Melendrez v. D & I Investment, Inc.
Melendrez v. D & I Investment, Inc.
2684, 2005 Daily Journal D.A.R. 3656 (Cal.App. 6 Dist., Mar 29, 2005)
Background: Borrowers who lost their residential property through nonjudicial disclosure sued purchaser at
trustee's sale to set aside trustee's sale and cancel trustee's deed. After bench trial, the Superior Court, Santa Cruz
County, No. CV141726, Robert B. Atack, J., concluded that sale was valid and that purchaser was bona fide
purchaser for value (BFP). Borrowers appealed.
Test for determining whether buyer of real property at foreclosure sale is a "bona fide purchaser" (BFP) is whether
the buyer (1) purchased the property for value, and **(2) had no knowledge or notice of the asserted rights of
another. West's Ann.Cal.Civ.Code § 2924.
A bona fide purchaser (BFP) 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.
The elements of "bona fide purchase" are payment of value, in good faith, **and without actual or constructive
notice of another's rights.
The elements to determine whether a party who takes or purchases a lien is a "bona fide encumbrancer" are
payment of value, in good faith, **and without actual or constructive notice of another's rights.
The objective of the recording statutes protecting bona fide purchasers and encumbrancers is to protect persons who
have invested substantial sums of money or property, or who have performed valuable services, in reliance on an
honest belief that they are acquiring a good title or lien. West's Ann.Cal.Civ.Code § § 1107, 1214.
The purpose of recording laws is to protect those who honestly believe they are acquiring a good title, and who
invest some substantial sum in reliance on that belief; they were not enacted to protect those whose ignorance of the
title is deliberate and intentional. West's Ann.Cal.Civ.Code § § 1107, 1214.
A person generally has "notice" of a particular fact, for purpose of recording laws, if that person has knowledge of
circumstances which, upon reasonable inquiry, would lead to that particular fact. West's Ann.Cal.Civ.Code § §
1107, 1214.
Whether a buyer at a foreclosure sale is a bona fide purchaser for value (BFP) is a question of fact, and thus the
Court of Appeal will reverse a trial court's determination on this question only if it is not supported by substantial
evidence. West's Ann.Cal.Civ.Code § 2924.
Substantial evidence supported finding that purchaser at trustee's foreclosure sale was bona fide purchaser for value
(BFP) even though purchaser had experience in foreclosure sales and purchase price was below market value;
purchaser engaged in competitive bidding and paid more than double initial bid, **and purchaser had no knowledge
of borrowers' asserted right to cancellation of sale under repayment agreement between borrowers and lender.
West's Ann.Cal.Civ.Code § § 2924, 2924g.
Foreclosure sale to bona fide purchaser for value (BFP) was not subject to being set aside on ground of fraud for any
violation of repayment agreement between borrowers and lender providing that sale would be cancelled upon
borrowers' payments; although there was potential for finding of fraud on part of lender, **there was no evidence
BFP was aware of repayment agreement. West's Ann.Cal.Civ.Code § § 2924, 2924g.
Substantial evidence supported finding that repayment agreement between borrowers and lender had not been orally
modified to allow borrowers to delay payment necessary to avoid foreclosure sale of borrowers' property, and thus
there was no irregularity with respect to ensuing trustee's sale; evidence consisted of written agreement itself, fact
that agreement was faxed to borrowers multiple times after alleged oral modification, letter advising borrowers of
payment date in accordance with written agreement, and testimony of lender's foreclosure specialist that he had no
conversation with borrowers about changing due date of payment. West's Ann.Cal.Civ.Code § § 2924, 2924g.
Presumption that nonjudicial foreclosure sale was conducted regularly and fairly may be rebutted only by substantial
evidence of prejudicial procedural irregularity. West's Ann.Cal.Civ.Code § 2924.
The party challenging a trustee's foreclosure sale has the burden to prove irregularity and thereby overcome the
presumption of the sale's regularity. West's Ann.Cal.Civ.Code § 2924.
*1242 Miguel and Maria Melendrez (Borrowers) lost their Watsonville home through a nonjudicial foreclosure sale
in July 2001, approximately eight months after their loan default. The residence was purchased by a third party,
defendant Royal Realty (Buyer). Borrowers thereafter sued to set aside the trustee's sale and to cancel the trustee's
deed. They claimed that the sale was in violation of a repayment agreement (which included a conditional
agreement to postpone the sale) with their lender, Washington Mutual Bank, N.A. (Lender), and thus violated Civil
Code section 2924g, subdivision (c)(2). [FN1]
After a three-day bench trial, the court concluded that the trustee's sale was valid. It decided that the sale did not
violate the repayment agreement between Borrowers and Lender. It held further that Buyer was a bona fide
purchaser for value (BFP) of the property at the sale.
Borrowers appeal. They argue that the trustee's sale was invalid because it took place notwithstanding a repayment
agreement under which Lender agreed to postpone the sale. Borrowers contend further that the court erred by
applying the wrong legal standard in reaching the conclusion that Buyer was a BFP. They assert that the correct
standard required significant consideration of the fact that Buyer was experienced in foreclosure sales.
We review case law suggesting that an experienced foreclosure buyer who acquires property at significantly less
than **418 its fair market value cannot be a BFP and reject that conclusion. Accordingly, we hold that the trial
court properly determined that Buyer was a BFP. The conclusion flowing directly from the fact that Buyer was a
BFP was that the trustee's sale was unassailable as to Buyer in the absence of fraud. Since there was no evidence of
fraud chargeable to Buyer, we conclude that the court properly rejected Borrowers' request to void the trustee's sale.
We thus affirm the judgment.
FACTS
I. Borrowers' Loan And Default
In or about June 1987, Borrowers executed a note and deed of trust in favor of Great Western Savings, Lender's
predecessor in interest. The deed of trust granted a security interest in residential property located at 61 White
Street, Watsonville, California (Property). Borrowers defaulted on the loan, and Lender initiated foreclosure
proceedings in January 2001. [FN2]
*1243 On January 26, Lender, through the trustee, California Reconveyance Company (Trustee), recorded a notice
of default. Borrowers received a copy of the notice. The default notice indicated that Borrowers had defaulted with
respect to monthly payments commencing in November 2000, and that the amount due under the loan as of January
24 was $4,266.08.
Lender, through Trustee, recorded a notice of trustee's sale, dated April 27; the notice set the sale date for May 22.
Borrowers received a copy of that sale notice as well. The trustee's sale was postponed initially from May 22 to
June 4; it was postponed a second time to July 16. [FN3]
FN3. The Trustee's certificate of postponement indicated that the sale was postponed from June 4 to July
16. The complaint, however, noted-- consistent with testimony by Lender's representatives and Lender's
records--that the sale was postponed from June 4 to July 14. Since July 14 was a Saturday and it is
undisputed--as reflected in the trustee's deed-- that the trustee's sale took place on July 16, it appears that
the Trustee postponed the sale from June 4 to July 16 because July 14 was a Saturday.
After receiving the notice of sale in early May, Miguel Melendrez contacted Lender to make payment arrangements
concerning the default. [FN4] Miguel understood from his telephone conversation with Lender's representative,
Mary Garcia, that he and his wife, Maria, needed to make three payments, namely, (1) $5,000 before the sale date,
(2) a payment at the end of June, and (3) a payment at the end of July. According to Miguel's testimony, Garcia said
that, if the $5,000 payment was made before the sale date, Lender would "cancel" the sale. [FN5] Miguel
understood further that, if either of the payments due in June **419 or July were missed, Lender would "start" the
sale again.
FN5. The written repayment agreement contradicted Miguel's understanding from the telephone conversation with
Garcia that the sale would be "cancelled." It provided that the trustee's sale would not proceed on May 22, if
Borrowers made all of the required payments, and that the sale would be postponed from time to time if timely
payments were made. In addition, Garcia testified that she merely "took the preliminary information," and that the
repayment plan was later "set up" (i.e., written agreement was prepared) by another employee, Robbie Carter.
Garcia testified
that the repayment plan that she discussed with Miguel involved a postponement of the May 22 trustee's
sale as long as Borrowers made the initial payment.
Thereafter on May 3, Lender faxed a letter (Repayment Agreement, or Agreement) to Borrowers at Maria's store.
Miguel was in Greenfield at the time and asked Maria to sign the Repayment Agreement on his behalf and *1244
return it by fax to Lender. Maria signed it for herself and on her husband's behalf, and returned it to Lender by fax
on May 3.
The typeface of the Repayment Agreement faxed on May 3 was indisputably unclear. Patricia Friedberg (Lender's
vice-president) testified that it was faxed to Borrowers not only on May 3, but also on May 22, May 23, and May 29.
Miguel testified that he was able to read "part of" the Agreement but did not attempt to obtain a better copy. Maria--
who does not read English--did not read the agreement and was not concerned about its legibility.
The Repayment Agreement [FN6] provided: "This letter when signed by you, dated and returned to Washington
Mutual as indicated below, will be your Agreement with Washington Mutual as to the repayment arrangement
negotiated on 05-[illegible]-01 [illegible] the outstanding delinquency on the above referenced loan. The following
are the terms of the repayment plan which were agreed upon:
FN6. Our quotation of portions of the Agreement is based upon our review of the letter (trial exhibit 7) itself.
Illegible words are noted.
The letter stated that all payments were to be made "in CERTIFIED FUNDS ONLY," and that they were required to
"be received in our office on or before the due dates indicated, not mailed on those dates. Any grace period afforded
by your loan documents is not applicable to the terms of this repayment arrangement."
On the issue of postponement of the trustee's sale, the Agreement provided: "Washington Mutual shall not proceed
with the Trustee's Sale on 05/22/01 provided that you make all payments required under the terms of this Agreement
and all other payments required under the subject promissory note ... The Trustee's sale shall initially be postponed
to a date following the next payment due under this Agreement. Subsequent postponements will occur after each
timely payment is received under the terms of this repayment arrangement.... [¶ ] ... Should timely payments not be
received as described in this arrangement, we reserve the right to immediately proceed with the scheduled Trustee's
sale
IV. Foreclosure
The trustee's sale took place on July 16. There were approximately four bidders (including Buyer) interested in the
Property. Following the auction crier's announcement of Lender's opening bid of approximately $76,000, there were
a number of bids by the four prospective buyers. The Property was sold to Buyer as the highest bidder; it paid
$197,100.
Buyer's principal, Dominic Ip, is a licensed real estate broker. Ip testified that, in the five years before September
2001, he--either individually or through his real estate business--had bought approximately 15 properties at
foreclosure sales. Approximately 50 percent of Buyer's sales resulted from brokerage deals transacted on behalf of
others (i.e., not Buyer's personal investment transactions).
**421 Prior to the trustee's sale, Ip conducted some research regarding the first lien against the Property, drove by
the Property, and ran comparable sales with the Multiple Listing Service to determine the Property's value. Ip did
not contact Trustee or Lender prior to the sale. [FN11]**Similarly, Ip did not contact Borrowers, and he had no
knowledge of any repayment agreement between Lender and Borrowers.
FN11. Ip, however, did call the number listed on the sale notice from which potential buyers (or, for that
matter, the trustors) could determine by voice mail whether the sale was postponed, and, if not, the amount
of the opening bid at the sale.
The trustee's deed (recorded July 26) conveyed the Property to Buyer. [FN12] The deed noted that a default as
indicated in the default notice had occurred and existed at the time of the sale. It also contained a recital that "[a]ll
requirements of law regarding the mailing of copies of notices or the publication of a copy of the Notice of Default
or the personal delivery of the copy of the Notice of Default and the posting and publication of copies of the Notice
of a Sale have been complied with." Borrowers became aware of the *1247 trustee's sale after they saw an eviction
notice posted on the front door of their residence in late July.
FN12. The trustee's deed conveyed the Property to "Royal Realty, a California corporation." Buyer was
sued as "Royal Realty," an unknown entity; Buyer, however, filed its answer to the complaint (as well as a
cross-complaint) as "D & I Investment, Inc., doing business as Royal Realty." Ip confirmed at trial that D
& I Investment, Inc. is a corporation that does business as Royal Realty. Thus, our references throughout
this opinion to Buyer are to D & I Investment, Inc., doing business as Royal Realty.
On September 14, Borrowers filed suit seeking, among other things, to set aside the trustee's sale and to cancel the
trustee's deed. [FN13] Borrowers named Lender, Buyer, and Trustee as defendants.
FN13. The record reflects that Buyer filed an action for unlawful detainer against Borrowers, case No.
CV141471. Borrowers sought an order consolidating their action with Buyer's unlawful detainer action.
The court denied that motion but ordered that trial of Borrowers' action precede trial of the unlawful
detainer action.
Borrowers filed a first amended complaint (complaint) on February 10, 2003, alleging seven causes of action.
Borrowers alleged that the trustee's sale under which Buyer took title to the Property was invalid because it was
conducted in violation of an alleged repayment agreement between Borrowers and Lender, as well as in violation of
the Lender's own internal procedures. The complaint asserted equitable and legal claims, including claims to cancel
the trustee's deed, to quiet title, and for wrongful foreclosure.
Prior to trial, Borrowers, Lender, and Trustee entered into a partial settlement. The settlement included the
dismissal of the wrongful foreclosure claim, and a stipulation that Lender and Trustee would remain as nominal
defendants as to the equitable claims to cancel the trustee's deed and to quiet title. [FN14]
FN14. The settlement stipulation included a recital that on June 11, 2003, the court granted summary
adjudication as to three causes of action, namely, claims for cancellation of deed based upon deprivation of
due process, breach of fiduciary duty (against Trustee), and breach of implied good faith covenant. (The
settlement also included a dismissal of the claim for an accounting.) While the court's summary
adjudication order was not made part of the record on appeal, there appears to be no dispute that the trial
proceeded between Borrowers and Buyer on only the causes of action for cancellation of trustee's deed, and
to quiet title. Lender and Trustee remained defendants as necessary parties; they, however, did not
actively participate at the trial.
**422 The case proceeded to a court trial on October 20, 2003. After a three-day trial, the court concluded that the
trustee's sale was valid and found for *1248 defendants. On December 23, 2003, the court entered a modified
statement of decision and judgment. [FN15]
FN15. Buyer filed a cross-complaint against Lender and Trustee, alleging, in essence, a contingent claim
for damages, i.e., that if Borrowers prevailed in the action, it would be as a result of the negligence of
cross-defendants, and that Buyer would be damaged thereby. The judgment therefore includes a recital that
because Borrowers did not prevail on their complaint, the cross-complaint was dismissed as moot.
Borrowers filed a notice of appeal on February 20, 2004. The appeal from the judgment was filed timely ( Cal.
Rules of Court, rule 2(a)(1)) and is a proper subject for appellate review.
DISCUSSION
I. Issues On Appeal
Borrowers challenge the court's entry of judgment against them, asserting the following:
1. The court used an incorrect standard in holding that Buyer was a BFP. (The court's finding directly implicated its
rejection of Borrowers' claims.) Using the proper standard, there was no substantial evidence to support the court's
conclusion that Buyer was a BFP.
2. The trustee's sale was void because it was held in violation of an agreement between Borrowers and Lender to
postpone the sale; the sale going forward notwithstanding this agreement was in violation of section 2924g,
subdivision (c)(2).
3. The court abused its discretion in finding that there were no irregularities with respect to the trustee's sale.
4. The court abused its discretion by concluding that the trustee's sale was valid since the sale was "contrary to law."
Because we deem it dispositive of this appeal, we begin by addressing the first contention. In so doing, we: (1)
summarize the parties' contentions; (2) briefly review the statutory scheme concerning nonjudicial foreclosures; (3)
identify the proper standard for determining whether a buyer at a foreclosure sale is a BFP; (4) determine whether
there was substantial evidence supporting the court's conclusion here that Buyer was a BFP; (5) discuss the legal
implications of Buyer's status as a BFP under the statutory presumptions *1249 of section 2924; and (6) decide the
legal effect-- disregarding section 2924--of Buyer as a BFP acquiring the Property at the trustee's sale. [FN16]
FN16. We discuss in part III, post, Borrowers' second contention that the foreclosure was invalid because it
violated the Repayment Agreement. Finding no merit to this contention, we need not address Borrowers'
remaining claims of error.
The court, in its modified statement of decision, concluded that Buyer "was a **423 bona fide purchaser of the real
property for value without notice of any adverse interest or of any irregularity in the sale proceedings.
Borrowers' challenge of the trustee's sale.) Borrowers contend that the court applied an incorrect standard. They
claim--citing Estate of Yates (1994) 25 Cal.App.4th 511, 32 Cal.Rptr.2d 53 (Yates )--that the test to determine
whether Buyer was a BFP should have been whether Buyer (1) was a speculator who frequently bought property at
foreclosure sales, and (2) purchased the Property at the trustee's sale for a price that was substantially less than its
fair market value. In the event that both questions are answered in the affirmative (Borrowers argue), the
foreclosure buyer cannot qualify as a BFP. Applying the Yates standard here, Borrowers assert that there was no
substantial evidence to support the conclusion that Buyer was a BFP.
Buyer responds that the court applied the proper standard in reaching the conclusion that it was a BFP. Quoting a
recent decision of this court, Buyer contends that it was a BFP because "[a] bona fide purchaser is one who pays
value for the property **without notice of any adverse interest or of any irregularity in the sale proceedings.
[Citations.]" (Nguyen v. Calhoun (2003) 105 Cal.App.4th 428, 442, 129 Cal.Rptr.2d 436 (Nguyen ).)
[1] "[S]ections 2924 through 2924k provide a comprehensive framework for the regulation of a nonjudicial
foreclosure sale pursuant to a power of sale contained in a deed of trust." (Moeller v. Lien (1994) 25 Cal.App.4th
822, 830, 30 Cal.Rptr.2d 777 (Moeller); see also Knapp v. Doherty (2004) 123 Cal.App.4th 76, 86-87, 20
Cal.Rptr.3d 1.)
[5] Under section 2924, there is a conclusive presumption [FN17] created in favor of a BFP who receives a
trustee's deed that **424 contains a recital that the trustee has fulfilled its statutory notice requirements. Section
2924 reads in relevant part: "A recital in the deed executed pursuant to the power of sale of compliance with all
requirements of law regarding the mailing of copies of notices or the publication of a copy of the notice of default or
the personal delivery of the copy of the notice of default or the posting of copies of the notice of sale or the
publication of a copy thereof shall constitute prima facie evidence of compliance with these requirements and
conclusive evidence thereof in favor of bona fide purchasers and encumbrancers for value and without notice."
[FN18]
FN17. "A 'conclusive presumption' requires the trier of fact to find the existence of the presumed fact from
the existence of the basic fact. An adverse party is not permitted to introduce evidence to contradict or rebut
the existence of the presumed fact. [Citation.]" (2 Jefferson, Cal. Evidence Benchbook (Cont.Ed.Bar 3d
ed. 2004) Presumptions, § 46.6, p. 1055; see also Cal. Law Revision Com. com., 29B pt. 2 West's Ann.
Evid.Code (1995 ed.) foll. § 601, p. 38.)
FN18. Buyer emphasizes the importance of this conclusive presumption in disposing of this case on appeal. The
potential application of this statutory presumption to this case is discussed in part II.E., post.
[6] Section 2924 does not contain a definition of "bona fide purchaser" to guide us in evaluating whether the
conclusive presumption of the statute is to be applied to a particular foreclosure sale in which the buyer has received
a trustee's deed containing the requisite recitals. In the context of applying the presumptions applicable under
section 2924, however, we have recently held that a BFP "is one who pays value for the property **without notice
of any adverse interest or of any irregularity in the sale proceedings. [Citations.]" (Nguyen, supra, 105 Cal.App.4th
at p. 442, 129 Cal.Rptr.2d 436.)
[7][8][9] *1251 This definition of a BFP in the context of section 2924 is consonant with decisions defining the
term under California's recording statutes, including sections 1107 [FN19] and 1214. [FN20] Thus, "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.]" (Hochstein v. Romero (1990) 219 Cal.App.3d
447, 451, 268 Cal.Rptr. 202; see also In re Marriage of Cloney (2001) 91 Cal.App.4th 429, 437, 110 Cal.Rptr.2d
615; Reiner v. Danial (1989) 211 Cal.App.3d 682, 689-690, 259 Cal.Rptr. 570.) " '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.]" (Gates Rubber Co. v. Ulman (1989) 214 Cal.App.3d 356, 364, 262 Cal.Rptr. 630.) **The
same elements exist to determine whether a party who takes or purchases a lien is a bona fide encumbrancer. (Caito
v. United California Bank (1978) 20 Cal.3d 694, 702, 144 Cal.Rptr. 751, 576 P.2d 466; First Fidelity Thrift & Loan
Assn. v. Alliance Bank (1998) 60 Cal.App.4th 1433, 1441, 71 Cal.Rptr.2d 295 (First Fidelity ).)
FN19. "Every grant of an estate in real property is conclusive against the grantor, also against everyone
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." (§ 1107.)
FN20. "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, and as
against any judgment affecting the title, unless the conveyance shall have been duly recorded prior to the
record of notice of action." (§ 1214.)
[10][11] Thus, the two elements of being a BFP are that the buyer (1) purchase the property in good faith for value,
and (2) have no knowledge or notice of the asserted rights of another. (14 Powell on Real Property (1996)
Recording Acts and Priorities, § 82.01[2], p. 82-12.)
**[12][13] The second element required to establish BFP status is that the buyer have neither knowledge nor notice
of the competing claim. (Triple A Management Co. v. Frisone (1999) 69 Cal.App.4th 520, 530, 81 Cal.Rptr.2d 669
(Triple A Management ).) The rationale for this requirement is that "[t]he recording laws were not enacted to protect
those whose ignorance of the title is deliberate and intentional ... Their purpose is to protect those who honestly
believe they are acquiring a good title, and who invest some substantial sum in reliance on that belief." (Beach v.
Faust (1935) 2 Cal.2d 290, 292-293, 40 P.2d 822.) "A person generally has 'notice' of a particular fact if that person
has knowledge of circumstances which, upon reasonable inquiry, would lead to that particular fact. [Citations.]"
(First Fidelity, supra, 60 Cal.App.4th at p. 1443, 71 Cal.Rptr.2d 295.)
Beach v. Faust, 2 Cal.2d 290, 40 P.2d 822 (Cal., Jan 25, 1935)
This controversy involves a one-third interest in a vacant tract of land in Kings County near the Kettleman Oil Field.
This interest originally stood of record in the name of B. W. Marks. While the interest in the property stood of
record in Marks' name, he filed a petition in bankruptcy, and was adjudicated a bankrupt by the United States
District Court for the Southern District of California, which includes Kings County. The order of adjudication was
made January 29, 1929. No certified copy of the decree of adjudication of bankruptcy was filed in Kings County, as
required by the Bankruptcy Act. Marks did not include the property in controversy in the schedule of assets, and the
trustee in bankruptcy did not learn of its existence until some time later. Without any knowledge of the bankruptcy,
T. A. Slocum, in May, 1929, paid Marks one hundred dollars for a quitclaim deed to the property. Shortly thereafter,
Frank F. Faust, one of the appellants, obtained a search of title which showed title vested in Marks, and contained no
reference to any bankruptcy proceedings. Faust then called on Marks, who told him that he (Marks) had conveyed
his interest in the property to Slocum, but *292 did not mention his (Marks') bankruptcy. Faust, without any
knowledge of the bankruptcy, then paid Slocum two hundred and fifty dollars for a deed to the property. Thereafter,
and on January 7, 1930, the trustee in bankruptcy, having learned of Marks' interest in the property, sold the one-
third interest to the plaintiff Beach, who bought the property for Frank C. Ayars, and the latter has been substituted
as the plaintiff in this action. In the meantime, one C. A. Walker instituted an action to quiet title against Marks and
others, covering the property. Lis pendens in usual form was recorded. Walker obtained judgment against Marks,
and subsequently quitclaimed the property to appellant Faust.
Upon this state of facts the trial court gave judgment for the plaintiff on the theory that the bankruptcy proceeding in
the federal court was constructive notice per se to all intending purchasers that Marks, the original owner of the
property, had been declared a bankrupt. There is some evidence that Marks told Slocum at the time he paid Marks
the one hundred dollars for a quitclaim deed that he did not think he was the owner of the property. As already
stated, Marks made no reference to his previous adjudication in insolvency. Concisely stated, the respondent claims
under the court sale in the bankruptcy proceeding, while the appellants claim under the quitclaim deeds from the
bankrupt Marks and Slocum and under the Walker judgment.
It is the contention of appellants that, since a certified copy of the order adjudicating Marks a bankrupt, and a
certified copy of the order approving the trustee's bond were not recorded in Kings County until after the recordation
of the quitclaim deeds referred to, and as both Slocum and Faust paid a consideration (not shown to be inadequate)
for the respective quitclaim deeds, Slocum was a bona fide purchaser for value, and without notice, and that Faust,
who acquired from Slocum, is similarly a bona fide purchaser, and is protected by the recording laws of this state.
(1) The recording laws were not enacted to protect those whose ignorance of the title is deliberate and intentional,
nor does a mere nominal consideration satisfy the requirement that a valuable consideration must be paid. Their
purpose is to protect those who honestly believe they are *293 acquiring a good title, and who invest some
substantial sum in reliance on that belief. (2) That a deed conveys merely "the right, title and interest" of the grantor
does not prevent the grantee from being a purchaser for a valuable consideration, without notice, within the
recording laws, so as to be protected from unrecorded instruments affecting the title to the property of which he had
no notice. (Phoenix Title & Trust Co. v. Old Dominion Co., 31 Ariz. 324 [253 Pac. 435, 59 A. L. R. 625]; Wisconsin
River Land Co. v. Selover, 135 Wis. 594 [116 N. W. 265, 16 L. R. A. (N. S.) 1073].) The pertinent provisions of our
own recording laws are found in sections 1213, 1214, and 1217 of the Civil Code. (3) It has long been the accepted
rule in this state that real estate, or an interest in real estate, can be aliened or assigned by a quitclaim deed.
(4) The adjudication of Marks in the bankruptcy court was not of itself notice per se, and the trustee was required
within thirty days after the adjudication to file a certified copy of the decree of adjudication in the office where
conveyances of real estate are recorded in every county where the bankrupt owned real estate not exempt from
execution. (U. S. Code, Title 11, sec. 75, subd. [c].) It is not here claimed the property was exempt.
