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Morris v. Off-Piste Capital LLC

Court of Appeals of Utah

August 24, 2017

Shane Morris, Appellee,
v.
Off-Piste Capital LLC, Appellant and Cross-appellee
v.
American Home Mortgage Servicing Inc., Appellee and Cross-appellant.

         Third District Court, Salt Lake Department The Honorable Robert P. Faust No. 080904328

          Bradley L. Tilt and Sara E. Bouley, Attorneys for Appellant and Cross-appellee

          Ronald G. Russell, Bentley J. Tolk, and Jeffery A. Balls, Attorneys for Appellee and Cross-appellant American Home Mortgage Servicing Inc.

          Judge Stephen L. Roth authored this Opinion, in which Judges J. Frederic Voros Jr. and David N. Mortensen concurred. [1]

          OPINION

          ROTH, JUDGE

         ¶1 This case involves multiple competing claims related to a parcel of real property (the Property). After a trial, the district court quieted title to the Property in Short Sale Services LLC. Off-Piste Capital LLC appeals, arguing that its claim to title is superior to Short Sale's for a variety of reasons. American Home Mortgage Servicing Inc. cross-appeals, claiming that the court improperly determined that it was bound by a default judgment entered against a different party. We affirm in part and reverse in part.

         BACKGROUND

         Off-Piste's Involvement with the Property

         ¶2 The Property is a parcel of residential real estate located in a Draper development, which Todd Smith bought in 2005. To finance the purchase, Smith borrowed money from various entities. As security for one of his loans, Smith executed a trust deed on the Property and conveyed it to Smart Assets LLC (the Smart Trust Deed), a company managed by Brian Smart. Smith defaulted on this loan almost immediately, which initiated a procession of transfers and proceedings that ultimately resulted in this action.

         ¶3 Smart Assets, acting in concert with Smith after he defaulted, assigned the Smart Trust Deed to "SS Services, LLC"[2]in November 2006 (the SS Services Assignment). Smith later told Smart Assets that the SS Services Assignment had been lost and asked Smart Assets to execute a duplicate, which Smart Assets did in March 2007. However, the replacement document Smith presented for signature was not a duplicate of the original assignment to SS Services. Instead, the second document was an assignment of the Smart Trust Deed to a different entity, Capital 360 LLC (the Capital 360 Assignment), something Smart Assets did not realize at the time it signed what it believed was a replacement of the original. These two competing assignments are the root of the direct appeal.

         ¶4 In January 2007-before execution of the Capital 360 Assignment-SS Services recorded a Notice of Interest based on the SS Services Assignment, though it did not record the assignment itself. The Notice of Interest explained the nature of SS Services' interest in the Property, specifically identifying its acquisition of the Smart Trust Deed through the SS Services Assignment. According to the court, the Notice of Interest "specifically and clearly [gave] notice that 'an unrecorded Assignment of Deed of Trust' relating to and specifically concerning the Property exists." The Notice of Interest contained an accurate legal description of the Property and correctly identified the trustor, trustee, beneficiaries, and recording information (including recording date, entry number, book, and page) for the Smart Trust Deed. And the court found that, in addition to describing the "legal interest SS Services had" under the assignment, the Notice of Interest provided "a valid address where further information about the unrecorded assignment could be found."

         ¶5 After recording the Notice of Interest, SS Services began a foreclosure proceeding that concluded in a trustee's sale under the Smart Trust Deed. On April 30, 2007, SS Services recorded a trustee's deed conveying full title to the Property to SS Services. However, on April 2, 2007-after SS Services recorded the Notice of Interest in January but before it recorded its trustee's deed on April 30-Capital 360 recorded the Capital 360 Assignment. Capital 360 then moved ahead with its own foreclosure proceeding based on the Capital 360 Assignment.

         ¶6 It was through Capital 360's foreclosure proceeding that Off-Piste became entangled in the Property. Off-Piste agreed to loan $1.75 million for the purchase of the Property to Canyon Vines Holding and Investments LLC. Canyon Vines secured the loan with its own trust deed to the Property in favor of its lender Off-Piste. Off-Piste recorded the Canyon Vines trust deed on March 2, 2008. Under the terms of the loan, Canyon Vines was to repay Off-Piste in full within fourteen days, but Canyon Vines immediately defaulted on the loan.

         ¶7 Eventually, another claimant to an interest in the Property, Shane Morris, brought this lawsuit, originally a judicial foreclosure action. Morris named multiple parties including Off-Piste in an attempt to clear the tangled web of title. Off-Piste instituted its own quiet title action via third-party complaint.

         ¶8 At trial, Off-Piste argued that its predecessor, Capital 360, had a superior claim to the Property compared to SS Services' claim. Specifically, Off-Piste sought to prove that Capital 360 was a bona fide purchaser of the Property and, because Capital 360 recorded the Capital 360 Assignment before the SS Services Assignment was recorded, its interest took priority over SS Services' interest by operation of law.

