Easements and Enforcement in California

In California, land may be originally owned by one owner who decides to sell a portion of the land to another person, and records an easement for ingress and egress to the retained parcel that crosses the property that is sold. Later, the owner of the land on which the easement is located may decide to bar the other owner from using the easement, or place obstructions on the easement.  Depending on the circumstances, the owner of the easement may file a legal action including causes of action for nuisance and injunctive relief, and obtain a judgment for a permanent injunction against interference with the easement, compensatory damages, and even punitive damages if malice is proved by clear and convincing evidence.

An easement is an incorporeal interest in the land of another that gives its owner the right to use another's property. The land to which the easement attaches is called the dominant tenement;  the land to which the burden or servitude is imposed is called the servient tenement. (Civil Code § 803) 

Easements are classified as appurtenant or in gross (also known as "incidents").  (Civil Code § 801)  The basic effect of the distinction arises when the owner of an easement conveys his property.  The conveyance of the dominant tenement transfers all appurtenant easements to the grantee, even though the easements are not specifically mentioned in the deed. (Civil Code §§ 1084, 1104 (transfer "passes all easements attached thereto"))   

An easement in gross, unlike an appurtenant easement, is merely a personal right to use the land of another.  It does not pass with the dominant tenement when it is sold.

Generally, the determination of whether an easement is appurtenant or in gross is made by reference to the instrument creating it.  However, often the instrument itself may be deficient because it fails to specify whether the easement is in gross or appurtenant, and it may fail to identify a dominant tenement.  

Moreover, the character of the easement as appurtenant or in gross are not necessarily determined by the nature of the rights granted because easements for right of way (“ingress and egress”) may be either appurtenant or in gross.  

When a court is called upon to determine whether an easement is appurtenant or in gross, it applies the general rules relating to the interpretation of deeds.  In most cases, “Grants are to be interpreted in like manner with contracts in general․”  (Civil Code § 1066.)

In interpreting incomplete or ambiguous deeds, courts may consider extrinsic evidence of the circumstances under which the deed was made.  When the deed does not expressly declare an easement to be appurtenant, or when the language of the deed is ambiguous, and it does not clearly appear whether an easement was intended to be in gross or appurtenant to land, evidence is admissible to determine the nature of the easement and to establish a dominant tenement.   

In considering extrinsic evidence of the nature of an easement, courts may consider the type of rights conveyed and the relationship between the easement and other real property owned by the recipient of the easement.  Where a roadway easement provides access to a particular parcel of real property, a court may infer the easement is appurtenant to that parcel. 

Courts also employ two rules in reviewing easement claims. The first rule, of statutory origin, is that “a reservation in any grant, . . . is to be interpreted in favor of the grantor.” (Civil Code § 1069.)  The second rule, of judicial origin, is that an easement will not be interpreted as being in gross if it may fairly be interpreted as being appurtenant.   

When the language of a deed is ambiguous, and it does not clearly appear whether the easement was intended to be in gross or appurtenant to land, it is never construed as personal when it may fairly be construed as appurtenant.  If it does not clearly appear from the deed that the parties intended the easement to be of a particular character, the trial court could properly find the easement to be appurtenant. Such a finding is supported by section 1069's directive that reservations in grants are to be construed in favor of the grantor.   

If the easement is appurtenant to the dominant parcel, successors in interest are entitled to enforce the easement.  Conveyance of the dominant tenement transfers all appurtenant easements to the grantee, even though the easements are not specifically mentioned in the deeds.  Thus, omission of any mention of the easement in the deed to a successor in interest to the dominant parcel is inconsequential.

There is no authority holding that a recorded easement for ingress and egress must actually touch the parcel to which it is appurtenant.  An easement for ingress and egress reserved in a deed may be appurtenant to a parcel it does not touch.

Each successive owner of the dominant tenement is entitled to enforce the easement.   

When a person interferes with the use of an easement he deprives the easement's owner of a valuable property right and the owner is entitled to compensatory damages.  The interference is a private nuisance and the party whose rights have been impeded can recover damages as measured in the case of a private nuisance.  The interference can also be enjoined by the owner of the easement as a harassment.