(5) For the foregoing reason, we are of the view that the appellant Faust, defendant in the court below, was a bona
fide purchaser of the property in controversy, and was protected by the recording laws.
For these reasons, the judgment must be, and is, reversed.
Gibson v. Westoby, 115 Cal.App.2d 273, 251 P.2d 1003 (Cal.App. 2 Dist., Jan 08, 1953)
An inquisition of insanity found in a sister state is entitled to the same faith and credit as it receives in the state
where it was found, as to the issues decided.
Extraterritorial effect and recognition of adjudication of competency or incompetency, sanity or insanity, note,
The effect of an adjudication that a person is incompetent is to fix the status of incompetency until such time as the
incompetent is restored to capacity.
An adjudication that a person is incompetent constitutes notice to all the world of the incapacity of such person to
make a valid conveyance.
Wherever and whenever an adjudication of incompetency is binding on any person, it is equally binding on all
persons, though they had constructive notice only under the statute.
A void conveyance passes no title, and cannot be made the foundation of a good title even under the doctrine of
bona fide purchase.
Action by an incompetent for a judgment that a conveyance made by him was void. Order granting defendants a
new trial following a judgment for plaintiff, reversed.
Appeal by plaintiff from an order granting a new trial in an action by an incompetent for a decree that a conveyance
made by him was void.
On November 3, 1927, the District Court of Curry County, New Mexico, found that plaintiff “is a person of unsound
mind, insane and incompetent to look after his own affairs and it so ORDERED by the Court” and appointed a
guardian of his person and estate. This judgment was in full force and effect at least until January 16, 1950.
On June 28, 1949, the probate court of this state, in and for the County of Los Angeles, under the provisions of
section 1460 et seq., of the Probate Code, found that plaintiff “is unable, unassisted, to manage and take care of
himself or his property,” adjudged that he was incompetent, and appointed a guardian of his person and estate. This
judgment has been in full force and effect at all times in question.
On June 8, 1949, a deed purporting to have been signed and acknowledged by plaintiff on November 18, 1948,
granting a parcel of realty, a part of his estate, to John McMahon, was recorded. Plaintiff's guardian did not join in
the deed, and no court order was ever made authorizing its execution.
On June 27, 1949, John McMahon signed and acknowledged a deed conveying the parcel of realty to defendants.
This deed was delivered to defendants in the latter part of August, 1949, and was recorded September 6, 1949.
On the trial of the action the court found the facts stated and rendered judgment for plaintiff quieting his title in the
realty. Defendants' motion for a new trial was granted on *275 the grounds of insufficiency of the evidence to
support the findings and “error of law.”
The foregoing facts are undisputed. (1) An inquisition of insanity found in a sister state is entitled to the same faith
and credit as it receives in the state where it was found, as to the issues decided. (44 C.J.S. 92, § 32d.) The New
Mexico statute provides that the district court having supervision of the guardian of the estate of an insane or
incompetent person shall have the power, upon the petition of any interested party, to order and direct the sale or
conveyance of any part of his estate, real or personal, or both, upon such terms and under such conditions as, in its
discretion, it may deem fit and proper. (2 N.M. Stat. 1941 Anno. § 35-207.) In Frkovich v. Petranovich, 48 N.M.
382 [151 P.2d 337, 155 A.L.R. 295], it was held that this and related statutes provide an adequate procedure for the
sale and conveyance of property belonging to an insane or incompetent person, and that such a person should not be
divested thereof except by the most strict compliance with the law, and then only with the best security for the
preservation for his use and benefit of the proceeds of the divestiture. The court also held (151 P.2d 345): “It appears
to be the general rule that a conveyance obtained from an insane person by one having knowledge of his incapacity
will be set aside without requiring a restoration of the consideration received, under the principle that anyone
dealing with an insane person, knowing his insanity, deals with him at his own peril and must bear alone whatever
loss arises from the transaction.” (See 12 C.J.S. 1009, § 44(7).)
Section 40 of the Civil Code provides: “After his incapacity has been judicially determined, a person of unsound
mind can make no conveyance or other contract, nor delegate any power or waive any right, until his restoration to
capacity.” In Hellman Commercial T. & S. Bank v. Alden, 206 Cal. 592 [275 P. 794], In Hellman Commercial T. &
S. Bank v. Alden, 206 Cal. 592 [275 P. 794], it was adjudged under then sections 1763-1767 of the Code of Civil
Procedure (now Prob. Code, §§ 1461, 1462, 1470- 1472, 1631) that a party at the date of the filing of the petition
was “and for a long time prior thereto had been and was at the date thereof, by reason of old age and weakness of
mind, unable unassisted to properly care for himself or his property and by reason thereof was likely to be imposed
upon by designing and artful persons. ...” The court held (p. 604-605): “When, however, a court has regularly
adjudged one to be incompetent, he thereby becomes incapable *276 of making a valid contract, and it is deemed to
be void, not because he is unable, unassisted, to properly care for his property, or lacked understanding of the nature
and effect of the particular transaction, but because the decree of incompetency is notice to the world of his
incapacity to make a valid contract. ... It seems evident that the term incompetent is intended to include not only the
insane, but also those who are afflicted with less serious derangements of the mind. The adjudication of mental
incapacity therefore applies to both the insane and the incompetent regardless of the character or degree of the
mental derangement. No further evidence of mental incapacity is required under our statute while such a decree
remains in full force and effect. The proof of the adjudication of incompetency presupposes a lack of mental
capacity to understand the nature and effect of a contract.” In Carroll v. Carroll, 16 Cal.2d 761 [108 P.2d 420],
Hochstein v. Romero, 219 Cal.App.3d 447, 268 Cal.Rptr. 202 (Cal.App. 4 Dist., Mar 15, 1990)
SUMMARY
After her former husband's death, appellant applied for and obtained an order liquidating all past and future
amounts the husband had owed to appellant into a judgment for a sum certain; appellant subsequently caused the
issuance of an abstract of judgment thereon. The abstract was recorded. It reflected the former husband as the
judgment debtor and on the reverse side named the former husband's surviving spouse as an additional judgment
debtor. However, due to an indexing error, the surviving spouse was not then indexed on the county recorder's
general index as a judgment debtor to appellant. The surviving spouse sold residential property that she and the
husband had held in joint tenancy. Almost five months later the surviving spouse was indexed as a judgment debtor
to appellant. Appellant then applied, pursuant to Code Civ. Proc., § 704.750 et seq., for an order for sale of the
property. The trial court denied the application. (Superior Court of San Diego County, No. N42096, Don Martinson,
Judge.)
The Court of Appeal affirmed. It held that 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. The court
held that the new owners of the property sold by the surviving spouse were bona fide purchasers for value without
notice of appellant's purported judgment lien, since they paid substantial value for the property, the transaction was
negotiated at arms' length through real estate brokers, and due to the improper indexing they lacked constructive
notice of the judgment lien. (Opinion by Froehlich, J., with Benke, Acting P. J., and Huffman, J., concurring.) *448
HEADNOTES
(2a, 2b, 2c) Real Estate Sales § 112--Bona Fide Purchasers-- Constructive Notice--Effect of Indexing Error.
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. Thus, the trial court did not err in refusing to enforce
a purported lien of an abstract of judgment against residential property, where the present owners of the property
were bona fide purchasers and had no notice of the lienor's abstract prior to acquiring title to the property. The
owners paid substantial value for the property and the transaction was negotiated at arm's length through real estate
brokers. **They lacked constructive notice of the lien, since, due to improper indexing, the party who sold the
property to the owners was not indexed on the county recorder's general index as a judgment debtor to the lienor
until almost five months after the owners acquired their title. When a document is improperly indexed and hence not
locatable by a proper search, mere recordation is insufficient to charge the subsequent purchaser with notice.
[See Cal.Jur.3d, Real Estate Sales, § 342 et seq.; Am.Jur.2d, Vendor and Purchaser, § 655 et seq.]
FROEHLICH, J.
Joy Lynn J. Hochstein Romero (Romero) appeals from the judgment [FN1] denying her application, made pursuant
to Code of Civil Procedure section 704.750 et seq., for an order for sale of certain residential real property (the
property) owned by third party claimants and respondents Mark and Mickie Evans. Because there is substantial
evidence that the Evanses purchased the property as bona fide purchasers for value, without actual or constructive
notice of a purported judgment lien against the owner-seller of the property, Portia Hochstein, we conclude the trial
court correctly denied Romero's application.
FN1 Rulings entered on a creditor's application for order for sale of dwelling, made pursuant to Code of
Civil Procedure section 704.750 et seq., are appealable. (Code Civ. Proc., § 704.830.)
In October of 1986 Stuart married Portia and deeded the property to himself and Portia in joint tenancy. Stuart died
in November of 1986, vesting title to the property in Portia pursuant to the right of survivorship attendant to a joint
tenancy deed.
The only issue is whether they had notice of Romero's abstract before they acquired title on March 22, 1988.
(4) Because a purchaser acquires property subject to prior interests of which he has either actual or constructive
notice (see generally, 3 Miller & Starr, Current Law of Cal. Real Estate (2d ed. 1989) Recording and Priorities, §
8:38, p. 346), we examine each form of notice. *452
A. Constructive Notice
(2c) Romero contends the Evanses are charged with constructive notice of the abstract of judgment, based on the
fact that the abstract (as filed with the county recorder for recording) referred to Portia as an additional judgment
debtor. Ordinarily a recorded document imparts constructive notice to subsequent purchasers and precludes them
from acquiring the property as bona fide purchasers without notice, because the law conclusively presumes that a
party acquiring property has notice of the contents of a properly recorded document affecting such property. (Civ.
Code, §§ 1213, 1214; Anderson v. Willson (1920) 48 Cal.App. 289, 293 [191 P. 1016]; Sieger v. Standard Oil Co.
(1957) 155 Cal.App.2d 649, 656-657 [318 P.2d 479].)
However, before the constructive notice will be conclusively presumed, the document must be "recorded as
prescribed by law." (Civ. Code, § 1213.) A document not indexed as required by statute (see Gov. Code, §§ 27230-
27265), does not impart constructive notice because it has not been recorded "as prescribed by law." "The policy of
the law [requiring recordation and indexing] is to afford facilities for intending purchasers ... in examining the
records for the purpose of ascertaining whether there are any claims against [the land], and for this purpose it has
prescribed the mode in which the recorder shall keep the records of the several instruments, and an instrument must
be recorded as herein directed in order that it may be recorded as prescribed by law. If [improperly indexed], it is to
be regarded the same as if not recorded at all." (Cady v. Purser (1901) 131 Cal. 552, 558 [63 P. 844].) Thus, it is not
sufficient merely to record the document. "California has an 'index system of recording,' and ... correct indexing is
essential to proper recordation. [Citations.]" (4 Witkin, Summary of Cal. Law, op. cit. supra, at p. 407; see also 3
Miller & Starr, Current Law of Cal. Real Estate (2d ed. 1989) Recording and Priorities, §§ 8:16-8:20, pp. 308-314.)
The California courts have consistently reasoned that the conclusive imputation of notice of recorded documents
depends upon proper indexing because a subsequent purchaser should be charged only with notice of those
documents which are locatable by a search of the proper indexes. Conversely, where the document is improperly
indexed and hence not locatable by a proper search, mere recordation is insufficient to charge the subsequent
purchaser with notice.
In re Marriage of Cloney, 91 Cal.App.4th 429, 110 Cal.Rptr.2d 615, 00 Cal. Daily Op. Serv. 6925, 2001
SUMMARY
A woman, whose former husband was in arrears in both child and spousal support and who had therefore recorded
the couple's dissolution judgment in the county recorder's office, applied for a writ of execution and an order of sale
as to real property previously owned by the husband. During the transaction by which the current owner acquired the
property, the escrow officer, who was also a notary public, noticed that the husband held the property under a
nickname (Mike Cloney) and not his full legal name (James Michael Cloney, which was the name on the dissolution
judgment), but she did not report this discrepancy to the title department or to the purchaser. Finding that the title
company had no duty to search for anything other than Mike or Michael as a first name, and that the escrow officer's
knowledge about the name discrepancy should not be imputed to the title officer, the trial court issued an order
quashing the levy and denying the application for order of sale. (Superior Court of Humboldt County, No. 72716, J.
Michael Brown, Judge.)
The Court of Appeal reversed. It held that a valid judgment lien recorded against a judgment debtor under one name
imparts 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 of his or her agency, the
purchaser's escrow agent gains actual knowledge of both of the names used by the seller. This knowledge is imputed
to the purchaser. Thus, under the present facts, the current owner had constructive notice of the recorded judgment
and took subject to the lien. (Opinion by McGuiness, P. J., with Corrigan and Parrilli, JJ., concurring.) *430
HEADNOTES
(1) Appellate Review § 144--Scope of Review--Questions of Law and Fact-- Mixed Questions--Legal
Consequences Where Facts Are Undisputed.
On appeal from an order quashing a levy by a woman on real property previously owned by her former husband and
denying her application for an order of sale, the issue whether the current owner of the property could be charged
with notice of her judgment lien against her former husband and his assets was a mixed question of law and fact.
Because the facts in the case were undisputed, the appeal was subject to review de novo as to the legal consequence
of the fact that the escrow officer who handled the sale of the property knew that the name used by the husband as
titleholder differed from his full legal name, and as to the issue whether, as purchaser of the property from the
husband, the current owner had constructive notice of the lien created by the recorded judgment.
(3) Records and Recording Laws § 9--Records of Instruments or Other Writings Affecting Real Property--Effect of
Record.
**Every duly recorded conveyance of real property, or recorded judgment affecting title to or possession of real
property, is constructive notice of the contents thereof to subsequent purchasers and mortgagees from the time of
recordation. **By the same token, any conveyance of real property is void as against any prior recorded judgment
affecting the title.
(4a, 4b) Real Estate Sales § 112--Bona Fide Purchasers--Notice--Effect of Recorded Dissolution Judgment--Where
Property Held Under Different Name.
The trial court erred in quashing a woman's levy and denying an application for order of sale as to real property
previously owned by plaintiff's former husband. At the time the property was sold, the husband was in arrears in
child and spousal support, and plaintiff had recorded the dissolution judgment, properly indexed *431 and cross-
indexed under both parties' full legal names. During the sale transaction, the escrow officer, who was also a notary
public, noticed that the husband held that property under a nickname, but she did not report this discrepancy to the
title department or to the purchaser. However, a valid judgment lien recorded against a judgment debtor under one
name imparts 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 of his or her agency, the
purchaser's escrow agent gains actual knowledge of both of the names used by the seller. This knowledge is imputed
to the purchaser. Thus, under the present facts, the current owner had constructive notice of the recorded judgment
and took subject to the lien.
[See 4 Witkin, Summary of Cal. Law (9th ed. 1987) Real Property, § 203; 3 Miller & Starr, Cal. Real Estate (3d ed.
2000) Escrows, §§ 6:23, 6:26; West's Key Number Digest, Vendor and Purchaser k. 229(10).]
(5) Abstracters and Title Insurers § 5--Title Insurers--Nature of Relationship with Insured.
A title insurance company is not the agent of its insured, and the insurer's knowledge is not imputed to the insured.
(6) Agency § 27--Rights, Duties, and Liabilities--Duties and Liabilities of Agents to Principal--Imputed
Knowledge.
Under Civ. Code, § 2332, an agent has a duty to disclose material matters to his or her principal, and the actual
knowledge of the agent is imputed to the principal. **It is assumed that the agent will communicate to his or her
principal all information acquired in the course of the agency, and when the knowledge of the agent is ascertained
the constructive notice to the principal is conclusive.
(7) Escrows § 3--Competency, Duties, and Liabilities of Escrow Holder--Dual Agency--Imputation of Knowledge.
The holder of an escrow is agent for all parties up to the time that the escrow is closed. Because an escrow agent in
a real property conveyance is a dual agent for both the purchaser and the seller, any escrow agency is of a limited
and special nature, and the obligations imposed on an escrow agent to disclose matters to his or her principals are
more limited than those imposed on an agent pursuant to a general agency. Thus, in order for any knowledge
acquired by an escrow agent to be imputed to either principal, such knowledge must have been acquired by the agent
within the course and scope of the limited agency. Nevertheless, insofar as the *432 agent, acting within the course
and scope of the agency duties, acquires specific material information pertinent to matters within the same escrow
that could have a substantial adverse effect on the principal, such knowledge will be imputed to the principal.
COUNSEL
Mathews, Kluck & Walsh and Laurence A. Kluck for Respondent Lloyd A. Launer.
McGUINESS, P. J.
In this case, the trial court found that a dissolution judgment properly recorded by appellant Dana J. Gregg and duly
indexed under the name of the judgment debtor, appellant's former spouse James Michael Cloney, was not
constructive notice to respondent Lloyd A. Launer as the subsequent purchaser of real property from that same
judgment debtor holding title to the subject property under the name "Mike Cloney," even though respondent's
escrow agent acquired knowledge prior to close of escrow that James Michael Cloney and Mike Cloney were and
are one and the same person. Thus, the question presented in this appeal is whether a valid judgment lien, properly
recorded against a judgment debtor under one name, imparts constructive notice to a subsequent purchaser of real
property from the same judgment debtor using a different name, where the purchaser's escrow agent-acting within
the course and scope of her duties-gains actual knowledge of both of the names used by the seller. **We conclude
that it does, and that the trial court erred as a matter of law in determining otherwise. We therefore reverse the order
quashing appellant's levy on the subject real property and denying her application for an order of sale thereof.
By statute, notice may be actual or constructive. Actual notice is defined as "express information of a fact," while
constructive notice is that "which is imputed by law." (Civ. Code, § 18.) (2) **"A person generally has 'notice' *437
of a particular fact if that person has knowledge of circumstances which, upon reasonable inquiry, would lead to that
particular fact." (First Fidelity Thrift & Loan Assn. v. Alliance Bank (1998) 60 Cal.App.4th 1433, 1443 [71
Cal.Rptr.2d 295]; Civ. Code, § 19; 5 Miller & Starr, Cal. Real Estate (3d ed. 2000) Recording and Priorities, §§
11:49 to 11:51, 11:58 to 11:59, pp. 129-138, 147-151.) [FN4] It is "black-letter law" that a bona fide purchaser for
value who acquires his or her interest in real property without knowledge or notice of another's prior rights or
interest in the property takes the property free of such unknown interests. **On the other hand, as respondent
necessarily acknowledges, it is an equally well-established principle of law that any purchaser of real property
acquires the property subject to prior interests of which he or she has actual or constructive notice. (Stout v. Gill
(1930) 110 Cal.App. 445, 449 [294 P. 446]; Hochstein v. Romero (1990) 219 Cal.App.3d 447, 451-452 [268
Cal.Rptr. 202]; 5 Miller & Starr, Cal. Real Estate, supra, Recording and Priorities, §§ 11:49 to 11:51, pp. 129- 138.)
FN4 Civil Code section 19 provides as follows: "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."
(3) Every duly recorded conveyance of real property, or recorded judgment affecting title to or possession of real
property, is constructive notice of the contents thereof to subsequent purchasers and mortgagees from the time of
recordation. By the same token, any conveyance of real property is void as against any prior recorded judgment
affecting the title. (Hochstein v. Romero, supra,219 Cal.App.3d at pp. 451-452 ["a recorded document imparts
constructive notice to subsequent purchasers and precludes them from acquiring the property as bona fide purchasers
without notice, because the law conclusively presumes that a party acquiring property has notice of the contents of a
properly recorded document affecting such property"]; Civ. Code, §§ 1213-1214; Gov. Code, § 27282, subds. (a)(1),
(b).) [FN5] Under section 697.320, subdivision (a)(1), the recording of a certified copy of a judgment *438 for child
or spousal support creates a judgment lien on all real property owned by the judgment debtor in the county of the
recording. [FN6] Any purchaser of property subject to a lien created pursuant to Code of Civil Procedure section
697.320 takes title subject to that lien in the amount of the lien at the time of transfer plus interest accruing
thereafter, enforceable through levy and sheriff's sale. (Code Civ. Proc., §§ 697.390, subd. (b), 699.710, 700.015.)
[FN7]
FN5 Civil Code section 1213 provides in pertinent part: "Every conveyance of real property or an estate for
years therein acknowledged or proved and certified and recorded as prescribed by law from the time it is
filed with the recorder for record is constructive notice of the contents thereof to subsequent purchasers
and mortgagees ...." (Italics added.)
Civil Code section 1214 provides: "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, and as against any judgment affecting the title, unless the conveyance shall have been
duly recorded prior to the record of notice of action." (Italics added.)
Government Code section 27282 provides in pertinent part: "(a) The following documents may be recorded
without acknowledgment, certificate of acknowledgement, or further proof: [¶] (1) A judgment affecting
the title to or possession of real property, authenticated by the certificate of the clerk of the court in which
the judgment was rendered. [¶] ... [¶] (b) Any document described in this section, from the time it is filed
with the recorder for record, is constructive notice of the contents thereof to subsequent purchasers and
mortgagees." (Italics added.)
It is undisputed that respondent did not have actual knowledge "Mike" and James Michael Cloney are one and the
same individual. It is equally undisputed that Holcomb, respondent's escrow agent and an employee of respondent's
title insurance company, did obtain actual knowledge of that fact when she asked for identification from "Mike"
Cloney and received information identifying him as James Michael Cloney. (4a) The issue is whether the escrow
agent's actual knowledge of this fact may be imputed to respondent. To the extent it may, by law he necessarily also
had constructive notice of the judgment lien recorded against James Michael Cloney, and that the person from
whom he was purchasing the subject Property was a judgment debtor under appellant's recorded dissolution
judgment. (Code Civ. Proc., §§ 697.320, subd. (a)(1), 697.390, subd. (b); Civ. Code, §§ 1213-1214; Gov. Code, §
27282, subds. (a)(1), (b); Hochstein v. Romero, supra,219 Cal.App.3d at pp. 451-452.)
FN8 " 'The insured and the insurer deal at arm's length. There is no room for the operation of a fiduciary
relationship. The title company is in business for profit. It may be willing to assume risks that the insured
might think imprudent.' [Citation.] [¶] ... As a matter of express statutory law, a title company issuing a
preliminary report does not owe a negligence duty to a prospective insured. (Ins. Code, §§ 12340.10,
12340.11; see generally, Southland Title Corp. v. Superior Court (1991) 231 Cal.App.3d 530, 536-538 [282
Cal.Rptr. 425] [no negligence liability based on preliminary report].) [The title insurer] was simply selling
a product. Imputing its knowledge to [purchasers of real property] would be like imputing a car
salesperson's knowledge of defective brakes to an unsuspecting buyer, and then using that imputed
knowledge to subject the buyer to liability for reckless conduct for driving a car with actual knowledge that
its brakes didn't work. Such a conclusion would be contrary to law, as well as to the most basic notions of
fair play. It is no more appropriate here." (Lewis v. Superior Court, supra,30 Cal.App.4th at pp. 1869-1870,
fn. omitted.)
The question whether an escrow agent's knowledge may be imputed to the purchaser of real property, however, is
an entirely different matter.(6) As a general rule, an agent has a duty to disclose material matters to his or her
principal, and the actual knowledge of the agent is imputed to the principal. (Civ. Code, § 2332.) [FN9] "It is ...
well-settled law in this state that notice given to or possessed by an agent within the scope of his employment and in
connection with and during his agency, is notice to the principal. [Citations.] ... 'The general rule is well settled that
the knowledge of the agent in the course of his [or her] agency is the knowledge of the principal. [Citation.] It rests
on the assumption that the agent will communicate to his [or her] principal all information acquired in the course of
his [or her] agency, and when the knowledge of the agent is ascertained the constructive notice to the principal is
conclusive. [Citation.]' " (Early v. Owens (1930) 109 Cal.App. 489, 494 [293 P. 136]; see also Triple A Management
Co. v. Frisone (1999) 69 Cal.App.4th 520, 534-535 [81 Cal.Rptr.2d 669] ["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."].) *440
FN9 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."
(7) "It is well-settled law in California that the holder of an escrow is agent for all parties up to the time that the
escrow is closed. [Citations.]" (Early v. Owens, supra,109 Cal.App. at p. 494; cf. Steiner v. Rowley (1950) 35 Cal.2d
713, 718 [221 P.2d 9].) Because an escrow agent in a real property conveyance is a dual agent for both the purchaser
and the seller, any escrow agency is of a limited and special nature, and the obligations imposed on an escrow agent
to disclose matters to his or her principals are more limited than those imposed on an agent pursuant to a general
agency. For this reason, in order for any knowledge acquired by an escrow agent to be imputed to either principal,
such knowledge must have been acquired by the escrow agent within the course and scope of his or her limited
agency. Nevertheless, insofar as the escrow agent-acting within the course and scope of his or her agency duties-
acquires specific material information pertinent to matters within the same escrow that could have a substantial
adverse effect on the principal, such knowledge will be imputed to the principal. (Triple A Management Co. v.
Frisone, supra,69 Cal.App.4th at pp. 533-535 ["The scope of the imputation of knowledge is directly related to the
scope of the duty arising from the agency agreement; it has nothing to do with whether the agent actually has the
information in question or has it only constructively."]; Early v. Owens, supra,109 Cal.App. at p. 494; 5 Miller &
Starr, Cal. Real Estate, supra, Recording and Priorities, §§ 11:70, 11:74 to 11:75, pp. 177-180, 188-194; 3 Miller &
Starr, Cal. Real Estate, supra, Escrows, §§ 6:23, 6:26, pp. 52-56, 65- 72.) [FN10] *441
FN10 "As a general rule, knowledge acquired by an agent within the course and scope of agency duties is
imputed to the principal. Imputation is based on the theory that the agent will disclose to the principal that
which it is obligated to disclose.
"... An escrow agent is employed by the parties to perform the concurrent conditions of the sales or loan
transaction. The parties submit escrow instructions to the agent, and generally the agent's duties are limited
to the performance of the instructions. Prior to the performance of the concurrent conditions of the escrow,
the escrow agent is the agent of both parties.... "... When the escrow agent is the dual agent for both parties,
the knowledge of the escrow agent regarding matters within the same escrow is imputed to both parties to
the escrow. When an escrow agent receives a notice of revocation or termination by one party, its
knowledge is imputed to the other party because this fact is within the agent's duty of disclosure to the
principal. Similarly, when one party to the escrow changes the contents of the instructions, the escrow
agent's knowledge of the change is imputed to the principal. [¶] ... [¶]
"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." (3 Miller &
Starr, Cal. Real Estate, supra, Escrows, § 6:23, pp. 52-54, fns. omitted, italics added; see also Triple A
Management Co. v. Frisone, supra,69 Cal.App.4th at p. 534.)