         ¶9 The district court ruled in favor of SS Services. It found that SS Services paid valuable consideration for its assignment from Smart Assets and that, in an abundance of caution, SS Services had obtained an assignment of the underlying promissory note from Smart Assets as well. According to the court, the additional assignment was "further evidence[] that a valid and legal assignment was made to SS Services."

         ¶10 Regarding the purported assignment of the Smart Trust Deed to Capital 360, the court made three key determinations. First, it found that Smart Assets had no intent to assign the Smart Trust Deed to Capital 360 because Smart Assets was not aware that the second assignment it executed named a party different from the first assignment to SS Services. Second, it found that Capital 360 paid no consideration for its purported assignment from Smart Assets. And third, it found that Capital 360 did not take its interest in good faith because the Notice of Interest put it on notice of the prior assignment of the Smart Trust Deed to SS Services. The court set aside Capital 360's interest in the Property-which also extinguished Off-Piste's interest-and quieted title to the Property in SS Services.

         American Home Mortgage's Involvement with the Property

         ¶11 Cross-appellant American Home Mortgage Servicing Inc. (AHM)[3] also claims an interest in the Property, which arose as a result of Smith conveying the Property to Zach Sorensen by warranty deed in 2006, after the Smart Trust Deed had been recorded. Sorensen financed his purchase with loans from Castle & Cooke Mortgage LLC, and he secured the loans' promissory notes by executing trust deeds to the Property. The trust deeds named Castle & Cooke as the lender and Mortgage Electronic Registration Systems Inc. (MERS) as the beneficial interest holder of the deed and the nominee of the lender as well as the lender's "successors and assigns."[4] These trust deeds were recorded, and the title company's failure to clear the Property of prior encumbrances, among them the Smart Trust Deed, was a matter of contention below but is not an issue on appeal. Castle & Cooke then apparently endorsed one or both notes in favor of AHM, which endorsements carried with them an assignment of interest in the trust deeds securing the notes.[5] See Utah Code Ann. § 57-1-35 (LexisNexis 2010) ("The transfer of any debt secured by a trust deed shall operate as a transfer of the security therefor."). Because under the terms of the deeds MERS remained the nominee and continued to hold the deed for AHM (as a successor or assign of Castle & Cooke), this set of transactions was apparently not recorded.

         ¶12 Shane Morris did not name AHM as a defendant when he initiated the original lawsuit. Seeking "Notice[s] of Non-Interest" from various parties, Morris received a letter from Castle & Cooke's attorney that disclaimed his client's interest in the Property. But the letter also informed Morris that the reason Castle & Cooke disclaimed any interest was because it had assigned its interests to AHM, "who [was] the current party in interest to the first mortgage originated by Castle & Cooke." Morris later amended his complaint to add a quiet title action. But despite the letter, Morris continued to name Castle & Cooke as a defendant and did not add AHM or MERS as a party.

         ¶13 Later, Off-Piste filed a third-party complaint also seeking to quiet title in the Property, the essence of which we explained above. The third-party complaint did not name AHM, but Off-Piste eventually named MERS as a defendant. Within a month of joining MERS in the quiet title case, Off-Piste learned, through a telephone conversation between the manager of Off-Piste and counsel for AHM, that AHM claimed an interest in the Property. Despite that information and Off-Piste's acknowledgement that it understood the importance of "bring[ing] all the parties [with an interest] to the litigation; otherwise, they are not covered, " Off-Piste never named AHM as a defendant. Off-Piste did, however, obtain a default judgment against MERS after MERS failed to answer the third-party complaint. The default purported to extinguish any claims that MERS had to the Property.

         ¶14 Roughly a year later, AHM moved for and was granted permission to intervene in the lawsuit. Off-Piste then moved for summary judgment against AHM on the ground that the default judgment against MERS was binding on AHM as well. Specifically, Off-Piste argued that AHM's interest flowed through the Castle & Cooke trust deeds, which named MERS as the beneficiary, and thus AHM's interest flowed through MERS itself. Because the default judgment stated that "[MERS] and all persons claiming under [MERS] have no right, title, lien, or estate in or to the [Property], " Off-Piste contended that AHM's interest had already been adjudicated-and eliminated-by the court.

         ¶15 AHM opposed the summary judgment and also filed motions to set aside the default judgment and for leave to conduct discovery. After a hearing, the court agreed with Off-Piste. It denied AHM's motions and granted summary judgment against AHM, concluding that "[t]he default judgment entered against MERS . . . is binding upon and applicable to AHM." As a result, AHM did not participate at trial. AHM now cross-appeals from the summary judgment decision.

         ISSUES AND ...


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