Scope of Unlawful Detainer Judgment

In many landlord-tenant disputes in California, there are legal actions in addition to the unlawful detainer case that has the primary goal of restoring possession of the premises to the landlord, as there are frequent disputes regarding unpaid rent, and even fraudulent inducement to enter into the lease.

In the recent court of appeal decision of Hong Sang Market v. Peng, a commercial tenancy dispute, the defendant tenant challenged a judgment awarding damages for back-due rent to her former landlord arguing that the judgment in the prior unlawful detainer action, in which landlord was awarded one month’s back-due rent along with possession of the premises, has a res judicata effect and bars any further claims for rent owed to landlord. 

The appellate court concluded that the unlawful detainer judgment did not preclude landlord from pursuing a separate civil action for back-due rent that accrued in months other than the one month for which damages were awarded in the unlawful detainer action. 

Although landlord's breach of contract action was filed before the unlawful detainer action, the judgment in the unlawful detainer action was entered before the judgment in the breach of contract action. Before trial of the breach of contract action, tenant filed a motion for judgment seeking to dismiss the breach of contract cause of action on the ground that it was barred by the doctrines of res judicata and collateral estoppel. Tenant argued that the September 2011 unlawful detainer judgment awarding $4,725 as back-due rent for the month of May 2011 had a res judicata effect that precluded a separate lawsuit seeking recovery of rent owed for the period from September 2009 through February 2011. Tenant argued that landlord's claim for back-due rent gave rise to a single cause of action for rent that could not be split between two different lawsuits. 

The trial court ruled in favor of landlord and awarded damages of $85,050, plus prejudgment interest of $18,075.39. The court rejected tenant's res judicata claim, reasoning that claim preclusion does not apply to matters that could not have been tried in the first action. Because landlord was limited by statute in the amount of rent it could recover in an unlawful detainer action, it had no choice but to file the two separate actions to achieve both the eviction of tenant and the payment in full of back-due rent.  

Although tenant acknowledged that Civil Code section 1952(b) expressly permits a landlord to bring a separate action for back-due rent after bringing an unlawful detainer action to recover possession of the premises, tenant argued that a landlord may not split a claim for rent between an unlawful detainer action and a subsequent civil action.  

As generally understood, the doctrine of res judicata gives certain conclusive effect to a former judgment in subsequent litigation involving the same controversy. The res judicata doctrine promotes judicial economy by precluding piecemeal litigation that may occur if a single cause of action is split into more than one lawsuit or if a particular issue has already been decided in an earlier lawsuit. In its primary aspect, commonly known as claim preclusion, it operates as a bar to the maintenance of a second suit between the same parties on the same cause of action. In its secondary aspect, commonly known as collateral estoppel, the prior judgment operates in a second suit, based on a different cause of action, as an estoppel or conclusive adjudication as to such issues in the second action that were actually litigated and determined in the first action.

Although the res judicata doctrine encompasses both claim and issue preclusion, the term res judicata has sometimes been used by California courts to denote claim preclusion, whereas the term collateral estoppel has denoted issue preclusion. 

It was undisputed that two of the three requisites for the application of claim preclusion were present in the Peng case. The unlawful detainer proceeding resulted in a final judgment on the merits, and the parties in the breach of contract action were identical to the parties in the unlawful detainer action. The parties’ dispute turned on whether the claim raised in the breach of contract action for back-due rent is identical to the claim raised in the unlawful detainer action, in which landlord sought and was awarded one month’s rent. Tenant asserted that the claims were identical and landlord was splitting a single cause of action for accrued but unpaid rent into two different lawsuits. 

The appellate court rejected the argument because the back-due rent cause of action was “split” between two very different legal proceedings-a summary unlawful detainer action and an ordinary civil lawsuit. An unlawful detainer action is a summary proceeding designed to adjudicate the right of immediate possession; the only claims that are cognizable in such a proceeding are those bearing directly on the immediate right of possession.  Cross-complaints and affirmative defenses are permissible only to the extent that they would, if meritorious, preclude a court from removing a tenant from the premises.  It is for this reason that a judgment in an unlawful detainer usually has very limited res judicata effect and will not prevent one who is dispossessed from bringing a subsequent action to resolve questions of title, or to adjudicate other legal and equitable claims between the parties. 

