Alleged bona fide purchaser could not obtain title free of original deed of trust when default judgment purporting to cancel deed of trust was later adjudicated void.

 

OC Interior Servs., LLC v Nationstar Mortgage, LLC (2017) 7 CA5th 1318

 

Banks’ predecessor in interest (Predecessor) had a lien on Homeowner’s property granted by a deed of trust. In 2009, Homeowner defaulted on the loan. Soon after, Homeowner communicated with the loan servicer about a forbearance agreement. At the same time, Homeowner sued Predecessor to cancel the deed of trust, loan, and promissory note, and to enjoin Predecessor and its successors from asserting any right to the property. After Predecessor failed to respond, Homeowner obtained a default judgment. Shortly thereafter, OCI purchased the property from Homeowner for $750,000, knowing that there was a recorded default judgment vacating Predecessor’s lien interest (and knowing that the property was worth $1.5 million). OCI also obtained a $937,500 title insurance policy, suspecting fraud at the time of its purchase. Subsequently, Predecessor discovered the default judgment and successfully moved to void the judgment on the ground that Homeowner served the summons and complaint at a former place of business.

 

After discovering a Notice of Trustee sale of the property, OCI filed the instant action to stop the foreclosure and obtain a determination that the property was not subject to the first deed of trust. Banks argued that, even assuming OCI was a bona fide purchaser (BFP), it could not claim title based on a void default judgment and thus remained subject to the first deed of trust. The trial court ruled in favor of OCI.

 

The Fourth District Court of Appeal reversed, holding that a void judgment in the chain of title has the effect of nullifying a subsequent transfer, including to a purported BFP. As a preliminary matter, the court noted that whether void on its face or shown to be void by extrinsic evidence, a void judgment is “for all purposes a nullity—past, present and future.” See City of Los Angeles v Morgan (1951) 105 CA2d 726, 732. Similarly, although the law protects innocent purchasers, that protection extends only to those who obtained “good legal title.” See Wutzke v Bill Reid Painting Serv., Inc. (1984) 151 CA3d 36, 43, reported at 7 CEB RPLR 99 (June 1984). Here, once the default was adjudicated void, it became a nullity and no longer vacated the first deed of trust. As a result, Banks retained their lien interest in the property. Accordingly, even assuming OCI was a BFP—”a dubious assumption given the above facts” (7 CA5th at 1336)—it could not obtain title free of Banks’ interest in the property under the first deed of trust. The trial court erred in granting summary judgment to OCI on the basis of its alleged BFP status.

 

THE EDITOR’S TAKE: The trial court’s conclusion that OCI was a BFP, which is “ordinarily a question of fact,” is what probably generated this convoluted court of appeal ruling that “a void judgment in the chain of title has the effect of nullifying a subsequent transfer, including a transfer to a purported bona fide purchaser.” I think that means that even if OCI was a BFP, the title it took was subject to a recorded deed of trust, because the default judgment setting it aside had been declared void. If the default judgment invalidating the deed of trust was void, then the deed of trust was valid. Since the deed of trust was of record, OCI took subject to it, even though it claimed to be a BFP.

 

That logic may be true, but it might have been simpler for the court to have held that OCI knew too much to qualify as a BFP without notice, thus disqualifying itself from protection under our recording act. That alternative explanation is certainly a lot easier to understand and probably no less fits these facts.—Roger Bernhardt

 

 

39 Real Property Law Reporter 44 (Cal CEB Jan. 2017), © The Regents of the University of California, reprinted with permission of CEB.