Opinion
NOT TO BE PUBLISHED
Santa Clara County Super. Ct. No. 1-05-CV054592
ELIA, J.Lon Chandler and Nancy Chandler (the Chandlers) appeal from a judgment of the Santa Clara County Superior Court filed June 6, 2008. The judgment provided that the Chandlers recover from both Alliance title, and from the obligor on a promissory note, jointly and severally, the sum of $553,636.13, which included interest and penalties to the date of judgment. However, the judgment provided that a wrongfully reconveyed deed of trust was voidable, but not void; that it was effective as of October 6, 2004, as to a bona fide encumbrancer (hereafter BFE); and that the Chandlers "shall recover nothing from defendant FAB Associates." The Chandlers assert that it is only with these three provisions of the judgment that they bring this appeal. They ask this court to "reverse and vacate the appropriate portions of the Judgment entered June 6, 2008, and remand the matter to the Superior Court with instructions to correct the findings in its Statement of Decision and enter judgment accordingly."
Initially, we must determine whether the specified portion of the judgment is severable from the rest of the judgment. "The well recognized rule is that there may be an appeal from a part of a judgment only if that part is severable. [Citations.]" (American Enterprise, Inc. v. Van Winkle (1952) 39 Cal.2d 210, 216.)
"The test of whether a portion of a judgment appealed from is so interwoven with its other provisions as to preclude an independent examination of the part challenged by the appellant is whether the matters or issues embraced therein are the same as, or interdependent upon, the matters or issues which have not been attacked. [Citations.] '[I]n order to be severable, and therefore appealable, any determination of the issues so settled by the judgment... must not affect the determination of the remaining issues whether such judgment on appeal is reversed or affirmed.... Perhaps another way of saying it would be that the judgment is severable when the original determination of those issues by the trial court and reflected in the judgment or any determination which could be made as the result of an appeal cannot affect the determination of the remaining issues of the suit....' [Citation.]" (American Enterprise, Inc. v. Van Winkle, supra, 39 Cal.2d at p. 217.)
Measured by this standard, the portions of the judgment in the present case that declare that a deed of reconveyance was voidable not void and was effective as to a BFE are inseparable from the part of the judgment awarding the Chandlers the amount of $553,636.13 from both Alliance Title and the obligor on the promissory note. It is evident that if the deed of reconveyance was void, the Chandlers would be reinstated to the status quo before the wrongful reconveyance and could also enforce the rest of the judgment for the $553,636. Accordingly, we conclude that the unchallenged parts of the judgment are so interwoven with those parts of the judgment that the Chandlers have appealed as to preclude an independent examination of the part challenged by the Chandlers.
"In some states, when an appeal is taken from a portion of a judgment which cannot be separated from the remainder of it, the court will decline to hear the appeal and will dismiss it. [Citations.] However, in California, such an appeal brings before the reviewing court all of the nonseverable portions. [Citations.]" (American Enterprise, Inc. v. Van Winkle, supra, 39 Cal.2d at pp. 217-218.)
To put it another way, upon an attempted partial appeal from a nonseverable judgment, we may not engage in partial review, although we will "consider and act upon the entire judgment when necessary to accomplish justice." (Everly Enterprises, Inc. v. Altman (1960) 54 Cal.2d 761, 765.)
For reasons that follow we reverse the entire judgment and remand the case to the lower court.
Background
On December 15, 2005, the Chandlers filed a complaint against Alliance Title Company (Alliance), 1202 S. Sixth LLC, Gabriel Masri (Masri), and FAB Associates (FAB) alleging numerous causes of action. The Chandlers named FAB as a necessary party to the causes of action affecting the deed of trust, but not for purposes of any damages or monetary relief.
As to the background of their complaint, the Chandlers made the following allegations. On May 6, 2004, they loaned Masri as the managing member of 1202 S. Sixth LLC (the LLC), $400,000 secured by a deed of trust against property located at 1198 5th Street in San Jose (the 5th Street Property). Alliance was the named trustee of the deed of trust.
On or about July 15, 2004, Masri, as managing member of the LLC intended to refinance the property so as to pay off loans on the 5th Street Property and replace them with a new first loan. On or about September 1, 2004, Masri requested that the Chandlers accept in place of their existing note and deed of trust on the 5th Street Property, a substitute note and deed of trust on a piece of property that Masri represented was his personal residence located on Moody Road in Los Altos (the Moody Road Property).
Nancy Scanlon, an employee and escrow officer at Alliance, submitted a modified note and deed of trust to the Chandlers for approval. The Chandlers informed Alliance that the modified note was not acceptable and that they needed a new note and more information about the Moody Road Property. On October 4, 2004, Ms. Scanlon wrote to the Chandlers requesting that they send her a signed request for full reconveyance and the original note and deed of trust on the 5th Street Property. Thereafter, on October 6, 2004, the Chandlers submitted a signed request for full reconveyance and the original note to Alliance. The Chandlers did so with instructions to hold them until they received an acceptable substitute note and deed of trust.
On or about December 1, 2004, the Chandlers became aware that additional loans had been recorded against the title to the 5th Street Property without first paying off their original note. They requested that Alliance advise them of the status of their original note and deed of trust. In response, they received a letter from Ms. Scanlon assuring them that they still had a lien in first position on the 5th Street Property.
On January 5, 2005, Masri ceased making payments on the Chandlers' note. Thereafter, the Chandlers caused a notice of default to be recorded in the official records of Santa Clara County, under the power of sale contained in their deed of trust.
On April 4, 2005, Alliance recorded a full reconveyance of the Chandlers' deed of trust without payment to the Chandlers.
