What is the Primary Right Theory in California?

The primary right theory was the subject of the recent case of Duncan v. Kihagi that arose out of an unlawful detainer action.

This was the second time that appellants Anne Kihagi, Christina Mwangi, and Zoriall LLC (the landlords) challenged a $2.7 million judgment against them. A jury concluded they harassed and unlawfully evicted their tenants, respondents Dale Duncan and Marta Munoz Mendoza. 

 

After the appellate court affirmed the judgment, the landlords moved to vacate the judgment, claiming it was “void.” 

 

They argued the tenants were barred from obtaining relief in this action because they had failed to pursue their legal remedies in unlawful detainer proceedings after giving up possession of their unit. 

 

Because this argument misapprehended the statute that governs surrendering possession of property in unlawful detainer proceedings, the appellate court affirmed the trial court’s order denying the landlords’ motion. 

 

Duncan in 1994 moved into a rent- controlled unit in a five-unit building on Hill Street in San Francisco. He was living there with Mendoza and their daughter when, in June 2014, the building was purchased by Zoriall, an LLC owned by Kihagi and Mwangi.

 

Starting in August 2014 and for a little over a year until Duncan and his family were forced to move, the new landlords took away various property- related benefits, ignored or delayed responding to maintenance and upkeep issues, were uncommunicative and uncooperative, and became increasingly hostile. 

 

While they were still living in their unit, the tenants initiated the proceedings when they sued the landlords in May 2015. 

 

In their first amended complaint filed that same month, they alleged causes of action for (1) nuisance, (2) breach of contract, (3) negligence, (4) harassment in violation of San Francisco’s Residential Rent Stabilization and Arbitration Ordinance (Rent Ordinance, S.F. Admin Code ch. 37), and (5) unfair business practices (Bus. & Prof. Code, § 17200 et seq.). 

 

The following month, on June 25, 2015, two unlawful detainer actions were filed against the tenants. Zoriall filed one (“the Zoriall unlawful detainer action”), and Mwangi filed a separate one (“the Mwangi unlawful detainer action”). 

 

The tenants filed an answer in the Mwangi unlawful detainer action in which they asserted affirmative defenses of retaliation and violation of the Rent Ordinance. 

 

Then they filed a “Notice of Surrender of Possession” in the action. The notice stated that the tenants vacated the premises. The notice further stated that the matter thus became an “ordinary civil action” under Civil Code section 1952.3. 

 

That statute provides that if a landlord brings an unlawful detainer action and the tenant surrenders possession before trial (making possession no longer at issue), the case becomes an ordinary civil action in which the landlord may obtain any relief to which he or she is entitled.  

 

In such an ordinary civil action the tenant, too, may “by appropriate pleadings or amendments to pleadings, seek any affirmative relief.” 

 

In general, if a defendant named in a complaint fails to allege any related cause of action by way of a cross-complaint in the action, the defendant “may not thereafter in any other action assert against the plaintiff the related cause of action not pleaded.” 

 

But this provision does not apply in an unlawful detainer action unless after delivering the property to the landlord, the tenant files a cross-complaint or an amended answer. 

 

The landlords claimed that because the tenants did not file a cross-complaint in the unlawful detainer actions, they were barred from pursuing their claims against the landlords in their already pending separate action. 

 

In 2016, the tenants filed an additional complaint against the landlords (“Duncan 2”) alleging that Mwangi had initiated an unlawful owner move-in eviction. 

 

This complaint alleged only two causes of action: (1) wrongful owner move-in eviction in violation of the Rent Ordinance and (2) negligence. 

 

Around the time trial started, the tenants on September 1, 2017, filed a second amended complaint that consolidated Duncan 1 and Duncan 2, with no substantive changes.

 

The amended complaint included all causes of action previously alleged: (1) nuisance, (2) breach of contract, (3) negligence, (4) violation of the Rent Ordinance (harassment), (5) unfair business practices, (5) violation of the Rent Ordinance (wrongful owner move-in eviction), and (6) another negligence cause of action. 

 

Following a jury trial, jurors found the landlords liable for two separate violations of the Rent Ordinance: wrongful eviction and tenant harassment. 

 

The appellate court affirmed the judgment in Duncan I. The landlords nonetheless filed six “motions to vacate judgment after trial” on various grounds. 

 

The single motion that is the subject of this appeal argued that the judgment was void based on the “primary rights theory.” 

 

In the motion, the landlords claimed that the trial court had lacked subject matter jurisdiction over the tenants’ claims after they surrendered possession of their rental unit. According to the landlords, such a relinquishment of possession waives a tenant’s right to a wrongful-eviction claim, and the judgment was thus “void" on its face. 

 

The tenants opposed the motions and argued they were without merit, frivolous, and designed to waste resources and time and as a procedural tactic to cause delays and to create unnecessary fees and costs. 

 

Following a hearing, the trial court denied all of appellants’ motions, including the one arguing that the judgment against them was void under the primary right theory.  

