CROSKEY, J.
A faithless trust deed beneficiary noticed a foreclosure sale despite the fact that the loan secured by the deed of trust had been fully repaid two years earlier. Shortly before the foreclosure sale, a prospective purchaser telephoned the trustor, and was told that the loan had been repaid. Believing that trustors often falsely claim that foreclosure sales of their properties should not go forward, the prospective purchaser disregarded the trustor's assertion of full repayment. The prospective purchaser then submitted a successful bid for the property at the foreclosure sale. The trustor brought suit to set aside the trustee's deed thereafter issued in favor of the purchaser. The trial court, after a bench trial, found in favor of the trustor and set aside the trustee's deed. On the purchaser's appeal, we conclude that the trial court did not err in setting aside the trustee's deed, but that the court also should have quieted title in favor of the trustor and conducted an accounting to properly account for money expended and rents collected by the purchaser while in possession of the property. We therefore will reverse the judgment as entered and remand with directions.
The only parties in this appeal are the trustors, brothers Bret and Elliot Lewis, and the purchaser at foreclosure, Barak Enterprises, Inc. The factual and procedural background of this action is somewhat convoluted. Nonetheless, there are very few disputed facts in this matter.
In May 2005, Bret Lewis purchased the subject property. In November 2005, a deed of trust on the property was signed by Elliot Lewis, who was acting on behalf of his brother, to secure payment of a $140,000 note in favor of Daybreak Group, Inc. The Daybreak deed of trust was not the only deed of trust encumbering the property. In January 2006, the Lewises refinanced their debt on the property. Fidelity National Title Company handled the escrow for the refinance. Two new trust deeds were placed on the property securing the payment of two notes, in a total amount in excess of $1,000,000. With the proceeds of these two notes, Fidelity was to pay off all existing loans on the property, including the Daybreak loan, and obtain and record reconveyances. The two new deeds of trust, in favor of the new lenders (hereafter, the refinance lenders), were to be recorded in the first and second positions. Fidelity obtained the new loans and paid off the prior loans, including the Daybreak loan. However, Fidelity failed to obtain and record a reconveyance of the Daybreak deed of trust. Thus, unbeknownst to the Lewises and the refinance lenders, the Daybreak deed of trust remained of record in apparent first position.
The following year, the Lewises brought suit against Daybreak in connection with another matter. That litigation was settled in late 2007, but the Lewises were required to bring a motion to enforce the settlement, which was granted in November 2007. At approximately the same time, and perhaps in retaliation for this litigation, Daybreak commenced foreclosure proceedings based on the Daybreak note, despite the fact that the note had been repaid in January of 2006. On December 13, 2007, the trustee on the Daybreak trust deed, the Chelsea Company, noticed a trustee's sale for January 8, 2008.
Barak was in the business of buying and selling real estate; some, but not all, of its business involved purchasing properties at foreclosure sales. Barak is operated by Yoav Atzmon and his wife. Atzmon was assisted by Michael Kafaei, who attended foreclosure sales nearly daily on Barak's behalf. On January 8, 2008, Kafaei obtained a list of foreclosure sales which were scheduled to take place on that day. In advance of every foreclosure sale he attends, Kafaei prepares a list of all properties scheduled to go to auction that day. However, Kafaei does not research any of these properties in advance; in his experience, 80% to 90% of the scheduled sales are postponed or cancelled. Shortly before the auction begins, the postponements and cancellations are announced, and opening bids are published for the remaining properties. It is at this point that Kafaei and Atzmon turn their attention to the properties which are proceeding to auction. The property at issue in this case was proceeding to auction, with an opening bid of $181,906.50. Kafaei brought the property to Atzmon's attention and they began to investigate whether Barak should bid on it. The parties stipulated that Atzmon first learned of the foreclosure sale of this property one to two hours before the sale.
Barak first contacted a title company, which informally confirmed to it that the Daybreak deed of trust was, in fact, in first position.
