Wednesday, April 6, 2016

Extrinsic Mistake Relieves Trustee of Default

Bae v. T.D. Service Co., No. B262921 (D2d4 Feb. 25, 2016)

Trustee to the deed of trust on a property gets sued in a real estate foreclosure dispute. Because trustees often get sued as relief-only defendants in cases where the title to property is at issue, Civil Code § 2924l sets forth a procedure permitting them to file a “declaration of non-monetary status” which absolves the trustee from participating in the litigation in any way unless some other party files an objection showing that some conduct by the trustee is really at issue. Trustee here served a § 2924l declaration, which was never opposed.

But Plaintiff put Trustee into default anyway, ultimately obtaining a $3 million default judgment more than two years later, Trustee, having become the subject of some collections efforts, moved for relief from default. The trial court granted the motion. Plaintiff appeals.

What makes this tricky are the time limits in the statutes that generally afford relief from default. Section 473(b) gives six months to move for relief on the grounds of mistake, inadvertence, or excusable neglect. Section 473.5 gives up to two years to obtain relief from a default that was entered without actual notice to the defendant.  

That all said, courts also have the inherent equitable power to vacate default judgments on grounds such as extrinsic fraud or extrinsic mistake. The court here focuses on the latter, which applies when some fact outside of the four corners of a default judgement led a court to mistakenly enter it. Courts generally apply a three-element test. The defaulted party seeking relief must: (1) show it has a meritorious case; (2) articulate a meritorious excuse for why it failed to defend the original case; and (3) that it acted diligently to set aside the default once discovered.

That test was met here. Trustee’s § 2924l declaration was timely and set out facts that showed a good faith belief that the trustee would was not liable for any act or omission of its own. No objection was ever filed, which should have absolved the trustee from answering and precluded any monetary liability. Trustee thus had a meritorious defense. 

Trustee also had a good excuse. It should have been able to rely on its filing of unchallenged § 2924l declaration in believing that it had no further obligation to participate in the case. In the absence of an objection, it was erroneous for the court to permit an entry of a default or default judgment against Trustee for failing to participate. 

Finally, Trustee acted diligently to set aside the default after learning about it. In addition to its reasonable reliance on its § 2494l declaration, Plaintiff made a bunch of service errors in prosecuting the default. In particular, Plaintiff failed to serve Trustee’s attorney with any of the default papers, including the default judgment, in violation of various statutes and rules governing the default procedure. In particular, Plaintiff violated Code of Civil Procedure §587 by failing to file an affidavit proving that a copy of the motion for entry of default had been mailed to the defaulting party’s attorney. It was thus not unreasonable that Trustee’s lawyer first learned of the default judgment when plaintiff tried to collect by levying its bank accounts. Which made Trustee’s lack of awareness pretty reasonable.


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