Posting for

Tuesday, September 22, 1998

by: Bert Rush

brush@firstam.com

FORECLOSURES/RIGHT OF REDEMPTION/NOTICE REQUIREMENTS

A recent California appeals court decision addresses the question of what happens to a junior interest missed by a judicial foreclosure.

The case is Diamond Benefits Life Insurance Co. v.Troll (1998) 77 Cal.Rptr.2d 581.

Around 1988 a developer (who later went to prison--but that's another story) built a golf course known as the Indian Springs Country Club near Palm Springs, in Indio, CA.

By mistake (?) two of the holes for the course were built on neighboring land owned by Raymond and J.A. Troll.

The golf course was financed in part by loans to the developer from Diamond Benefits Life (obtained illegally--but again that's another story), which loans were secured by two deeds of trust against the property in favor of Diamond Benefits Life. These deeds of trust were recorded in March and July, 1988.

When the Trolls learned their land had become part of the golf course they threatened to sue. This dispute was settled by an agreement between the developer and the Trolls, whereby the Trolls obtained easements affecting the golf course property, as follows:

(1) The Trolls were given rights of access at different locations across portions of the property;

(2) The Trolls were given the right to drain water from their property (the dominant tenement) onto the golf course property (the servient tenement);

(3) The Trolls got the right to annex portions of their property to a planned unit development on the golf course property; and

(4) The Trolls obtained rights for future owners of a portion of their property to enjoy golf course privileges--to the same extent as owners in the planned unit development on the golf course property.

These rights were created, as a matter of record, by a grant of easement recorded in October 1988.

In 1989 Diamond Benefits Life brought an action for judicial foreclosure of its deeds of trust. This action did not name the Trolls. The action resulted in a foreclosure sale in which Diamond Benefits Life was the successful bidder. Deeds from the foreclosing judicial officer were recorded in February 1992.

After foreclosure the Trolls filed a quiet title action, apparently claiming that since they had not been named in the judicial foreclosure their easement rights were not wiped out by the ensuing sale--and now those easement rights should be declared free and clear of any encumbrance in favor Diamond Benefits Life. Diamond Benefits Life demurred and the quiet title action was dismissed on legal grounds.

But dismissal of the quiet title action did not necessarily dispose of the Trolls' easement rights, which they continued to assert over the property. So Dia-Benefits Life brought its own quiet title action against the Trolls. Although styled as a quiet title action, this was also considered as an action for judicial foreclosure of the previously-foreclosed deeds of trust as against the easement rights of the Trolls.

The trial court held that the Trolls would enjoy an equitable right of redemption such that they might redeem (ie., buy) all of the land sold at the foreclosure sale by paying the amount of Diamond Benefits Life's successful bid. This right of redemption was to last for 90 days after entry of the final judgment. If the Trolls failed to redeem, their easement rights would be wiped out. The trial court's holding was an attempt to restore the Trolls to the position they would have been in had they been named in the judicial foreclosure.

But this wasn't a good result for the Trolls. They didn't have the millions needed to buy the golf course--or maybe just didn't want to undertake its ownership obligations--so they appealed.

On appeal the Trolls argued that as holders of a recorded junior interest they were necessary or indespensible parties to the judicial foreclosure that the judicial foreclosure did not bind them (or otherwise affect their interests) because they were not named and served as parties, and that after the foreclosure was completed the foreclosing party should not retain a right to re-do the foreclosure to affect their interests. In effect, their easement rights would survive the foreclosure, and thereafter be enforceable against the successful bidder and its successors.

Alternatively, the Trolls argued that if their equitable right of redemption should be upheld, they should be required to pay only an amount calculated to equal the value of those easement rights they seek to preserve, rather than the value of the whole golf course --or, as they put it, they should be given "pro tanto redemption rights."

Diamond Benefits Life cross-appealed, arguing that under California law holders of mere easement rights are not necessary parties to an action for judicial foreclosure, so the foreclosure as conducted should have been sufficient to wipe out the Trolls' junior easements. This argument was based on California Code of Civil Procedure section 726(c), dealing with judicial foreclosures, which does not expressly identify holders of easement rights as necessary parties; and also based on an analogy to California statutes dealing with non-judicial foreclosures, which apparently do not require that a trustee enforcing a power of sale give notice to persons holding easement rights. To require joinder of easement holders in judicial foreclosures, argued Diamond Benefits Life, would create inconsistent requirements as between judicial and non-judicial foreclosures.

The Court of Appeal modified and affirmed the trial court decision, holding (unsurprisingly) that holders of recorded easement rights are within the definition of "necessary parties" under California statutes. If this is creates inconsistency with the requirements for non-judicial foreclosures, the Court was unconcerned, saying:

Next the Court held that the foreclosing party in a judicial foreclosure who fails to name a necessary party retains a right of foreclosure against the unnamed party. In this connection, the Court relied on case authority from Oregon (unnamed holder of party wall easement) and New Jersey (unnamed holder of road easement) and said this rule merely restores the parties to their original positions--without prejudice to either party. And, said the Court, while the Trolls were necessary parties they were not indispensable parties, so "the foreclosure was valid as to the parties served."

The Court likewise agreed that the Trolls should be given an equitable right of redemption, but it held the redemption period should be one year from the date of judgment--same as the redemption period provided by California statute for interests affected by judicial foreclosures. (Note: There is no right of redemption following a statutory non-judicial foreclosure in California.)

Finally, the Court agreed that the Trolls should not be awarded a "pro tanto" redemption right. Case law cited by the Trolls in this regard was distinguished, because the Troll easement rights could not be said to attach only to a small "physically defined" portion of the golf course property.

Comment: This seems (to me) to be a very reasonable and fair decision--I'd expect it to be followed in other states.

Title folk (examiners and claims handlers alike) should be glad to see this decision because it addresses some issues We frequently encounter--mainly, what interests must be dealt with in a judicial foreclosure, and what's the result if one of these interests is "missed" or not properly joined by adequate service of process.

In the past we've seen claims in which a "missed" party makes extravagant claims of having escaped unscathed by the foreclosure of a senior interest--perhaps now to enjoy priority over a successful bidder. The decision in Diamond Benefits Life gives some comfort that courts will be willing to view these cases as calling for equitable relief--so the finality of judicial foreclosures will be disturbed only to the extent that a missed party may be given a right of redemption, redeemable in a fair amount payable to the successful bidder, and lasting for a reasonable period.

This remedy should not be expected to encourage many missed parties to pursue the right of redemption. Typically, they can't afford to redeem the foreclosing interest and instead tend to view their "missed" status as giving them a bargaining position. This case, if anything, seems to weaken such a bargaining position.

On the other hand, this decision should not result in relaxation of our underwriting standards. We should still examine court records when asked to insure following a judicial foreclosure--and we should not be encouraged to insure against missed or inadequately joined parties.

And, leave us not forget, non-judicial foreclosures are a whole different animal--because the conventional wisdom is they probably don't involve sufficient "state action" to bring into play constitutional rights of due process. As a result, in most cases, and in most states, if a foreclosing party complies with statutory requirements for conducting a non-judicial foreclosure the result will probably be upheld if taken to court.

(Caveat: Many of us in California aren't comfortable with our statutes' failure to require notice to junior lienholders and the like--and there's little case law to give us comfort. So, many title companies and examiners are reluctant to insure out of a non-judicial foreclosure unless all such parties have been sent mailed notices --statutes notwithstanding.)

Remember I said there's more to the story of Diamond Benefits Life--stay tuned.

Questions, comment, argument? Just press the "reply" button....