Elliot Lewis happened to be the listing agent on the property. When Atzmon called Elliot Lewis, between 1 and 1 1/2 hours before the sale, Atzmon initially did not disclose that he was a potential purchaser at a foreclosure sale. Instead, he simply questioned Elliot Lewis about the property for approximately 15 minutes. At the end of the conversation, Atzmon told Elliot Lewis that he was considering purchasing the property at the foreclosure sale. When Elliot Lewis inquired as to the basis for the foreclosure, Atzmon identified the opening bid amount. Elliot Lewis realized that this referred to the Daybreak deed of trust, which he believed had been reconveyed when the note had been paid off in January of 2006. Elliot Lewis told Atzmon that he and his brother had paid off the debt as part of the refinancing of the loan.
After Atzmon had telephoned Elliot Lewis, Elliot Lewis called his father, Attorney Lawrence Lewis (Attorney Lewis) at the firm of Allen Matkins Leck Gamble Mallory & Natsis LLP (Allen Matkins). On January 9, 2008, the day after the sale, Attorney Lewis filed a complaint, in the names of Bret and Elliot Lewis, against Daybreak, Chelsea and Doe defendants, to set aside the trustee's sale and to quiet title to the property. That same day, Barak obtained a trustee's deed in its favor. The Lewises recorded a lis pendens on the property prior to the time Barak recorded its trustee's deed. On January 18, 2008, the plaintiffs amended their complaint to name Barak as one of the Doe defendants. On February 8, 2008, plaintiffs filed their first amended complaint, adding a cause of action to cancel the trustee's deed.
On April 9, 2008, Barak filed an answer to the complaint. In its answer, Barak asserted numerous affirmative defenses. Three of them (unclean hands, comparative fault, and comparative negligence) were based on the Lewises' failure to make certain that a reconveyance had been recorded when they paid off the Daybreak note. Barak alleged offset, on the basis that if the Lewises were found entitled to equitable relief, Barak would have the right to the return of the $181,906.51 he had paid for the property, plus costs and attorney fees. Finally, Barak alleged additional affirmative defenses suggesting that any damages were caused by third parties (Daybreak and/or Chelsea), and that it would be entitled to indemnity from them. Barak did not file a cross-complaint at this time.
In May of 2008, by stipulation, plaintiffs filed a second amended complaint, and Barak's answer to the first amended complaint was deemed an answer to that pleading. In their second amended complaint, plaintiffs added as defendants Fidelity and the refinance lenders. Nine causes of action were alleged; as to Barak, the original causes of action remained: (1) set aside trustee's sale; (2) quiet title; and (3) cancel trustee's deed. Additionally, Barak was named in a cause of action for declaratory relief.
Prior to trial, on no less than three occasions, Barak unsuccessfully attempted to establish that it was a bona fide purchaser as a matter of law: (1) in a motion to expunge the lis pendens; (2) in a demurrer; and (3) in a motion for summary judgment. Barak recognized that, in order to obtain the protections granted a bona fide purchaser, a buyer must "(1) purchase the property in good faith for value, and (2) have no knowledge or notice of the asserted rights of another." (Melendrez v. D & I Investment, Inc. (2005) 127 Cal.App.4th 1238, 1251, italics omitted). Barak conceded that Elliot Lewis had told him that the loan had been repaid. However, Barak argued that this fact did not deprive it of bona fide purchaser status. Barak took the position that a statement by a trustor could convey no notice as a matter of law. In denying the summary judgment motion, the trial court stated, "It's clear on [its] face that your client is not a bona fide purchaser." When defense counsel inquired what more Barak could have done, the court responded, "[n]ot buy it."
A defendant seeking to file a cross-complaint against a plaintiff may do so, as a matter of right, at the same time it files its answer. If it files later, it may do so only with leave of court. (Code Civ. Proc., § 428.50.) Although Barak's answer was filed in April of 2008 (and deemed filed in response to the second amended complaint in May of 2008), no cross-complaint was filed at that time. Instead, more than one year later, on June 3, 2009, Barak filed its cross-complaint, without first seeking leave of court.
