Tailwind v. Wells Fargo

NOTICE: NOT FOR OFFICIAL PUBLICATION.
UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL
AND MAY BE CITED ONLY AS AUTHORIZED BY RULE.

IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE

TAILWIND PROPERTIES, L.L.C., Plaintiff/Appellee,

v.

WELLS FARGO BANK, N.A., Defendant/Appellant.

No. 1 CA-CV 19-0402
FILED 5-12-2020

Appeal from the Superior Court in Maricopa County
No. CV2017-096604
The Honorable Steven P. Lynch, Judge Pro Tempore

VACATED; REMANDED

COUNSEL

The Hendrix Law Office, P.L.L.C., Gilbert
By Heather M. Hendrix
Counsel for Plaintiff/Appellee

Wright, Finlay & Zak, LLP, Phoenix
By Joel F. Newell
Counsel for Defendant/Appellant
 TAILWIND v. WELLS FARGO
Decision of the Court

MEMORANDUM DECISION

Judge Maria Elena Cruz delivered the decision of the Court, in which
Presiding Judge Lawrence F. Winthrop and Judge David B. Gass joined.

C R U Z, Judge:

¶1 Wells Fargo Bank, N.A. (“Wells Fargo”) appeals the superior
court’s denial of its motion to set aside a default judgment in favor of
Tailwind Properties, L.L.C. (“Tailwind”). For the following reasons, we
vacate the default judgment and remand for further proceedings.

FACTUAL AND PROCEDURAL HISTORY

¶2 In 2001, Dave L. Winant (“Winant”) purchased real property
on East Wagoner Road in Phoenix. In 2007, Winant obtained a $215,000
loan from Integrity Funding (“Integrity”) and executed a corresponding
note and a deed of trust securing Integrity’s interest in the property.
Integrity recorded the deed of trust.

¶3 At some point, Integrity purportedly sold the note and deed
of trust to Wells Fargo. Ocwen Loan Servicing (“Ocwen”), on behalf of
Wells Fargo, obtained possession of the note, and on March 1, 2013, the
servicing rights to the loan were transferred to Ocwen. Ocwen then began
sending mail related to servicing the loan to Winant at the property, and
Winant started making payments to Ocwen. Wells Fargo and Ocwen never
obtained a written assignment of the deed of trust from Integrity nor
recorded any instrument evidencing an interest in the property.

¶4 In 2017, Andrew Smith (“Smith”) of Tailwind offered to buy
the property from Winant and inquired if there were any loans on the
property. Winant advised Smith that there was a loan, and Smith told
Winant that he “would take care of it.” Winant asked Smith if he needed
the loan number or contact information for the servicer. Smith replied that
he “didn’t need that information because it was a matter of public record.”

¶5 On October 20, 2017, Winant conveyed his interest on the
property to Tailwind. Winant stopped making payments on the loan, and
Ocwen continued to send mail to Winant at the property. After purchasing
the property, Tailwind obtained a litigation guarantee from a title company

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showing that Integrity had a recorded interest in the property, namely the
2007 deed of trust.

¶6 On November 2, 2017, Tailwind filed a quiet title action
against Integrity. Tailwind also named all “unknown or unrecorded heirs,
devisees, successor-in-interest, or assignees” of Integrity as defendants. On
the same day, Tailwind filed a lis pendens with the Maricopa County
Recorder. Tailwind attempted multiple times to serve process on Integrity,
but service of process proved difficult because Integrity had dissolved in
2015. Tailwind eventually served Integrity through the Arizona
Corporation Commission. Although Tailwind was aware of Integrity’s
inactive status at the time of service, Tailwind did not attempt to serve
process by publication or any other means on unknown or unrecorded
assignees of Integrity.

¶7 After no response to the quiet title complaint, Tailwind filed
a notice and application for entry of default. The superior court entered a
default judgment on January 24, 2018, against Integrity and any unknown
or unrecorded assignees. Although the judgment lodged by Tailwind states
that the unknown and unrecorded parties were served with process, no
such service was ever effected.

¶8 Still unaware of Tailwind’s quiet title action, and due to
Winant’s failure to meet the monthly loan payment obligation, the trustee
under the deed of trust began foreclosure proceedings on behalf of Wells
Fargo and Ocwen. As a result of the foreclosure proceedings, on March 16,
2018, Ocwen discovered the lis pendens previously filed by Tailwind. Wells
Fargo then discovered the default judgment quieting title to the property,
contacted Tailwind, and had informal settlement discussions from March
to August 2018. On June 25, 2018, Wells Fargo filed a motion to set aside
the default judgment. The court denied Wells Fargo’s motion to set aside
the default judgment pursuant to Arizona Rule of Civil Procedure (“Rule”)
60(b). Wells Fargo timely appealed, and we have jurisdiction pursuant to
Arizona Revised Statutes (“A.R.S.”) section 12-2101(A)(2).