The damages are measured in the same manner as those for a nuisance, and can include diminution of the property's value, and for annoyance and discomfort flowing from loss of use. The damages may be unliquidated and not readily subject to precise calculation, and the amount thereof is necessarily left to the subjective discretion of the trier of fact․  If the plaintiff is wrongfully deprived of use of the easement for a period of time, the award may include damages calculated by a specified dollar amount per day.  If malice is shown by clear and convincing evidence, exemplary (punitive) damages can be recovered. 

Code of Civil Procedure §731 provides that an action may be brought by any person whose property is injuriously affected, or whose personal enjoyment is lessened by a nuisance, as defined in Civil Code § 3479, and the nuisance may be enjoined or abated as well as damages recovered therefor. Section 3479 defines nuisance as anything that is injurious to health, including, but not limited to, an "obstruction to the free use of property, so as to interfere with the comfortable enjoyment of life or property".  An encroachment is the nuisance if it is an obstruction to the free use of the easement by the owner of the dominant tenement.

The action may also include a cause of action for harassment.  Harassment is defined as a knowing and willful course of conduct directed at a specific person that seriously alarms, annoys, or harasses the person and that serves no legitimate purpose.  The course of conduct must be that which would cause a reasonable person to suffer substantial emotional distress, and the defendant must actually cause substantial emotional distress to the plaintiff.  (Code of Civil Procedure § 527.6(b)(3).)  The prevailing party may be awarded attorney's fees, so this cause of action should be carefully considered because it may result in an award of attorney's fees against an unsuccessful claimant.

Code of Civil Procedure §526 provides that an injunction may be granted to remove the encroachment when it appears by the complaint that the plaintiff is entitled to the relief demanded, and the relief, or any part thereof, consists in restraining the commission or continuance of the act complained of, either for a limited period or perpetually, when pecuniary compensation would not afford adequate relief, or where it would be extremely difficult to ascertain the amount of compensation that would afford adequate relief.  Injunction is a remedy for the tort of nuisance.  An action to abate a nuisance is an action in equity that is tried by the judge, not a jury.

A preliminary injunction may be granted at any time before a judgment with a verified complaint that shows satisfactorily that sufficient grounds exist therefor. (Code of Civil Procedure§526)

It is proper to record a notice of pendency of action, commonly called a lis pendens, on a servient tenement in an action concerning an easement.  A lis pendens is a recorded document giving constructive notice that an action has been filed affecting title or right to possession of the real property described in the notice. Claimant means a party to an action who asserts a real property claim and records the notice of the pendency of the action. A real property claim means the cause or causes of action in a pleading which would, if meritorious, affect (a) title to, or the right to possession of, specific real property or (b) the use of an easement identified in the pleading, other than an easement obtained pursuant to statute by any regulated public utility.  A lis pendens may be recorded in an action to establish an easement, to enforce the claimant's rights under an easement, or that affects the use of an easement. 

LESSONS:

1.         Determine if the easement is appurtenant or in gross, and if appurtenant, it passes with the transfer of ownership of the dominant and servient tenements, even if it is not mentioned in the deeds.

2.         Easements appurtenant to the servient tenement should appear in the preliminary title report for the sale of the servient tenement, and the report should always be carefully read to obtain a complete understanding of the issues with the title, including easements.

3.         Interference with an easement is a nuisance, and it can be permanently enjoined, and result in a judgment for compensatory damages and punitive damages.

Revocable vs. Irrevocable Trusts

Whether a creditor can reach assets in a revocable trust is a common question, and the general answer is revocable trusts offer no protection from creditors. However, if the trust is irrevocable, such protection is provided.  The reason for this different treatment is illustrated in the recent case of Dudek v. Dudek.

InDudek, the Court of Appeal reversed the decision of the trial judge, and held that the signing of the irrevocable Trust that specified a life insurance policy was an asset of the Trust, caused the Policy to become an asset of the Trust and under the control of the specified trustee immediately upon the signing. In other words, the Policy was no longer under the control of the grantor/settlor as it had been gifted to a Trust no longer owned by the grantor/settlor.

