Ayala v. Dawson – First District Court of Appeal Finds Would-Be Buyer Collaterally Estopped To Claim Interest in Property Following Unsuccessful Eviction Defense

“Ayala could have moved to consolidate the unlawful detainer proceeding with this action, thus requiring the court to determine whether the issues presented were so complex and so intertwined with the issue of title that ‘the entire case [should be] treated as an ordinary civil action, not as a summary proceeding’ (Martin-Bragg v. Moore (2013) 219 Cal.App.4th 367, 387), but he did not do so. Instead, he ‘acceded to the summary and expedited procedures of unlawful detainer with respect to’ his claim to equitable title.”

In Ayala v. Dawson, the First District Court of Appeal navigated the collateral estoppel created by an unlawful detainer defendant’s litigation of his ownership of the property while simultaneously seeking to litigate his own breach of contract claims.

Ayala wanted to purchase a multiunit property in Vacaville, but he couldn’t qualify for a mortgage, so he asked his friend Dawson, a real estate broker, to actually buy and finance the property with Ayala’s down payment. According to Ayala, he would then make installment payments until he paid it off. In addition to the down payment, Ayala made monthly payments that exceeded the principal and interest on the mortgage. He supposedly also made hundreds of thousands of dollars in improvements over the 12 years he lived there.

When Ayala moved in, he actually executed a form titled “Residential Lease with Option To Purchase”, later arguing that he thought he was signing an installment sales contract, not a lease with an option.

According to Dawson, the option expired in 2004. By 2011, Dawson was eager to refinance the property, as a prior refinancing led to negative cash flow. Meanwhile, Ayala had begun paying rent late and allowing the property to fall into disrepair, and this prevented Dawson from refinancing. Dawson offered to sell him the property again anyway, taking into account the down payment but characterizing the monthly payments as “rent” instead of “installment payments”, and Ayala refused on the basis that he believed he was already the owner.

Ayala sued for, among other things, specific performance on the sales contract. Dawson meanwhile filed an eviction lawsuit, which Ayala originally challenged with a Delta Motion To Quash – an evidentiary motion that attacks the jurisdiction of a court in unlawful detainer on the basis that the plaintiff cannot allege the requisite landlord-tenant relationship. Ayala claimed he was not a tenant, but rather a vendee on the installment contract.

The unlawful detainer court then held a one and a half day evidentiary hearing on this issue, ultimately denying the motion. Ayala took a writ on the order, and the appellate division affirmed the trial court. However, Ayala went into default in the unlawful detainer. Dawson later brought a motion for summary judgment in Ayala’s case, arguing that Ayala’s motion to quash had already unsuccessfully litigated this claim. The First District Court of Appeal affirmed on the theory that Ayala was now collaterally estopped from relitigating the issue in the second lawsuit.

Interestingly, Ayala had argued that the entry of a clerk’s judgment by default in the unlawful detainer case was not a judgment on the merits. Generally, the entry of a default judgment would not be considered on the merits. However, a Delta Motion to Quash is essentially a motion for summary judgment in the form of a special appearance challenge to jurisdiction. Unlawful detainers are unique in allowing a defendant to fully litigate a material aspect of the case before actually appearing in the action; the clerk’s default judgment could still follow a determination subject to issue preclusion, even if the judgment was not itself on the merits.