Deutsche Bank Nat’l Tr. Co. v. Pheasant Grove LLC – 8/23/2018

September 4, 2018

Arizona Court of Appeals Division One holds that when a claim for reformation is time-barred, a request for declaratory judgment seeking substantively the same relief as the reformation claim is also time-barred.

Homeowners financed the purchase of Lots 8 and 9 with a loan and recorded a deed of trust naming those two lots in favor of their lender.  When the homeowners refinanced the loan in 2003, the lender released the prior deed of trust and recorded a deed of trust against only Lot 9.  The lender subsequently sold the 2003 deed of trust to a bank.  The homeowners then borrowed additional funds, recorded another deed of trust against both Lots 8 and 9 in favor of a different lender, defaulted on that loan, and an investor purchased both Lots 8 and 9 in a trustee’s sale.  After the trustee’s sale, the homeowners defaulted on the 2003 deed of trust owned by the bank.  The bank commenced an action to reform the 2003 deed of trust to include both Lots 8 and 9, quiet title as to the investor’s interest in Lots 8 and 9 as inferior to that of the bank, and grant declaratory relief that the bank’s interest encumbered both Lots 8 and 9 and was superior to that of the investor.  The investor claimed the bank’s action was barred by the statute of limitations, the trial court agreed, and granted the investor’s motion as to all claims.

The bank appealed the dismissal of its declaratory judgment action, and the Court of Appeals affirmed.  When determining the limitations period applicable to a claim for declaratory relief, courts examine the substance of the action to identify the relationship out of which the claim arises and the relief sought.  The Court rejected the bank’s claim that its declaratory judgment action was timely because it was governed by a six-year statute of limitations that commenced in 2011 when the investor acquired the property.  Instead, the Court concluded that the legal effect of the declaratory judgment action was reformation of the 2003 deed of trust to correct for the omission of Lot 8, applied the three-year statute of limitations for deed reformation commencing in 2003, and concluded the suit was untimely.  The Court also concluded that the doctrine of replacement of mortgages—which allows a senior lender that records a replacement mortgage to maintain priority against the holder of an intervening interest—did not apply to the bank’s claim because there was no intervening lender between the homeowners’ first loan and the 2003 refinancing.

Judge Howe authored the opinion; Judges Beene and Cattani joined.