Petitioner David Dudek appealed to recover money distributed to the respondents in accordance with the beneficiary designation of the Genworth Life Insurance Policy that covered the life of J.D. Dudek, David's brother. 

According to David, in late 2009, J.D. created and executed the J.D. Dudek Life Insurance Trust, an irrevocable life insurance trust that named David as the trustee, and beneficiary of the death benefit of $1,000,000. David claimed the Policy is listed as an asset of the Trust, to be held and administered in accordance with the Trust's terms. 

The Trust designates David and his sister as the residual beneficiaries of the Trust who would be entitled to the proceeds of the Policy. 

J.D. prepared and submitted to the life insurance company the forms required by that company to change the ownership and beneficiary designations on the Policy in order to establish David, as trustee, as the sole owner and named beneficiary of the Policy.

David was unaware that not long after J.D. submitted the forms, the insurance company rejected the ownership and beneficiary designation forms because J.D. had altered some of his entries without initialing the changes. David was also unaware that J.D. had failed to file corrected forms with the life insurance company after he was notified of the insurance company's rejection of his submitted forms. 

Further, David did not know that in 2016, J.D. submitted a new form to the life insurance company in which he purported to alter the beneficiary designation on the Policy to name the respondents as the beneficiaries of the Policy, or that the new form was accepted by the life insurance company. 

After J.D. died, David submitted the Trust to the life insurance company and sought to obtain the proceeds of the policy. The life insurance company refused, and instead distributed the proceeds of the policy to the beneficiaries that it had on file, pursuant to the beneficiary designations that J.D. submitted in 2016. 

David filed the Petition seeking an order directing the respondents to transfer the proceeds of the Policy to him as the trustee of the Trust. 

The trial court concluded that the Trust had not been funded, and therefore, had not become a valid trust, as a result of J.D.'s failure to file documents with the life insurance company to change the ownership and beneficiary designations to correspond with the terms of the Trust document.  In other words, the trial court concluded that no trust was ever created because J.D. never effectively placed the Policy into the Trust. 

The Appellate Court held the trial court erred because the Petition alleged facts that could support a finding that the execution of the Trust document created an irrevocable trust, and constituted an effective inter vivos donative transfer of the Policy to David as trustee of the Trust.  Given the irrevocable nature of the Trust and the language in the Trust document demonstrating J.D.'s intention to immediately transfer ownership of the Policy to David, upon execution of the Trust document, the Policy irrevocably became Trust property. As a result, J.D. had no ability to effectuate any further transfer of the Trust property to other parties. 

The Trust stated that JD, as the Grantor, retained no right, title, or interest in any trust property. The Trust and all interests in it were irrevocable, and the Grantor had no power to alter, amend, revoke, or terminate any trust provision or interest. Schedule A of the Trust listed two assets to be held in the Trust: (1) one hundred dollars, and (2) the $1,000,000 Policy. 

After the insurance company distributed the proceeds to the respondents, David sent letters to the respondents notifying them that they had received the proceeds from the Policy to which they were not legally entitled because those proceeds were the property of the Trust. David asked the respondents to deliver to him, as trustee of the Trust, the Policy's death benefits. David did not receive payment from any of the respondents. 

David filed his Petition seeking: 

(1) an order directing the transfer of Trust property from respondents to David, as trustee, pursuant to Probate Code section 850; 

(2) an order determining the proper beneficiaries of the Trust's assets pursuant to Probate Code section 17200; 

(3) a determination that the respondents had acted in bad faith in wrongfully taking, concealing, or disposing of property belonging to the Trust; and 

(4) a determination that J.D. had acted in bad faith in wrongfully taking, concealing, or disposing of the property of the Trust. 

Respondents argued that David's claim should have been brought against J.D., alone, and they had no liability to the Trust because they are not signatories to the Trust, were not bound by the Trust and owed no duty or obligations to the Trust. 

David contended that the trial court erred in concluding that J.D. failed to complete the steps necessary to create the Trust as required by Probate Code § 15200(b).  According to David, when J.D. executed the Trust, he forfeited his interest in and control of the Trust    and its assets, so that J.D. did not have the right to change the beneficiary designation in November 2016.  Because J.D. lost the right to change the beneficiary designation, David, as trustee of the Trust, may properly pursue a claim against respondents for recovery of the Trust's assets that respondents received, but to which they were not entitled. 

