Loconte v. Option One Mortgage, E043445 (Cal. App. 3/6/2008)

• Court: California Court of Appeals
• Writing for the Court: Gaut
• Decision Date: 06 March 2008
• Docket Number: E043445
• Citation: Loconte v. Option One Mortgage, E043445 (Cal. App. 3/6/2008) (Cal. App. 2008)
• Parties: MICHAEL J. LOCONTE, Plaintiff and Appellant, v. OPTION ONE MORTGAGE, Defendant and Respondent.

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MICHAEL J. LOCONTE, Plaintiff and Appellant, v. OPTION ONE MORTGAGE, Defendant and Respondent.

E043445

Court of Appeals of California, Fourth Appellate District, Division Two

March 6, 2008

NOT TO BE PUBLISHED

Appeal from the Superior Court of Riverside County, No. INC056212, H. Morgan Dougherty, Judge. Affirmed.

Cienfuegos Co and P. David Cienfuegos for Plaintiff and Appellant.

Best Best & Krieger, Robert J. Hanna, Douglas S. Phillips and Kira L. Klatchko for Defendant and Respondent.

OPINION

GAUT, J.

1. Introduction

Plaintiff purchased real property for $33,000 at a trustee's foreclosure sale and discovered afterwards that it was subject to a senior lien of $330,000. Plaintiff appeals from the judgment entered after the trial court granted defendants' summary judgment motion. The primary matter in dispute is a legal issue regarding the effect of a real estate subordination agreement. In the absence of any material disputed facts, we conduct a de novo review and affirm the trial court's legal conclusions.

2. Factual and Procedural Background

The following material facts are generally not disputed except as noted. The subject property is a residence in Palm Desert. In June 2004, the property owner, Deborah Borchard (Deborah), executed a first trust deed in the amount of $20,000 in favor of Norm Edson.¹ After the Edson deed was recorded, Deborah granted the property to her husband, Thomas C. Borchard (Thomas). Thomas executed a deed of trust in the amount of $330,000 in favor of defendant Sunwest Home Loans. The grant deed to Thomas and the Sunwest trust deed were both recorded on September 16, 2004.

On January 3, 2005, Edson recorded a notice of default on the property. The appraised fair market value of the property in March 2005 was $420,000. A notice of trustee's sale, scheduled for May 4, 2005, was recorded on April 8, 2005. On April 11, 2005, while the foreclosure was pending, Edson executed an assignment dated April 8, 2005, transferring his beneficial interest in the Edson deed to defendant North American Title Insurance Company (North American).

On April 29, 2005, North American recorded the assignment from Edson and also recorded a document entitled "Subordination," making the Edson deed junior in interest to the Sunwest deed. Plaintiff disagrees that the subordination agreement had this legal effect.

A second notice of trustee's sale was recorded on May 3, 2005, continuing the date of the trustee's sale from May 4 to May 26, 2005.

The trustee's sale under the Edson deed was conducted on May 26, 2005. Plaintiff was the successful bidder for the purchase price of $33,000. Plaintiff had constructive, but not actual, notice of the senior encumbrance.

In January 2006, plaintiff filed the instant lawsuit against defendants seeking an injunction and declaratory relief on the grounds that the trustee's sale extinguished the lien based on the Sunwest deed. Plaintiff also executed a "Notice of Noncompliance by Subordination Agreement with Statutory Notice Requirements," asserting the subordination document recorded by North American on April 29, 2005, was invalid under Civil Code sections 2953.3 and 2953.4.²

Plaintiff has not made any payments on the obligation secured by the Sunwest deed. On February 1, 2006, Sunwest recorded a notice of default against the property.

In June 2006, the trial court denied plaintiff's application for a preliminary injunction and ruled that plaintiff was "not a successor in interest but rather a holder of legal title to the subject property."

The trial court granted defendants' summary judgment motion on the grounds that no material facts were disputed and defendants prevailed as a matter of law.

3. Summary Judgment

As stated by this court: "On appeal from the trial court's grant of defendants' motion for summary judgment, `. . . we review the trial court's decision de novo, applying the rule that "[a] defendant is entitled to summary judgment if the record establishes as a matter of law that none of the plaintiff's asserted causes of action can prevail. [Citation.] To succeed, the defendant must . . . demonstrate that under no hypothesis is there a material issue of fact that requires the process of a trial." [Citation.]' (Flatt v. Superior Court (1994) 9 Cal.4th 275, 279.)" (Miscione v. Barton Development Co. (1997) 52 Cal.App.4th 1320, 1324-1325; Code Civ. Proc., § 437c.) A party may rely on a new legal issue on appeal. (Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 24.) A judgment may be affirmed based on any correct legal theory. (D'Amico v. Board of Medical Examiners (1974) 11 Cal.3d 1, 18-19; Howard S. Wright Construction Co. v. BBIC Investors, LLC (2006) 136 Cal.App.4th 228, 240.)

