Case Name: The Bank of New York Mellon, FKA The Bank of New York as Trustee for the Certificateholders of the CWABS, Inc., Asset-Backed Certificates, Series 2006-18 v. City of Morgan Hill, et al.

Case No.: 1-15-CV-279257

Motion for Summary Judgment and Summary Adjudication by plaintiff/cross-defendant The Bank of New York Mellon FKA The Bank of New York as Trustee for the Certificateholders of the CWABS, Inc., Asset-Backed Certificates, Series 2006-18

On or about October 8, 2002, Robert J. Smyser and Janie M. Smyser (“Smysers”) purchased property located at 19091 Saffron Drive in the city of Morgan Hill (“Subject Property”). (Complaint, ¶¶1 and 7.) In conjunction with the purchase, the Smysers obtained a loan in the original principal amount of $152,480 from First Nationwide Mortgage Corporation (“First Nationwide Loan”) secured by a first deed of trust recorded against the Subject Property on October 8, 2002 (“First Nationwide DOT”) and a loan in the original principal amount of $6,500 from the Housing Trust of Santa Clara County (“Housing Trust Loan”) secured by a second deed of trust recorded against the Subject Property on October 8, 2002 (“Housing Trust DOT”). (Complaint, ¶8.)

On or about March 16, 2006, the Smysers obtained a loan in the original principal amount of $325,000 from New Century Mortgage Corporation (“New Century Loan”) secured by a deed of trust recorded against the Subject Property on March 20, 2006 (“New Century DOT”), which paid off in full the First Nationwide Loan and the Housing Trust Loan and satisfied/extinguished the First Nationwide DOT and Housing Trust DOT, respectively. (Complaint, ¶9.)

On or about July 25, 2006, the Smysers obtained a loan in the original principal amount of $500,000 from Mortgage Now, Inc. (“Subject Loan”) secured by a deed of trust recorded against the Subject Property on August 7, 2006 (“Subject DOT”), which paid off in full the New Century Loan and satisfied/extinguished the New Century DOT. (Complaint, ¶¶2 and 9.)

On or about July 28, 2014, the Smysers filed for Chapter 13 bankruptcy. (Complaint, ¶4.)

Plaintiff The Bank of New York Mellon FKA The Bank of New York as Trustee for the Certificateholders of the CWABS, Inc., Asset-Backed Certificates, Series 2006-18 (“Bank”) is the current beneficiary of the Subject DOT. (Complaint, ¶¶1 – 2.)

Defendant City of Morgan Hill (“City”) claims an interest in the Subject Property or some part of it pursuant to a quitclaim deed given by the Smysers and recorded on February 20, 2015. (Complaint, ¶3.) City claims the Subject DOT is void and/or unenforceable based upon provisions of a document entitled Property Value Restrictions, Resale Agreement and Option to Purchase (“Resale Agreement”) recorded on October 8, 2002. (Complaint, ¶11.)

On April 10, 2015, the plaintiff Bank filed a complaint against defendant City asserting causes of action for:

(1) Declaratory Relief
(2) Quiet Title
(3) Judicial Foreclosure of Deed of Trust
(4) Equitable Subrogation
(5) Judicial Foreclosure of Equitable Lien

On May 21, 2015, defendant City filed a demurrer to the second and third causes of action in the complaint. On July 7, 2015, the court (Hon. Lucas) overruled defendant City’s demurrer.

On July 17, 2015, defendant City filed an answer to the Bank’s complaint. On the same date, defendant City also filed a cross-complaint against Bank and others. In its cross-complaint, City alleges that, for many years, it operated a program that offers residents with low and moderate incomes the opportunity to purchase a home below fair market value, the Below Market Rate (“BMR”) Program. (Cross-Complaint, ¶12.) To implement the program, City developed and enacted numerous regulations. (Cross-Complaint, ¶14.) Purchasers who participate in the BMR Program are subject to those regulations. (Cross-Complaint, ¶15.) The BMR Program regulations forbid owners from refinancing a BMR unit without City’s prior written notice and approval and restricted the amount that could be refinanced to 95% of the BMR value of the property. (Cross-Complaint, ¶16.) BMR Program regulations also imposed obligations and restrictions on lenders. (Cross-Complaint, ¶17.) Significantly, BMR Program regulations required lenders to prepare and record a request for notice of default so that City would be given notice of a homeowner’s default, an event that would trigger the City’s preemptive right to purchase the unit. (Id.)

