In Kachlon v. Markowitz, (— Cal.Rptr.3d —, Cal.App. 2 Dist., Nov. 17, 2008), a California Court of Appeal considered whether a couple who initiated foreclosure proceedings on a home, and the trust company used for the proceedings, were liable for initiating those proceedings when the debt for which the couple had an interest in was satisfied. The Court of Appeal concluded that the couple who initiated the foreclosure proceedings were liable; however, the trust company was immune from liability under California law.
In 1998, Donald and Debra Markowitz purchased a home from Mordechai and Monica Kachlon. Pursuant to the purchase agreement, the Markowitzes owed the Kachlons an additional $53,000 which was secured by a second deed of trust on the home. In early July of 2002, City National Bank (“Bank”) agreed to extend Donald Markowitz a $200,000 line of credit to be secured by a new second deed of trust on the Markowitz’s home. As part of the transaction, the Bank required that the original $53,000 debt owed to the Kachlons was satisfied and that the Kachlons release any interest or rights they have in the property. At the time, the Markowitzes still owed the Kachlons $12,000. The Bank arranged to give the Kachlons $12,000 in satisfaction of the Markowitzes’ debt in exchange for a release of their interest in the Markowitzes’ home. The exchange was made and the Kachlons deposited the $12,000 in their joint account.
In January 2003, the Kachlons were notified that their deed of trust was to be removed from the title on the Markowitzes’ property, but the Kachlons objected claiming that the debt was still not satisfied. The Kachlons then initiated foreclosure proceedings against the Markowitzes’ property for default on their loan agreement. But the trustee terminated the proceeding when it was presented with the signed documents provided to the Bank proving that the debt was satisfied. The Kachlons substituted Best Alliance as trustee. Best Alliance began the foreclosure proceedings based on information provided by the Kachlons which indicated that only $12,000 had been paid and an additional $56,899.91 was still owed. Markowitzes’ attorney contacted Best Alliance with all of the evidence that the debt was satisfied and Best Alliance suspended the foreclosure proceedings.
The Kachlons sued the Markowitzes and Best Alliance for their conduct in connection with the attempted foreclosure sale. After a jury trial, the Markowitzes were awarded $140,000 for damages from the Kachlons and $60,000 from Best Alliance. After trial, Best Alliance asked the trial court to not find it liable because it was entitled to immunity from liability under California law. The trial court agreed and set aside the $60,000 judgment against Best Alliance. All the parties appealed.
The Court of Appeal began with a discussion of the duties of a trustee. Simply put, a trustee is to return the deed of trust to the owner of the property once the debt is satisfied, or in the alternative, a trustee is to initiate foreclosure proceedings on the property upon the owner’s default. The court went into some detail about the procedures followed by trustees in the foreclosure proceeding and the responsibilities the trustee owes to both the owner of the property and the lender.
Next, the Court of Appeal examined at some length the California law that Best Alliance asserts provides it with immunity from liability in connection with its conduct during the foreclosure proceedings. California law provides trustees with certain privileges in the discharge of their duties as trustees. In some situations, this means that the trustee is completely immune from liability for its actions, and in other circumstances the trustee is immune from liability so long as it did not intend to do harm through its actions.
The Court of Appeal explained that the foreclosure proceeding that Best Alliance was engaged in against the Markowitzes property only afforded it partial immunity. Nonetheless, the court also said that any harm resulting from Best Alliances’ conduct was not intentional and therefore Best Alliance was immune from liability. For example, Mordechai Kachlon provided Best Alliance with false information showing that only $12,000 had been paid and an additional $56,899.91 was still owed. Once Markowitzes’ lawyer gave Best Alliance the proper evidence, Best Alliance suspended the foreclosure proceedings. The Markowitzes argued that Best Alliance should be liable because it relied on the information provided by the Kachlons rather than performing additional research. The court again reiterated that under California law, Best Alliance was immune in this transaction but for its own intentional actions to do harm.
The Kachlons also argue that they are entitled to the same immunity from liability as Best Alliance because the California law extends to beneficiaries of a trust, as the Kachlons were, when they are acting as trustee. The court explained that this provision was completely irrelevant here because the Kachlons were not acting as trustee. Moreover, the court pointed out that even if the Kachlons could in some way be considered trustees, the jury found that they intentionally tried to harm the Markowitzes through their actions. Thus, they would not even qualify for the type of immunity available under this sort of trustee action.
In conclusion, the Court of Appeal found that the Kachlons were liable for initiating the foreclose proceedings; however, Best Alliance was immune from liability.
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