Under the Probate Code § 15200, a trust may be created in one of five ways: 

(a) A declaration by the owner of property that the owner holds the property as trustee.
(b) A transfer of property by the owner during the owner's lifetime to another person as trustee. 

(c) A transfer of property by the owner, by will or by other instrument taking effect upon the death of the owner, to another person as trustee. 

(d) An exercise of a power of appointment to another person as trustee. 

(e) An enforceable promise to create a trust." 

The Petition alleged that J.D. sought to create the Trust pursuant to subdivision (b) of section 15200— through the transfer of property by the owner during the owner's lifetime to another person as trustee.

The essential necessary elements of a valid trust are:

(1) a trust intent (Probate Code § 15201); 

(2) trust property (Probate Code § 15202); 

(3) trust purpose (Probate Code § 15203); and 

(4) a beneficiary (Probate Code § 15205

Except for trusts that are created by declaration or by contract, a transfer of the intended trust property is required for the creation of an express trust, whether during life or at death.  The effectiveness of a transfer for the purposes of establishing an inter vivos trust, however, is determined by the rules that govern the making of gifts. A gift is a transfer of personal property, made voluntarily, and without consideration.  A donative transfer is a gratuitous transaction. It can be inter vivos or testamentary

Three things are necessary for a valid gift:
(a) There must be an intent, on the part of a donor having capacity to contract, to make an unconditional gift. 

(b) There must be an actual or symbolical delivery, such as to relinquish all control by the donor. 

(c) The donee must signify acceptance, except where it may be presumed. 

With respect to personal property, a donative transfer that is intended to be completed during the donor's lifetime may be completed in one of two ways: either by the actual delivery of the personal property at issue to the intended donee or through the use of a document of donative transfer. 

The Petition alleged that J.D. intended to make a donative transfer of the Policy into the Trust, such that the Policy would be owned by David as Trustee, through the use of a document of donative transfer. 

An inter vivos donative document may transfer any type of personal property, whether tangible or intangible, including contract rights such as those embodied in a life-insurance policy.  An inter vivos donative document is a writing signed by the donor that (a) identifies the donor and donee, (b) describes the subject matter of the gift, and (c) specifies the nature of the interest given. 

The Trust document attached to the Petition appeared to meet all of the necessary 

elements of a donative transfer document. Specifically, the Trust document evidenced that J.D. had the intent to effectuate an immediate, complete and irrevocable transfer of ownership of the Policy to David, as trustee. 

Thus, although J.D.'s failure to complete the forms according to Genworth's requirements protected Genworthfrom claims made against it by individuals other than those who were identified on the forms that it had on file, the failure to properly complete the forms could not invalidate or revoke the irrevocable gift that J.D. had previously effectuated to David, as trustee of the Trust. Once J.D. made a donative transfer of the policy to David, J.D. no longer owned the Policy, even if Genworth was unaware of this. 

Thus, although J.D.'s later decision to name the respondents as beneficiaries through the change of beneficiary forms provided by Genworth may have protected Genworth from claims for damages made by individuals or entities not identified on the forms on the ground that it had wrongfully distributed the proceeds, David's naming the respondents as beneficiaries on the Genworth documents did nothing to alter David's legal right to possess the Policy, and, ultimately, its proceeds, as trustee of the Trust. 

Once an irrevocable trust is created and a valid transfer of property is made to the trust, the settlor no longer has any right to possess or otherwise dispose of the property placed in an irrevocable trust, such that that individual has no ability to reverse course or change his/her mind later. 

David may name the respondents in his Petition, and the respondents are proper parties to the action brought pursuant to the Probate Code. If David can establish the facts alleged in the Petition, then it would be clear that J.D. created an irrevocable trust, and properly funded it, when he delivered to David the transferring document (i.e., the Trust document itself, which included the transferring language). 

If the Trust was created, then David's entitlement to the proceeds of the Policy that was an asset of the Trust would be established, and he would be able to seek the court's assistance in having those proceeds conveyed to him in his capacity as trustee. 

