Cypress On Sunland Homeowners Ass'n v. Orlandini

• Court: Arizona Court of Appeals
• Writing for the Court: OPINION
• Citation: Cypress On Sunland Homeowners Ass'n v. Orlandini, 227 Ariz. 288, 257 P.3d 1168, 609 Ariz. Adv. Rep. 39 (Ariz. App. 2011)
• Decision Date: 19 May 2011
• Docket Number: Nos. 1 CA–CV 10–0142,1 CA–CV 10–0235.,s. 1 CA–CV 10–0142
• Parties: CYPRESS ON SUNLAND HOMEOWNERS ASSOCIATION, a non-profit corporation; Scott Jacoby, an individual, Plaintiffs–Appellees,v.James V. ORLANDINI, II; First American Title Insurance Company, a California corporation, Intervenors–Appellants.Cypress on Sunland Homeowners Association, Plaintiff–Appellee,v.James V. Orlandini, II; First American Title Insurance Company, a California corporation, Intervenors–Appellants.

227 Ariz. 288

257 P.3d 1168

609 Ariz. Adv. Rep. 39

CYPRESS ON SUNLAND HOMEOWNERS ASSOCIATION, a non-profit corporation; Scott Jacoby, an individual, Plaintiffs–Appellees,

v.James

v. ORLANDINI, II; First American Title Insurance Company, a California corporation, Intervenors–Appellants.Cypress on Sunland Homeowners Association, Plaintiff–Appellee,

v.James

v. Orlandini, II; First American Title Insurance Company, a California corporation, Intervenors–Appellants.

Nos. 1 CA–CV 10–0142

1 CA–CV 10–0235.

Court of Appeals of Arizona, Division 1, Department B.

May 19, 2011.

Gust Rosenfeld P.L.C. by Scott A. Malm, Phoenix, Attorneys for Appellants.Shaw & Lines, LLC by Mark E. Lines, Phoenix, Attorneys for Scott Jacoby.Maxwell & Morgan, PC by Charles E. Maxwell, Brian W. Morgan, Paul R. Neil, Mesa, Attorneys for Cypress on Sunland Homeowners' Association.

OPINION

WEISBERG, Judge.

¶ 1 James V. Orlandini, II and First American Title Insurance Company (collectively “Intervenors”) appeal from the trial court's orders consolidating cases, denying a notice of change of judge, reinstating a default judgment on foreclosure, and awarding attorneys' fees and costs to Cypress on Sunland Homeowners' Association (“HOA”). We affirm the court's orders consolidating cases and denying a notice of change of judge. We reverse the court's order reinstating the default judgment on foreclosure because the conduct of the HOA's lawyers in obtaining the default judgment on foreclosure constituted a fraud upon the court. We also reverse the award of attorneys' fees and costs to the HOA and remand the matter to the trial court for further proceedings.

PROCEDURAL BACKGROUND

¶ 2 These appeals involve separate but related superior court actions regarding the same real property: CV2007–090828 (the “lien foreclosure action”) and CV2008–021749 (the “quiet title action”). The issues on appeal arise from the consolidation of those actions and orders entered thereafter in favor of Cypress on Sunland Homeowners' Association and Scott Jacoby (collectively “Appellees”).

The Lien Foreclosure Action

¶ 3 Derrick Spearman owned real property in Phoenix (“the property”) subject to a Declaration of Covenants, Conditions, Restrictions & Easements (“CC & Rs”) of the HOA recorded in January 2003. On June 2, 2006, American Lending Corporation (“ALC”) loaned $190,400 to Spearman, as evidenced by a note, and secured by a deed of trust on the property recorded on June 8, 2006 in Maricopa County records at Document No. 2006–778589 (first deed of trust). On the same day, ALC loaned $23,900 to Spearman, as evidenced by a note and secured by a second deed of trust on the property and also recorded on June 8, 2006. First American Title Insurance Co. (“First American”) issued a lender's title insurance policy to ALC and its assignees insuring the first deed of trust. The first deed of trust was assigned to Alliance Bancorp on June 6, 2006 by an unrecorded assignment. It was then assigned to HSBC Bank, USA, as trustee for Deutsche Alt–A Securities Mortgage Loan Trust, Series 2006–AR5, (“the Bank”) on June 12, 2006. This later assignment was recorded on November 10, 2008.

¶ 4 Spearman failed to pay assessments due the HOA. Pursuant to the CC & Rs, the unpaid amount was secured by an assessment lien on the property. In anticipation of filing a lien foreclosure action, the HOA, through its attorneys, Maxwell & Morgan, P.C., obtained a litigation guarantee showing ALC's June 8, 2006 first and second deeds of trust. It also showed that on February 9, 2007, the HOA had recorded a judgment against Spearman in the amount of $748.21.

