Opinion
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
APPEAL from a judgment of the Superior Court of Los Angeles County. Los Angeles County Super. Ct. No. BC326174. Andria K. Richey, Judge. Affirmed.
Wright, Finlay & Zak, Robin Prema Wright, Jonathan M. Zak and Richard D. Simpson, Jr., for Plaintiff, Cross-Defendant and Appellant.
Law Offices of Robert F. Schauer and Robert F. Schauer for Defendant, Cross-Complainant and Respondent Home Loan Mortgage Corporation.
Anderson, McPharlin & Conners, Michael S. Robinson; Cunningham & Treadwell, James H. Treadwell; Christopher E. Deal for Defendant, Cross-Complainant and Respondent Windvest Corporation.
ARMSTRONG, J.
Plaintiff and appellant DLJ Mortgage Capital, Inc. ("DLJ") appeals the trial court's entry of summary judgment in favor of Home Loan Mortgage Corporation ("Home Loan") and Windvest Corporation ("Windvest") in DLJ's suit for, among other things, a constructive trust on monies collected with respect to certain home loans. Because we conclude that the trial court properly ruled that the promissory notes held by Windvest represented enforceable obligations of the borrowers, we affirm.
In this unfortunate case, a home lender, Euro-Funding Corporation, originated eight residential mortgage loans to four borrowers, secured by deeds of trust on their homes. Euro-Funding had its borrowers execute duplicate original notes for the eight loans. The loans to the borrowers were funded by Home Loan Mortgage Corporation, a warehouse lender, through four separate escrows on four different dates between January and March 2004. Euro-Funding indorsed and delivered to Home Loan original promissory notes with respect to the eight loans. At a later time, for valuable consideration, DLJ Mortgage Capital, Inc. received the second full set of original promissory notes with a bailee letter from IBB Funding. The fraudulent parties, Euro-Funding/IBB Funding, are nowhere to be found.
Home Loan borrowed the money from its warehouse lender, First Collateral, who actually transferred the money directly into the respective escrows.
It is not clear to us whether IBB Funding is an actual commercial entity, or simply a name appearing on letterhead stationery.
Specifically, on January 6, 2004, First Collateral, on behalf of Home Loan, received original promissory notes in the principal amounts of $280,000 and $35,000 made by Marcus Anderson payable to Euro-Funding, and disbursed $275,184 and $34,300 to Lender's Direct Escrow for the refinance of Mr. Anderson's residence. On January 7, 2004, the loans closed and deeds of trust securing the notes were recorded. At a later date, DLJ purchased these loans from Euro-Funding; duplicate originals of these promissory notes and assignments of the deeds of trust were delivered to DLJ on January 22, 2004.
On January 15, 2004, First Collateral received original promissory notes in the principal amounts of $312,000 and $39,000 made by Daniel and Clara Balderama payable to Euro-Funding, and disbursed $305,760 and $38,220 to Statewide Realtors Escrow for the purchase of the Balderama's residence. On January 16, 2004, escrow closed on the home purchase and deeds of trust securing the notes were recorded. At a later date, DLJ purchased these loans from Euro-Funding; duplicate originals of these promissory notes and assignments of the deeds of trust were delivered to DLJ on January 30, 2004.
On January 29, 2004, First Collateral received original promissory notes in the principal amounts of $244,000 and $47,750 made by Olivia Light payable to Euro-Funding, and disbursed $239,120 and $44,835 to Stone Ridge Escrow for the purchase of Ms. Light's residence. On January 30, 2004, the escrow closed and the deeds of trust securing the notes were recorded. At a later date, DLJ purchased these loans from Euro-Funding; duplicate originals of these promissory notes and assignments of the deeds of trust were delivered to DLJ on February 18, 2004.
On February 27, 2004, First Collateral received original promissory notes in the principal amounts of $368,000 and $69,000 made by Evan Saona payable to Euro-Funding, and disbursed $360,640 and $67,620 to West Coast Escrow for the purchase of Mr. Saona's residence. On March 1, 2004, the escrow closed and the deeds of trust securing the notes were recorded. At a later date, DLJ purchased these loans from Euro-Funding; duplicate originals of these promissory notes and assignments of the deeds of trust were delivered to DLJ on March 18, 2004.
