A quiet title action is brought to establish, or “quiet”, an interest in real estate between adverse parties. One can establish any interest in property or cloud upon title. (CCP §760.010) A common goal is to establish title by adverse possession. Adverse possession is a way of acquiring title to real property through continuous possession or use for a specified period of time. One of the elements required to prove adverse possession is that the possession or use must be “hostile to the owner’s title.” What happens if the adverse possession occurs on property with a deed of trust recorded, and the lender forecloses? In a recent California decision, the adverse possessor lost because the adverse possession did not count against the Lender until the lender acquired the property at the trustee’s sale.
In Charles Scott Bailey v. Citibank N.A. owners of property in Kern County had a deed of trust. They went into default and a Notice of Default was recorded, so the owners filed a series of bankruptcies. Apparently, the lender never completed the foreclosure, the bankruptcies concluded, and the owners walked away from the property. Plaintiffs, seeing it empty in 2013, saw that as a green light to take possession and pay property taxes. Citibank became the successor to the original deed of trust in 2017, and recorded a new notice of default, foreclosed, and became the new owner in 2018.
A few months later Plaintiffs filed their quiet title suit. There was much hubbub in the courts, a default & judgment for quiet title by adverse possession, the default judgment set aside, and appeals. For our purposes, an issue on appeal was whether, as a matter of law, plaintiffs’ possession was adverse to Citibank for the required five-year period.
The court began by noting that the elements of an adverse possession claim consist of the following:
(1) actual possession by the plaintiff of the property under claim of right or color of title;
(2) the possession consists of open and notorious occupation of the property in such a manner as to constitute reasonable notice to the true owner;
(3) the possession is adverse and hostile to the true owner;
(4) the possession is uninterrupted and continuous for at least five years, and (5) the plaintiff has paid all taxes assessed against the property during the five-year period.
During the time period when Citibank’s interest was merely that of the beneficiary of the 2005 deed of trust (i.e., a lienholder), plaintiffs’ possession of the property would not be considered hostile to Citibank’s rights. Additionally, plaintiffs could gain no greater title than that of the original owners they had dispossessed; namely, title subject to the 2005 deed of trust. Consequently, the plaintiffs’ adverse possession claim was subject to and eliminated by Citibank’s foreclosure of the 2005 deed of trust.
The court explained that the doctrine of adverse possession relates to possessory estates, i.e., it involves possession of property hostile to the corresponding rights of the true owner. Citibank’s interest in the property was that only of a trust deed beneficiary. In practical effect, a deed of trust is a lien on the property, and the right to possession does not pass to the beneficiary. Thus, possession is presumed to be amicable and not subordinate to the mortgage. It would not be adverse until the right to possession of the property is acquired through foreclosure. Citibank only gained a possessory interest after the foreclosure and recording of the Trustee’s Deed in 2018. Therefore, the plaintiffs’ occupation of the property was not averse to Citibank until the deed was recorded in 2018, only a few months before plaintiffs filed their lawsuit. (If the possession started before the deed of trust was recorded, the result may have been different)
Another reason the plaintiffs failed is that the adverse possessors can only obtain the title which the owners had when the adverse possession began – they cannot acquire a greater title than that held by the owner. The title obtained by a trustee’s deed on foreclosure relates back to the status of the title held by the trustor (owner) when the deed of trust was originally executed and recorded.