Judge Michael Shultz, Case Number: 24STCV21891, Date: 2025-03-25 Tentative Ruling

[TENTATIVE] ORDER SUSTAINING IN PART AND OVERRULING IN PART DEFENDANT’S DEMURRER TO THE FIRST AMENDED COMPLAINT [Reservation No. -8498]

The first amended complaint (“FAC”) arises from a dispute over the ownership of real property located at 606-608 N. Fuller Avenue in Los Angeles, which Plaintiff alleges she owns. Plaintiff alleges that her father, Kevin Song, (“Kevin”) used the property as security for a loan obtained from Velocity Commercial Capital LLC (“Velocity” or “Defendant”). Kevin allegedly incorporated a company with the same name as Plaintiff’s previously dissolved company, Lioness Investment, Inc. (“Borrower”). In procuring the loan, Kevin falsely claimed that the Borrower owned the Fuller Avenue real property, which served as security for the $1,295,000 loan. Velocity subsequently recorded a Deed of Trust (“DOT").

Defendant, PHH Mortgage Service Corporation, issued a Notice of Default and threatened to foreclose on the real property. Plaintiff alleges claims for fraud, slander of title, cancellation of instrument, and to quiet title.

Velocity demurs to the entire FAC on grounds it is an improper party since it doesn’t have any interest in the subject deed of trust, which Plaintiff admits in discovery responses. Velocity assigned its interest in the mortgage at issue to Defendant, U.S. Bank National Association (“USB”). Velocity asks the court to take judicial notice of the assignment recorded November 7, 2022 (the “Assignment”) which assigns all of Velocity’s rights and liabilities concerning the mortgage to USB. The assignment negates all of Plaintiff’s claims. Any relief against Velocity is not possible.

Velocity further argues that the FAC fails to acknowledge that Velocity did not issue the notice of default and, therefore, is not liable for slander of title. Velocity otherwise acted as a good faith encumbrancer for value.

Plaintiff argues that Velocity relies on the interpretation of the Assignment. As a matter of law Velocity cannot escape liability by assigning its interests. Plaintiff alleges facts to support all claims against Velocity because it was not a good faith encumbrancer. Plaintiff alleges that Velocity failed to exercise reasonable diligence in determining the ownership of the real property before originating the loan and then recorded a void deed of trust which affected Plaintiff’s ability to sell the real property.

Plaintiff asks the court to take judicial notice of Secretary of State records of her property, Lioness Investment Inc., Plaintiff’s discovery responses, and Velocity’s Form 10K filed with the Securities and Exchange Commission.

In reply, Velocity argues that Velocity was a good faith encumbrancer for value. Plaintiff failed to allege facts showing Velocity had actual or constructive notice of the Borrower’s status. The assignment has preclusive effect because Velocity does not owe any obligations to Plaintiff under the assigned deed of trust. The court can take judicial notice of the Assignment because its language is not reasonably in dispute. It is established that Velocity acted in good faith in investigating the chain of title before originating the loan. Velocity has no interest in whether any document is cancelled.

A demurrer tests the sufficiency of a complaint as a matter of law and raises only questions of law. (Schmidt v. Foundation Health (1995) 35 Cal.App.4th 1702, 1706.) In testing the complaint’s sufficiency, the court must assume the truth of the properly pleaded factual allegations as well as facts that can be reasonably inferred from those expressly pleaded facts. The court may also consider matters properly subject to judicial notice. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.)

The court may not consider contentions, deductions, or conclusions of fact or law. (Moore v. Conliffe (1994) 7 Cal.4th 634, 638.) Plaintiff is required to allege facts sufficient to establish every element of each cause of action. (Rakestraw v. California Physicians Service (2000) 81 Cal.App.4th 39, 43.) Where the complaint fails to state facts sufficient to constitute a cause of action, courts should sustain the demurrer. (Code Civ. Proc., § 430.10(e); Zelig v. County of Los Angeles (2002) 27 Cal.4th 1112, 1126.)

Sufficient facts are the essential facts of the case stated "with reasonable precision and with particularity that is sufficiently specific to acquaint the defendant with the nature, source, and extent of his cause of action.” (Gressley v. Williams (1961) 193 Cal.App.2d 636, 643-644.) Whether the Plaintiff will be able to prove the pleaded facts is irrelevant. (Stevens v. Superior Court (1986) 180 Cal.App.3d 605, 609–610.)

A demurrer may also be sustained if a complaint is “uncertain.” Uncertainty exists where a complaint’s factual allegations are so confusing, they do not sufficiently apprise a defendant of the issues it is being asked to meet. (Williams v. Beechnut Nutrition Corp. (1986) 185 Cal.App.3d 135, 139, fn. 2; Code Civ. Proc., § 430.10(f).)

