Plaintiff Diamond Heights Village Association, Inc. (Association), sued the owners of a condominium unit for failing to pay assessments levied for maintenance of common areas. The Association also sued Financial Freedom Senior Funding Corporation (Financial Freedom), which holds a deed of trust on the unit securing a reverse mortgage loan. In its single cause of action against Financial Freedom, the Association sought foreclosure of assessment liens and priority over the deed of trust. Financial Freedom obtained a summary judgment in its favor. A bench trial against the unit owners on other causes of action was held, at which the court partially voided Financial Freedom's deed of trust.
The Association appeals the summary judgment for Financial Freedom, and Financial Freedom appeals the judgment on the remaining claims voiding its property interest. Financial Freedom also appeals the court's attorney fee orders.
We affirm summary judgment for Financial Freedom on the lien foreclosure cause of action and reverse the judgment on the remaining claims to the extent it voids Financial Freedom's deed of trust. The trial court erred in voiding Financial Freedom's security interest in the property when Financial Freedom had not been joined as a party on the claims being tried, and final judgment had already been entered in its favor. We affirm the court's attorney fee orders.
The Association maintains a 396-unit residential condominium complex in San Francisco known as Diamond Heights Village. Diamond Heights Village is governed by a first restated declaration of covenants, conditions, and restrictions (CC&R's) recorded in 1990. Under the CC&R's, homeowners agree to pay assessments levied by the Association for maintenance of Diamond Heights Village. (See Civ. Code, § 1366 [authorizing assessments].)
Mark Williams owned a unit in Diamond Heights Village and failed to pay the assessments. The Association recorded notices of delinquent assessment in 1994 and 1995. To avoid collection efforts by the Association and other creditors, Williams filed five separate bankruptcy petitions from 1995 to 1999, each of which was dismissed. Several days after the fifth bankruptcy petition was dismissed, Williams conveyed the Diamond Heights Village condominium unit to himself and his mother, Lois Crosby, as joint tenants. In 2000 and 2001, the Association recorded assessment liens against the condominium unit. (Civ. Code, § 1367.)
In 2002, the Association obtained a default judgment against Williams for foreclosure of the assessment liens. The total amount of the judgment, including attorney fees and costs, was $39,199.
In October 2004, Crosby applied for a reverse mortgage with defendant Financial Freedom, a subsidiary of IndyMac Bank. A homeowner must be 62 years of age or older to qualify for a reverse mortgage with Financial Freedom. Crosby, born in 1920, qualified. Crosby's application stated that there was an outstanding judgment against her and listed the Association among those holding a lien on the property.
Financial Freedom ordered a preliminary title report that noted title ownership by Crosby and her son, Williams, as joint tenants. The preliminary title report did not list the Association's assessment liens despite their
In November 2004, Financial Freedom obtained certification from the Association concerning certain features of Diamond Heights Village, such as unit ownership in fee simple and the provision of property and liability insurance. The Association also certified that there was nothing in the CC&R's "that would prevent the placing of a first mortgage lien on an individual unit or would jeopardize the first lien status of such a mortgage due to future association assessments." (Italics added.) Financial Freedom's certification form did not ask if there were unpaid past assessments.
Financial Freedom completed the transaction in December 2004, creating a new first mortgage. Williams transferred his one-half interest in the unit to his mother, Crosby, giving her full title to the unit. Crosby then executed a deed of trust in favor of Financial Freedom to secure a reverse mortgage loan. The two documents—Williams's grant deed and Crosby's deed of trust—were notarized by the same person on the same date, and recorded within seconds of each other. Williams did not receive any consideration from his mother for the transfer of his ownership interest in the unit. In funding the loan, Financial Freedom paid off first and second deeds of trust totaling $219,935. Financial Freedom also paid $48,948 in cash to Crosby. Financial Freedom funded the loan in an amount no less than $278,505.
An amended judgment against Williams and Crosby for foreclosure of the Association's assessment liens was entered in 2005. The amended judgment included interest and costs incurred from the time of the original 2002 judgment and totaled $51,184. The Association did not record an abstract of judgment for the amended judgment. The Association obtained a writ of execution for the sale of the unit, but Crosby filed another petition for bankruptcy. The petition was later dismissed. The judgment was last renewed in January 2008 for an updated amount of $64,854.