As noted, the Chandlers filed a complaint against Alliance, the LLC, Masri and FAB. The Chandlers sued Alliance for breach of fiduciary duty, escrow negligence, and breach of contract. As to the LLC and Masri, the Chandlers sued for breach of contract. As to all defendants the Chandlers sued for cancellation of the deed of reconveyance. In addition, the Chandlers asked for declaratory relief. The Chandlers sought damages against Alliance, the LLC and Masri in the sum of at least $400,000 plus interest at the rate of 10.5 percent; for declaratory relief that the reconveyance dated October 6, 2004 and recorded April 4, 2005, was void such that their deed of trust was reinstated in first position against title to the Property; attorney fees; punitive damages against Alliance and costs of suit. On January 23, 2006, the Chandlers filed a notice of lis pendens with the court. The lis pendens had been recorded on December 19, 2005.
Alliance filed an answer to the Chandlers' complaint on February 22, 2006. In their verified answer, Alliance admitted they managed the escrow process for Masri's refinance of the 5th Street Property and they had a duty to exercise the skill and care of a reasonably competent escrow holder in the transaction; that through Ms. Scanlon, their escrow agent, Alliance understood that a modified note and deed of trust submitted to the Chandlers was not acceptable and Alliance was to await further instructions from the Chandlers; that on October 4, 2004, Alliance wrote to the Chandlers and requested a signed request for reconveyance and delivery of the Chandlers' original promissory note; that on October 5, 2004, the Chandlers submitted a signed request for reconveyance and their original promissory note to Alliance with instructions to hold them until the Chandlers received an acceptable substitute note and deed of trust; that Alliance wrote to the Chandlers on November 3, 2004, to see if the issue of the substitute note and deed of trust had been resolved; that in December 2004, the Chandlers requested that Alliance advise them of the status of the escrow and their note and deed of trust; that on December 28, 2004, Alliance confirmed and assured the Chandlers in writing that they had a lien in first position on the 5th Street Property and provided them with "subordinate liens" that were recorded against the 5th Street Property; that on April 1, 2005, the new lenders, FAB, made a demand on Alliance having been insured as a first lien; and that on April 24, 2005, to protect the interest of the new lenders and itself under the title policy and disregarding the Chandlers' instructions to the contrary, Alliance recorded a full reconveyance of the Chandlers' deed of trust without payment to the Chandlers.
At trial, these admissions were read into the record by counsel for the Chandlers.
Evidence Adduced at the Court Trial
Virender Luthra testified as the manager of FAB that he had made two loans to Masri secured against title to the 5th Street Property. The first loan of $592,000 was made sometime in July 2004, at which time he became aware of the Chandlers' deed of trust that was also secured against the title to the 5th Street Property. As the lender on this loan, he issued instructions to the escrow company that the Chandlers' loan was to be paid off, but learned later that it had been subordinated to FAB's loan instead. Lon Chandler confirmed that in the summer of 2004 he was involved in subordinating his loan to some new financing that Masri was seeking.
With respect to FAB's second loan to Masri of $1,350,000, it occurred in October 2004. Luthra understood from the preliminary title report that the Chandlers still had a deed of trust secured against the title to the 5th Street Property. However, as the lender on this second loan, Luthra issued instructions to Alliance to "pay off" the Chandlers' loan and put FAB in the first position on the new loan and place FAB's first loan in the second position. Luthra admitted that the escrow settlement statement from this second loan did not indicate that the Chandlers' loan was repaid. However, he did receive a title insurance policy from Alliance that said that FAB was insured as a first deed of trust against the title on the 5th Street Property. At some point, Masri stopped making payments on FAB's loan and so FAB commenced foreclosure proceedings. The 5th Street Property was purchased by FAB on a credit bid of $1,648,000 at a trustee sale.
Thereafter, Luthra made a claim on the title insurance policy and received $1,350,000—the full amount of FAB's second loan to Masri.
Lon Chandler testified that he first learned that Masri intended to refinance the 5th Street Property when he received an email from Ms. Scanlon in September 2004 informing him that Masri was refinancing and telling him that she had drawn up a subordination agreement. After receiving the email, he emailed Ms. Scanlon that it was "unlikely" that he would subordinate to the new note. Ms. Scanlon responded to the Chandlers saying that she would await further instructions.
On October 4, 2004, the Chandlers received an email from Ms. Scanlon asking them to execute a request for full reconveyance (hereafter the October 4th email). In response to the email, the Chandlers telephoned Ms. Scanlon and told her that they would go ahead and send the documents that she had requested in her email, but that it was to be "clearly understood" that the reconveyance was not to go ahead until they received evidence of a new note and deed of trust. The Chandlers gave the original deed of trust and promissory note, along with the executed request for reconveyance to Doug Tobin, the person who had negotiated the loan from the Chandlers to Masri, so that he could take them to Ms. Scanlon at Alliance.
The Chandlers signed the request for reconveyance on October 5, 2004. Lon Chandler acknowledged that by signing the original deed of trust he was indicating that the loan had been fully paid.
At this time, the Chandlers were under the impression that Ms. Scanlon was preparing a new note and deed of trust on the Moody Road property in the same escrow. On October 22, Ms. Scanlon telephoned the Chandlers and asked for written instructions. In response, the Chandlers sent an email advising Ms. Scanlon that they were not willing to release their interest in the 5th Street Property until they received tangible evidence that a new note and deed of trust had been executed by Masri on the Moody Road Property. The email went on to say that the Chandlers had been told that a new note and deed of trust was executed by Masri with 1st American Title; and that they had been given a copy of the preliminary title report from a refinance on the Moody Road Property along with a copy of a loan statement demonstrating that the Moody Road Property had sufficient equity so they could move their loan from the 5th Street Property. In the email, the Chandlers told Ms. Scanlon "Do not reconvey our interest until these claims and promises of performance have been satisfied and delivered upon."