The court grants Velocity’s request to take judicial notice of the fact that a document recorded on November 7, 2022, reflects that Velocity assigned to USB all of Velocity’s rights and interests in a deed of trust signed by Borrower and recorded August 11, 2022. USB is described in the Assignment as “Trustee for Velocity Commercial Capital Loan Trust 2022-5) that secures real property at 606 North Fuller Avenue in Los Angeles.” (Def. RJN, Ex. A.)

The court denies Velocity’s request for judicial notice of Plaintiff’s responses to Velocity’s requests for admission The court can take judicial notice of a pleading party’s discovery responses “to the extent ‘they contain statements of the [party] or his agent which are inconsistent with the allegations of the pleading before the court.’” (Bounds v. Superior Court (2014) 229 Cal.App.4th 468, 477.) Velocity uses the admission as evidence to support its arguments that Plaintiff agrees that Velocity does not have any ownership interest in the real property. There is no contrary allegation in the FAC.

The court denies Plaintiff’s request for judicial notice of her supplemental responses to requests for admission because it is an improper use of discovery responses for purposes of demurrer. Plaintiff also relies on evidence that she did not admit that Velocity assigned its rights and liability as a matter of law. (Opp. 7, fn 1.)

The court also denies the request to take judicial notice of Secretary of State records or Velocity’s Form 10K filed with the Securities and Exchange Commission as both are irrelevant to the disposition of Defendant’s demurrer.

B. Velocity is not a proper party to the second cause of action of action for quiet title.

“(a) A description of the property that is the subject of the action. In the case of tangible personal property, the description shall include its usual location. In the case of real property, the description shall include both its legal description and its street address or common designation, if any.

(b) The title of the plaintiff as to which a determination under this chapter is sought and the basis of the title. If the title is based upon adverse possession, the complaint shall allege the specific facts constituting the adverse possession.

(d) The date as of which the determination is sought. If the determination is sought as of a date other than the date the complaint is filed, the complaint shall include a statement of the reasons why a determination as of that date is sought.

(e) A prayer for the determination of the title of the plaintiff against the adverse claims.” (Code Civ. Proc., § 761.020.)

Plaintiff generally alleges that Defendants, some or all of them, may claim some right, title or interest in the property. (FAC ¶ 28.) The only allegation of an adverse claim to Plaintiff’s title is the Borrower, which is the corporation created by Kevin. (FAC ¶ 1.) Plaintiff does not allege that Velocity claims title to the property.

There is no dispute that Velocity’s interest in the mortgage, and thus, the real property under the DOT has been transferred to USB, which Plaintiff also alleges. (FAC 2:11-12.)

C. The third cause of action for slander of title is well stated; Defendant has not established its assignment of the DOT extinguishes its liability allegedly owed to Plaintiff.

Plaintiff alleges that Velocity recorded the DOT, although Velocity did not conduct due diligence by confirming the date when the Borrower was incorporated and determining the true owner of the real property before originating the loan to the Borrower. Velocity recorded a DOT that was procured by fraud, which Velocity would have discovered had it conducted its due diligence. (FAC ¶ 21.)

The cause of action requires (1) proof of a publication (2) that was without privilege or justification, (3) made either with knowledge the publication was false or without regard for its truthfulness and that (4) causes direct and immediate pecuniary loss. (Howard v. Schaniel (1980) 113 Cal.App.3d 256, 263–264.) The allegations support all elements of the cause of action. The allegation that Velocity originated the loan to Borrower without conducting due diligence supports the third element, that Velocity recorded the DOT “without regard for its truthfulness.” (Id.)

The DOT was allegedly recorded in August of 2022. Defendant assigned to USB “all interest, all liens, any rights due to or to become due thereon.” (Def. RJN, Ex A.) Contrary to Velocity’s argument, the Assignment does not transfer Velocity’s liability for its own misconduct in recording the DOT in the first place. (Dem. 9:10-11.)

Defendant’s argument -- that an assignee stands in the shoes of the assignor and acquires all the assignor’s rights and liability – has no meaning without a factual context. Professional Collection Consultants v. Hanada (1997) 53 Cal.App.4th 1016, on which Defendant relies, involved the timeliness of an assignee’s suit against the borrowers for failing to comply with a loan payment schedule. The court determined that the assignee who succeeded the FDIC as receiver for the lending bank, was entitled to the benefit of the statute of limitations applicable to claims brought by the FDIC to enforce notes. (Professional at 1018. [“We must decide whether the statute applies to an FDIC assignee. Only one California court has addressed this issue. It concluded an ‘FDIC's assignee is entitled to the benefit of the federal statute of limitations in enforcing notes from failed banks.’”].) The case did not consider whether an assignor (Velocity, the lender) could escape liability for alleged misconduct that caused a third party (Plaintiff) harm by assigning rights and obligations under a deed of trust to another entity.