On June 30, 2009, the Lewises moved to strike the cross-complaint, as it had been filed without leave. On July 10, 2009, realizing its mistake, Barak filed a motion for leave to file its cross-complaint. However, Barak could not set that motion for a hearing earlier than September 14, 2009, which was after the August 20, 2009 trial date.
On August 10, 2009, the trial court struck the cross-complaint, as it had been untimely filed without leave.
As already noted, Barak had filed a motion for leave to file his cross-complaint on July 10, 2009, but could not set it for a hearing until after the trial date. It therefore sought, on July 13, 2009, an ex parte order shortening time for hearing on its motion for leave (or, in the alternative, postponing the trial date).
By this time, a second issue had also come to Barak's attention. Atzmon had recently reviewed a document in the case and realized that Attorney Lewis was employed by Allen Matkins. In October of 2008, Pico Flower LLC, a real estate company owned and managed by Atzmon, had retained another Allen Matkins attorney to represent it in a different unrelated action. Concerned that Pico Flower (effectively Atzmon) was represented by the same law firm which was suing Barak (effectively Atzmon), Barak intended to file a motion to disqualify Attorney Lewis from representing the Lewises. Although Barak had not yet filed its motion to disqualify, it believed that this motion, too, should be heard prior to trial, so it sought an order shortening time for hearing on this motion as well.
The trial court denied Barak's ex parte request with respect to both issues. As to the motion for leave to file a cross-complaint, the court noted that the cross-complaint appeared baseless, as against the Lewises, and that there simply was no exigency requiring immediate consideration of the motion for leave to file it. As to the motion to disqualify counsel, the court noted that Barak should have known that Allen Matkins was opposing counsel in this case as early as January 2008 — some 9 months before Pico Flower retained Allen Matkins and 18 months prior to Barak's alleged discovery of the purported conflict. The court concluded that Barak's failure to timely discover the identity of opposing counsel did not constitute a sufficient reason to continue the trial or give Barak preferential scheduling on the motion to disqualify.
On August 6, 2009, Barak filed its motion to disqualify Allen Matkins, because of the purported dual representation. Barak argued that the concurrent representation of Pico Flower and the Lewises violated Allen Matkins's duties of loyalty and confidentiality owed to Pico Flower.
The Lewises opposed the motion on the basis that Allen Matkins was neither suing nor representing Atzmon. Instead, it was opposing Barak and representing Pico Flower, two independent entities.
The trial commenced on August 20, 2009. Midway through the trial, on Friday, August 21, Attorney Lewis indicated that, despite the Lewises' earlier opposition to Barak's ex parte request to hear the disqualification motion before trial, the Lewises would like the matter heard and resolved. The court indicated that the motion could be heard the following Monday morning. Barak requested time to file a reply memorandum. The court stated that Barak could present its reply orally. When Barak's counsel represented that he had not yet reviewed the Lewises' opposition to the motion, the court postponed the hearing on the motion to Monday afternoon.
The trial court concluded that there was no actual conflict as Barak and Pico Flower are two separate entities. "[O]f greater concern" to the court, however, was the fact that this motion was filed in August 2009, while Atzmon had been on notice of Attorney Lewis's firm affiliation since January 2008, and Pico Flower had nonetheless elected to retain that firm after learning that fact. The court concluded that the motion was merely a trial tactic, and denied it.
By the time of trial, the Lewises had obtained the defaults of Daybreak and Chelsea. Fidelity had appeared (and was defending the refinance lenders). As Daybreak and Chelsea had defaulted, there was no need for a jury trial on the Lewises' numerous claims against them for pursuing the foreclosure sale after the debt had been paid. The Lewises moved that the court try its equitable claims against Barak first, with its negligence claim against Fidelity proceeding to a jury trial thereafter. Barak opposed that motion on the basis that, while title to real property is an equitable issue, possession thereof is an issue of law.
