Ung v. Koehler

Filed 10/16/07 Ung v. Koehler CA1/1

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION ONE

In 1991, plaintiff Mui Ung gave a promissory note to defendant Henry Koehler, secured by a deed of trust on real property. Over 10 years later, defendant filed a notice of default and sought nonjudicial foreclosure to recover unpaid sums under the note. In an earlier lawsuit, which was appealed to this court, plaintiff unsuccessfully contended that the notice of default was time-barred.

After the prior appeal was decided, plaintiff sought to redeem the property, but she and defendant differed on the outstanding balance of the note. Plaintiff filed this action for declaratory relief as to the amount owing and an injunction to prevent defendant from proceeding with foreclosure until that issue had been settled. Opposing the injunction, defendant contended that plaintiff was barred by the doctrine of res judicata from challenging the outstanding balance stated in the notice of default because the issue had not been raised in her initial lawsuit. The trial court rejected defendants argument and granted an injunction against foreclosure.

Rather than appeal entry of the injunction, defendant moved to strike portions of the complaint on the same res judicata theory. When that was unsuccessful, defendant asked the trial court to modify or dissolve the injunction, again on res judicata grounds. Defendant has now appealed the trial courts denial of the latter motion. We affirm, holding that the trial court did not abuse its discretion in denying the motion to modify or dissolve and that res judicata does not bar plaintiffs claim for redemption.

I. BACKGROUND

This is the second appeal to result from this dispute. The background is set out in our first decision, reported as Ung v. Koehler (2005) 135 Cal.App.4th 186 (Ung I), which we incorporate by reference. As explained in Ung I, plaintiff executed a promissory note to defendant in December 1991 that was secured by deeds of trust to two real properties in Oakland. Although the note matured at the end of 1992, defendant apparently took no measures to collect until April 2004, when he recorded a notice of default against one of the two Oakland properties. Plaintiff filed Ung I in an effort to prevent nonjudicial foreclosure, contending that the statutory time period for enforcing the security interest in the deed of trust had expired and seeking a permanent injunction barring its enforcement. (Id. at p. 191.)

Plaintiffs contention turned on the construction of the Marketable Record Title Act (Civ. Code, 880.020 et seq.), which governs the time limits for enforcing security interests in a deed of trust. In Ung I, we reversed the trial courts grant of summary judgment and entry of a permanent injunction in plaintiffs favor, concluding that defendants filing was not time-barred. (Ung I, supra, 135 Cal.App.4th at p. 205.) Following remand, the trial court entered judgment for defendant in Ung I on June 12, 2006.

In the interim, the parties had discussed the total amount due by plaintiff under the promissory note. Because of the accrual of additional interest and attorney fees incurred in Ung I, defendant set the figure considerably higher than the amount stated in the notice of default.

Two weeks after entry of judgment, plaintiff filed this action. The complaint alleges that the original loan from defendant to plaintiff was usurious and that the parties entered into a novation, which plaintiff partially performed. As a result of that novation, the complaint alleges, the amount due on the loan is substantially less than the $150,000 stated in defendants notice of default. The complaint asserts causes of action for redemption under Civil Code section 2903, breach of a contract by defendant not to foreclose, declaratory relief regarding the true amount due under the promissory note and the legality of the foreclosure proceedings, and temporary injunctive relief against foreclosure.

Soon after filing the complaint, plaintiff filed an ex parte application for a temporary restraining order and preliminary injunction against foreclosure. In a declaration accompanying the application, plaintiff acknowledged that she had borrowed money from defendant to pay off a debt associated with real property in Oakland. At the time she received defendants notice of default in 2004, she had not made any payments nor spoken with defendant in eight years, and she could not locate any of her records bearing on the loan. After filing Ung I, plaintiff continued searching for her records but still could not locate them. She intensified her search after receiving this courts decision in Ung I, finally locating a file relating to the loan less than a month before this lawsuit was filed. According to plaintiff, the documents in the file demonstrated that the parties had entered into a novation regarding the original note and that the amount stated in defendants notice of default was incorrect. Plaintiff stated that she was willing to pay an amount far in excess of what she believed she actually owed on the debt in order to redeem the property, but her offer had been declined. Attached to the declaration was correspondence demonstrating that the parties discussed a novation in 1994, although nothing in the documentation reflects final agreement on a new principal sum. In the memorandum of points and authorities accompanying the motion, plaintiff noted that she was challenging not only the amount of principal and interest due, but also the amount of attorney fees demanded by defendant as part of the redemption price.