"... Under the general rules of agency, the agent has a duty to disclose to a principal all matters that are
material to the principal or that may affect the principal's decision. Because of this duty, the knowledge of
the agent within the course and scope of agency duties usually is imputed to the principal.
"... In the case of an escrow agent, these agency principles are limited because the escrow agent is a dual
agent for both parties, and is only a special agent with those obligations prescribed by the instructions given
to it by the principals.... [¶] ... [¶]
"... As a special agent, the escrow agent's duty of disclosure is limited to those functions being performed
by the agent. Within the course and scope of these prescribed duties, the agent has a duty to disclose
material matters that would have a substantial adverse effect on the principal where it knows that the
principal is looking to the agent for protection as to those very facts. For example, it may be within the
scope of the agent's duties, and the agent may have a duty to disclose: a notice of assignment that is shown
in a title report received by the escrow agent, a judgment lien listed in a preliminary report that is not
described in the title policy, a true loan value that is crucial to a principal's decision to complete an
exchange, and the fact that a senior lien is not a construction loan." (3 Miller & Starr, Cal. Real Estate,
supra, Escrows, § 6:26, pp. 65- 66, fns. omitted, italics added.)
(4b) The question, then, is whether Holcomb's actual knowledge of Cloney's full name was acquired within the
course and scope of her escrow agency. We conclude that it was
**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 *442 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. (Triple A Management Co. v. Frisone,
supra,69 Cal.App.4th at p. 531; First Fidelity Thrift & Loan Assn. v. Alliance Bank, supra,60 Cal.App.4th at pp.
1443-1445.) At the very least, imputed knowledge of the fact the seller of the Property was actually named James
Michael Cloney placed respondent on reasonable inquiry notice of possible clouds to his title to the Property
recorded under this name. Under these circumstances, since appellant's dissolution judgment had been properly
recorded, the applicable statutes impose constructive knowledge of the existence of the judgment lien on respondent .
(Code Civ. Proc., §§ 697.320, subd. (a)(1), 697.390, subd. (b); Civ. Code, §§ 19, 1213-1214; Gov. Code, § 27282,
subds. (a)(1), (b); Triple A Management Co. v. Frisone, supra,69 Cal.App.4th at pp. 534-536; Hochstein v. Romero,
supra,219 Cal.App.3d at pp. 451-452; Early v. Owens, supra,109 Cal.App. at pp. 494-496; 5 Miller & Starr, Cal.
Real Estate, supra, Recording and Priorities, §§ 11:51, 11:59, pp. 137-138, 149-151.)
Respondent argues that Holcomb's acquisition of knowledge of the discrepancy in Cloney's name is irrelevant,
because she had no actual, personal knowledge of appellant's judgment lien, and did not mention the discrepancy to
First American's title department. Thus, respondent urges, Holcomb's discovery of Cloney's alternative names was
merely "incidental" to her escrow duties. Respondent's argument completely misses the point. The issue is not
whether Holcomb actually knew about appellant's recorded judgment lien against Cloney, or whether it was her duty
to search the state of Cloney's title. The pertinent question instead is whether Holcomb's actual, undisputed
knowledge of Cloney's true full name was acquired in the course and scope of her escrow agency, and therefore may
be imputed to respondent. If so, that imputed knowledge by itself is enough to place respondent on constructive
notice of the state of Cloney's title. (Code Civ. Proc., §§ 697.320, subd. (a)(1), 697.390, subd. (b); Civ. Code, §§
1213-1214; Gov. Code, § 27282, subds. (a)(1), (b); Triple A Management Co. v. Frisone, supra,69 Cal.App.4th at
pp. 534- 536; Hochstein v. Romero, supra,219 Cal.App.3d at pp. 451-452.)
Respondent next argues that Holcomb's actual, undisputed knowledge about Cloney's full name was not acquired
within the course and scope of her escrow agency, and therefore cannot be imputed to respondent.
Specifically, respondent insists Holcomb's knowledge of Cloney's actual identity, which she learned at the point she
asked him for *443 identification, "was acquired strictly in her capacity as a notary public." Because of the asserted
"coincidence" that Holcomb "also happens to be a notary public" in addition to being the parties' escrow agent, and
the testimony to the effect she received her notary's license independently of First American and was not separately
paid by her employer for performing notary duties, respondent claims the information about Cloney's name "had no
connection to her duties under the escrow instructions," did not have to be disclosed at all, and cannot be imputed to
respondent.
Under the record presented, we must reject this line of reasoning. Holcomb's request that Cloney produce
identification was made in the context of his one and only meeting with her as escrow agent, and was a necessary
part of his execution of the documents in escrow transferring and conveying the Property to respondent. The
necessity of identifying Cloney as the true owner and seller of the Property was part and parcel of the escrow itself.
The fact Holcomb coincidentally happened to be a notary public as well as the parties' escrow agent, and therefore
served in both capacities on this occasion, is essentially irrelevant.
It was in her capacity as escrow agent, and within the course and scope of the duties of that agency, that she needed
to ascertain the identity of the individual presenting himself to her as the seller. To put it another way, if Holcomb
had not been a notary public, she would simply have obtained some other individual in possession of that license to
notarize Cloney's signature. As escrow agent, she would still have needed to confirm that Cloney was in fact the
seller. Indeed, it would have been a violation of Holcomb's duties as escrow agent to have disbursed respondent's
purchase money to Cloney without first taking care to ascertain his identity. (3 Miller & Starr, Cal. Real Estate,
supra, Escrows, § 6:25, pp. 57-65.)
The fact that Cloney's actual full name was different from that appearing on the deed and other ownership
documents appertaining to the Property was clearly important information highly material to the escrow. Because
Holcomb acquired this knowledge in the context of the escrow itself and in the performance of her duties as escrow
agent, respondent had a right to this information, and she had a duty to give it to him. Knowledge of this material
information must therefore be imputed to respondent as a matter of law. (3 Miller & Starr, Cal. Real Estate, supra,
Escrows, §§ 6:23, 6:25 to 6:26, pp. 52-56, 65-72; 5 Miller & Starr, Cal. Real Estate, supra, Recording and Priorities,
§§ 11:51, 11:70, 11:74, pp. 137-138, 177-180, 188-189.) In short, the record shows that knowledge of Cloney's
actual full name and identity was material to the subject matter of Holcomb's escrow agency, and she acquired this
knowledge while acting in the course and scope of her duties as escrow agent for respondent. Because as escrow
agent she had a legal duty to disclose this information to her principal and will be presumed to have *444 fulfilled
this duty, the knowledge of Cloney's actual full name must be imputed to respondent. (Triple A Management Co. v.
Frisone, supra,69 Cal.App.4th at pp. 534- 535; 5 Miller & Starr, Cal. Real Estate, supra, Recording and Priorities,
§§ 11:49 to 11:51, 11:58 to 11:59, pp. 129-138, 147-151; 3 Miller & Starr, Cal. Real Estate, supra, Escrows, §§
6:23, 6:25 to 6:26, pp. 52-56, 57-72.)
Thus, we hold that an undisputedly valid judgment lien recorded 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 of his or her agency the purchaser's
escrow agent gains actual knowledge of both of the names used by the seller. Knowledge of the critical fact that
James Michael Cloney and Mike Cloney were one and the same person-learned prior to the close of escrow by
Holcomb in her capacity as respondent's escrow agent and in the course and scope of her duties-is imputed to
respondent. Respondent therefore had constructive notice of appellant's recorded judgment against James Michael
Cloney. (Code Civ. Proc., §§ 697.320, subd. (a)(1), 697.390, subd. (b); Civ. Code, §§ 19, 1213-1214, 2332; Gov.
Code, § 27282, subds. (a)(1), (b); Triple A Management Co. v. Frisone, supra,69 Cal.App.4th at pp. 530-531, 534-
536; First Fidelity Thrift & Loan Assn. v. Alliance Bank, supra,60 Cal.App.4th at pp. 1443-1445; Hochstein v.
Romero, supra,219 Cal.App.3d at pp. 451-452; Early v. Owens, supra,109 Cal.App. at pp. 494-496.)
Because the trial court erred as a matter of law in failing to impute to respondent the knowledge of Cloney's full
name acquired by respondent's escrow agent, we must reverse the trial court's order quashing appellant's levy on the
Property and denying her application for an order of sale.
Disposition
The order quashing appellant's levy on the Property and denying her application for an order of sale is reversed.
Appellant is awarded her costs on appeal.
Triple A Management Co., Inc. v. Frisone, 69 Cal.App.4th 520, 81 Cal.Rptr.2d 669, 99 Cal. Daily Op. Serv.
721, 99 Daily Journal D.A.R. 857 (Cal.App. 5 Dist., Jan 25, 1999)
SUMMARY
The assignee of a security interest in a deed of trust unilaterally signed an agreement subordinating the deed of trust
to a subsequent deed of trust and recorded that subordination agreement. Thereafter, the assignor paid its secured
debt and the earlier deed of trust was reconveyed to it. When the trustor of the subsequent deed of trust defaulted,
the assignor asserted its lien had first priority. However, the beneficiary of the subsequent deed of trust alleged, in
reliance on the subordination agreement, that it had first priority. **In the ensuing actions and cross-actions the trial
court determined the subordination agreement was ineffective and entered judgments accordingly. (Superior Court
of Fresno County, Nos. 506064-5 and 525623-5, James L. Quaschnick and Stephen Joseph Kane, Judges. FN* )
FN* Judge Quaschnick ruled on the motion for summary adjudication; Judge Kane was the trial judge and
made posttrial rulings regarding attorney fees.
**The Court of Appeal affirmed the judgment and denied a petition for a writ of mandate as moot. The court held
that the trial court did not err in determining that the subordination agreement was ineffective. **The beneficiaries
of the subsequent deed of trust were limited in their right to rely on the recorded subordination agreement **by
knowledge possessed by their escrow agent and imputed to the beneficiaries as principal, that the assignee of the
security interest in the deed of trust did not have the authority to execute the subordination agreement. Also, the
common law restriction on the predefault sale of a pledged debt instrument further applied to deprive the assignee of
the security interest of the unilateral right to subordinate the pledged deed of trust. The assignee had only a collateral
security interest in the deed of trust and thus could not subordinate that deed of trust to a subsequent lien, and
knowledge of that limitation was imputed to the subsequent lienholder through its escrow agent. (Opinion by
Vartabedian, J., with Ardaiz, P. J., and Wiseman, J., concurring.)
HEADNOTES
(1a, 1b, 1c, 1d, 1e, 1f) Deeds of Trust § 14--Priorities-- Subordination Agreement--Validity.
The trial court did not err in determining that a subordination agreement was ineffective. **The assignee of a
security interest in a deed of trust had unilaterally signed the agreement subordinating the deed of trust to a
subsequent deed of trust. **However, the beneficiaries of the subsequent deed of trust were limited in their right to
rely on the recorded subordination agreement by knowledge possessed by the beneficiaries' escrow agent and
imputed to them as principals, **that the executor of the subordination agreement owned only a collateral interest in
the deed of trust it subordinated and thus had no power to subordinate that deed of trust. Also, the common law
restriction on the predefault sale of a pledged debt instrument further applied to deprive the assignee of the security
interest of the unilateral right to subordinate the pledged deed of trust. The assignee had only a collateral security
interest in the deed of trust and thus could not subordinate that deed of trust to a subsequent lien, and knowledge of
that limitation was imputed to the subsequent lienholder through its escrow agent.
[See 3 Witkin, Summary of Cal. Law (9th ed. 1987) Security Transactions in Real Property, § 41 et seq.]
(2) Deeds of Trust § 14--Priorities--Good Faith Encumbrancer for Value:Words, Phrases, and Maxims--Good Faith
Encumbrancer for Value.
A good faith encumbrancer for value who records first takes its interest in the real property free and clear of
unrecorded interests (Civ. Code, §§ 1107, 1214). An encumbrancer in good faith and for value means a person who
has taken or purchased a lien and who has parted with something of value in consideration thereof. A good faith
encumbrancer is one who acts without knowledge or notice of competing liens on the subject property. If a trustee
executes an unauthorized reconveyance and the trustor subsequently conveys the property, a grantee who does not
have notice of the trustee's lack of authority receives title free and clear of the lien. Similarly, a junior lender has the
right to rely on a state of record title which indicates that a senior lien will be satisfied out of the interests of all
signatories to a senior promissory note. A secret agreement that the senior lien will be satisfied out of the interests of
only some of the signatories is not binding upon the junior encumbrancer.
[See 3 Miller & Starr, Cal. Real Estate (2d ed. 1989) §§ 8:2, 8:3.]
(3) Deeds of Trust § 14--Priorities--Good Faith Encumbrancer for Value--Use of Escrow Agent.
In the absence of conflicting knowledge, a good faith encumbrancer is entitled to rely on the recorded chain of title
in determining from whom he or she needs to obtain a subordination agreement in order to establish his or her lien
as the first priority deed of trust (Civ. Code, § 1214). The fact that the encumbrancer searches and evaluates the
record through an escrow or title agent does not in any manner diminish his or her right to rely on the state of the
record title.
(7) Appellate Review § 50--Presenting and Preserving Questions in Trial Court--Judgment--Adequacy of Statement
of Decision.
Failure to determine a material issue in a statement of decision can, in some circumstances, be reversible error if
there is evidence that would support a finding in the opposing party's favor.
COUNSEL
Dietrich, Glasrud & Jones, Dietrich, Glasrud, Mallek & Aune and Bruce A. Owdom for Defendants and Appellants,
for Plaintiffs and Appellants and for Petitioners Larry F. Frisone and Robert D. Frisone. *524
Alborg, Veiluva & Cannata, Thomas E. Alborg and Michael J. Veiluva for Defendant, Cross-complainant and
Appellant, for Cross-complainant, Cross-defendant and Respondent and for Petitioner Stewart Title of Modesto.
Albert J. Berryman; Caswell, Bell, Hillison, Burnside & Greer, Robert K. Hillison and Robert A. Werth for Cross-
complainant, Cross-defendant and Appellant and for Defendant, Cross-complainant and Appellant Western Farm
Credit Bank.
Wild, Carter & Tipton and Steven E. Paganetti for Plaintiff and Respondent, for Defendant and Respondent and for
Real Party in Interest Triple A Management Company, Inc.
VARTABEDIAN, J.
The assignee of a security interest in a deed of trust unilaterally signed an agreement subordinating the deed of trust
to a subsequent deed of trust. Thereafter, the assignor paid its secured debt and the earlier deed of trust was
reconveyed to it. **When the trustor of the subsequent deed of trust defaulted, the assignor asserted its lien had first
priority. **However, the beneficiary of the subsequent deed of trust contended, in reliance on the subordination
agreement, that it had first priority. **Among other findings, the trial court determined the subordination agreement
was ineffective. It entered judgments and awarded attorney fees in accordance with this underlying finding. Various
parties have appealed from different aspects of the judgment. We affirm the judgment in its entirety.
In 1988, Triple A Management Company, Inc. (hereafter Triple A) bought 140 acres near Kingsburg from Western
Farm Credit Bank (hereafter Western). Western secured its purchase money loan of $504,000 to Triple A with a first
deed of trust on the property. Triple A farmed the property.
Triple A agreed, in 1992, to sell 20.4 acres of the property to Greenwood Estates Associates (hereafter Greenwood)
for $525,000. Greenwood promised to pay $100,000 as a down payment and to deliver a promissory note, secured
by deed of trust on the property, in the amount of $425,000. As a condition of the sale, Triple A agreed to
subordinate its security interest in favor of any future “development loan” not to exceed $1.6 million. **Western
agreed to release the 20.4 acres from its lien in return for assignment to it of the Greenwood promissory note and
deed of trust as additional collateral for the original Triple A debt. *525
The parties opened an escrow at Stewart Title of Modesto (hereafter Stewart Title). **We refer to this escrow as
escrow 1, in keeping with the practice of the parties to this appeal. The escrow instructions directed Stewart Title “to
prepare the necessary Assignment of Deed of Trust” so that Western's interest in the Greenwood debt could be
recorded.
While its escrow with Triple A was pending, Greenwood agreed to sell the 20.4-acre parcel to Mark Sullivan. FN1
The purchase price of $990,000 was to be paid by Sullivan's assumption of the Greenwood promissory note to
Triple A, his execution of a new note to Greenwood in the amount of $340,000 secured by a third deed of trust on
the property, and by payment of $350,000 cash obtained from a new loan. FN2 Sullivan was to obtain the cash from
the Frisones, private investment lenders who operated through several family trusts. The parties opened escrow for
the resale of the 20.4 acres; **that escrow was also with Stewart Title. **Among the seller's escrow instructions was
one directing that title would vest in Sullivan subject to “Deed of Trust to be of record at close of escrow in favor of
[Triple A] and collaterally assigned to [Western] securing a loan in the amount of $425,000.00 ... shall be ...
subordinated to the loan in favor of [Frisones].” The Frisones' escrow instructions directed Stewart to release the
loan funds only when the Frisones' deed of trust would be the first priority lien on the property and when Stewart
had issued a lender's title insurance policy insuring the Frisones' first lien status. **We will refer to this escrow as
escrow 2, as do the parties.
FN1 Sullivan was a nominal buyer acting on behalf of others. The details of the relationship between
Sullivan and the others, Abourezk-Ray Real Estate Development, Investors Lending, Ron Shapazian and
Lee Abourezk, are not relevant to the issues on appeal. Accordingly, we will refer to the aggregation, direct
and remote parties to the purchase from Greenwood, as Sullivan.
FN2 The escrow closing statement demonstrates Sullivan included in his financing various fees,
commissions, and other charges (some which of were paid to those on whose behalf Sullivan acted). Thus,
the total amount borrowed exceeded the purchase price.
After a time, both escrows were assigned to the same escrow agent at Stewart Title, **Carol Wheeler.
On July 6, 1993, Greenwood signed the note and deed of trust called for in escrow 1 (both the note and the deed of
trust are dated June 14, 1993). **Triple A signed a security agreement granting Western a security interest in the
Greenwood note and deed of trust, and on August 3, 1993, **Triple A executed a recordable assignment of the
Greenwood deed of trust. We set forth the operative portions of that assignment verbatim. The assignment is on a
preprinted form and was prepared by Stewart Title; preprinted portions are rendered in normal typeface, portions
inserted by typewriter are indicated in italics, and handwritten portions are rendered in boldface. *526
“Collateral
“For Value Received, the undersigned hereby grants, assigns and transfers to Western Farm Credit Bank, a
California corporation, all beneficial interest under that certain Deed of Trust dated June 14, 1993, executed by
Triple A Management Company, Inc., a California corporation, Trustor, to Stewart Title of Modesto, a California
corporation, Trustee, and recorded as Instrument No. concurrently herewith, 1993, in Book ___, Page ___, of
Official Records in the Office of the County Recorder of Fresno County, State of California;
“Together with the note or notes therein described or referred to, the money due and to become due thereon with
interest, and all rights accrued or to accrue under said Deed of Trust.” FN3
FN3 Although the parties do not base any of their arguments on this point, the assignment of deed of trust
misidentified the deed of trust to be assigned. Greenwood, not Triple A, is the trustor in the Greenwood
deed of trust.
Documents from escrow 1 were recorded on August 17, 1993. Among those recorded were the Greenwood deed of
trust and the Triple A assignment of that deed of trust to Western.
As escrow 1 moved forward, **Greenwood attempted to obtain Triple A's agreement to subordinate the Greenwood
deed of trust to the proposed lien of the Frisones, although it is not clear exactly the level of detail of Greenwood's
request. **Triple A categorically refused to subordinate its interest because it did not want to reopen negotiations
with Western.
**After Triple A refused to subordinate its interest to the Frisones, Stewart Title prepared a subordination agreement
using its standard preprinted form for signature by Western. FN4 **This document, dated August 4, 1993, was signed
by Donald O'Dell, assistant vice-president, on behalf of Western on August 18, 1993, and recorded on August 23,
1993. The subordination agreement describes Western as the “present owner and holder of the [Greenwood] deed of
trust and note” and states that the Frisones are expressly relying on the subordination in funding their loan to
Sullivan. **O'Dell testified that Greenwood's principal, Roger Rule, represented to him Triple A had agreed to the
subordination. **O'Dell also said Wheeler of Stewart Title told him the *527 subordination was that required by the
original Greenwood/Triple A agreement. Nevertheless, the subordination agreement itself provides in boldface
uppercase letters: “Notice: This subordination agreement contains a provision which allows the person obligated on
your real property security to obtain a loan a portion of which may be expended for other purposes than
improvement of the land.” In addition, O'Dell signed a representation that he had read and approved the estimated
closing statement for escrow 2, which had been delivered to him with the subordination agreement. The closing
statement clearly disclosed that the new loan was for the purchase of the property. O'Dell testified at trial that he
merely glanced at the documents before he signed them, on the assumption that Triple A would carefully scrutinize
the subordination agreement he assumed would be presented to it.
FN4 **There was no evidence that Wheeler knew Triple A had refused to subordinate when she decided
Western was the proper party to execute the subordination agreement. The evidence suggests a principal in
Greenwood, Roger Rule, had told her Western would sign the subordination agreement, but Rule did not
testify at trial. Apparently he had absconded.
On August 18, 1993, Sullivan executed a promissory note and deed of trust in favor of the Frisones and a note and
deed of trust in favor of Greenwood. Western's subordination agreement was recorded and escrow 2 closed on
August 23, 1993. Stewart Title issued to the Frisones a lender's title insurance policy insuring that, as of August 23,
1993, the Frisones' deed of trust enjoyed first priority among the deeds of trust recorded against the property.
After making one quarterly interest payment on the Greenwood-Triple A note, Sullivan defaulted on that loan.
Western recorded a substitution of trustee and notice of default in September of 1994; in these documents Western
asserted it was “the present Beneficiary” under the Greenwood deed of trust. In 1995, Triple A satisfied its original
debt to Western; Western's assignee reconveyed to Triple A the Greenwood note and deed of trust.
**On March 21, 1994, Triple A filed an action against the Frisones and Sullivan for a declaration that its lien on the
20.4 acres was superior to the Frisones' lien. Its amended complaint also alleged causes of action for negligence and
breach of fiduciary duty against Stewart Title and Western. **The Frisones filed an action for declaration of the
priority of their deed of trust on January 4, 1995. The complaint also included related causes of action for injunctive
relief and damages against Triple A, Western and its related entities, Sullivan and his related entities, and the
Greenwood interests. Various defendants filed cross-complaints for damages and indemnity against each other.
Pertinent to this appeal are the cross-complaints of Stewart Title and Western against each other. All of the actions
were consolidated.
The Frisones moved for a preliminary injunction to prevent Triple A and Western from nonjudicially foreclosing on
the Greenwood deed of trust. *528 **Judge O'Neill denied the preliminary injunction and the Frisones appealed.
(Frisone v. Triple A Management Co., No. F023088.)By nonpublished opinion filed June 18, 1996, this court
reversed the trial court and ordered issuance of the preliminary injunction.
While the preliminary injunction appeal was pending, Western moved for summary adjudication of several of the
Frisones' causes of action. On June 20, 1996, Judge Quaschnick granted the motion in part, concluding that Western
was entitled to judgment on the Frisones' count 3, breach of contract, because Western had not breached the
subordination agreement.
Trial on the remaining counts began on September 10, 1996. Trial was before the court, sitting without a jury. Judge
Kane bifurcated the issues for trial. The first portion of the trial concerned the declaratory judgment counts. **On
September 24, 1996, the court issued an oral statement of decision in favor of Triple A and against the Frisones. As
restated in its October 18, 1996, memorandum of decision, the court concluded that the Frisones did not directly rely
on Western's subordination agreement, since they did not know about it. To the extent Stewart was the Frisones'
agent and did rely on the subordination agreement, **that reliance was unreasonable because Stewart had actual
knowledge that the assignment of the Greenwood deed of trust to Western was not a full assignment but was for
security purposes only. **Impliedly, the court concluded the security agreement did not empower Western
unilaterally to subordinate the Greenwood deed of trust **and Stewart would have discovered this if it had used due
diligence to inquire about the “collateral” assignment of that deed of trust to Western.
The court then conducted the damages phase of the trial. After hearing from expert and other witnesses, the court
filed a proposed statement of decision on December 3, 1996, which it made final on January 23, 1997. **The court
concluded Stewart Title was negligent in its preparation of the original collateral assignment and the subordination
agreement. **It held that Triple A was damaged by this negligence in that it was forced to incur attorney fees to
protect its lien priority. **The court concluded Western was negligent in executing the subordination agreement, but
that this negligence did not proximately cause anyone loss. **The court denied the new trial motions filed by
Stewart Title and the Frisones by order dated March 5, 1997. **The court denied Western's request for attorney fees
from Stewart but awarded a portion of its attorney fees against Triple A.
Stewart Title and the Frisones filed timely notices of appeal. Western filed a timely notice of appeal from the denial
of its request for attorney fees against Stewart Title. The appeals were consolidated. *529
While the appeal was pending, Stewart Title and the Frisones filed a petition for writ of mandate in this court
seeking to vacate the trial court's order expunging a notice of lis pendens the Frisones had recorded on June 23,
1995. This court stayed the order expunging the lis pendens on July 31, 1997, and issued an order to show cause on
September 26, 1997. Hearing on the order to show cause subsequently was ordered to occur at the time for oral
argument on the merits of the appeal.
Discussion
I. The Stewart Title and Frisone Appeals
A. Issues Presented
Stewart Title and the Frisones (sometimes referred to collectively in this part I as appellants) primarily contend they
were entitled to rely on the recorded assignment of the Greenwood deed of trust in seeking subordination from
Western only. They contend the trial court charged them with knowledge in escrow 2 of unrecorded documents that
were part of the unrelated escrow 1 in order to bar them from reliance on the recorded assignment of the Greenwood
deed of trust.
Appellants also contend Western actually had the power to execute the subordination agreement under the terms of
its security interest in the Greenwood promissory note and deed of trust. Finally, they contend Western breached the
subordination agreement by representing that it owned the Greenwood deed of trust, if and to the extent it did not
have the full power under the security agreement to subordinate that deed of trust.
Stewart Title also contends it should not have been required to pay Triple A's attorney fees under the “tort of
another” doctrine since Triple A itself was at fault in creating the conflict that resulted in this litigation. This issue is
addressed in the unpublished portion of this opinion.
