California real estate financing typically includes a note and deed of trust. In event of default the trustee named in the deed of trust is a third party who would conduct the non-judicial foreclosure process, and hold a trustee sale. This is not a true ‘trustee’ with fiduciary duties but an agent for the parties with statutory duties. When disputes arise regarding foreclosure, Sacramento real estate attorneys often see that the trustee is often named in the lawsuit by the borrower with the other defendants. Given that the trustee relies on instructions of the beneficiary and does not act on its own, the complaint does not allege any specific wrongful act committed by the trustee. As a result, Civil Code section 2924l provides that the trustee may file a “Declaration of Nonmonetary Interest” in the case. The declaration must state that the trustee’s “reasonable belief that it is named as a defendant … solely in its capacity as trustee and not due to its acts or omissions.” Unless another party objects, the trustee then avoids participation in the lawsuit and liability for damages and attorney fees.
In Bae v. T.D. Service Company, Bae defaulted on a $5 million dollar property in Glen Ivy. The property was sold at a trustee sale, and the plaintiff sued everyone, including the Trustee. The trustee filed a Declaration of Nonmonetary Interest, and not an answer to the complaint. The Plaintiff’s attorney entered the trustee’s default and obtained a default judgment, all without providing notice to the trustee’s attorney. That’s right, the clerk entered the default, the judge granted the judgment, all without notifying the trustee’s attorney. Unbelievable, but it happened, and the trustee moved to set aside the default and won. More bizarre- the plaintiff appealed.
The court first looked at requirements for setting aside a default. Civil Procedure section 473.5 permits the court to set aside a default or default judgment if the defendant, through no inexcusable fault of his own, [received] no actual notice” of the action, provided that relief is requested not more two years after the entry of the default judgment. But here, the Trustee filed its motion more than two years later.
Outside the statutory scheme, the courts have the inherent authority to vacate a default and default judgment on equitable grounds such as extrinsic fraud or extrinsic mistake. Extrinsic fraud usually arises when a party is denied a fair adversary hearing because he has been ‘deliberately kept in ignorance of the action or proceeding, or in some other way fraudulently prevented from presenting his claim or defense. The term “extrinsic mistake” is “broadly applied when circumstances extrinsic to the litigation have unfairly cost a party a hearing on the merits.
The court in this case focused on extrinsic mistake. Under this doctrine, relief from the default is available when the clerk erred in entering it. Civil Procedure section 585 and those following govern defaults. Section 587 requires that the plaintiff file an affidavit testifying that a copy of the application was mailed to the defendant’s attorney of record. This did not happen in this case.
In cases of extrinsic mistake, the court applies a three part test.
1 – The defaulted party must demonstrate that it has a meritorious case.
2 – The party seeking to set aside the default must articulate a satisfactory excuse for not presenting a defense to the original action.
3 – The moving party must demonstrate diligence in seeking to set aside the default once discovered.
Here, the court found that the trustee passed all three.
1. Under 2924l, the trustee may avoid participation in the lawsuit, and liability for damages and attorney fees, by filing a declaration of non-monetary status. This presents a meritorious defense;
2. The declaration of nonmonetary status shielded the trustee from needing to participate in the action, thus no additional defense was needed;
3. The plaintiff never served the trustee’s attorney with the request for entry of default, request for entry of judgment, nor the judgment itself. Thus, counsel was unaware of the need to seek relief from default.
This is the right result. The plaintiff did not dispute any of the facts discussed above, but decided to roll the dice and lost.