Judge: Mark H. Epstein, Case: 24SMCV02409, Date: 2024-08-22 Tentative Ruling

Case Number: 24SMCV02409    Hearing Date: August 22, 2024    Dept: I

The motion to expunge is CONTINUED. 

Plaintiff filed a wrongful foreclosure action against defendants.  Plaintiff also filed a lis pendends on the theory that if it prevails, it is seeking the property back.  Defendants move to expunge the lis pendens and plaintiff opposes.

A lis pendens is an evidentiary motion.  The court does not rely on the pleadings alone; it can (and should) consider evidence.  Further, unlike a summary judgment motion, the court is to weigh the evidence to determine whether the plaintiff is likely to succeed or not.  Here, many of the facts are not disputed.

In 2023, plaintiff obtained a loan from defendant for $220,000.  The property in question was security for the loan and plaintiff signed a Deed of Trust in defendant’s favor.  There were two other loans.  One was with First Bridge, and there was a second as well.  There is some debate as to the loans’ priority.  Plaintiff contends that they were all equal in rank, but defendant contends that it was in the third position with First Bridge in the first, or senior, position.  For these purposes, though, the court is willing to assume that the issue is not material.  The First Bridge loan was what it sounds like: a bridge loan.  It was for a much larger sum than defendant’s loan.  It was interest only for a relatively short time with a balloon payment due at the end.  It is not really disputed that plaintiff did not make two of the interest only payments to First Bridge.  However, First Bridge did not issue or record a Notice of Default.  Even so, defendants learned of the nonpayment and elected to make the payments themselves to keep the First Bridge loan current.  Defendants did so and then sent a Notice of Default to plaintiff, claiming a default on defendants’ loan and requiring plaintiff to pay defendants what defendants had paid First Bridge (although the number in the Notice of Default was higher than that).  The basis for the default was plaintiff’s default on the First Bridge loan “and/or” the failure to make the First Bridge payments.  The notice of default was recorded in September 2023, stating that $89,345.85 was owed to defendants.  Plaintiff did not cure the default or attempt to do so, which led defendants to record a Notice of Trustee’s Sale on December 22, 2023.  That notice stated that the amount due to defendants was $574,962.79.  The sale occurred on January 17, 2024, and a Trustee’s Deed Upon Sale was recorded on February 9, 2024.  Defendants were the successful bidders.  Plaintiff brings the instant action claiming that the foreclosure was wrongful and seeking (among other things) title to the property.  In support of its position, plaintiff recorded a lis pendens.  Defendants seek to expunge the lis pendens and plaintiff opposes.

Plaintiff has objected to portions of the Valsky declaration.  As to paragraph 12, Valsky states that defendants paid the monthly payments to First Bridge to protect defendants’ interest.  The court believes Valsky has sufficient knowledge to make that statement.  The objection is OVERRULED.  There is another problem.  Defendants submitted new evidence in reply.  The court believes there is cause to allow that submission.  If plaintiff really believes it needs to be able to respond to that evidence, the court will discuss it.  (Plaintiff did object to it on this ground.)

A lis pendens is a powerful tool.  Because it is recorded, it puts the world on notice that the person holding title to the property might not have good title because the issue is being litigated.  Accordingly, a buyer who buys the property after a lis pendens is filed buys with that knowledge and could be forced to give title to the plaintiff if the plaintiff ultimately prevails in the litigation even though the buyer is not a party to the litigation.  Of course, the buyer might have recourse against the seller, but the buyer still loses the property.  In contrast, but for the lis pendens, a buyer who is unaware of the litigation would be a buyer in due course and would take free and clear of the litigation.  Because a seller cannot deliver clean title, a lis pendens has the practical effect (in many cases) of making the property unsaleable until the lis pendens is removed or significantly reducing the potential sale price.  Moreover, a lis pendens can be recorded without judicial intervention or permission.  A litigant simply files the papers and the deed (so to speak) is done.  That is a powerful and inexpensive tool.  The burden is on the defendant in the litigation to bring a motion to expunge the lis pendens, which will remain on the property until and unless that motion is granted (and for a while longer if there is an appeal).

Motions to expunge a lis pendens are governed by CCP sections 405, et seq.  To grant the motion, the court must make two findings (and then determine that a bond from plaintiff would not be a better option).  The first is that the litigation, if successful, could effect title.  The burden to show that is on the plaintiff, but it is often decided on the complaint alone.  This makes obvious sense in that if the cause of action could not cause the plaintiff to have an interest in the property, then the lis pendens has no basis.  The second finding is whether “the claimant has not established by a preponderance of the evidence the probable validity of the real property claim.”  That is a bit oddly worded—there is a sort of double negative.  What it means is that although defendant is bringing the motion the burden of persuasion is on the plaintiff.  If no one puts in any evidence of anything, the lis pendens will be expunged.  Of course,  the court’s determination is not binding at trial; but it is final in the practical sense that if the motion is granted and the lis pendens is expunged (and the order is not reversed on appeal), then a buyer can take free and clear of the litigation—even if the buyer is aware of the litigation.

