First Tennessee National Bank Association (“FTB”) initiated a nonjudicial foreclosure on residential real property and sold the property at a foreclosure sale to DM Residential Fund II, LLC (“DM”). The property lacked a utilities easement needed to provide electrical service to the new home on the property. DM discovered the easement issue shortly after buying the property but waited two years to file suit against FTB seeking to rescind the transaction based on FTB’s failure to disclose this defect.
The district court granted FTB’s motion for summary judgment on the grounds that DM was not entitled to the equitable remedy of rescission. Even though a jury could have reasonably concluded that DM could not have discovered the utility easement issue prior to the foreclosure sale, and therefore a genuine issue of material fact existed, a party seeking the equitable remedy of rescission must do so “promptly upon discovering the facts which entitle him [or her] to rescind.” (Civ. Code § 1691.)
It was undisputed that shortly after the sale DM discovered it did not have electricity and could not obtain any absent the purchase of an additional easement. Nevertheless, the Ninth Circuit, relying on a 1920 California Supreme Court case, ruled that “a reasonable person would be put on inquiry notice as to whether there had been some wrongdoing in the sale of the residence, at which point a duty to investigate the wrongdoing arises.”
DM presented no evidence that would allow a trier of fact to conclude it would not have been able to discover the facts supporting its right to rescind at the time it discovered the defect. The Court further noted that DM took actions inconsistent with “unwinding the contract” including encumbering the property, building improvements and attempting to sell it. By taking those actions and waiting two years to sue FTB, DM affirmed the transaction and its right to rescind was gone. As such, the Ninth Circuit concluded that there was no genuine question of material fact on this issue and affirmed the trial court’s granting FTB’s motion for summary judgment.
The moral of the story is he who sits on his rights, with knowledge that his rights may have been violated, is lost and may be stuck with a defective property with no path for recourse. Therefore, a party who may be entitled to rescind a contract must act “promptly upon discovering the facts which entitle him to rescind” or else he may find himself stuck with the object of the contract. And this is true even if any applicable statute of limitations has yet to expire such as the three-year statute of limitations for fraud; an argument made in the dissenting opinion.
DM Residential Fund II, LLC v. First Tennessee Bank Nat’l Assoc. (December 30, 2015) 2015 U.S. App. LEXIS 22816.