 

On appeal, the landlords renewed their argument that the judgment the tenants obtained following a jury trial must be set aside as void based on the primary right theory. The appellate court held the argument failed. 

 

The argument turns on the effect of the tenants surrendering possession of their unit before trial in either of the unlawful detainer actions. 

 

In general, unlawful detainer actions are summary in character, ordinarily, only claims bearing directly upon the right of immediate possession are cognizable, and cross-complaints and affirmative defenses, legal or equitable, are permissible only insofar as they would, if successful, preclude removal of the tenant from the premises. 

 

If the tenant surrenders the property such that possession is no longer at issue, though, the landlord may expand the relief sought by way of an amended complaint. 

 

The tenant, too, may, by appropriate pleadings or amendments to pleadings, seek any affirmative relief, and assert all defenses, to which he or she is entitled, whether or not the lessor has amended the complaint.

In other words, once a tenant sued for unlawful detainer surrenders possession as set forth in section 1952.3, the tenant may seek affirmative relief that would not have otherwise been available in an unlawful detainer proceeding. 

 

Relying on the primary right theory, the landlords attempted to turn this principle on its head, contending that unless the tenant seeks affirmative relief in the unlawful detainer proceeding the tenant is barred from seeking it at all. 

 

According to them, as soon as Duncan and Mendoza relinquished possession of their unit, any causes of action or damages related to the issue of Respondents’ primary right of possession was completely resolved in favor of Appellants. 

 

The appellate court was not persuaded. 

 

The primary right theory is a theory of code pleading that has long been followed in California. It provides that a cause of action is composed of a ‘primary right’ of the plaintiff, a corresponding ‘primary duty’ of the defendant, and wrongful act by the defendant constituting a breach of that duty. 

 

The most salient characteristic of a primary right is that it is indivisible: the violation of a single primary right gives rise to but a single cause of action. 

 

A pleading that states the violation of one primary right in two causes of action contravenes the rule against splitting a cause of action. 

 

The primary right theory has a fairly narrow field of application. It is invoked most often when a plaintiff attempts to divide a primary right and enforce it in two suits. 

 

The theory prevents this result by either of two means: (1) if the first suit is still pending when the second is filed, the defendant in the second suit may plead that fact in abatement; or (2) if the first suit has terminated in a judgment on the merits adverse to the plaintiff, the defendant in the second suit may set up that judgment as a bar under the principles of res judicata. 

 

The latter application of the primary right theory appears to be most common: numerous cases hold that when there is only one primary right an adverse judgment in the first suit is a bar even though the second suit is based on a different theory or seeks a different remedy. 

 

Neither scenario occurred here. 

 

More fundamentally, the theory was simply inapplicable in the circumstances presented here. 

 

Again, only the right to possession is in issue in a summary unlawful detainer action. 

 

To preserve the summary nature of the proceedings, the rule developed that ordinarily affirmative defenses may not be asserted. 

 

Only defenses which are directly relevant to possession may be considered. 

 

Section 1952.3 codifies the rule that if the tenant gives up possession of the property after the initiation of unlawful detainer proceedings but before trial, the action becomes an ordinary one for damages. 

 

In other words, when the tenants gave up possession, they surrendered only the very narrow issue of current possession of their unit. 

 

Section 1952.3, subdivision (a)(2) then permitted them to seek any affirmative relief they were otherwise entitled to that was not otherwise available in an unlawful detainer action. 

 

The tenants proceeded with their own complaints and did not seek relief by filing a cross-complaint in the unlawful detainer actions. 

 

But, contrary to the landlords’ insistence, they were not required to do so. 

 

In general, where a defendant to a lawsuit fails to allege any related causes of action by way of a cross-complaint, that defendant may not thereafter in any other action assert against the plaintiff the related cause of action not pleaded. 

 

This requirement to allege all related claims does not apply in unlawful detainer actions, however, unless one of two things happens: the tenant (1) files a cross-complaint or(2) files an answer to any amended complaint the landlord files after the case becomes a regular civil action. 

 

In other words, if a tenant chooses to file a cross-complaint in an unlawful detainer action after surrendering possession, all possible causes of action must be alleged. 

 

Here, the tenants had no reason to file such a cross-complaint after surrendering possession of their unit since they already had filed a separate complaint. And they apparently had no reason to file an amended answer, since there is no indication that after the tenants surrendered possession the landlords sought any further relief in the unlawful detainer actions. 

 

It was simply not true that the tenants improperly split a cause of action into successive suits, as the landlords claim. 

 

Here, the only legal claim the tenants abandoned when they moved out of their unit was the narrow issue of current possession, the sole focus of the unlawful detainer proceedings. The landlords apparently do not dispute for purposes of this appeal that the tenants had other valid legal claims against them. 

 

But they insist that those claims were either waived when the tenants surrendered current possession of their unit, or the claims should have been litigated in the unlawful detainer actions. 

 

As there is no legal support for these arguments, the appellate court rejected them. 

