Opinion
NOT TO BE PUBLISHED
APPEAL from a judgment of the Superior Court of Imperial County No. ECU03797, Joseph W. Zimmerman, Judge.
NARES, J.
This action involves a promissory note given by New Century Corporation (NCC) to Positive Investments, Inc. (PII), which was secured by a deed of trust on land owned by NCC. In order to attempt to avoid the debt, NCC filed for bankruptcy in the United States Bankruptcy Court for the Southern District of California (Southern District Bankruptcy Court), and thereafter, without court approval, transferred the property to a newly formed entity, Imco Incorporated (Imco), which itself thereafter initiated bankruptcy proceedings in the United States bankruptcy Court for the Central District of California (Central District Bankruptcy Court).
After PII was granted relief from stay, it commenced a foreclosure sale. PII was the successful buyer and thereby obtained title to the property. Thereafter, NCC initiated this proceeding in the Imperial County Superior Court, recording a lis pendens on the property and seeking to set aside the foreclosure sale.
PII demurred on the basis that because NCC had transferred the property to Imco, it lacked standing to bring this action. PII also brought a motion to expunge the lis pendens filed against the property. NCC opposed the motion, and requested leave to amend to add Imco as a plaintiff. The court sustained the demurrer without leave to amend, finding NCC lacked standing to prosecute the action, and expunged the lis pendens.
NCC appeals asserting (1) it has standing to sue PII because its transfer to Imco was void as it was in violation of bankruptcy laws; (2) it has standing as the trustor on the deed of trust foreclosed upon; and (3) the court abused its discretion in refusing to allow it to amend its complaint to cure the standing defect by adding Imco as a plaintiff. We affirm.
FACTUAL AND PROCEDURAL BACKGROUND
A. The Loan
In December 2004 James Lo, president of NCC, approached Rao Yalamanchili, president of PII, to obtain a loan due to NCC's default on an existing mortgage on the property, 320 acres of real estate in Imperial County, California (the property). It was represented that NCC had a purchaser for the property but would need a six-month bridge loan in order for the buyer to have time to provide the purchase money for the sale. PII provided an initial loan in the amount of $5.3 million, secured by a deed of trust on the property. The deed of trust named PII as the beneficiary and NCC as the trustor.
B. Default and Foreclosure Proceedings
When the note became due, NCC failed to tender the amount owing. PII informed NCC it was in default on the note, explained the late fees that were owed, and stated that foreclosure proceedings would be initiated if payment was not forthcoming.
In response, NCC presented a letter of intent from a new buyer. Thereafter, as an accommodation to NCC, and in the hopes of avoiding foreclosure proceedings, PII extended the due date for the loan for an additional four months.
When the new due date arrived, NCC did not pay the amount due on the loan. In June 2006 PII recorded a notice of default with the Imperial County Recorder's Office. Two days later, PII served NCC with a 10-day notice of default. In July 2006 PII served NCC with a 30-day notice of default. Thereafter, in September 2006, PII recorded a notice of trustee's sale. On that same day, PII posted a notice of trustee's sale at the Imperial County courthouse, and thereafter published a public notice of sale in the Imperial Valley Weekly. PII scheduled the foreclosure sale for 3:00 p.m. on October 12, 2006.
C. NCC Files for Bankruptcy Protection
On October 11, 2006, one day before the scheduled foreclosure sale, NCC filed a chapter 11 bankruptcy petition with the Southern District Bankruptcy Court. The primary asset listed in the petition was the property.
PII filed a motion for relief from stay, which was heard by the court at two separate hearings. Following the initial hearing, Lawrence Yang, bankruptcy counsel for NCC, incorporated a new entity, Imco.
At the second hearing, after hearing testimony regarding the value of the property, the court indicated that it was going to grant PII's petition for relief from stay.
D. NCC Transfers the Property to Imco
On the same day as the second hearing on PII's relief from stay petition, NCC's principal Lo executed a quitclaim deed transferring the property to Imco. The transfer was without the knowledge, permission or authorization of the Southern District Bankruptcy Court.
E. Imco Files for Bankruptcy Protection
The next day, Imco filed its own Chapter 11 proceeding, but in the Central District Bankruptcy Court. Yang again appeared as counsel for the debtor, Imco. Lo signed the bankruptcy petition as president of Imco. Imco listed the property as its primary asset.
