Opinion
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
APPEAL from a judgment of the Superior Court of Los Angeles County, Super. Ct. No. LC071501, Richard B. Wolfe, Judge.
Balisok & Associates, Inc., Russell S. Balisok and Steven C. Wilheim for Plaintiff and Appellant.
Christina Yu; Lewis Brisbois Bisgaard & Smith and Michael W. Connally for Defendant and Respondent.
ALDRICH, J.
INTRODUCTION
Jeanne Brown (Jeanne) appeals from the judgment entered against her upon the finding by the trial court that the interest of defendant Sandia Laboratory Federal Credit Union (Sandia) in real property based on a recorded trust deed was superior to that of Jeanne as a tenant based on a prior but unrecorded lease. At issue is the question of notice to Sandia prompted by Jeanne’s possession of the property. We hold that the evidence supports the trial court’s findings and affirm the judgment.
We refer to Jeanne and Douglas Brown by their first names and mean no disrespect thereby.
FACTUAL AND PROCEDURAL BACKGROUND
Jeanne, as lessee of a residence located on Gazette Avenue in Winnetka, California (the property), brought the instant quiet title action against her son, Douglas Brown, as her lessor, and Sandia, a nonprofit federally chartered credit union located in New Mexico, as holder of a trust deed.
Douglas Brown filed for bankruptcy court protection under Chapter 7 in Massachusetts and for that reason was not before the trial court in Los Angeles County. The bankruptcy trustee decided not to participate in the instant action.
Before trial, Jeanne and Sandia agreed that the sole question for the trial court to resolve was “whether the interest of Sandia Laboratory Federal Credit Union, as the holder of the deed of trust against the property is superior to the interest of the lessee.”
The parties stipulated to the following facts: Jeanne has continuously resided at the property since she and her then husband Charles Brown acquired it in 1962. In April 1997, Douglas became the record title owner of the property. Jeanne and Douglas executed a lease agreement on April 15, 1997, under which Jeanne leased the property from Douglas. The lease was never recorded.
On April 27, 2004, seven years after the lease between Jeanne and Douglas was executed, Sandia lent money to Douglas, who executed a trust deed (the trust deed) granting the property as security for the loan, and naming Sandia as the beneficiary. Recorded as instrument No. 04-1026356, the trust deed was “signed by Douglas Brown and not by Jeanne . . . .” The parties stipulated that Jeanne does not appear as an owner of the property and any “possessor interest” she might have “did not appear in the record . . . .” Thus, Jeanne’s lease with Douglas was executed before the date on which the trust deed was recorded, but the lease “was not recorded.”
In addition to the admitted facts, Jeanne testified that Douglas lived in the house on the property until the late 1980’s and never moved back in. Jeanne agreed in 1997 to sell the property to Douglas in return for his agreement to make major repairs while she took care of the minor ones. Douglas agreed to lease the property to Jeanne for one dollar a year. At the time, Douglas was living in Boston, Massachusetts. At Douglas’s suggestion, Jeanne signed a lease that Douglas’s attorney prepared.
Jeanne did not testify that she informed Sandia that she was living alone on the property, that she was leasing the property, or that Douglas had moved out. Nor did Jeanne explain why the lease was not recorded. Jeanne did testify that she never permitted anyone onto the property to appraise or inspect it. Two or three times, real estate agents came to the house asking to look at it because Douglas wanted to sell it. Jeanne did not let them in, telling them, “ I have a lease here, and I don’t want you coming in the house.’ ”
According to Sandia’s mortgage manager Velma Aaron, Douglas had granted Sandia two first mortgages and two second mortgages in connection with this property. Douglas’s application for the 2004 loan at issue came to Aaron’s desk because Douglas sought a debt consolidation loan and he had a lot of outstanding debt. Aaron was involved in making the 2004 loan and she gave the final approval for it. The loan was an “owner-occupied loan” that had a preferential interest rate. Aaron testified that Douglas told her he was living on the property along with his children and his mother was taking care of his children because he had gone through a divorce.