Velocity concurs that one cannot assign away its liability. (Reply 2:19-20.) Velocity argues that since Plaintiff has no beneficial interest in the DOT, Velocity does not owe Plaintiff “liabilities and obligations” under that document. (Reply 3:5-7.) Insofar as Defendant is arguing a new theory that it owes no duty to Plaintiff simply because Plaintiff has no interest in the DOT, this is a new argument not raised in the demurrer and is not considered.

Secondly, the argument miscomprehends the allegations. Plaintiff alleges damage for Velocity’s recording of the DOT to secure a loan which Velocity extended without conducting due diligence on the ownership, chain of title, or the true identity of the Borrower which affected Plaintiff’s ability to market her property as there was now a $1,295,000 cloud on it.

The time period that Velocity owned the loan is irrelevant; Plaintiff’s claims are based on Velocity’s alleged misconduct preceding the loan. (Reply 2:14-15.)

D. Velocity is an improper party to the fourth cause of action for cancellation of instruments.

A claim to cancel instruments is distinct from a quiet title action. The latter is directed at a person who claims an interest adverse to the plaintiff, without right. An action to cancel an instrument to remove a cloud on title is directed at a particular instrument, which a plaintiff contends is invalid. (Wolfe v. Lipsy (1985) 163 Cal.App.3d 633, 638.) It is an equitable claim codified in Civ. Code, § Code § 3412.[2] It does not seek to hold a defendant liable for damage. Rather it allows a plaintiff to cancel an instrument that creates a cloud on title. (Weeden v. Hoffman (2021) 70 Cal.App.5th 269, 292.)

Plaintiff seeks cancellation of the DOT that allegedly created the cloud. Velocity has transferred its interests to USB and is an improper party. Again, the only alleged adverse claimant to title is the Borrower. However, Plaintiff alleges it against all Defendants.

E. Whether Defendant is a good faith encumbrancer cannot be determined at this stage.

A good faith encumbrancer is one who acts without knowledge or notice of competing liens. (Triple A Management Co., Inc. v. Frisone (1999) 69 Cal.App.4th 520, 530.) Whether Velocity qualifies as one is a question of fact. (Triple A Management Co., Inc. v. Frisone (1999) 69 Cal.App.4th 520, 536. Defendant argues that Plaintiff must allege facts showing some form of valid notice whether actual, constructive, imputed or implied. A good faith encumbrancer is entitled to rely on the recorded state of title “as that state of title objectively presents itself.” (Triple A at 530.) However, a lender cannot ignore information that reasonably brings into question the state of title reflected. (Id. at 531.)

The alleged facts support an inference that Defendant either failed in the first instance to verify the Borrower’s status and determine the owner of the property, or Defendant ignored public information.

Paragraph 12 of the FAC alleges that Plaintiff incorporated her company, Lioness Investment, Inc. (“Lioness”) on September 5, 2013. On September 16, 2013, Plaintiff’s mother conveyed the property to Lioness. On March 5, 2021, Plaintiff dissolved Lioness. Plaintiff alleges that upon dissolution, Lioness, conveyed the property to her.

The FAC alleges that nine months later, on January 4, 2022, Plaintiff’s father, Kevin, incorporated a company using the now-dissolved corporation’s name. (FAC ¶¶ 14-15, 17-18.) The FAC includes the Articles of Information for Plaintiff’s Lioness showing a Corporate No. of C3599741 and that it was subsequently dissolved. Kevin incorporated his company, also Lioness Investment, Inc., on January 4, 2022, bearing Corporate No. C482712.

The claim for slander of title against Velocity survives demurrer. It also serves to dispute the contention that Velocity is a good faith encumbrancer.

The FAC alleges facts to support the contention that Velocity was on notice sufficient to question the state of title at the time of loan origination.

Based on the foregoing, demurrer to the second cause of action for quiet title and the fourth cause of action for cancellation is SUSTAINED without leave to amend. The demur to the third cause of action for slander of title is OVERRULED. Defendant is ordered to answer within 30 days.

[1] Yvanova v. New Century Mortgage Corp. (2016) 62 Cal.4th 919 [Disapproved Fontenot in part regarding the issue of a borrower’s standing to sue for wrongful foreclosure.]

[2] "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." (Civ. Code, § 3412.)