The Association learned of Financial Freedom's first deed of trust at some point and, in an effort to establish priority for its assessments over Financial Freedom's deed of trust, filed the present action in December 2007. The
Financial Freedom answered the complaint raising several affirmative defenses, including the statute of limitations. It also filed a cross-complaint for declaratory relief and other claims. Financial Freedom asserted that it has a valid first lien against the Diamond Heights Village condominium unit and that it is "a bona fide encumbrancer with respect to said lien." It sought a judicial determination of the rights and interests of itself and the Association in the property. Judgment creditor Hassen & Associates also answered the complaint. Homeowners Williams and Crosby never answered the complaint and their default was entered in March 2008.
In February 2009, Financial Freedom moved for summary judgment on the Association's complaint, which stated a single cause of action against Financial Freedom for foreclosure of liens. Financial Freedom noted that the Association did not have a judgment lien and was basing its priority claim upon the assessment liens. Financial Freedom argued that the Association's action for foreclosure of the assessment liens, and the claimed priority under them, failed because (1) foreclosure of the assessment liens had already been litigated, reduced to judgment, and merged into that judgment; (2) foreclosure of the assessment liens was time-barred; and (3) the CC&R's expressly subordinated assessment liens to first mortgage holders like Financial Freedom.
Financial Freedom requested dismissal of its cross-complaint and sought entry of judgment in its favor. In June 2009, Judge Woolard entered a judgment in favor of Financial Freedom and against the Association decreeing that the Association "shall recover nothing, and shall obtain no relief, as against defendant Financial Freedom, in this action." The court denied Financial Freedom's motion for contractual attorney fees under the CC&R's because there was "no privity" between Financial Freedom and the Association. (Civ. Code, § 1717.)
The Association's remaining claims against homeowners Williams and Crosby and judgment creditor Hassen & Associates were tried before Judge Nancy Davis on May 26, 2009, a few weeks after Judge Woolard had granted summary judgment to Financial Freedom. The Association contended that Judge Woolard's summary judgment ruling in Financial Freedom's favor did not preclude Judge Davis from setting aside the alleged fraudulent conveyance and determining Financial Freedom's security interest as a result of setting aside that conveyance. The court agreed and proceeded to resolve issues affecting Financial Freedom despite a dispositive ruling in Financial Freedom's favor on the only cause of action against it and its absence from trial on the remaining claims. The only defendant appearing at trial was judgment creditor Hassen & Associates.
The court issued a statement of decision in August 2009. The court found that "the transfer from Williams to Crosby was fraudulent and must be set aside to the extent necessary to satisfy the Association's claim" for assessments. The court noted that, "[a]t the time of the transfer, Williams and Crosby owned the Unit as Joint tenants, each owning an undivided one-half interest. As the transfer is set aside, the result is that Williams and Crosby remain joint tenants and were joint tenants at the time the deed of trust was granted to Financial Freedom by Crosby." Crosby "could encumber her own one half interest, but could not encumber the one half interest in the Unit owned by Williams who, at the time, was a judgment debtor of the Association." The court ruled that the deed of trust "conveyed by Crosby to Financial
The court's statement of decision acknowledges that a fraudulent transfer is not voidable against "a person who took in good faith and for a reasonably equivalent value." (Civ. Code, § 3439.08, subd. (a).) The court ruled that Financial Freedom was not a bona fide encumbrancer entitled to the protection of this statute because Financial Freedom "actively participated in the transfer from Williams to Crosby" and performed an inadequate title review that failed to discover the recorded assessment liens. The court also suggested that Financial Freedom forfeited any claim to bona fide encumbrancer status by dismissing its cross-complaint for declaratory relief and choosing not to appear at trial.
