Keefe v. Arbuckle CA3 ( 2013 )

Filed 12/4/13 Keefe v. Arbuckle CA3
NOT TO BE PUBLISHED
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
THIRD APPELLATE DISTRICT
(San Joaquin)
----
HOWARD M. KEEFE, as Trustee, etc.,
Plaintiff and Respondent, C068492
v. (Super. Ct. No. CV031382)
SCOTT E. ARBUCKLE, as Trustee, etc.,
Defendant, Cross-complainant and
Respondent;
ALBERT SEASTRAND et al.,
Defendants, Cross-defendants and
Appellants.
Plaintiff Howard M. Keefe, as trustee of the Sunrise Trust, and defendant Scott
Arbuckle, as trustee of the Arbuckle Trust, separately invested in the construction of a
Stockton house. Both received and recorded assignments of deeds of trust securing their
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investments. Arbuckle subsequently pursued nonjudicial foreclosure proceedings
without notifying Keefe, and bought the property for less than half of its appraised value.
Keefe’s interest was wiped out by the sale.
In pursuing nonjudicial foreclosure, Arbuckle retained defendant California
Foreclosure, LLC (which was owned and operated by defendants Albert and Loretta
Seastrand) to conduct the trustee’s sale. The Seastrands were aware of the recorded
junior interests held by Keefe and Monique Bjorndal, another investor, and knew they
were entitled to notice before the sale. But Keefe claimed the Seastrands back-dated and
falsified their proof of compliance with the statutory notice requirement.
After Arbuckle sold the property to others, Keefe sued to set aside the sale and
reinstate his trust deed. Keefe later amended his complaint to seek damages and to add
allegations of intentional misconduct. Before trial, Keefe assumed Bjorndal’s interest in
the property.
A jury found defendants liable to Keefe for fraud and other torts. Keefe was
awarded $442,500 in general damages, and California Foreclosure and the Seastrands
were ordered to pay $57,500 in punitive damages.
California Foreclosure and the Seastrands (collectively the Seastrands) now
contend (1) Keefe is not a holder in due course of the relevant promissory note, and thus
he has no standing in this action; (2) the note and trust deed that Keefe acquired from
Bjorndal were both fabricated; and (3) the trial court erred in excluding evidence
regarding whether Keefe was a holder in due course.
We conclude Keefe has standing and a basis to sue. The Civil Code requires prior
notice to others in the chain of title as a condition of conducting a trustee’s sale. (Civ.
Code, § 2924b.) Lack of notice is substantial and prejudicial and can give rise to legal
action, and when a senior lienholder conducts a nonjudicial foreclosure sale in a manner
that includes material irregularities, tort remedies are available to the junior lienholder.
2
Under these circumstances, the trial court did not err in excluding evidence regarding
whether Keefe was a holder in due course.
We will affirm the judgment.
BACKGROUND
Michael Erb was a Stockton real estate broker who owned or controlled several
legal entities, including St. Andrews Partners and Yolland & Co. Through a series of
transactions, Erb obtained hundreds of thousands of dollars from Arbuckle, Keefe and
other investors. In return, he and the entities he controlled issued a series of promissory
notes, deeds of trust and assignments of deeds of trust encumbering a Stockton residential
property owned by St. Andrews Partners.
In exchange for $300,000, Erb gave Keefe a note secured by a deed of trust (the
Yolland note), with a face value of $350,000, along with an assignment of deed of trust
conveying trust deeds Erb apparently issued on behalf of St. Andrews Partners in favor of
Yolland & Co. Keefe recorded the assignment of deed of trust. Arbuckle’s interest, also
described as an assignment of deed of trust from Yolland & Co. and securing a debt of
$105,000, had been recorded more than two years before Keefe recorded his interest.
Arbuckle subsequently recorded a notice of default and a substitution of trustee
naming California Foreclosure as the new trustee. At the time California Foreclosure
began preparations for Arbuckle’s foreclosure sale, four different secured interests were
recorded against the property. Arbuckle held the second and Keefe held the third.1
Arbuckle was the only bidder at the June 17, 2005 sale, and he bought the property
for $493,863.40. The value of the property at the time of sale was $1,325,000. Keefe
1 Counsel informed the trial court that Erb was convicted of securities fraud some time
before trial. Citing Evidence Code section 352, the trial court did not permit the jury to
hear arguments or testimony about Erb’s criminal case.
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testified that if he had known about the trustee’s sale, he would have been prepared to bid
$1,000,000 for the property.2
The trial court denied competing motions for summary adjudication. One of the
bases for the motion by the Seastrands was a challenge to Keefe’s standing to sue; the
Seastrands claimed the Yolland note was a nullity because it failed to comply with the
law of negotiable instruments.
The Seastrands asserted Keefe’s lack of standing again in opposition to Keefe’s
motion in limine seeking to exclude evidence regarding defects in the Yolland note. The
trial court granted Keefe’s motion in limine.
