Filed 5/14/20 Shetty v. Bank of New York Mellon CA6

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SIXTH APPELLATE DISTRICT

SATISH SHETTY,

Plaintiff and Appellant,

v.

THE BANK OF NEW YORK MELLON,

Defendant and Respondent.

H045717

(Santa Cruz County

Super. Ct. No. 16CV03022 )

Plaintiff Satish Shetty filed an amended complaint against defendant The Bank of New York Mellon (BNY Mellon) alleging causes of action for wrongful foreclosure, quiet title, and cancellation of instruments. The trial court sustained defendant’s demurrer without leave to amend and dismissed all causes of action.

On appeal, plaintiff argues that the trial court erred in sustaining the demurrer without leave to amend. He contends that he adequately pleaded an exception to the tender rule and that his causes of action were otherwise adequately pleaded. We agree and reverse the judgment.

I. Background

In September 2005, Jose Rincon and Ofelia Colimote (borrowers) obtained a mortgage for $382,000, which was evidenced by a promissory note and secured, through a deed of trust, by real property located in Freedom, California. The “ ‘Lender’ ” was identified as First Magnus, the “ ‘Trustee’ ” was Santa Cruz Title Company, and Mortgage Electronic Registration Systems, Inc. (MERS) was the “nominee” for the lender and the lender’s “successors and assigns.” MERS was also identified as “the beneficiary” under the deed of trust. In August 2011, an assignment of the deed of trust was recorded, reflecting that MERS assigned the deed of trust to BNY Mellon.

In September 2015, borrowers conveyed by grant deed their entire interest in the Freedom property to plaintiff. The grant deed stated that it “also assigned any and all claims and causes of action known and unknown arising out of and related to the property described herein and respective mortgages to [plaintiff].”

In December 2015, Bayview Loan Servicing, LLC, as attorney in fact for BNY Mellon, executed a substitution of trustee making the Law Offices of Les Zieve (Les Zieve) the trustee under the deed of trust. In January 2016, Les Zieve recorded a notice of default and election to sell under the deed of trust, reflecting that borrowers had “past due payments plus permitted costs and expenses” of $131,477.15.

In April 2016, a notice of trustee’s sale was recorded, stating that the Freedom property would be sold on May 18, 2016. The trustee’s sale was completed on that date, at which BNY Mellon purchased the Freedom property. A trustee’s deed upon sale was recorded later that month.

Before the foreclosure sale, in April 2016, plaintiff filed the instant action against defendant. Defendant filed a demurrer, which the trial court sustained with leave to amend. In July 2017, plaintiff filed an amended complaint, alleging three causes of action: (1) wrongful foreclosure; (2) cancellation of instruments; and (3) quiet title. Defendant again demurred. Defendant also filed a request for judicial notice of documents including: a verified complaint from a related case filed by plaintiff in Los Angeles County, and a bankruptcy petition and attached schedules filed by borrower Rincon.

The trial court sustained defendant’s demurrer without leave for amend. The court also granted the request for judicial notice, taking “judicial notice of the existence of each of the documents as requested.” The court found that plaintiff had failed to “allege tender,” that an allegation of tender was required for each cause of action, and that he had “not provided any valid exception to the tender rule.” The trial court entered a judgment of dismissal, and this appeal followed.

II. Discussion

In reviewing an order sustaining a demurrer, “ ‘we examine the complaint de novo to determine whether it alleges facts sufficient to state a cause of action under any legal theory, such facts being assumed true for this purpose. [Citations.]’ [Citation.] We may also consider matters that have been judicially noticed. [Citations.]” (Committee for Green Foothills v. Santa Clara County Bd. of Supervisors (2010) 48 Cal.4th 32, 42.) “As a general rule in testing a pleading against a demurrer the facts alleged in the pleading are deemed to be true, however improbable they may be.” (Del E. Webb Corp. v. Structural Materials Co. (1981) 123 Cal.App.3d 593, 604 (Del. E. Webb Corp.).)