Defendant opposed entry of the preliminary injunction, arguing that there was reason to doubt plaintiffs claim of recent discovery of the purported novation documents, since plaintiffs present interpretation of the documents would have undercut the factual foundation for her legal arguments in Ung I. Discounting the possibility that the documents were only recently discovered, defendant argued that plaintiffs claims are barred by the doctrine of res judicata, since she could have raised them in Ung I.

On August 9, 2006, the trial court granted the preliminary injunction, concluding that plaintiffs claim for redemption was not barred by res judicata because it did not arise until defendant refused to provide an accurate payoff amount in 2006 and because it involved a different primary right from those asserted in Ung I. The court also concluded that plaintiffs evidence demonstrated a likelihood of success on the merits of her claim that defendant had misstated the amount due on the note in the notice of default. Defendant did not appeal the courts order.

Later that month, defendant filed a motion to strike the portions of the complaint challenging the contents of the notice of default. The basis for the motion was that these claims are barred under the doctrine of res judicata because of Koehlers successful defense and final judgment in Ung Iin other words, effectively the same argument raised and rejected in connection with defendants opposition to the motion for a preliminary injunction.

In an order filed September 28, 2006, the trial court denied defendants request to strike plaintiffs claims.[1] Explaining its holding, the court noted that [t]he primary right Ung litigated in the prior case was the right to be free from wrongful foreclosure pursuant to a particular Notice of Default. Plaintiff, who raised two defenses in that litigation, could have also raised the defense that the principal amount stated was incorrect, but that defense was not raised and the underlying factual issue was therefore not determined. Under the doctrine of res judicata, the court held, Ung is precluded . . . from now challenging the propriety of the non-judicial foreclosure, or from litigating any alleged defect in the Notice of Default. But she is not barred from litigating her right to exercise her statutory right of redemption because that constitutes a different primary right. Further, the court held, because the issue of the principal amount due was not raised or resolved in Ung I, the doctrine of collateral estoppel did not preclude plaintiff from litigating the correct pay-off amount in the current litigation.

Undeterred, less than two weeks later defendant filed a motion to modify or dissolve the preliminary injunction, again invoking the doctrine of res judicata. In doing so, defendant attempted to take advantage of what he viewed as an inconsistency in the courts ruling on the prior motion. Pointing out that the court had ruled that Ung is precluded [by res judicata] . . . from litigating any alleged defect in the Notice of Default, defendant argued that the implication of the courts order was that plaintiff may not challenge [the notice of default] on the ground that it misstates the principal amount, since such a misstatement was a defect that could have been challenged in the prior litigation.

Recognizing that the statute governing motions to modify a preliminary injunction requires a material change in circumstances or some similar justification (Code Civ. Proc.,  533), defendant argued that, in effect, the court had created changed circumstances by contradicting itself. Alternatively, defendant argued, modifying the preliminary injunction would serve the interests of justice because the trial court had erred when it ruled that the right of redemption was a different primary right than the right involved in Ung I.

The trial court denied the motion, reiterating the reasoning of its prior holding that res judicata does not bar plaintiffs claim for redemption. The court also recognized [t]his is the third time the court has ruled on this issue, now dressed up in differing procedural garments without complying with the statutory requirements to present new facts or law. (See [Code Civ. Proc.,] 1008; 533.)

II. DISCUSSION

Defendant has appealed the trial courts denial of his motion to modify or dissolve the preliminary injunction, arguing in this court the theory of res judicata he so thoroughly exhausted below.