Keefe presented evidence at trial that he had invested $300,000 in exchange for his
$350,000 recorded interest. Keefe also presented evidence that Monique Bjorndal had
invested a similar amount in what she initially understood as a partnership with Erb, but
that, in lieu of a share of profits, she had accepted a $100,000 promissory note secured by
a fourth-position deed of trust. Before trial, Keefe assumed Bjorndal’s interest in the
property. Keefe and Bjorndal received nothing from the proceeds of the trustee’s sale;
the combined loss was $450,000.
After closing arguments, the Seastrands moved for directed verdict, arguing once
again that Keefe lacked standing due to the defective promissory note. The trial court
denied the motion for directed verdict.
The jury found Arbuckle, California Foreclosure and each of the Seastrands liable.
Keefe was awarded $442,500 in general damages, and California Foreclosure and the
Seastrands were ordered to pay $57,500 in punitive damages.
2 “A foreclosure by trustee’s sale wipes out all junior encumbrances.” (Greenwald &
Bank, Cal. Practice Guide: Real Property Transactions (The Rutter Group 2013) ¶ 6:518,
pp. 6-96.4 to 6-96.5, italics omitted.)
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Additional facts will be included in the discussion as relevant to the contentions on
appeal.
DISCUSSION
The Seastrands contend Keefe is not a holder in due course of the Yolland
promissory note, and thus Keefe has no standing to enforce his claims in this action.
They also claim undisputed evidence proves that the note and trust deed Keefe acquired
from Bjorndal were both fabricated, and thus he obtained no rights from those
documents. In addition, the Seastrands claim the trial court erred in excluding evidence
regarding the defects in the Yolland note.
A
We begin with the challenge to the Yolland note and the Bjorndal note and deed of
trust. Essentially, the Seastrands argue that the law of commercial transactions trumps
the law of nonjudicial foreclosure. They claim Keefe has no standing to complain about
lack of notice under Civil Code section 2924b unless he can first prove that he is a holder
in due course of the negotiable instrument secured by the recorded deed of trust.
The right to notice of default and notice of sale in a nonjudicial foreclosure
proceeding is defined in Civil Code section 2924b, subdivision (c)(2), which provides in
relevant part:
“(2) The persons to whom notice shall be mailed under this subdivision are:
[¶] . . . [¶]
“(B) The beneficiary or mortgagee of any deed of trust or mortgage recorded
subsequent to the deed of trust or mortgage being foreclosed, or recorded prior to or
concurrently with the deed of trust or mortgage being foreclosed but subject to a recorded
agreement or a recorded statement of subordination to the deed of trust or mortgage being
foreclosed.
“(C) The assignee of any interest of the beneficiary or mortgagee described in
subparagraph (B), as of the recording date of the notice of default.”
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Before 1977, trustees were required to give notice only to persons specified in the
security instrument and those who had recorded a special notice request; the requirement
to send notices to all holders of deeds of trust was added in 1977 to “ ‘reduce harshness’ ”
where an interest holder had not filed a special request. (Estate of Yates (1994) 25
Cal. App. 4th 511, 519.) In other words, the notice requirement was adopted to protect
junior lienholders who might not otherwise know they were at risk of having their liens
extinguished by a sale of the property.
Keefe’s second amended complaint alleged that Arbuckle bought the secured
property for under $500,000 at a sale conducted by the Seastrands. The complaint further
alleged that the Seastrands observed, but did not react to, efforts by Erb to “chill the
bidding,” and that, shortly thereafter, Arbuckle placed the property under contract for
sale at a price of $1,300,000. Keefe alleged that because of the lack of statutory notice,
he missed the sale and lost $450,000.
Keefe recognizes there is a dispute over whether the Yolland note was properly
endorsed and delivered. But the crux of his complaint was not that he could have
enforced or sold the note; it was that he could have protected his security interest by
purchasing the property himself.
The Seastrands cite cases addressing enforcement of negotiable instruments,
including a case that describes the history and purpose of the law applicable to negotiable
instruments. (See Creative Ventures, LLC v. Jim Ward & Associates (2011) 195
Cal. App. 4th 1430.) But none of the cited cases holds that the Civil Code section 2924b
notice requirement, which has been in existence for over 30 years, applies only to holders
in due course. The Seastrands also quote a bankruptcy court opinion that involved a
bank’s right to relief from bankruptcy stay, and an opinion of this court about judicial
notice, but those cases do not support their argument. The law governing actions to
collect assigned debts does not assist us in the nonjudicial foreclosure context.
(Fontenot v. Wells Fargo Bank, N.A. (2011) 198 Cal. App. 4th 256, 270.)
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In Debrunner v. Deutsche Bank National Trust Co. (2012) 204 Cal. App. 4th 433
(Debrunner), the Court of Appeal rejected an argument much like the one asserted by the
Seastrands. Debrunner and others extended a loan secured by residential property in
March 2006. (Id. at p. 436.) He recorded a deed of trust in the property, but it was junior
to a first deed of trust securing a much larger promissory note. (Ibid.) The first deed of
trust was assigned from one financial institution to another until Deutsche Bank became
the final assignee and initiated foreclosure proceedings. (Ibid.) The promissory note was
not transferred with the assignments of the trust deed. (Debrunner, supra, 204
Cal.App.4th at p. 437.) Debrunner tried to halt Deutsche Bank’s foreclosure, arguing that
a deed of trust “ ‘cannot be transferred independently’ ” of the promissory note which
must be “ ‘properly assigned’ ” and physically attached to the trust deed. (Ibid.)
