Opinion
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
Sonoma County Super. Ct. No. 073842.
Margulies, J.
Jane Oliver put her separate property residence into a trust for the benefit of her son, Justin, who was then a minor. After Jane’s death in 1992, the surviving trustee, Justin’s stepfather, used the trust property as security for a personal loan from The CIT Group/Consumer Finance, Inc. (CIT). Justin later sued his stepfather and CIT, alleging that the CIT transaction was a breach of his mother’s trust and that CIT knowingly induced, aided, and abetted the breach. The trial court granted summary judgment to CIT, holding that there was no triable issue of material fact as to whether CIT had actual knowledge of the breach when it entered into the transaction, as required in order to establish its liability under Probate Code section 18100. We affirm.
I. BACKGROUND
A. The Trust
A few months before her death from cancer in August 1992, Jane established “The Jane J. Oliver 1992 Trust” (Trust). The named trustees were Jane J. Oliver and her second husband, Philip Hirsch. Jane created the Trust, in part, to set aside a financial nest egg for her son by her first marriage, Justin, who was then 12 years old. The Trust provided that Hirsch, as surviving trustee, would hold her Sebastopol residence in trust for Justin until he turned 21, at which time Justin would take title to the property and could sell it and obtain the equity. Hirsch had the right to remain living in the residence without payment of rent until Justin turned 21, but was responsible for all expenses, including mortgage payments, property taxes, insurance, and maintenance. The Trust also provided that Hirsch would receive real properties Jane owned in Santa Rosa, her record company business, and her personal possessions.
B. The CIT Loan
Between 1990 and Jane’s death, Hirsch had no income from his occupation as a record producer at the record company Jane owned. He supported himself with money that Jane had inherited. After Jane’s death, Hirsch used assets that he inherited from Jane, including a $600,000 Merrill Lynch stock account, as well as credit card borrowing, to support himself and continue her business. In 1998, when he had exhausted the funds in the Merrill Lynch account, Hirsch sought to obtain a mortgage loan secured by the Sebastopol property. He worked with a loan broker, Robert Copland, who helped him arrange a mortgage loan from CIT.
On December 14, 1998, CIT funded the $100,498 loan. In connection with the loan, Hirsch changed the title of the Sebastopol property from himself as trustee to himself as widower. As a condition of funding the loan, CIT required that the loan proceeds be used to pay off balances totaling $29,413 on three of Hirsch’s credit cards. Another $9,173.45 was used to pay off defaulted loan payments and defaulted taxes and penalties on the Sebastopol property. Hirsch used the remaining net proceeds of $57,941.22 to support himself and his business. In 1999, Hirsch refinanced the CIT loan with a $405,000 loan from World Savings secured by the Sebastopol property. On June 14, 2001, Hirsch conveyed the Sebastopol property to Justin.
C. The Pleadings
In June 2002, Justin filed the present action against Hirsch, CIT, World Savings, Copland, and other defendants. Justin’s “First Amended Verified Petition for Order Compelling Redress of Breach of Trust, Fraudulent Concealment and for Accounting” alleged in part that Hirsch breached his fiduciary duty as trustee by, among other things, taking out personal loans secured by the trust property, including the CIT loan, and that CIT and the other defendants knowingly and actively assisted Hirsch in breaching his fiduciary duties. The amended petition further alleged that Justin had been damaged by the unauthorized encumbrances placed on the property as a result of the CIT and World Savings loans and the dissipation for Hirsch’s personal use of the mortgage proceeds he so obtained.
CIT asserted as an affirmative defense that Justin’s claims against it were barred by Probate Code section 18100 et seq. because CIT “acted in good faith, and for valuable consideration, and [to the extent that Hirsch was in fact violating the terms of the Trust] . . . was without actual knowledge that [he] was doing so.”