On November 3, 2004, Ms. Scanlon emailed the Chandlers asking if the issue with the new note and deed of trust had been "taken care of yet." The Chandlers informed her that it had not. The Chandlers did not find out that the escrow on FAB's second loan had closed until December 30, 2004. At that time, Ms. Scanlon sent him "something in writing" confirming that they did not have anything to worry about because their loan to Masri was in first position on the 5th Street Property.
The deed of reconveyance was signed by Jack K. Plecque of Alliance on October 6, 2004.
Ms. Scanlon confirmed that she was an escrow officer with Alliance in 2004 and 2005. However, she was "laid off on October 15th, and Alliance closed its doors in December." Ms. Scanlon admitted that she was the escrow officer for Masri's purchase of the 5th Street Property, the July 2004 refinance, and the October 2004 refinance.
There is no indication in the record of the year that this took place, but since Ms. Scanlon's testimony was given in March 2008, we can assume that Alliance closed up at the end of either 2006 or 2007.
On September 21, 2004, Ms. Scanlon received an email from Masri asking her to subordinate the Chandlers' loan in a new round of financing. Ms. Scanlon recollected that she had a conversation with the Chandlers about subordinating their loan, but was told by someone that a reconveyance would be done instead.
Nevertheless, Ms. Scanlon admitted that she sent an email to the Chandlers that prompted a reply in which the Chandlers stated they would not "rush into this subordination thing." Ms. Scanlon replied that she would wait for the Chandlers to work out the details with Masri. At some point during the escrow period, Ms. Scanlon learned that the Chandlers were not willing to subordinate their loan to the new loan from FAB. She admitted, however, that she was told that "they" wanted her to do a new note outside escrow. Ms. Scanlon clarified that by outside of escrow, she meant in another escrow.
Ms. Scanlon denied that when she sent the Chandlers the October 4th email requesting that they execute a request for full reconveyance and send her the original note and deed of trust, that she received a phone call from the Chandlers saying that they were expecting a substitute note and deed of trust. However, she admitted that Masri told her that "it would be handled outside of escrow," but maintained that this happened well before she sent the email to the Chandlers on October 4. Ms. Scanlon was forced to admit that at no time did the Chandlers tell her that they were willing to hold an unsecured promissory note on the 5th Street Property.
Ms. Scanlon confirmed that the escrow on the FAB loan closed on October 7, 2004, and she sent the FAB deed of trust to be recorded the same day. Ms. Scanlon recollected that Jack Plecque, an officer of Alliance as trustee, signed the full reconveyance on October 6, 2004, and she notarized his signature. Ms. Scanlon admitted that this signed full reconveyance was in her file and she placed on it a yellow post-it note that stated, "do not record." Ms. Scanlon believed that she had had a conversation with the Chandlers wherein they told her not to record the reconveyance, but that this conversation took place after escrow closed. She denied that the Chandlers told her to hold the request for reconveyance until after they received a substitute note and deed of trust.
The Trial Court's Findings
Relevant to this appeal, Judge Elfving made the following written findings based on the evidence adduced at the trial:
1. Since the LLC was the obligor on the Chandlers' deed of trust and because the deed of trust securing the Chandlers' promissory note had been reconveyed, the Chandlers should recover against the LLC the full amount of the note with interest accruing at the rate set forth in the note until paid.
2. The preponderance of the evidence established that the Chandlers delivered to Ms. Scanlon as escrow officer and employee of Alliance a fully executed and notarized request for reconveyance as well as the original promissory note and deed of trust. At the time of delivery of the documents to the pending escrow for the refinance of the Property, the Chandlers had communicated to Ms. Scanlon that they did not want their promissory note in the full amount of $400,000 to be unsecured. Ms. Scanlon understood that the Chandlers expected her to hold the original note and executed request for full reconveyance until they received an acceptable substitute promissory note and security. Ms. Scanlon, without obtaining confirmation from the Chandlers, relied on a statement from Masri that the substitute security would be handled outside of escrow. Furthermore, Ms. Scanlon could not have reasonably relied on the information provided her by Masri because she knew not to record the reconveyance as supported by her "post it" note on the first page of the preliminary title report that stated " 'Do not record per Lon Chandler." In addition, Ms. Scanlon's behavior exhibited some intent to follow the Chandlers' instructions. For example, the original note remains in the Alliance file without being marked paid as was Ms. Scanlon's practice and the original reconveyance document was not recorded but a second original document was recorded months later. Finally, a letter dated December 28, 2004 from Ms. Scanlon to the Chandlers confirmed that she had not reconveyed their deed of trust and it remained of record in a position of priority to FAB's new deed of trust. The knowledge of Ms. Scanlon is imputed to Alliance, but only in its capacity as escrow holder in the refinance transaction.