An unlawful detainer judgment has a limited res judicata effect because the claim preclusion aspect of the res judicata doctrine applies only to matters that were raised or could have been raised in the earlier action on matters that were litigated or litigable. A necessary corollary is that a prior judgment generally does not bar a subsequent claim if the matter could not have been raised or litigated in the earlier action. Thus, in a situation in which a court in the first action would clearly not have had jurisdiction to entertain the omitted theory or ground, then a second action in a competent court presenting the omitted theory or ground is not precluded.  Because the scope of an unlawful detainer proceeding is limited, the preclusive effect of an unlawful detainer judgment is likewise limited. 

A cause of action for back-due rent falls into the category of claims that a court has limited power to decide in an unlawful detainer proceeding. If landlord proceeds by way of a three-day notice to “pay or quit” when the tenant is in default in rent payments, landlord is limited to recovering rent that accrued within one year of the notice. The amount of back-due rent is generally limited to that demanded in the three-day notice. A landlord proceeding by way of a three-day notice for nonpayment of rent may also recover damages for rental losses occurring after the period covered by the three-day notice expires. 

If landlord proceeds by way of a 30-day notice of termination of a rental agreement, landlord may not recover back-due rent, but may seek damages for the reasonable rental value of the premises from the termination of the tenancy until entry of the unlawful detainer judgment. 

By contrast, the right to recover back-due rent is not so limited in an ordinary civil action premised upon section 1951.2 of the Civil Code. A landlord can generally recover up to four years of back-due rent if the claim is based upon a written lease agreement under Code Civ. Proc., § 337.2, a four-year statute of limitations for breach of written lease. Because a court has no jurisdiction to award more than one year’s back-due rent in an unlawful detainer action, res judicata principles suggest that an unlawful detainer judgment should not preclude a separate, civil action for back-due rent that is not recoverable in an unlawful detainer proceeding. 

The California Legislature has gone further in limiting the res judicata effect of an unlawful detainer judgment in section 1952(b), that provides that a landlord who brings an unlawful detainer action is not precluded from bringing a separate action to recover rent under Civil Code section 1951.2, provided that landlord may not recover damages in the subsequent civil action for any detriment for which a claim for damages was made and determined on the merits in the previous action.

An exception applies when, during the course of an unlawful detainer proceeding, possession no longer becomes an issue and the action is converted to an ordinary civil action in which the landlord may seek relief not otherwise recoverable in an unlawful detainer proceeding. 

Accordingly, the appellate court held that an unlawful detainer judgment awarding back-due rent did not preclude landlord from seeking additional back-due rent in an ordinary civil action. However, landlord was precluded from recovering back-due rent associated with a particular time period in the subsequent civil action if such a claim was actually determined on the merits in the unlawful detainer action. Thus, landlord was precluded from recovering twice for the same items of damages, and may not renew a claim for back-due rent associated with a particular time period if that periodic claim was denied on the merits in the unlawful detainer action. 

Because the damages for back-due rent in the unlawful detainer judgment in Peng were limited to the month of May 2011, landlord was not precluded from seeking additional back-due rent covering the period from September 2009 through February 2011 in its breach of contract action, plus pre-judgment interest and attorney's fees and costs. 

Peng illustrates the technical nature of an unlawful detainer action regarding the issues and remedies, and a prudent landlord or tenant are best served by obtaining legal counsel competent in the area of real estate law.

Reconveyance of Paid-Off Liens is Essential

One of the most important steps in a sale or refinance in California that is frequently overlooked, is the recording of a reconveyance of each of the liens after they have been paid.  Many borrowers do not realize that recording a reconveyance of a satisfied lien is essential to clear the title of that lien, and unless a reconveyance is recorded, the lien will show up as unpaid on a future preliminary title report.