Probate Code section 18100 provides: “With respect to a third person dealing with a trustee or assisting a trustee in the conduct of a transaction, if the third person acts in good faith and for a valuable consideration and without actual knowledge that the trustee is exceeding the trustee’s powers or improperly exercising them: [¶] (a) The third person is not bound to inquire whether the trustee has power to act or is properly exercising a power and may assume without inquiry the existence of a trust power and its proper exercise. [¶] (b) The third person is fully protected in dealing with or assisting the trustee just as if the trustee has and is properly exercising the power the trustee purports to exercise.”
D. CIT’s Summary Judgment Motion
CIT moved for summary judgment in November 2005. Supplemental papers in support of and in opposition to the motion were filed, and the matter was eventually continued until July 2006.
1. Supporting Evidence
The primary evidence CIT submitted in support of its motion, and upon which the court relied in granting summary judgment to CIT, was the declaration of Joel Brenner. Brenner was an underwriter with CIT in 1998, who evaluated and approved Hirsch’s loan application. While Brenner had no specific recollection of the Hirsch loan, he reviewed CIT’s loan file and made assertions of fact based on the contents of the file and his familiarity with CIT’s loan and underwriting practices in 1998.
Brenner’s most relevant assertions are as follows:
1. Brenner acknowledged that prior to the funding of the CIT loan Hirsch changed title to the Sebastopol property from himself as trustee of the Trust to himself as an individual. According to Brenner, the title change was consistent with CIT’s practices concerning loans handled in 1998 and not indicative of any knowledge that the loan was improper. Specifically, he averred that if CIT learned from a preliminary title report or otherwise that the proposed security for the loan to an individual was titled in the name of a trustee, the loan processor would inform the borrower’s mortgage broker that either (1) the security had to be titled in the name of the individual or (2) the loan could proceed without any change in title as a loan to the borrower in the capacity of a trustee, and that it was up to the borrower to decide which option to choose. In Brenner’s experience, a trustee’s transfer of title as called for by the first option was not indicative of any irregularity or breach of trust.
2. When CIT was presented with a loan application by an individual borrower where the proposed security was titled in the name of a trustee and CIT had been informed that the trustee would transfer the property to himself as an individual, CIT would approve the loan only if it received a certification of trust which showed that the current trustee was also the individual borrower. CIT’s underwriters did not review trust certifications or trust documents except to confirm that the certificate of trust showed that the current trustee was the same person as the trustee on title. Further, CIT’s underwriters did not make or conduct any inquiry into the provisions or circumstances of a particular trust or make or conduct any inquiry into whether a trustee had the power to change the title of real property.
3. In connection with loan transactions in which some or all of the loan proceeds would be disbursed directly to the borrower, CIT would request a “ ‘cash out letter’ ” in which the borrower would state his intended use of the loan funds. CIT would review the “cash out letter” only for the purpose of evaluating the applicant’s financial picture. It would not review the letter to evaluate whether the borrower intended to use loan proceeds for the purposes authorized by a trust.
4. If a CIT employee became aware that a statement in a certification of trust was inaccurate, or that a loan applicant would be exceeding or misusing trust powers by transferring title to the security, or that the loan would be improper or unauthorized, the employee would take action to address that concern. Regarding the Hirsch loan file, nothing in the certification of trust states that Hirsch did not have the power to change the titling of the Sebastopol property or that any statement in the certification of trust was inaccurate. Nothing in the loan file indicates that Hirsch’s “cash out letter” was reviewed to evaluate whether Hirsch intended to use the loan proceeds only for the purposes authorized by the Trust. Nothing in the loan file indicates that any CIT employee ever became aware or concerned that: (1) the certification of trust was inaccurate in any respect, (2) Hirsch was exceeding or misusing Trust powers, or (3) the Hirsch loan was improper or unauthorized.