 

LESSONS:

 

1.         Civil Code section 1952.3 provides that if a landlord brings an unlawful detainer action and the tenant surrenders possession before trial (making possession no longer at issue), the case becomes an ordinary civil action in which the landlord may obtain any relief to which he or she is entitled.  

 

2.         In general, unlawful detainer actions are summary in character, ordinarily, only claims bearing directly upon the right of immediate possession are cognizable, and cross-complaints and affirmative defenses, legal or equitable, are permissible only insofar as they would, if successful, preclude removal of the tenant from the premises. 

 

3.         In other words, once a tenant sued for unlawful detainer surrenders possession as set forth in section 1952.3, the tenant may seek affirmative relief that would not have otherwise been available in an unlawful detainer proceeding. 

 

4.         The primary right theory is a theory of code pleading that has long been followed in California. It provides that a cause of action is composed of a ‘primary right’ of the plaintiff, a corresponding ‘primary duty’ of the defendant, and wrongful act by the defendant constituting a breach of that duty. 

 

5.         The primary right theory has a fairly narrow field of application. It is invoked most often when a plaintiff attempts to divide a primary right and enforce it in two suits. 

 

6.         In general, where a defendant to a lawsuit fails to allege any related causes of action by way of a cross-complaint, that defendant may not thereafter in any other action assert against the plaintiff the related cause of action not pleaded. 

How is an Easement Abandoned in California?

The recent decision in Visitacion Investment, LLC v. 424 Jessie Historic Properties, LLC, involved Appellant Visitacion Investment, LLC (Visitacion) that owned a large plot of land in San Francisco. California. 

A portion of the land was subject to an easement reserved when a railroad sold that portion to Visitacion’s predecessor-in-interest. 

 

The dominant tenement of the easement, a plot of land adjacent to Visitacion’s property, was owned by respondent 424 Jessie Historic Properties, LLC (JHP). 

 

In preparing to develop its property, Visitacion brought the action to quiet title to the easement on grounds of abandonment. 

 

Visitacion and JHP filed cross-motions for summary judgment. The trial court found no material triable issues of fact and rendered judgment in favor of JHP, holding there had been no abandonment as a matter of law. 

 

Concluding that disputed issues of fact preclude any definitive finding on the issue of abandonment, the appellate court reversed the grant of summary judgment to JHP.

 

A portion of the Visitacion property (servient parcel) was formerly owned by the Southern Pacific Transportation Company (Southern Pacific). The servient parcel was bounded on the east by the right-of-way for a series of mainline railroad tracks that are still in active use. 

 

When Southern Pacific conveyed the servient parcel to Visitacion’s predecessor-in-interest in 1990, Southern Pacific was conducting railroad-related business operations on a parcel across the northern border of the servient parcel. 

 

In support of these operations, the deed of conveyance reserved an easement with respect to several separately described portions of the servient parcel (the easement). 

 

As relevant here, the easement encumbered a strip of land curving diagonally across the servient parcel from its northeast corner, which was bordered to the north by the Southern Pacific parcel and to the east by the railroad right-of-way. Southern Pacific’s parcel became the dominant tenement of the easement.

 

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 on which the burden is imposed is called the servient tenement. 

 

Southern Pacific merged with the Union Pacific Railroad (Union Pacific) in 1997.  At some point, railroad activities on the dominant tenement ceased, although the date of cessation is unclear from the appellate record. 

 

In 2015, Union Pacific sold the dominant tenement and an adjacent parcel (together, JHP property) to the predecessor-in-interest of JHP. As part of the sale, Union Pacific expressly conveyed to JHP its rights under the easement in the diagonal strip described above, although the deed contained no warranty regarding the continued existence of such rights. 

 

Visitacion planned a large, mixed-use residential development on the Visitacion property. As part of that development, Visitacion hoped to use the portion of its land that was encumbered by the easement. 

 

To that end, Visitacion brought its quiet title action against JHP, alleging that the easement has been extinguished under the doctrine of abandonment. 

 

JHP responded with a cross-complaint, denying abandonment and seeking to establish its full and complete legal and equitable ownership of the easements. 

 

Visitacion’s claim of abandonment was premised on the cessation of railroad activities on the JHP property and its sale to JHP, a real estate development company, JHP argued that the easement had not been abandoned because it continues to allow vehicular and pedestrian access to the JHP property and can be used for the installation of communications equipment or for activities associated with the active mainline rail service on its eastern boundary. 

 

Without denying its exploration of the construction of buildings on the JHP property, JHP provided evidence that the JHP property is zoned to allow a variety of activities authorized under the easement, including activities associated with the mainline tracks or other “freight storage or transfer, loading and unloading of rail cars, and railroad maintenance, construction or repair” and a data center or other telecommunication facilities. 

 

Since JHP acquired the property, it had licensed its temporary use to a railroad maintenance and construction contractor working on a railroad electrification project for CalTrain. 

 

Further, JHP argued use of the easement for an access roadway and the installation of communications lines will be necessary for any future development on the JHP property. Because, JHP contended, such uses are authorized under the easement, it cannot be found to have been abandoned. 