3. As to FAB Associates, the reconveyance executed by Alliance as trustee on October 6, 2004, was voidable, but not void. It was valid as to a BFE. FAB was a BFE because as lender in the refinance escrow, FAB specifically instructed the escrow holder to close escrow only when its new deed of trust was in a position of first priority. FAB explicitly required that the Chandlers' deed of trust be reconveyed prior to the funding of the loan. FAB instructed the escrow holder that it was not sufficient that Alliance obtain a title insurance policy insuring FAB's position or priority. On the contrary, Alliance was not to close escrow on the refinance until the Chandler deed of trust was reconveyed. Under the circumstances, FAB could reasonably rely on its instructions and the expectation that the escrow holder would follow those instructions. As to notice that the Chandlers' loan had not been paid, the standard escrow instructions provided by FAB required that the escrow holder delete and pay off the Chandlers' loan, however, Luthra testified that payoff is never strictly necessary so long as the lien is deleted some way at close of escrow. FAB did not anticipate that the escrow closing statement would specifically demonstrate a payoff of the Chandler deed of trust. Therefore, FAB would not have reasonably noted the absence of a payoff to Chandler, nor was inquiry notice created thereby. FAB had constructive notice imputed from the knowledge of the escrow holder that the trustee had executed the original deed of reconveyance. FAB's duty of inquiry did not require it to confirm that the reconveyance was recorded at close of escrow. Moreover, since the reconveyance was valid at the time of execution on October 6, 2004, there is no evidence that FAB had actual or constructive notice of conditions communicated by the Chandlers to the escrow holder for the use of the request for reconveyance. The knowledge of the escrow holder that the executed request for reconveyance was provided to escrow subject to conditions is not imputed to FAB as party to the escrow. Alliance, as a limited and special agent for FAB as party to the escrow was not obligated to disclose the substance of its communications with the Chandlers. Further the negligence of Alliance as escrow holder does not defeat FAB's status as a BFE.
4. The application of the doctrine of equitable subrogation is unnecessary for the judgment.
Issues Presented
Appellants contend that the trial court committed three separate errors of law, all of which constituted reversible error. First, the trial court erred in imputing to Alliance Title the knowledge of its escrow officer Nancy Scanlon, but only in Alliance's capacity as escrow holder in the refinance transaction and not imputing that same knowledge to that same employer as trustee under the deed of trust. Second, the trial court erred in imputing only some of Alliance's knowledge to FAB, but not all the knowledge. Third, the trial court erred in finding that FAB's credit bid did not create a surplus for junior lien holders.
Standard of Review
Since in this appeal the Chandlers question the legal conclusions reached by the trial court with regard to imputed knowledge between the escrow holder, the trustee under the deed of trust and FAB Associates, we apply an independent standard of review. (Crocker National Bank v. City and County of San Francisco (1989) 49 Cal.3d 881, 888 [if the inquiry requires critical consideration, in a factual context, of legal principle and their underlying values, the question is predominantly legal and its determination is reviewed independently].)
Discussion
In effect, the Chandlers seek to cancel the 2004 reconveyance of their deed of trust and to reinstate their security interest in the property that was subsequently transferred to FAB. The resolution of this issue depends on whether or not the reconveyance was void or voidable and if only voidable whether or not FAB can claim the status of BFE. Under California law, a bona fide purchaser for value or in this case encumbrancer, takes title free and clear of an improperly reconveyed deed of trust, so long as the reconveyance is voidable and not void. (Firato v. Tuttle (1957) 48 Cal.2d 136; Erickson v. Bohne (1955) 130 Cal.App.2d 553, 555-556; Civ. Code, § 1107 [every grant of an estate in real property is conclusive against the grantor, also against every one subsequently claiming under him, except an encumbrancer who in good faith and for a valuable consideration acquires a title or lien by an instrument that is first duly recorded].)
A deed is void if the grantor's signature is forged or if the grantor is unaware of the nature of what he or she is signing. (Erickson v. Bohne, supra, 130 Cal.App.2d at pp. 555-556.) On the other hand, a voidable deed is one where the grantor is aware of what he or she is executing, but has been induced so to do through fraudulent misrepresentations. (Fallon v. Triangle Management Services, Inc. (1985) 169 Cal.App.3d 1103, 1106.) The same rules apply to the reconveyance of the property interest under a deed of trust as to the conveyance of property by grant deed. (Wutzke v. Bill Reid Painting Service, Inc. (1984) 151 Cal.App.3d 36, 43.)
Thus, if the reconveyance was void, it would have no effect even against a subsequent bona fide purchaser or encumbrancer. (Crittenden v. McCloud (1951) 106 Cal.App.2d 42; Bryce v. O’Brien (1936) 5 Cal.2d 615, 616.) If the reconveyance was voidable, however, it may have been subject to cancellation and rescission as against the trustee, but could be relied upon by a subsequent BFE. (Erickson v. Bohne, supra, 130 Cal.App.2d at pp. 555-556.)
Void v. Voidable
Relying on In re Marriage of Cloney (2001) 91 Cal.App.4th 429, the Chandlers argue, in essence, that it was error by the trial court not to impute the knowledge that Ms. Scanlon had, i.e. the request for reconveyance was to be held until the Chandlers had substitute security, to the trust department of Alliance as trustee of the Chandlers' deed of trust. The Chandlers contend that if the knowledge that Ms. Scanlon had was imputed to the trust department of Alliance, the full reconveyance could not have been unconditionally delivered to escrow and effective on delivery because the same entity that executed it was holding onto it subject to conditions that they, the Chandlers, had imposed. Consequently, the Chandlers argue that there was no delivery; that if there was no delivery the full reconveyance was void and not just voidable.
We find the Chandlers' reliance on In re Marriage of Cloney, supra, 91 Cal.App.4th 429 (Cloney), to be misplaced. The issue in that case was whether a purchaser of real property took subject to a judgment lien of record when the judgment identified the seller by his full, real name, and the escrow documents identified the seller by a nickname. More particularly, the issue concerned whether the knowledge of the escrow agent, who was aware that the seller and the individual identified in the judgment lien were one and the same, was imputed to the purchaser, so that the purchaser had constructive notice of the judgment lien. (Id. at pp. 432, 444.)