(1a) The Frisones and Stewart Title both contend the Frisones were good faith encumbrancers for value and, as such,
were protected by the conclusive presumption that the recorded state of title to the property reflected the true state of
title. Accordingly, they contend, the Frisones were entitled to rely on the subordination agreement signed by
Western, since the recorded assignment of the Greenwood deed of trust established Western as the owner of the
beneficial interest under that deed of trust. Further, they *530 claim the trial court erred in refusing to determine
whether the Frisones were good faith encumbrancers; the trial court stated that such a determination was irrelevant.
(2) “A good faith encumbrancer for value who first records takes its interest in the real property free and clear of
unrecorded interests. (Civ. Code, §§ 1107, 1214; 3 Miller & Starr, Cal. Real Estate (2d ed. 1989) Recording and
Priorities, §§ 8:2, 8:3, pp. 270, 273 [unrecorded instrument not enforceable against subsequent bona fide purchaser
who first records].) 'An encumbrancer in good faith and for value means a person who has taken or purchased a
lien ... and who has parted with something of value in consideration thereof. [Citation.] ... [A] ”good faith“
encumbrancer is one who acts without knowledge or notice of competing liens on the subject property. [Citations.]' (
Brock v. First South Savings Assn. (1992) 8 Cal.App.4th 661, 667....)If a trustee executes an unauthorized
reconveyance and the trustor subsequently conveys the property, a grantee who does not have notice of the trustee's
lack of authority receives title free and clear of the lien. ( Firato v. Tuttle (1957) 48 Cal.2d 136, 139....)Similarly, a
junior lender has the right to rely on a state of record title which indicates that a senior lien will be satisfied out of
the interests of all signatories to a senior promissory note. A secret agreement that the senior lien will be satisfied
out of the interests of only some of the signatories is not binding upon the junior encumbrancer. ( Caito v. United
California Bank (1978) 20 Cal.3d 694, 702....)” ( First Fidelity Thrift & Loan Assn. v. Alliance Bank (1998) 60
Cal.App.4th 1433, 1440-1441 [ 71 Cal.Rptr.2d 295].)
(3) Thus, it clearly is the law that, in the absence of conflicting knowledge, a good faith encumbrancer is entitled to
rely on the recorded chain of title in determining from whom he needs to obtain a subordination agreement in order
to establish his lien as the first priority deed of trust. The fact that the encumbrancer searches and evaluates the
record through an escrow or title agent does not in any manner diminish his right to rely on the state of the record
title. (See Civ. Code, § 1214.) Indeed, given the pervasive role of title companies as escrow agents in California, a
contrary conclusion would substantially eviscerate Civil Code section 1214. (1b) We conclude the trial court erred
in finding the Frisones did not rely on the state of the recorded chain of title.
(4) Several limitations are inherent in the protection afforded a good faith encumbrancer for value, however; two
such limitations are relevant in the present case. **First, the subsequent encumbrancer is permitted only to rely on
the recorded state of title as that state of title objectively presents itself: the subsequent encumbrancer is not entitled
to view the record either through rose-colored glasses or with blinders on. That is, he is not entitled *531 to interpret
ambiguities in his own favor nor is he entitled to ignore reasonable warning signs that appear in the recorded
documents. **Second, a lender is not entitled to ignore information that comes to him from outside the recorded
chain of title, to the extent such information puts him on notice of information that reasonably brings into question
the state of title reflected in the recorded chain of title. (First Fidelity Thrift & Loan Assn. v. Alliance Bank, supra,
60 Cal.App.4th at pp. 1443, 1445.)
In First Fidelity, an earlier lender erroneously reconveyed its deed of trust and that reconveyance was duly recorded .
A new lender knew that the borrower had listed the earlier loan as an encumbrance of the property on his loan
application, but its review of the record title disclosed the reconveyance. The new lender contacted the borrower's
bank (which was not the earlier lender) and was told the earlier loan had been paid off. The new lender funded its
loan and recorded its deed of trust. At no time did it contact the earlier lender to inquire about the status of the loan.
(First Fidelity Thrift & Loan Assn. v. Alliance Bank, supra, 60 Cal.App.4th at pp. 1436-1438.)The earlier lender
eventually discovered its mistake, filed a lis pendens, and successfully obtained an order rerecording its deed of trust
as of the date of the lis pendens.
After the borrower defaulted on both outstanding loans, the earlier lender sued the new lender to establish the
priority of its deed of trust. Losing in the trial court on summary judgment, the earlier lender appealed. The Court of
Appeal recognized that in some circumstances information outside the chain of title (in this case, the borrower's loan
application listing the earlier encumbrance) can operate to put a subsequent lender on notice of an unrecorded
interest in the property if it has “knowledge of circumstances which, upon reasonable inquiry, would lead to that
particular fact.” (First Fidelity Thrift & Loan Assn. v. Alliance Bank, supra, 60 Cal.App.4th at p. 1443.)The court
concluded, however, that this was a limited duty of inquiry that the new lender had discharged by its additional
inquiry to the borrower and his bank. Accordingly, the court held, the new lender was entitled to first priority.(Id. at
p. 1445.)
First Fidelity involved information generated by the subsequent lender outside the chain of title . In Buehler v.
Oregon-Washington Plywood Corp. (1976) 17 Cal.3d 520 [ 131 Cal.Rptr. 394, 551 P.2d 1226] the issue was
whether parol evidence was admissible to establish a limitation on a recorded easement that was not explicit on the
face of the recorded document. The easement, granted by appellants' predecessor in interest to respondents'
predecessor in interest, granted a right to transport harvested timber across appellants' property. The easement was in
gross, but the easement could only be transferred to an entity that owned at least one-third of the timber on *532
certain surrounding lands. (Id. at pp. 527-528.)A dispute arose when appellants learned that one respondent was
transporting across appellants' property timber harvested at remote locations. Appellants contended the original
grantors and grantees had intended the easement to be limited to the transport of timber harvested on the grantors'
lands and those immediately surrounding. In granting summary judgment, the trial court concluded respondents
were entitled to rely on the easement as recorded, since the language of the easement was clear and did not contain
any such limitation. (Id. at p. 526.)
“Appellants also challenge the trial court's determination that [one respondent] was a bona fide purchaser. The trial
court had based this determination upon an uncontradicted showing that [this respondent] 'had no knowledge of any
interpretation other than the plain meaning of the document.' But the [easement] [had no 'plain meaning.'] Thus the
issue is whether [respondent or its predecessor] are chargeable with notice of appellants' claims.... It has been said
that: ' ”In so far as a purchaser has actual or constructive notice of a conveyance or other instrument executed by one
previously owning or claiming to own the land, he is charged with notice of all matters stated or referred to in such
conveyance, which may possibly affect the title, **and he is bound to make any inquiries or researches suggested by
such statements or references.“ ' [Citations.]
“When a 'conveyance in a chain of title under which a purchaser for value claims shows on its face it is so
ambiguous as to leave room for reasonable difference of opinion as to what was granted, or when the grant contains
limiting or qualifying words sufficient to cast reasonable doubt on what was intended to be granted, the purchaser
will be chargeable with notice of this ambiguity, and the effect of these limiting or qualifying words, and his rights,
if controversy comes up, must be left to be determined by the courts, ...' [Citations.]” ( 17 Cal.3d at p. 529.)
**The court concluded that a triable issue of fact existed “as to whether [respondent] should have investigated any
competing claims” under the easement. ( 17 Cal.3d at p. 529.)
(1c) **Thus, the state of the law, as exemplified by Buehler and First Fidelity, is clear: if the reference to
“collateral” in the title of the assignment of the Greenwood deed of trust and the reference to the assignment as
additional security in the instructions provided to Stewart Title in connection with escrow 2 were sufficient to give
the Frisones knowledge that they should have investigated Western's authority to subordinate that deed of trust, then
the Frisones are chargeable with what a reasonable investigation would have revealed. “The constructive notice
imparted by the recording of *533 a document has been extended to charge an intending purchaser [or
encumbrancer] with a duty to investigate the rights afforded by an unrecorded document referred to in that recorded
document.” ( Gates Rubber Co. v. Ulman (1989) 214 Cal.App.3d 356, 365 [ 262 Cal.Rptr. 630].)
Accordingly, we must determine whether these two documents-the recorded “collateral assignment” and the escrow
instruction identifying the assignment of the Greenwood deed of trust as “collaterally assigned ... securing a loan”-
placed upon the Frisones a duty to inquire about the nature of Western's interest in the Greenwood deed of trust. If
so, we must then determine what they would have found had they inquired: FN5 if Western actually had the power to
subordinate the Greenwood deed of trust, the knowledge with which the Frisones are chargeable merely authorizes
the transaction that in fact occurred.
FN5 As Civil Code section 19 states: “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.”
However, before we reach those issues, we must address two intervening points. **First, both Stewart Title and the
Frisones argue that knowledge obtained by Stewart Title should not be imputed to the Frisones. **Second, the
Frisones contend the trial court failed to make a finding that they were not good faith encumbrancers for value and
the matter initially must be remanded for such a finding. We turn to those issues.
We agree, as Stewart Title and the Frisones argue, that the trial court attributed too broad a scope to the agency
relationship between the two appellants. Thus, the trial court impermissibly imputed to the Frisones the knowledge
Stewart Title obtained in escrow 1, as we will discuss below. **Nevertheless, the trial court was correct in
concluding that Stewart Title was indeed the Frisones' agent; the parameters of that agency relationship, although
narrower than described by the trial court, are well established in California law. The limited question of importance
to this appeal is whether, within the true scope of Stewart Title's agency, Stewart Title's knowledge of the contents
of the escrow 2 instructions and the recorded documents in the chain of title for the property conveyed in escrow 2
are properly to be imputed to the Frisones. **We will conclude such knowledge must be imputed to them.
The well-regarded treatise on California real estate law by Miller and Starr contains a detailed and extensive
summary of the law of agency as it applies *534 to real estate transactions and escrow agents. (See 2 Miller & Starr,
Cal. Real Estate (2d ed. 1989) ch. 3, p. 2 et seq. [agency generally]; id. at § 5:21, pp. 438-442 [escrow agents]; 3
Miller & Starr, Cal. Real Estate, supra, § 8:56, p. 378; id. at § 8:61, p. 387 [notice imputed through agent].) (5a) The
authors state:
“An escrow agent is employed by the parties to perform the concurrent conditions of the sales or loan transaction.
The parties submit escrow instructions to the agent, and generally his duties are limited to the performance of the
instructions....
**“As a general rule, knowledge acquired by an agent within the course and scope of his agency duties is imputed to
the principal. Imputation is based on the theory that the agent will disclose to his principal that which he is obligated
to disclose.
“As a dual agent for both parties, the knowledge of the escrow agent regarding matters within the same escrow is
imputed to both parties to the escrow....
“On the other hand, the escrow agent is only a limited or special agent, and his obligations to disclose matters to his
principal are also limited.... [¶ ] ... Based on this principle, knowledge acquired by the escrow agent beyond the
scope of his limited agency is not imputed to either principal....
“... The knowledge of an escrow agent acquired in [an earlier] escrow where one principal [in a second escrow] is
not a party is not imputed to the principal who is not a party to that [earlier] escrow.” (2 Miller & Starr, supra, §
5:21, pp. 438-440, fns. omitted.)
(1d) This rule concerning knowledge obtained in separate escrows is not merely one based on practical
considerations, as Triple A suggests in attempting to distinguish cases cited by appellants. Thus, in discussing La
Mancha Dev. Corp. v. Sheegog (1978) 78 Cal.App.3d 9 [ 144 Cal.Rptr. 59] and Far West Savings & Loan Assn. v.
McLaughlin (1988) 201 Cal.App.3d 67 [ 246 Cal.Rptr. 872], Triple A argues the separate escrows in those cases
occurred months apart and may not even have involved the same employee of the escrow company. In the present
case, Triple A argues, the simultaneity of the escrows and the singularity of the escrow officer render imputation of
the knowledge permissible.
We disagree. (5b) 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 *535
will be presumed to have fulfilled this duty. (Cf. Contini v. Western Title Ins. Co. (1974) 40 Cal.App.3d 536, 547 [
115 Cal.Rptr. 257]; Jaffe v. Heffner (1959) 173 Cal.App.2d 512, 518 [ 343 P.2d 374].) The scope of the imputation
of knowledge is directly related to the scope of the duty arising from the agency agreement; it has nothing to do with
whether the agent actually has the information in question or has it only constructively (see Kirby v. Palos Verdes
Escrow Co. (1986) 183 Cal.App.3d 57, 65 [ 227 Cal.Rptr. 785]), or whether it is practical to expect the agent to
remember something that happened months ago (see 2 Miller & Starr, supra, § 5:21, pp. 439-441).
(1e) Similarly, we reject Triple A's contention that the trial court did not in fact impute Stewart Title's knowledge
gained in escrow 1 to the Frisones in escrow 2. The trial court stated: “Stewart was the Frisones' agent and to the
extent [Western] misrepresented things to Stewart [in escrow 2], which Stewart reasonably relied upon, Frisones
could properly seek damages against [Western] based on those misrepresentations. [¶] **In this case, however,
Stewart's reliance on [Western] was not reasonable at all. Stewart, through Wheeler, knew that [Western] was not
the owner and holder of the Greenwood Note and deed of trust. Wheeler knew this because [Western's] escrow
instructions [in escrow 1] so indicated.” (Capital lettering omitted.)
Nevertheless, on appeal we review the trial court's result, not its reasoning. ( Belair v. Riverside County Flood
Control Dist. (1988) 47 Cal.3d 550, 568 [ 253 Cal.Rptr. 693, 764 P.2d 1070].) In this case, it is correct to impute to
the Frisones knowledge of the two critical facts we have identified above. **One fact, that Triple A had “collaterally
assigned to [Western] securing a loan ...” the Greenwood deed of trust, was contained in the escrow instructions in
escrow 2. Subordination of that deed of trust to its own deed of trust was an express precondition to release of the
Frisones' funds; the Frisones instructed Stewart Title to release the funds only if this precondition were
accomplished. Accordingly, Stewart Title obtained that knowledge in the course of the agency for which the
Frisones had employed it. FN6 **The second fact, that the assignment to Western was a “collateral assignment,” was
reflected in the chain of title to the property being transferred in escrow 2. As such, the statutes impose constructive
knowledge of the contents of the assignment on Stewart Title as the Frisones' agent and on the Frisones directly.
(See Civ. Code, § 1213.)
FN6 This knowledge is imputed due to Stewart Title's status as escrow agent, not because of its role as title
insurer, as appellants contend. (Cf. Lewis v. Superior Court (1994) 30 Cal.App.4th 1850, 1856, 1869-1870
[ 37 Cal.Rptr.2d 63].)
Accordingly, we conclude the Frisones had imputed and constructive knowledge of the two facts that we deem
critical to the resolution of this case. We agree with appellants that the law does not permit us to impute to *536 the
Frisones the actual knowledge Stewart Title may have had concerning the content of the underlying, unrecorded
security agreement between Triple A and Western, nor of the content of the escrow instructions in escrow 1, because
Stewart Title's actual knowledge of those matters was obtained outside the scope of its agency on behalf of the
Frisones.
D. The Trial Court's Refusal to Make a Finding on Good Faith Encumbrancer for Value Status
In response to Stewart Title's request for statement of decision, the court issued a proposed statement of decision on
December 3, 1996. It subsequently reiterated that statement of decision after considering the parties' objections. Of
particular relevance is the following passage (the format of the statement of decision is a restatement of Stewart
Title's statement of the issue followed by the court's resolution of the issue):
“5. Whether [Western] and/or Triple A should be estopped from claiming that [Western] was the owner of the entire
beneficial interest of the Greenwood Deed of Trust.
“Neither should be estopped because neither Stewart nor the Frisones reasonably relied upon Triple A's execution of
Exhibit No. 5 [the collateral assignment of deed of trust] or [Western's] execution of Exhibit No. 10 [the
subordination agreement].
“6. Whether Frisones are bona fide encumbrancers for value by virtue of their making the loan to Sullivan in Escrow
No. 2.
“In view of the findings of fact and conclusions of law which this court has made, this is not a relevant issue.”
(6) 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. ( Hochstein
v. Romero (1990) 219 Cal.App.3d 447, 451 [ 268 Cal.Rptr. 202].) (7) Further, Code of Civil Procedure section 632
requires the court, upon request, to issue a statement of decision “explaining the factual and legal basis for its
decision as to each of the principal controverted issues at trial.” Failure to determine a material issue in a statement
of decision can, in some circumstances, be reversible error if there is evidence that would support a finding in the
opposing party's favor. ( Sperber v. Robinson (1994) 26 Cal.App.4th 736, 745 [ 31 Cal.Rptr.2d 659].)
(1f)Since, in our view, the Frisones' status as good faith encumbrancers for value is a key issue in this case-
dispositive, if it is resolved in the *537 Frisones' favor-we tread very cautiously in this area. If we took the trial
court's conclusion that “this is not a relevant issue” literally and in isolation, we would be constrained to reverse the
judgment and remand for a statement of decision on this issue if there was substantial evidence to support a finding
in the Frisones' favor. (See Miramar Hotel Corp. v. Frank B. Hall & Co. (1985) 163 Cal.App.3d 1126, 1130 [ 210
Cal.Rptr. 114].)
Viewing the trial court's conclusion in context, however, we must conclude the trial court did not simply refuse to
decide the critical issue of the Frisones' status as good faith encumbrancers. Rather, the court decided a subissue of
the good faith issue against the Frisones, and only then concluded the broader question was “not a relevant issue.”
We explain.
**As noted in our earlier exposition of the good faith encumbrancer question, one cannot be afforded that status if
he fails to investigate the state of title after he is put on notice (constructively) by recorded documents in the chain of
title or (actually) by information acquired from any source that the state of title is questionable. (See p. 530,
ante.)**There was no evidence whatsoever that Stewart Title or the Frisones attempted in any way to investigate the
meaning of the “securing a loan” and “collateral” information in their actual and constructive possession. **Thus,
there was no issue of fact to resolve concerning the diligence of any investigation by appellants. (See First Fidelity
Thrift & Loan Assn. v. Alliance Bank, supra, 60 Cal.App.4th at p. 1445.)
**The trial court did expressly find, both in its memorandum of decision following trial and in its statement of
decision that Stewart Title, as the Frisones' agent, could not reasonably conclude that the collateral assignment of
deed of trust conveyed to Western the full beneficial interest in the Greenwood deed of trust, which is the only
circumstance that would permit the Frisones to have good faith encumbrancer status without further inquiry.
**Accordingly, on the state of the evidence in this case, the court's finding is in all practical respects a finding that
Stewart Title and the Frisones were on reasonable notice of the need to investigate further the true meaning of the
assignment to Western that appeared of record. (See Buehler v. Oregon-Washington Plywood Corp., supra, 17
Cal.3d at p. 529.)
**For these reasons, we conclude the trial court's express finding on the reasonableness issue constitutes, by
necessity, an implied finding that the Frisones were not good faith encumbrancers for value. As such, the court's
failure to make an express finding on the good faith encumbrancer issue is harmless. ( Manson v. Reed (1986) 186
Cal.App.3d 1493, 1504 [ 231 Cal.Rptr. 446]; see Sperber v. Robinson, supra, 26 Cal.App.4th at p. 745.)We
therefore return to the question whether there was substantial evidence *538 to support the finding the trial court
impliedly and of necessity made, namely, that the Frisones were not good faith encumbrancers for value because
they had sufficient information to impose upon them a duty of inquiry concerning Western's power to subordinate
the Greenwood deed of trust.
There are very few published cases addressing the question of what facts constitute sufficient notice to raise a duty
of inquiry (see, e.g., Kirby v. Palos Verdes Escrow Co., supra, 183 Cal.App.3d at pp. 65-66; Greiner v. Kirkpatrick
(1952) 109 Cal.App.2d 798, 801 [ 241 P.2d 564]), and none of those cases involves the meaning to be attributed to a
“collateral assignment” of a deed of trust. (See 3 Miller & Starr, Cal. Real Estate, supra, § 8:62, pp. 388-390
[collecting cases]; see generally, Annot., Recorded Real Property Instrument as Charging Third Party With
Constructive Notice of Provisions of Extrinsic Instrument Referred to Therein (1979) 89 A.L.R.3d 901.)
In Bank One Texas v. Pollack (1994) 24 Cal.App.4th 973 [ 29 Cal.Rptr.2d 510], the issue concerned a creditor's duty
of inquiry under Civil Code section 19. The case involved a Texas bank that obtained a judgment in Texas against
one Pollack for $1.2 million. Six years before entry of the judgment, Pollack had transferred all of his assets to an
inter vivos trust over which he retained the power of revocation until his death. ( 24 Cal.App.4th at p. 976.)Pollack
died in 1989 leaving an insolvent estate. In December of 1989, the Texas bank obtained a California judgment based
on the Texas judgment; it duly recorded an abstract of the judgment against Pollack in Los Angeles County. (Ibid.)
Also in December of 1989, the Bank of Montreal settled certain claims against the inter vivos trust and Pollack's
estate by accepting a promissory note secured, in part, by a deed of trust on Pollack's Los Angeles County residence,
owned by the trust. ( 24 Cal.App.4th at p. 977.)After the trust defaulted on the Bank of Montreal loan and the bank
conducted a foreclosure sale of the residence, a dispute arose between the two banks over the proceeds of the sale.
(Ibid.)
The appellate court noted that pursuant to Probate Code former section 18201 (repealed by Stats. 1991, ch. 992, § 2,
p. 4617), a creditor of an insolvent estate is entitled to levy directly on any assets held by a trust that the decedent
had the power to revoke during his lifetime. The court further noted that “one is presumed to know the law” and,
therefore, the Bank of Montreal was to be “charged with actual knowledge of Probate Code section 18201.” ( 24
Cal.App.4th at p. 981.)The Bank of Montreal also had actual knowledge Pollack's estate was insolvent and that the
trust was revocable *539 during Pollack's lifetime. (Ibid.) **“Armed with this knowledge, a prudent person would
ascertain whether there were liens recorded against the decedent or his estate [in addition to any liens recorded
against the trust itself]. Accordingly, [the Bank of Montreal] is charged with constructive notice of the lien recorded
by [the Texas bank against Pollack's estate], and it thus took the [deed of trust on the residence owned by the trust]
with notice of another's rights.” (Id. at p. 982.)
While the Bank One case obviously has many dissimilarities to the case now before us, it is similar to the present
case with respect to the interaction between constructive knowledge of the law and actual knowledge of certain
facts. In this case, the security transaction between Western and Triple A was governed by division 9 of the
California Uniform Commercial Code (hereafter UCC). (Com. 4, 23C West's Ann. Cal. U. Com. Code (1990 ed.)
foll. § 9102, subd. (3), p. 297; Black v. Sullivan (1975) 48 Cal.App.3d 557, 564 [ 122 Cal.Rptr. 119].) Accordingly,
the Frisones and Stewart Title are charged with constructive knowledge of the relevant provisions of the UCC. (See
Bank One Texas v. Pollack, supra, 24 Cal.App.4th at p. 981.)Section 9207, subdivision (1), of the UCC provides:
“A secured party must use reasonable care in the custody and preservation of collateral in his possession. In the case
of an instrument or chattel paper reasonable care includes taking necessary steps to preserve rights against prior
parties unless otherwise agreed.” (Italics added.)
**Armed with the knowledge that Western owned only a collateral or security interest in the Greenwood deed of
trust, and charged with the knowledge that, unless otherwise agreed, the secured party had no power to subordinate
the security interest against Greenwood (i.e., to fail “to preserve rights against prior parties”), **a reasonable and
prudent lender would have inquired about the exact nature of the security interest held by Western. (Bank One Texas
v. Pollack, supra, 24 Cal.App.4th at p. 982; see also Citizens Nat. Bank v. Davisson (1913) 229 U.S. 212, 223 [33
S.Ct. 625, 629, 57 L.Ed. 1153].) FN7 There is no evidence in the record that the Frisones or Stewart Title, as their
agent, conducted such an inquiry. Accordingly, the Frisones are chargeable with notice of the terms of the security
agreement; they were not entitled to rely on an interpretation of the collateral assignment that would impute to
Western the authority to unilaterally subordinate the Greenwood deed of trust.(Buehler v. Oregon-Washington
Plywood Corp., supra, 17 Cal.3d at p. 529; see *540Radunich v. Basso (1965) 235 Cal.App.2d 826, 835 [ 45
Cal.Rptr. 824].) FN8 We now turn to the final question in this part of the inquiry, whether Western in fact-that is,
based on what appellants would have discovered had they made reasonable inquiry-had the power under the security
agreement to unilaterally subordinate the Greenwood deed of trust.
FN7 As it turns out, the security agreement between Triple A and Western “otherwise agreed” that Western
had no duty “to take any action to preserve any rights of or against any prior or other parties in connection
with the Collateral ....” The present case, of course, does not involve any failure of Western to take action
to preserve the priority of the Greenwood deed of trust but, rather, affirmative action it took to undermine
the priority of that deed of trust.
FN8 The Frisones also argue briefly that the trial court erred in granting summary adjudication against
them on their cause of action against Western for breach of the subordination agreement, of which the
Frisones were a third party beneficiary. Although the contention is not renewed in the Frisones' reply brief,
we address it briefly. The alleged breach, in essence, was of the warranty of title: Western asserted in the
subordination agreement that it was the owner of the deed of trust and had the power to subordinate it to the
Frisones' lien. The warranty of title, in analogous circumstances involving the sale of goods under division
2 of the UCC, is excluded in “circumstances which give the buyer reason to know that the person selling
does not claim title in himself or that he is purporting to sell only such right or title as he or a third person
may have.” (Cal. U. Com. Code, § 2312.)An official comment to this section states that such circumstances
include sales by “sheriffs, executors, foreclosing lienors and persons similarly situated.” (Com. 5, 23A
West's Ann. Cal. U. Com. Code (1964 ed.) foll § 2312, p. 243.) **We conclude notice to appellants that
Western held only a security interest in the deed of trust constituted circumstances excluding any assertion
of warranty of title.
The parties agree that Western's actual rights in the Greenwood promissory note and deed of trust are those rights
that exist as described in or as a result of the unrecorded security agreement executed by Triple A upon its
assignment of the deed of trust to Western. After a brief historical digression, we will turn to the content of that
security agreement.