 

The trial court denied Visitacion’s motion for summary judgment and granted JHP’s motion. 

In granting judgment, the trial court was persuaded that the scope of the easement extended beyond railroad-related activities, citing the broad language relating to communications equipment and the testimony of a former Southern Pacific employee that the company’s business at one time included the installation of commercial fiber optic cables in some of its railroad rights-of-way. 

 

The court rejected Visitacion’s claim that Union Pacific’s conduct evidenced an intent to abandon the easement, relying on evidence that (1) the railroad actively marketed the property, (2) JHP had entered into agreements with Visitacion in 2016 and the construction company in 2019 granting access to the property, and (3) the property would be “effectively landlocked” without access over the easement. 

 

The appellate court concluded that the trial court erred in granting summary judgment to JHP for three independent reasons. 

 

First, resolution of this matter would likely turn on the interpretation of the easement deed. Although that interpretation is ultimately an issue of law for the court, the trial court erred in construing the easement in the context of the summary judgment motions, given the ambiguity in the language of the deed and the conflicting evidence regarding the context and use of the easement. 

 

Second, the evidence submitted by Visitacion could, if accepted by the trier of fact, support a finding of abandonment, notwithstanding the contrary evidence submitted by JHP. It therefore created triable issues of fact that preclude summary judgment. 

 

Third, the trial court’s finding that, as a matter of law, Union Pacific did not intend to abandon the easement was based on a misunderstanding of the law governing such intent.

 

Abandonment of an easement created by grant, as here, requires proof of (1) the cessation of use of the easement by the owner of the dominant tenement and (2) unequivocal and decisive acts on the part of the [dominant tenant], clearly showing an intention to abandon.

 

An easement that is found to be abandoned does not ‘revert’ to the grantor it is simply extinguished.

 

Abandonment, and in particular the intent to abandon, are issues of fact. 

 

With respect to this inquiry, California has adopted the view of the original Restatement of Property that the intention required in the abandonment of an easement is the intention not to make in the future the uses authorized by it. The benefit of an easement lies in the privilege of use of the land subject to it. There is no abandonment unless there is a giving up of that use. 

Abandonment hinges upon the intent of the owner to forego all future conforming uses of the property, and the trier of fact must “determine whether there was a bona fide intent to preserve the right of way for actual railroad use.

 

Although mere nonuse is insufficient to demonstrate an intent to abandon, a long period of nonuse may be considered as evidence of the necessary intent. 

 

In determining the “conforming” or “authorized” uses of an easement, the touchstone is the language of the document creating the easement.

 

The extent of a servitude is determined by the terms of the grant. Deeds are interpreted in the same manner as contracts. In interpreting a deed, our primary objective is to determine and carry out the intent of the parties by looking at the deed’s plain language, as construed in light of any extrinsic evidence which may prove a meaning of which the language of the instrument is reasonably susceptible.

 

In determining the uses permitted by an easement, the court must also consider the “purpose and character” of the easement.

 

 The terms of the easement constrain the uses permitted to those interests expressed in the grant and those necessarily incident thereto pass from the owner of the fee. 

 

It is well settled that both parties have the right to insist that so long as the easement is enjoyed it shall remain substantially the same as it was at the time the right accrued, entirely regardless of the question as to the relative benefit and damage that would ensue to the parties by reason of a change in the mode and manner of its enjoyment.

 

There was little question that the terms of the deed containing the easement were ambiguous. The easement is referred to as a “railroad easement,” but its authorized uses include the installation of communications equipment as well as railroad equipment. Further, the deed’s descriptions of the various tracts subject to the easement refer specifically to the creation of a “drill & spur track” and an “access roadway.” 

 

Based on this language, Visitacion and JHP posit reasonable but conflicting interpretations, with Visitacion contending the easement permits only railroad-related uses (including railroad-related communications and access) and JHP arguing that any use for the purposes of communications and access is authorized. 

 

The trial court’s interpretation was based largely on the language of the easement deed, with little consideration of the circumstances of its creation or the original parties’ use of the easement. Although the trial court was correct that the deed’s language authorizing the installation of communications equipment is broad, that language is potentially subject to limitation by other provisions of the easement deed and the history of its use. 

 

The deed is entitled “Railroad Easement,” arguably suggesting that the parties intended the easement to be used solely for railroad purposes. Further, one of the easement parcels transferred to JHP was described as a “signal cabinet area” in the quitclaim deed, suggesting it had been used for communications related to the railroad’s operations.

 

The original parties could have chosen to use broad language to describe the allowable communications equipment simply to accommodate changing technology for railroad communications, rather than to permit the installation of equipment serving other communications purposes. 

 

The trial court’s decision did not address the evidence submitted by Visitacion in support of its contention that Union Pacific had abandoned the easement. Because that evidence was sufficient, under long-established case law, to support a finding by a trier of fact that the easement was abandoned, Visitacion’s submission created triable issues of fact precluding a grant of summary judgment to JHP. 