Here, the first prong is easily met.  If plaintiff prevails in the wrongful foreclosure action, the property might revert to plaintiff.  After all, it is the defendant who allegedly wrongfully foreclosed and who now holds title through the allegedly wrongful foreclosure.  If plaintiff succeeds, title could be restored.  It is the second prong where the issue is joined.  A major question is whether defendants’ actions to protect their security interest gave rise to a default under the documents.  The relevant loan agreement provision states that a “failure to pay on a timely basis, or the occurrence of any other default under any note, . . . constitutes a default under the agreement.”  In the event of a default, the contract allows defendants to act to protect their interest without notice, and that would include protecting against a foreclosure by First Bridge.  The problem is in part that elsewhere, the following appears.  “[I]f there is any action or proceeding (including, without limitation, any judicial or nonjudicial proceeding to foreclose the lien of a junior or senior mortgage or deed of trust) affecting or purporting to affect the Mortgaged Property, this Security Instrument, Lender’s security for the performance of the Obligations and payment of the Indebtedness, or the rights or powers of Lender or Trustee under the Loan Agreement, the Note or this Security Instrument, Lender or Trustee may (but is not obligated to) (a) make any such payment or do any such act in such manner and to such extent as either deems necessary to preserve or protect the Mortgaged Property . . . .”  The area of dispute is this.  While there is no real dispute that plaintiff did not make two First Bridge interest payments, First Bridge never issued a notice of default.  Defendants made the payments but not because the loan had been declared defaulted.  According to plaintiff, that is fatal to defendants’ case because there was no action or proceeding that had been commenced toward foreclosing on the property.  Plaintiff’s reading is that defendants can advance the money to First Bridge only if the loan has been declared in default (and maybe not until a notice of sale is issued), not just because a payment has not been made.  By way of hypothetical example, consider the situation where plaintiff had arranged with First Bridge to agree to give plaintiff 60 days’ grace to make two interest payments.  That agreement would not be reflected in any County Recorder’s office document; it might be reflected only in an exchange of emails.  It might well be that defendants would look and see that the payments were not made, but it would make little sense for defendants to be able to front the payment and then declare a default.  Nor is that such a strange hypothetical.  This was a bridge loan—the interest only payments mattered, but the loan was coming due shortly in any event.  The question is whether the contract gave defendants the right to make payments on the other loans if plaintiff did not do so even if the lender elected not to declare the other loan to be in default.  Defendants, on the other hand, contend that paragraph 7.1.12 (quoted above) of the loan documents is an independent event of default—different from the default that occurs if there is a proceeding (which is in paragraph 7.1.6).  Thus, the defense claims, it is an alternative basis of a default, and that is sufficient.  The weird and odd thing is that it is unclear that defendants’ right to make payments to secure its position, which can be found in paragraph 10 of the Deed of Trust (for example) arises not upon plaintiff’s failure to make a payment to another lender, but rather when there is an action or proceeding instituted by another lender that might impair defendants’ position in the property.  Thus, one might argue, it might have been proper for defendants to have claimed a default due to the nonpayment of interest on the First Bridge loan, but the “cure” would only be some agreement by First Bridge that it would not take any action on that basis (perhaps).  The documents are not 100% clear to the court.

The court believes that the better reading at least at this stage, is that defendants did not have the right to make the payment to First Bridge unilaterally and demand reimbursement by plaintiff, at least given that First Bridge had not even declared a default.  Under the law and the various contracts here, a junior (or co-equal) lender has plenty of time to protect its interest once a notice of default is issued.  The notice is issued and there is a cure period.  During that period, the junior (or co-equal) lender can cure the default and subrogate itself to declaring its own loan in default if the borrower does not reimburse.  And that is the whole point.  The point of allowing another lender to cure the other default is to protect the security and the other lender’s security interest.  Curing a default that has not been declared does not serve such a purpose.  Worse, to allow it to occur discourages a borrower from trying to reach an accord with the other lender because even if the borrower reaches such an agreement, the junior (or co-equal) lender can nonetheless create a formal default and create an immediate financial obligation on the borrower.  (Here, had the default been only the failure to make payments to First Bridge, the cure might have been nothing more than a letter from First Bridge that it was permitting the delay.)  Because the court’s reading of the contract allowed the defendants here to pay First Bridge and then declare a default only if First Bridge had first declared a default, at least based on the record thus far, the notice of default may have been flawed and hence the sale could be improper.

All of that said, neither party really briefed this issue.  Defendants just assume that they had the right to make the payment to First Bridge even though there is no evidence that they had contacted First Bridge to see if First Bridge even cared or was going to do something that might impair defendants’ collateral.  But the documents are not quite that clear.  Plaintiff, on the other hand, just assumes that defendants had no rights with regard to the First Bridge loan at all.  The court would appreciate supplemental simultaneous briefs addressing this issue, with evidence if need be. 

There is a second problem.  The amount of the default ought to have been essentially two months of interest.  The notice of default, though, was almost $90,000, which seems higher than the amount actually paid by defendants to First Bridge.  But even if defendants’ notice of default had the right amount (due to late fees), the notice of sale lists an amount six times greater.  In fact, even if one adds in all of defendants’ outstanding loan balance the notice of trustee’s sale is about twice what the number should have been.  Defendants have suggested no explanation for this that the court recalls seeing.  Defendants counter by saying that the notice of trustee sale is valid whether or not the amount is correct—the amount is mere extra information.  The court is not so sure.  At least on this record, the court does not view what may be a very incorrect amount as a technical defect that it can so easily overlook.  For example, if that is the amount due and owing under the loan at issue, one might well assume that the lender would submit a credit bid, which informs how the auction would go; if the amount is double the amount of the loan, then the credit bid would be different.  If such is the case, then this provides an alternative reason to deny the motion.  Again, there is not a lot of briefing on this.  Defendants just assume this away, but they provide no authority that the amount set forth in the Notice of Trustee’s Sale is irrelevant.  Plaintiff assumes that it must be relevant even though the property is going to be sold to the highest bidder at auction, and so the amount in that document is not really the “cure” amount needed to be paid by plaintiff to bring the loan current.

The motion will be CONTINUED to allow that briefing.  The court will discuss timing with the parties.  Because there is no evidence that the property is declining in value or that defendants are suffering any immediate injury due to the lis pendens, the court is not inclined to require any bond at this moment.  That may change at the next hearing.