Cypress on Sunland HOA v. Orlandini (CA1 5/19/11)

Those of you who read Villa de Jardine v. Flagstar Bank may have wondered whether the same firm had made the same sort of argument elsewhere. Wonder no more. This is the sort of thoroughly fouled-up situation that makes for an interesting opinion. Whether it’s mostly depressing or mostly hilarious is up to you.

A homeowners’ association filed a foreclosure action for unpaid assessments. Its Complaint alleged that its lien was superior to all others even though there was note secured by a first deed of trust on the house. The original holder of the note was served but did not answer because it had assigned it to another; the HOA took default judgment (the owner apparently didn’t answer, either). The HOA’s form of judgment proclaimed that it had a valid first lien and foreclosed all others. (The $190,000 property was then sold to one Draper for $5,599, which satisfied the HOA’s claim.)

The bank that held the note then noticed a trustee’s sale. Its lawyer wrote to the HOA’s lawyers asking them to confirm in writing that the HOA’s judgment hadn’t foreclosed the first deed of trust. Those lawyers did so (though they later tried to recant). The bank foreclosed. In the mean time, Draper had sold the property to Jacoby (for $110,000), who now filed a quiet-title action against the bank. The bank then sold the property to Orlandini, who (along with his own lender) intervened in the quiet-title action and counterclaimed to set aside the foreclosure judgment under Rule 60(4) (judgment void) and (6) (any other reason). The bank was dismissed because it no longer had an interest in the property. On cross-motions the court granted summary judgment for Orlandini and against Jacoby, finding that the first deed of trust had priority and had not been foreclosed. (Jacoby was not a bona fide purchaser for value because he had bought knowing of the first deed of trust and the then-pending trustee’s sale.} The court also found that the HOA’s lawyers knew that their Complaint and default judgment were false and misleading.

Before anything further happened the HOA moved to consolidate its old foreclose case with the Jacoby/Orlandini quiet-title action so that it could respond to the argument that it had defrauded the court. The quiet-title judge stayed that case and let the foreclosure-case judge (presumably because that case was older) decide on consolidation.

That judge then consolidated the cases, reinstated the default judgment nunc pro tunc – concluding that the HOA’s position on lien priority was enough of a legal argument not to be fraud – and granted the HOA fees. Orlandini appealed.

He had opposed consolidation, because the foreclosure case was not a “pending” action as required by the rules. The Court of Appeals briefly holds, in effect, that setting aside the judgment revived it again, so that consolidation was proper. Orlandini also argued that reversing the quiet-title order was a prohibited “horizontal appeal.” But a judge can reverse another’s ruling when a substantial change has occurred. The court says that the HOA intervention, presenting arguments not made to the first judge, was a substantial change.

The court then addresses the substance, and it is here that the HOA lawyers presented the Villa de Jardine argument. The court rejects it, citing Villa de Jardine along the way, throwing in such words as “implausible,” “nonsensical,” and “absurd.” The HOA also argued that the CC&Rs say that the HOA’s lien is subordinate to a “first mortgage,” a deed of trust isn’t a mortgage, therefore the HOA is superior to it. To us this is jaw-dropping but the court spends a couple of patient paragraphs explaining that it’s wrong. (Why? Because the court finds that “mortgage” in such a document includes “deed of trust,” which means that even the HOA’s own CC&Rs contradicted its position.)

On the issue of fraud, the court found the HOA’s arguments “not supportable on any legitimate ground,” . . .  “specious, legally and logically unsound, and . . . so contrived as to be little more than sophistry.” And a judgment obtained “by concealing material facts and suppressing the truth with the intent to mislead the court” is a fraud on the court. These things weren’t mistakes or overzealousness; the HOA’s own lawyers had admitted, in the letter the bank requested, that its lien was inferior.

The court vacates the reinstating of the foreclosure judgment. It then remands, though, for reasons we admit to not being clear on. Jacoby, to his credit, didn’t agree with the HOA, contending instead that the quiet-title result was wrong because there were issues of fact about the validity of Orlandini’s title. Apparently the theory is that since the change of circumstance justifies a horizontal appeal the foreclosure judge should now rule on those issues since he hadn’t specifically done so before (he based his ruling on the HOA’s arguments). So Jacoby gets another bite of the apple because after he lost the first time another party popped up to make arguments that turned out to be specious.

The opinion also vacates the fee award to the HOA, which was apparently made as a sanction on the basis of procedural objections Orlandini made. The court disagrees that they were groundless, in bad faith, or harassment. The court also rules out the foreclosure-fee statute (neither the HOA nor Orlandini sought foreclosure now) and the contract statute (the contract being the CC&Rs – but this controversy didn’t arise out of them).

This 35-pager is actually not a bad read. Too many, too long footnotes but this is Division One – somebody would probably get fired otherwise. Number Three, though, is interesting: it says that the quiet-title judge sent his order to the State Bar and that the court is doing likewise with this opinion. Sounds like the Presiding Disciplinary Judge may have some more work to do.

(link to opinion)