 

Visitacion’s evidence, which was largely uncontradicted, demonstrated that all of Union Pacific’s easement-related activities on the servient parcel ceased several years prior to the sale to JHP. 

 

On this evidence, a trier of fact could conclude that Union Pacific, prior to the sale to JHP, had formed an intent not to make in the future the uses authorized by the easement. 

 

A reasonable inference of such intent could be made from the removal of all conforming equipment and the significant period of nonuse, which the internal review confirmed. Similar evidence has repeatedly been found sufficient to support a finding of abandonment of a railroad easement in California and other jurisdictions.

 

Even if the easement permitted non-railroad uses, Union Pacific could be found to have formed an intent not to take advantage of them. For this reason, Visitacion’s evidence necessarily created triable issues of fact that prevented a grant of summary judgment to JHP. 

 

Although Visitacion’s evidence is sufficient to support a finding of abandonment, it did not demonstrate an entitlement to summary judgment. As we have noted, abandonment, and in particular intent to abandon, are issues of fact. Issues of intent in this context as in others often turn on circumstantial evidence and inferences that, when conflicting, are not amenable to summary judgment.  

 

Further, although a trier of fact could find abandonment on Visitacion’s evidence, that finding is not compelled as a matter of law. A judge or jury could also conclude that Union Pacific’s conduct was neither unequivocal nor decisive in demonstrating an intent to forgo all further authorized uses of the easement. 

 

In addition, JHP provided evidence that could be found to refute an intent to abandon. Although JHP’s claim that it intends to make such use of the easement will depend on subsequent interpretation of the easement, JHP’s evidence is sufficient at this stage of the proceedings to create a triable issue of fact that precluded a grant of summary judgment for Visitacion. 

 

The trial court’s conclusion that, as a matter of law, Union Pacific lacked the intent to abandon appears to have been based on a misunderstanding of the law governing such intent. The court did not expressly identify the legal standard it applied in finding no intent to abandon, but it reasoned that Union Pacific could not be found to have intended to abandon the easement because it actively marketed the easement as part of the JHP property.

 

Although this suggests that Union Pacific did not intend to voluntarily relinquish the easement at the time of the sale to JHP, the intent to abandon an easement does not require or depend upon an intent to relinquish it. 

 

The intention required in the abandonment of an easement is the intention not to make in the future the uses authorized by it.

 

The trial court separately justified its finding of no intent to abandon on the ground that the JHP property would be “effectively” landlocked without access over the easement. Visitacion presented evidence refuting JHP’s claim that the property would be landlocked without access through the easement, including the admission by a JHP witness that the easement is merely “currently the most economically feasible access to the JHP property.” 

 

The issue whether the property was landlocked thus presented a triable issue of disputed fact, and the court erred in premising a grant of summary judgment on JHP’s claim. 

 

Further, although the landlocked nature of the parcel might justify a finding of an easement by necessity, an issue the court did not expressly consider, it does not bear on the issue of abandonment. JHP has presented no authority suggesting that the need for access, standing alone, makes roadway access an authorized use under the easement. 

 

Whether access to the JHP property was an authorized use of the easement or was permitted only to the extent such access was necessarily incident to the expressly authorized uses, must be resolved by interpretation of the easement. 

 

The trial court’s grant of summary judgment to JHP was reversed, and the trial court was directed to vacate the judgment and its order granting summary judgment. 

 

LESSONS:

 

1.         An easement is an incorporeal interest in the land of another that gives its owner the right to use another’s property. 

 

2.         The land to which the easement attaches is called the dominant tenement; the land on which the burden is imposed is called the servient tenement. 

 

3.         Abandonment of an easement created by grant, as here, requires proof of (1) the cessation of use of the easement by the owner of the dominant tenement and (2) unequivocal and decisive acts on the part of the [dominant tenant], clearly showing an intention to abandon.

 

4.         An easement that is found to be abandoned “does not ‘revert’ to the grantor it is simply extinguished.

 

5.         Abandonment, and in particular the intent to abandon, are issues of fact. 

Reinstating A Loan Modification Agreement After Default

The recent decision of Taniguchi v. Restoration Homes LLC, is a case of first impression (meaning the issue has not been previously decided by a California court of appeal) regarding a very typical problem, i.e., what amount must a defaulting borrower of a loan modification agreement pay to reinstate the modification agreement?  

The amount of the missed loan modification payments (plus fees and expenses) as argued by the borrowers, or the missed loan modification payments (plus fees and expenses) and the amount of the earlier default on the original loan as argued by the lender?

The appellate court found in favor of the borrowers who missed four monthly payments on a mortgage loan that had been modified after an earlier default, and decided that the borrowers could reinstate the loan modification under California Civil Code §§ 2924c and 2953 by paying the four missed payments, plus fees and expenses.

If all or part of the principal secured by a mortgage or deed of trust becomes due as the result of the borrower’s default in paying interest or installments of principal, section 2924c allows the borrower to cure the default, reinstate the loan, and avoid foreclosure by paying the amount in default, plus specified fees and expenses. 