LESSONS:

1.         The effect of an irrevocable trust is different from that of a revocable trust, and the grantor/settlor should carefully consider the nature of the trust being created.

2.         After signing the living trust, it should be funded with assets by transferring the assets into the trust (e.g., deeding real property to the trustee of the Trust).

3.         If the trust is irrevocable, and the language in the trust document demonstrates the intention to immediately transfer ownership of the assets to the trustee, upon execution of the trust document, the asset may irrevocably became trust property.

4.         An irrevocable trust prevents the grantor from making any changes to the trust after it is signed, and consideration should be given to making Trust revocable so it can be amended and revoked.

A License to Use Land May Become Irrevocable

In the recent decision in Shoen v. Zacarias, the California Court of Appeal held that when a landowner grants someone permission to use her land, she generally retains the right to revoke that license at any time.  The landowner may nevertheless be estopped from revoking that license—and the license will accordingly become irrevocable for “so long a time as the nature of it calls for”—if the person using the land has expended money or its equivalent in labor improving the land in the execution of the license. 

Critically, however, the expenditure of money or labor can make a license irrevocable only if that expenditure is “substantial,” “considerable” or “great.” 

The Appellate Court concluded that the trial court’s grant of an irrevocable license was an abuse of discretion because the court construed the “substantial expenditure” requirement too permissively, and used the wrong legal standard in declaring the license to be forever irrevocable. 

Shoen and Zacarias are neighbors whose backyards consist primarily of steep upward hillsides. At the top of Zacarias’ hillside and midway up Shoen’s is a flat patch of ground. The property line zigzags through this flat patch. Of this patch, 490 square feet are on Shoen’s side of the line, and the remainder is on Zacarias’. 

Before either Shoen or Zacarias bought their parcels, someone had leveled out the flat patch, poured three concrete “meditation pads,” and placed ornamental gravel on the patch. The prior owner of Zacarias’ parcel had also installed steps made of railroad ties leading all the way up to the flat patch, while the prior owner of Shoen’s parcel had installed railroad-tie steps leading two-thirds of the way to the flat patch but stopping about 20 to 30 feet shy of the patch. 

When Zacarias bought her parcel in 2003, she mistakenly believed that the entire flat patch was on her land. Over the next two years, she 

(1) brought in contractors to grade the patch to make it flatter, 

(2) removed stacks of bamboo and cleared overgrown brush from the patch, 

(3) installed new ornamental gravel,

(4) planted a low, 18-inch-tall hedge and built a foot-tall wooden fence around the perimeter of the patch, 

(5) populated the patch with a 10 foot-by-10 foot cloth cabana, a chaise lounge, a table and chairs, none of which is affixed to the ground and each of which remains movable, (6) installed underground electrical conduit from her house to the patch, and 

(7) installed sprinklers and then replaced them with a drip system in order to water the hedges on the patch. Each of these improvements was made in 2003, 2004 or the early part of 2005.  

In 2006, when the Shoen family trust acquired the parcel now owned by Shoen, the prior owner disclosed Zacarias’s encroachment of the flat patch. Both Shoen and her father admitted knowing that the disputed area was on their land. From that time until April 2011, and in an effort to be a “good neighbor,” neither the trustees of the Shoen family trust nor Shoen (who was living on the property) told Zacarias to stop using the disputed area. 

In May 2012, Zacarias was asked to vacate the disputed area because Shoen desired to landscape the area. Zacarias ignored the request.  During the period between the Shoen family trust acquiring the disputed area and the request that Zacarias stop using that area, Zacarias spent time and money to keep the entire flat patch usable. In particular, she 

(1) kept the trees near the patch trimmed, 

(2) cleared the brush on her hillside every year, 

(3) replaced the plants comprising the low ficus hedge when it died, 

(4) watered the hedges, 

(5) sometimes used the cabana’s lighting or other electricity, and 

(6) re- upholstered the top of the cabana and the furniture. 

Zacarias paid the gardener who trimmed the trees $130 per month for the upkeep of her entire parcel of land. She paid laborers $700 per year to clear the brush on all of her land. The new ficus hedge cost $2,350 to replace. Zacarias’s average monthly electric and water bill for her house, swimming pool and entire yard was $1,200.