A. Tender Requirement

In general, “as a condition precedent to an action . . . to set aside the trustee’s sale on the ground that the sale is voidable because of irregularities in the sale notice or procedure, the [plaintiff] must offer to pay the full amount of the debt for which the property was security.” (Lona v. Citibank, N.A. (2011) 202 Cal.App.4th 89, 112 (Lona).)

There are recognized exceptions to the tender rule. Tender is not required where: (1) the underlying debt is invalid; (2) the trustee’s deed is void on its face; (3) there exists a counterclaim that is equal to or greater than the amount due; or (4) it would be inequitable to impose the condition on the particular party challenging the sale. (Lona, supra, 202 Cal.App.4th at pp. 112-113.)

On appeal, plaintiff argues that he “invoked at least three exceptions to the tender rule,” namely: (1) that “the loan on the property he owned had not been funded and was void,” (2) that “the loan was not in default, depriving the defendant of any right to foreclose,” and (3) that plaintiff “alleged damages, which could be set off against any debt claimed by the defendant.”

In his amended complaint, plaintiff alleged that the underlying debt was invalid. Plaintiff alleged that “the purported loan purportedly evidenced by the promissory note did not fund, First Magnus advanced no funds to [borrowers] and no indebtedness was created.” Thus, he contended that there was “no debt owing” on the promissory note.

On appeal, defendant maintains that this allegation, which on demurrer we must accept as true, was contradicted by judicially noticed documents, and thus the allegation need not be accepted as true. In particular, defendant points to two judicially-noticed documents: (1) the deed of trust, as evidence that the borrowers obtained a loan of $382,000; and (2) a notice of default, as evidence that by 2016 “the [b]orrowers were more than $100,000 behind in their payments.”

“ ‘Taking judicial notice of a document is not the same as accepting the truth of its contents or accepting a particular interpretation of its meaning.’ [Citation.] While courts take judicial notice of public records, they do not take notice of the truth of matters stated therein. [Citation.] ‘When judicial notice is taken of a document, . . . the truthfulness and proper interpretation of the document are disputable.’ [Citation.]” (Herrera v. Deutsche Bank National Trust Co. (2011) 196 Cal.App.4th 1366, 1375 (Herrera); accord Yvanova v. New Century Mortgage Corp. (2016) 62 Cal.4th 919, 924, fn. 1 [a court may take judicial notice of “[t]he existence and facial contents of . . . recorded documents,” but cannot take notice “of disputed or disputable facts stated therein.”] (Yvanova).) In granting the request for judicial notice, the trial court stated that it “takes judicial notice of the existence of each of the documents as requested.” (Italics added.)

Here, the deed of trust stated that the borrowers obtained a $382,000 loan, and the notice of default stated that the borrowers were $131,477.15 behind in their payments. The facts in these statements were hearsay and disputed by plaintiff’s allegation that the loan did not fund and no indebtedness was created. (Herrera, supra, 196 Cal.App.4th at p. 1375.) While the trial court’s taking of judicial notice established the existence of the deed of trust and notice of default, it did not establish the truth of the statements made therein. (Yvanova, supra, 62 Cal.4th at p. 924, fn. 1.) Accordingly, even though the existence of the recorded documents was properly noticed, the content of the documents was disputed and thus could not be used to establish the truth of the matters contained in the documents.

Defendant also points to an allegation plaintiff made in a related proceeding, and argues that it contradicts the instant allegation that the loan was void. Specifically, defendant contends that plaintiff “conceded in a verified complaint (that he filed in a related case) that the Borrowers ‘executed two separate documents entitled “Adjustable Rate Note” and “Deed of Trust” securing the note that was generated by the loan brokers on/dated September 23, 2005.’ ” We disagree with defendant’s interpretation of this allegation. Contrary to defendant’s contention, this allegation from a related case concedes nothing about the validity of the underlying debt. Rather, it merely admits the existence of the documents. The content of the documents was disputed and could not be judicially noticed. These judicially-noticed documents did not contradict plaintiff’s allegations in this case.