Aaron testified that Douglas did not list any former or current residences in his loan application other than the Winnetka property. Aaron was aware that Douglas also lived in Boston. Asked about it, Douglas explained to Aaron that he “lived in both places.” Because the loan application reflected his employer’s location as Beverly, Massachusetts, Aaron asked Douglas “point blank” where his primary residence was. For the loan to be an owner-occupied loan, federal standards required that Douglas be living in the property more than 50 percent of the time. Douglas reported that he was living in Winnetka, California at least 50 percent of the time, although he worked in Massachusetts. Aaron believed him, concluding that Douglas was telecommuting. A lot of Sandia’s members telecommute. Aaron testified that no one informed Sandia at any time that Douglas’s mother was living on the property pursuant to a lease.
Aaron acknowledged that without her files, she could not determine whether the prior four loans to Douglas had been secured by the Winnetka property. The loans were not secured by property in Massachusetts because Sandia does not lend in that state.
In order to process the loan application, Sandia ordered a full title search and a full appraisal, which appraisal necessitated access to the interior of the house. The trial court’s statement of decision quoted from the appraisal report, that “[t]he subject property consists of a single family residence that is owner-occupied. Since the subject does not appear to be encumbered by a lease, the fee simple interest was appraised. . . .” The appraiser certified that “I have personally inspected the interior and exterior areas of the subject property and the exterior of all properties listed as comparable in the appraisal report. . . .” The appraisal report contains a photograph of the interior. Asked how that appraiser gained access to the house given she denied access to agents and appraisers, Jeanne testified that Douglas had a key. The appraisal conducted in connection with the 2004 loan (exhibit 1) and Douglas’s loan application (exhibit 2) were admitted into evidence.
At the close of the bench trial, the court entered a 23-page statement of decision. The court found that “in accordance with applicable California law, the interest of the Defendant, Sandia, is superior to be [sic] the interest claimed by the Plaintiff, Jeanne Brown.” Recognizing Jeanne was a victim and a pawn in Douglas’s dealings with Sandia, the court found, although the lease was prior in time, that Sandia was a good faith encumbrancer for value without actual or constructive notice of Jeanne’s unrecorded lease. Citing the record title, the loan application, Aaron’s interview of Douglas, and the appraisal, the court determined that Sandia had no implied knowledge of Jeanne’s lease because Jeanne’s possession of the property was not inconsistent with record title being in Douglas. Therefore, the court ruled, Sandia’s trust deed was superior to Jeanne’s claimed interest based on her unrecorded, undisclosed lease. Judgment was entered accordingly, and Jeanne filed her timely appeal.
CONTENTIONS
Jeanne contends that there is no substantial evidence to support the trial court’s finding that Sandia was a good faith encumbrancer for value. She contends that Sandia had constructive knowledge of her unrecorded lease because she was in sole possession of the property and because the fact that she is residing there constitutes a suspicious circumstance requiring investigation by Sandia.
DISCUSSION
1. Standard of review
“The 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 (1999) 69 Cal.App.4th 520, 536.)
2. California’s law of the good faith encumbrancer for value
“A good faith encumbrancer for value who first records takes its interest in the real property free and clear of unrecorded interests. [Citations.] . . . . [A] ‘ “good faith” encumbrancer is one who acts without knowledge or notice of competing liens on the subject property. [Citations.]’ ” (First Fidelity Thrift & Loan Assn. v. Alliance Bank (1998) 60 Cal.App.4th 1433, 1440-1441, citing, Civ. Code, §§ 1107 , 1214 .)
Civil Code section 1107 reads: “Every grant of an estate in real property is conclusive against the grantor, also against every one subsequently claiming under him, except a purchaser or incumbrancer who in good faith and for a valuable consideration acquires a title or lien by an instrument that is first duly recorded.”
Civil Code section 1214 reads in relevant part, “Every conveyance of real property or an estate for years therein, other than a lease for a term not exceeding one year, is void as against any subsequent purchaser or mortgagee of the same property, or any part thereof, in good faith and for a valuable consideration, whose conveyance is first duly recorded . . . .”
All conveyances of real property, except for a lease of one year or less are void as against any subsequent purchaser or mortgagee of the same property, or any part thereof, in good faith and for a valuable consideration, whose conveyance is first recorded. (Civ. Code, § 1214.) Hence, a lease for longer than one year is such a conveyance. (See ibid.) But, Jeanne’s lease with Douglas was not recorded. There is no dispute that Sandia’s encumbrance was recorded and that Sandia was a purchaser for value. The question thus is whether Sandia is an encumbrancer “in good faith” in the sense that it was an encumbrancer without notice. (See, e.g., High Fidelity Enterprises, Inc. v. Hull (1962) 210 Cal.App.2d 279, 281-282.)