Cloney addressed the type of notice arising as a matter of law from recorded liens on real property. There, a purchaser obtained real property from a seller who held title as "Mike Cloney." A judgment had been recorded against "James Michael Cloney," creating a lien against all real property he owned in the county. (See Code Civ. Proc., § 697.320, subd. (a)(1).) Since the escrow agent's actual knowledge of Cloney's full name was imputed to the purchaser, by operation of law the purchaser had constructive notice of the judgment lien recorded against the seller, and took title subject to the lien. (Cloney, supra,at p. 442.) Specifically, the appellate court held "that an undisputedly valid judgment lien against a judgment debtor under one name does impart constructive notice of the lien to a subsequent purchaser to whom the same judgment debtor sells real property under a different name, where while acting within the course and scope or his or her agency the purchaser's escrow agent gains actual knowledge of both of the names used by the seller." (Id. at pp. 444.)
The lower court had found that the knowledge of the escrow officer could not be imputed to the title officer in the same title company. (In re Marriage of Cloney, supra, 91 Cal.App.4th at p. 435.) The appellate court did not address the issue of whether this finding was erroneous.
Civil Code section 2332 provides: "As against a principal, both principal and agent are deemed to have notice of whatever either has notice of, and ought, in good faith and the exercise of ordinary care and diligence, to communicate to the other." A principal is also charged with knowledge his agent acquires prior to or outside the agency relationship, if the agent's knowledge "can reasonably be said to be present in the mind of the agent while acting for the principal." (Columbia Pictures Corp. v. DeToth (1948) 87 Cal.App.2d 620, 631.) The fact that the agent did not communicate such knowledge to the principal does not prevent operation of the rule. "The agent may have been guilty of a breach of duty to his principal, yet the knowledge has the same effect as to third persons as though his duty had been faithfully performed." (Id. at p. 630, italics added.)
"The basis for imputing knowledge to the principal is that the agent has a legal duty to disclose information obtained in the course of the agency and material to the subject matter of the agency, and the agent will be presumed to have fulfilled this duty." (Triple A Management Co. v. Frisone (1999) 69 Cal.App.4th 520, 534-535; Cloney, supra, 91 Cal.App.4th 429, 439.)
"Generally speaking, an 'escrow' is a transaction in which one person, for the purpose of effecting a sale, transfer or incumbrance of real or personal property to another person, delivers any written instrument, money, evidence of title or other thing of value to a third party, the escrow holder or depository, to be held by him for ultimate transmittal to the other person upon the happening of an event or the performance of certain specified conditions [citations]. Thus, according to one view, the escrow holder is not the agent of either party; he is merely a third party depository. [Citations.] However, an escrow holder has also been referred to as the agent of all the principals to the escrow. But even so, the agency is not considered a general one. On the contrary, it is treated as a limited agency wherein the obligations of the escrow holder to each party are strictly in accordance with the escrow instructions given by that party [citations]." (Lee v. Title Ins. & Trust Co. (1968) 264 Cal.App.2d 160, 162.)
More recently, it has been held that with regard to an escrow agent, an escrow agent is a special agent employed by the parties to the sales or loan transaction according to instructions submitted to the agent by the parties. As a dual agent for the both parties, the knowledge of the escrow agent regarding matters in that escrow may be imputed to both parties to the escrow under an agency theory. (Triple A Management Co. v. Frisone, supra, 69 Cal.App.4th at p. 534, italics added.)
Civil Code section 2332 by its own terms applies to principals and agents. It says nothing about other agents of a principal.
Notwithstanding the foregoing, even if this court assumed for the sake of argument that the knowledge that Ms. Scanlon had that the request for reconveyance was to be held until the Chandlers received acceptable substitute security should be imputed to Alliance as trustee of the Chandlers' deed of trust, for reasons that follow we would still find that the reconveyance was voidable not void.
In Firato v. Tuttle, supra, 48 Cal.2d 136, the Firatos loaned money to the Tuttles and received a promissory note and deed of trust on the Tuttles' property. The trust deed named a real estate broker, McCormick, as trustee. The trustee was authorized to reconvey only if the loan was paid in full. Although the loan was not paid off, McCormick executed a reconveyance of the deed of trust upon a false recitation that the loan had been paid in full. Thereafter, the Tuttles sold the property. Before the Firatos discovered the fraud, the property had been conveyed several times. The subsequent grantees were bona fide purchasers for value and knew nothing of the unauthorized act of McCormick. The Firatos sued to cancel the purported reconveyance by McCormick and to have their deed of trust reinstated. Demurrers were sustained and judgment entered against the Firatos. (Id. at pp. 137-138.)
The Supreme Court affirmed the judgment. The court found that the unauthorized reconveyance of a trust deed by the trustee, while voidable, was not necessarily void as to a subsequent bona fide purchaser of the property for value. The court drew a distinction between conveyances that are merely unauthorized and those that are "wholly void...
[such] as where a deed has been forged or has not been delivered." (Firato v. Tuttle, supra, 48 Cal.2d at p. 139.) In the case of unauthorized reconveyances, such as the one in the case before it, the court found that former Civil Code section 2243 "would protect innocent purchasers for value who take without any notice that the conveyance by the trustee was unauthorized...." (Ibid.)