Defendant also asserts that a voluntary Chapter 11 Bankruptcy petition filed by one of the borrowers, Rincon, contradicts allegations made in the amended complaint. We again disagree. “[W]hile courts are free to take judicial notice of the existence of each document in a court file, including the truth of results reached, they may not take judicial notice of the truth of hearsay statement in decisions and court files. [Citation] Courts may not take judicial notice of allegations in affidavits, declarations and probation reports in court records because such matters are reasonably subject to dispute and therefore require formal proof. [Citation.]” (Lockley v. Law Office of Cantrell, Green, Pekich, Cruz & McCort (2001) 91 Cal.App.4th 875, 882.) The content of the bankruptcy petition was therefore not subject to judicial notice. In addition, even looking at the content of the bankruptcy petition, it does not facially contradict plaintiff’s allegations in this case. In the bankruptcy petition, Rincon listed a debt claim of $382,000 to First Magnus, and identified the subject property as the nature of the debt claim. However, in listing the debt claim, Rincon checked boxes to indicate that the debt was contingent, unliquidated, and disputed. At best, then, this was an acknowledgment that there existed a disputed debt claim in the amount of $382,000. Thus, the bankruptcy petition did not contradict plaintiff’s allegation that the loan was invalid.

Finally, defendant points to an order issued in an appeal in Rincon’s bankruptcy proceeding: Shetty, supra, 2018 U.S. Dist. LEXIS 29745. In that case, after the foreclosure sale of the subject property, BNY Mellon filed a motion in the bankruptcy court for relief from the automatic stay so that it could proceed with its unlawful detainer action in state court. (Shetty, supra, 2018 U.S. Dist. LEXIS 29745 at pp. 4-5.) The bankruptcy court granted BNY Mellon’s motion because the “recorded Trustee’s Deed Upon Sale was prima facie evidence that Rincon did not own the property.” (Ibid.) On appeal, the district court affirmed the bankruptcy court’s order granting the motion for relief from the automatic stay. (Shetty, supra, 2018 U.S. Dist. LEXIS 29745 at p. 14.)

According to defendant, “[i]mplicit in the court’s order is the existence of the loan debt of borrower Rincon.” Not so. First, while it is appropriate to take judicial notice of the existence of a court document, “factual findings in a prior judicial opinion are not a proper subject of judicial notice.” (Kilroy v. State of California (2004) 119 Cal.App.4th 140, 148.) Second, in granting BNY Mellon’s motion for relief, the bankruptcy court explicitly stated “that to the extent Shetty or Rincon were litigating whether the foreclosure sale was lawful, the Bankruptcy Court’s order granting relief from the stay would ‘not impact that court’s proceedings.’ ” (Shetty, supra, 2018 U.S. Dist. LEXIS 29745 at p. 5.) Thus, the bankruptcy court’s order, and the district court’s affirmance of that order, did not implicitly determine the existence or validity of the underlying debt. Indeed, the bankruptcy court explicitly rejected the implication that its order would affect the challenge to the foreclosure sale.

In sum, none of the judicially-noticed documents conclusively establishes that the debt was valid, or establishes that plaintiff’s allegations may be disregarded on demurrer. As explained, the contents of the identified documents are not properly subject to judicial notice. While the existence of these documents appears to show the existence of a valid loan, “a court cannot by means of judicial notice convert a demurrer into an incomplete evidentiary hearing in which the demurring party can present documentary evidence and the opposing party is bound by what that evidence appears to show.” (Fremont Indemnity Co. v. Fremont General Corp. (2007) 148 Cal.App.4th 97, 115.)