There are several types of notice that can defeat a bona fide encumbrancer’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. (5 Miller & Starr, Cal. Real Estate (3d ed. 2000) Recording and Priorities, § 11:51, p. 138.) 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. (Ibid.) Fourth, implied notice arises when the encumbrancer has knowledge from a possession of the property that is inconsistent with record title (ibid.), or knowledge of suspicious circumstances or condition that would prompt a reasonable person to inquire. (Triple A Management Co. v. Frisone, supra, 69 Cal.App.4th at p. 532, citing Buehler v. Oregon-Washington Plywood Corp. (1976) 17 Cal.3d 520, 529.) With implied notice, the law infers notice of all information that would have been discovered in an investigation. (5 Miller & Starr, supra, § 11:75, p. 189, citing Civ. Code, § 19; see Del Giorgio v. Powers (1938) 27 Cal.App.2d 668, 679 [inquiry notice of existence of unknown partners].) Jeanne’s appeal focuses on the fourth type of notice, implied notice, either from possession that is inconsistent with title or notice that prompts a reasonable person to inquire.
Civil Code section 19 reads: “Every person who has actual notice of circumstances sufficient to put a prudent man upon inquiry as to a particular fact, has constructive notice of the fact itself in all cases in which, by prosecuting such inquiry, he might have learned such fact.”
Generally, the burden of proof falls on the person claiming bona fide encumbrancer status to present evidence that he or she acquired interest in the property without notice of the prior interest. (Gates Rubber Co. v. Ulman (1989) 214 Cal.App.3d 356, 366, fn. 6; Hodges v. Lochhead (1963) 217 Cal.App.2d 199, 203.) However, the burden of proof as to acts of dominion sufficient to establish notice by possession rests with the party claiming such possession (High Fidelity Enterprises, Inc. v. Hull, supra, 210 Cal.App.2d at pp. 281-282), i.e., Jeanne here.
3. Application to the facts of this case
First, Jeanne contends that the uncontradicted evidence established that she had sole possession of the property that was open and notorious. She insists, because Douglas told Aaron Jeanne was living on the property, that “Sandia actually knew, even without inquiring of the persons possessing the property, that someone other than the record owner was in possession.” Not so.
“The possession required to impart notice to a subsequent purchaser must be open, notorious, exclusive and visible, and not consistent with the record title. [Citation.]” (High Fidelity Enterprises, Inc. v. Hull, supra, 210 Cal.App.2d at p. 281, italics added citing Randall v. Allen (1919) 180 Cal. 298, 303; 5 Miller & Starr, supra, Recording and Priorities, § 11:51, p. 138.) That is, while possession may constitute notice (ibid.), the duty to investigate does not arise “when apparent possession is consistent with title appearing of record. [Citations.]” (Caito v. United California Bank (1978) 20 Cal.3d 694, 702.) Sandia had no knowledge of Jeanne’s unrecorded lease and there was nothing about the information available to Sandia that would indicate Jeanne had sole possession of the property. Rather, the record shows that Douglas applied to Sandia for an owner-occupied loan. Douglas told Sandia’s Aaron that both he and Jeanne were living on the Winnetka property. Further, the appraisal provided no indication that Jeanne had sole possession because, apart from the fact that record title did not disclose a lease, the only reasonable inference to be drawn from Jeanne’s testimony was that Douglas, who had a key, was the person who let the appraiser into the house to photograph it. This act of dominion served to reinforce to Sandia that Douglas had possession. Thus, the evidence supports the trial court’s conclusion that the knowledge that Sandia had was that Jeanne’s possession was not inconsistent with record title being in Douglas.
Next, Jeanne relies on the rule that suspicious circumstances should have prompted Sandia to inquire and a reasonable investigation would have revealed that she had sole possession of the property. (Triple A Management Co. v. Frisone, supra, 69 Cal.App.4th at p. 532.) Jeanne argues that her “sole possession[,] together with the fact she does not appear on title, clearly imparts notice.” She suggests that a mother living with her adult son must be leasing or at least her interest is inconsistent with the title being in the son. Not so.