2. Justin’s Opposition
Justin contended that the following facts raised reasonable inferences negating CIT’s statutory defenses: (1) CIT knew that Hirsch applied for the loan in his individual capacity even though the loan application stated that title was to be held by the Trust, the preliminary title report stated that title was vested in Hirsch as surviving trustee of the Trust, and the certification of trust stated that title to the assets of the Trust “ ‘should be taken’ ” in Hirsch’s name as successor trustee of the Trust; (2) although CIT claimed that Copland must have informed it that Hirsch wanted to proceed with the loan as an individual, Copland denied having any such discussion with CIT and there is no indication in Copland’s or CIT’s loan file that Hirsch wanted to transfer the property to himself in order to use it as security for his personal loan; (3) Hirsch made no representation to CIT that he had authority to remove the property from the Trust so he could use it as security for a personal loan; (4) CIT had actual knowledge that Hirsch intended to make personal use of the loan proceeds as shown by Hirsch’s “cash out letter” and the fact that CIT itself conditioned the loan on the payoff of Hirsch’s personal credit card balances at the close of escrow; (5) CIT had actual knowledge that Hirsch was using Trust property to secure the loan because it had the documentation prepared by which Hirsch transferred title from the Trust to himself as an individual and signed the promissory note and deed of trust in his individual capacity; and (6) CIT admitted that it relied on the certification of trust only to confirm Hirsch’s identity as the trustee, and it therefore did not rely on the certification in determining Hirsch’s authority to transfer the property to himself in order to use it as security for a personal loan.
E. Trial Court Ruling
The trial court found that the inference arising from Brenner’s declaration is that CIT had no concern or actual knowledge that Hirsch was misusing or exceeding his trust powers since it would have been CIT’s standard practice to make a notation in the file of any such concern or knowledge. It held that Justin had not provided any evidence to controvert this standard practice as identified by Brenner or to raise a triable issue as to whether CIT had actual knowledge that: (1) Hirsch was exceeding or misusing his trust powers, or (2) the loan was improper or unauthorized. At most, Justin’s evidence shows that CIT might have had constructive knowledge of a possible breach of trust if it had an obligation to review, analyze, and inquire about trust powers. Since Probate Code sections 18100 and 18100.5 negate any such obligation, there was no triable issue of material fact with respect to CIT’s defenses based on these statutes, and CIT was entitled to summary judgment.
Justin timely appealed from the ensuing judgment in favor of CIT.
II. DISCUSSION
Justin argues that Hirsch’s lack of authority to transfer title to the Sebastopol property out of the Trust so that it could be used as security for a personal loan was so obvious that it negated any inference based on Brenner’s declaration that CIT lacked actual knowledge of Hirsch’s breach of trust.
Probate Code section 18100 protects third parties who deal with or assist the trustee by excusing them from investigating and permitting them to assume the existence of a trust power and its proper exercise except where the third parties have actual knowledge of a breach of the trust. (Vournas v. Fidelity Nat. Tit. Ins. Co. (1999) 73 Cal.App.4th 668, 673 (Vournas).) Vournas explains the pertinent legislative history of section 18100 as follows: “Section 18100 replaced former Civil Code section 2243, which the courts had interpreted as creating a duty of inquiry, thus making constructive notice as binding as actual notice [on third parties involved in transactions with trust property]. [Citations.] In recommending replacement of former Civil Code section 2243 with section 18100, the Law Revision Commission expressly stated the intent of the new law was to give greater protection to third parties in transactions involving trust property. The report states: ‘The proposed law protects a third person who acts in good faith and for a valuable consideration unless the third person has actual knowledge that the trustee is improperly exercising powers under the trust. Constructive knowledge or inquiry notice of the trustee’s powers is not sufficient to deprive a good faith transferee of protection.’ [Citation.]” (Vournas, at p. 673, fn. 4.)
Thus, as the trial court found, Probate Code section 18100 negates any obligation by a lender in CIT’s position to review, analyze, or inquire about trust powers merely because it becomes aware of facts that would cause a reasonable person to suspect that a potential borrower may not be authorized to use trust property to secure the type of personal loan requested. That section eliminates any duty by a lender to investigate or police the powers of the trustee absent actual knowledge of a breach of trust. (Vournas, supra, 73 Cal.App.4th at p. 677.)