Under section 2953, the right of reinstatement cannot be waived in any express agreement made or entered into by a borrower at the time of or in connection with the making of or renewing of any loan secured by a deed of trust, mortgage or other instrument creating a lien on real property.

The borrowers in the appeal missed four monthly payments on a mortgage loan that had been modified after an earlier default. The modification deferred certain amounts due on the original loan, including principal, and provided that any default would allow the lender to void the modification and enforce the original loan terms. 

The borrowers argued that under sections 2924c and 2953, they can reinstate the modified loan by paying the four missed payments, plus fees and expenses. 

The lender argued that section 2953 does not apply to the modified loan, and that under section 2924c the borrowers have the right to reinstate the original loan by paying the amount of the earlier default on the original loan, which had been deferred under the modification to the end of the loan term, as well as paying the missed modified monthly payments that caused the default on the modified loan. 

The appellate court concluded that the borrowers had the better argument.

In 2006, Charles and Marie Louise Taniguchi (the Taniguchis) obtained a 30-year home loan of $510,500, secured by a deed of trust. 

By early 2008, the Taniguchis were having difficulty making the required loan payments, and in 2009 they agreed to a “Balloon Loan Modification Agreement” (Modification) that adjusted the principal amount, eliminated an adjustable interest rate rider, reduced the interest rate and monthly payments, and deferred until the maturity of the loan approximately $116,000 of indebtedness, including accrued and unpaid interest and principal, fees, and foreclosure expenses. 

Under the Modification, the Taniguchis’ loan matured in 10 years, at which point the Taniguchis would need to refinance or make a balloon payment of about $531,000, plus any additional charges. 

The Modification provided that failure to make modified payments as scheduled would be an event of default, and that in the event of a default the Modification would be null and void at the lender’s option, and the lender would have the right to enforce the loan and associated agreements according to the original terms. 

The Modification left unchanged certain provisions of the original loan documents, including acceleration clauses authorizing the lender to require immediate payment by a defaulting borrower of the full amount of principal not yet paid and all interest owed on that amount, and to invoke the power of sale. 

The Taniguchis defaulted on the modified loan, which was eventually assigned to Restoration Homes, LLC (Restoration Homes). Restoration Homes caused a notice of default to be recorded in 2013. 

The Taniguchis were informed that to reinstate their account and avoid foreclosure, they would be required to pay their four missed monthly payments and the associated late charges specified in the modified loan (totaling about $11,000) and $4,500 in foreclosure fees and costs, plus all the sums that had previously been deferred under the Modification. By then, the deferred amount was over $120,000 in principal, interest and charges. 

The Taniguchis took exception to the amount Restoration Homes required for reinstatement and they filed suit in superior court.

Shortly after that, Restoration Homes caused a notice of trustee’s sale to be recorded, which led the Taniguchis to file a second suit and seek a temporary restraining order to prevent the foreclosure sale. 

In their complaint, the Taniguchis alleged four causes of action against Restoration Homes for: 

1.  violation of section 2924c by demanding excessive amounts to reinstate the loan, 

2.  unfair competition, 

3.  breach of contract, and 

4.  breach of the covenant of good faith and fair dealing. 

The trial court granted Restoration Homes’ motion for summary motion, and entered judgment for Restoration Homes.

Like the Taniguchis’ loan documents, the typical form promissory note and deed of trust provide that upon any default in the trustor’s obligations, the beneficiary may elect to accelerate the payment of all sums of principal and interest and commence foreclosure proceedings. 

The statutory right of reinstatement, set forth in section 2924c, effectively modifies the contract provision which permits acceleration upon default. 

Section 2924c, subdivision (a)(1) provides that when a mortgage loan is accelerated as a result of a borrower’s default, the borrower can reinstate the loan by paying all amounts due, other than the portion of principal as would not then be due had no default occurred. That is, the borrower can cure the default and reinstate the loan by paying the amount of the default, including fees and costs resulting from the default, rather than the entire accelerated balance. 

The mortgage lender must inform the borrower of the correct amount due to reinstate the loan.  

California courts have long recognized the public policy behind the right to reinstatement. A Court of Appeal in 1949 observed that Section 2924c of the Civil Code was first enacted in 1933, during a time of financial stress and depression throughout the United States. The purpose of the legislation was to save equities in homes, in many instances built up through years of monthly payments. 

Section 2953 limits the ability of a borrower to waive the right of reinstatement: Any express agreement made or entered into by a borrower at the time of or in connection with the making of or renewing of any loan secured by a deed of trust, mortgage or other instrument creating a lien on real property, whereby the borrower agrees to waive the rights, or privileges conferred upon him by Sections 2924, 2924b, 2924c of the Civil Code or by Sections 580a or 726 of the Code of Civil Procedure shall be void and of no effect. 

The Taniguchis contended that under section 2924c, they had the right to avoid foreclosure and reinstate their modified loan by making up the missed modified payments, plus costs and fees. They argued that the Modification is an agreement made at the time of or in connection with the making of or renewing of any loan secured by a deed of trust, and therefore cannot include any waiver of the right of reinstatement.