First, occupancy by family member is not inconsistent with record title such as would give rise to a duty to inquire. On point is Rafftery v. Kirkpatrick (1938) 29 Cal.App.2d 503. There, the borrower and her parents were in possession of a residence together. After the lender foreclosed, the father attempted to set aside the foreclosure arguing that his daughter and her husband held the property in trust for the father. (Id. at p. 507.) The court held that the daughter and her husband “held the record title to the property. They resided on it. Usually when the record owners of property live on it the reasonable inference follows that they are in possession of it. This is not destroyed by the fact that other members of the family lived there with them. Under such circumstances a mortgagee would not be put on inquiry as to a secret trust existing in favor of others than the legal owners.” (Id. at p. 508, italics added.) Also analogous is Houts v. First Trust & Savings Bank (1917) 34 Cal.App. 613, where title to the family residence was in the name of the husband’s business and the wife was a tenant by an unrecorded lease. When a lender sought to foreclose on its loan secured by the property, the wife argued that her occupancy of the house should have put the lender on inquiry notice that she had a prior leasehold interest in the property. (Id. at p. 614.) The Houts court held that the wife’s occupancy did not give rise to a duty to inquire because her interest was consistent with record title being in her husband. (Id. at p. 615.) Jeanne’s attempt to distinguish Houts is unavailing.
Likewise, Jeanne’s attempts to distinguish Caito v. Union California Bank, supra, 20 Cal.3d 694, Kane v. Huntley Financial (1983) 146 Cal.App.3d 1092, and Gates Rubber Co. v. Ulman, supra, 214 Cal.App.3d 356 are unavailing. She argues that in these cases, record title was in conformity with apparent possession. But, the result in each of these cases was the same, namely, that the subsequent purchaser was not put on notice by virtue of possession that was consistent with record title. As explained here, Sandia was not aware Jeanne had sole possession at any time before the lawsuit and so Jeanne’s possession not only did not appear inconsistent with Douglas’s title, but Jeanne’s possession did not compel Sandia to investigate further.
Here, as in Rafftery and Houts, from Sandia’s standpoint, Douglas was record owner and he lived on the property at least 50 percent of the time. Sandia’s reasonable inference was that Douglas was in possession. His possession is not undermined by the fact that Jeanne, his mother, also lived there with him. Nothing about these facts put Sandia on inquiry notice of an unrecorded lease in favor of the record owner’s mother.
Second, Sandia did make an inquiry. Douglas’s application indicated that his employer was located in Massachusetts. This caused Aaron to ask Douglas “point blank” where his primary residence was. Douglas told Sandia that he was living on the property at least 50 percent of the time and that it was his primary residence even though he worked in Massachusetts. Aaron believed him, concluding that, as with many of Sandia’s members, Douglas was telecommuting.
Jeanne argues, that Sandia could not rely on Douglas’s fraudulent statements. Jeanne’s citation to Chalmers v. Raras (1962) 200 Cal.App.2d 682, is misplaced. There, the appellants, purchasers of the entire 10 acre property, claimed they were bona fide purchasers for value, without actual or constructive notice of a prior contract for sale of a 3.5 acre portion of it to another party. The Chalmers court held that the statement in the appellants’ purchase and sale contract that their purchase was “ ‘subject nevertheless, to the rights, if any, of the parties offering to buy the easterly strip of the said property . . .’ ” (id. at p. 687) raised a red flag giving appellants “sufficient facts to compel further inquiry and [they] cannot now claim to be bona fide purchasers merely because they chose to make no investigation as to the ‘other parties.’ ” (Ibid.) Chalmers rejected the argument that the subsequent purchasers were entitled to rely on their broker’s representations. The appellate court held that where the subsequent purchasers were on inquiry notice and failed to investigate, they were not bona fide purchasers. (Id. at p. 688.) No such red flag was present in this case to compel Sandia to inquire further about Douglas’s possession. Unlike Chalmers, where the appellants were negligent in failing to further inquire after having been put on notice, nothing about Douglas’s possible statements to Sandia put the latter on notice that there was a prior interest in the property.
DISPOSITION
The judgment is affirmed. Each party to bear its own costs of appeal.
We concur: KLEIN, P. J., KITCHING, J.