We conclude that plaintiff adequately alleged an exception to the tender rule. Specifically, plaintiff alleged that the underlying loan “did not fund” and “no indebtedness was created.” An action attacking “the validity of the underlying debt” does not require an allegation of tender “since it would constitute an affirmation of the debt.” (Lona, supra, 202 Cal.App.4th at p. 112.) Further, at the demurrer stage, “the facts alleged in the pleading are deemed to be true, however improbable they may be.” (Del E. Webb Corp., supra, 123 Cal.App.3d at p. 604.) None of the judicially-noticed documents identified by defendant directly contradicted plaintiff’s allegations that the underlying debt was invalid. Thus, plaintiff was excused from alleging tender as part of his causes of action. The trial court’s reliance on the tender rule as a basis for sustaining the demurrer was error.

We now address whether plaintiff otherwise adequately stated causes of action for wrongful foreclosure, quiet title, and cancellation of instruments.

B. Standing

Defendant argues that plaintiff lacked standing to challenge the foreclosure sale because he was “not the borrower in this action, [was] not in privity with the lender, and ha[d] not assumed the obligations of the home loan leading to the foreclosure.”

In Hacker v. Homeward Residential, Inc. (2018) 26 Cal.App.5th 270 (Hacker), the plaintiff sued the defendants for claims arising from an allegedly void assignment of the deed of trust. (Id. at p. 272.) The borrower in Hacker obtained a loan secured by a deed of trust against real property. (Ibid.) The loan and deed of trust underwent several assignments. Eventually, the borrower defaulted on the loan, and the servicer recorded a notice of default. (Id. at p. 273.) Later, the borrower and her son (who had obtained an interest in the property) entered into a short sale agreement whereby the purchaser would buy the home and the lender would release the loan. (Ibid.) The transaction did not close, however, because the title company advised that there were “ ‘questionable title documents’ ” related to one of the assignments. The purchaser sued, and the borrower and her son settled. (Ibid.) Under the settlement, the borrower and her son conveyed title to the property by grant deed, conveying “ ‘any and all of their interest’ ” in the property to the purchaser. (Id. at pp. 273-274.) Thereafter, another notice of default was recorded against the property, and the property was sold at a foreclosure sale. (Id. at p. 274.) The plaintiff, a trustee for the purchaser, filed a complaint for, inter alia, wrongful foreclosure and cancellation of instruments. The defendants filed a demurrer, which the trial court sustained without leave to amend. (Ibid.)

The appellate court agreed with the trial court’s finding that the plaintiff lacked standing because he “failed to allege facts establishing an ownership interest in the property sufficient to confer standing.” (Hacker, supra, 26 Cal.App.5th at p. 277.) However, the appellate court also determined that the trial court abused its discretion in denying leave to amend because the plaintiff had put the trial court on notice that he “claimed to have owned the property.” (Id. at p. 279.) Importantly, the plaintiff had tried to present the trial court with evidence of his ownership by “attempting to place in the record the grant deed via both of his [requests for judicial notice], and by informing the trial court in a declaration . . . he had received a grant deed” to the property. (Ibid.) The appellate court held that, on demurrer, the grant deed was sufficient “to establish a colorable claim that [the plaintiff] was the owner of the property at the time of the foreclosure” sale, which conferred standing. (Id. at p. 280.) Further, even if, as the defendants argued, “the circumstances surrounding the grand deed [were] ‘suspicious,’ ” the court emphasized that it must consider the allegations to be true “ ‘however improbable they may be.’ ” (Ibid.)

Like in Hacker, plaintiff in this case allegedly obtained title to the subject property by grant deed. Although plaintiff was not the borrower, the grant deed was sufficient to confer standing to challenge the foreclosure sale. “To the extent that [the defendant] would challenge the validity of the grant deed, such a challenge would constitute an issue of triable fact,” something not appropriately decided at the demurrer stage. (Hacker, supra, 26 Cal.App.5th at p. 280.)