Prior to the adoption of the UCC in 1963, it clearly was the law that, in the absence of an agreement between the
parties ( Johnson v. Mortgage Guarantee Co. (1931) 117 Cal.App. 416, 421-422 [ 4 P.2d 208]), a secured party did
not have the power to “sell, compromise, or otherwise discharge the pledged debt, or the security therefor, without
the consent of the pledgor.” ( Revert v. Hesse (1920) 184 Cal. 295, 300 [ 193 P. 943]; see former Civ. Code, § 3006
[repealed at the time of adoption of UCC].) (The secured party could, of course, assign his own interest in the
collateral. ( 184 Cal. at p. 300.)) These rules reflected both the state of the common law and the law under former
Civil Code section 3006. ( Traders Bank v. Wilcox (1919) 42 Cal.App. 24, 27 [ 183 P. 256]; see generally, Rest.,
Security, §§ 20-23.) The rule was applicable both before any default by the pledgor (see generally, Knudsen v. Hill
(1964) 227 Cal.App.2d 639 [ 38 Cal.Rptr. 859]) and after default. That is, even after default by the pledgor, the
secured party was not entitled to sell the pledged note at a foreclosure sale, but instead was entitled only to collect
the pledged note as it came due (Traders Bank v. Wilcox, supra, 42 Cal.App. at pp. 27-28 [noting certain exceptions
not relevant here]), so long as the pledged note was not itself in default ( Beatty v. Pacific States S. & L. Co. (1935)
4 Cal.App.2d 692, 699 [ 41 P.2d 378]).*541
Where the secured party attempted to dispose of or impair the pledged debt, the pre-UCC rights of the pledgor were
summarized as follows: “[I]f the pledgee sells or releases the debt or security otherwise than upon collection, the
pledgor may set aside the sale or release, if other circumstances permit, or hold the pledgee for conversion.” (Beatty
v. Pacific States S. & L. Co., supra, 4 Cal.App.2d at p. 699; see generally, Rest., Security, supra, § 24.)
With the adoption of the UCC in 1963 (see Stats. 1963, ch. 819), former Civil Code section 3006 was repealed
(Stats. 1963, ch. 819, § 2, p. 1997) and a new rule was adopted: under UCC section 9504, regardless of the nature of
the collateral pledged by a debtor, “[a] secured party after default may sell, lease or otherwise dispose of any or all
of the collateral ....” (Cal. U. Com. Code, § 9504, subd. (1).) “When collateral is disposed of by a secured party after
default, the disposition transfers to a purchaser for value all of the debtor's rights therein ...,” subject to certain
conditions concerning good faith. (Id.,§ 9504, subd. (4).)
Nevertheless, in order for a secured party to exercise its right to sell or otherwise dispose of the collateral under the
UCC, the debtor must be “in default under a security agreement” for which the collateral is security. (Cal. U. Com.
Code, § 9501, subd. (1); see Meadows, Warranties of Title, Foreclosure Sales, and the Proposed Revision of U.C.C.
§ 9-504: Has the Pendulum Swung Too Far?(1997) 65 Fordham L.Rev. 2419, 2419, fn. 2; see also Riebe v. Budget
Financial Corp. (1968) 264 Cal.App.2d 576, 588 [ 70 Cal.Rptr. 654] [discussing similar restrictions on powers of
pawn broker who receives notes as collateral].)
The parties have not cited any cases containing a modern, post-UCC statement of the powers of a pledgee of
promissory notes when the pledgor is not in default. Our own research has not disclosed any case specifically
discussing this issue. FN9 The novel question we must address is, after adoption of the UCC, what is the relationship
between the pledgor and pledgee prior to any default by the pledgor?
FN9 In Hersch v. Citizens Savings & Loan Assn. (1983) 146 Cal.App.3d 1002, 1010 [ 194 Cal.Rptr. 628], it
seems assumed that the secured party was not entitled to sell the debt instruments pledged to it if the
pledgor was not in default on the primary obligation.
California Uniform Commercial Code section 1103 states: “Unless displaced by the particular provisions of this
code, the principles of law and equity ... shall supplement its provisions.” The UCC affirmatively changed the law
regarding postdefault sale or disposition of pledged debt instruments, permitting such sale where it had been
previously prohibited. (See Cal. Annot. to Proposed U. Com. Code (1960) Deering's Ann. Cal. U. Com. Code, §
9504 (1986 ed.) pp. 577-578.) However, the national and *542 California official comments to section 9207 both
state that the code carries forward the common law in the predefault situation. (See Deering's Ann. Cal. U. Com.
Code, § 9207, supra, at pp. 447-448.)Further, the purposes of and rationale for the prior law continue unabated
under the UCC. (See, e.g., Knudsen v. Hill, supra, 227 Cal.App.2d at p. 645 [absence of ready market and difficulty
of valuation of private debt obligations]; Traders Bank v. Wilcox, supra, 42 Cal.App. at p. 27 [same, and adequacy
of other remedies].)
Accordingly, we conclude the common law restriction on predefault sale (Traders Bank v. Wilcox, supra, 42
Cal.App. at p. 29) of a pledged debt instrument continues to govern California security transactions. (See Ibrahim v.
Ford Motor Co. (1989) 214 Cal.App.3d 878, 896-898 [ 263 Cal.Rptr. 64]; AtlasThriftCo. v. Horan (1972) 27
Cal.App.3d 999, 1008 [ 104 Cal.Rptr. 315, 59 A.L.R.3d 389].) Thus, in the absence of an agreement between Triple
A and Western to the contrary, Western did not have the right unilaterally to sell, release or subordinate the
Greenwood deed of trust.
SUMMARY
The assignee of a security interest in a deed of trust unilaterally signed an agreement subordinating the deed of trust
to a subsequent deed of trust and recorded that subordination agreement. Thereafter, the assignor paid its secured
debt and the earlier deed of trust was reconveyed to it. When the trustor of the subsequent deed of trust defaulted,
the assignor asserted its lien had first priority. However, the beneficiary of the subsequent deed of trust alleged, in
reliance on the subordination agreement, that it had first priority. In the ensuing actions and cross-actions the trial
court determined the subordination agreement was ineffective and entered judgments accordingly. (Superior Court
of Fresno County, Nos. 506064-5 and 525623-5, James L. Quaschnick and Stephen Joseph Kane, Judges. FN* )
FN* Judge Quaschnick ruled on the motion for summary adjudication; Judge Kane was the trial judge and
made posttrial rulings regarding attorney fees.
The Court of Appeal affirmed the judgment and denied a petition for a writ of mandate as moot. The court held that
the trial court did not err in determining that the subordination agreement was ineffective. **The beneficiaries of the
subsequent deed of trust were limited in their right to rely on the recorded subordination agreement by knowledge
possessed by their escrow agent and imputed to the beneficiaries as principal, that the assignee of the security
interest in the deed of trust did not have the authority to execute the subordination agreement. Also, the common law
restriction on the predefault sale of a pledged debt instrument further applied to deprive the assignee of the security
interest of the unilateral right to subordinate the pledged deed of trust. The assignee had only a collateral security
interest in the deed of trust and thus could not subordinate that deed of trust to a subsequent lien, and knowledge of
that limitation was imputed to the subsequent lienholder through its escrow agent. (Opinion by Vartabedian, J., with
Ardaiz, P. J., and Wiseman, J., concurring.)
HEADNOTES
(1a, 1b, 1c, 1d, 1e, 1f) Deeds of Trust § 14--Priorities-- Subordination Agreement--Validity.
The trial court did not err in determining that a subordination agreement was ineffective. **The assignee of a
security interest in a deed of trust had unilaterally signed the agreement subordinating the deed of trust to a
subsequent deed of trust. **However, the beneficiaries of the subsequent deed of trust were limited in their right to
rely on the recorded subordination agreement by knowledge possessed by the beneficiaries' escrow agent and
imputed to them as principals, that the executor of the subordination agreement owned only a collateral interest in
the deed of trust it subordinated and thus had no power to subordinate that deed of trust. Also, the common law
restriction on the predefault sale of a pledged debt instrument further applied to deprive the assignee of the security
interest of the unilateral right to subordinate the pledged deed of trust. The assignee had only a collateral security
interest in the deed of trust and thus could not subordinate that deed of trust to a subsequent lien, and knowledge of
that limitation was imputed to the subsequent lienholder through its escrow agent.
[See 3 Witkin, Summary of Cal. Law (9th ed. 1987) Security Transactions in Real Property, § 41 et seq.]
(2) Deeds of Trust § 14--Priorities--Good Faith Encumbrancer for Value:Words, Phrases, and Maxims--Good Faith
Encumbrancer for Value.
A good faith encumbrancer for value who records first takes its interest in the real property free and clear of
unrecorded interests (Civ. Code, §§ 1107, 1214). An encumbrancer in good faith and for value means a person who
has taken or purchased a lien and who has parted with something of value in consideration thereof. A good faith
encumbrancer is one who acts without knowledge or notice of competing liens on the subject property. If a trustee
executes an unauthorized reconveyance and the trustor subsequently conveys the property, a grantee who does not
have notice of the trustee's lack of authority receives title free and clear of the lien. Similarly, a junior lender has the
right to rely on a state of record title which indicates that a senior lien will be satisfied out of the interests of all
signatories to a senior promissory note. A secret agreement that the senior lien will be satisfied out of the interests of
only some of the signatories is not binding upon the junior encumbrancer.
[See 3 Miller & Starr, Cal. Real Estate (2d ed. 1989) §§ 8:2, 8:3.]
(3) Deeds of Trust § 14--Priorities--Good Faith Encumbrancer for Value--Use of Escrow Agent.
In the absence of conflicting knowledge, a good faith encumbrancer is entitled to rely on the recorded chain of title
in determining from whom he or she needs to obtain a subordination agreement in order to establish his or her lien
as the first priority deed of trust (Civ. Code, § 1214). The fact that the encumbrancer searches and evaluates the
record through an escrow or title agent does not in any manner diminish his or her right to rely on the state of the
record title.
(7) Appellate Review § 50--Presenting and Preserving Questions in Trial Court--Judgment--Adequacy of Statement
of Decision.
Failure to determine a material issue in a statement of decision can, in some circumstances, be reversible error if
there is evidence that would support a finding in the opposing party's favor.
COUNSEL
Dietrich, Glasrud & Jones, Dietrich, Glasrud, Mallek & Aune and Bruce A. Owdom for Defendants and Appellants,
for Plaintiffs and Appellants and for Petitioners Larry F. Frisone and Robert D. Frisone. *524
Alborg, Veiluva & Cannata, Thomas E. Alborg and Michael J. Veiluva for Defendant, Cross-complainant and
Appellant, for Cross-complainant, Cross-defendant and Respondent and for Petitioner Stewart Title of Modesto.
Albert J. Berryman; Caswell, Bell, Hillison, Burnside & Greer, Robert K. Hillison and Robert A. Werth for Cross-
complainant, Cross-defendant and Appellant and for Defendant, Cross-complainant and Appellant Western Farm
Credit Bank.
Wild, Carter & Tipton and Steven E. Paganetti for Plaintiff and Respondent, for Defendant and Respondent and for
Real Party in Interest Triple A Management Company, Inc.
VARTABEDIAN, J.
The assignee of a security interest in a deed of trust unilaterally signed an agreement subordinating the deed of trust
to a subsequent deed of trust. Thereafter, the assignor paid its secured debt and the earlier deed of trust was
reconveyed to it. **When the trustor of the subsequent deed of trust defaulted, the assignor asserted its lien had first
priority. **However, the beneficiary of the subsequent deed of trust contended, in reliance on the subordination
agreement, that it had first priority. **Among other findings, the trial court determined the subordination agreement
was ineffective. It entered judgments and awarded attorney fees in accordance with this underlying finding. Various
parties have appealed from different aspects of the judgment. We affirm the judgment in its entirety.
In 1988, Triple A Management Company, Inc. (hereafter Triple A) bought 140 acres near Kingsburg from Western
Farm Credit Bank (hereafter Western). Western secured its purchase money loan of $504,000 to Triple A with a first
deed of trust on the property. Triple A farmed the property.
Triple A agreed, in 1992, to sell 20.4 acres of the property to Greenwood Estates Associates (hereafter Greenwood)
for $525,000. Greenwood promised to pay $100,000 as a down payment and to deliver a promissory note, secured
by deed of trust on the property, in the amount of $425,000. As a condition of the sale, Triple A agreed to
subordinate its security interest in favor of any future “development loan” not to exceed $1.6 million. **Western
agreed to release the 20.4 acres from its lien in return for assignment to it of the Greenwood promissory note and
deed of trust as additional collateral for the original Triple A debt. *525
The parties opened an escrow at Stewart Title of Modesto (hereafter Stewart Title). **We refer to this escrow as
escrow 1, in keeping with the practice of the parties to this appeal. The escrow instructions directed Stewart Title “to
prepare the necessary Assignment of Deed of Trust” so that Western's interest in the Greenwood debt could be
recorded.
While its escrow with Triple A was pending, Greenwood agreed to sell the 20.4-acre parcel to Mark Sullivan. FN1
The purchase price of $990,000 was to be paid by Sullivan's assumption of the Greenwood promissory note to
Triple A, his execution of a new note to Greenwood in the amount of $340,000 secured by a third deed of trust on
the property, and by payment of $350,000 cash obtained from a new loan. FN2 Sullivan was to obtain the cash from
the Frisones, private investment lenders who operated through several family trusts. The parties opened escrow for
the resale of the 20.4 acres; **that escrow was also with Stewart Title. **Among the seller's escrow instructions was
one directing that title would vest in Sullivan subject to “Deed of Trust to be of record at close of escrow in favor of
[Triple A] and collaterally assigned to [Western] securing a loan in the amount of $425,000.00 ... shall be ...
subordinated to the loan in favor of [Frisones].” The Frisones' escrow instructions directed Stewart to release the
loan funds only when the Frisones' deed of trust would be the first priority lien on the property and when Stewart
had issued a lender's title insurance policy insuring the Frisones' first lien status. **We will refer to this escrow as
escrow 2, as do the parties.
FN1 Sullivan was a nominal buyer acting on behalf of others. The details of the relationship between
Sullivan and the others, Abourezk-Ray Real Estate Development, Investors Lending, Ron Shapazian and
Lee Abourezk, are not relevant to the issues on appeal. Accordingly, we will refer to the aggregation, direct
and remote parties to the purchase from Greenwood, as Sullivan.
FN2 The escrow closing statement demonstrates Sullivan included in his financing various fees,
commissions, and other charges (some which of were paid to those on whose behalf Sullivan acted). Thus,
the total amount borrowed exceeded the purchase price.
After a time, both escrows were assigned to the same escrow agent at Stewart Title, **Carol Wheeler.
On July 6, 1993, Greenwood signed the note and deed of trust called for in escrow 1 (both the note and the deed of
trust are dated June 14, 1993). **Triple A signed a security agreement granting Western a security interest in the
Greenwood note and deed of trust, and on August 3, 1993, **Triple A executed a recordable assignment of the
Greenwood deed of trust. We set forth the operative portions of that assignment verbatim. The assignment is on a
preprinted form and was prepared by Stewart Title; preprinted portions are rendered in normal typeface, portions
inserted by typewriter are indicated in italics, and handwritten portions are rendered in boldface. *526
“Collateral
“Assignment of Deed of Trust
“For Value Received, the undersigned hereby grants, assigns and transfers to Western Farm Credit Bank, a
California corporation, all beneficial interest under that certain Deed of Trust dated June 14, 1993, executed by
Triple A Management Company, Inc., a California corporation, Trustor, to Stewart Title of Modesto, a California
corporation, Trustee, and recorded as Instrument No. concurrently herewith, 1993, in Book ___, Page ___, of
Official Records in the Office of the County Recorder of Fresno County, State of California;
“Together with the note or notes therein described or referred to, the money due and to become due thereon with
interest, and all rights accrued or to accrue under said Deed of Trust.” FN3
FN3 Although the parties do not base any of their arguments on this point, the assignment of deed of trust
misidentified the deed of trust to be assigned. Greenwood, not Triple A, is the trustor in the Greenwood
deed of trust.
Documents from escrow 1 were recorded on August 17, 1993. Among those recorded were the Greenwood deed of
trust and the Triple A assignment of that deed of trust to Western.
As escrow 1 moved forward, **Greenwood attempted to obtain Triple A's agreement to subordinate the Greenwood
deed of trust to the proposed lien of the Frisones, although it is not clear exactly the level of detail of Greenwood's
request. **Triple A categorically refused to subordinate its interest because it did not want to reopen negotiations
with Western.
**After Triple A refused to subordinate its interest to the Frisones, Stewart Title prepared a subordination agreement
using its standard preprinted form for signature by Western. FN4 **This document, dated August 4, 1993, was signed
by Donald O'Dell, assistant vice-president, on behalf of Western on August 18, 1993, and recorded on August 23,
1993. The subordination agreement describes Western as the “present owner and holder of the [Greenwood] deed of
trust and note” and states that the Frisones are expressly relying on the subordination in funding their loan to
Sullivan. **O'Dell testified that Greenwood's principal, Roger Rule, represented to him Triple A had agreed to the
subordination. **O'Dell also said Wheeler of Stewart Title told him the *527 subordination was that required by the
original Greenwood/Triple A agreement. Nevertheless, the subordination agreement itself provides in boldface
uppercase letters: “Notice: This subordination agreement contains a provision which allows the person obligated on
your real property security to obtain a loan a portion of which may be expended for other purposes than
improvement of the land.” In addition, O'Dell signed a representation that he had read and approved the estimated
closing statement for escrow 2, which had been delivered to him with the subordination agreement. The closing
statement clearly disclosed that the new loan was for the purchase of the property. O'Dell testified at trial that he
merely glanced at the documents before he signed them, on the assumption that Triple A would carefully scrutinize
the subordination agreement he assumed would be presented to it.
FN4 **There was no evidence that Wheeler knew Triple A had refused to subordinate when she decided
Western was the proper party to execute the subordination agreement. The evidence suggests a principal in
Greenwood, Roger Rule, had told her Western would sign the subordination agreement, but Rule did not
testify at trial. Apparently he had absconded.
On August 18, 1993, Sullivan executed a promissory note and deed of trust in favor of the Frisones and a note and
deed of trust in favor of Greenwood. Western's subordination agreement was recorded and escrow 2 closed on
August 23, 1993. Stewart Title issued to the Frisones a lender's title insurance policy insuring that, as of August 23,
1993, the Frisones' deed of trust enjoyed first priority among the deeds of trust recorded against the property.
After making one quarterly interest payment on the Greenwood-Triple A note, Sullivan defaulted on that loan.
Western recorded a substitution of trustee and notice of default in September of 1994; in these documents Western
asserted it was “the present Beneficiary” under the Greenwood deed of trust. In 1995, Triple A satisfied its original
debt to Western; Western's assignee reconveyed to Triple A the Greenwood note and deed of trust.
**On March 21, 1994, Triple A filed an action against the Frisones and Sullivan for a declaration that its lien on the
20.4 acres was superior to the Frisones' lien. Its amended complaint also alleged causes of action for negligence and
breach of fiduciary duty against Stewart Title and Western. **The Frisones filed an action for declaration of the
priority of their deed of trust on January 4, 1995. The complaint also included related causes of action for injunctive
relief and damages against Triple A, Western and its related entities, Sullivan and his related entities, and the
Greenwood interests. Various defendants filed cross-complaints for damages and indemnity against each other.
Pertinent to this appeal are the cross-complaints of Stewart Title and Western against each other. All of the actions
were consolidated.
The Frisones moved for a preliminary injunction to prevent Triple A and Western from nonjudicially foreclosing on
the Greenwood deed of trust. *528 **Judge O'Neill denied the preliminary injunction and the Frisones appealed.
(Frisone v. Triple A Management Co., No. F023088.)By nonpublished opinion filed June 18, 1996, this court
reversed the trial court and ordered issuance of the preliminary injunction.
While the preliminary injunction appeal was pending, Western moved for summary adjudication of several of the
Frisones' causes of action. On June 20, 1996, Judge Quaschnick granted the motion in part, concluding that Western
was entitled to judgment on the Frisones' count 3, breach of contract, because Western had not breached the
subordination agreement.
Trial on the remaining counts began on September 10, 1996. Trial was before the court, sitting without a jury. Judge
Kane bifurcated the issues for trial. The first portion of the trial concerned the declaratory judgment counts. **On
September 24, 1996, the court issued an oral statement of decision in favor of Triple A and against the Frisones. As
restated in its October 18, 1996, memorandum of decision, the court concluded that the Frisones did not directly rely
on Western's subordination agreement, since they did not know about it. To the extent Stewart was the Frisones'
agent and did rely on the subordination agreement, **that reliance was unreasonable because Stewart had actual
knowledge that the assignment of the Greenwood deed of trust to Western was not a full assignment but was for
security purposes only. Impliedly, the court concluded the security agreement did not empower Western unilaterally
to subordinate the Greenwood deed of trust **and Stewart would have discovered this if it had used due diligence to
inquire about the “collateral” assignment of that deed of trust to Western.
The court then conducted the damages phase of the trial. After hearing from expert and other witnesses, the court
filed a proposed statement of decision on December 3, 1996, which it made final on January 23, 1997. **The court
concluded Stewart Title was negligent in its preparation of the original collateral assignment and the subordination
agreement. **It held that Triple A was damaged by this negligence in that it was forced to incur attorney fees to
protect its lien priority. **The court concluded Western was negligent in executing the subordination agreement, but
that this negligence did not proximately cause anyone loss. **The court denied the new trial motions filed by
Stewart Title and the Frisones by order dated March 5, 1997. **The court denied Western's request for attorney fees
from Stewart but awarded a portion of its attorney fees against Triple A.
Stewart Title and the Frisones filed timely notices of appeal. Western filed a timely notice of appeal from the denial
of its request for attorney fees against Stewart Title. The appeals were consolidated. *529
While the appeal was pending, Stewart Title and the Frisones filed a petition for writ of mandate in this court
seeking to vacate the trial court's order expunging a notice of lis pendens the Frisones had recorded on June 23,
1995. This court stayed the order expunging the lis pendens on July 31, 1997, and issued an order to show cause on
September 26, 1997. Hearing on the order to show cause subsequently was ordered to occur at the time for oral
argument on the merits of the appeal.
Discussion
A. Issues Presented
Stewart Title and the Frisones (sometimes referred to collectively in this part I as appellants) primarily contend they
were entitled to rely on the recorded assignment of the Greenwood deed of trust in seeking subordination from
Western only. They contend the trial court charged them with knowledge in escrow 2 of unrecorded documents that
were part of the unrelated escrow 1 in order to bar them from reliance on the recorded assignment of the Greenwood
deed of trust.
Appellants also contend Western actually had the power to execute the subordination agreement under the terms of
its security interest in the Greenwood promissory note and deed of trust. Finally, they contend Western breached the
subordination agreement by representing that it owned the Greenwood deed of trust, if and to the extent it did not
have the full power under the security agreement to subordinate that deed of trust.
Stewart Title also contends it should not have been required to pay Triple A's attorney fees under the “tort of
another” doctrine since Triple A itself was at fault in creating the conflict that resulted in this litigation. This issue is
addressed in the unpublished portion of this opinion.
(1a) The Frisones and Stewart Title both contend the Frisones were good faith encumbrancers for value and, as such,
were protected by the conclusive presumption that the recorded state of title to the property reflected the true state of
title. Accordingly, they contend, the Frisones were entitled to rely on the subordination agreement signed by
Western, since the recorded assignment of the Greenwood deed of trust established Western as the owner of the
beneficial interest under that deed of trust. Further, they *530 claim the trial court erred in refusing to determine
whether the Frisones were good faith encumbrancers; the trial court stated that such a determination was irrelevant.
(2) “A good faith encumbrancer for value who first records takes its interest in the real property free and clear of
unrecorded interests. (Civ. Code, §§ 1107, 1214; 3 Miller & Starr, Cal. Real Estate (2d ed. 1989) Recording and
Priorities, §§ 8:2, 8:3, pp. 270, 273 [unrecorded instrument not enforceable against subsequent bona fide purchaser
who first records].) 'An encumbrancer in good faith and for value means a person who has taken or purchased a
lien ... and who has parted with something of value in consideration thereof. [Citation.] ... [A] ”good faith“
encumbrancer is one who acts without knowledge or notice of competing liens on the subject property. [Citations.]' (
Brock v. First South Savings Assn. (1992) 8 Cal.App.4th 661, 667....)If a trustee executes an unauthorized
reconveyance and the trustor subsequently conveys the property, a grantee who does not have notice of the trustee's
lack of authority receives title free and clear of the lien. ( Firato v. Tuttle (1957) 48 Cal.2d 136, 139....)Similarly, a
junior lender has the right to rely on a state of record title which indicates that a senior lien will be satisfied out of
the interests of all signatories to a senior promissory note. A secret agreement that the senior lien will be satisfied
out of the interests of only some of the signatories is not binding upon the junior encumbrancer. ( Caito v. United
California Bank (1978) 20 Cal.3d 694, 702....)” ( First Fidelity Thrift & Loan Assn. v. Alliance Bank (1998) 60
Cal.App.4th 1433, 1440-1441 [ 71 Cal.Rptr.2d 295].)
(3) Thus, it clearly is the law that, in the absence of conflicting knowledge, a good faith encumbrancer is entitled to
rely on the recorded chain of title in determining from whom he needs to obtain a subordination agreement in order
to establish his lien as the first priority deed of trust. The fact that the encumbrancer searches and evaluates the
record through an escrow or title agent does not in any manner diminish his right to rely on the state of the record
title. (See Civ. Code, § 1214.) Indeed, given the pervasive role of title companies as escrow agents in California, a
contrary conclusion would substantially eviscerate Civil Code section 1214. (1b) We conclude the trial court erred
in finding the Frisones did not rely on the state of the recorded chain of title.
(4) Several limitations are inherent in the protection afforded a good faith encumbrancer for value, however; two
such limitations are relevant in the present case. **First, the subsequent encumbrancer is permitted only to rely on
the recorded state of title as that state of title objectively presents itself: the subsequent encumbrancer is not entitled
to view the record either through rose-colored glasses or with blinders on. That is, he is not entitled *531 to interpret
ambiguities in his own favor nor is he entitled to ignore reasonable warning signs that appear in the recorded
documents. **Second, a lender is not entitled to ignore information that comes to him from outside the recorded
chain of title, to the extent such information puts him on notice of information that reasonably brings into question
the state of title reflected in the recorded chain of title. (First Fidelity Thrift & Loan Assn. v. Alliance Bank, supra,
60 Cal.App.4th at pp. 1443, 1445.)
In First Fidelity, an earlier lender erroneously reconveyed its deed of trust and that reconveyance was duly recorded .