As between the Lewises and Barak, it was undisputed that: (1) the Lewises had paid off the Daybreak note as part of the 2006 refinance; (2) no reconveyance had been recorded; (3) Daybreak had improperly foreclosed on its note; (4) Barak learned of the foreclosure sale of the property shortly before it occurred; (5) Barak confirmed that there was no reconveyance recorded; (6) prior to the sale, Atzmon spoke with Elliot Lewis, who had told him that the Daybreak note had been repaid; and (7) Barak nonetheless purchased the property at the foreclosure sale, where Barak was the only bidder.
The Lewises argued that they were entitled to return of the property on two alternative bases: (1) the trustee's sale was invalid, because it was based on a debt which had been repaid; and (2) Barak was not a bona fide purchaser. This latter argument was itself supported by two alternative theories: (1) Barak had knowledge that the loan had been paid off; and (2) a grossly inadequate sales price was accompanied by irregularities in the sale. As we conclude that the Lewises were entitled to prevail on the grounds that the trustee's sale was invalid and Barak had knowledge that the loan had been repaid (and thus was not a bona fide purchaser), it is unnecessary to discuss the theory of inadequate sales price accompanied by irregularities in sale. However, we note the Lewises' pursuit of this theory because it was the basis for much of the evidence proffered by Barak at trial.
As to the issue of grossly inadequate sales price, both parties introduced testimony of appraisers to establish the actual fair market value of the property at the time Barak obtained it for just under $182,000.
When Barak's last witness finished giving testimony, Barak's counsel stated that Barak had no further witnesses on the equitable claims, but had more evidence to offer as to Barak's affirmative defenses. Barak indicated that it could elicit that testimony in the second (jury) phase of the trial. The court then asked which affirmative defenses Barak had not yet covered in its evidence. Barak then enumerated all of its affirmative defenses, both equitable and legal. The court then asked, "So as to the equitable claims of the plaintiff[s], you have no further witnesses, correct?" Barak agreed. After the Lewises introduced one brief rebuttal witness, the court sought briefing from the parties, and indicated that it would "make the ruling with regard to the [bona fide purchaser issue] and that's really the only issue."
While the parties were briefing the bona fide purchaser issue after trial, the court heard Barak's previously-filed motion for leave to file the cross-complaint. The trial court indicated its tentative ruling was to deny the motion, on the basis that it was too late. The court also noted that nothing would prevent Barak from pursuing an independent action against its co-defendants.
On September 23, 2009, the trial court issued a minute order indicating that the Lewises were entitled to judgment in their favor.
On November 5, 2009, the trial court entered judgment in favor of the Lewises and against Barak. The judgment declared that the trustee's deed "is hereby set aside." Additionally, the judgment ordered Barak to reconvey the property to the Lewises, by recorded grant deed, "free and clear of any encumbrances placed on the [p]roperty from January 8, 2008 to the present."
On appeal, Barak argues that the trial court erred: (1) in denying Barak a jury trial of the Lewises' causes of action; (2) in its evidentiary rulings at trial limiting the testimony of Atzmon, Speer and Kafaei, regarding the lack of irregularities at the sale and the reasonableness of ignoring a trustor's assertion that a foreclosure sale is improper; (3) in denying its motion for leave to file a cross-complaint, and in denying its ex parte request that the motion be heard prior to trial; (4) in denying its motion to disqualify Allen Matkins; and (5) in denying Barak the opportunity to introduce evidence on its affirmative defenses.