DISCUSSION

¶9 Wells Fargo argues the superior court abused its discretion
when it denied the motion to set aside the default judgment. Wells Fargo
asserts its failure to answer the quiet title action, as an unknown or
unrecorded successor-in-interest, was the direct result of Tailwind’s
rejection of the loan servicer information offered by Winant and its
resulting failure to identify, name, serve, inform or notify Wells Fargo of

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the action. Wells Fargo, therefore, argues it did not respond as a result of
surprise or excusable neglect. See Ariz. R. Civ. P. 60(b)(1).

I. Standard of Review

¶10 “At the outset we note that it is a highly desirable legal
objective that cases be decided on their merits and that any doubts should
be resolved in favor of the party seeking to set aside the default judgment.”
Hirsch v. Nat’l Van Lines, Inc., 136 Ariz. 304, 308 (1983). Nonetheless, “[w]e
view the facts in the light most favorable to upholding the trial court’s
ruling on a motion to set aside a default judgment.” Ezell v. Quon, 224 Ariz.
532, 534, ¶ 2 (App. 2010). To be entitled to the relief it seeks, Wells Fargo
must show: “1) that its failure to file a timely answer was excusable under
one of the subdivisions of Rule 60[(b)], 2) that it acted promptly in seeking
relief and 3) that it had a substantial and meritorious defense to the action.”
Almarez v. Superior Court, 146 Ariz. 189, 190 (App. 1985).

II. Surprise or Excusable Neglect

¶11 Wells Fargo first argues its lack of notice of the sale from
Winant to Tailwind, coupled with no knowledge of the pending quiet title
action until Wells Fargo started to proceed with its non-judicial foreclosure
rights against Winant, qualifies as “surprise” under Rule 60. Further, Wells
Fargo argues its delayed filing was the result of “excusable neglect” because
it was unaware of Tailwind’s lawsuit to quiet title and the resulting default
judgment.

¶12 The superior court may relieve a party from a final default
judgment if it can show surprise or excusable neglect. Ariz. R. Civ. P.
60(b)(1). “The standard to be met in setting aside a default judgment, for
mistake, inadvertence, surprise or excusable neglect, is whether the conduct
causing the default might be the act of a reasonably prudent person under
the same circumstances.” Ramada Inns, Inc. v. Lane & Bird Advert., Inc., 102
Ariz. 127, 129 (1967). In response to Wells Fargo’s claim of surprise or
excusable neglect, Tailwind claims Wells Fargo’s failure to disclose the
specific terms under which it became a successor-in-interest or holder of the
note somehow relieved Tailwind of any duty to comply with notice of the
action to unknown or unrecorded parties. But Tailwind’s argument misses
the point: the rule in Arizona is that the security interest follows the note,
even absent an assignment. A.R.S. § 33-817; In re Vasquez, 228 Ariz. 357,
359-60, ¶ 8 (2011). Therefore, no assignment—recorded or otherwise—is
needed for Wells Fargo to establish its legal interest in the subject property.
Once established, Wells Fargo only needs to show that its delay in moving

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to set aside the judgment was consistent with that of a reasonably prudent
person under the circumstances.

¶13 Tailwind relies on the recorded lis pendens as sufficient notice
of the proceedings to Wells Fargo. However, a lis pendens applies
prospectively to give notice to prospective purchasers or lenders that
litigation is underway which affects title to the real property. Delo v. GMAC
Mortg., L.L.C., 232 Ariz. 133, 136, ¶ 11 (App. 2013). A lis pendens is a “mere
gesture” that does “not satisfy due process notice requirements.” Id. at 138,
¶ 17 (quoting Roberts v. Robert, 215 Ariz. 176, 180, ¶ 19 (App. 2007)). Here,
the lis pendens filed by Tailwind was recorded at least four and one-half
years after Wells Fargo had acquired its interest in the property and was
collecting regular monthly mortgage payments on the same. Recording of
the lis pendens did not adequately notify or inform Wells Fargo of the
pending quiet title action.

¶14 Wells Fargo’s conduct in failing to answer Tailwind’s
complaint, which led to the default judgment, was consistent with the
conduct of a reasonably prudent person without notice of the pending
action. Tailwind’s failure to conduct the required due diligence and give
due notice to those with an unrecorded interest resulted in Wells Fargo’s
surprise and excuses Wells Fargo’s own “neglect” in answering the lawsuit
prior to entry of the default judgment.

III. Wells Fargo Acted Promptly in Seeking Relief

¶15 Rule 60(c)(1) requires that a motion to set aside a default
judgment “be made within a reasonable time [and] no more than 6 months
after the entry of the judgment.” Ariz. R. Civ. P. 60(c)(1). “What is a
‘reasonable time’ within which to make the motion must depend on the
circumstances of the particular case.” Marquez v. Rapid Harvest Co., 99 Ariz.
363, 366 (1965) (quoting Ariz. R. Civ. P. 60). “Although the moving party is
‘required to show good reason for his failure to take appropriate action
sooner’ and should offer ‘some explanation of the delay in seeking relief,’
‘where no intervening rights have attached in reliance upon the judgment,
any doubt should be resolved in favor of securing a trial upon the merits.’”
Hilgeman v. Am. Mortg. Sec., Inc., 196 Ariz. 215, 220, ¶ 16 (App. 2000)
(quoting Marquez, 99 Ariz. at 365-66).