Citing Yvanova, supra, 62 Cal.4th 919, defendant contends that only “a borrower has standing to challenge a purportedly void assignment of the note and deed of trust.” This contention reads too much into the Yvanova court’s holding. In Yvanova, the court held: “We conclude a home loan borrower has standing to claim a nonjudicial foreclosure was wrongful because an assignment by which the foreclosing party purportedly took a beneficial interest in the deed of trust was not merely voidable but void, depriving the foreclosing party of any legitimate authority to order a trustee’s sale.” (Id. at pp. 942-943.) However, earlier in the opinion, the court emphasized that “[o]ur ruling in this case is a narrow one[:]” “[w]e hold only that a borrower who has suffered a nonjudicial foreclosure does not lack standing” under the circumstances described in the case. (Id. at p. 924, italics added.) Thus, the court’s narrow holding in Yvanova does not preclude standing for plaintiff to pursue the instant action.

C. The Wrongful Foreclosure

“To obtain the equitable set-aside of a trustee’s sale or maintain a wrongful foreclosure claim, a plaintiff must allege that (1) the defendants caused an illegal, fraudulent, or willfully oppressive sale of the property pursuant to a power of sale in a mortgage or deed of trust; (2) the plaintiff suffered prejudice or harm; and (3) the plaintiff tendered the amount of the secured indebtedness or was excused from tendering. [Citation.]” (Chavez v. Indymac Mortgage Services (2013) 219 Cal.App.4th 1052, 1062.)

Here, plaintiff adequately alleged a cause of action for wrongful foreclosure. In his amended complaint, plaintiff alleged that there was no indebtedness created because the underlying loan was never funded. If the loan never funded, then the deed of trust was without effect. “A void contract is without legal effect. [Citation.] ‘It binds no one and is a mere nullity.’ [Citation.]” (Yvanova, supra, 62 Cal.4th at p. 929.) Further, a claim for wrongful foreclosure may be based on “allegations that the foreclosing party acted without authority,” like where the deed of trust was void. (Id. at pp. 929-930.) If the deed of trust was void, then the foreclosing party in this case acted without authority. Plaintiff adequately pleaded an illegal, fraudulent, or willfully oppressive sale.

Plaintiff also adequately pleaded prejudice or harm. Plaintiff alleged that he was “the current sole owner of the property” at issue. Plaintiff attached as an exhibit the grant deed which allegedly conveyed title in the property. The grant deed was sufficient to establish a “colorable claim that [plaintiff] was the owner of the property at the time of the foreclosure” in 2016. (Hacker, supra, 26 Cal.App.5th at p. 280.) If the foreclosure sale was wrongful or illegal, then plaintiff’s ownership interest in the property was harmed.

Finally, as discussed previously, plaintiff was excused from alleging tender. Accordingly, plaintiff adequately pleaded the elements of wrongful foreclosure. The trial court erred by sustaining the demurrer as to this cause of action.

D. Quiet Title

To state a cause of action for quiet title, the complaint must be verified and allege (1) a description of the subject property, (2) the basis for the plaintiff’s title, (3) the defendant’s adverse interest in the property, (4) the date as of which the determination is sought, and (5) a prayer for the determination of the title against the adverse claims. (Code Civ. Proc., § 761.020.) Although tender must be alleged to sustain an action for quiet title, “[f]ull tender of the indebtedness is not required if the [plaintiff] attacks the validity of the underlying debt.” (Lueras v. BAC Home Loans Servicing, LP (2013) 221 Cal.App.4th 49, 87.)

In his amended complaint, plaintiff identified the subject property, alleged the basis for his title to the subject property, namely the grant deed, and alleged that he held “free and clear title . . . .” In addition, he identified defendant’s adverse interest in the property (based on the challenged foreclosure sale) and asked for an order clearing plaintiff’s title as of September 18, 2015. In addition, as discussed earlier, plaintiff was excused from alleging tender because he attacked the validity of the underlying debt. Taken together, plaintiff’s allegations were sufficient to state a cause of action for quiet title, and the trial court erred by sustaining the demurrer to this cause of action.

Defendant notes that plaintiff’s amended complaint was unverified, and that Code of Civil Procedure section 761.020 requires a quiet title claim to be verified. Defendant identifies no authority that such a defect would warrant sustaining a demurrer without leave to amend. Assuming that a demurrer is warranted when an unverified quiet title claim is made, since there is a “ ‘reasonable possibility that the defect can be cured by amendment’ ” (Loeffler v. Target Corp. (2014) 58 Cal.4th 1081, 1100), on remand plaintiff should be permitted to amend the complaint to cure this defect.