Preliminarily, we conclude the trial court did not err in proceeding, initially, with a court trial on equitable issues. An action to set aside a trust deed foreclosure is an equitable action in which the parties have no right to a jury trial. (Raedeke v. Gibraltar Sav. & Loan Assn. (1974) 10 Cal.3d 665, 671.) While it is true that an action to quiet title which also puts possession into controversy raises a legal issue as well as an equitable one (Code Civ. Proc. § 592; Veale v. Piercy (1962) 206 Cal.App.2d 557, 562), a trial court does not err in trying the equitable issues, to the court, first. (Id. at p. 563.) This is true even if the court's determination of the equitable issues is ultimately dispositive of the legal issues. (Ibid.)
It is unnecessary to address each evidentiary ruling challenged by Barak for the simple reason that, on the undisputed facts, the Lewises were entitled to a judgment setting aside the trustee's sale as a matter of law. This is true for two reasons.
First, "[a]s a general rule, if the funds necessary to reinstate or pay off a defaulted loan secured by a deed of trust are received by the lender prior to the foreclosure sale, the foreclosure sale is invalid and may be set aside, even if the purchaser was an innocent third party." (Garcia v. World Savings, FSB (2010) 183 Cal.App.4th 1031, 1047, italics added) When the underlying debt has been fully repaid, the lien is extinguished. (Winnett v. Roberts (1986) 179 Cal.App.3d 909, 922.) When there is no legal basis for the foreclosure sale, a purchaser's innocence cannot render the sale nonetheless effective. (Bank of America v. La Jolla Group II (2005) 129 Cal.App.4th 706, 713-714.)
Second, Barak was not a bona fide purchaser as a matter of law.
"A buyer is a bona fide purchaser if it bought property in good faith, for value, and had no knowledge or notice of the asserted rights of another. [Citation.] `"The absence of notice is an essential requirement . . . ." [Citation.]' [Citation.] The notice necessary to defeat bona fide status may be actual (express information of a fact), or constructive (imputed by law). [Citation.] To have constructive notice, a person must have notice or knowledge of the circumstances, `"which, upon reasonable inquiry, would lead to that particular fact." [Citations.]' [Citation.]" (612 South LLC v. Laconic Limited Partnership (2010) 184 Cal.App.4th 1270, 1278.)
We are concerned here with actual, rather than constructive, notice. "Actual notice may . . . attach when a `subsequent party is told of the prior interest, hears it discussed by others, [or] sees some document referring to the interest. . . .' [Citations.]" (Kabayan v. Yepremian (C.D. Cal. 1995) 190 B.R. 389, 395, affd. (1997) 116 F.3d 1295.) In order to be effectual, notice "should be precise and complete enough to put the defendant upon his guard." (Kowalsky v. Kimberlin (1916) 173 Cal. 506, 510-511 [stating, in dicta, that a mere assertion of an undefined interest gives insufficient notice].) Most importantly, and entirely contrary to Barak's arguments before the trial court, "a party may not ignore information coming from outside the recorded chain of title, to the extent such information puts the party on notice of information that reasonably brings into question the state of title reflected in the recorded chain of title." (612 South LLC v. Laconic Limited Partnership, supra, 184 Cal.App.4th at pp. 1278-1279.) The "recording laws were not enacted to protect those whose ignorance of the title is deliberate and intentional . . . . Their purpose is to protect those who honestly believe they are acquiring a good title, and who invest some substantial sum in reliance on that belief.' [Citation.]" (Melendrez v. D & I Investment, Inc., supra, 127 Cal.App.4th at p. 1252.)
While the issue of whether a buyer is a bona fide purchaser is ordinarily a question of fact, (612 South LLC v. Laconic Limited Partnership, supra, 184 Cal.App.4th at p. 1279), we resolve it as a matter of law in this instance, as the facts are undisputed. Prior to purchasing the property, Barak was told, by Elliot Lewis, that the underlying debt had been fully repaid. The assertion was precise and complete; Elliot Lewis did not simply assert an undefined interest in the property, but explained that the debt had been repaid, through escrow, as part of a refinance transaction. Barak thus had actual knowledge that the Lewises asserted that the Daybreak loan had been repaid and the Daybreak deed of trust had been extinguished. Barak cannot claim the protected status of a bona fide purchaser who had no notice of the Lewises' claim to the property, because the Lewises had told him of their claim.