In our view, Justin’s evidence fails to create a triable issue of fact as to whether CIT had actual knowledge that Hirsch was breaching the Trust by using Trust property to obtain a loan to be used for personal purposes. Although Justin’s evidence arguably shows that CIT had actual knowledge of Hirsch’s intention to use Trust property as security for what appeared to be a personal loan, that is not equivalent to knowledge that Hirsch was breaching the Trust. The latter would have required CIT to be familiar with the specific terms of the Trust and to determine that the purposes for which Hirsch was planning to use the loan proceeds in fact violated or exceeded his powers as trustee. This would not necessarily have been a simple or obvious determination to make. The trust instrument authorized Hirsch to (1) borrow money and encumber trust property by deed of trust “for the debts of the trust,” among other purposes; (2) continue any business belonging to the settlor; (3) loan money to the trust with interest, and receive security by encumbrance against any trust assets; and (4) pay himself reasonable compensation as trustee without prior court approval. Given these broad powers, it would not have been self-evident to CIT which of Hirsch’s proposed uses of the funds would be a breach of trust even if it had tried to analyze them in light of the Trust terms.
In reliance on People of State of Cal. v. Larkin (N.D.Cal. 1976) 413 F.Supp. 978 (Larkin) and Probate Code section 16004, Justin maintains that no such analysis of Hirsch’s trust powers was necessary because his use of trust property to secure a private loan was a per se breach of trust. We are not convinced. Probate Code section 16004 states in relevant part: “The trustee has a duty not to use or deal with trust property for the trustee’s own profit or for any other purpose unconnected with the trust, nor to take part in any transaction in which the trustee has an interest adverse to the beneficiary.” (Prob. Code, § 16004, subd. (a).) However, section 16004 does not override the provisions of the trust instrument itself. That section must be read in conjunction with other portions of Division 9 of the Probate Code, including section 16000, which reads: “On acceptance of the trust, the trustee has a duty to administer the trust according to the trust instrument and, except to the extent the trust instrument provides otherwise, according to this division.” (Italics added.) Thus, even if the CIT loan appeared on its face to violate section 16004, such a violation is not a per se breach of trust.
Larkin is also inapposite. In Larkin, the California Attorney General sought to recover real property on behalf of a charitable trust. (Larkin, supra, 413 F.Supp. at p. 980.) The real property had been used as collateral to secure a loan made to the trustees’ for-profit, private business. (Ibid.) Larkin held, in part, that the use of trust property to secure a private loan to a trustee was a per se breach of trust, and that the trustees’ good faith belief that the loan would advance trust purposes was irrelevant to whether they had breached their fiduciary duties. (Id. at pp. 981–982.) This holding was based on former Civil Code section 2229, a predecessor to Probate Code section 16004. However, Larkin did not consider the effect of statutory language such as that now contained in Probate Code section 16000, nor the possibility that language in the trust instrument itself might supersede the statutory duties of a trustee.
The defendants in Larkin also claimed that they should be considered good faith purchasers for value of the subject property under former Civil Code section 2243, because they believed that the trustees had authority to execute a deed of trust on the charitable trust’s assets. (Larkin, supra, 413 F.Supp. at p. 983.) The court rejected this theory in reliance on then-prevailing California statutory law to the effect that a transferee of trust property with actual knowledge of the trust must be deemed to have constructive notice that the transfer is in breach of trust. (Ibid.) It held that such a transferee could therefore not be considered a good faith purchaser of the property for purposes of Civil Code section 2243 and would hold the property as an involuntary trustee under the trust. (Ibid.)
Former Civil Code section 2243 provided: “ ‘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.’ ” (Larkin, supra, 413 F.Supp. at p. 982, italics omitted.)
If Larkin correctly stated current California law, Justin might have had a winning argument against summary judgment. But Larkin was decided 10 years before the enactment of Probate Code section 18100. The latter statute repealed and superseded Civil Code section 2243. (Stats. 1986, ch. 820, §§ 7, 40.) As discussed earlier, Probate Code section 18100 relieved third parties dealing with a trust of any duty of inquiry. To incur liability to the trust beneficiaries, such third parties must have actual knowledge, not constructive notice, that the trustee is violating the terms of the trust.