PII again moved for relief from stay, on an ex parte basis, requesting that such relief bind all subsequent transferees of the property, and also requesting sanctions. At the ex parte hearing, the court swore in Yang as a witness and asked him a series of questions about the quitclaim deed from NCC to Imco. The court found it appeared there had been bankruptcy fraud on the part of Imco; its principal, Lo; and its counsel, Yang, and set the matter for a sanctions hearing. In doing so, the court (The Honorable Barry Russell, United States Bankruptcy Judge) made the following comments:
"This is probably the worst abuse that I've ever seen in the bankruptcy system.... [¶]... [¶] And I'm also going to set this as a very serious matter, and I─but the reason I [set this] on short notice, because it seems so outrageous─I always hope in these cases that maybe there's another side to it, in this case, there wasn't.... [¶]... I know I have inherent power under Rule 9011 [of the Bankruptcy Rules of Procedure] on any number of matters. But I think sanctions certainly are warranted in this case. I just don't know for what. It's just amazing. I'm not ruling on that now, but it's clear to me that they are warranted."
The court granted PII relief from stay and made the order binding on any debtor in a subsequent bankruptcy proceeding and against any successor or assignee of Imco. The court further prohibited Imco, Lo and Yang from further transferring the property.
At the sanctions hearing the court ordered sanctions in the amount of $23,049.73, jointly and severally against Imco, Lo, and Yang. Thereafter, the court ordered disgorgement of fees paid to Yang, found the transfer was "a scheme designed to defeat the relief from stay proceedings in the [NCC] case," and found Yang's actions "were not consistent with those of an officer of the court."
All orders of the Central District Bankruptcy Court are final and have not been appealed.
F. PII's Foreclosure Sale of the Property
On June 27, 2007, the day after PII's obtained relief from stay, PII, through First American Title Insurance Company (First American) caused the foreclosure sale to proceed, and PII was the successful bidder, obtaining title to the property.
G. The Instant Action
In July 2007 NCC filed a complaint against PII, seeking to set aside the foreclosure sale. NCC also filed and recorded a lis pendens against the property. PII filed a demurrer, arguing among other things that NCC lacked standing to pursue the action given the transfer of the property to Imco. The court sustained the demurrer with leave to amend.
NCC filed a first amended complaint, which is the operative pleading on this appeal (hereafter, the complaint). The complaint described the loan and the deed of trust. The complaint alleged that the deed of trust "provides that (1) [NCC] is the trustor; (2) [PII] is the beneficiary; (3) [PII] appointed Equal Escrow Inc. as the trustee; and (4) [NCC] granted [PII] the power to sell the property in case of default. The [d]eed of [t]rust between [NCC] and [PII] established contractual and legal privity between [PII] and [NCC]. Because of said legal and contractual privity, [NCC] has standing to assert [a] cause of action concerning the [d]eed of [t]rust against [PII]."
The complaint alleged, on information and belief, that PII, when it originally recorded its notice of trustee's sale in September 2006 and scheduled a foreclosure sale for October 2006, "failed to either post or publish the notice of sale" in compliance with California law. The complaint further alleged that the transfer of the property by NCC to Imco during NCC's bankruptcy was "void a[b] initio" and a "nullity" as it was accomplished "without prior court order from the Bankruptcy Courts." Thus, NCC alleged, "Even after the execution of the [q]uitclaim [d]eed, [NCC] retained all right, title and interest in the [p]roperty. Moreover, [PII's] representation to the Bankruptcy Court that the transfer of the title to the [p]roperty by the [q]uitclaim [d]eed was legally invalid was a binding judicial admission. [PII] is therefore [e]stopped to rely on the [q]uitclaim [d]eed against its own admission."
The complaint alleged on information and belief that "during the automatic stay of the foreclosure sale imposed by either the First or Second [bankruptcy petition], [PII] did not give any notice of postponement or otherwise reschedule the foreclosure sale by informing [NCC] of the new date, time and place of sale." The complaint further alleged that "[i]mmediately after the stay relief being granted and without noticing [NCC] or otherwise posting or publishing the notice of sale, [PII] allegedly conducted a public auction within 24 hours and became the only bidder at such auction...." The complaint alleged on information and belief that "[PII], acting alone or with others, fixed or restrained bidding at the foreclosure sale of June 27, 2007 which resulted in the unreasonable and unfair purchase price of $5,565,000.00 and operated as a fraud or deceit upon [NCC] as the trustor." NCC alleged the true value of the property was "over $16 million."