On or about September 17, 2002, the Smysers entered into an agreement with City entitled. Property Value Restrictions, Resale Agreement and Option to Purchase (“Restriction Agreement”) setting forth the terms and restrictions of their purchase of the Subject Property. (Cross-Complaint, ¶18.) On October 8, 2002, the Restriction Agreement, along with two deeds of trust, and a grant deed were all duly recorded and properly indexed. (Cross-Complaint, ¶20.) City also duly recorded a Request for Notice of any default and sale under the First Nationwide DOT. (Id.) The Grant Deed also stated that it was “made and accepted subject to certain conditions contained in the document entitled ‘Resale Value Restrictions, Resale Agreement and Option to Purchase’ which is recorded concurrently herewith and incorporated herein by reference.” (Cross-Complaint, ¶21.)

The Restriction Agreement grants City the preemptive right to purchase the Subject Property. (Cross-Complaint, ¶24.) The Restriction Agreement also contains restrictions on the BMR Owner’s ability to transfer or encumber the Subject Property. (Cross-Complaint, ¶25.) The Restriction Agreement sets forth limits and procedures for refinancing the Subject Property. (Cross-Complaint, ¶26.) The Restriction Agreement gives City the right to declare a default and file suit in court to have a prohibited transfer declared void. (Cross-Complaint, ¶27.) The Restriction Agreement states that a default is deemed notice of intent to sell the Subject Property triggering the City’s right to repurchase. (Cross-Complaint, ¶28.)

When the Smysers refinanced the loan on the Subject Property with the Subject Loan, they did not provide City with prior written notice as required. (Cross-Complaint, ¶34.) City did not have prior knowledge and did not give prior approval of the Subject Loan or Subject DOT. (Id.) Had City known of the proposed loan transaction, City would not have consented because the amount was in excess of 95% of the BMR value, the maximum allowed under the Restriction Agreement and BMR Program regulations. (Id.) On information and belief, the Subject DOT was assigned to Bank. (Cross-Complaint, ¶37.)

Bank recorded a notice of default on or about July 15, 2014 stating the Smysers were $320,698.46 in arrears. (Cross-Complaint, ¶44.) City learned of the Smysers’ default shortly after Bank recorded the notice of default. (Cross-Complaint, ¶45.) City declared the Smysers in default and exercised its option to purchase the Subject Property, giving notice to the Smysers. (Cross-Complaint, ¶¶46 – 47.) In conducting further research, City learned the Smysers had encumbered the Subject Property in violation of the Restriction Agreement and the BMR Program regulations. (Cross-Complaint, ¶48.) On or about July 28, 2014, the Smysers filed for Chapter 13 bankruptcy. (Cross-Complaint, ¶49.) On or about August 8, 2014, City sent notice to the Smysers regarding the prohibited transfers. (Cross-Complaint, ¶50.) On or about October 28, 2014, City filed a motion in US Bankruptcy Court for an order allowing the Smysers to quitclaim the Subject Property to City. (Cross-Complaint, ¶52.) On November 28, 2014, the Bankruptcy Court approved City’s motion. (Id.) Thereafter, City recorded a quitclaim deed from the Smysers. (Cross-Complaint, ¶53.)

City’s cross-complaint asserts causes of action for:

(1) Declaratory Relief
(2) Quiet Title
(3) Fraudulent Concealment [versus Mortgage Now, Inc.]
(4) Intentional Interference with Contractual Relationship [versus Mortgage Now, Inc.]
(5) Negligence [versus Mortgage Now, Inc.]