The loans represented by the promissory notes have been paid in full by the borrowers to Home Loan's assignee, Windvest. In this lawsuit, DLJ claims that it is entitled to the payments Windvest received from the borrowers.
Windvest purchased the loans and promissory notes from First Collateral.
On competing motions for summary judgment, the trial court determined that the notes indorsed and delivered to Home Loan were the only enforceable notes since those notes were first-in-time negotiated by Euro-Funding to an innocent third party, Home Loan, whose funds benefited the borrowers. Windvest was found to have succeeded to Home Loan's senior priority lien status that had been perfected by its possession of the notes, which status was not affected by the later fraud on DLJ.
DLJ argues that there was a triable issue of fact concerning whether the notes held by Windvest "were the notes that were issued by the borrowers." After reviewing the record, however, it is apparent that the material facts are undisputed. For instance, DLJ does not dispute that, with respect to each borrower, Home Loan received a set of original notes indorsed by Euro-Funding before DLJ received duplicate originals of the same notes indorsed by Euro-Funding. Rather, the issue in this case is the legal consequence of the undisputed facts.
As DLJ asserts, "California Commercial Code § 3105 (a) defines 'issue' to mean the first delivery of the instrument by the maker for the purpose of giving rights on the instrument. The term 'maker' is defined in Commercial Code § 3103 (a)(5) as the person identified in the note agreeing to pay the obligation, which in this instance are the borrowers." DLJ concludes from the foregoing that "the eight promissory notes could only have been issued by the borrowers to Euro-Funding when they became legally enforceable obligations. Clearly they only became legally enforceable obligations when the respective loan/purchase escrows closed as the sole purpose of their execution was to obtain the loan funds represented by the promissory notes." In fact, Home Loan received the executed promissory notes the day before each of the loans funded. DLJ argues that by obtaining possession of the notes before they were enforceable obligations of the makers, the borrowers never "issued" the promissory notes to Home Loan. From this, DLJ concludes that, even though Home Loan actually funded the borrowers' loans and took all reasonable steps to perfect its security interest in the promissory notes, it in fact had no interest at all in the notes.
The flaw in DLJ's argument is equating the Commercial Code phrase "giving rights on the instrument" with the concept of "legally enforceable obligation." When the borrowers delivered the loan documents to Euro-Funding, they intended to, and did, give Euro-Funding rights on the instruments. (Com. Code, § 3105, subd. (a).) This is true regardless of whether the notes were then "legally enforceable obligations." Of course, the borrowers only intended to, and did, issue a single promissory note to evidence each individual loan. As the holder of the notes, Euro-Funding had the right to, and did, negotiate the notes to Home Loan. (Com. Code, § 3201.) Having done so, the second set of original notes were not negotiable instruments: They had not been delivered to Euro-Funding for the purpose of giving rights, since the borrowers only intended to be obligated on a single note for each loan; at best, they were delivered to satisfy Euro-Funding's demand for a duplicate original of the borrowers' notes. Thus, the notes which DLJ acquired from Euro-Funding weeks after Euro-Funding indorsed the issued notes to Home Loan were themselves unissued and unenforceable.
Moreover, as Windvest argues, even an unissued note is enforceable, subject to the maker's assertion of the defense of nonissuance. (Com. Code, § 3105, subd. (b).) None of the borrowers asserted such a defense. Rather, each of the borrowers paid their notes in full.
In sum, we can find no fault with the trial court's determination: "Home Loan obtained and negotiated the notes in question first. Home Loan's possession of the notes created a perfected security interest, and precluded Euro-Funding or IBB from selling any rights in those notes free from Home Loan's interest. . . . [W]here there are two sets of promissory notes, only the first negotiated to an innocent third party – here Home Loan – are enforceable."
DISPOSITION
The judgment is affirmed.
We concur: TURNER, P. J. MOSK, J.