The complaint stated causes of action seeking to (1) set aside the foreclosure sale, (2) cancel the deed conveying the property to PII, (3) quiet title to the property in NCC, and (4) impose a constructive trust on the property. NCC also sought damages for an alleged breach of trustee's duty and collusive bidding practices and sought an accounting and injunctive relief.
H. PII's Demurrer and Motion To Expunge Lis Pendens
PII demurred to the complaint, arguing NCC lacked standing because it had quitclaimed the property to Imco. PII argued that, while under the Bankruptcy Code such transfers may be set aside as fraudulent, the transfer of the property was never set aside in this case, and title never reverted back to NCC. PII noted that at the time of the foreclosure sale, Imco held title to the property and that NCC in its complaint admitted the transfer to Imco.
PII also argued NCC should not be allowed leave to amend to add Imco as a plaintiff, as that entity lacked standing to sue as well. NCC pointed out that notices of a foreclosure sale must only be sent to the trustor, not subsequent owners of the property. Therefore, it argued, Imco could not allege any failure to provide it with notice of the sale.
NCC opposed the motion, arguing that as the trustor for the property, NCC had contractual standing to contest the foreclosure sale. Further, NCC asserted that it did not lose standing to contest the sale by quitclaiming the property to Imco. NCC also opposed the motion to expunge the lis pendens, asserting that it had evidence no trustee's sale occurred on June 27, 2007.
I. Motion for Leave To Amend
NCC also moved for leave to amend to add Imco as a plaintiff. NCC argued Imco had standing to pursue the action as the titleholder of the property. In doing so, NCC withdrew its allegations in the complaint that "the quitclaim deed was automatically void. Upon further review of applicable bankruptcy law, the quitclaim deed was voidable, but not void ab initio." The proposed second amended complaint also named First American, the foreclosure sale manager, as a defendant in addition to PII.
J. Court's Order Sustaining Demurrer Without Leave To Amend.
The court sustained PII's demurrer without leave to amend. In doing so, the court found NCC lacked standing to prosecute the action because it quitclaimed all title and interest to Imco. Further, the court rejected NCC's assertion it had standing based upon contractual privity with PII as a trustor. In denying leave to amend to add Imco as a plaintiff, the court indicated Imco had remedies it could pursue in separate litigation and found it was "too prejudicial to both the parties to allow possible dual theories of standing via an additional cause of action in quiet title...."
The court granted the motion to expunge the lis pendens and granted PII's application for attorney fees on that motion.
DISCUSSION
I. NCC LACKS STANDING TO BRING THE INSTANT ACTION
A. Law on Standing
Code of Civil Procedure section 367 requires that "[e]very action must be prosecuted in the name of the real party in interest." The real party in interest is a person " 'who has the right to sue under the substantive law. It is the person who owns or holds title to the claim or property involved, as opposed to others who may be interested or benefited by the litigation.' [Citation.]" (O'Flaherty v. Belgum (2004) 115 Cal.App.4th 1044, 1094.) "A complaint filed by someone other than the real party in interest is subject to general demurrer on the ground that it fails to state a cause of action." (Redevelopment Agency of City of San Diego v. San Diego Gas & Electric Co. (2003) 111 Cal.App.4th 912, 921.)
B. Effect of NCC's Quitclaim of the Property to Imco
A quitclaim deed transfers to the grantee all of the right, title and interest that the grantor had at the time the deed was executed and delivered. (City of Manhattan Beach v. Superior Court (1996) 13 Cal.4th 232, 239.) It transfers the grantor's legal and equitable interest in the property. (Rosenthal v. Landau (1949) 90 Cal.App.2d 310, 312-313.)
It is undisputed that NCC quitclaimed all interest it had in the property to Imco. Therefore, the subsequent foreclosure sale transferred title in the property from Imco to PII. It took nothing from NCC because NCC no longer had any title or claim to the property. Because NCC held no title or claim to the property at the time of the foreclosure sale, it cannot be a real party in interest with standing to challenge that sale. (Blumhorst v. Jewish Family Services of Los Angeles (2005) 126 Cal.App.4th 993, 1001 [real party in interest is one who had suffered actual or impending harm].)
C. "Contractual" Right of Standing as Trustor
As an alternative theory of standing, NCC asserts that as the named trustor on the deed of trust, it "has the contractual right to challenge the foreclosure sale." We reject this contention.