A new lender knew that the borrower had listed the earlier loan as an encumbrance of the property on his loan
application, but its review of the record title disclosed the reconveyance. The new lender contacted the borrower's
bank (which was not the earlier lender) and was told the earlier loan had been paid off. The new lender funded its
loan and recorded its deed of trust. At no time did it contact the earlier lender to inquire about the status of the loan.
(First Fidelity Thrift & Loan Assn. v. Alliance Bank, supra, 60 Cal.App.4th at pp. 1436-1438.)The earlier lender
eventually discovered its mistake, filed a lis pendens, and successfully obtained an order rerecording its deed of trust
as of the date of the lis pendens.
After the borrower defaulted on both outstanding loans, the earlier lender sued the new lender to establish the
priority of its deed of trust. Losing in the trial court on summary judgment, the earlier lender appealed. The Court of
Appeal recognized that in some circumstances information outside the chain of title (in this case, the borrower's loan
application listing the earlier encumbrance) can operate to put a subsequent lender on notice of an unrecorded
interest in the property if it has “knowledge of circumstances which, upon reasonable inquiry, would lead to that
particular fact.” (First Fidelity Thrift & Loan Assn. v. Alliance Bank, supra, 60 Cal.App.4th at p. 1443.)The court
concluded, however, that this was a limited duty of inquiry that the new lender had discharged by its additional
inquiry to the borrower and his bank. Accordingly, the court held, the new lender was entitled to first priority.(Id. at
p. 1445.)
First Fidelity involved information generated by the subsequent lender outside the chain of title . In Buehler v.
Oregon-Washington Plywood Corp. (1976) 17 Cal.3d 520 [ 131 Cal.Rptr. 394, 551 P.2d 1226] the issue was
whether parol evidence was admissible to establish a limitation on a recorded easement that was not explicit on the
face of the recorded document. The easement, granted by appellants' predecessor in interest to respondents'
predecessor in interest, granted a right to transport harvested timber across appellants' property. The easement was in
gross, but the easement could only be transferred to an entity that owned at least one-third of the timber on *532
certain surrounding lands. (Id. at pp. 527-528.)A dispute arose when appellants learned that one respondent was
transporting across appellants' property timber harvested at remote locations. Appellants contended the original
grantors and grantees had intended the easement to be limited to the transport of timber harvested on the grantors'
lands and those immediately surrounding. In granting summary judgment, the trial court concluded respondents
were entitled to rely on the easement as recorded, since the language of the easement was clear and did not contain
any such limitation. (Id. at p. 526.)
“Appellants also challenge the trial court's determination that [one respondent] was a bona fide purchaser. The trial
court had based this determination upon an uncontradicted showing that [this respondent] 'had no knowledge of any
interpretation other than the plain meaning of the document.' But the [easement] [had no 'plain meaning.'] Thus the
issue is whether [respondent or its predecessor] are chargeable with notice of appellants' claims.... It has been said
that: ' ”In so far as a purchaser has actual or constructive notice of a conveyance or other instrument executed by one
previously owning or claiming to own the land, he is charged with notice of all matters stated or referred to in such
conveyance, which may possibly affect the title, **and he is bound to make any inquiries or researches suggested by
such statements or references.“ ' [Citations.]
“When a 'conveyance in a chain of title under which a purchaser for value claims shows on its face it is so
ambiguous as to leave room for reasonable difference of opinion as to what was granted, or when the grant contains
limiting or qualifying words sufficient to cast reasonable doubt on what was intended to be granted, the purchaser
will be chargeable with notice of this ambiguity, and the effect of these limiting or qualifying words, and his rights,
if controversy comes up, must be left to be determined by the courts, ...' [Citations.]” ( 17 Cal.3d at p. 529.)
**The court concluded that a triable issue of fact existed “as to whether [respondent] should have investigated any
competing claims” under the easement. ( 17 Cal.3d at p. 529.)
(1c) **Thus, the state of the law, as exemplified by Buehler and First Fidelity, is clear: if the reference to
“collateral” in the title of the assignment of the Greenwood deed of trust and the reference to the assignment as
additional security in the instructions provided to Stewart Title in connection with escrow 2 were sufficient to give
the Frisones knowledge that they should have investigated Western's authority to subordinate that deed of trust, then
the Frisones are chargeable with what a reasonable investigation would have revealed. “The constructive notice
imparted by the recording of *533 a document has been extended to charge an intending purchaser [or
encumbrancer] with a duty to investigate the rights afforded by an unrecorded document referred to in that recorded
document.” ( Gates Rubber Co. v. Ulman (1989) 214 Cal.App.3d 356, 365 [ 262 Cal.Rptr. 630].)
Accordingly, we must determine whether these two documents-the recorded “collateral assignment” and the escrow
instruction identifying the assignment of the Greenwood deed of trust as “collaterally assigned ... securing a loan”-
placed upon the Frisones a duty to inquire about the nature of Western's interest in the Greenwood deed of trust. If
so, we must then determine what they would have found had they inquired: FN5 if Western actually had the power to
subordinate the Greenwood deed of trust, the knowledge with which the Frisones are chargeable merely authorizes
the transaction that in fact occurred.
FN5 As Civil Code section 19 states: “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.”
However, before we reach those issues, we must address two intervening points. **First, both Stewart Title and the
Frisones argue that knowledge obtained by Stewart Title should not be imputed to the Frisones. **Second, the
Frisones contend the trial court failed to make a finding that they were not good faith encumbrancers for value and
the matter initially must be remanded for such a finding. We turn to those issues.
We agree, as Stewart Title and the Frisones argue, that the trial court attributed too broad a scope to the agency
relationship between the two appellants. Thus, the trial court impermissibly imputed to the Frisones the knowledge
Stewart Title obtained in escrow 1, as we will discuss below. **Nevertheless, the trial court was correct in
concluding that Stewart Title was indeed the Frisones' agent; the parameters of that agency relationship, although
narrower than described by the trial court, are well established in California law. The limited question of importance
to this appeal is whether, within the true scope of Stewart Title's agency, Stewart Title's knowledge of the contents
of the escrow 2 instructions and the recorded documents in the chain of title for the property conveyed in escrow 2
are properly to be imputed to the Frisones. **We will conclude such knowledge must be imputed to them.
The well-regarded treatise on California real estate law by Miller and Starr contains a detailed and extensive
summary of the law of agency as it applies *534 to real estate transactions and escrow agents. (See 2 Miller & Starr,
Cal. Real Estate (2d ed. 1989) ch. 3, p. 2 et seq. [agency generally]; id. at § 5:21, pp. 438-442 [escrow agents]; 3
Miller & Starr, Cal. Real Estate, supra, § 8:56, p. 378; id. at § 8:61, p. 387 [notice imputed through agent].) (5a) The
authors state:
“An escrow agent is employed by the parties to perform the concurrent conditions of the sales or loan transaction.
The parties submit escrow instructions to the agent, and generally his duties are limited to the performance of the
instructions....
**“As a general rule, knowledge acquired by an agent within the course and scope of his agency duties is imputed to
the principal. Imputation is based on the theory that the agent will disclose to his principal that which he is obligated
to disclose.
“As a dual agent for both parties, the knowledge of the escrow agent regarding matters within the same escrow is
imputed to both parties to the escrow....
“On the other hand, the escrow agent is only a limited or special agent, and his obligations to disclose matters to his
principal are also limited.... [¶ ] ... Based on this principle, knowledge acquired by the escrow agent beyond the
scope of his limited agency is not imputed to either principal....
“... The knowledge of an escrow agent acquired in [an earlier] escrow where one principal [in a second escrow] is
not a party is not imputed to the principal who is not a party to that [earlier] escrow.” (2 Miller & Starr, supra, §
5:21, pp. 438-440, fns. omitted.)
(1d) This rule concerning knowledge obtained in separate escrows is not merely one based on practical
considerations, as Triple A suggests in attempting to distinguish cases cited by appellants. Thus, in discussing La
Mancha Dev. Corp. v. Sheegog (1978) 78 Cal.App.3d 9 [ 144 Cal.Rptr. 59] and Far West Savings & Loan Assn. v.
McLaughlin (1988) 201 Cal.App.3d 67 [ 246 Cal.Rptr. 872], Triple A argues the separate escrows in those cases
occurred months apart and may not even have involved the same employee of the escrow company. In the present
case, Triple A argues, the simultaneity of the escrows and the singularity of the escrow officer render imputation of
the knowledge permissible.
We disagree. (5b) 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 *535
will be presumed to have fulfilled this duty. (Cf. Contini v. Western Title Ins. Co. (1974) 40 Cal.App.3d 536, 547 [
115 Cal.Rptr. 257]; Jaffe v. Heffner (1959) 173 Cal.App.2d 512, 518 [ 343 P.2d 374].) The scope of the imputation
of knowledge is directly related to the scope of the duty arising from the agency agreement; it has nothing to do with
whether the agent actually has the information in question or has it only constructively (see Kirby v. Palos Verdes
Escrow Co. (1986) 183 Cal.App.3d 57, 65 [ 227 Cal.Rptr. 785]), or whether it is practical to expect the agent to
remember something that happened months ago (see 2 Miller & Starr, supra, § 5:21, pp. 439-441).
(1e) Similarly, we reject Triple A's contention that the trial court did not in fact impute Stewart Title's knowledge
gained in escrow 1 to the Frisones in escrow 2. The trial court stated: “Stewart was the Frisones' agent and to the
extent [Western] misrepresented things to Stewart [in escrow 2], which Stewart reasonably relied upon, Frisones
could properly seek damages against [Western] based on those misrepresentations. [¶] **In this case, however,
Stewart's reliance on [Western] was not reasonable at all. Stewart, through Wheeler, knew that [Western] was not
the owner and holder of the Greenwood Note and deed of trust. Wheeler knew this because [Western's] escrow
instructions [in escrow 1] so indicated.” (Capital lettering omitted.)
Nevertheless, on appeal we review the trial court's result, not its reasoning. ( Belair v. Riverside County Flood
Control Dist. (1988) 47 Cal.3d 550, 568 [ 253 Cal.Rptr. 693, 764 P.2d 1070].) In this case, it is correct to impute to
the Frisones knowledge of the two critical facts we have identified above. **One fact, that Triple A had “collaterally
assigned to [Western] securing a loan ...” the Greenwood deed of trust, was contained in the escrow instructions in
escrow 2. Subordination of that deed of trust to its own deed of trust was an express precondition to release of the
Frisones' funds; the Frisones instructed Stewart Title to release the funds only if this precondition were
accomplished. Accordingly, Stewart Title obtained that knowledge in the course of the agency for which the
Frisones had employed it. FN6 **The second fact, that the assignment to Western was a “collateral assignment,” was
reflected in the chain of title to the property being transferred in escrow 2. As such, the statutes impose constructive
knowledge of the contents of the assignment on Stewart Title as the Frisones' agent and on the Frisones directly.
(See Civ. Code, § 1213.)
FN6 This knowledge is imputed due to Stewart Title's status as escrow agent, not because of its role as title
insurer, as appellants contend. (Cf. Lewis v. Superior Court (1994) 30 Cal.App.4th 1850, 1856, 1869-1870
[ 37 Cal.Rptr.2d 63].)
Accordingly, we conclude the Frisones had imputed and constructive knowledge of the two facts that we deem
critical to the resolution of this case. We agree with appellants that the law does not permit us to impute to *536 the
Frisones the actual knowledge Stewart Title may have had concerning the content of the underlying, unrecorded
security agreement between Triple A and Western, nor of the content of the escrow instructions in escrow 1, because
Stewart Title's actual knowledge of those matters was obtained outside the scope of its agency on behalf of the
Frisones.
D. The Trial Court's Refusal to Make a Finding on Good Faith Encumbrancer for Value Status
In response to Stewart Title's request for statement of decision, the court issued a proposed statement of decision on
December 3, 1996. It subsequently reiterated that statement of decision after considering the parties' objections. Of
particular relevance is the following passage (the format of the statement of decision is a restatement of Stewart
Title's statement of the issue followed by the court's resolution of the issue):
“5. Whether [Western] and/or Triple A should be estopped from claiming that [Western] was the owner of the entire
beneficial interest of the Greenwood Deed of Trust.
“Neither should be estopped because neither Stewart nor the Frisones reasonably relied upon Triple A's execution of
Exhibit No. 5 [the collateral assignment of deed of trust] or [Western's] execution of Exhibit No. 10 [the
subordination agreement].
“6. Whether Frisones are bona fide encumbrancers for value by virtue of their making the loan to Sullivan in Escrow
No. 2.
“In view of the findings of fact and conclusions of law which this court has made, this is not a relevant issue.”
(6) 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. ( Hochstein
v. Romero (1990) 219 Cal.App.3d 447, 451 [ 268 Cal.Rptr. 202].) (7) Further, Code of Civil Procedure section 632
requires the court, upon request, to issue a statement of decision “explaining the factual and legal basis for its
decision as to each of the principal controverted issues at trial.” Failure to determine a material issue in a statement
of decision can, in some circumstances, be reversible error if there is evidence that would support a finding in the
opposing party's favor. ( Sperber v. Robinson (1994) 26 Cal.App.4th 736, 745 [ 31 Cal.Rptr.2d 659].)
(1f)Since, in our view, the Frisones' status as good faith encumbrancers for value is a key issue in this case-
dispositive, if it is resolved in the *537 Frisones' favor-we tread very cautiously in this area. If we took the trial
court's conclusion that “this is not a relevant issue” literally and in isolation, we would be constrained to reverse the
judgment and remand for a statement of decision on this issue if there was substantial evidence to support a finding
in the Frisones' favor. (See Miramar Hotel Corp. v. Frank B. Hall & Co. (1985) 163 Cal.App.3d 1126, 1130 [ 210
Cal.Rptr. 114].)
Viewing the trial court's conclusion in context, however, we must conclude the trial court did not simply refuse to
decide the critical issue of the Frisones' status as good faith encumbrancers. Rather, the court decided a subissue of
the good faith issue against the Frisones, and only then concluded the broader question was “not a relevant issue.”
We explain.
**As noted in our earlier exposition of the good faith encumbrancer question, one cannot be afforded that status if
he fails to investigate the state of title after he is put on notice (constructively) by recorded documents in the chain of
title or (actually) by information acquired from any source that the state of title is questionable. (See p. 530,
ante.)**There was no evidence whatsoever that Stewart Title or the Frisones attempted in any way to investigate the
meaning of the “securing a loan” and “collateral” information in their actual and constructive possession. **Thus,
there was no issue of fact to resolve concerning the diligence of any investigation by appellants. (See First Fidelity
Thrift & Loan Assn. v. Alliance Bank, supra, 60 Cal.App.4th at p. 1445.)
**The trial court did expressly find, both in its memorandum of decision following trial and in its statement of
decision that Stewart Title, as the Frisones' agent, could not reasonably conclude that the collateral assignment of
deed of trust conveyed to Western the full beneficial interest in the Greenwood deed of trust, which is the only
circumstance that would permit the Frisones to have good faith encumbrancer status without further inquiry.
**Accordingly, on the state of the evidence in this case, the court's finding is in all practical respects a finding that
Stewart Title and the Frisones were on reasonable notice of the need to investigate further the true meaning of the
assignment to Western that appeared of record. (See Buehler v. Oregon-Washington Plywood Corp., supra, 17
Cal.3d at p. 529.)
**For these reasons, we conclude the trial court's express finding on the reasonableness issue constitutes, by
necessity, an implied finding that the Frisones were not good faith encumbrancers for value. As such, the court's
failure to make an express finding on the good faith encumbrancer issue is harmless. ( Manson v. Reed (1986) 186
Cal.App.3d 1493, 1504 [ 231 Cal.Rptr. 446]; see Sperber v. Robinson, supra, 26 Cal.App.4th at p. 745.)We
therefore return to the question whether there was substantial evidence *538 to support the finding the trial court
impliedly and of necessity made, namely, that the Frisones were not good faith encumbrancers for value because
they had sufficient information to impose upon them a duty of inquiry concerning Western's power to subordinate
the Greenwood deed of trust.
There are very few published cases addressing the question of what facts constitute sufficient notice to raise a duty
of inquiry (see, e.g., Kirby v. Palos Verdes Escrow Co., supra, 183 Cal.App.3d at pp. 65-66; Greiner v. Kirkpatrick
(1952) 109 Cal.App.2d 798, 801 [ 241 P.2d 564]), and none of those cases involves the meaning to be attributed to a
“collateral assignment” of a deed of trust. (See 3 Miller & Starr, Cal. Real Estate, supra, § 8:62, pp. 388-390
[collecting cases]; see generally, Annot., Recorded Real Property Instrument as Charging Third Party With
Constructive Notice of Provisions of Extrinsic Instrument Referred to Therein (1979) 89 A.L.R.3d 901.)
In Bank One Texas v. Pollack (1994) 24 Cal.App.4th 973 [ 29 Cal.Rptr.2d 510], the issue concerned a creditor's duty
of inquiry under Civil Code section 19. The case involved a Texas bank that obtained a judgment in Texas against
one Pollack for $1.2 million. Six years before entry of the judgment, Pollack had transferred all of his assets to an
inter vivos trust over which he retained the power of revocation until his death. ( 24 Cal.App.4th at p. 976.)Pollack
died in 1989 leaving an insolvent estate. In December of 1989, the Texas bank obtained a California judgment based
on the Texas judgment; it duly recorded an abstract of the judgment against Pollack in Los Angeles County. (Ibid.)
Also in December of 1989, the Bank of Montreal settled certain claims against the inter vivos trust and Pollack's
estate by accepting a promissory note secured, in part, by a deed of trust on Pollack's Los Angeles County residence,
owned by the trust. ( 24 Cal.App.4th at p. 977.)After the trust defaulted on the Bank of Montreal loan and the bank
conducted a foreclosure sale of the residence, a dispute arose between the two banks over the proceeds of the sale.
(Ibid.)
The appellate court noted that pursuant to Probate Code former section 18201 (repealed by Stats. 1991, ch. 992, § 2,
p. 4617), a creditor of an insolvent estate is entitled to levy directly on any assets held by a trust that the decedent
had the power to revoke during his lifetime. The court further noted that “one is presumed to know the law” and,
therefore, the Bank of Montreal was to be “charged with actual knowledge of Probate Code section 18201.” ( 24
Cal.App.4th at p. 981.)The Bank of Montreal also had actual knowledge Pollack's estate was insolvent and that the
trust was revocable *539 during Pollack's lifetime. (Ibid.) **“Armed with this knowledge, a prudent person would
ascertain whether there were liens recorded against the decedent or his estate [in addition to any liens recorded
against the trust itself]. Accordingly, [the Bank of Montreal] is charged with constructive notice of the lien recorded
by [the Texas bank against Pollack's estate], and it thus took the [deed of trust on the residence owned by the trust]
with notice of another's rights.” (Id. at p. 982.)
While the Bank One case obviously has many dissimilarities to the case now before us, it is similar to the present
case with respect to the interaction between constructive knowledge of the law and actual knowledge of certain
facts. In this case, the security transaction between Western and Triple A was governed by division 9 of the
California Uniform Commercial Code (hereafter UCC). (Com. 4, 23C West's Ann. Cal. U. Com. Code (1990 ed.)
foll. § 9102, subd. (3), p. 297; Black v. Sullivan (1975) 48 Cal.App.3d 557, 564 [ 122 Cal.Rptr. 119].) Accordingly,
the Frisones and Stewart Title are charged with constructive knowledge of the relevant provisions of the UCC. (See
Bank One Texas v. Pollack, supra, 24 Cal.App.4th at p. 981.)Section 9207, subdivision (1), of the UCC provides:
“A secured party must use reasonable care in the custody and preservation of collateral in his possession. In the case
of an instrument or chattel paper reasonable care includes taking necessary steps to preserve rights against prior
parties unless otherwise agreed.” (Italics added.)
**Armed with the knowledge that Western owned only a collateral or security interest in the Greenwood deed of
trust, and charged with the knowledge that, unless otherwise agreed, the secured party had no power to subordinate
the security interest against Greenwood (i.e., to fail “to preserve rights against prior parties”), **a reasonable and
prudent lender would have inquired about the exact nature of the security interest held by Western. (Bank One Texas
v. Pollack, supra, 24 Cal.App.4th at p. 982; see also Citizens Nat. Bank v. Davisson (1913) 229 U.S. 212, 223 [33
S.Ct. 625, 629, 57 L.Ed. 1153].) FN7 There is no evidence in the record that the Frisones or Stewart Title, as their
agent, conducted such an inquiry. Accordingly, the Frisones are chargeable with notice of the terms of the security
agreement; they were not entitled to rely on an interpretation of the collateral assignment that would impute to
Western the authority to unilaterally subordinate the Greenwood deed of trust.(Buehler v. Oregon-Washington
Plywood Corp., supra, 17 Cal.3d at p. 529; see *540Radunich v. Basso (1965) 235 Cal.App.2d 826, 835 [ 45
Cal.Rptr. 824].) FN8 We now turn to the final question in this part of the inquiry, whether Western in fact-that is,
based on what appellants would have discovered had they made reasonable inquiry-had the power under the security
agreement to unilaterally subordinate the Greenwood deed of trust.
FN7 As it turns out, the security agreement between Triple A and Western “otherwise agreed” that Western
had no duty “to take any action to preserve any rights of or against any prior or other parties in connection
with the Collateral ....” The present case, of course, does not involve any failure of Western to take action
to preserve the priority of the Greenwood deed of trust but, rather, affirmative action it took to undermine
the priority of that deed of trust.
FN8 The Frisones also argue briefly that the trial court erred in granting summary adjudication against
them on their cause of action against Western for breach of the subordination agreement, of which the
Frisones were a third party beneficiary. Although the contention is not renewed in the Frisones' reply brief,
we address it briefly. The alleged breach, in essence, was of the warranty of title: Western asserted in the
subordination agreement that it was the owner of the deed of trust and had the power to subordinate it to the
Frisones' lien. The warranty of title, in analogous circumstances involving the sale of goods under division
2 of the UCC, is excluded in “circumstances which give the buyer reason to know that the person selling
does not claim title in himself or that he is purporting to sell only such right or title as he or a third person
may have.” (Cal. U. Com. Code, § 2312.)An official comment to this section states that such circumstances
include sales by “sheriffs, executors, foreclosing lienors and persons similarly situated.” (Com. 5, 23A
West's Ann. Cal. U. Com. Code (1964 ed.) foll § 2312, p. 243.) **We conclude notice to appellants that
Western held only a security interest in the deed of trust constituted circumstances excluding any assertion
of warranty of title.
The parties agree that Western's actual rights in the Greenwood promissory note and deed of trust are those rights
that exist as described in or as a result of the unrecorded security agreement executed by Triple A upon its
assignment of the deed of trust to Western. After a brief historical digression, we will turn to the content of that
security agreement.
Prior to the adoption of the UCC in 1963, it clearly was the law that, in the absence of an agreement between the
parties ( Johnson v. Mortgage Guarantee Co. (1931) 117 Cal.App. 416, 421-422 [ 4 P.2d 208]), a secured party did
not have the power to “sell, compromise, or otherwise discharge the pledged debt, or the security therefor, without
the consent of the pledgor.” ( Revert v. Hesse (1920) 184 Cal. 295, 300 [ 193 P. 943]; see former Civ. Code, § 3006
[repealed at the time of adoption of UCC].) (The secured party could, of course, assign his own interest in the
collateral. ( 184 Cal. at p. 300.)) These rules reflected both the state of the common law and the law under former
Civil Code section 3006. ( Traders Bank v. Wilcox (1919) 42 Cal.App. 24, 27 [ 183 P. 256]; see generally, Rest.,
Security, §§ 20-23.) The rule was applicable both before any default by the pledgor (see generally, Knudsen v. Hill
(1964) 227 Cal.App.2d 639 [ 38 Cal.Rptr. 859]) and after default. That is, even after default by the pledgor, the
secured party was not entitled to sell the pledged note at a foreclosure sale, but instead was entitled only to collect
the pledged note as it came due (Traders Bank v. Wilcox, supra, 42 Cal.App. at pp. 27-28 [noting certain exceptions
not relevant here]), so long as the pledged note was not itself in default ( Beatty v. Pacific States S. & L. Co. (1935)
4 Cal.App.2d 692, 699 [ 41 P.2d 378]).*541
Where the secured party attempted to dispose of or impair the pledged debt, the pre-UCC rights of the pledgor were
summarized as follows: “[I]f the pledgee sells or releases the debt or security otherwise than upon collection, the
Apledgor may set aside the sale or release, if other circumstances permit, or hold the pledgee for conversion.”
(Beatty v. Pacific States S. & L. Co., supra, 4 Cal.App.2d at p. 699; see generally, Rest., Security, supra, § 24.)
With the adoption of the UCC in 1963 (see Stats. 1963, ch. 819), former Civil Code section 3006 was repealed
(Stats. 1963, ch. 819, § 2, p. 1997) and a new rule was adopted: under UCC section 9504, regardless of the nature of
the collateral pledged by a debtor, “[a] secured party after default may sell, lease or otherwise dispose of any or all
of the collateral ....” (Cal. U. Com. Code, § 9504, subd. (1).) “When collateral is disposed of by a secured party after
default, the disposition transfers to a purchaser for value all of the debtor's rights therein ...,” subject to certain
conditions concerning good faith. (Id.,§ 9504, subd. (4).)
Nevertheless, in order for a secured party to exercise its right to sell or otherwise dispose of the collateral under the
UCC, the debtor must be “in default under a security agreement” for which the collateral is security. (Cal. U. Com.
Code, § 9501, subd. (1); see Meadows, Warranties of Title, Foreclosure Sales, and the Proposed Revision of U.C.C.
§ 9-504: Has the Pendulum Swung Too Far?(1997) 65 Fordham L.Rev. 2419, 2419, fn. 2; see also Riebe v. Budget
Financial Corp. (1968) 264 Cal.App.2d 576, 588 [ 70 Cal.Rptr. 654] [discussing similar restrictions on powers of
pawn broker who receives notes as collateral].)