On October 8, 2015, Bank filed its answer to City’s cross-complaint. On February 11, 2016, City dismissed its cross-complaint as to cross-defendants Mortgage Now, Inc., Capriano Homeowners Assoc., and Franchise Tax Board.

On July 28, 2016, Bank filed the motion now before the court, a motion for summary judgment/ adjudication of City’s cross-complaint.

I. Requests for Judicial Notice.

A. Bank’s request for judicial notice is GRANTED.

In support of its motion for summary judgment/ adjudication, Bank requests judicial notice of various recorded documents including (1) the First Nationwide DOT; (2) the New Century DOT; (3) Full Reconveyance of the First Nationwide DOT; and (4) Substitution of Trustee and Deed of Reconveyance of the New Century DOT.

“[A] court may take judicial notice of the fact of a document’s recordation, the date the document was recorded and executed, the parties to the transaction reflected in a recorded document, and the document’s legally operative language, assuming there is no genuine dispute regarding the document’s authenticity. From this, the court may deduce and rely upon the legal effect of the recorded document, when that effect is clear from its face.” (Fontenot v. Wells Fargo Bank, N.A. (2011) 198 Cal.App.4th 256, 265 (Fontenot).)

To the extent allowed by the holding in Fontenot, Bank’s request for judicial notice of the recorded documents is GRANTED.

B. City’s request for judicial notice is GRANTED.

1. Recorded documents.

In opposition, City also requests judicial notice of various recorded documents including (1) the Restriction Agreement; (2) Notice of Default and Election to Sell Under Deed of Trust; and (3) Quit Claim Deed.

“[A] court may take judicial notice of the fact of a document’s recordation, the date the document was recorded and executed, the parties to the transaction reflected in a recorded document, and the document’s legally operative language, assuming there is no genuine dispute regarding the document’s authenticity. From this, the court may deduce and rely upon the legal effect of the recorded document, when that effect is clear from its face.” (Fontenot v. Wells Fargo Bank, N.A. (2011) 198 Cal.App.4th 256, 265 (Fontenot).)

To the extent allowed by the holding in Fontenot, City’s request for judicial notice of the recorded documents is GRANTED.

2. 2000 BMR Program Policies & Procedures Manual.

City also requests judicial notice of selected portions of the 2000 BMR Program Policies & Procedures Manual, promulgated by the City’s Business Assistance and Housing Services Office. City cites Trinity Park, L.P. v. City of Sunnyvale (2011) 193 Cal.App.4th 1014, 1027 where the court wrote, “The Evidence Code also expressly provides for judicial notice of a public entity’s legislative enactments (Evid. Code, § 452, subd. (b)) and official acts (id., subd. (c)). Thus, we may take notice of local ordinances [citation] and the official resolutions, reports, and other official acts of a city [citation].” In Trinity, the court apparently took judicial notice of a city ordinance regarding below market rate housing. Here, City is not asking the court to take judicial notice of an ordinance, but rather a policy and procedures manual. City has not provided the court with any authority establishing that a policy and procedures manual qualifies for judicial notice as a legislative enactment or official act. Accordingly, City’s request for judicial notice of the 2000 BMR Program Policies & Procedures Manual is DENIED.

3. Court record.

Finally, City requests judicial notice of court records from the United States Bankruptcy Court. Evidence Code section 452, subdivision (d) states that the court may take judicial notice of “[r]ecords of any court of record of the United States.” Evidence Code sections 452 and 453 permit the trial court to “take judicial notice of the existence of judicial opinions and court documents, along with the truth of the results reached—in the documents such as orders, statements of decision, and judgments—but [the court] cannot take judicial notice of the truth of hearsay statements in decisions or court files, including pleadings, affidavits, testimony, or statements of fact.” (People v. Woodell (1998) 17 Cal.4th 448, 455.) Accordingly, City’s request for judicial notice of the United States Bankruptcy Court records is GRANTED.