The California Legislature did not define the phrase “at the time of or in connection with the making of or renewing of any loan secured by a deed of trust” for purposes of section 2953, and there is no clear definition in the case law. Whether a loan that has been modified by the parties as part of a workout agreement is considered ‘made’ or ‘renewed’ is unclear. 

The appellate court agreed with the Taniguchis that the Modification can be understood as being in connection with the making of a loan secured by a deed of trust, because amounts were added to the existing loan, specifically the accrued and unpaid interest. 

The lender argued that the Modification simply altered the terms under which the original loan was made. 

However, as a general matter, extensions of loans and renewals alike are contractual revisions of the terms of the obligation, the effect of which is to alter the time and terms of payments becoming due. After the extension or renewal, the debtor is not in breach or default so long as the amended or renewed terms of the indebtedness are performed. 

In sum, the appellate court concluded that for purposes of section 2953, the Taniguchis’ Modification is appropriately viewed as the making or renewal of a loan secured by a deed of trust. It is thus subject to the anti-waiver provisions of section 2953. 

Section 2924c gives the Taniguchis the opportunity to cure their precipitating default (that is, the missed modified monthly payments) by making up those missed payments and paying the associated late charges and fees, and in that way to avoid the consequences of default on the modified loan. 

LESSONS:

1.                 If there is a default in payment of a loan modification agreement, the modification can be reinstated by paying the missed payments, plus fees and expenses.

2.                 As a general matter, extensions of loans and renewals alike are contractual revisions of the terms of the obligation, the effect of which is to alter the time and terms of payments becoming due.

Deed of Trust Must Sufficiently Describe the Property

In the recent case of MTC Financial, Inc. v. California Department of Tax and Fee Administration, the California Appellate Court confirmed the need for accuracy and sufficiency of the legal description of the property in a deed of trust in order for it to be enforceable.

In the underlying case, proceeds remaining after a home foreclosure sale were deposited with the trial court due to competing claims to the proceeds. A primary dispute between the claimants was whether a first in time deed of trust sufficiently described the foreclosed property. Among other things, the trial court found the description was insufficient, and the trust deed was therefore void. It entered judgment in favor of the next in time state tax lien. Finding no error in the result of the judgment, the Appellate Court affirmed. 

In 2017, a foreclosure sale for the home (the property) of Kamini and Anand Chopra (collectively, the Chopras) was conducted by MTC Financial Inc. (the trustee). Following an initial distribution of the sale proceeds, the trustee determined there was a conflict between outstanding claims to the remaining proceeds (the surplus fund). The trustee deposited the surplus fund with the trial court so it could determine the claimants’ respective priorities pursuant to California Civil Code section 2924j, subdivisions (c) and (d).

Among the claimants was appellant Rajindar Mehta, the grantee of a 2004 deed of trust signed by the Chopras (the trust deed). Mehta claimed his trust deed was senior in priority because it was created first in time relative to the outstanding claims to the fund. 

Respondent, the California Department of Tax and Fee Administration (the Tax Department), disputed Metha’s claim and contended that its 2008 tax lien against Kamini Chopra had senior priority as next in time because, among other things, the trust 

deed was void and unenforceable based upon its insufficient legal description of the property.

The trust deed’s legal description of the property contained multiple points of inaccuracy or ambiguity: 

(1) the lot number of “68” was incorrect (it should have been “88”); 

(2) the book page number of “810-11” was incorrect (it should have been “1-11”); 

(3) the city of the property was not identified; and 

(4) regarding the county where the property is located, the description only reads “said county,” although a preceding information field does state the correct “Orange County.” 

At the same time, the trust deed referenced an assessor’s parcel number, which matched the number identified for the property according to attachments to the trustee’s petition which was filed with the deposit of the surplus fund.

The attachments included two copies of a purported assessor’s map denoting information that could correspond to the trust deed’s legal description of the property. For example, the map purports to depict a “Tract No. 9268,” which is the tract described in the trust deed. 

Ambiguously, however, both numbers “68” and “88” (respectively, the incorrect lot number listed in the trust deed and the true lot number that should have been listed) appear at different locations on the map. Neither Mehta nor the Tax Department discussed this map in their briefs, either at the trial court level or on the appeal. 

An assessor’s parcel number, also referred to as an APN, is a numerical identifier associated with a particular piece of property for property tax assessment purposes.

After conducting two hearings, the trial court found in favor of the Tax Department.  Among other things, the court determined the Tax Department’s tax lien claim to have priority over Mehta’s claim because the trust deed contained a fatally defective legal description of the property and Mehta had failed to produce evidence of actually lending money to the Chopras, as the trust deed purported.

The order also stated: As for the assessor’s parcel number appearing on the face of the trust deed, there is no evidence that such number is the correct assessor’s parcel number assigned by the Orange County Assessor to the subject real property, especially given the other erroneous information appearing in the deed of trust. 