The parties have not cited any cases containing a modern, post-UCC statement of the powers of a pledgee of
promissory notes when the pledgor is not in default. Our own research has not disclosed any case specifically
discussing this issue. FN9 The novel question we must address is, after adoption of the UCC, what is the relationship
between the pledgor and pledgee prior to any default by the pledgor?
FN9 In Hersch v. Citizens Savings & Loan Assn. (1983) 146 Cal.App.3d 1002, 1010 [ 194 Cal.Rptr. 628], it
seems assumed that the secured party was not entitled to sell the debt instruments pledged to it if the
pledgor was not in default on the primary obligation.
California Uniform Commercial Code section 1103 states: “Unless displaced by the particular provisions of this
code, the principles of law and equity ... shall supplement its provisions.” The UCC affirmatively changed the law
regarding postdefault sale or disposition of pledged debt instruments, permitting such sale where it had been
previously prohibited. (See Cal. Annot. to Proposed U. Com. Code (1960) Deering's Ann. Cal. U. Com. Code, §
9504 (1986 ed.) pp. 577-578.) However, the national and *542 California official comments to section 9207 both
state that the code carries forward the common law in the predefault situation. (See Deering's Ann. Cal. U. Com.
Code, § 9207, supra, at pp. 447-448.)Further, the purposes of and rationale for the prior law continue unabated
under the UCC. (See, e.g., Knudsen v. Hill, supra, 227 Cal.App.2d at p. 645 [absence of ready market and difficulty
of valuation of private debt obligations]; Traders Bank v. Wilcox, supra, 42 Cal.App. at p. 27 [same, and adequacy
of other remedies].)
Accordingly, we conclude the common law restriction on predefault sale (Traders Bank v. Wilcox, supra, 42
Cal.App. at p. 29) of a pledged debt instrument continues to govern California security transactions. (See Ibrahim v.
Ford Motor Co. (1989) 214 Cal.App.3d 878, 896-898 [ 263 Cal.Rptr. 64]; AtlasThriftCo. v. Horan (1972) 27
Cal.App.3d 999, 1008 [ 104 Cal.Rptr. 315, 59 A.L.R.3d 389].) Thus, in the absence of an agreement between Triple
A and Western to the contrary, Western did not have the right unilaterally to sell, release or subordinate the
Greenwood deed of trust.
Appellants contend the security agreement does in fact contain agreements that permitted Western to dispose of
(subordinate) Triple A's interest in the Greenwood deed of trust. **We reject this argument for three reasons.
**First, the duty of reasonable care imposed by UCC section 9207, subdivision (1) “may not be disclaimed by
agreement.” (Com. 1, 23C West's Ann. Cal. Com. Code, supra, foll. § 9207, p. 405.) No one involved in this appeal
has contended Western acted with reasonable care in executing the subordination agreement, and the trial court
expressly found to the contrary. **Therefore, even if the security agreement in some circumstances may have
permitted Western to subordinate the deed of trust for legitimate purposes, as a matter of law the security agreement
could not validly permit Western to subordinate the deed of trust with the lack of care it exercised in this case.
**Second, it is irrelevant whether the security agreement may have permitted Western to subordinate the deed of
trust if Triple A was in default on its promissory note to Western. There was no evidence Western was acting to
foreclose on its interest in the collateral. In the absence of any evidence Western's actions were an attempt to enforce
its postdefault rights, we decline to consider whether those rights, if exercised, would have been sufficient to justify
Western's actions in executing the subordination agreement in the manner it did.
**Third, as we have seen, in the absence of an express provision in the security agreement between a secured party
and a debtor, the secured party does not have the power to sell, release, or otherwise impair a debt *543 obligation
pledged to it as collateral. Accordingly, in the absence of some showing to the trial court that the security
relationship had been modified by agreement of the parties, a finding by the trial court that Western had only a
collateral security interest in the Greenwood note and deed of trust was conclusive of the issue of Western's
predefault power, unilaterally, to subordinate the deed of trust to the Frisones' lien.
On appeal, the Frisones assert that “[n]o provision of the security agreement ... precluded the Bank's power to
subordinate the deed of trust.” They then attempt to show that the security agreement granted similar powers to
Western, powers that in some instances might be viewed as broader than the power to subordinate the deed of trust.
The Frisones do not, however, point to anything in the security agreement or elsewhere that granted to Western the
power to subordinate, unilaterally, the Greenwood deed of trust. In the absence of such an affirmative showing, for
the reasons stated above, Western's status as a “secured party” prevented it from validly subordinating the deed of
trust. Triple A was entitled to have the subordination agreement declared void (Revert v. Hesse, supra, 184 Cal. at p.
300) and that is, in effect, the relief the court granted. As a result, the judgment in this regard must be affirmed.
Disposition
The judgment is affirmed. Costs and attorney fees on appeal are awarded to Triple A from Stewart Title; costs on
appeal are awarded to Triple A from the Frisones; costs on account of Western's appeal are awarded to Stewart Title
as respondent from Western. As a result of our disposition of their appeals, the Frisones and Stewart Title's petition
for writ of mandate or other appropriate relief is moot. The petition is denied.
https://www.agentxtra.net/Extranet/singlesource/NavMaster.asp?
DocID=1042085
We receive numerous requests to insure the transfer of the beneficial interest in deeds
of trust. These assignments are usually absolute. Many assignments are for collateral
purposes, to secure a new debt evidenced by a new note. This memo should serve as
guidance to the examination steps and the policy forms to be used in these situates.
1. The promissory note must also be assigned. The recorded assignment of the
beneficial interest in a deed of trust is only the security half of the transfer. The
promissory note, or other evidence of an obligation secured by a deed of trust, is the
primary half of the transfer.
The holder of a secured note may validly assign it without also assigning the
beneficial interest in the deed of trust. In that event the new holder of the note has the
right to enforce the deed of trust. But an assignment of the deed of trust without an
assignment of the note is not valid. In that event, the assignee of the deed of trust has
no interest and the assignment is ineffective against the holder of the note.
2. Absolute assignment of the note and deed of trust. An absolute assignment of the
beneficial interest in a deed of trust may be insured by a lender's policy describing the
deed of trust and the assignment, or by an endorsement (104 series) to a previous
policy issued by this company.
Any request to insure the assignment of a deed of trust must consider whether the
note was properly transferred. A general index search should be made of the original
payee to ensure there are no pending bankruptcy or incompetency proceedings which
would affect capacity and to discover any federal or state tax liens which may have
attached to the beneficial interest before assignment.
We may rely upon the assurances of institutional lenders and trusted outside
escrow companies that the note was endorsed and transferred to the insured assignee.
In the discretion of management, such assurances may be verbal.
In all other cases, the proposed insured assignee must furnish a copy of the note
to confirm proper endorsement and delivery.
We are not willing to provide coverage for risk caused by lack of transfer of the
note. If we do not have the assurance of that transfer, or the evidence of that transfer,
then an exception in schedule B of the policy or endorsement must be included as
follows:
Where a deed of trust has been assigned for collateral, you must assume that the
assignor, S, has not assigned all his right in the security and both S and L have rights
to the original deed of trust. A reconveyance of the deed of trust must be requested by
S and L. Any foreclosure of the deed of trust must be authorized by both S and L.
It is even more important to verify actual endorsement and delivery of the note
when the assignment is for collateral only. Therefore, we must follow the procedure
described for absolute transfers, obtaining either a dependable assurance or evidence
from the insured collateral assignee that the original note was endorsed and delivered.
Otherwise, the same exception shown above related to risk to loss due to lack of proper
transfer must be shown in schedule B.
First Fidelity Thrift & Loan Ass'n v. Alliance Bank, 60 Cal.App.4th 1433, 71 Cal.Rptr.2d 295, 98 Cal.
Daily Op. Serv. 599, 98 Daily Journal D.A.R. 789 (Cal.App. 2 Dist., Jan 22, 1998)
The defendants have not rebutted these presumptions of law with any
evidence.
SUMMARY
The same parcel of commercial real estate was encumbered by two deeds of trust. The deed recorded first in time
was mistakenly reconveyed. The lender that recorded a deed of trust second in time did not directly contact the
lender responsible for the deed of trust that was recorded first in time, but relied on the title record reflecting the
reconveyance. The lender that had recorded the original deed brought an action against the borrower resulting in a
judgment that reinstated its deed second in time to the other deed, according to the official land title records. Both
loans went into default and, in the subsequent foreclosure proceedings, the trial court denied the summary judgment
motion of the lender that had mistakenly reconveyed its deed of trust, and granted the summary judgment motion of
the lender whose deed of trust, although second in time, was first of record. (Superior Court of Los Angeles County,
No. BC147677, David P. Yaffe, Judge.)
The Court of Appeal affirmed, holding that the deed that was first of record, even though second in time, had
priority, since no evidence was presented to demonstrate that the second lender had any reason to suspect that the
reconveyance was a mistake, and the second lender had no legal duty to investigate further to determine whether the
reconveyance was in error. The inquiry legally required is only a reasonable inquiry, not an exhaustive one. The
second lender's duty of inquiry was discharged once the sole discrepancy had been explained in a manner consistent
with normal practice. (Opinion by Zebrowski, J., with Boren, P. J., and Ito, J., [FN*] concurring.) *1434
(1a, 1b) Deeds of Trust § 14--Priorities--Rights of Good Faith Encumbrancer--Notice of Prior Unrecorded or
Reconveyed Encumbrance.
A good faith encumbrancer for value who first records takes its interest in the real property free and clear of
unrecorded interests (Civ. Code §§ 1107, 1214). An encumbrancer in good faith and for value means a person who
has taken or purchased a lien, or perhaps merely the means of obtaining one, and who has parted with something of
value in consideration thereof. A good faith encumbrancer is one who acts without knowledge or notice of
competing liens on the subject property. An unrecorded instrument is valid if a subsequent encumbrancer has notice
of it, i.e., if that person has knowledge of circumstances that, upon reasonable inquiry, would lead to that particular
fact (Civ. Code, §§ 19, 1217). If a trustee executes an unauthorized reconveyance and the trustor subsequently
conveys the property, a grantee who does not have notice of the trustee's lack of authority receives title free and
clear of the lien. Similarly, a junior lender has the right to rely on a state of record title which indicates that a senior
lien will be satisfied out of the interests of all signatories to a senior promissory note. A secret agreement that the
senior lien will be satisfied out of the interests of only some of the signatories is not binding upon the junior
encumbrancer.
[See 4 Witkin, Summary of Cal. Law (9th ed. 1987) Real Property, § 209; 3 Miller & Starr, Cal. Real Estate (2d ed.
1989) §§ 8:2, 8:36, 8:38, 8:45.]
(2a, 2b, 2c) Deeds of Trust § 14--Priorities--Deed Recorded First in Time Yet Second of Record Due to Mistaken
Reconveyance.
In a foreclosure proceeding, the trial court did not err when it denied a lender's motion for summary judgment based
on a deed of trust that was actually recorded first in time, yet appeared second of record after another deed of trust,
due to a reconveyance made in error. After the borrower advised the second lender of the original encumbrance on
the borrower's commercial property, the second lender obtained a title report and learned that the original deed of
trust had been reconveyed. No evidence was presented to demonstrate that the second lender had any reason to
suspect that the reconveyance was a mistake, and the second lender had no legal duty to investigate further to
determine whether the reconveyance was in error. The inquiry legally required is only a reasonable inquiry, not an
exhaustive one. **The second lender's *1435 duty of inquiry was discharged once the sole discrepancy had been
explained in a manner consistent with normal practice. Hence, the deed that was first of record, even though second
in time, had priority.
[See Weil & Brown, Cal. Practice Guide: Civil Procedure Before Trial 3 (The Rutter Group 1997) ¶ 10:240 et seq.]
This case concerns a question of priority between two deeds of trust held by different lenders. Both deeds of trust
encumber the same parcel of commercial real property. The deed of trust that was first in time was recorded, but was
later mistakenly reconveyed. The deed of trust that was second in time was also recorded, but not until after the first
had been reconveyed. The deed of trust that was second in time thus became first of record. The party that recorded
the second deed of trust had knowledge that the first deed of trust had been recorded and also that it had been
reconveyed, but no knowledge that the reconveyance was an error. The question is whether the party that recorded
the second deed of trust should have investigated more than it did. We will find that the investigation undertaken in
this case was adequate. We will therefore hold that the deed that is first of record, even though second in time, has
priority. *1436
The borrower made the capital reduction payment as planned. When he did, First Fidelity instructed the trustee of
the deed of trust to record a partial reconveyance. However, First Fidelity instructed the trustee to reconvey the
commercial property, not the home. (First Fidelity's instructions contained the legal description of the commercial
property, rather than the legal description of the home; apparently this was a clerical error.) The trustee followed
First Fidelity's instructions as given, and hence recorded a reconveyance of the commercial property, not the home.
After this partial reconveyance, the public land title records showed the commercial property as unencumbered.
2. The Alliance loan application; the loan from the nonparty bank.
Four months after the borrower made his capital reduction payment and First Fidelity mistakenly reconveyed its
deed of trust on the commercial property, the borrower applied to Alliance for a loan. In a self-prepared personal
financial statement which accompanied his application, the borrower scheduled several parcels of real estate owned,
and noted encumbrances against these properties. One was the commercial property now in question. **The
financial statement noted an encumbrance against this property in favor of First Fidelity. This was no longer
consistent with the land title records, since First Fidelity's deed of trust had been reconveyed. *1437
**Two months later, while the borrower's loan application to Alliance was still being processed, the borrower
obtained a loan from a third bank (the nonparty bank). The nonparty bank's loan was secured by a deed of trust
against the same commercial property. The state of record title then reflected a deed of trust against the commercial
property securing the loan from the nonparty bank, but no encumbrance in favor of First Fidelity (because it had
been reconveyed).
3. Alliance reviews title report, makes inquiries, funds loan, does not call
First Fidelity.
Prior to funding its loan, Alliance's loan officer reviewed a preliminary and a supplemental title report showing only
the nonparty bank's deed of trust. The title report thus revealed a discrepancy between the financial statement in the
borrower's loan application (which noted an encumbrance against the property in favor of First Fidelity) and the
official land title records (which showed only a deed of trust in favor of the nonparty bank). When Alliance's loan
officer first discussed this discrepancy with the borrower, the borrower told Alliance that he had "refinanced" and
that one of his properties-either his home or his commercial property (he was not sure which)-had been "released."
In a subsequent telephone conversation, the borrower advised Alliance that his financial statement was in error, and
that the deed of trust in favor of First Fidelity encumbered only his home (which was consistent with the official
land title records). [FN2]
FN2 First Fidelity moved to strike the evidence of the phone conversation, contending that this evidence
was inconsistent with the testimony of the Alliance loan officer at his deposition and was therefore
excludable pursuant to D'Amico v. Board of Medical Examiners (1974) 11 Cal.3d 1 [112 Cal.Rptr. 786, 520
P.2d 10] (declaration on summary judgment which is inconsistent with prior deposition testimony can be
disregarded). **The deposition excerpts in the record, however, show that the initial discussion between the
borrower and the loan officer occurred at a lunch in the marina. At the deposition, the loan officer was
asked only about the lunch meeting in the marina. The record does not reflect additional questioning about
possible subsequent conversations between the loan officer and the borrower. **The record therefore does
not demonstrate inconsistency between the loan officer's deposition testimony regarding the marina lunch
meeting and his summary judgment declaration regarding the subsequent telephone conversation. **Hence
no basis has been demonstrated for an evidentiary exclusion pursuant to D'Amico. Nor did First Fidelity
present any evidence contradicting the loan officer's declaration concerning his telephone conversation with
the borrower.
The Alliance loan officer understood that the nonparty bank, which then held the first deed of trust of record against
the commercial property, "was servicing [the borrower's] primary banking needs and had done so for approximately
the prior three years." The loan officer telephoned the non-party bank seeking further clarification. The nonparty
bank advised that the *1438 loan from First Fidelity against the commercial property had been repaid. [FN3] In a
second conversation, the nonparty bank further advised that First Fidelity held a deed of trust only against the
borrower's home (which was also consistent with the official land title records).
FN3 First Fidelity objected that Alliance's evidence of what it learned from the nonparty bank was hearsay.
This particular example would be, if it were offered to prove that First Fidelity's loan had actually been
repaid. That is not the question here, however. To the contrary, it is undisputed that First Fidelity's loan was
not repaid. **The question here is the nature of inquiry required of and performed by Alliance, and what
Alliance learned in that inquiry. Hence the hearsay objection was not valid. Similar hearsay objections by
First Fidelity were similarly invalid.
Alliance then funded its own loan to the borrower, and secured it by a second deed of trust on the commercial
property, junior only to the first deed of trust in favor of the nonparty bank. Although First Fidelity appears to
suggest that Alliance would have funded its loan even if it had knowingly been in third position, behind deeds of
trust in favor of both First Fidelity and the nonparty bank, there is no evidence to support this assertion, and Alliance
denies it. The evidence shows only that Alliance's loan approval committee considered and approved a loan to be
secured by a second deed of trust junior only to that of the nonparty bank.
Alliance never contacted First Fidelity directly. It is this omission that fuels this lawsuit. First Fidelity contends in
its brief that "A simple phone call to First Fidelity would have disclosed the existence and validity of First Fidelity's
lien." However, the record contains no evidence to support this assertion, and it is instead in the realm of
speculation. There is no evidence, for example, of any standard practice or policy for directing or handling such
inquiries, or whether First Fidelity would have been willing to offer such information at all. Whether such a call
would, with reasonable dispatch, have been directed to someone with knowledge or a requirement to investigate is
not known. Whether such a call would have caused First Fidelity to reexamine the underlying documentation and to
discover the error in its earlier reconveyance instructions is not known. First Fidelity might simply have confirmed
that it had indeed ordered reconveyance of its encumbrance against the commercial property, as its records did in
fact reflect. Alternatively, in view of the possibility of subsequent claims of slander of title, detrimental reliance,
interference with prospective economic advantage, etc., which could potentially be based on whatever First Fidelity
might say about the borrower's property, First Fidelity might have followed a policy of directing such inquiries to
the state of record title. Several possibilities are apparent, and what might actually have happened if Alliance had
inquired of First Fidelity remains unknown. However, it does appear that this litigation would not have ensued had
this phone call been made, and the lack of the call forms the major issue in this case. *1439
5. First Fidelity discovers its error; First Fidelity sues the borrower.
Almost two years after Alliance initially funded its loan, First Fidelity discovered that it had mistakenly reconveyed
its deed of trust against the commercial property. First Fidelity then filed suit against the borrower seeking
reinstatement of that encumbrance, and recorded a lis pendens. First Fidelity did not, however, name Alliance in this
suit. First Fidelity eventually obtained a judgment against the borrower which reinstated First Fidelity's deed of trust
against the commercial property as of the date on which First Fidelity had recorded its lis pendens. This date was of
course long after the recordation of Alliance's deed of trust. First Fidelity thus regained a deed of trust against the
commercial property but, insofar as the official land title records showed, that deed of trust was junior in time to
Alliance's deed of trust.
First Fidelity then obtained an injunction against Alliance's foreclosure from the writs and receivers department of
the Los Angeles Superior Court. The case was then transferred to the "fast track" department with the injunction in
place. *1440
Alliance contended that it had no actual notice of any outstanding interest held by First Fidelity and that it had no
duty to investigate any more than it did. [FN4]
FN4 Alliance also raised additional claims, discussion of which is not necessary in view of the disposition
on appeal.
Discussion
1. A good faith encumbrancer takes clear of unknown liens.
(1a) A good faith encumbrancer for value who first records takes its interest in the real property free and clear of
unrecorded interests. (*1441Civ. Code, §§ 1107, 1214; 3 Miller & Starr, Cal. Real Estate (2d ed. 1989) Recording
and Priorities, §§ 8:2, 8:3, pp. 270, 273 [unrecorded instrument not enforceable against subsequent bona fide
purchaser who first records].) "An encumbrancer in good faith and for value means a person who has taken or
purchased a lien, or perhaps merely the means of obtaining one, and who has parted with something of value in
consideration thereof. (Fulkerson v. Stiles (1909) 156 Cal. 703, 706 [105 P. 966].) ... [A] 'good faith' encumbrancer
is one who acts without knowledge or notice of competing liens on the subject property. (See, e.g., Combination
Land Co. v. Morgan (1892) 95 Cal. 548, 552 [30 P. 1102]; Brown v. Johnson (1979) 98 Cal.App.3d 844, 851 [159
Cal.Rptr. 675]; Schut v. Doyle (1959) 168 Cal.App.2d 698, 702- 703 [336 P.2d 567]; 3 Miller & Starr, Cal.Real
Estate (2d ed. 1989) § 8:38, p. 346; 4 Witkin, Summary of Cal. Law (9th ed. 1987) Real Property, § 209, p. 412.)"
(Brock v. First South Savings Assn. (1992) 8 Cal.App.4th 661, 667 [10 Cal.Rptr.2d 700].) If a trustee executes an
unauthorized reconveyance and the trustor subsequently conveys the property, a grantee who does not have notice of
the trustee's lack of authority receives title free and clear of the lien. (Firato v. Tuttle (1957) 48 Cal.2d 136, 139 [308
P.2d 333].) Similarly, a junior lender has the right to rely on a state of record title which indicates that a senior lien
will be satisfied out of the interests of all signatories to a senior promissory note. A secret agreement that the senior
lien will be satisfied out of the interests of only some of the signatories is not binding upon the junior encumbrancer.
(Caito v. United California Bank (1978) 20 Cal.3d 694, 702 [144 Cal.Rptr. 751, 576 P.2d 466]; but see Wutzke v.
Bill Reid Painting Service, Inc. (1984) 151 Cal.App.3d 36, 39 [198 Cal.Rptr. 418] [bona fide purchaser's interest not
senior to that of holder of deed of trust whose deed was reconveyed by forgery]; see also 3 Miller & Starr, supra, §
8:10, p. 297 [bona fide purchaser could, however, be protected by title insurance].)
(3) A defendant is entitled to summary judgment if that defendant's moving papers show that an element of
plaintiff's case cannot be established. (Code Civ. Proc., § 437c, subd. (o)(2); Weil & Brown, Cal. Practice Guide:
Civil Procedure Before Trial 3 (The Rutter Group 1997) ¶ 10:240 et seq., p. 10-77 et seq.) That Alliance had
knowledge of First Fidelity's equitable claim for reinstatement of its reconveyed deed of trust was an element of
First Fidelity's case. (4) "The general rule places the burden of proof upon a person claiming bona fide purchaser
status to present evidence that he or she acquired interest in the property without notice of the prior interest. (Bell v.
Pleasant (1904) 145 Cal. 410, 413-414 [78 P. 957]; Alcorn v. Buschke (1901) 133 Cal. 655, 657-658 [66 P. 15];
Hodges v. Lochhead (1963) 217 Cal.App.2d 199, 203 [31 Cal.Rptr. 879]; 2 Miller & Starr, Current Law of Cal. Real
Estate [(1977)] § 11:28, p. 51.) ... [¶] If the prior party claims an equitable rather than a legal title, however, the
burden of proof is upon the person asserting that title. (Bell v. Pleasant, supra, 145 Cal. 410, 414-415; Garber v.
Gianella (1893) 98 Cal. 527, 529-530 [33 P. 458]; 2 Miller & Starr, Current Law of Cal. Real Estate, supra, § 11:28,
pp. 52- 53.)" (Gates Rubber Co. v. Ulman (1989) 214 Cal.App.3d 356, 366, fn. 6 [262 Cal.Rptr. 630].) (2b) Showing
that Alliance was not an innocent purchaser for value was hence an element of First Fidelity's claim. (Firato v.
Tuttle, supra, 48 Cal.2d 136, 138.)
In its moving summary judgment papers, Alliance presented evidence that it had no knowledge that First Fidelity
had a claim (i.e. no knowledge that First Fidelity had reconveyed in error). The burden on summary judgment thus
shifted to First Fidelity to present evidence showing a triable issue of fact that Alliance did have notice of First
Fidelity's claim. (Code Civ. Proc., § 437c, subd. (o)(2).) First Fidelity attempted to meet this burden by presenting
evidence of two facts: 1) that the borrower had initially listed a First Fidelity encumbrance against the commercial
property on his financial statement, and 2) that Alliance had not telephoned First Fidelity to inquire. The question
thus resolves into whether evidence of these two facts, viewed in light of the evidence that First Fidelity's deed of
trust had been reconveyed, would be sufficient to support a finding of "notice" of First Fidelity's continuing
equitable claim within the meaning of the recording statutes. *1443
3. The duty to inquire.
(1b) Civil Code section 1217 provides: "An unrecorded instrument is valid as between the parties thereto and those
who have notice thereof." (Italics added.) Assuming that First Fidelity's deed of trust qualifies as an "unrecorded"
instrument, even though it was actually "recorded but reconveyed," Alliance would be subject to it if Alliance had
"notice" within the meaning of section 1217. (See, e.g., 3 Miller & Starr, Cal. Real Estate, supra, Recording and
Priorities, §§ 8:2, 8:80, pp. 270, 415.) A person generally has "notice" of a particular fact if that person has
knowledge of circumstances which, upon reasonable inquiry, would lead to that particular fact. (See, e.g., 3 Miller &
Starr, supra, § 8:45, p. 355; Civ. Code, § 19.)
FN5 Notwithstanding that the attorney was representing the ranch owner in a criminal matter, and
presumably had ample occasion to talk with him.
The Supreme Court stated that "[t]he deed of trust to plaintiff [the barber] was prior in time, and would be prior in
right save for the failure to record *1444 it. It is conceded that the deed to [the attorney] was first recorded, and that
at the time of said recordation, no prior conveyance or encumbrance appeared of record. But [the attorney's] right is
superior to plaintiff's only if [the attorney] is a bona fide purchaser, for the recording acts protect the subsequent
purchaser who gives value before he has any notice, actual or constructive, of prior equities. [Citations.] The
question is, therefore, whether [the attorney] had either actual notice of plaintiff's prior claim, or constructive notice
thereof by reason of facts sufficient to put him on inquiry, before he gave value, that is, before his law firm
undertook the obligation to defend [the ranch owner]. If he had none, then his title is good as against plaintiff, and
defendant ..., his transferee, will likewise take a title superior to that of plaintiff ...." (March v. Pantaleo, supra, 4
Cal.2d 242, 243-244.) The Supreme Court went on to rule that in view of the fact that the attorney had been told
about only one prior lender, and had checked the land title records to determine that an encumbrance in favor of that
lender had been reconveyed, no further inquiries were necessary. The judgment in favor of defendant was thus
affirmed.