II. Bank’s motion for summary judgment/ adjudication is DENIED.

A. Statute of Limitations.

Bank argues first that the City’s cross-claims against it for declaratory relief and quiet title are based upon an alleged breach of the Restriction Agreement and is, therefore, governed by a four year statute of limitations. (See Code Civ. Proc., §337—four year statute of limitations for “[a]n action upon any contract, obligation or liability founded upon an instrument in writing.”) Bank contends the claims accrued in August 2006 when the Smysers breached the Restriction Agreement by refinancing with Mortgage Now, Inc. (Subject Loan and Subject DOT). According to Bank, City had to file these cross-claims by August 2010, but this complaint was not even filed until April 2015.

As Bank acknowledges, “The statute of limitations that applies to an action is governed by the gravamen of the complaint, not the cause of action pled.” (City of Vista v. Robert Thomas Securities, Inc. (2000) 84 Cal.App.4th 882, 889; see also Davies v. Krasna (1975) 14 Cal.3d 502, 515—“The statute of limitations to be applied is determined by the nature of the right sued upon, not by the form of the action or the relief demanded.”)

In opposition, City raises a number of arguments, but the one the court finds persuasive is City’s argument that the four year statute of limitations for breach of contract does not apply. Rather, a five year statute of limitations applies for “An action for violation of a restriction, as defined in Section 784 of the Civil Code.” (Code Civ. Proc., §336, subd. (b).) Civil Code section 784 states, “ ‘Restriction,’ when used in a statute that incorporates this section by reference, means a limitation on, or provision affecting, the use of real property in a deed, declaration, or other instrument, whether in the form of a covenant, equitable servitude, condition subsequent, negative easement, or other form of restriction.”

This court agrees with City that the gravamen of the claims at issue is based upon an alleged violation of a restriction as defined by Civil Code section 784. Consequently, “The period prescribed in this subdivision runs from the time the person seeking to enforce the restriction discovered or, through the exercise of reasonable diligence, should have discovered the violation. A failure to commence an action for violation of a restriction within the period prescribed in this subdivision does not waive the right to commence an action for any other violation of the restriction and does not, in itself, create an implication that the restriction is abandoned, obsolete, or otherwise unenforceable.” (Code Civ. Proc., §336, subd. (b).) Similar to the statute of limitations for fraud claims, Code of Civil Procedure section 336 expressly adopts a delayed discovery rule.

In moving for summary judgment/ adjudication, Bank incorrectly applies Code of Civil Procedure section 337. In furtherance thereof, Bank incorrectly focuses on the alleged breach of the Restriction Agreement in August 2006 as the date the claims accrued. Bank references evidence in its argument that City should have discovered the violation because City’s own written policies called for a title summary to be ordered upon the receipt of a notice of default. Bank cites evidence that City had actual notice of a default by the Smysers when they became delinquent on their HOA assessment. However, as City points out in opposition, the policy requires a title summary to be ordered “upon receipt of a Notice of Default.” The evidence proffered by Bank does not establish that City received a notice of default. City also argues in opposition that notice of the HOA delinquency does not establish, as a matter of law, that City should have discovered the refinancing particularly in view of the evidence that the Smysers brought their account current pursuant to an arrangement with the HOA. “Resolution of the statute of limitations issue is normally a question of fact.” (Fox v. Ethicon Endo-Surgery, Inc. (2005) 35 Cal.4th 797, 810.) Thus, even if the court considered Bank’s evidence, the evidence would present a triable issue as to whether the delayed discovery rule would apply.

Accordingly, cross-defendant Bank’s motion for summary judgment/ adjudication on the ground that the cross-claims are barred by the statute of limitations is DENIED.