A judgment for the Tax Department was entered and was timely appealed by Mehta.   On appeal, Mehta argued the trial court erred in finding the trust deed void. Mehta, as the appellant, had the burden of demonstrating the trial court erred. 

Well-established principles for determining the relative priorities of property interests were implicated. California observes a “first in time, first in right” system of lien priorities where, generally, competing enforceable interests have priority among themselves according to the time of their creation. (Civil Code § 2897.) 

As to determining the enforceability of such interests, a trust deed must sufficiently describe the property securing it to be enforceable.  To be sufficient, the description must be such that the land can be identified or located on the ground by use of the description. A description that is equally applicable to two different parcels is fatally defective.

Mehta contended his trust deed sufficiently described the property because of the parcel number, address, and trustor names contained in it. 

The Appellate Court disagreed. First, it noted that the trustor names (the Chopras) and address contained in the trust deed do not provide grounds for a sufficient property description in that case. The names have no logical relationship to whether the property is sufficiently described and the subject address is only listed as the address of the trustors (not the property). Accordingly, the only potentially valid basis for finding the property description to be sufficient, of the three offered by Mehta, is the parcel number contained in the trust deed. 

While the Appellate Court found no reason to disagree that a parcel number could theoretically satisfy the law’s requirement for sufficient legal description of a property, it also found that a parcel number, by itself, does not necessarily demonstrate the actual, physical location of a property. Generally, such a number corresponds to an assessor’s map which is a type of map that does not have to necessarily correspond with the actual physical location of a property.  Parcel numbers assigned pursuant to Revenue & Tax Code section 327 need not correspond with actual subdivisions, lots, tracts or other legal divisions or boundaries of land.

Additionally, the trust deed’s legal description of the property refers to a “recorded” map in its legal description. That revealed another potential issue with respect to locating the property by its parcel number because a “recorded” map could mean a certified parcel map filed in the Orange County Clerk Recorder’s Office. (See Gov. Code § 66499.55.) 

Given that a parcel map and assessor’s map need not necessarily correspond to each other, even if the trust deed’s parcel number correctly corresponds to a property depicted in a tax assessor’s map (a fact that had not been demonstrated by Mehta), this would not necessarily establish what property the trust deed is describing in a certified parcel map. In sum, the parcel number in the case, by itself, did not necessarily describe the property’s actual, physical location so that it could be identified or located on the ground. 

Mehta offered no demonstration of how the parcel number could have been used to locate the property. He instead argued—as he did to the trial court—that no parol evidence is needed to confirm the trust deed is a lien on this property. Mehta’s argument was incorrect. 

The inaccuracies of the trust deed’s legal description of the property created an ambiguity, which implicated a need for clarification by extrinsic evidence. Indeed, in the relevant cases cited by the parties, courts based their determinations regarding sufficient description of a property upon examinations of extrinsic evidence. 

A parcel map is used to sell, lease, or finance property.  The Subdivision Map Act generally prohibits the sale, lease, or financing of any parcel of a subdivision until the recordation of an approved map in full compliance with the law. 

In contrast, no such extrinsic evidence was offered to the court in this matter. This left the trust deed’s ambiguity unresolved with no demonstration that the property could be identified or located by the legal description of the trust deed. 

As a result, Mehta failed to carry his independent burden at the trial court level to prove that the trust deed’s legal description of the property was sufficient to be enforceable. On appeal, with respect to the trial court’s factual finding that there was no evidence demonstrating the sufficiency of the parcel number, Mehta failed to meet his burden under substantial evidence review to demonstrate that the evidence was (1) “uncontradicted and unimpeached” and (2) “of such a character and weight as to leave no room for a judicial determination that it was insufficient to support a finding". 

Finally, the Appellate Court was not persuaded that Mehta’s assertions regarding notice of the trust deed should control the disposition of this appeal. Mehta asserted the indexing of the county recorder filing system provided effective notice of the trust deed to the Tax Department. However, Mehta did not say how this point, even if shown, would impact the dispositive issue of whether the trust deed sufficiently described the property. 

The absence of meaningful discussion existing within the context of case law supported a conclusion that if the trust deed was void, then notice of it achieved nothing for the purpose of determining the senior interest to the surplus fund.  The Appellate Court was not aware of any principle justifying it to hold that the recording of a deed, void as to any person, was notice to such person of anything, except, perhaps, of the existence of the void instrument.

A void thing is as no thing. In other words, Mehta did not persuade that any notice his trust deed may have imparted would outweigh the conclusion that the trust deed was void and unenforceable. 

In sum, Mehta failed to carry his independent burden at the trial court level to show the trust deed’s legal description of the property was sufficient to make it enforceable. (Evid. Code § 500.) 

On appeal, Mehta did not carry his burden to demonstrate the trial court committed reversible error. 

LESSONS:

1.         The legal description of the property is essential to have it enforced, and an insufficient legal description may render the trust deed void.

2.         Inaccuracies in a trust deed’s legal description of the property creates an ambiguity, which implicates a need for clarification by extrinsic evidence.

3.         The recording of a void instrument is only notice of a void and unenforceable instrument.