Statute of Limitations Bars Lender’s Subsequent Action to Quiet Title Against Junior Lienholder Mistakenly Omitted from Initial Judicial Foreclosure Action

A recently issued opinion by the Court of Appeal, Fifth Appellate District tells a cautionary tale regarding a lender’s failure to name a junior lienholder in its initial judicial foreclosure action.

In Cathleen Robin v. Al Crowell, — Cal.Rptr.3d —-, 2020 WL 5951506, plaintiffs sued defendant, a junior lienholder, for quiet title, having failed to name him in the initial judicial foreclosure action. Defendant raised the statute of limitations defense, but the trial court found in favor of plaintiffs. The court of appeal reversed, holding that the 60-year statute of limitations which the trial court applied only applied to a nonjudicial trustee’s sale, and the trial court could not exercise the trustee’s power of sale after the expiration of the statute of limitations on a judicial action to foreclose.

In 2006, plaintiffs loaned Steve and Marta Weinstein (the “Weinsteins”) $450,000, secured by a deed of trust on one parcel of the Weinstein’s property. In 2007, the Weinsteins and defendant Al Crowell (“Crowell”) recorded a second deed of trust on the property, securing a promissory note executed by the Weinsteins in 2004.

The Weinsteins’ promissory note to plaintiffs permitted plaintiffs to accelerate the due date of their loan in the event a tentative subdivision map for the development of the property was not approved by January 1, 2008. Plaintiffs exercised this right, accelerating the due date to April 5, 2008, and the Weinsteins failed to make payment by that date. Plaintiffs initiated a judicial foreclosure under the deed of trust, but failed to name Crowell as a defendant, despite his recorded deed of trust. The trial court entered a judgment in favor of plaintiffs in the foreclosure action in 2011, ordering the sale of the property. In 2014, plaintiffs purchased the property at the foreclosure sale for a credit bid of $150,000.

After the Weinsteins’ one-year redemption period expired, plaintiffs attempted to sell the property to the owners of a neighboring property. The title search conducted at that time revealed Crowell’s recorded deed of trust. In June 2016, plaintiffs filed this quiet title action to clear title to the property. Following a bench trial, the trial court entered judgment in favor of plaintiffs on the complaint and the cross-complaint. It exercised its equitable powers to correct a mistake in the prior foreclosure action – the mistake of failing to include Crowell as a party to that action. The trial court granted Crowell a three-month redemption right, which it believed would put him in the same position he would have been in if he had been included in the Weinstein foreclosure action. The court of appeal disagreed, reversing the judgment as being barred by the statute of limitations and directing the trial court to vacate its judgment and enter a new judgment in favor of Crowell on the complaint and the cross-complaint.

As an initial matter, the court of appeal found that “a junior lienholder is not affected by the foreclosure of a senior lien, if the junior lien existed prior to the foreclosure and the junior lienholder was not made a party to the senior lienholder’s foreclosure action.” In order to remove a junior lien, the senior lienholder (or buyer at the senior sale) could file a second action to foreclose the omitted party’s equity of redemption or a quiet title action having the same effect.  The junior lienholder, however, may raise the statute of limitations defense to the senior lienholder’s foreclosure action. This is what occurred here.

In analyzing the applicable statute of limitations, the court of appeal first concluded that the statute of limitations applicable to foreclosures governed the case. In discussing the statute of limitations for judicial foreclosures, the court of appeal applied Civil Code section 2911, which provides that a lien is extinguished by the lapse of time within which, under the Code of Civil Procedure, an action can be brought upon the principal obligation. The court noted that while the statute referenced the Code of Civil Procedure, it was not deciding whether the 4-year period under Code of Civil Procedure section 337(a) applied, or the 6-year period under Commercial Code section 3118 applied. Rather, such a determination was immaterial because either time expired before plaintiffs brought their action.

In applying the facts of the case, the court cited Flack v. Boland (1938) 11 Cal. 2d 103, 106, for the proposition that “[t]he limitations period for bringing a judicial foreclosure action begins to run upon maturity of the obligation secured, that is, when the underlying promissory note comes due, but is unpaid.” Plaintiffs accelerated the maturity date of the promissory note, making payment due on April 5, 2008; the Weinsteins failed to make payment by that date; plaintiffs filed the action for foreclosure against the Weinsteins within four years after that date; but plaintiffs did not file this action to foreclose against defendant until more than eight years after maturity of the note.

In discussing the statute of limitations for nonjudicial foreclosures, the court of appeal noted that the 60-year limitation period pursuant to Civil Code section 882.020(a)(2) applied to plaintiffs’ deed of trust because the deed of trust did not reflect the maturity date. That section, however, provides that the 60-year limitations applies “[u]nless the lien of a…deed of trust…has earlier expired pursuant to Section 2911…” The court concluded: “In this case, because there was no extension or tolling of the statute of limitations on plaintiffs’ judicial foreclosure action, the limitations period set out in Civil Code section 882.020 prescribed only the limit on their time for conducting a trustee’s sale under the deed of trust.”

The court rejected plaintiffs’ contention that a second foreclosure action or quiet title action having the same effect could be used by the trial court as an equitable remedy by which a senior lienholder could dispose of a junior lien that was inadvertently omitted from the prior foreclosure action. The Weinsteins’ obligation under plaintiffs’ deed of trust ended when the judicial foreclosure action was complete and there could be no further obligation under which they were in default. Accordingly, plaintiffs could not strictly comply with the procedures to conduct a nonjudicial foreclosure, including the recording of a notice of default that warranted the sale of the property. The court concluded:

In substance, plaintiffs’ quiet title action was aimed at completing the prior judicial foreclosure that omitted defendant and failed to eliminate his interest in the property. The expiration of the applicable limitations period and extinguishment of the lien of the deed of trust barred any judicial action to foreclose at the time the quiet title action was commenced. The court cannot ignore the limitations period prescribed by the Legislature for judicial actions to foreclose against a trustor and junior lienholders, and equitably substitute in its place the limitations period prescribed for the trustee’s exercise of the power of sale in the deed of trust.

This case emphasizes the importance of obtaining a title report prior to the filing of a judicial foreclosure action, which could have assisted plaintiffs in naming all junior lienholders.  While the opinion notes that a lender may pursue a junior lienholder in a subsequent action, given the various delays facing California courts, a statute of limitations may quickly slip away from a litigant before a subsequent action could be filed to correct the issue.