In support of this standing argument, NCC relies on Garfinkle v. Superior Court (1978) 21 Cal.3d 268 (Garfinkle). However, Garfinkle does not support NCC's position.
In Garfinkle, the plaintiffs, whose property was under threat of a foreclosure sale, sought a declaration that California's nonjudicial foreclosure sales procedures violated the due process clause of the state and federal constitutions. (Garfinkle, supra, 21 Cal.3d at pp. 273-274, 276.) The California Supreme Court, however, refused to apply due process principles to nonjudicial foreclosure sales, holding that such sales were an action "authorized solely by the contract between the lender and the trustor." (Id. at p. 277.) The contract is the deed of trust between the lender and the trustor. (Ibid.) Thus, the high court concluded, a nonjudicial foreclosure sale is a private act, not state action, and thus not subject to due process principles. (Id. at pp. 281-282.)
Thus, while our high court in Garfinkle held foreclosure sales are a matter of contract between a lender and trustor, it did not hold that a trustor who has quitclaimed its deed has "contractual" standing to challenge a foreclosure sale. In fact, the plaintiffs in Garfinkle, unlike NCC, held title to the property that was the subject of that action when they filed their complaint. (Garfinkle, supra, 21 Cal.3d at p. 272.) Thus, unlike NCC, they faced an actual or threatened harm as a result of the threatened foreclosure sale, and by virtue, had standing to prosecute the action. Regardless of any "contractual" relationship NCC as trustor had with PII, it did not have standing to pursue an action challenging a foreclosure sale on property it had previously quitclaimed to another.
D. Impact of Bankruptcy Law
NCC asserts that it held title to the property at the time of the alleged foreclosure sale because its quitclaim deed was void as it occurred during the pendency of its bankruptcy proceedings, and it occurred without prior court authorization. This contention is unavailing.
As NCC conceded below, a transfer done in violation of bankruptcy law renders the transaction voidable, not void.
In In re Tippett (9th Cir. 2008) 542 F.3d 684, 687 (Tippett) the debtors listed their residence as an asset in their chapter 7 bankruptcy proceedings. Thereafter, while the bankruptcy proceedings were pending, they "without authorization and without disclosing their bankruptcy, listed the residence for sale through a real estate broker." (Tippett, supra, 542 F.3d at p. 687.) They sold the residence, and the bankruptcy trustee filed an adversary proceeding against the sellers and the buyer, "seeking to recover the sales proceeds... avoid the lenders' liens, and quiet title." (Ibid.)
Like NCC here, the bankruptcy trustee in Tippet argued that the deed to the buyer was "a nullity ab initio, which conveyed nothing to [the buyer]," because the transfer was not authorized. (Tippett, supra, 542 F.3d at pp. 690-691.) However, the Ninth Circuit held the transfer was not void, but rather was governed by Bankruptcy Code section 549 (11 U.S.C. 549). (Tippett, supra, at pp. 691-692.) Because the buyer was a good faith transferee, the Ninth Circuit held the trustee could not avoid the transfer. (Id. at pp. 690-691, fn. 6.)
Section 363(b)(1) and (c) of the Bankruptcy Code provides that the sale or transfer of estate property outside the ordinary course of business must be accomplished through a noticed motion: "The trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate...." (11 U.S.C. 363(b)(1), (c).) Moreover, in order to invalidate a transfer made in violation of section 363, section 549 provides that the trustee must bring an action to avoid such a transfer. (11 U.S.C. 549(a), (d).) One exception, not applicable here, provides the unauthorized transfer of real property may not be avoided where it is made to a good faith purchaser: "The trustee may not avoid under subsection (a) of this section a transfer of an interest in real property to a good faith purchaser without knowledge of the commencement of the case and for present fair equivalent value unless a copy or notice of the petition was filed, where a transfer of an interest in such real property may be recorded to perfect such transfer, before such transfer is so perfected that a bona fide purchaser of such real property, against whom applicable law permits such transfer to be perfected, could not acquire an interest that is superior to such interest of such good faith purchaser." (11 U.S.C. 549(c).)
Thus, under sections 363 and 549 of the Bankruptcy Code and the holding of Tippett, NCC's quitclaim deed was not automatically void, but only voidable at the request of the trustee.