The court entered a judgment in August 2009 ordering the Diamond Heights Village condominium unit sold and declaring the rights of the Association, homeowners, Financial Freedom, and judgment creditor Hassen & Associates to the proceeds of the sale. The court declared Hassen & Associates to have senior position, with right of first payment. The court ordered the remaining funds held until any appeal was resolved and, thereafter, "divided between the Association and Financial Freedom in accordance with their one-half secured interest" in the unit. The court awarded the Association $89,562 for assessments through May 2009, payable from Williams's one-half interest in the property. The court also awarded the Association attorney fees against the homeowners under the CC&R's, later assessed at $82,086, to be paid from Williams's property interest. Financial Freedom was left with just Crosby's original one-half interest in the property to secure its mortgage loan and payments of at least $278,505. Sale proceeds from that one-half interest may be insufficient to pay the full amount owed to Financial Freedom.
In September 2009, Financial Freedom filed a motion to vacate the judgment. Financial Freedom argued that the court had no jurisdiction to enter a judgment affecting Financial Freedom's deed of trust because (1) the prior summary judgment fully adjudicated the Association's single cause of action against Financial Freedom, (2) the Association's appeal of the summary judgment divested the court of jurisdiction before the court ruled on the remaining claims affecting Financial Freedom's interest, and (3) Financial
We are presented with three related appeals, which we have consolidated for purposes of briefing, argument, and decision. On the summary judgment in Financial Freedom's favor on the foreclosure cause of action: the Association appeals the judgment and Financial Freedom separately appeals the postjudgment order denying it attorney fees. On the judgment following trial in the Association's favor on the cause of action for fraudulent conveyance and all other remaining claims: Financial Freedom appeals both the judgment (and order denying its motion to vacate the judgment) and the postjudgment order awarding the Association attorney fees.
As noted above, the Association recorded assessment liens against the Diamond Heights Village condominium unit in 2000 and 2001. (Civ. Code, § 1367.) In 2002, the Association obtained a default judgment against homeowner Williams for foreclosure of the assessment liens. The Association did not record an abstract of judgment. The court issued writs of execution for the sale of the unit to satisfy the judgment but the homeowners' petitions for bankruptcy stayed proceedings and prevented levy. It was at this juncture that Williams conveyed his one-half interest in the property to his joint tenant and mother, Crosby, and she then mortgaged the entire property to Financial Freedom.
The Association then filed a new complaint in which it asserted a single cause of action against Financial Freedom for foreclosure of the Association's assessment liens and sought priority over Financial Freedom's deed of trust. Financial Freedom moved for summary judgment arguing, among other things, that the Association's action for foreclosure of the assessment liens, and claimed priority under them, failed because foreclosure of the assessment liens had already been litigated, reduced to judgment, and merged into that judgment. Judge Woolard granted the motion. The court ruled that the Association's assessment liens merged into the judgment from the earlier foreclosure action against the homeowners, the judgment was unrecorded, and Financial Freedom's recorded deed of trust thus had priority.
"[W]hen a final judgment is entered, all causes of action arising from the same obligation are merged into the judgment and all alternative remedies to enforce that obligation extinguished by the judgment granting one of those remedies. [Citation.] The creditor cannot thereafter enforce the original obligation, because the judgment `". . . creates a new debt or liability, distinct from the original claim or demand, and this new liability is not merely evidence of the creditor's claim, but is thereafter the substance of the claim itself."' ([Citation,] italics in original.) In other words, the . . . judgment extinguishes the contractual rights and remedies previously extant,
The Association argues that application of the merger doctrine under these circumstances creates the anomalous situation of a condominium association losing priority the moment a judgment is entered on an assessment. The Association argues that assessment liens should work like real estate attachment liens imposed during litigation. Where an attachment lien is in effect, a
The Association maintains that it is not really relitigating the assessments but, instead, the fraudulent conveyance that gave Financial Freedom a deed of trust. But Financial Freedom was not named as a defendant in the fraudulent conveyance cause of action. Financial Freedom was named as a defendant in a single cause of action for judicial foreclosure of the assessment liens. In that cause of action, the Association sought recovery against the homeowners for past assessments and alleged that the 2000 and 2001 liens encumber the property to secure the assessments. Those allegations were asserted, and adjudicated, in prior litigation. They may not be relitigated now. The trial court properly granted summary judgment to Financial Freedom on the Association's cause of action to foreclose the previously litigated assessments liens.