Former Civil Code section 2243 provided that "Everyone to whom property is transferred in violation of a trust, holds the same as an involuntary trustee under such trust, unless he purchased it in good faith, and for a valuable consideration." (Repealed by Stats. 1986, ch. 820, § 7, p. 2730.) " Former Civil Code section 2243, upon which the court in Firato relied, was replaced by Probate Code section 18100 [fn. omitted], which expanded the protections afforded an innocent purchaser in connection with the acquisition of property conveyed by a trustee. '[S]ection 18100 was specifically adopted to change the prior law, which placed third party purchasers of trust property on constructive or inquiry notice of possible breaches of trust. The new law gives such purchasers protected bona fide status except where they have actual knowledge of a breach.' [Citation.]" (Schiavon v. Arnaudo Bros. (2000) 84 Cal.App.4th 374, 381.)
We see no reason to distinguish this case from Firato v. Tuttle, supra, 48 Cal.2d 136. Even if Alliance as trustee knew that the request for reconveyance was to be held until the Chandlers received satisfactory substitute security, the designated trustee under the deed of trust executed the reconveyance fully aware of the consequences of his act, although he was not properly authorized to reconvey.
The Chandlers rely on Duley v. Westinghouse Electric Corp. (1979) 97 Cal.App.3d 430 for the proposition that the reconveyance was void not just voidable.
In Duley v. Westinghouse Electric Corp., supra,97 Cal.App.3d 430 (Duley), seller sold property to buyer in exchange for a promissory note secured by a deed of trust on the property. Subsequently, a judgment lien was placed on the property. Seller's trust deed was mistakenly reconveyed. Seller sued to cancel the reconveyance and establish the priority of his deed of trust. In cancelling the reconveyance, the appellate court reasoned, "The only legal and equitable solution in the situation... is cancellation of the reconveyance, returning the parties to their status quo. The court may cancel a written instrument where there is a reasonable likelihood, if left outstanding, it may seriously injure a person against whom it is void or voidable.... Allowing the reconveyance to stand would leave [seller] without security for his loan and create an inequitable windfall for [judgment lienor], as its abstract of judgment would take priority in any sale of the property." (Id. at p. 432.)
Nevertheless, the Duley court did not hold that the reconveyance was void. Rather, the court held that the reconveyance was voidable. (Duley, supra, at p. 432.)
While courts of equity are empowered to cancel a written instrument where there is a reasonable likelihood that it may seriously injure a person against whom it is void or voidable (Civ. Code, § 3412), where there is a possibility that there has been a subsequent conveyance to a bone fide purchaser or encumbrancer we will decline so to do. (See Firato v. Tuttle, supra, 48 Cal. 2d 136, 138, 139 [to the effect that before there will be a reconveyance, it must be shown that any subsequent conveyance was to other than an innocent purchaser for value].)
Civil Code section 3412 provides that "A written instrument, in respect to which there is a reasonable apprehension that if left outstanding it may cause serious injury to a person against whom it is void or voidable, may, upon his application, be so adjudged, and ordered to be delivered up or canceled."
Furthermore, regrettably, the outcome is partly the Chandlers' fault. By sending the request for full reconveyance, the deed of trust and the promissory note to Ms. Scanlon without a demand that the loan be paid off, the Chandlers made it easier for the situation in which they found themselves to occur. "Where one of two innocent persons must suffer by the act of a third, he, by whose negligence it happened, must be the sufferer." (Civ. Code, § 3543.)
The Chandlers seem to argue that the deed of reconveyance was void because it was not "delivered" to escrow, as the conditions for reconveyance were not met. The only authority upon which the Chandlers rely for this proposition is Duley, supra,97 Cal.App.3d 430. As noted, we do not see how that case advances the Chandlers' argument.
Without any citation to authority FAB asserts that for a deed of reconveyance to be valid, it must be delivered, just as any other deed of trust. Both FAB and the Chandlers seem to be assuming that before the reconveyance is valid the deed of reconveyance must be formally delivered into escrow.
Accordingly, the question is when or does, a deed of reconveyance need to be "delivered" to escrow in the sense that the Chandlers are attempting to use the word.
" 'An escrow involves the deposit of documents and/or money with a third party to be delivered on the occurrence of some condition.' [Citations.]" (Summit Financial Holdings, Ltd. v. Continental Lawyers Title Co. (2002) 27 Cal.4th 705, 711.)
"A real property loan generally involves two documents, a promissory note and a security instrument. The security instrument secures the promissory note. This instrument 'entitles the lender to reach some asset of the debtor if the note is not paid. In California, the security instrument is most commonly a deed of trust (with the debtor and creditor known as trustor and beneficiary and a neutral third party known as trustee). The security instrument may also be a mortgage (with mortgagor and mortgagee, as participants). In either case, the creditor is said to have a lien on the property given as security, which is also referred to as collateral.' [Citation.]" (Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226, 1235.)
"The majority of loans secured by real property in California are evidenced by a promissory note and a deed of trust. The promissory note is a promise the debtor/trustor makes to the lender/beneficiary to repay the loan on the terms indicated in the note. [Citation.] A deed of trust is the document which evidences the debt that is secured by a particular piece of real property. The deed of trust contains a legal description of the real property to which it applies and identifies: (1) the debtor/trustor; (2) the lender/ beneficiary; and (3) the trustee. A trustee of a deed of trust has two principal functions: (1) to foreclose against the real property when necessary and (2) to issue and record a reconveyance when the debt has been paid. [Citations.]" (Trustors Security Service v. Title Recon Tracking Service (1996) 49 Cal.App.4th 592, 595, superseded by statute on other grounds as stated in Markowitz v. Fidelity Nat. Title Co. (2006) 142 Cal.App.4th 508.)
