Countrywide Home Loans v. La Jolla Group II, et al, No. 07-17142 (9th Cir. 2010)

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FILED NOT FOR PUBLICATION UNITED STATES COURT OF APPEALS OCT 05 2010 MOLLY C. DWYER, CLERK U .S. C O U R T OF APPE ALS FOR THE NINTH CIRCUIT UNITED STATES OF AMERICA, Defendant, No. 07-17142 D.C. No. CV-02-06405-AWI and MEMORANDUM * LA JOLLA GROUP II; TERRANCE FRAZIER, Defendants-counter-claimants - Appellees, NEVADA TRUST DEED SERVICES, INC.; LA SALLE NATIONAL BANK, Counter-defendants Appellants, v. COUNTRYWIDE HOME LOANS, INC., Plaintiff-cross-defendant Appellant, v. CTC REAL ESTATE SERVICES, * This disposition is not appropriate for publication and is not precedent except as provided by 9th Cir. R. 36-3. page 2 Third-party-defendant Appellant. Appeal from the United States District Court for the Eastern District of California Anthony W. Ishii, Chief District Judge, Presiding Argued and Submitted January 13, 2010 San Francisco, California Before: KOZINSKI, Chief Judge, HUG and CLIFTON, Circuit Judges. Countrywide Home Loans, Inc. ( Countrywide ) appeals the district court s judgment quieting title to a home in favor of defendants La Jolla Group II and Terrance Frazier. 1. CTC s erroneous Notice of Full Reconveyance converted Countrywide s senior deed of trust into an equitable lien of equal priority. See First Fidelity Thrift & Loan Ass n v. Alliance Bank, 71 Cal. Rptr. 2d 295, 300 01 (Cal. Ct. App. 1998) (finding that an erroneously reconveyed deed of trust created an equitable claim to reinstatement of a previously extinguished lien ); see also 4 Harry D. Miller, Miller & Starr s California Real Estate § 10:31 (3d ed. 2000) [hereinafter Miller & Starr] (equitable lien has the same priority as the erroneously reconveyed lien). The foreclosure sale by Nevada Trust Deed Services, Inc. ( Nevada Trust ) under a junior deed of trust did not extinguish this lien. 5 Miller & Starr § 11:99. page 3 2. Defendants did not acquire the home free and clear of Countrywide s lien because they were not bona fide purchasers for value. See Melendrez v. D & I Inv., Inc., 26 Cal. Rptr. 3d 413, 424 (Cal. Ct. App. 2005). A buyer at a foreclosure sale is a bona fide purchaser if he (1) bought the property for fair value; and (2) had no knowledge or notice of anyone else s rights to the property. 5 Miller & Starr § 11:50. Although a purchaser at a foreclosure sale may rely on the record of title, he must investigate ambiguities in that record. 5 Miller & Starr § 11:81. Here, CTC s Notice of Full Reconveyance reciting that Countrywide s senior lien had been paid in full was inconsistent with both Nevada Trust s Notice of Default initiating foreclosure proceedings on a much smaller junior lien and CTC s second Notice of Default. These inconsistencies put defendants on notice because they had knowledge of circumstances[,] which, upon reasonable inquiry, would lead to [discovery of Countrywide s unrecorded lien]. Triple A Mgmt. Co. v. Frisone, 81 Cal. Rptr. 2d 669, 676 (Cal. Ct. App. 1999) (quoting First Fidelity Thrift & Loan Ass n, 71 Cal. Rptr. 2d at 301). The district court erroneously relied on First Fidelity Thrift & Loan Ass n v. Alliance Bank, 71 Cal. Rptr. 2d 295 (Cal. Ct. App. 1998), to hold that defendants had no duty to investigate beyond the record of title. But First Fidelity held that there is a duty of inquiry, which is discharged once the . . . discrepancy [in the page 4 record of title has] been explained in a manner consistent with normal practice. First Fidelity, 71 Cal. Rptr. 2d at 303. Defendants didn t discharge their duty under First Fidelity because they never investigated the inconsistencies between CTC s Notice of Full Reconveyance and the two Notices of Default. The district court found that Nevada Trust would have told the defendants that the Notice of Full Reconveyance had been recorded by mistake. The court also found that a call to CTC would have revealed that it had initiated foreclosure proceedings under Countrywide s lien. Thus, had defendants investigated, they would have learned that Countrywide retained an interest in the home. See 5 Miller & Starr § 11:61 (constructive notice of facts discoverable through reasonable investigation). 3. Countrywide isn t entitled to rescission due to procedural irregularities because it hasn t proved that it was prejudiced by Nevada Trust s statements or any collusion between defendants. A procedural irregularity must have contributed to the inadequacy of price or otherwise injured the party seeking rescission for the court to set aside a nonjudicial foreclosure sale. Knapp v. Doherty, 20 Cal. Rptr. 3d 1, 14 (Cal. Ct. App. 2004) (emphasis omitted). Because defendants aren t bona fide purchasers, Countrywide retains a valid lien on the home. Countrywide hasn t shown that it will be prejudiced by having to enforce this lien through a judicial page 5 foreclosure proceeding. See 4 Miller & Starr § 10:32 (equitable creditor s remedy is limited to judicial foreclosure). Countrywide therefore hasn t rebutted the presumption that the foreclosure sale was conducted fairly and regularly. See 4 Miller & Starr § 10:211. Countrywide s argument that the homeowners were prejudiced is irrelevant because they re no longer parties to the suit. Cf. Lo v. Jensen, 106 Cal. Rptr. 2d 443, 446 (Cal. Ct. App. 2001) (finding that debtor could rescind sale when collusion caused home to sell for a fraction of fair market value). 4. Nevada Trust s failure to give the IRS adequate notice was not a proper ground for rescinding the foreclosure sale because the statute obligating trustees to notify the IRS, Cal. Civ. Code § 2924b(c)(4), was enacted after the sale occurred. Rescission is a retrospective remedy, and section 2924b(c)(4) lacks any express declaration of retrospectivity or a clear indication that the electorate, or the Legislature, intended [the statute to apply retrospectively]. Tapia v. Superior Court, 807 P.2d 434, 436 (Cal. 1991). REVERSED AND REMANDED.

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