Code of Civil Procedure section 436, subdivision (b) provides that a trial court may strike any pleading not filed in conformity with the law. Code of Civil Procedure section 428.50 sets forth the time limits within which a defendant may file a cross-complaint without leave of court. It cannot be disputed that Barak initially filed its cross-complaint outside those time limits. Therefore, the trial court did not err in striking it.
Barak contends, however, that the court subsequently erred both in refusing to shorten time for a hearing on its motion for leave to file the cross-complaint (so that it could be heard prior to trial) and in ultimately denying the motion (when it was heard after trial). We conclude that any error in this regard was necessarily harmless, on the basis that Barak's purported cross-complaint against the Lewises simply reasserted two of Barak's affirmative defenses against them.
Barak attempted to plead two causes of action against the Lewises: (1) negligence (in failing to assure that the Daybreak reconveyance was recorded) and (2) unjust enrichment (because, if the Lewises obtained return of the property, they would benefit from the improvements Barak made to it). Barak clearly asserted comparative negligence and offset as affirmative defenses against the Lewises in its answer. As the issues of whether the Lewises were negligent and whether the Lewises would be unjustly enriched by acquiring title with no offsetting payments to Barak were already before the trial court in the form of Barak's affirmative defenses,
Barak argues the trial court erred in denying its motion to disqualify Allen Matkins from representing the Lewises, on the basis that the firm's dual representation of the Lewises and Pico Flower was improper. "Generally, a trial court's decision on a disqualification motion is reviewed for abuse of discretion." (People ex rel. Dept. of Corporations v. SpeeDee Oil Change Systems, Inc. (1999) 20 Cal.4th 1135, 1143.) "However, the trial court's discretion is limited by the applicable legal principles. [Citation.] Thus, where there are no material disputed factual issues, the appellate court reviews the trial court's determination as a question of law." (Id. at p. 1144.)
"Depending on the circumstances, a disqualification motion may involve such considerations as a client's right to chosen counsel, an attorney's interest in representing a client, the financial burden on a client to replace disqualified counsel, and the possibility that tactical abuse underlies the disqualification motion." (People ex rel. Dept. of Corporations v. SpeeDee Oil Change Systems, Inc., supra, 20 Cal.4th at p. 1145.) When the issue raised is one of successive representations of adverse clients, the chief value jeopardized is that of client confidentiality. (Flatt v. Superior Court (1994) 9 Cal.4th 275, 283.) When the issue is simultaneous representation of adverse clients, the chief value at issue is that of attorney loyalty. (Id. at p. 284.) In either situation, the rules applied favor the first client represented. Thus, in cases of successive representation, "the need to protect the first client's confidential information requires that the attorney be disqualified from the second representation." (People ex rel. Dept. of Corporations v. SpeeDee Oil Change Systems, Inc., supra, 20 Cal.4th at p. 1146.) Similarly, in cases of simultaneous representation, courts protect the duty of undivided loyalty which the attorney owes the first client until the representation is complete. (Flatt v. Superior Court, supra, 9 Cal.4th at pp. 286-287.) "`[D]ecisions condemn acceptance of employment adverse to a client even though the employment is unrelated to the existing representation.'" (Id. at p. 287, italics added.)