The trial court granted defendant Financial Freedom summary judgment on the only cause of action stated against it. The order was filed on May 6, 2009. Financial Freedom then dismissed its cross-complaint, and Judge Woolard entered judgment for Financial Freedom on June 3, 2009. The judgment decreed that the Association "shall recover nothing, and shall obtain no relief, as against defendant Financial Freedom, in this action."
Trial of the Association's remaining claims against other defendants commenced before Judge Davis on May 26, 2009, and judgment was entered on August 17, 2009. Trial of those remaining claims was proper, including trial of the Association's cause of action against the homeowners for fraudulent conveyance of their condominium unit. It was not proper, however, to void Financial Freedom's security interest in the property (in whole or part) when Financial Freedom had not been joined as a party to the fraudulent conveyance cause of action, and final judgment had already been entered in its favor.
The Association brought its first cause of action to set aside a fraudulent transfer of real property against homeowners Williams and Crosby. A transfer is fraudulent if the debtor made the transfer "[w]ith actual intent to hinder,
The judgment voiding Financial Freedom's interest in the property is also defective in another respect. Judge Woolard granted Financial Freedom's summary judgment motion on May 6, 2009, and entered judgment on June 3, 2009. Judge Davis did not enter judgment on the remaining claims until August 17, 2009, over two months after Financial Freedom obtained a judgment decreeing that the Association "shall recover nothing, and shall obtain no relief, as against defendant Financial Freedom, in this action." Judge Davis's judgment also came after the Association appealed Judge Woolard's judgment in Financial Freedom's favor. Despite that final decree, and its appeal, Judge Davis issued a judgment granting the Association relief against Financial Freedom. Judge Davis voided Financial Freedom's deed of trust as to one-half of the property and gave the Association priority over Financial Freedom on that half. This, too, was error.
Therefore, we must reverse the judgment entered by Judge Davis and remand the case with directions to enter a judgment affecting the rights only of those defendants properly before it: homeowners Williams and Crosby and judgment creditor Hassen & Associates. The judgment shall not invalidate any part of Financial Freedom's deed of trust or otherwise impair its interests in the property.
The Association, in its foreclosure cause of action against the homeowners, Financial Freedom, and judgment creditor Hassen & Associates, included in its complaint a plea for an award of contractual attorney fees against the homeowners. The Association did not request attorney fees against Financial Freedom. Nevertheless, Financial Freedom filed a motion for contractual attorney fees after obtaining summary judgment in its favor. The court denied the motion, and Financial Freedom challenges that denial on appeal. The trial court was correct.
Civil Code section 1717, subdivision (a) provides in pertinent part that "[i]n any action on a contract, where the contract specifically provides that attorney's fees and costs, which are incurred to enforce that contract, shall be awarded either to one of the parties or to the prevailing party, then the party who is determined to be the party prevailing on the contract, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorney's fees in addition to other costs."
Civil Code section 1717 is also interpreted "to further provide a reciprocal remedy for a nonsignatory defendant, sued on a contract as if he were a party to it, when a plaintiff would clearly be entitled to attorney's fees should he prevail in enforcing the contractual obligation against the defendant." (Reynolds Metals Co. v. Alperson, supra, 25 Cal.3d at p. 128.) Thus, a
These principles do not aid Financial Freedom because the Association did not sue Financial Freedom under the CC&R's, never sought fees against Financial Freedom under the CC&R's, and was not entitled to fees against Financial Freedom had the Association prevailed. Civil Code section 1717 covers signatories to a contract containing a fee provision and those who are sued as alleged parties to the contract or otherwise alleged to be bound by its terms. The Association never alleged that Financial Freedom was bound by the CC&R's. The Association included Financial Freedom in the cause of action for judicial foreclosure of liens because Financial Freedom claimed a senior lien that the Association disputed. The action between the Association and Financial Freedom rested upon a legal question as to lien priority, not contractual enforcement of the CC&R's.