The change in the law brought about by the enactment of Probate Code section 18100 is illustrated by Adler v. Manor Healthcare Corp. (1992) 7 Cal.App.4th 1110 (Adler). In reliance on that statute, Adler held that the purchaser of an easement over trust property—despite constructive notice that the granting of the easement was a breach of the trust—had no liability to trust beneficiaries because the purchaser had no actual knowledge of the breach and no duty to inquire into the trustee’s powers. (Id. at pp. 1119–1120.) On that ground, the Adler court affirmed summary judgment in favor of the purchaser. (Ibid.)
Justin tries to distinguish Adler on the grounds that the trustee in Adler made an express representation to the purchaser that it had authority to grant the easement. While Hirsch denied making such an express representation in this case, his decision to seek the loan amounted to an implicit representation to the same effect, which CIT was entitled to rely on under Probate Code section 18100.
In his reply brief, Justin cites Hirsch’s self-serving deposition testimony to the effect that he instructed Copland to ask CIT’s legal department to verify that he was authorized to encumber the trust property and use the loan proceeds any way he wanted, and that Copland reported back with an assurance that CIT had responded affirmatively. Since Justin cites no testimony from Copland or CIT confirming that any such communications actually took place, this evidence creates no triable issue of fact regarding CIT’s actual knowledge of Hirsch’s trust powers.
Justin also tries to distinguish Adler on the basis that Hirsch’s breach of trust was so “cogent and obvious” from the facts known to CIT that to ignore it was an act of bad faith. Hirsch borrows the phrase “cogent and obvious” from Hollywood Nat. Bank v. International Business Machines Corp. (1974) 38 Cal.App.3d 607 (Hollywood Nat. Bank), a case involving the interpretation of Commercial Code section 8302, which defines a “ ‘bona fide purchaser’ ” of a security as a “ ‘purchaser for value in good faith and without notice of any adverse claim.’ ” (Hollywood Nat. Bank, at pp. 612–613, italics omitted.) The “cogent and obvious” phrase apparently originated in the following passage from an early edition of Corpus Juris: “ ‘[M]ere knowledge of facts sufficient to put a prudent man on inquiry, without actual knowledge, or mere suspicion of an infirmity or defect of title, does not preclude the transferee from occupying the position of a holder in due course, unless the circumstances or suspicions are so cogent and obvious that to remain passive would amount to bad faith.’ ” (See Popp v. Exchange Bank (1922) 189 Cal. 296, 303, cited in Hollywood Nat. Bank, at p. 614.) Hollywood Nat. Bank cites the language in support of the legal principle that “[t]he holder of a negotiable instrument will be charged with a defect in that instrument when the circumstances . . . justify the conclusion that the failure ‘to make inquiry arose from a suspicion that inquiry would disclose a vice or defect in the instrument.’ ” (Hollywood Nat. Bank, at p. 614.)
It is at least arguable whether the legal standard discussed in Hollywood Nat. Bank has any relevance whatsoever under Probate Code section 18100. It would seem contradictory for the Legislature to purport to relieve third parties from a duty of inquiry by requiring actual knowledge of a breach of trust in one clause of section 18100 while reinserting a duty of inquiry into the same sentence of the statute by requiring the third party to “act[] in good faith.” Forcing third parties to distinguish between circumstances merely giving constructive notice of a breach of trust, which require no further inquiry, and “cogent and obvious” circumstances, which compel such an inquiry, would thoroughly undermine the purpose of section 18100 to “fully protect[]” third parties dealing with a trustee. (Prob. Code, § 18100, subd. (b).) In our view, reading an exception into the statute for “cogent and obvious” circumstances short of actual knowledge is simply not consistent with the statute’s text, history, and purpose.
