Beach Break Equities, LLC v. Lowell – Defendant’s Right to Restitution Hearing Following Reversal

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“As a general rule, when a judgment is reversed on appeal, the appellant is entitled to restitution for all things lost by reason of the judgment. This principle is embodied in California statutory law and settled equitable principles . . . When a landlord who has secured a writ of possession evicts a tenant before the appellate rights of the tenant have been exhausted, the landlord assumes the risk it will be subject to a full accounting and restitution if the judgment granting the writ of possession is reversed on appeal.”

Beach Break Equities is a cautionary tale to unlawful detainer plaintiffs to be strategic in how and when they recover possession.

Beach Break Equities, LLC acquired a home in 2010 in a foreclosure sale. Five years prior, Lowell supposedly took possession of the property pursuant to a written, residential lease “for five years for $1,200 per month with three automatic five-year renewals”. While not before the court in the issue on appeal, the general rule for recording and lien priority is that the first in time is first in right – in the case of mortgages recorded before the commencement of tenancies, mortgages will take priority. If they are foreclosed, they will wipe out subsequent/junior interests (including tenancies). However, California law protects certain kinds of residential tenancies at foreclosure. If the lease is “bona fide” (i.e., negotiated in good faith at arm’s length), it will survive a foreclosure.

Lowell probably advanced his claim of a twenty year residential tenancy (with no rent increases) without having to deal with controverting evidence (because Beach Break wasn’t there in 2005), but this is so far afield of the average residential lease that it is difficult to imagine that this was anything other than a gimmick between Lowell and the former owner to extract the last bit of value out of the asset the owner was about to lose. In any event…

Beach Break Equities moved for summary adjudication on the issue of possession. It won, but Lowell appealed to the Appellate Division, which reversed the judgment, finding that there were “triable factual issues on several matters including whether Beach Break had notice of Lowell’s lease; whether Lowell was a bona fide tenant entitled to notice under applicable statutes; and whether Beach Break was a bona fide purchaser”. This second dispute appears a bit pretextual, as there are firm statutory presumptions in favor of treating recitals of procedural compliance in a trustee’s deed as conclusive evidence in favor of bona fide purchasers. (See, e.g., Bank of Am., N.A. v. La Jolla Grp. II (2005) 129 Cal. App. 4th 706, 713–14, citing Cal. civ., §2924)

Either way, the bigger problem here is that it is much easier to create a dispute of material fact as to whether Lowell was a bona fide lessee in 2005 (that is, assuming you overlook the requirement that “bona fide” leases aren’t supposed to be obviously below market rate – and Lowell’s rent couldn’t go up until 2016.)

Nonetheless, this did create a dispute of material fact, which means that, when the judgment was reversed in 2013, and Beach Break Equities had already evicted Lowell and sold the property, this complicated Lowell’s “restitution hearing” and led to 14 months of “procedural maneuverings”.

Specifically, in April of 2015, Beach Break Equities attempted to amend the complaint to convert the action from an unlawful detainer (focused primarily on the issue of possession and only incidentally on damages) to a regular civil action for damages. This was denied. Then, in September of 2015, it tried to dismiss the entire case, arguing that it had an absolute right to voluntarily dismiss its own action, even if this would prejudice Lowell. This was also denied.

Finally, on the eve of trial, it moved to exclude evidence of restitution, arguing that Lowell was required to cross-complain for this relief, and he hadn’t. The trial court granted this motion, and Lowell appealed.

“Both sides agree the sole issue on appeal is whether a party who has obtained a reversal of a judgment in an unlawful detainer case must file a cross-complaint seeking restitution to obtain this form of relief.”

The Fourth District Court of Appeal found that, “[a]s a general rule, when a judgment is reversed on appeal, the appellant is entitled to restitution for all things lost by reason of the judgment”, citing to Section 908 of the Code of Civil Procedure.

It concluded that Lowell was entitled to a restitution hearing, noting that, “while the plaintiff has the right to dismiss the action before trial, where no counterclaim or request for affirmative relief has been filed, that right, after a trial and reversal of the judgment, is subject to the right of the defendant to restoration of benefits lost by virtue of the erroneous judgment. The court has inherent power to enforce that right, unaffected by the right of the plaintiff to dismiss the action. The existence of the power to restore benefits after reversal flows from the rule that upon reversal the action is as though it had never been tried, and the court will, where justice requires it, place the parties as nearly as may be in the condition in which they stood previously”.

The court took no position on the merits of Lowell’s right to restitution, merely noting that he was entitled to the hearing. But a determination in 2016 about dispossession in 2011 followed by a sale of the property, would seem to make it very difficult to put the parties back to their positions prior to the motion for summary adjudication. It is difficult to speculate how the equities will play out in the hearing. Ultimately, “caveat emptor” isn’t a very satisfying adage for landlords here. Perhaps the lesson is to keep an eye on your standard of review when you win possession, and consider negotiating a stay pending appeal.