Case Name:        Jenhon Liu v. CitiMortgage, Inc., et al.

Case No.:            1-13-CV-257216

Defendant Lion Share Investments, LLC (“Lion Share”) demurs to the fifth, sixth, and seventh causes of action (for quiet title, to set aside trustee’s deed, and for declaratory relief, respectively) of the second amended complaint (“SAC”) of plaintiff Jenhon Liu (“Liu”), on the ground of failure to state facts sufficient to constitute a cause of action. (Code Civ. Proc.,
§ 430.10, subd. (e).)

Request for Judicial Notice

In support of its demurrer, Lion Share asks the Court to take judicial notice of a copy of the trustee’s deed upon sale, recorded on August 21, 2013. Courts may take judicial notice of the existence and recordation of real property records, when the authenticity of the documents is not challenged. (See Fontenot v. Wells Fargo Bank, N.A. (2011) 198 Cal.App.4th 256, 264-265.) Here, Liu does not challenge the authenticity of the trustee’s deed upon sale. Thus, Lion Share’s request for judicial notice is GRANTED.

Bona Fide Purchaser for Value

Lion Share contends that it is a bona fide purchaser for value of the property at issue. Thus, it reasons that any fraud or error chargeable to CitiMortgage does not constitute a basis for maintaining a cause of action against Lion Share. In opposition, Liu asserts that CitiMortgage lacked a contractual basis to sell his property at the foreclosure sale because he made all of his monthly mortgage payments, CitiMortgage unnecessarily purchased property insurance on his behalf, and CitiMortgage charged him for the costs of these policies, plus interest and late fees. Thus, Liu argues that the trustee’s sale was void and, as a result, Lion Share’s status as a bona fide purchaser for value does not immunize it from an action to set aside the trustee’s sale.

The parties primarily rely on two cases concerning the effect of a third party’s status as a  bona fide purchaser for value on the validity of a foreclosure sale: Melendrez v. D & I Instrument (2005) 127 Cal.App.4th 1238 (“Melendrez”) and Bank of America v. La Jolla Group, II (2005) 129 Cal.App.4th 706 (“La Jolla”).

In Melendrez, the Court of Appeal relied upon the general proposition that a trustor cannot set aside a foreclosure sale against a bona fide purchaser for value based on irregularities in the foreclosure sale process, except in the case of fraud. (Melendrez, supra, 127 Cal.App.4th 1238 at p. 1256.) In particular, the Court of Appeal cited Strutt v. Ontario Sav. & Loan Assn. (1970) 11 Cal.App.3d 547 for the proposition that it is well established that a subsequent good faith purchaser for value, and without notice of the fraud, takes title free of any equity of the person defrauded. (Melendrez, supra, 127 Cal.App.4th at pp. 1257-1258.) The Court reasoned that as the third party was not on notice of the repayment agreement, there was no basis for setting aside the sale. (Id.)

In La Jolla, the Court of Appeal stated that a power of sale in a deed of trust is a creature of contract, arising from the parties’ agreement. (La Jolla, supra, 129 Cal.App.4th at p. 712) Thus, a beneficiary may only exercise its power of sale in the event a default occurs. (Id.) If no default occurs, there is no contractual basis for the exercise of the power of sale. (Id.) The Court rejected that argument that a trustee’s deed conveyed unassailable title to a bona fide purchaser. (Id. at p. 713.) It indicated that the common law and statutory presumptions that a trustee sale is conducted fairly only apply to the conduct of the trustee’s sale, not the underlying basis for the foreclosure sale, such as the absence of a default. (Id. at p. 714.)

The decisions in the Melendrez and La Jolla cases depend upon the characterization of the underlying foreclosure sale as either “void” or “voidable.” In this regard, the Melendrez court premised its decision on the proposition expressed in Strutt v. Ontario Sav. & Loan Assn. (1970) 11 Cal.App.3d 547 that a trustor cannot set aside a foreclosure sale against a bona fide purchaser for value except in the case of fraud. (Melendrez, supra, 127 Cal.App.4th at 1257.)The Strutt court, however, limited this proposition to circumstances when a trustee’s sale may have been “voidable.” (Strutt, supra, 11 Cal.App.3d at p. 554.) In contrast, the La Jolla court disregarded this presumption because it found that the absence of a contractual basis to exercise the power of sale clause in the deed of trust rendered the subsequent deed upon sale “void” as opposed to “voidable.” (La Jolla, supra, 129 Cal.App.4th at pp. 713-715; see also Little v. Cfs Service Corp. (1987) 188 Cal.App.3d 1354, 1362 [where sale void, it has no legal effect and cannot be enforced].) A foreclosure sale is generally considered to be “void” where the lender lacks the contractual basis to exercise the power of sale. (See Chavez v. Indymac Mortgage Services (2013) 219 Cal.App.4th 1052, 1063.)

Here, Liu alleges that there was no contractual basis for the exercise of the power of sale because he never defaulted under the terms of the deed of trust. The Deed of Trust reads, in pertinent part:

“5. … Borrower shall keep the improvements now existing or hereafter erected on the Property insured against loss by fire … and any other hazards … for which Lender requires insurance. This insurance shall be maintained in the amounts and for the periods that Lender requires…. If Borrower fails to maintain coverage described above, Lender may, at Lender’s option, obtain coverage to protect Lender’s right in the Property in accordance with paragraph 7. [¶] … 7. … Any amounts disbursed by Lender … shall become additional debt of Borrower secured by this Security Instrument. Unless Borrower and Lender agree to other terms of payment, these amounts shall bear interest from the date of disbursement at the Note rate and shall be payable, with interest, upon notice from Lender to Borrower requesting payment.”

Liu interprets this language to mean that any amounts disbursed by the Lender (CitiMortgage) to obtain coverage become additional debt only if the Borrower (Liu) failed to maintain adequate insurance. Liu alleges that he has continually maintained adequate property insurance on the property at all times. (See SAC, p. 4:17-18.) Assuming this is a proper interpretation of the deed of trust (see Aragon-Haas v. Family Security Ins. Services, Inc. (1991) 231 Cal.App.3d 232, 239 [general demurrer admits not only the contents of a pleaded contract, but also any meaning to which the instrument is reasonably susceptible]), the amounts disbursed by CitiMortgage for excess insurance would not constitute additional debt. Thus, Liu alleges that he has made all contractual payments required under the terms of the deed of trust, and is therefore not in default.

Accordingly, Liu adequately alleges that CitiMortgage lacked a contractual basis to exercise its power of sale and therefore, the foreclosure sale was “void” as opposed to “voidable.” Given that a “void” sale may be set aside even as to a bona fide purchaser, Lion Share’s demurrer on the basis that its status as a bona fide purchaser grants it immunity from suit is without merit. As Lion Share does not contend that these causes of action are otherwise insufficient, Lion Share’s demurrer to the fifth, sixth, and seventh causes of action for quiet title, to set aside trustee’s deed, and for declaratory relief, respectively, is OVERRULED.