A. The Trial Courts Ruling Under Code of Civil Procedure Section 533

We are required to deny this appeal without regard to our views on res judicata. Under Code of Civil Procedure section 533, the trial court was granted discretion to modify or dissolve the preliminary injunction upon a showing that there has been a material change in the facts upon which the injunction or temporary restraining order was granted, that the law upon which the injunction or temporary restraining order was granted has changed, or that the ends of justice would be served by the modification or dissolution of the injunction or temporary restraining order. Reviewing the trial courts ruling for abuse of that discretion (Professional Engineers v. Department of Transportation (1997) 15 Cal.4th 543, 562), we find no basis for dissolution of the injunction, even if the trial court was wrong in concluding that res judicata did not bar plaintiffs redemption claim.[2]

Between August 2006, when the trial court granted the injunction, and October 2006, when defendant sought to dissolve or modify it, there was no relevant change in either the parties circumstances or the relevant law. On appeal, defendant does not even attempt to argue that such a change occurred.[3] Rather, defendant argues that the ends of justice would be served by dissolution of the injunction because the trial court erred in evaluating the res judicata impact of Ung I.

First, this argument ignores the dispute between defendant and plaintiff over the proper amount of ancillary expenses, such as attorney fees, demanded by defendant as part of the cost of redemption. When the trial court granted the preliminary injunction, it noted that [p]laintiff has raised significant questions, unanswered in Defendants oppositions, as to whether the attorneys fees and costs . . . are reasonable and were actually incurred by Koehler. Even if the trial court was wrong in its evaluation of the res judicata issue, it would have been justified in refusing to dissolve the injunction against foreclosure until the remaining redemption price issues had been settled.

Second, the trial court did not abuse its discretion in concluding that the ends of justice would not be served by dissolution of the injunction even if its legal conclusion was in error. Defendant is not prejudiced by the injunction. He is seeking over $500,000 from plaintiff, far more than she concedes is owed. Until defendant is paid, plaintiffs debt continues to accrue interest at an above-market rate. The debt is secured by a deed of trust on real property that, plaintiff has suggested, is worth far more than even the amount demanded. Finally, the issue of res judicata will not be lost or abandoned if the injunction is continued in place. At some point, a final judgment will issue, and defendant will be able to raise the argument on appeal at that time.[4]

In contrast, leaving the injunction in place will ensure that plaintiff is not forced to sell off her property unnecessarily or required to pay an amount far more than she actually owes to save it from forced sale. We find no abuse of discretion in the trial courts decision to retain the injunction.

B. Res Judicata

Because the trial courts denial of defendants motion to dissolve the injunction under Code of Civil Procedure section 533 did not constitute a reversible abuse of discretion, we are not required to address the correctness of the courts res judicata ruling. We nonetheless exercise our discretion to reach that question because it presents an issue of law that has been fully briefed by the parties and will continue to be a matter of contention in the litigation. (E.g., In re Hoddinott (1996) 12 Cal.4th 992, 996, fn. 3; Keitel v. Heubel (2002) 103 Cal.App.4th 324, 332 [court has the discretion to address issues of importance to the parties].) By resolving the issue now, we may save the parties the expense of a third appeal.

We agree with the trial court that plaintiff is not barred from litigating the issue of the correct amount due under the promissory note (or its successor agreement, if any), and for much the same reasons. As we explain below, the right of redemption is neither a cause of action for purposes of primary right doctrine, nor is it an affirmative defense to enforcement of the debt or the notice of default. For that reason, the doctrine of res judicata does not prevent plaintiff from raising the claim now, despite her failure to raise it earlier. Further, as the trial court noted, plaintiff is not precluded from raising the factual issue of the novation in the context of her claim for redemption because that factual issue was not actually litigated in Ung I.

The doctrine of res judicata was addressed generally in Mycogen Corp. v. Monsanto Co. (2002) 28 Cal.4th 888, 896897, footnote omitted (Mycogen): Res judicata describes the preclusive effect of a final judgment on the merits. Res judicata, or claim preclusion, prevents relitigation of the same cause of action in a second suit between the same parties or parties in privity with them. . . . [Citation.] Under the doctrine of res judicata, if a plaintiff prevails in an action, the cause is merged into the judgment and may not be asserted in a subsequent lawsuit; a judgment for the defendant serves as a bar to further litigation of the same cause of action. [] A clear and predictable res judicata doctrine promotes judicial economy. Under this doctrine, all claims based on the same cause of action must be decided in a single suit; if not brought initially, they may not be raised at a later date.