In June 2012, Shoen sued Zacarias for damages, injunctive and declaratory relief on theories of (1) trespass, (2) nuisance, (3) ejectment, and (4) negligence. 

Zacarias answered and counter-sued for damages and injunctive relief on theories of (1) prescriptive easement, (2) equitable easement and (3) nuisance based on Shoen’s placement of two video cameras on Shoen’s property that overlooked the disputed area as well as portions of the flat patch on Zacarias’s property. 

Zacarias asserted that she had an irrevocable license to use the disputed area based on Shoen’s acquiescence to her use of the disputed area.  During the trial, Zacarias estimated that from 2003 onward she spent at least $15,000 to $25,000 to improve and maintain the disputed area. This amount included $8,638.55 for the cabana and other portable furniture on the flat patch. It also included a portion of her monthly gardening, electrical and water bills that Zacarias calculated by dividing the square footage of her entire property (6,928) by the square footage of the disputed area (490). 

The trial court ruled that Zacarias should be awarded an exclusive irrevocable license to use the disputed area and that this license would last forever, even after Zacarias sold the property. Although acknowledging that “some significant portion of” Zacarias’s estimate of the $15,000 to $25,000 “was spent before” Shoen acquiesced to Zaracias’s use of the disputed area, the court nonetheless concluded that Zacarias had “spent substantial sums and physical labor" landscaping, maintenance and care of the disputed area during the six and possibly seven years that Zacarias had used it with Shoen’s acquiescence. 

The court further ruled that the equities favored granting the license not only to Zacarias but also in perpetuity to her successors-in-interest because the disputed area was accessible from the Zacarias property.  The property but did not appear to provide any benefit to the Shoen property because it was not viably accessible from that property. The court lastly ruled that this permanent license would also be exclusive due to the physical layout of the parcels and the parties’ bad relationship. 

When a landowner allows someone else to use her land, the owner is granting a license. A license may be created by express permission or by acquiescence; that is, by tacitly permitting another to repeatedly do acts upon the land with full knowledge of the facts and without objecting. 

Although a license may generally be revoked at any time at the pleasure of the licensor, a court may declare the license to be irrevocable for so long a time as the nature of it calls for if the licensee has expended money, or its equivalent in labor while reasonably relying on the existence of the license. 

Critically, courts may exercise their power to declare a license irrevocable only if the expenditures in reliance on the license are “substantial,” “considerable” or “great," and  “trivial” expenditures will not suffice. 

This particular requirement exists for two reasons. First, it mirrors a similar requirement in the doctrine of equitable estoppel, the doctrine that forms the principal rationale for the California Supreme Court’s recognition of a judicial power to declare licenses irrevocable. Second, the requirement of significant expenditures ensures that courts use their power to create irrevocable licenses sparingly. This is critical because such licenses are functionally indistinguishable from easements and because courts are rightly reluctant to exercise what is, in effect, the right of eminent domain by permitting the licensee to occupy property owned by another. 

Nearly every case where a license has been declared irrevocable has involved the licensee’s permanent alteration of the land and the ensuing upkeep, whether by building, altering or upgrading a roadway.  Examples are constructing a ditch, canal or levee to transport water, building a canal or levee, erecting a wall, or raising living quarters such as cabins. 

The Appellate Court found that the trial court abused its discretion in making an irrevocable license perpetual in duration for two reasons. First, the trial court used the wrong legal standard. Rather than look to when Zacarias would obtain the return on the investment of her upkeepoccurring after she obtained a license, the court engaged in a wholly separate inquiry into who would make better use of the disputed area by balancing the greater value and utility of the disputed area to Zacarias due to her ready access to the area, against the lesser value and utility of the area to Shoen (due to her less-than-ready access to the area. 

Second, the proper analysis could not have yielded an irrevocable license that is perpetual in duration. This is not a case where Zacarias was seeking to obtain a license for long enough to obtain a return on her major investments in improving the flat patch because she made all of those improvements beforeany license was granted. The only investment to be recovered was Zacarias’s annual investment in upkeep. The licensee’s annual cost of upkeep, without more, does not warrant a perpetual license to recover the investment in upkeep; if it did, everyirrevocable license would be perpetual. 