Thus, in practical effect, a deed of trust is a lien on real property. (Monterey S.P. Partnership v. W.L. Bangham, Inc. (1989) 49 Cal.3d 454, 460 [deeds of trust are practically and substantially only mortgages with a power of sale].)
"A reconveyance is a deed by the trustee of a deed of trust that reconveys the trustee's title to the trustor or to another person legally entitled to it. Reconveyance is accomplished by the beneficiary executing a request for reconveyance. When the trustee receives the request, the trustee executes and records a deed of reconveyance transferring the security interest to the current owner of the property. On recordation, the lien is extinguished." (4 Miller & Starr, Cal. Real Estate (3d ed. 2000) Deeds of Trust §10:111, p. 340; Civ. Code, §§ 2939, 2941, subd. (b)(1).)
Civil Code section 2941, subdivision (b)(1)(A) provides that the trustee "shall execute the full reconveyance and shall record or cause it to be recorded in the office of the county recorder in which the deed of trust is recorded within 21 calendar days after receipt by the trustee of the original note, deed of trust, request for a full reconveyance... and other documents as may be necessary to reconvey, or cause to be reconveyed, the deed of trust."
Hence, Civil Code section 2941 clarifies who must prepare and record a reconveyance and when such actions must be undertaken, but makes no change in the law governing the nature and operation of deeds of trust. It comes into play only after the obligation furnishing the benefit has been satisfied and title has reverted. At that point, Civil Code section 2941 requires preparation and recordation of a reconveyance in order to clear title records.
As to delivery of the full reconveyance, Civil Code section 2941, subdivision (b)(1)(B), provides that the "trustee shall deliver a copy of the reconveyance to the beneficiary, its successor in interest, or its servicing agent, if known. The reconveyance instrument shall specify one of the following options for delivery of the instrument, the addresses of which the recorder has no duty to validate: [¶] (i) The trustor... and that person's last known address, as the person to whom the recorder will deliver the recorded instrument...." (Italics added.)
Thus, it appears that the only "delivery" where a deed of reconveyance is concerned, is for a copy to be delivered to the beneficiary. Once recorded, the instrument is "delivered" by the recorder sending the recorded instrument to whomever the trustee specified should receive the instrument.
In this case, the deed of reconveyance specified that Masri should receive the instrument.
One who violates Civil Code section 2941 may be held civilly liable to the person affected by the violation for a $500 penalty, plus "all damages which that person may sustain by reason of the violation[.]" (Civ. Code, § 2941, subd. (d).) However, there is nothing in the statute to suggest that failure to comply with the statute renders the reconveyance void.
Certainly, like any other conveyancing instrument, the validity of a deed of trust turns on compliance with certain minimum requirements: A deed of trust may be created, renewed or extended only by a writing "executed with the formalities required in the case of a grant of real property." (Civ. Code, § 2922.) Thus, in accordance with this general rule, delivery to the beneficiary is requisite to the validity and operation of a trust deed. Whether a deed of trust has been delivered depends on the intention of the parties. Nevertheless, here, we are concerned not with the creation, renewal or extension of a deed of trust.
While it is common for the payoff and discharge of a secured debt and the reconveyance to be conducted through an escrow (4 Miller & Starr, Cal. Real Estate (3d ed. 2000) Deeds of Trust §10:112, p. 343), it is not a necessity. Since Alliance was to act as the recording agent and would have been expected to execute and record the reconveyance as trustee, there was no necessity that the reconveyance be "delivered" into the escrow. (See Bennett v. Steinman (1948) 84 Cal.App.2d 494, 497.)
Accordingly, we conclude that the trial court did not err in finding that the reconveyance was voidable, but not void. Therefore, we turn to the issue of whether FAB can claim to be a BFE.
Is FAB a BFE?
In general, "[t]he determination whether a party is a good faith purchaser or encumbrancer for value ordinarily is a question of fact; on appeal, that determination will not be reversed unless it is unsupported by substantial evidence. [Citation.]" (Triple A Management Co. v. Frisone, supra, 69 Cal.App.4th 520, 536.)
However, in this case, whether FAB may be charged with notice of the unauthorized reconveyance of the Chandlers' deed of trust is a mixed question of law and fact. Essentially, the facts are undisputed. Therefore, this issue is subject to de novo review as to the legal effect of the escrow officer's knowledge that the request for reconveyance was to be held until the Chandlers received satisfactory substitute security can be imputed to FAB and if so, the effect this has on FAB's claim of BFE. Since the inquiry requires critical consideration, in a factual context, of legal principles and their underlying values, the question is predominantly legal and its determination is reviewed independently. (Crocker National Bank v. City and County of San Francisco, supra, 49 Cal.3d at p. 888.)
The Chandlers argue that because the evidence showed that FAB had actual knowledge of their deed of trust, the only way it could be a BFE was if it had relied on the imputed knowledge of Ms. Scanlon that the Chandlers' deed of trust had been reconveyed. The Chandlers assert that although the trial court imputed this knowledge to FAB, the court erred when it failed to impute Ms. Scanlon's knowledge that the request for reconveyance was to be held awaiting substitute security; that the executed reconveyance was being held in escrow unrecorded; or that she was following the instructions from the Chandlers not to record the reconveyance.
As this court has explained before, " 'a bona fide purchaser for value who acquires his interest in real property without notice of another's asserted rights in the property takes the property free of such unknown rights. [Citations.]' [Citations.] ' "The elements of bona fide purchase are payment of value, in good faith, and without actual or constructive notice of another's rights. [Citation.]" [Citation.]' [Citation.] The same elements exist to determine whether a party who takes or purchases a lien is a bona fide encumbrancer. [Citations.]" (Melendrez v. D & I Investment, Inc. (2005) 127 Cal.App.4th 1238, 1251.)
