A recent opinion on the Citrus El Dorado, LLC v. Chicago Title Company case made my wish come true. It’s a pretty classic story of company meets bank, company gets money from bank, company ends up being unable to pay loan from bank, shenanigans, and a happy ending (for the bank); still, it sets an important precedent where deeds of trust are concerned.
Citrus, a commercial developer, bought a parcel of unimproved land in La Quinta, CA, to turn it into residential housing. In 2007, they got a construction loan of about $13.4 million from First Heritage Bank, to be released incrementally, secured by a deed of trust on the property. When FHB went belly-up, the FDIC took over and supplied a few of Citrus’s installments, before assigning the loan to Stearns Bank in February 2009.
When Citrus submitted a draw request in March, Stearns told them to go suck a lemon, and in April, Stearns sent a “Notice of Event of Default and Demand for Immediate Payment,” i.e., we noticed you’re not paying back your loan and we’re giving you a couple weeks to settle your balance of over $13 million.
Things soured further (citrus joke) when Chicago Title Company recorded a Substitution of Trustee in July 2009, naming them the new trustee under the deed of trust (sidenote: if a legal terminologist wants to come up with a more elegant way of saying that, be my guest) and the new beneficiary as FNBN Rescon I, LLC.
(Cue five year interlude…)
In late 2014, Chicago put their foot down and recorded a Notice of Default and Election to Sell, claiming an unpaid principal balance of $12.7 million and a total balance due of over $20 million. The property went to public auction in March 2015 and, predictably, Rescon bid highest with a credit bid of $7.2 million. So far, so standard.
Then, Citrus filed for wrongful foreclosure, wrongful disseisin (land grab), and conspiracy, on the basis of Chicago Title’s failure, as trustee of the deed of trust, to verify that Rescon received a valid assignment of the loan, and to verify the authority of whoever appointed Chicago Title as trustee when they signed the substitution form.
Chicago Title demurred, Citrus appealed, and after a little back and forth, the Court of Appeal finally ruled against Citrus. A beneficiary or trustee can be liable for wrongful foreclosure if they caused an “illegal, fraudulent, or willfully oppressive sale of real property,” which wasn’t the case here. There are a few exceptions – Citrus relied on Lupertino v. Carbahal for a lot of their case – but exceptions prove the rule. A deed of trust trustee has narrow duties: foreclose if the borrower defaults, and reconvey the deed if the loan is repaid. As the Court put it, the trustee’s role is “passive.” Any wrongful foreclosure claims based on alleged expanded duties aren’t gonna go far.
And as for Citrus, well… when life gives you lemons…