVE TO AMEND for the reasons discussed in connection with Provident and Seaside’s demurrer to this claim.

 

Second Cause of Action for Wrongful Foreclosure

 

Doyle and Duquette argue that the second cause of action does not state a claim against them because they did not conduct the challenged foreclosure sale.  However, the complaint alleges that Doyle and Duquette purchased the Property through the challenged sale, and the City seeks to vacate the sale through its claim for wrongful foreclosure.  (See Santos v. Countrywide Home Loans, 2009 U.S. Dist. LEXIS 103453 (E.D. Cal., Nov. 5, 2009, No. Civ. 2:09-02642 WBS DAD) [wrongful foreclosure is an action in equity, where a plaintiff seeks to set aside a foreclosure sale].)  Consequently, Doyle and Duquette are proper parties to the second cause of action.  (See Washington Mutual Bank v. Blechman (2007) 157 Cal.App.4th 662, 668 [“When a party seeks to set aside and vacate a trustee’s sale in a foreclosure proceeding, there can be no doubt that the parties to the sale transaction are indispensable parties.”].)

 

            Doyle and Duquette’s demurrer to the second cause of action is accordingly OVERRULED.

 

Third Cause of Action for Quiet Title

 

Finally, as urged by Doyle and Duquette, the third cause of action fails because the City seeks a determination of its title in the Property as of a date other than the date when the complaint was filed, but does not allege the reasons why a determination as of that date (April 13, 2013) is sought.  (Code Civ. Proc., § 761.020, subd. (d).)  While the City offers an explanation in its opposition papers, the statute requires that these reasons be alleged in the complaint.

 

Doyle and Duquette’s demurrer to the third cause of action is consequently SUSTAINED WITH 10 DAYS’ LEAVE TO AMEND.

 

The currently-scheduled date for case management conference (9-23-14 at 3:45 p.m.) is CONTINUED to November 4, 2014 at 10:00 a.m. in Department 5.

 

[1] In their reply brief, Provident and Seaside contend that the City’s allegations establish only that the deed of trust was voidable, as opposed to void ab initio, and the deed is consequently enforceable by bona fide purchasers.  (See Fallon v. Triangle Management Servs. (1985) 169 Cal.App.3d 1103, 1106.)  However, as discussed below, the City alleges that any individuals who purchased the Property after the Restriction Agreement was recorded were not bona fide purchasers.

[2] Provident and Seaside argue in their reply brief that the tender requirement applies to anyone seeking to cancel a trustee’s sale, citing Arnolds Management Corp. v. Eischen (1984) 158 Cal.App.3d 575, 577 (hereinafter, “Arnold”), which applied it to a junior lienor.  However, Arnoldhas been criticized
(see United States Cold Storage v. Great Western Savings & Loan Assn. (1985) 165 Cal.App.3d 1214, 1226 [holding Arnold did not apply retroactively and junior lienor stated a claim notwithstanding its failure to allege tender]) and is factually distinguishable from this action, while other authority supports the conclusion that only those actually liable for a debt are required to allege tender (see Humboldt Sav. Bank v. McCleverty (1911) 161 Cal. 285, 291 [homesteader whose husband had taken out a loan against the homestead property was not required to allege tender in order to challenge the sale of the property; “The debt was not hers, and she was not liable for any part of it.”]).  While Provident and Seaside contend that it would be inequitable to allow the City to invoke its right to purchase the Property without offering to tender the amount owed on the loan, this argument lacks merit because the amount owed and the sale price are not necessarily related, and the City is attacking the loan itself.  (See Onofrio v. Rice (1997) 55 Cal.App.4th 413, 424 [tender not required if the action attacks the validity of the underlying debt].)