E. Cancellation of Instruments

Civil Code section 3412 provides that “[a] written instrument, in respect to which there is a reasonable apprehension that if left outstanding it may cause serious injury to a person against whom it is void or voidable, may, upon his application, be so adjudged, and ordered to be delivered up or canceled.” To cancel an instrument, the plaintiff must plead and prove: “ ‘(1) the instrument is void or voidable . . . ; and (2) there is a reasonable apprehension of serious injury including pecuniary loss or the prejudicial alteration of one’s position. [Citation.]’ [Citation.]” (Thompson v. Ioane (2017) 11 Cal.App.5th 1180, 1194 (Thompson).) As to the first element, the “plaintiff must allege, inter alia, facts showing actual invalidity of the apparently valid instrument . . . .” (Wolfe v. Lipsy (1985) 163 Cal.App.3d 633, 638 (Wolfe), disapproved on other grounds in Droeger v. Friedman, Sloan & Ross (1991) 54 Cal.3d 26, 35-36.)

Defendant contends that plaintiff’s cancellation of instruments cause of action was time barred. “Actions for cancellation of an instrument are subject to the four-year limitations period in the catchall provision of [Code of Civil Procedure] section 343.” (Salazar v. Thomas (2015) 236 Cal.App.4th 467, 477, fn. 8; accord, Zakaessian v. Zakaessian (1945) 70 Cal.App.2d 721, 725 [“[o]rdinarily a suit to set aside and cancel a void instrument is governed by section 343 of the Code of Civil Procedure”].)

In his cause of action for cancellation of instruments, plaintiff asked the court to cancel the deed of trust, the assignment of deed of trust, the substitution of trustee, the notice of default and notice of sale, and the trustee’s deed upon sale. The deed of trust was executed in September 2005 and the assignment to BNY Mellon was recorded in August 2011. The notice of default and election to sell under the deed of trust was recorded in January 2016; the trustee’s sale occurred in May 2016. Plaintiff’s amended complaint was filed in August 2017.

“Generally speaking, a cause of action accrues at ‘the time when the cause of action is complete with all of its elements.’ [Citation.]” (Fox v. Ethicon Endo-Surgery, Inc. (2005) 35 Cal.4th 797, 806.) In this case, plaintiff received title to the property in September 2015. At the earliest, plaintiff’s “ ‘reasonable apprehension of serious injury’ ” accrued when the notice of default was recorded in January 2016. (Thompson, supra, 11 Cal.App.5th at p. 1194.) Plaintiff argues that the cause of action accrued when the foreclosure took place in March 2016. Either date is well within the four-year statute of limitations period. In short, plaintiff’s cancellation of instruments cause of action was not time barred as to these instruments. Because the statute of limitations had not run on at least some of these instruments, demurrer could not properly be sustained to this cause of action on limitations grounds.

Plaintiff otherwise stated a cognizable cause of action for cancellation of instruments. As to the first element, plaintiff identified the deed of trust, the assignment of deed of trust, the substitution of trustee, the notice of default and notice of sale, and the trustee’s deed upon sale as void instruments due to the invalidity of the underlying loan. Further, as discussed previously, plaintiff alleged facts showing actual invalidity of the documents. As to the second element, plaintiff alleged a prejudicial alteration of his ownership position with respect to the subject property. Thus, the trial court erred in sustaining defendant’s demurrer to this cause of action.

III. Disposition

The judgment is reversed. The superior court is directed to vacate its order sustaining the demurrer without leave to amend. The court shall enter a new order overruling the demurrer. Each party shall bear their own costs.

 

_______________________________

Mihara, J.

WE CONCUR:

_____________________________

Premo, Acting P. J.

_____________________________

Bamattre-Manoukian, J.

Shetty v. The Bank of New York Mellon

H045717