Application of the doctrine here is complicated by the unusual procedural posture created by defendants pursuit of nonjudicial foreclosure: Plaintiff, who would normally be the defendant, is the plaintiff, and vice versa. If defendant had sought to collect on the promissory note through judicial procedures, he would have filed an appropriate action.[5] In that action, plaintiff would have been able to assert any defenses to collection that she had, and the action would have culminated in a judgment specifying the amount due, if any, and the extent of defendants right to foreclose. Because the power of sale in the deed of trust permits defendant to proceed without invoking judicial process, however, plaintiff was not provided a ready forum in which to present her defenses. Instead, she was required to file her own action, Ung I, to assert those defenses. Although she was listed as the plaintiff in that action, her claims were, in fact, affirmative defenses to defendants right to nonjudicial relief under the note and deed of trust.

Because of this role reversal, the primary right doctrine, argued by plaintiff and relied on by the trial court, does not resolve the dispute. Under Californias res judicata doctrine, courts look to whether two proceedings involve the same cause of action. (Mycogen, supra, 28 Cal.4th at p. 897 [all claims based on the same cause of action must be decided in a single suit; if not brought initially, they may not be raised at a later date].) The primary right doctrine is invoked to resolve this question; all claims seeking to enforce the same primary right are regarded as part of the same cause of action, regardless of whether they involve the same legal theory. (Id. at p. 904.) A primary right is determined exclusively by reference to the plaintiffs injury. As far as its content is concerned, the primary right is simply the plaintiffs right to be free from the particular injury suffered. [Citation.] (Crowley v. Katleman (1994) 8 Cal.4th 666, 681; see also Craig v. County of Los Angeles (1990) 221 Cal.App.3d 1294, 1301 [  the harm suffered   is   the significant factor   in defining a primary right]; accord, Balasubramanian v. San Diego Community College Dist. (2000) 80 Cal.App.4th 977, 992.) In Ung I, plaintiff did not allege any injury; on the contrary, she was admittedly the beneficiary of a loan on which she had shirked her payment obligations for many years. Rather, her claims for equitable relief were actually affirmative defenses to foreclosure, and thereby to payment of the debt. In the absence of injury, the primary doctrine is inapplicable.

That does not mean that the doctrine of res judicata does not apply to Ung I. Although most often raised with respect to plaintiffs claims, the doctrine of res judicata also requires a defendant to assert all defenses to [ ] recovery that he or she might have when presented with a plaintiffs lawsuit. (State Bd. of Equalization v. Superior Court (1985) 39 Cal.3d 633, 641; see Warga v. Cooper (1996) 44 Cal.App.4th 371, 378.)

The claim for redemption that plaintiff is asserting in this action is not, however, a defense to recovery. The statutory right to redeem prior to a nonjudicial sale, also known as  equity of redemption  (4 Miller & Starr, Cal. Real Estate (3d ed. 2000)  10:195, p. 613 (11/2003)), permits a person with an interest in the property to extinguish the lien by a full payment of all sums due by the terms of the secured obligation, including all costs and fees, at any time after the debt is due and before the property is sold at a foreclosure sale. (Ibid., citing Civ. Code,  29032905, italics added.) The right of redemption is therefore neither a defense to payment of the debt secured by the deed of trust nor to the beneficiarys security interest. It is merely an alternative means to satisfy the debt. By paying in full the amounts due, plus all costs and fees, the debtor may compel the beneficiary of the deed of trust to accept direct payment on the loan rather than payment through forced sale of the property. In order to forestall foreclosure, however, the debtor must capitulate to the beneficiarys legitimate demand for payment.

Because the statutory right to redeem is neither an affirmative defense to foreclosure and payment, nor a cause of action for purposes of primary right theory, res judicata does not bar plaintiffs current claim. Indeed, if plaintiff were not challenging the amount stated as due in the notice of default, her assertion of the right of redemption would create no controversy. A party seeking to redeem ordinarily may do so merely by paying a sum calculated from information provided by the beneficiary in the notice of default. (See Civ. Code,  2924, subd. (a)(1)(D), 2924c, subd. (b)(1).) If plaintiff had accepted defendants statement of the amount due, we have no doubt that she could have exercised her right of redemption by paying that amount, despite not having asserted that right in the earlier lawsuit. Defendant effectively concedes as much.[6] It is only because she disagrees with the amount due that defendant has raised the issue of res judicata.