NCC contends PII is estopped from asserting the quitclaim during bankruptcy was effective because it argued during the bankruptcy proceedings "that the quitclaim deed was illegal and ineffective under the Bankruptcy Code." However, PII did not move in the bankruptcy proceedings to invalidate the transfer. Rather, PII sought relief from stay so that the foreclosure sale could go forward as against Imco. Thus, PII's position taken in the bankruptcy proceedings did not estop it from asserting NCC lacked standing to prosecute this action.
II. NO ABUSE OF DISCRETION IN DENYING LEAVE TO AMEND
NCC asserts the court erred in denying leave to amend because the proposed second amended complaint "included Imco as an additional named plaintiff in order to cure any alleged lack of standing for [NCC] to quiet title and to set aside the foreclosure sale" and because it added First American "as an additional named defendant to properly allege negligent performance of the foreclosure proceedings by First American, the trustee seller." These contentions are unavailing.
A. Standard of Review
The trial court exercises its discretion in deciding whether to grant leave to amend. (Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 967.) Absent a reasonable possibility that any pleading defects can be cured by amendment, the trial court does not abuse its discretion by denying leave to amend. (Ibid.) Appellant carries the burden of proving an amendment would cure any defect. (Schifando v. City of Los Angeles (2003) 31 Cal.4th 1074, 1081.)
B. Analysis
The second amended complaint proposed to add Imco in causes of action for unjust enrichment and quiet title. The unjust enrichment claim states that PII "has been unjustly enriched to the detriment of [NCC] and Imco." The quiet title claim alleged that "[d]efendants' failure... to duly post notice of the sale at a public place, to duly post notice of the sale at the [p]roperty, to duly announce postponement of the sale, and to duly conduct the trustee's sale of the [p]roperty, have clouded title in and to the [p]roperty."
However, the notices leading up to the foreclosure sale, according to NCC's own complaint, occurred in 2006. Imco was not quitclaimed the property until May 2007, months after the allegedly improper notices were sent out. As Imco did not hold title to the deed at the time notices were issued, it lacks standing to challenge any alleged defects in those notices.
Moreover, to effectuate a foreclosure sale, the notice of default and notice of sale must only be given to (1) any persons who have recorded requests for notice; (2) the trustor; (3) the mortgagor; and (4) certain other specified persons who hold an "estate or interest... acquired by an instrument sufficient to impart constructive notice of the estate or interest in the land... recorded in the office of the county recorder... prior to the recording date of the notice of default." (Civ. Code, § 2924b, subds. (b)-(c).
Imco thus was not entitled to notice of the foreclosure sale as it was not a party to the note and deed of trust and did not hold title until after the notice of default and sale were sent out. (Perez v. 222 Sutter St. Partners (1990) 222 Cal.App.3d 938, 945 [trustee owes no duty to give notice of foreclosure sale to anyone other than those specified in Civ. Code, § 2924b].)
Further, "[i]f a party files an amended complaint and attempts to avoid the defects of the original complaint by either omitting facts which made the previous complaint defective or by adding facts inconsistent with those of previous pleadings, the court may take judicial notice of prior pleadings and may disregard any inconsistent allegations." (Colapinto v. County of Riverside (1991) 230 Cal.App.3d 147, 151.) "It is well settled that ' "[f]acts once alleged cannot be withdrawn from consideration by merely filing an amended pleading omitting them without explanation.... [Citation.]" ' [Citations.]" (Filmservice Laboratories, Inc. v. Harvey Bernhard Enterprises, Inc. (1989) 208 Cal.App.3d 1297, 1305.) Moreover, where the pleader fails to explain the inconsistency in the pleadings, the pleading may be treated as a sham, subject to peremptory disposition to prevent abuse of the court's process. (Amid v. Hawthorne Community Medical Group, Inc. (1989) 212 Cal.App.3d 1383, 1391; Kessler v. Lauretz (1974) 39 Cal.App.3d 441, 446-447.)
Here, the original and first amended complaint alleged that NCC was the title holder to the property. The proposed second amended complaint sought to add Imco, alleging for the first time it held title to the property. However, the proposed second amended complaint still claimed NCC also had standing to set aside the foreclosure sale. On appeal, NCC still asserts (despite its concession below) that the quitclaim deed was void and it holds legal title to the property. The court was well within its discretion to take judicial notice of the contradictions in NCC's various complaints, treat the proposed amendment as a sham, and deny leave to amend to prevent an abuse of the court's process.
DISPOSITION
The judgment is affirmed. PII shall recover its costs on appeal.
WE CONCUR: McCONNELL, P. J., McINTYRE, J.