A subordination agreement is an instrument by which parties to a deed of trust agree voluntarily to alter the priority of their respective interests in a particular piece of real property. (§ 2953.1, subd. (c).) In other words, one party agrees its senior encumbrance will become junior to a later encumbrancer's interest. (Middlebrook-Anderson Co. v. Southwest Sav. & Loan Assn. (1971) 18 Cal.App.3d 1023, 1030.) A recorded subordination agreement gives constructive notice of its contents to all persons. (§ 2943 et seq.) In this case, North American agreed to subordinate the senior Edson trust deed to the Sunwest loan. The recorded subordination document gave constructive notice to all persons including plaintiff.

The recorded document entitled "Subordination" first described the $20,000 Edson deed and then recited that the beneficial interest had been assigned to North American. The document further recited that the Sunwest loan for $330,000 "was intended to be in first position on the land described in the Edson Deed of Trust" and "as a condition precedent to obtaining the Sunwest Loan, Sunwest Home Loans required that its deed of trust shall unconditionally be and remain at all times a lien or charge upon the land hereinbefore described, prior to and superior to any other deed of trust." Further, North American, as "Assignee of the Edson Deed of Trust is agreeable that the Sunwest Loan deed of trust securing the same shall constitute a lien or charge upon said land which is unconditionally prior and superior to the lien or charge of the Edson Deed of Trust." It was therefore agreed "the Sunwest Loan deed of trust securing said note in favor of Sunwest Home Loans, and any renewals or extensions thereof, shall unconditionally be and remain at all times a lien or charge on the property therein described, prior and superior to the lien or charge of the Edson Deed of Trust." Finally, Northwest "intentionally and unconditionally waives, relinquishes and subordinates the lien or charge of the Edson Deed of Trust security instrument in favor of the lien or charge upon said land of the deed of trust in favor of Sunwest Home Loans."

Plaintiff contends the subordination document violates section 2953.3, providing:

"Every subordination agreement shall contain:

"(a) At the top of the subordination agreement there shall appear in at least 10-point bold type, or, if typewritten, in capital letters and underlined, the words `SUBORDINATION AGREEMENT.'

"(b) A notice in at least eight-point bold type, or, if typewritten, in capital letters, shall appear immediately below the legend required by subdivision (a) of this section reading as follows:

"NOTICE: This subordination agreement (`may result' or `results' as appropriate) in your security interest in the property becoming subject to and of lower priority than the lien of some other or later security instrument."

It is not disputed that the subordination document did not bear the appropriate title, typewritten or in 10-point bold type. Nor did it contain the prescribed notice, typewritten or in eight-point bold type. Nevertheless, one problem presented by plaintiff's reliance on section 2953.3 is that it does not apply to the Sunwest loan for $330,000. Section 2953.5, subdivision (a), provides: "Sections 2953.1 through 2953.4 shall not apply to any subordination clause or subordination agreement which expressly states that the subordinating loan shall exceed twenty-five thousand dollars ($25,000)." As explained by the Attorney General, subsection (a) applies to a subordination clause used in relation to the second loan on a piece of property, the lien of which becomes senior to a lien of a loan which was already on the property. (43 Op.Atty.Gen. 19 (1964).) The Sunwest loan was the second loan. It became senior to the Edson loan. Because the Sunwest loan was more than $330,000, it was not subject to the requirements of section 2953.3.

But, even if the Sunset loan and the subordination document were subject to section 2953.3, the purpose of the statute is to afford adequate notice to North American as the party agreeing to the subordination, not to a person like plaintiff, who purchased the property at foreclosure. (Handy v. Gordon (1967) 65 Cal.2d 578, 581.) The prescribed notice in subdivision (b) refers to "your security interest in the property" being deprived of its seniority, not to a third party acquiring some later interest in the property as occurred in this case.

Section 2953.4 provides for a method to void a subordination agreement if exercised by the holder of the security interest to be subordinated or by the holder's successor in interest:

"(a) Any subordination clause and any subordination agreement which is executed after the effective date of this act and which does not substantially comply with the provisions of Section 2953.2 or Section 2953.3 shall be voidable upon the election of the person whose security interest is to be subordinated or his successor-in-interest exercised within two years of the date on which the instrument to which his security interest is subordinated is executed; provided that such power of avoidance shall not be exercisable by any person having actual...