LESSONS:

1.         Granting a license may create a situation whereby the licensee can expend substantial money or labor in reliance on the license, and thereby make the license irrevocable.

2.         When granting a license for use of land, do so in writing, and reserve the right to revoke the license for any reason at any time, and regardless of how much money or labor the licensee invests in the land.

Wrongful Foreclosure Is Difficult to Prove

In the recent decision in Citrus El Dorado, LLC v. Chicago Title Company, the California Court of Appeal held that while a beneficiary (lender) or trustee (bank or title company) under a deed of trust who conducts an illegal, fraudulent or willfully oppressive sale of property may be liable to the trustor (borrower) for wrongful foreclosure, a trustee has no duty to verify that the beneficiary received a valid assignment of the loan or to verify the authority of the person who signed a substitution of trustee.

In the Citrus El Doradocase, acommercial developer lost a parcel of real property in a trustee’s sale following a nonjudicial foreclosure. It sued Chicago Title Company because it acted as the trustee in conducting the sale. 

The Appellate Court concluded that the trustee in such a sale is subject to tort liability onlyfor the violation of duties established by the deed of trust and governing statutes, unless the trustee has effectively taken on a different or modified duty by its actions. 

According to Citrus’s complaint, it purchased the property—an unimproved 9.25-acre parcel in La Quinta, California—with the intention of developing it into a residential housing tract. Citrus entered into a Construction Loan Agreement with First Heritage Bank to fund the construction, and First Heritage was to disburse to Citrus a total of $13,394,000 in a series of incremental draws as construction of the development progressed, a standard provision. The loan was secured by a deed of trust on the property. 

After Citrus received some, but not all, of the loan funds, First Heritage failed and was placed into a Federal Deposit Insurance Corporation (FDIC) receivership. The FDIC funded several more draw requests by Citrus. Then the FDIC notified Citrus that the loan had been assigned to Stearns Bank (Stearns) and that disbursements to Citrus would be handled by Stearns. But when Citrus submitted a draw request to Stearns, it was denied, even though there was an unfunded balance of at least $609,000 in the budgeted loan funds for Citrus. 

Stearns then sent Citrus a Notice of Event of Default and Demand for Immediate Payment. The notice stated that payments required under the loan had not been made, constituting an immediate Event of Default with no rights to cure. The notice gave Citrus several weeks to remit the total payoff balance of over $13 million, including a principal balance of approximately $12.7 million. 

Chicago Title recorded a Substitution of Trustee, substituting Chicago Title as the new trustee under the deed of trust. The Substitution identified FNBN Rescon I, LLC (Rescon) as the present Beneficiary of the deed of trust, and it was executed by Stearns as Rescon’s exclusive servicing agent.

Chicago Title then recorded a Notice of Default and Election to Sell that stated there remained an unpaid principal balance on the loan of approximately $12.7 million, with a total balance due of over $20 million. 

Then Chicago Title issued a Notice of Trustee’s Sale, stating that the property would be sold at public auction on March 3, 2015. A Trustee’s Deed Upon Sale was recorded on March 6, 2015, and it indicated the public auction took place on March 5, 2015, and that Rescon was the highest bidder with a credit bid of $7.2 million. 

Citrus sued Chicago Title for wrongful foreclosure; wrongful disseisin and ouster; and conspiracy. Citrus’s wrongful foreclosure cause of action (like its other two causes of action) arose from allegations that Chicago Title: 

(1) was negligent in failing to verify that Rescon received a valid assignment of the loan; 

(2) was negligent in failing to verify the authority of the person who signed the substitution of trustee form; and 

(3) conducted the trustee’s sale improperly in various respects, including by selling the property by way of a private sale purportedly to Rescon, rather than by public auction as required by California Civil Codesection 2924g, and by accepting a purported credit bid that in fact amounted to giving the property to Rescon “literally . . . for free.” 

The Court of Appeal rejected the first two contentions because Chicago Title had no duty to make the inquiries Citrus asserted it should have made. The third contention failed to state a claim because it was not adequately supported by the facts. 