B. Bona Fide Encumbrancer.

As a second and separate basis for summary judgment/ adjudication, Bank contends that it is a bona fide encumbrancer. “A purchaser (including an encumbrancer) in good faith for value and without actual or constructive notice is entitled to protection against undisclosed liens and equities existing against … unrecorded instruments.” (Caito v. United California Bank (1978) 20 Cal.3d 694, 702.) Bank proffers evidence that Mortgage Now, Inc. funded a $500,000 loan to the Smysers secured by a deed of trust recorded against the Subject Property on August 7, 2006. At the time of the recording of the Subject DOT, Mortgage Now, Inc. did not have actual knowledge of the Restriction Agreement. Bank acquired its beneficial interest in the Subject DOT on or about September 28, 2006. At the time it acquired its beneficial interest in the Subject DOT, Bank did not have actual knowledge of the Restriction Agreement.

Having established that it (or its predecessor) paid good value and lacked any actual notice of the Restriction Agreement, Bank argues that it also did not have constructive notice of the Restriction Agreement. Civil Code section 1213 states, in relevant part, “Every conveyance of real property or an estate for years therein acknowledged or proved and certified and recorded as prescribed by law from the time it is filed with the recorder for record is constructive notice of the contents thereof to subsequent purchasers and mortgagees.” (Emphasis added.)

Bank argues that the Restriction Agreement here does not impart constructive notice because it was not properly indexed.

It is a common misperception, which the trial court evidently shared, that a recorded document imparts constructive notice from the moment it is recorded. That is not the law. The operative event is actually the indexing of the document…

The most recent in a long line of authorities stating this principle is Hochstein v. Romero (1990) 219 Cal.App.3d 447 [268 Cal.Rptr. 202]: “[B]efore the constructive notice will be conclusively presumed, the document must be ‘recorded as prescribed by law.’ (Civ. Code, § 1213.) A document not indexed as required by statute (see Gov. Code, §§ 27230-27265), does not impart constructive notice because it has not been recorded ‘as prescribed by law.’ ” (Id. at p. 452.) The court explained the principle, citing such authorities as Witkin and Miller and Starr: “ ‘The policy of the law [requiring recordation and indexing] is to afford facilities for intending purchasers … in examining the records for the purpose of ascertaining whether there are any claims against [the land], and for this purpose it has prescribed the mode in which the recorder shall keep the records of the several instruments, and an instrument must be recorded as herein directed in order that it may be recorded as prescribed by law. If [improperly indexed], it is to be regarded the same as if not recorded at all.’ [Citation.] Thus, it is not sufficient merely to record the document. ‘California has an ”index system of recording,“ and … correct indexing is essential to proper recordation. [Citations.]’ [Citations.]” (Original italics.) (Hochstein v. Romero, supra, 219 Cal.App.3d at p. 452.)

The reason for this rule is obvious. The courts have long recognized that constructive notice is a “fiction” (Richardson v. White, supra, 18 Cal. at p. 106), so if a recorded document is going to affect title there must at least be a way for interested parties to find it: “The California courts have consistently reasoned that the conclusive imputation of notice of recorded documents depends upon proper indexing because a subsequent purchaser should be charged only with notice of those documents which are locatable by a search of the proper indexes.” (Italics added.) (Hochstein v. Romero, supra 219 Cal.App.3d at p. 452.)

(Lewis v. Superior Court (1994) 30 Cal.App.4th 1850, 1866–67.)

Here, Bank proffers evidence that the Smysers acquired the Subject Property by grant deed and the grant deed identifies the Smysers using their middle initials, “Robert J. Smyser and Janie M. Smyser.” The grant deed is indexed under the names “Robert J. Smyser” and “Janie M. Smyser.” The Restriction Agreement, however, identifies the Smysers by spelling out their full names, “Robert Joseph Smyser” and “Janie Marie Smyser.” The Restriction Agreement is indexed under the names “Robert Joseph Smyser” and “Janie Marie Smyser.” The Restriction Agreement is not indexed under the names “Robert J. Smyser” and “Janie M. Smyser.” A search of the Santa Clara County Recorder’s index using “Robert J. Smyser” and “Janie M. Smyser” does not reveal the Restriction Agreement.

