Monday, April 28, 2014

FYI: Cal App Ct Reverses Ruling in Favor of Lender on Trespass and Nuisance Allegations Following Lender's Foreclosure

Wednesday, February 26, 2014

The California Court of Appeal, Fourth District, recently reversed a trial court’s grant of summary judgment in favor of a lender regarding allegations that the lender maintained a nuisance and overused an easement that it obtained through a foreclosure sale.

A copy of the opinion is available at:

Plaintiffs owned a piece of real property located in La Mesa, California.  A condominium project (the “Aragon Project”) was to be constructed on another property adjacent to the Plaintiffs’ property.  The Aragon Project had three phases of construction and was to be governed by the Aragon Homeowners Association (the “HOA”).  The Aragon Project was funded via a revolving line of credit given by a bank (“Bank”).

The Aragon Project property had an “ingress and egress” easement over Plaintiffs’ property.  Specifically, the easement granted “the right of ingress and egress for public road purposes over, along and across the easterly 40 feet thereof.” This easement was created in 1941 by the previous property’s owner.

The developer began construction on the Aragon Project and within 4 years, phases 1 and 2 were completed.  During the construction of phases 1 and 2, the developer made substantial improvements to the easement including installing sewers and storm drains ad well as paving it. After completing the first two phases of the Aragon Project, the developer transferred its ownership interest to the HOA.

During construction of phase 3, the developer went bankrupt.  As a result of the developer’s bankruptcy, Bank gained title to various portions of the Aragon Project via trustee sale including the deed creating the subject easement.

After the developer completed construction of phases 1 and 2, Plaintiffs filed a lawsuit claiming the easement’s improvements and structures were an overuse and were outside the scope of the easement’s description.  Plaintiffs alleged causes of action for trespass, nuisance, injunctive relief and declaratory relief.  Bank and the HOA were the named defendants.

Bank subsequently filed a motion for summary judgment arguing:  (1) it did not own the structures and improvements at issue;  (2) it did not maintain or control the structures and improvements at issue;  (3) it could not be held liable for tort actions under former section 1365.9, as it is not an owner of individual condominium units; ; (4) the structures and improvements at issue do not violate the reserved easement; and  (5) could not be held liable as it only acted as a lender to the developer regarding the Aragon project. The Court granted Bank’s motion for summary judgment, and Plaintiffs appealed.

The Appellate Court began its analysis by determining if there was a triable question of fact as to whether the easement’s improvements and addition of structures could constitute overuse.  The Court determined there was a triable question of fact regarding whether the easement was being overused.

The Court then addressed Bank’s argument that it did not own, control, or maintain any of the Aragon Project’s structures or improvements.  Plaintiffs argued that Bank took a security interest in the Aragon Project’s personal property, as well as an interest in the easement and improvements thereon. The Court held Bank did hold an interest in the Aragon Project’s structures and improvements.

Specifically, the Court examined the trustee’s deeds Bank gained through its foreclosure.  The initial trustee’s deed gave Bank ownership of the Aragon Project’s completed condominium phases as well as several uncompleted condominiums in final phase of the project. The subsequent trustee’s deed gave Bank ownership of the Aragon Project’s property including the easement at issue.  The only properties exempted from Bank’s trustee’s deeds were any property interests previously deeded to the HOA.  Thus, the Court held nothing established that Bank did not own the Aragon Project’s improvements and structures. 

Bank next contended the HOA owned the easement’s improvements and structures and thus, only the HOA is liable to Plaintiff.  Bank relied on a Covenants, Conditions and Restrictions’ (“CC&R’s) provision that stated the HOA had a duty to maintain the Aragon Project’s improvements and structures. However, the Court rejected this argument as Bank offered no explanation as to how the CC&R’s maintenance provision absolved Bank of an ownership interest in the subject improvements.

Bank next argued that when the Aragon Project developer transferred  a completed portion to the HOA, it automatically transferred all the easement rights to the HOA.  The Court found this argument unpersuasive as the developer transferred ownership rights to both Bank and the HOA, and therefore both have rights in the subject easement.

The Court then addressed Bank’s argument that it is merely a “lender” and is immune under California Civil Code section 3434.  Section 3434 states:

A lender who makes a loan of money, the proceeds of which are used or may be used by the borrower to finance the design, manufacture, construction, repair, modification or improvement of real or personal property for sale or lease to others, shall not be held liable to third persons for any loss or damage occasioned by any defect in the real or personal property so designed, manufactured, constructed, repaired, modified or improved or for any loss or damage resulting from the failure of the borrower to use due care in the design, manufacture, construction, repair, modification or improvement of such real or personal property, unless such loss or damage is a result of an act of the lender outside the scope of the activities of a lender of money or unless the lender has been a party to misrepresentations with respect to such real or personal property.

The Court rejected its immunity argument as Bank failed to show how its ownership interests were within the scope of activities a lender of money typically engages in.  Thus, Bank failed to meet section 3434’s burden and was not immune from liability.

Lastly, Bank argued that former Civil Code section 1365.9 entitled it to summary judgment.  Former section 1365.9(b) states:

Any cause of action in tort against any owner of a separate interest arising solely by reason of an ownership interest as a tenant in common in the common area of a common interest development shall be brought only against the association…

The Appellate Court held that, in order to be afforded protection under section 1365.9(b), Bank was required to show the HOA maintained and had in effect one or more policies of insurance which included coverage for general liability of the association. Cal. Civ. Code §1365.9(b)(1). Additionally, the insurance policies had to cover the causes of action alleged by Plaintiffs. Id. 

The Court held that section 1365.9 was inapplicable as Bank failed to show that any of the HOA’s insurance policies covered the Plaintiffs’ claims.  Therefore, the Court determined that Bank was not entitled to summary judgment under former Civil Code section 1365.9(b).

Accordingly, the California Court of Appeals, Fourth District, reversed the lower’s court’s ruling granting Bank’s motion for summary judgment.

Eric Tsai
McGinnis Wutscher Beiramee LLP
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