The foregoing discussion reveals the true issue on this appeal: Defendant does not object to plaintiffs exercise of the right of redemption per se, but only to her litigation of the amount due under the promissory note. The basis for the argument is that plaintiffs assertion of the right to redeem for an amount less than that stated in the notice of default requires her to prove a novation. Because that novation could have been asserted in Ung I as an affirmative defense to payment under the promissory note, defendant argues that litigation of the issue is now barred.

As the trial court observed, it may be true that assertion of the novation as an affirmative defense would now be barred by plaintiffs failure to raise it in Ung I. When the novation is raised in the context of plaintiffs current exercise of the right to redeem, however, it is not asserted as a defense to recovery. Instead, it is merely one of the factual issues that must be resolved to determine the proper amount to be paid for redemption of plaintiffs property, along with the proper amount of interest and attorney fees and costs owed.

This coincidence of issues does not preclude plaintiff from litigating fully her assertion of the right to redeem because res judicataotherwise known as claim preclusionoperates only on the level of entire claims and defenses, not particular factual issues. Res judicata affords no basis for finding that an individual factual issue, raised in the broader context of a claim, is precluded from litigation. Because, for the reasons discussed above, plaintiffs claim for redemption is not barred by res judicata, the doctrine does not prevent her from litigating the fact of the novation in the context of that claim, even if assertion of the novation as an affirmative defense would now be precluded.[7]

As the trial court also noted, preclusion of individual factual issues is the concern of the doctrine of collateral estoppel, not res judicata. If the novation issue had, in fact, been litigated in Ung I, collateral estoppel would preclude plaintiff from raising it now. (See, e.g., Alvarez v. May Dept. Stores Co. (2006) 143 Cal.App.4th 1223, 1233.) Because the novation was never raised in Ung I, however, collateral estoppel does not preclude plaintiff from raising the issue in the context of her claim for redemption.

We acknowledge that some of the cases cited by defendant contain broad language that can be read to support defendants argument that even the factual issue of a novation is now precluded. (E.g., Pacific Mut. Life Ins. Co. v. McConnell (1955) 44 Cal.2d 715, 724725 [even though the causes of action be different, the prior determination of an issue is conclusive in a subsequent suit between the same parties as to that issue and every matter which might have been urged to sustain or defeat its determination].) Upon examination, however, all such cases turn on the time-tested principles of res judicata applied above. In McConnell, for example, the issue precluded was the tardy assertion of an affirmative defense to the validity of an agreement entered into during insurance insolvency proceedings. As the court explained its holding, [t]he basic issue before the court when the agreement was submitted for approval [in the first litigation] was the propriety of each of its provisions, and the determination of that issue is conclusive as to every matter which might have been urged to sustain or defeat its determination. (Id. at p. 725.) In other words, because the validity of the agreement had already been determined, any further affirmative defense challenging that validity was barred. Unlike McConnell, only the timeliness of the notice of default, and not its general validity, was actually adjudicated in Ung I. Accordingly, litigation of factual or legal issues relating to the validity of the notice of default that were not actually or necessarily resolved in Ung I is not now barred.

Defendant responds that even if Ung Is claims addressed only the timeliness of the notice of default, she is now barred from litigating any purported defect in the notice of default that could have been raised at the time Ung I was filed.[8] Even if plaintiff should have known of the novation at the time Ung I was filed, that constructive knowledge would not bar her current claim for redemption. California courts have consistently rejected the type of transactional test for res judicata urged by defendant, in which every claim related to the general subject matter of a lawsuit is barred from subsequent litigation. (See, e.g., Federation of Hillside & Canyon Assns. v. City of Los Angeles (2004) 126 Cal.App.4th 1180, 1203.) Instead, the California rule bars only the re-litigation of the same cause of action, which is defined by the primary right test. (Ibid.) As discussed extensively above, we conclude that the doctrine of primary rights is not relevant to this situation.