In this case, Barak overlooks the fact that, if Allen Matkins's representation of the Lewises and Pico Flower was improper, it was the acceptance of the Pico Flower representation that was problematic, not Allen Matkins's continued representation of the Lewises. The Lewises were Allen Matkins's first client; the firm owes a duty of loyalty (and confidentiality) to them. Barak takes the position that the Lewises never formally retained Allen Matkins, so the firm owes them no duty of loyalty. The contention is meritless. "`"When a party seeking legal advice consults an attorney at law and secures that advice, the relation of attorney and client is established prima facie." [Citation.] "The absence of an agreement with respect to the fee to be charged does not prevent the relationship from arising."'" (People ex rel. Dept. of Corporations v. SpeeDee Oil Change Systems, Inc., supra, 20 Cal.4th at p. 1148.) Allen Matkins filed a complaint on behalf of the Lewises and was at all times unambiguously the Lewises' counsel of record. The absence of a retainer agreement is irrelevant.
Moreover, we agree with the trial court's conclusion that this motion appears to have been brought for improper tactical reasons. A trial court has discretion to find that laches forecloses the claim of conflict. (See River West, Inc. v. Nickel (1987) 188 Cal.App.3d 1297, 1309.) Atzmon was on constructive, if not actual, notice that Allen Matkins was representing the Lewises since January 2008. Atzmon was the one person with the knowledge of his involvement in both Barak and Pico Flower. Atzmon nonetheless retained Allen Matkins to represent Pico Flower in October 2008. Atzmon either was, or should have been, aware of the purported conflict from that moment, but only raised the issue on the eve of trial. When Atzmon is the person who created the conflict, he cannot be heard to complain about it, and he certainly cannot be heard to complain about it nine months after he created it. The trial court did not err.
It is clear from our discussion of the conversation on the record at the end of the bench trial that Barak had not yet introduced all of the evidence pertaining to its affirmative defenses; it was agreed that the trial court would resolve only the issue of whether Barak had been a bona fide purchaser.
It is also clear from our discussion of the applicable law that the trial court did not err in concluding that Barak was not a bona fide purchaser. The trial court, however, then determined that its resolution of that issue necessarily resolved all of Barak's affirmative defenses. Having reviewed the affirmative defenses asserted by Barak, we agree only in part.
Barak was not a bona fide purchaser because he knew of the interest the Lewises claimed in the property by reason of having repaid the Daybreak loan. Several of Barak's affirmative defenses (unclean hands, comparative fault, and comparative negligence) alleged that the Lewises were partly to blame for their loss of the property (and/or Barak's loss of his purchase money) because of their failure to insure that Fidelity had obtained and recorded a reconveyance of the Daybreak deed of trust. Even if the Lewises somehow failed to meet a "reasonable person" standard of care with respect to the recordation of a reconveyance, this would have no effect on the trial court's judgment. The Lewises' purported negligence caused them to have an unrecorded interest in the property; Barak, however, purchased the property with actual knowledge of that very same unrecorded interest. The reason the interest was not recorded is not relevant; Barak's notice of that interest is all that is important. Putting it another way, "[a]n unrecorded instrument is valid as between the parties thereto and those who have notice thereof." (Civ. Code, § 1217, italics added.) That the instrument may have been unrecorded as the result of negligence or unclean hands does not change the fact that Barak had notice of it and it is therefore valid as to Barak. Barak's loss of the purchase price was caused solely by its own determination to buy the property despite knowledge of the Lewises' claim. The purchase at the foreclosure sale constituted a business decision in which Barak necessarily accepted the risk of that loss.
Similarly, Barak's affirmative defenses alleging third party misconduct are also irrelevant to the Lewises' judgment setting aside the trustee's sale and quieting title. There is no dispute between Barak and the Lewises that the real entity at fault here is Daybreak, which foreclosed on a trust deed which had been extinguished two years earlier when the secured obligation to Daybreak had been repaid. Yet Daybreak was not before the court;
We reach a different conclusion, however, with respect to Barak's affirmative defense of offset or unjust enrichment.
The judgment is reversed and, upon remand, the trial court is directed to vacate the judgment and, after conducting an accounting consistent with the views expressed herein, to enter a new judgment (1) declaring that the trustee's deed is void ab initio and directing that it be set aside,
WE CONCUR:
KLEIN, P. J.
KITCHING, J.
