This case involved a unique set of facts which arose due to the convergence of a fraudulent loan transaction and the subsequent bankruptcy of a bank. Plaintiff Mary McGurk had fallen behind on her mortgage when defendant Kim convinced her to “refinance” by deeding her home to him and leasing the property back to her. Kim obtained a new mortgage with New Century and pulled out equity which was to be used to pay McGurk’s lease payments. McGurk had the option to repurchase within a year but, by that time, her money was gone and she no longer had title to her home.
McGurk filed suit against Kim, New Century and others alleging fraud. She also sought to quiet title to the property and recorded a lis pendens. Kim stipulated to judgment being entered against him. New Century filed a cross-complaint, alleging it was a bona fide encumbrancer for value and that its deed of trust was a valid lien or that, alternatively, it had an equitable lien against the property. New Century subsequently filed for bankruptcy, which automatically stayed the proceedings as against it. McGurk opted to proceed against New Century in bankruptcy court, dismissing New Century from the original litigation and obtaining a judgment quieting title as against the remaining defendants. New Century’s bankruptcy estate settled with McGurk for $10,000.
The problem arose a year later when Deutsche Bank stepped forward to assert ownership of the deed of trust which New Century had, unbeknownst to McGurk, assigned to it prior to the judgment quieting title. Deutsche Bank, which inexplicably failed to record the assignment for some five months, filed a new suit against McGurk for declaratory relief to establish the validity of its deed of trust. The court determined that Deutsche Bank’s interest in the property had been extinguished by the judgment quieting title in favor of McGurk. Key to this determination was that Deutsche Bank had failed to timely record its assignment while McGurk had, in fact, recorded her lis pendens.
Deutsche Bank appealed and the Court of Appeal, Second Appellate District, reversed the judgment of the Los Angeles County Superior Court. Because New Century’s deed of trust was both of record and actually known to McGurk, her dismissal of New Century rendered the quiet title judgment meaningless as against New Century and therefore also as to Deutsche Bank, which were both at the time strangers to the action. Correct practice would have been to obtain relief from stay from the bankruptcy court, then obtain judgment against New Century in the original litigation, which would have been binding as against its successor, Deutsch Bank, as well.
Comment: While the court appeared sympathetic to McGurk’s position, she appeared to have been doomed by her lawyer’s failure to follow the precise language of the statutes governing quiet title actions and lis pendens.
Deutsche Bank National Trust Co. v. McGurk (2012) 206 Cal.App.4th 201