Debrunner further argued that the deed of trust and promissory note “ ‘must remain
married and joined to each other for a secured debt to exist. Once they are divorced, or
widowed, . . . the deed of trust becomes a nullity and the promissory note an unsecured
debt.’ ” (Ibid.)
The court in Debrunner held that the nonjudicial foreclosure procedures set forth
in Civil Code sections 2924 through 2924k make up a “ ‘comprehensive framework’ ” for
the regulation of nonjudicial foreclosure, and the framework does not include a mandate
for physical possession of an original promissory note. (Debrunner, supra, 204
Cal.App.4th at p. 440.) The court found no basis for transferring additional requirements
from the California Uniform Commercial Code. (Ibid.)
The Seastrands contend Debrunner and similar cases are “simply bad law.” They
remind us that the United States Supreme Court held a note and mortgage “inseparable”
back in 1872. But Keefe’s action is based on the specifics of California’s nonjudicial
foreclosure scheme.
The plain language of the notice statute requires that notices be sent to every
beneficiary of “any deed of trust . . . recorded subsequent to” the one under foreclosure
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and to every assignee of any such beneficiary. (Civ. Code, § 2924b, subd. (c)(2).) We
agree with the Debrunner court that there is no basis for inserting additional requirements
into the nonjudicial foreclosure scheme.
Accordingly, even if the notes and deed of trust were defective or they did not
fully comply with the law of negotiable instruments (Cal. U. Com. Code, § 3101 et seq.),
as the Seastrands claim, Keefe would still have standing and a basis to sue.
A junior lienholder can reasonably rely on the notice requirements set forth in
Civil Code section 2924b. (Little v. CFS Service Corp. (1987) 188 Cal. App. 3d 1354,
1361.) Lack of notice is “clearly substantial and prejudicial” and can give rise to legal
action. (Ibid.) Moreover, when a senior lienholder conducts a nonjudicial foreclosure
sale in a manner that includes “ ‘material irregularities,’ ” tort remedies are available to
the junior lienholder. (South Bay Building Enterprises, Inc. v. Riviera Lend-Lease, Inc.
(1999) 72 Cal. App. 4th 1111, 1121-1122.)
A party has standing to sue if “the statement of a cause of action shows an
invasion of the plaintiff’s legally protected interests.” (5 Witkin, Cal. Procedure (5th ed.
2008) Pleadings, § 908, p. 323.) Keefe has standing because he was accurately identified
in the chain of title, he received no notice of Arbuckle’s sale, and he lost his security
interests in a sale alleged to be fraudulent. The motion for directed verdict was properly
denied.
B
We turn next to the claim that the trial court erred in excluding evidence regarding
whether Keefe was a holder in due course.
In response to a request for admission directed to California Foreclosure, Ms.
Seastrand admitted that “it was our obligation, prior to the Sale, to mail or cause to be
mailed the Notice of Sale to any and all beneficiaries listed on the Trustee Sale Guarantee
under any deeds of trust recorded subsequent to the Arbuckle Deed of Trust.” Her
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admission rendered the matter conclusively established for trial. (Code Civ. Proc.,
§ 2033.410; Monroy v. City of Los Angeles (2008) 164 Cal. App. 4th 248, 260.)
At the start of trial, Keefe submitted motion in limine No. 1, seeking to exclude
evidence and argument regarding the Yolland promissory note. In support of the motion,
Keefe referenced the admission by the Seastrands that they had an obligation to give him
notice of the sale. The motion said that although the Seastrands originally claimed to
have mailed notice to Keefe, they changed their defense when Keefe established during
discovery that the proofs of mailing were falsely back-dated. According to Keefe’s
motion, at that point the Seastrand defense switched to an attack on the validity of
Keefe’s promissory note and a related argument that Keefe was never entitled to statutory
notices. The motion in limine sought an order “excluding any evidence or argument that
Keefe is not in possession of the original promissory note.”
After extensive argument, the trial court granted the motion in limine, concluding
that identification in the chain of title was sufficient for standing, and the admission by
the Seastrands meant the matter was no longer at issue.
The Seastrands assert that the exclusion of evidence about Keefe’s promissory
note deprived them of a fair trial, requiring reversal per se. But the Seastrands admitted
they had a statutory duty to send notices to each junior lienholder before conducting a
trustee’s sale. Keefe’s name and address were clearly listed on the trustee sale guarantee
as a junior lienholder to whom notice was due. The facts presented demonstrate no
applicable limitation or defense to the statutory obligation arising under Civil Code
section 2924b.
In any event, if evidence regarding Keefe’s promissory note had been admitted, it
would not have excused the notice obligation. Because a different result was not
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probable, any evidentiary error was harmless. (Pool v. City of Oakland (1986) 42 Cal. 3d
1051, 1069 [applying Code Civ. Proc., § 475].)
DISPOSITION
The judgment is affirmed.
MAURO , J.
We concur:
RAYE , P. J.
MURRAY , J.
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