III. DISPOSITION

The order of the trial court is affirmed.

_________________________

Margulies, J.

We concur:

_________________________

Marchiano, P.J.

_________________________

Swager, J.

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[1] The court did, however, grant the motion in small part by striking a reference to the deed of trust as void and unenforceable. The trial court noted that [t]he question of the validity of the deed of trust was decided in the prior litigation.

[2] We reject plaintiffs claim that we have no jurisdiction over this appeal, since Code of Civil Procedure section 904.1, subdivision (a)(6) authorizes appeal of an order refusing to dissolve an injunction. We do agree, however, that our review is restricted to the standard of review applied to a motion under Code of Civil Procedure section 533, rather than the standard that would have been applicable to review of the original order granting the injunction. Further, we disregard defendants arguments addressed to the trial courts refusal to modify the preliminary injunction to require plaintiff to pay some theoretical undisputed amount. Because a request merely to modify an injunction is not appealable under section 904.1, we lack jurisdiction over any appeal of the trial courts refusal of that request.

[3] Defendant has not repeated his dubious argument that the trial court created a change in circumstances by issuing a ruling that was internally inconsistent.

[4] It is also worth recalling that defendant voluntarily waited over 10 years before taking any action to enforce the debt. He can hardly complain about procedural delay now.

[5] As explained in Ung I, The beneficiary of a deed of trust ordinarily has two means to enforce the security interest provided by the deed. First, Code of Civil Procedure section 725a expressly grants the beneficiary the right to bring an action for judicial foreclosure in the manner . . . of a mortgage upon such property. [Citations.] In addition, if the deed of trust contains an express provision granting a power of saleas deeds of trust invariably dothe beneficiary may pursue nonjudicial foreclosure, often called a trustees sale, under the detailed regulatory provisions of [Civil Code] sections 2924 through 2924l. [Citations.] (Ung I, supra, 135 Cal.App.4th at p. 192.) Under this remedy, sale of encumbered real property ordinarily occurs outside the sanction and supervision of the judiciary. (See Civ. Code,  2924.)

[6] Defendant concedes in his opening brief that plaintiff is barred from raising a claim for redemption only to the extent [the claim] seeks to address any issues that arose before the filing of [Ung I]. Despite various facially inconsistent statements in his brief, he does not argue that plaintiff has forfeited her right to redeem entirely. Further, he concedes that the trial court may decide the proper amount of attorney fees and costs due on redemption, an issue that arose after the filing of Ung I.

[7] Such cases as Alpha Mechanical, Heating & Air Conditioning, Inc. v. Travelers Casualty & Surety Co. of America (2005) 133 Cal.App.4th 1319 and Torrey Pines Bank v. Superior Court (1989) 216 Cal.App.3d 813, are not inconsistent with this holding. In both cases, the courts found that the assertion of affirmative defenses in a subsequent litigation was barred by the resolution of claims for relief based on the same facts in prior litigation. As noted above, we do not question that plaintiff would be precluded from asserting novation as either an affirmative defense or a claim for relief in this action. Res judicata does not, however, prevent her from proving the factual issue that she owes less to defendant than the amount stated in the notice of default, even though proving that involves proof of a novation.

[8] The premise of defendants argumentthat the novation issue could have been raised when Ung I was filedis by no means certain. In support of her preliminary injunction motion, plaintiff presented evidence suggesting that she was unaware of the novation at the time she filed Ung I. Under California law, if plaintiff can demonstrate that, at the time Ung I was filed, she had genuinely forgotten about the alleged novation, had not discovered the papers relating to the novation, and, in the exercise of reasonable diligence, could not have discovered them at that point, res judicata would not bar any claim related to the novation. (See Allied Fire Protection v. Diede Construction, Inc. (2005) 127 Cal.App.4th 150, 155156.) Although defendant attacks the credibility of plaintiffs claim of forgetting and late discovery, such an attack is irrelevant in this court. The evidentiary record has not yet been developed, and we could not, in any event, resolve such a factual issue on appeal.