Citing to Orr v. Byers (1988) 198 Cal.App.3d 666 (Orr), Bank argues the use of the Smysers’ full complete names to record the Restriction Agreement does not adequately impart constructive notice to subsequent encumbrancers. In Orr, a plaintiff obtained a judgment against “William Elliott” but recorded an abstract of judgment misspelling the last name as “Elliot” and “Eliot.” The debtor then sold property to a third party and the plaintiff sought to foreclose against the property nonetheless, arguing the third party had constructive notice of the abstract under the doctrine of idem sonans. The Orr court rejected such a theory. “ ‘The doctrine of idem sonans is that though a person’s name has been inaccurately written, the identity of such person will be presumed from the similarity of sounds between the correct pronunciation and the pronunciation as written. Therefore, absolute accuracy in spelling names is not required in legal proceedings, and if the pronunciations are practically alike, the rule of idem sonans is applicable.’ [Citation.] The rule is inapplicable, however, under circumstances ‘where the written name is material.’ [Citation.]” (Orr, supra, 198 Cal.App.3d at p. 669.) “[T]he doctrine of idem sonans remains viable for purposes of identification. But it has not, to our knowledge, been applied in this state to give constructive notice to good faith purchasers for value.” (Id.) In the Orr court’s view, the written name used in recording an abstract of judgment was material and so the rule of idem sonans did not apply. “As respondents succinctly state, Orr asks us ‘to change the law of constructive notice to accommodate [his] error in such a way that future title searches will be required to be performed only by trained individuals with elaborate and expensive equipment at their disposal or else to go uninsured in a world where prudence demands title insurance. Neither result is satisfactory, especially considering that the simple alternative is to require [judgment creditors] simply to spell the names of their judgment debtors properly.’” (Id. at pp. 672 – 673.)

Orr involves the misspelling of a name. Here, the Smysers’ names are not misspelled. The legal authority cited by Bank does not support Bank’s assertion that the Restriction Agreement is, as a matter of law, improperly indexed because the Smysers’ middle names were used instead of their middle initials. “The California courts have consistently reasoned that the conclusive imputation of notice of recorded documents depends upon proper indexing because a subsequent purchaser should be charged only with notice of those documents which are locatable by a search of the proper indexes. Conversely, where the document is improperly indexed and hence not locatable by a proper search, mere recordation is insufficient to charge the subsequent purchaser with notice.” (Dyer v. Martinez (2007) 147 Cal.App.4th 1240, 1245 citing Hochstein v. Romero (1990) 219 Cal.App.3d 447, 452; italics removed.)

Bank also proffers the declaration of a purported expert who opines that the Restriction Agreement was outside the scope of a reasonably diligent public chain of title search by subsequent title searcher because of the inconsistent use of initials for the Smysers’ middle names. City, in opposition, proffers its own expert who opines precisely the opposite. At the very least, this presents a triable issue of material fact as to whether the Restriction Agreement was properly indexed. [For the same reason, Bank’s argument that the Restriction Agreement is unenforceable for failure to comply with Government Code section 27281.5 also presents a question of fact.]

Accordingly, cross-defendant Bank’s motion for summary judgment/ adjudication on the ground that Bank is a bona fide encumbrancer is DENIED.

To the extent the court relied on any evidence submitted by the parties in ruling on this motion for summary judgment/ adjudication, any objections thereto are OVERRULED. The court declines to rule on evidentiary objections which were not material to the court’s ruling. “In granting or denying a motion for summary judgment or summary adjudication, the court need rule only on those objections to evidence that it deems material to its disposition of the motion. Objections to evidence that are not ruled on for purposes of the motion shall be preserved for appellate review.” (Code Civ. Proc., §437c, subd. (q).)