In other words, a BFE is one who acts without knowledge or notice of competing liens on the subject property. (First Fidelity Thrift & Loan Assn. v. Alliance Bank (1998) 60 Cal.App.4th 1433, 1440-1441.)
There are several types of notice that can defeat a BFE's primary interest. The first is actual knowledge or notice of a prior interest. The second is constructive notice that arises from the proper recording of a prior interest. Third, is notice that is imputed to an encumbrancer from knowledge acquired by an agent within the course and scope of his or her authority. Fourth, implied notice arises when the encumbrancer has knowledge from the possession of the property that is inconsistent with record title or knowledge of suspicious circumstances or condition that would prompt a reasonable person to inquire. (5 Miller & Starr, Cal. Real Estate (3d ed. 2000) Recording and Priorities, § 11:51, pp. 138-139.)
As noted, an escrow agent is a special agent employed by the parties to the sales or loan transaction according to instructions submitted to the agent by the parties. As a dual agent for both parties, the knowledge of the escrow agent regarding matters in that escrow may be imputed to both parties to the escrow under an agency theory. (Triple A Management Co. v. Frisone, supra, 69 Cal.App.4th at p. 534.)
Nevertheless, " ' The escrow agent is only a limited or special agent, and its obligations to disclose matters to its principal are also limited.... [¶]... Based on this principle, knowledge acquired by the escrow agent beyond the scope of its limited agency is not imputed to either principal. 'The test in each case is whether the agent acquired the knowledge within the course and scope of the limited agency, and whether the knowledge was of a type that a dual agent is obligated as a fiduciary to disclose to a principal. Thus, whatever duty the escrow agent may have is limited to knowledge acquired in the escrow in which both principals are parties. Knowledge of documents or events within an escrow is imputed because each party has a right to see all documents and instructions in the escrow. '[Citations.]" (Cloney, supra,91 Cal.App.4th at pp. 440-441, fn. 10.)
Accordingly, the question, then, is whether Ms. Scanlon's actual knowledge that the Chandlers' request for reconveyance was to be held until substitute security was made available and that it was not forthcoming as escrow closed, was acquired within the course and scope of her escrow agency and was of a type that an agent is obligated as a fiduciary to disclose.
"An escrow holder is a fiduciary and like any other fiduciary is under a duty to communicate to his principal knowledge acquired in the course of his agency with respect to material facts which might affect the principal's decision as to a pending transaction, particularly where... he [or she] knows that the principal is looking to him [or her] for protection as to those very facts of which he [or she] has knowledge." (Contini v. Western Title Ins. Co (1974) 40 Cal.App.3d 536, 547.) On the other hand, an escrow holder "has no general duty to police the affairs of its depositors"; rather, an escrow holder's obligations are "limited to faithful compliance with [the depositors'] instructions." (Claussen v. First American Title Guaranty Co. (1986) 186 Cal.App.3d 429, 435-436.)
In this case, we believe that it is correct to impute to FAB the knowledge of the critical fact we have identified above. FAB's escrow instructions specifically required that Ms. Scanlon pay off and delete the Chandlers' loan in order to put FAB into first position. This was an express precondition of the release of FAB's funds. The knowledge that Ms. Scanlon obtained from Masri that this was not to happen, but rather the Chandlers were expecting substitute security, which she knew they did not have as the close of escrow approached, was material to FAB's decision to fund the loan. By closing escrow without paying off the Chandlers' loan, Ms. Scanlon violated FAB's escrow instructions. Thus, FAB is chargeable with the same knowledge of the Chandlers' situation regarding the reconveyance of its deed of trust that Ms. Scanlon had. (See, e.g., Thein v. Sticha (1949) 93 Cal.App.2d 295, 298, [agent's knowledge that buyer had deposited funds into escrow imputed to seller]; California Nat. Bank v. Havis (2004) 120 Cal.App.4th 1122, 1138 [seller's lender's communication with escrow agent re deed of trust reconveyance imputed to buyer's lender].) As a result, FAB cannot claim to be a BFE because they knew that the Chandlers' request for reconveyance was being held until substitute security was made available to the Chandlers and that when they funded their loan the Chandlers had not received this substitute security.
"A party to a real estate conveyance is not entitled to ignore any information pertinent to title that comes to him or her, even from outside the recorded chain of title, to the extent such information puts him or her on reasonable inquiry notice of information that may bring into question the state of title. [Citations.]" (Cloney, supra, 91 Cal.App.4th 441-442.) Similarly, a party to a refinance transaction is not entitled to ignore any information pertinent to their lien holder position on the title that comes to them. At the very least, the knowledge imputed to FAB regarding holding the Chandlers' request for reconveyance, placed FAB on reasonable inquiry notice of possible problems with their position as lien holder on the title of the 5th Street property.
Accordingly, we conclude that the trial court erred in concluding that FAB is a BFE.
Finally, the parties argue the merits of the application of equitable subrogation to this case. However, because the trial court found that FAB was a BFE the trial court found the application of this doctrine unnecessary for the judgment. Since we have reversed the judgment we believe the more prudent approach is for the trial court to rule on this issue in light of our finding that FAB cannot claim to be a BFE.
Disposition
The judgment is reversed and the case is remanded to the trial court for further proceedings.
WE CONCUR: RUSHING, P. J., PREMO, J.