I know of a borrower who obtained a hard money loan in 1999, and then refinanced and paid it off with a conventional 30-year bank loan.  Two subsequent refinances were obtained as the interest rates decreased during the 2000-2008 time period without any issues. It was not until a third refinance was made in 2012 that a preliminary title report showed the 1999 lien had never been reconveyed, and it was clouding the title and preventing the refinance over 10 years later.

Fortunately, the escrow officer that handled the 1999 loan was located, and she obtained and recorded a reconveyance.  However, California statutes provide an alternative method to record a reconveyance of a deed of trust, if a title company is willing.

California Civil Code section 2941, subdivision (b)(3) sets forth the procedure by which a title insurance company may prepare and record a release of a mortgage obligation. 

It states: “If a full reconveyance has not been executed and recorded pursuant to either paragraph (1) or (2) [which require the beneficiary and trustee to take steps to reconvey the deed of trust after a mortgage has been satisfied] within 75 calendar days of satisfaction of the obligation, then a title insurance company may prepare and record a release of the obligation. However, at least 10 days prior to the issuance and recording of a full release pursuant to this paragraph, the title insurance company shall mail by first-class mail with postage prepaid, the intention to release the obligation to the trustee, trustor, and beneficiary of record, or their successor in interest of record, at the last known address.

"The release shall set forth:

(i) The name of the beneficiary.

(ii) The name of the trustor.

(iii) The recording reference to the deed of trust.

(iv) A recital that the obligation secured by the deed of trust has been paid in full.

(v) The date and amount of payment.

"The release issued pursuant to this subdivision shall be entitled to recordation and, when recorded, shall be deemed to be the equivalent of a reconveyance of a deed of trust.”

In a recent case, a plaintiff sought damages for a title company's alleged negligence in executing and recording a release of an assigned lien without complying with the provisions of section 2941(b)(3). Plaintiff argued that as the successor to U.S. Bank, the original beneficiary of the deed of trust, Plaintiff was entitled to damages, including attorney’s fees, under section 2941(b)(6), which states, “In addition to any other remedy provide by law, a title insurance company preparing or recording the release of the obligation shall be liable to any party for damages, including attorney’s fees, which any person may sustain by reason of the issuance and recording of the release . . . .”

The title company demurred to the cause of action, arguing that the plaintiff failed to allege that the tort claims included in the cause of action were assigned to plaintiff with the loan and deed of trust. The trial court agreed, and issued an order sustaining the demurrer without leave to amend and dismissing the title company from the case.

Plaintiff argued that the trial court erred, because plaintiff had alleged that the title company had prepared and recorded the release, which represented that the obligation secured by the deed of trust was paid in full, and that the release was to be deemed the equivalent of a reconveyance under section 2941(b)(3)(B).

Plaintiff further alleged that the title company prepared and recorded the release “carelessly, recklessly, negligently, and without authorization from any person having the authority to authorize such act, and without first complying with the provisions of Civil Code § 2941(b)(3).”  Plaintiff contended that the release was void and of no effect, but asked that if the release “had or has the effect of releasing or reconveying” the deed of trust, plaintiff should be awarded damages as authorized by section 2941(b)(6).

The Court of Appeal began with the language of section 2941, which, as a remedial statute, is to be liberally construed to protect all persons coming within its purview.  In view of the broad language of the statute, the appellate court had no difficulty concluding that plaintiff had alleged facts sufficient to state a claim for damages because plaintiff alleged that as a result of the assignment from U.S. Bank, it was the beneficiary of the deed of trust that was released without compliancy with section 2941(b)(3).

Whether U.S. Bank, plaintiff, or anyone else could prove damages against the title company was an open question, which had no bearing on the fact that section 2941(b)(6) imposes broad liability on any title insurance company that issues and records a release under subdivision (b)(3). 

This decision illustrates the importance of obtaining a reconveyance within 75 days after the lien is paid, and not having to rely upon section 2941.  A prudent borrower will insist on receiving a copy of the reconveyance from the escrow company or title company involved in the sale or refinance because only the recording of the reconveyance will clear the title to the real property.