In any event, even if we applied the legal standard applied in Hollywood Nat. Bank, CIT would still be entitled to summary judgment. The loan in issue here was not “a rush transaction that reeked of chicanery,” as was the loan transaction in issue in Hollywood Nat. Bank. (Hollywood Nat. Bank, supra, 38 Cal.App.3d at p. 615.) Brenner’s declaration established that the loan was processed in a fashion fully consistent with other loans processed by CIT in 1998, including transactions involving property titled in the name of a trustee, and that no “red flags” came to CIT’s attention during the course of the transaction. Although Justin attempts to impugn the Brenner declaration by labeling it as self-serving and pointing to the lack of any written CIT loan policies, Justin fails to come forward with any evidence from his own discovery or investigation that directly controverts the declaration.
In our view, the evidence Justin does produce—including the loan application, certification of trust, “cash out letter,” and evidence that no income verification was required of the borrower—do not come close to suggesting a loan transaction that was so suspicious or outside the ordinary course of business as to indicate a willful refusal by CIT to pursue or acknowledge evidence of wrongdoing. Justin emphasizes that the loan application, preliminary title report, and certificate of trust all contained what he construes as clear and explicit restrictions against taking title to the property out of the Trust. They do not. The loan application simply stated how title was held at the time when Hirsch applied for his loan and the manner in which it was expected to be held. The preliminary title report reported on how title was vested as of October 30, 1998, the time it was issued. In the same document, the title company offered to issue a policy to CIT for the property titled in the name of Hirsch as an individual. Neither document purported to specify or restrict how title to the Sebastopol property must or could be held under the Trust.
Similarly, although the certification of trust recited that title to the Trust’s assets “should” be taken in Hirsch’s name as successor trustee of the Trust, the word “should” in that context cannot reasonably be construed to mean “must” or “may only.” The word “should” is generally construed to be permissive or advisory rather than mandatory. (See, e.g., Kucera v. Lizza (1997) 59 Cal.App.4th 1141, 1151–1152 [the words “may” and “should” are ordinarily permissive]; Boam v. Trident Financial Corp. (1992) 6 Cal.App.4th 738, 745, fn. 6 [“should” used in the present or future tense, while more forceful than “may,” can convey only a moral obligation or strong recommendation]; U.S. v. Marcucci (9th Cir. 2002) 299 F.3d 1156, 1159 [unlike “shall” or “must,” the word “should” leaves discretion to do otherwise]; U.S. v. Maria (2d Cir. 1999) 186 F.3d 65, 70 [“[t]he common meaning of ‘should’ suggests or recommends a course of action, while the ordinary understanding of ‘shall’ describes a course of action that is mandatory”].) Contrary to Justin’s claim, the use of the word “should” in the certification of trust certainly does not provide cogent and obvious notice that Hirsch lacked power to change the titling to the property.
Justin argues that we should reverse the judgment because CIT acted like other subprime lenders who have gained notoriety for their sloppy lending practices. Even assuming for the sake of analysis that CIT falls into that category, an assertion for which Justin offers no evidence, it would still be entitled to summary judgment under Probate Code section 18100. Barring unusual circumstances not shown here, that statute expressly relieves lenders—whether conventional or subprime—of any duty to scrutinize the legal authority of its borrowers.
We perceive no meaningful distinction between Adler and the present case. CIT met its initial burden of establishing a complete defense under Probate Code section 18100, and Justin failed to create a triable issue of material fact with respect to CIT’s good faith or actual knowledge of a breach of trust. Summary judgment was therefore properly granted in favor of CIT. We need not reach CIT’s claim that it was also entitled to summary judgment under section 18100.5 and on other grounds asserted in its trial court motion.
III. DISPOSITION
The judgment is affirmed.
We concur: Stein, Acting P.J., Swager, J.
Probate Code section 18100.5 provides in relevant part: “A person who acts in reliance upon a certification of trust without actual knowledge that the representations contained therein are incorrect is not liable to any person for so acting.” (Prob. Code, § 18100.5, subd. (f).)