Wrongful foreclosure is a common law tort claim, and the elements of a cause of action are: 

(1) The trustee or mortgagee caused an illegal, fraudulent, or willfully oppressive sale of real property pursuant to a power of sale in a mortgage or deed of trust; 

(2) the party attacking the sale (usually but not always the trustor, who is the borrower or mortgagor) was prejudiced or harmed; and 

(3) in cases where the trustor or mortgagor challenges the sale, the trustor or mortgagor tendered the amount of the secured indebtedness or was excused from tendering.

The third element is the most difficult for the borrower to establish because it requires a sufficient amount of money the borrower normally does not have, and it is a standard defense argument by the lender that is often effective in having the case dismissed.

A beneficiary or trustee under a deed of trust who conducts an illegal, fraudulent or willfully oppressive sale of property may be liable to the borrower for wrongful foreclosure. Nevertheless, the trustee of a deed of trust is not a true trustee with fiduciary obligations, but acts merely as an agent for the borrower-trustor and lender-beneficiary. 

The trustee’s common agency for both the borrower and lender is a passive one, for the limited purpose of conducting a sale in the event of the borrower’s default or reconveying the property upon satisfaction of the debt. 

The rights and powers of trustees in nonjudicial foreclosure proceedings are strictly limited and defined by the contract of the parties and the statutes. The scope and nature of the trustee’s duties are exclusively defined by the deed of trust and the governing statutes. No other common law duties exist. The trustee’s only duties are: (1) upon default to undertake the steps necessary to foreclose the deed of trust; or (2) upon satisfaction of the secured debt to reconvey the deed of trust.

The trustee generally has no duty to take any action except on the express instruction of the parties or as expressly provided in the deed of trust and the applicable statutes.  

Applying these principles, the Appellate Court rejected Citrus’s arguments that Chicago Title had a duty to verify that the beneficiary received a valid assignment of the loan or to verify the authority of the person who signed the substitution of trustee. Such an inquiry was beyond the scope of the trustee’s duties as defined by the deed of trust and the applicable statutes, and there was no appropriate basis for imposing tort liability on Chicago Title for failing to take actions that were beyond the scope of its duties. 

To successfully challenge a foreclosure sale based on a procedural irregularity, the plaintiff must show that there was a failure to comply with the procedural requirements for the foreclosure sale, and that the irregularity prejudiced the plaintiff. 

Citrus alleged that the trustee’s sale of the property was noticed for March 3, 2015, but the property was not sold until March 5, 2015. Citrus further alleged that the property was, according to the trustee’s deed, sold to Rescon for a $7.2 million credit bid. 

But those facts, without more, did not support Citrus’s assertions that Chicago Title failed to properly declare the date, time, and place for the sale; that the sale was made by private sale, rather than public auction; or that the purported credit bid was essentially a fraud and in fact Chicago Title literally gave the property away to Rescon for free. 

Citrus needed facts showing that the postponement of the trustee’s sale was not performed in accordance with statutory requirements. It presented no facts showing that the sale was not conducted as a public auction, and it presented no facts showing that the credit bid made by Rescon was fraudulent or in any other way improper. 

Moreover, Citrus presented no facts demonstrating any prejudice flowing from the purported defects in the notice of default, or demonstrating that the defect impaired Citrus’s ability to protect its interest in the property.  Although Citrus complained it was never able to engage in any meaningful discussion with the lender concerning the notice of default, there were no facts that this failure to communicate was a result of any inaccuracies in the contact information in the notice of default. 

Although Citrus alleged that the notice of default stated a wrongfully inflated redemption figure, Citrus did not establish that it intended at any point to exercise its redemption rights, regardless of the amount. 

LESSONS:

1.         Proving wrongful foreclosure is difficult because the foreclosing trustee is typically compliant with the statutory requirements.

2.         The borrower must show that there was a failure to comply with the procedural requirements for the foreclosure sale, and that the irregularity prejudiced the plaintiff.

3.         Facts demonstrating at most mere technical violations of the foreclosure process, do not give rise to a tort claim against the foreclosing trustee.