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Void Judgments and the Risk To Real Estate Buyers – An Action to Cancel an Instrument Does Not Quiet Title

I had previously discussed the case of OC Interiors, where the court determined that a void judgment in the chain of title to real property nullifies all subsequent transfers, including a transfer to a bona fide purchaser. That is a frightening prospect for buyers, and a reason to take a close look at the preliminary title report, and consult a real estate attorney if they are not comfortable with what they find. A default judgment may, in some cases, easily be found to be void. In a more recent decision, some other defendants tried to avoid this result by arguing that the void default judgment had the effect of granting quiet title relief, and thus the subsequent transaction was valid. They were disappointed to find otherwise – the action to cancel and instrument did not have the same impact as an action to quiet title.

Sacramento-real-estate-instrument-cancellation-attorneyIn Deutsche Bank National Trust Company v. Alan Pyle et al. Saluto owned property in Rancho Mirage and obtained a loan. She defaulted and began a firestorm of recording documents to screw up the chain of title to presumably prevent foreclosure and eviction. The long list of recorded documents is set out at the end of this post. (I wonder if she paid someone to muddy things up like this- I have done a quiet title in a similar situation, and the hired perpetrator faced Federal criminal charges). A trustee’s sale was held. Saluto then filed an action against the lender to cancel the trustee’s deed and deed of trust and obtained a default judgment. Eventually, the lender got the judgment set aside, the court finding that she had falsified the proofs of service, and that the judgment was void.

The issues on appeal for the court were: (1) whether defendants were entitled to bona fide purchaser or encumbrancer status, and (2) the impact of the void default judgment in the chain of title.
It first noted that the elements of a bona fide purchaser payment of value, in good faith, and without actual or constructive notice of another’s rights. “[A] bona fide purchaser for value who acquires his interest in real property without notice of another’s asserted rights in the property takes the property free of such unknown rights.”

Sacramento-title-problem-attorneyFinding the Judgment Void Results in Notice of the Trustee’s Deed
The court found it worth noting that defendant Pyle has an MBA and experience in the financial industry; Defendant Broadhurst is a licensed mortgage broker and realtor The court quickly found that these people were not BFPs. The lender had recorded a trustee’s deed. Once the default judgment was found void, the legal effect was to eliminate it from the record. This leaves the trustee’s deed in the chain of title, and thus these defendants had record notice of the trustee’s deed.

The Difference Between Cancellation of an Instrument and Quiet Title

The defendants then argued that they the quiet title statutes should apply because with the default judgment Saluto obtained quiet title relief. Specifically, section 764.060 which provides that where a party purchases real property for value in reliance on a quiet title judgment without notice of any defects or irregularities in the judgment or the case in which the judgment was entered, the party’s rights cannot be impaired even if the quiet title judgment is later successfully directly or collaterally attacked. But the court said- this was not a quiet title action.

Civil Code section 3412 provides 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 obtain cancellation under this section, a plaintiff must allege the instrument is “void or voidable” and would cause “serious injury” if not canceled. A decree cancelling an instrument essentially rescinds it, and places the parties back in the position they were before the instrument was made.

Quiet Title:
When a lawsuit seeks to both quiet title to the property and cancel an instrument, courts find that the cancellation is incidental to the quiet title; the lawsuit asserts only one claim. Quieting title is the relief granted once a court determines that title belongs in the plaintiff. Where there is a contract between the parties, the Plaintiff must show a right to rescind before he can be granted the right to quiet his title. Unlike a claim for cancellation, the court cannot enter a default judgment – the plaintiff must present evidence. Even if the defendant defaults, the Judge is required to hear and consider their evidence if they show up at the hearing.
Here, the defendants had not alleged a quiet title claim. Even better, in their application for an ex parte default judgment, they stated “THIS IS NOT A QUIET TITLE CASE AND DOES NOT REQUIRE A COURT HEARING.”
While it was a creative argument, the court did not buy it. The default judgment did not quiet title.

The Mess of Recorded Documents

In May 2006 a grant deed was recorded conveying title to the Property from Saluto to SNJ Properties, LLC (SNJ).

In November 2006 another grant deed was recorded, wherein title to the Property was conveyed from SNJ to Atistar Mortgage Solutions, LLC (Atistar).

In February 2007 Atistar conveyed title to the Property back to SNJ.

In July 2007 an “Affidavit & Notice of Dissolution of Trust Deed and Merger of Trust Deed into Title of Trust Deed Beneficiary” (Affidavit) was recorded, stating that SNJ transferred its interest in the Property to LBMC and WaMu. That same day, another grant deed was recorded, whereby SNJ purported to convey title to LBMC and WaMu.

In August 2007 Deutsche Bank recorded its trustee’s deed.

In July 2010 a recorded grant deed purported to convey title to the Property from Saluto to Lillie LTD (Lille).
In September 2010 a grant deed was recorded whereby SNJ purported to convey title to the Property to Lillie.
In July 2012 SNJ purported to convey title in the Property to Equalizer, LLC (Equalizer). Saluto then purportedly conveyed title from Lillie to Equalizer. Saluto also purportedly conveyed title in the Property to Equalizer. LBMC also purportedly conveyed title in the Property to Equalizer. Finally, Atistar purportedly conveyed title to Equalizer. In net effect, these transfers made it appear that SNJ, Atistar and LBMC had no interest in the property and that Equalizer had title to the property.