Financial Freedom argues that it is nevertheless entitled to fees because "as a practical matter" Financial Freedom, and not the legally liable homeowners, would have had to bear the cost of the fees if the Association prevailed against the owners. Financial Freedom reasons as follows: if the Association prevailed on its judicial foreclosure claim and assertion of lien priority, the Association would have been entitled to fees against the homeowners under the CC&R's. Those fees, as a debt of the homeowners, would have been paid to the Association from the sale proceeds before Financial Freedom, as a junior lienholder on half the property, received any proceeds (or Financial Freedom would have to pay the Association's secured debt and fees to protect Financial Freedom's property interest and avoid foreclosure of the property). Financial Freedom argues that this collateral economic consequence of a foreclosure action entitles it to fees.
Financial Freedom's argument relies upon Saucedo v. Mercury Sav. & Loan Assn. (1980) 111 Cal.App.3d 309 [168 Cal.Rptr. 552] (Saucedo). In Saucedo, home buyers took the property subject to an existing loan secured by a deed of trust. (Id. at p. 311.) The deed holder refused to allow the purchasers to assume the loan without paying a transfer fee and increased interest, and threatened to enforce a due-on-sale clause requiring full payment of the loan. (Ibid.) The purchasers filed a successful suit to enjoin the deed holder from
There are distinguishing points between Saucedo and this case. A central point of distinction is that the purchasers who recovered fees in Saucedo were the successors in interest to the property subject to the promissory note containing the disputed due-on-sale clause and fee provision. (See Leach v. Home Savings & Loan Assn. (1986) 185 Cal.App.3d 1295, 1304-1306 [230 Cal.Rptr. 553] [distinguishing and limiting Saucedo].) Here, the Association and Financial Freedom are complete strangers to each other, and the dispute rests upon the priority of competing security interests established by separate documents (an assessment lien and a deed of trust). The case resembles Clar v. Cacciola (1987) 193 Cal.App.3d 1032, 1037-1039 [238 Cal.Rptr. 726] more than it resembles Saucedo, supra, 111 Cal.App.3d at page 315. In Clar, this District Court of Appeal refused to extend the reciprocal attorney fee provision of Civil Code section 1717 where the parties advanced competing claims on the priority of two deeds of trust. (Clar, supra, at pp. 1038-1039.) The prevailing defendants in Clar claimed a right to recover attorney fees because, had they lost, the plaintiffs' attorney fees would have been added to the secured debt under the terms of the deed of trust, which the defendants would have had to pay "to prevent foreclosure and protect their equity in the property." (Id. at p. 1037.) The court held that the defendants' potential obligation to pay fees was too speculative. (Id. at pp. 1037-1038.)
As noted earlier, claims against the remaining defendants were tried after defendant Financial Freedom obtained summary judgment. Following that trial, the court awarded the Association, as the prevailing party, attorney fees against defendant homeowners Williams and Crosby under the CC&R's and a statute authorizing fee recovery in a condominium association's action to collect delinquent assessments. (Civ. Code, §§ 1717, 1366, subd. (e)(1).) Financial Freedom does not deny the validity of these fee provisions but argues that fees should have been denied in this instance because "as a practical matter" Financial Freedom as a junior lienor on one-half of the foreclosed property, not the homeowners, will bear the economic impact of the fee award. We again note our reluctance to embrace the practical liability approach to Civil Code section 1717 but have no occasion to discuss it further here. We are reversing the judgment to the extent that it voided Financial Freedom's senior lienor status on the property, and thus no adverse economic impact attends the court's order awarding fees to the Association against the homeowners. Financial Freedom's objection to the fee award is therefore moot.
The June 3, 2009 judgment in favor of Financial Freedom is affirmed. The August 17, 2009 judgment in favor of the Association is reversed to the extent that it voided, in whole or part, Financial Freedom's deed of trust on the property. The case is remanded with directions to amend the judgment consistent with the views expressed in this opinion, and to permit Financial Freedom an opportunity to address the court concerning amendment at any hearing conducted on the matter.
The September 24, 2009 order denying Financial Freedom attorney fees against the Association is affirmed. The February 8, 2010 order granting the Association attorney fees against Williams and Crosby is affirmed.
Ruvolo, P. J., and Rivera, J., concurred.