¶ 5 On April 9, 2007, the HOA filed a lien foreclosure action against Spearman and ALC pursuant to Arizona Revised Statutes (“A.R.S.”) section 33–1807(A)(2007). The complaint alleged that ALC had two deeds of trust on the property; it did not state that one of them was a first deed of trust, nor did it cite A.R.S. § 33–1807(B)(2), regarding the priority of a first deed of trust over an assessment lien. The complaint further alleged that under the CC & Rs, the HOA had a “lien upon the Property which was perfected upon recordation of the CC & Rs” and that the defendants' liens upon the property were “subordinate and inferior to the rights and lien of the [HOA].” It sought judgment in the principal sum of $2,436.28, plus prejudgment interest; costs and attorneys' fees pursuant to A.R.S. § 33–1807(H); a declaration that the assessment lien was “a superior and priority lien on the Property”; and an order foreclosing “the interests of the Defendants, and all persons claiming under them ... except such rights of redemption as they may have by law.”

¶ 6 ALC was served but, having previously assigned the first deed of trust, did not answer. After an ex parte hearing on June 4, 2007, at which only the HOA's lawyer was present, Commissioner M. Scott McCoy entered a default judgment on foreclosure in favor of the HOA and against Spearman and ALC and its unknown heirs and devisees. The judgment, which was prepared by Maxwell & Morgan, awarded the HOA the principal sum due, together with prejudgment interest, costs and attorneys' fees, declared the assessment lien a “valid first lien,” foreclosed all other liens held by defendants and “all persons claiming under any of them,” and ordered a sale to satisfy the debt. The judgment did not reflect that the HOA purported to foreclose on the first deed of trust. On July 26, 2007, Robert Draper purchased the property at a sheriff's sale for $5,599. The appraised value of the property on that date was $190,000.

¶ 7 On October 9, 2007, the successor trustee of the Bank noticed a trustee's sale to foreclose on the first deed of trust. The notice stated that Wells Fargo Home Improvement (“Wells Fargo”) was the servicing agent for the Bank. After the successor trustee became aware of the HOA's judgment on foreclosure, on January 2, 2008, the attorney for the Bank/Wells Fargo wrote Brian Morgan of Morgan & Maxwell advising him that Wells Fargo had a first deed of trust on the property securing a loan in the principal amount of $190,400, and recorded June 8, 2006 at document number 20060778589. Acknowledging that the default judgment had foreclosed the second deed of trust, he asked Morgan to confirm in writing that the first deed of trust had priority over the assessment lien, that it had not been extinguished by the judgment, and that any wording in the judgment suggesting otherwise “was nothing more than a clerical error.” Although later claiming that he was “deceived” by the letter, Warren Nikolaus of Maxwell & Morgan responded. He stated that the HOA “asserted no lien priority over the first mortgage held by your client in our past foreclosure lawsuit upon the property” and that “individuals who buy such properties at sheriff's sales are also aware that they are bidding and taking properties subject to the first mortgage only.” ¹

¶ 8 On March 15, 2008, Draper sold the property by warranty deed to his friend, Scott Jacoby, for $110,000. Jacoby was aware of the pending trustee's sale and the Bank's position that it held a first lien. The Bank obtained a trustee's deed upon sale on May 22, 2008, and on September 26, 2008, sold the property to James V. Orlandini for $80,550.

The Quiet Title Action

¶ 9 On September 22, 2008, a few days before Orlandini purchased the property, Jacoby filed a complaint to quiet title to the property pursuant to A.R.S. § 12–1101(2003). He named the Bank as a defendant and claimed that its interest in the property had been foreclosed as a result of the judgment on foreclosure. After the Bank answered the complaint, Jacoby filed a motion for judgment on the pleadings and/or summary judgment.

¶ 10 In March 2009, Orlandini became aware of the quiet title action. Orlandini and First American filed a motion to intervene and submitted a proposed answer and a counterclaim. In their counterclaim, they sought declaratory relief to set aside the default judgment entered in the foreclosure action, as well as the subsequent sheriff's sale, pursuant to Arizona Rule of Civil Procedure 60(c)(4) and (6),² or alternatively, restitution based on unjust enrichment. Jacoby stipulated only to Orlandini's joinder as a real party in interest, but objected to intervention on any other ground.

¶ 11 Judge Edward 0. Burke granted the motion to intervene, and the Intervenors filed their answer and counterclaim. The court granted the Bank's motion to dismiss because it no longer had an interest in the property. Jacoby then filed a motion to dismiss the Interveners' counterclaim alleging (1) failure to join necessary parties; (2) that the claims were time-barred under Rule 60(c); and (3) lack of standing. The Intervenors disputed these allegations and specifically asserted that they had requested relief within a reasonable time under Rule 60(c)(6), and also that the default judgment could be set aside for a “fraud upon the court.” In addition to their response to Jacoby's motion to dismiss, the Intervenors filed a cross-motion for summary judgment.

¶ 12 After oral argument on Jacoby's motions to dismiss and for summary judgment and the Interveners' cross-motion for summary judgment, the court rejected the arguments made in Jacoby's motions and granted the Interveners' cross-motion. As to the cross-motion, the court ruled that under A.R.S. § 33–1807(B) and the CC & R's, the assessment lien was subordinate to the first deed of trust held by ALC and its successors in interest; that the first deed of trust was a first lien and was superior to the assessment lien, which could not be foreclosed by the HOA's default judgment. The court further ruled that the allegations and recitations in the HOA's foreclosure complaint and in the judgment of foreclosure, that the assessment lien was a first lien that had priority over and was superior to the first deed of trust, and therefore foreclosed the first deed of trust, were...