¶16 Default judgment for Tailwind was filed on January 24, 2018.
Wells Fargo claims it first learned of it sometime in March 2018, after Wells
Fargo commenced foreclosure of the mortgage loan on February 28, 2018.
Wells Fargo’s undisputed position is that its June 25, 2018 motion to set

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aside the default judgment was filed only after negotiations with Tailwind
failed.

¶17 A review of the record reveals that from March to June 2018,
lawyers for Wells Fargo and Tailwind consistently communicated to
attempt to “come to a resolution acceptable to both sides without an
expensive court fight with an undetermined outcome.” At one point, Wells
Fargo advised that it planned to file a motion to set aside, when Tailwind
responded, “there is no reason for you needlessly to run up fees for your
client . . . [t]he property isn’t going anywhere.” During this time, the parties
extended multiple offers and counteroffers. The parties also sought an
appraisal of the property, and Wells Fargo attempted to get an affidavit
from Winant in support of its position that Tailwind failed to avail itself of
information that would give constructive notice of Wells Fargo’s interest.
However, after multiple attempts to email and call Winant, Wells Fargo was
unable to get any response from Winant. At that time, and after another
failed offer, Wells Fargo advised that it would be filing a motion to set aside
the judgment. In an attempt to still settle, Tailwind asked Wells Fargo “to
hold off” on filing the motion. Wells Fargo subsequently filed its motion
on the same day, June 25, 2018, three months after learning of the judgment.

¶18 We note that the court did not find that the time it took Wells
Fargo to file its motion to set aside the judgment was unreasonable; it
denied Wells Fargo’s motion on other grounds. See, e.g., Hirsch, 136 Ariz.
at 309 (noting that because the defendant failed to establish excusable
neglect, the court did not consider the timing and meritorious defense
issues). Wells Fargo’s motion was filed within six months of entry of the
default judgment, as required by Rule 60(c)(1). In light of the strong policy
that cases should not be decided by default, Wells Fargo’s and Tailwind’s
attempts to settle all the way up to the day the motion was filed is “good
reason” for the delay. See Hilgeman, 196 Ariz. at 220, ¶ 16. Wells Fargo also
stands to be stripped of a lien of around $170,000, and nothing in the record
reveals that Tailwind acted upon reliance on the judgment during the delay
resulting in prejudice to itself. See id. at ¶ 17 (citing Staefa Control-Sys., Inc.
v. St. Paul Fire & Marine Ins. Co., 875 F. Supp. 656, 658 (N.D. Cal. 1994)
(noting that “passage of time alone is not dispositive” and finding three-
month delay reasonable considering prejudice to moving party and no
prejudice to nonmoving party)); see also Roll v. Janca, 22 Ariz. App. 335, 338
(1974) (finding amount in controversy of $25,000 gave rise to a strong
presumption of trial on the merits). Wells Fargo provided good reason for
its decision not to file sooner, including Tailwind’s requests that it not do
so. When viewed in the light of long-standing authority that any doubt

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should be resolved in favor of trial on the merits, Wells Fargo’s three-month
delay was not unreasonable.

IV. Substantial and Meritorious Defense to the Action

¶19 The party challenging a default judgment must “set forth facts
which, if proved at the trial, would constitute a meritorious defense.”
Richas v. Superior Court, 133 Ariz. 512, 517 (1982). However, establishing a
meritorious defense does not require that the moving party show that it will
likely prevail at trial. Cline v. Ticor Title Ins. Co. of Cal., 154 Ariz. 343, 348 n.5
(App. 1987). Winant’s affidavit establishes he sold the property to
Tailwind, Tailwind inquired and was advised of the pending mortgage
loan on the property, and Tailwind refused Winant’s offer for details
regarding the loan and the identity of the loan servicer. Ocwen’s affidavit
shows: it services the loan, holds the note on behalf of Wells Fargo, and the
formal assignment of the deed of trust to Wells Fargo could not be obtained
because Integrity was dissolved. Because Arizona law does not require that
a deed of trust be recorded to be valid, A.R.S. §§ 33-412(B), -817, and because
“[o]ne is not a bona fide purchaser if he fails to avail himself of information
within reach that, if pursued, would have revealed an adverse interest,”
Hall v. World Sav. & Loan Ass’n, 189 Ariz. 495, 501 (App. 1997), Wells Fargo
has established a meritorious defense. Therefore, the superior court abused
its discretion in failing to set aside the default judgment.

CONCLUSION

¶20 For the foregoing reasons, we vacate the default judgment
and remand the matter for further proceedings consistent with this
decision.

AMY M. WOOD • Clerk of the Court
FILED: AA

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