Although the instant case is not identical, it is similar in significant respects. Here the borrower advised Alliance of
only one encumbrance on the commercial property, purportedly in favor of First Fidelity. Upon obtaining a title
report, Alliance learned that First Fidelity had no encumbrance on the commercial property, but instead that the
nonparty bank did. Upon inquiring further of the borrower and the nonparty bank, Alliance was told that First
Fidelity held an encumbrance against the borrower's home, a property with which Alliance was not concerned, but
that the loan against the commercial property had been repaid. It was a reasonable deduction from this information
that First Fidelity's deed of trust against the commercial property had been reconveyed, which in fact was correct.
No evidence was presented to the effect that Alliance had reason to suspect that the unusual had occurred: that First
Fidelity had reconveyed by mistake.
Just as the attorney knew the identity of the barber in March, the subsequent encumbrancer here (Alliance) had
notice of the identity of the prior lender (First Fidelity). March imposed no duty on the subsequent encumbrancer to
contact the prior lender after learning that the prior deed of trust had been reconveyed. Perhaps, from a standpoint of
good business practice, it might have been advisable for Alliance to contact First Fidelity here, since whatever First
Fidelity's response-whether to discover its error, to simply confirm the reconveyance, or to decline to provide
information-it would likely have obviated this litigation, either by way of estoppel or by dissuading Alliance from
making its loan. As a legal matter, however, there is no authority for the proposition that a prospective lender,
learning that a prior *1445 deed of trust had been reconveyed, has a duty to investigate further to determine whether
that reconveyance was in error. No California case has ever so held, and no such case has been found from any other
jurisdiction. If such a rule had been applied in March, the unrecorded deed of trust would presumably have been
discovered. In view of the fact that most parcels of real estate have likely been subject to a lien that has been
reconveyed, a broad rule would seriously complicate the lending process far beyond anything which seems
contemplated by the statutes by creating a duty to investigate beyond the state of record title in virtually all cases.
The only possible narrowing factor here was the information provided by the initial listing of the lien on the
borrower's financial statement. The subsequent encumbrancer in March (the attorney) was able to ignore similar
information without consequence (the ranch owner's statement that he had borrowed money from the barber,
unaccompanied by any statement that he had paid it back). Alliance, however, did not ignore similar information
here. Instead, Alliance obtained further clarification from the borrower, and further information from the nonparty
bank. Additionally, Alliance consulted a title report. The information ultimately assembled by Alliance from these
three sources was both internally consistent and consistent with common secured lending procedures: First Fidelity
once had a deed of trust, but it had been reconveyed.
First Fidelity contends that the duty to inquire continued even in the face of the information assembled by Alliance.
The inquiry legally required, however, is only a reasonable inquiry, not an exhaustive one. Although this is a matter
of degree, the duty to inquire here was discharged once the sole discrepancy had been explained in a manner
consistent with normal practice. As the Supreme Court stated in March, "[f]urther inquiries ... were not, under these
circumstances, necessary." (March v. Pantaleo, supra, 4 Cal.2d 242, 244.)
Disposition
The judgment is affirmed. Alliance to recover costs on appeal.
Bank of Mendocino v. Baker, 82 Cal. 114, 22 P. 1037 (Cal. Dec 19, 1889)
Barthelmess v. Cavalier, 2 Cal.App.2d 477, 38 P.2d 484 (Cal.App. 2 Dist. Nov 28, 1934)
Mock v. Santa Monica Hospital, 187 Cal.App.2d 57, 9 Cal.Rptr. 555 (Cal.App. 2 Dist. Dec 02, 1960)
(2) Moreover, as stated in the Wennerholm case, at page 716: “If any verified pleading contains an allegation which
renders a complaint vulnerable, the defect cannot be cured simply by omitting the allegation, without explanation, in
a later pleading.” In Owens v. Traverso, 125 Cal.App.2d 803, the applicable law is stated as follows, at page 804 [
271 P.2d 164]: “... although prior complaints are normally superseded by subsequent ones, and should be
disregarded, a pleader cannot cure a defect in a verified complaint by simply, without legal explanation, omitting
such allegations from subsequently filed pleadings. In such a case the original defect infects the subsequent pleading
so as to render it vulnerable to a demurrer.” (See also Regus v. Schartkoff, 156 Cal.App.2d 382, 391-392 [ 319 P.2d
721].) In the light of such authorities, we turn to an examination of the earlier verified complaints.
In the original complaint it is alleged as follows: “As a result of Plaintiff's injuries during her employment, she
instituted an action before the Industrial Accident Commission, which action demanded and received prolonged
hearings up until June of 1957. It was only during said hearings, and particularly after the submission of reports
from examining physicians in said hearings, that Plaintiff discovered that her injuries, and particularly the injury to
her shoulder, was the *61 direct and proximate result of the negligence and malpractice of the Defendants herein
alleged.” (Emphasis added.)
The language of the first amended complaint is not entirely consistent with the allegation just quoted that it was
“only during said hearings, and particularly after the submission of reports from examining physicians in said
hearings,” that the plaintiff discovered that her injury to her shoulder was due to the negligence of the defendants. In
the first amended complaint the plaintiff makes the following allegations: “Plaintiff instituted an action before the
Industrial Accident Commission which action demanded and received numerous and prolonged hearings and re-
hearings up until June of 1957. Until the conclusion of said hearings and the submission of numerous medical
reports which were a result of numerous physical examinations ordered by the Commission, Plaintiff was neither
aware nor could she reasonably have known with the exercise of reasonable diligence and inquiry the cause or
causes of her injury and especially the cause or causes of her continued pain and discomfort in her back and
particularly her shoulder. The reason for said hearings was to determine and adjudicate the causes for said injuries
and pain. It was only after said hearings and within one (1) year from refiling of this Complaint that Plaintiff learned
from the medical reports submitted before the Commission and from subsequent physical examinations that her
injuries, pain and discomfort and particularly the injury to her shoulder was the direct and proximate result of the
negligence and malpractice of the Defendants herein alleged.” (Emphasis added.) No explanation was offered with
respect to such inconsistency.
Portions of the second amended complaint appear to be inconsistent with allegations of the original complaint and
other portions appear to be inconsistent with allegations of the first amended complaint. Since such portions are of
importance in the determination of this appeal, it is necessary to quote them at length. Two portions are: “On
January 20, 1956, John R. Black, M. D. was appointed by the Industrial Accident Commission to examine the
Plaintiff in connection with her shoulder and upper back injury and for the first time in his medical report filed
before the Commission and on record therein was there an indication that the upper back and shoulder injury was
not caused by the Plaintiff's original fall but, instead, was caused by the method and procedure of the surgery
performed upon the Plaintiff by the Defendants. On March 23, 1956, the Industrial Accident Commission ordered
*62 a hearing for the cross-examination of Dr. Black for the purpose of submitting rebuttal evidence to the cause of
her upper back and shoulder injury and in connection therewith, the Commission ordered further examination of the
Plaintiff for the purpose of determining the cause of her shoulder and upper back injury. On March 23, 1956, the
Industrial Accident Commission made an Order granting the Petition for Reconsideration again for the purpose of
determining the cause for the upper back and shoulder injury. On April 12, 1956, the Commission made another
Order for Reconsideration of the cause of Plaintiff's injury and for further examination. On April 9, 1957, the
Industrial Accident Commission made another Order for further hearing to determine the cause and extent of
Plaintiff's shoulder and upper back injury. On May 20, 1957, John R. Black, M. D. submitted a report on file therein
again indicating that Plaintiff's shoulder and upper back injury was not a result of her original trauma but a result of
the method and procedure of operation. ... Plaintiff further alleges that she could not determine whether she had a
cause of action because the issue of what caused her presnt complaint was being determined by the Industrial
Accident Commission and by the numerous physicians and surgeons appointed by the Commission to examine her
and that before she could become aware of her cause of action, it was necessary for the Industrial Accident
Commission and the numerous doctors appointed by said Commission to determine the cause of her injury, and for
the further reason that Plaintiff sustained said injury while she was completely under the influence of general
anaesthesia during surgery. ...” (Emphasis added.) A third portion is in the language which is quoted hereinabove
from the first amended complaint. No explanation of any inconsistency was offered.
In the third amended complaint, the plaintiff alleges that the defendants examined and treated plaintiff on many
occasions subsequent to her surgery and filed numerous reports of their examinations and findings with the
Industrial Accident Commission, all of which reports contained the conclusion that her failure to recover and her
symptoms were in no way connected with the surgery. She further alleges that her employer and its insurance carrier
requested numerous rehearings before the commission “predicated on the contention that Plaintiff's complaints and
injuries subsequent to surgery were not the proximate result of and not connected with her injury” and that “[o]n
each such occasion of said hearings, the Commission *63 ruled that Plaintiff's injuries and pain in the upper
extremities were a result of her original injury and ordered further treatment and examination.” The final paragraph
of the third amended complaint, obviously of an evidentiary nature, is: “Plaintiff refers to her Industrial Accident
case, Claim No. 54 L. A. 153-838 entitled 'Bessie Mock vs. J. J. Newberry Company, a corporation; Liberty Mutual
Insurance Company, a corporation' and incorporates the entire file of said case including all of the reports, minutes
and orders contained therein and will ask leave of Court at the time of trial to present said file into evidence in proof
of Plaintiff's cause.”
While an affidavit of counsel for the plaintiff was filed in opposition to the demurrer to the third amended
complaint, it explains none of the inconsistencies found in the examination of the several complaints except that the
affiant does quote from the report of January 24, 1956, of Dr. Black as follows: “ 'As far as the shoulder condition is
concerned, there is nothing in the history to indicate that the patient sustained any injury to her shoulder, however, it
does happen that with the patient lying face down on an operating table, shoulders and arms are abducted and this
sometimes gives rise to a so-called frozen shoulder syndrome. The medical probabilities are that the patient's present
complaints in her shoulder came on subsequent to surgery and are related to the operation and consequently are an
industrial disability.' ” FN2 It is to be noted that, in his affidavit, counsel for the plaintiff states that Dr. Black's report,
“represents the first subtle indication to this Plaintiff of her present cause of action.” But he further states that
“[t]here is nothing in this report to give rise to any suspicion of malpractice.”
FN2 Hereinafter in this opinion, reference is made to the law with respect to a new injury, received in the
course of treatment of an industrial injury, as the subject of compensation in the proceedings before the
Industrial Accident Commission.
The fourth amended complaint and the fifth amended complaint are identical. Insofar as the affidavit, to which
reference has been made, may be used as an attempted explanation of the allegations of the fourth and fifth amended
complaints with respect to information received from Dr. Black, we find a reference to September 30, 1957, as the
date of the hearing “for cross-examination of Dr. Black in order to determine the cause of the shoulder injury.”
(3) An action by a patient against a physician and surgeon *64 for injuries sustained by the patient by reason of
negligent treatment is an action sounding in tort and not upon a contract. The statute of limitations of one year
embodied in subdivision 3 of section 340 of the Code of Civil Procedure governs such an action. ( Stafford v. Shultz,
42 Cal.2d 767, 775 [ 270 P.2d 1]; Huysman v. Kirsch, 6 Cal.2d 302, 306 [ 57 P.2d 908]; Calvin v. Thayer, 150
Cal.App.2d 610, 616 [ 310 P.2d 59]; Costa v. Regents of University of California, 116 Cal.App.2d 445, 454 [ 254
P.2d 85]; Ehlen v. Burrows, 51 Cal.App.2d 141, 144 [ 124 P.2d 82].) However, the statute of limitations does not
commence to run until the plaintiff discovers his injury or through the exercise of reasonable diligence should have
discovered it. ( Stafford v. Schultz, supra, 42 Cal.2d 767, 776; Hurlimann v. Bank of America, 141 Cal.App.2d 801,
802-803 [ 297 P.2d 682]; Hemingway v. Waxler, 128 Cal.App.2d 68, 70-71 [ 274 P.2d 699]; Greninger v. Fischer,
81 Cal.App.2d 549, 553 [ 184 P.2d 694].) As stated by Mr. Justice White in Trombley v. Kolts, 29 Cal.App.2d 699,
at page 709 [ 85 P.2d 541]: “Certainly the statute of limitations should not run against appellant's rights during the
time she was in ignorance of the cause of her disability, and could not with reasonable care and diligence ascertain
such cause. ...” More recently, in Hundley v. St. Francis Hospital, 161 Cal.App.2d 800, it was said, at page 806 [
327 P.2d 131]: “Thus, in the absence of actual discovery of the negligence, the statute does not commence to run
during such period ( Huysman v. Kirsch, 6 Cal.2d 302 [57 P.2d 908]), and this is true even though the condition
itself is known to the plaintiff, so long as its negligent cause and its deleterious effect is not discovered ( Trombley v.
Kolts, 29 Cal.App.2d 699 [ 85 P.2d 541]).” (See also Myers v. Stevenson, 125 Cal.App.2d 399, 402 [ 270 P.2d 885].)
(4) Moreover, the statute of limitations with respect to a cause of action for malpractice does not ordinarily
commence to run while the physician-patient relationship continues between the defendant physician and the
plaintiff. ( Myers v. Stevenson, supra, 125 Cal.App.2d 399, 401), unless the plaintiff has in fact discovered the injury
or through the use of reasonable diligence should have discovered it. (See Petrucci v. Heidenreich, 43 Cal.App.2d
561, 562 [ 111 P.2d 421]; Hundley v. St. Francis Hospital, supra, 161 Cal.App.2d 800, 806.)
(5) In order to show that his cause of action is not barred where the act of the defendant which is alleged to have
been negligent occurred more than a year before the commencement of the action, the plaintiff must state in his
complaint “when *65 the discovery was made, the circumstances under which it was made, and facts to show that
the plaintiff is not at fault for not having made an earlier discovery, and that he had no actual or presumptive
knowledge of facts sufficient to put him on inquiry. ( Myers v. Stevenson, supra, 125 Cal.App.2d 399; Wohlgemuth
v. Meyer, supra, 139 Cal.App.2d 326, 330-331 [ 293 P.2d 816].)” ( Hurlimann v. Bank of America, supra, 141
Cal.App.2d 801, at 803.)
(6) In the light of the applicable law, we turn again to the allegations of the plaintiff in her second and fifth amended
complaints. In the former pleading, the plaintiff alleged that on January 20, 1956, Dr. Black was appointed by the
Industrial Accident Commission to examine her “in connection with her shoulder and upper back injury and for the
first time in his medical report filed before the Commission and on record therein was there an indication that the
upper back and shoulder injury was not caused by the Plaintiff's original fall but, instead, was caused by the method
and procedure of the surgery performed upon the Plaintiff by the Defendants. ” (Emphasis added.) We must
conclude that the contents of such report, the date of which is given as January 24, 1956, in the affidavit of the
plaintiff's counsel heretofore noted, was known to the plaintiff or her attorney prior to or about March 23, 1956,
because it is further alleged that on the latter date “the Industrial Accident Commission ordered a hearing for the
cross-examination of Dr. Black for the purpose of submitting rebuttal evidence to the cause of her upper back and
shoulder injury and in connection therewith, the Commission ordered further examinations of the Plaintiff for the
purpose of determining the cause” of that injury. It appears, therefore, that the pleading of the plaintiff in the fifth
amended complaint as to the acquisition of information with respect to the relationship between that injury and the
operation is in essence the same as in the second amended complaint except for the date thereof, as is evident from
the following excerpt, heretofore noted, from the fifth amended complaint: “... that plaintiff, subsequent to said
operation, was not informed and had no reason to believe that her pain and suffering and her aforesaid injuries to her
upper extremities were a direct and proximate result of the aforesaid negligence of defendants during said operation
until September 30, 1957, at which time plaintiff was informed by John R. Black, M. D., that her aforesaid injuries
were in some manner directly and solely connected *66 with the aforesaid operation upon plaintiff and not
connected with or related to the prior injury plaintiff sustained during the course of her employment. ” (Emphasis
added.) No satisfactory explanation has been offered for the inconsistencies apparent in the various allegations of the
plaintiff. Therefore, in passing upon the merits of the demurrer to the fifth amended complaint, the court below was
warranted in determining that for more than one year prior to the filing of her action the plaintiff had information
indicating that her shoulder and upper back injury had its origin in the operation and not in the accident she suffered
at her place of employment.
(7a) A question still remains to be answered. We must determine whether the plaintiff's information with respect to
the origin of her injury of which she complains in this action was sufficient to put her on inquiry as to the existence
of negligence on the part of the defendants. In her first as well as in her last complaint she alleges that her injury is
permanent and that she was caused to suffer and continues to suffer severe pain. Certainly, a prudent person would
believe that if, in the course of an operation at one point on the body, a serious and painful injury occurred to
another part of the body, there was cause for an investigation for the purpose of determining whether there was fault
on the part of the surgeons and their assistants. (8) As stated in Bathke v. Rahn, 46 Cal.App.2d 694, at page 696 [
116 P.2d 640]: “This brings into play the rule so frequently announced in this state that 'as the means of knowledge
are equivalent to knowledge, if it appears that the plaintiff had notice or information of circumstances which would
put him on an inquiry which, if followed, would lead to knowledge, or that the facts were presumptively within his
knowledge, he will be deemed to have had actual knowledge of these facts.' ( Lady Washington Consolidated Co. v.
Wood, 113 Cal. 482 [45 P. 809].)” (See also Hemingway v. Waxler, supra, 128 Cal.App.2d 68, 71; Ehlen v.
Burrows, supra, 51 Cal.App.2d 141, 145.) FN3(7b) No sufficient excuse or explanation for the plaintiff's failure to
pursue a reasonable inquiry has been offered in her pleadings.
FN3 Codification of the rule is found in section 19 of the Civil Code: “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.” (See
also Crabbe v. White, 113 Cal.App.2d 356, 359-360 [ 248 P.2d 193].)
Caito v. United California Bank, 20 Cal.3d 694, 576 P.2d 466, 144 Cal.Rptr. 751 (Cal., Mar 03, 1978)
SUMMARY
Two cotenants of a farm brought an action seeking partition, accounting, and declaration of rights and priorities of
four parties claiming an interest in the property. Such parties, named as defendants, consisted of the other two
cotenants, a lending bank that as beneficiary and trustee of a first deed of trust foreclosed and sold the farm while
the action was pending, and a second bank that was beneficiary and trustee of a second deed of trust that, unknown
to plaintiffs, encumbered the farm as security for the extension of an independent loan to defendant cotenants.
Plaintiffs (who had intended to sign the loan instruments to the first bank merely to accommodate defendant
cotenants but actually signed as comakers) had later loaned defendant cotenants $6,000 to keep the bank loan in a
current status, and had reduced the loan by collecting and paying over to the bank $17,500 in farm rentals. The
foreclosure sale fetched $130,000 of which the first bank retained about $45,000 pursuant to its note and deed of
trust and deposited the surplus in court. The trial court, treating plaintiffs as accommodation parties, declared that
the $45,000 was to be charged only to defendant cotenants' one-half interest ($65,000) in the proceeds from the sale;
as to the $20,000 balance of that interest, the court ruled that plaintiffs' right to reimbursement from defendant
cotenants for the $6,000 loan and $17,500 farm rentals had priority over the claims of the second bank on the second
deed of trust, with the result that the second bank was awarded nothing. (Superior Court of Imperial County, No.
42421, George R. Kirk, Judge.)
**The Supreme Court reversed, holding that because the instruments to the first bank had been signed by plaintiffs
as comakers, they had acquired no rights as accommodating parties. **Therefore the first bank's note had been
satisfied equally out of plaintiffs' and defendant cotenants' interest in the sale proceeds, and the $85,000 balance was
similarly allocable to them in equal shares, only defendant cotenants' share, however, being subject to the
attachment of the second bank's lien. As to the claims on that $42,500 half-share, plaintiffs had no right of equitable
subrogation to the security position of the first bank with respect to the $6,000 loan or the $17,500 farm rentals, the
latter in any event having been collected as agents for that bank pursuant to prior assignment; on the contrary, the
lien of the second bank had priority over plaintiffs' equitable right of reimbursement from defendant cotenants. This
was so because the second bank, having bargained for the second deed of trust without notice or knowledge of the
intended accommodation or of any rights of contribution between the two pairs of cotenants, was entitled to the
benefits of a bona fide encumbrancer for value without notice of any prior claim other than that asserted by the first
bank.
(5) Joint ownership is not in itself a circumstance sufficient to impose a duty on an encumbrancer to inquire whether
there are unrecorded agreements between joint owners. (Kirby Lumber Co. v. Temple Lumber Co. (1935) 125 Tex.
294 [ 83 S.W.2d 638, 643].) Policy runs against upholding secret liens and charges to the injury of subsequent
innocent encumbrancers. ( Schut v. Doyle (1959) 168 Cal.App.2d 698, 702 [ 336 P.2d 567].) Inquiry does not
become a duty when apparent possession is consistent with title appearing of record. ( Smith v. Yule (1866) 31 Cal.
180, 184; Three Sixty Five Club v. Shostak (1951) 104 Cal.App.2d 735, 738 [ 232 P.2d 546]; Pacific Fruit Exchange
v. Schropfer (1929) 99 Cal.App. 692, 694 [ 279 P. 170].)
Buehler v. Oregon-Washington Plywood Corp., 17 Cal.3d 520, 551 P.2d 1226, 131 Cal.Rptr. 394 (Cal. Jul
12, 1976)
SUMMARY
Plaintiffs, the owners of a ranch, executed a “road agreement” with defendants' predecessors in interest, granting
them permanent easements in gross “for any purposes reasonably related to the ownership, management and
exploitation of timber and forest products which from time to time may be owned or controlled by the owner or
owners of said easements ...” The easement was assignable only to a partnership or corporation which had acquired
operating control of at least one-third of the timber situated in parts of a tract of land enclosing plaintiffs' ranch.
When plaintiffs learned that the easement was being used for hauling timber originating from points outside the
enclosing tract, they brought an action for trespass and declaratory relief. According to affidavits filed by plaintiff
and the attorney representing him at the time the easement was executed, the easement holders had indicated to
plaintiffs during the contract negotiations that the easement could only be used to haul timber originating within the
enclosing tract, and plaintiffs believed that these understandings were incorporated in the road agreement. The trial
court adopted defendants' interpretation of the road agreement, determining that the language was completely clear
and that the easement conferred could be used and enjoyed regardless of the location of the lands from which such
timber and forest products were derived. Accordingly, the court granted defendants' motion for summary judgment
and dismissed the complaint. (Superior Court of Mendocino County, No. 30508, Arthur B. Broaddus, Judge.)
The Supreme Court reversed. The court held the trial court was in error in granting the motion for summary
judgment, thereby precluding a trial to determine the road agreement's true meaning in light of extrinsic evidence.
The court held that provisions in the agreement limiting the use and assignability of the subject easements suggested
an intention on the part of the contracting parties that the easements be used solely for the purpose of logging
operations relating to the utilization of timber rights in the enclosing tract, and, since the language was reasonably
susceptible of that meaning, it was subject to clarification by means of extrinsic evidence.
(4) Easements and Licenses in Real Property § 7--Easements--Mode and Extent of User--Appurtenant Easements.
Although the benefit of an appurtenant easement attaches only to the land of the easement holder, while an easement
in gross runs in favor of the person specified in the grant, territorial restrictions are not necessarily absent simply
because the parties have limited the use and enjoyment of the easement to a number of specified persons. Such
restrictions may be directly relevant to the matter of the scope and extent of permitted use.
THE COURT.
In this proceeding, involving the interpretation of an agreement creating an easement in real property, plaintiffs
William and Jessie Buehler appeal from a summary judgment dismissing their complaint for declaratory relief and
for trespass. After decision by the Court of Appeal, First Appellate District, Division Four, reversing the judgment,
we granted a hearing in this court for the purpose of giving further consideration to the issues raised. Having made a
thorough examination of the cause, we have concluded that the opinion of the Court of Appeal prepared by Justice
Christian and concurred in by Presiding Justice Caldecott and Justice Emerson (retired judge of the superior court
sitting under appointment by the Chairman of the Judicial Council) correctly treats and disposes of the issues
involved, and we adopt such opinion as and for the opinion of this court.
[ ] Appellants' predecessors in interest, Joseph and Mary Campbell, once owned a ranch enclosed by a large land
area known as the Garcia tract. In 1908, the Campbells conveyed to the L. E. White Lumber Company (hereinafter
White Lumber) and its successors and assigns, all timber then standing on the ranch. White Lumber was also
granted an *524 easement across Campbell Ranch to haul the Campbell timber and any other timber which White
Lumber might “acquire upon adjoining land or lands in the vicinity of” the Campbell Ranch.
The easement granted to White Lumber was subsequently transferred to the S. C. Rudolph Lumber Corporation
(hereinafter Rudolph Lumber). By 1954, Rudolph Lumber had also acquired property in the Garcia tract formerly
owned by White Lumber, and granted an option to several persons, including W. M. Moores and W. H. A. Smith, to
purchase the property in the Garcia tract. Shortly thereafter, Moores and Smith, as well as the Cloverdale Redwood
Company, were granted licenses to use all timber rights and easements owned by Rudolph Lumber, including the
right-of-way created by the Campbell grant. The licensees began removing timber from both the Campbell ranch
and the Garcia tract.
Meanwhile, appellants had become the owners of the Campbell ranch. They brought suit in 1955, disputing the right
of Moores and Smith, Cloverdale Redwood and Rudolph Lumber to cut and haul timber under the circumstances
described above. Appellants then contended that the Campbell grant only permitted the easement holders to cut
timber which had become merchantable by 1908; that the definition of “merchantable” timber was to be determined
by logging practices existing in 1908 or those followed by White Lumber; that whatever rights the easement holders
might have acquired by the Campbell grant had been forfeited by lapse of time; that the ranch had been damaged by
careless logging and road building; and that the easement holders were prohibited from using the Campbell
easement to haul timber originating outside of the section in which the timber described in the Campbell grant was
located.
The action was settled and dismissed, and a “road agreement” was executed and recorded in 1956; it provided that
Moores and Smith and Cloverdale Redwood were granted permanent easements in gross “for any purposes
reasonably related to the ownership, management and exploitation of timber and forest products which from time to
time may be owned or controlled by the owner or owners of said easements ....” The easement was assignable only
to a partnership or corporation which had acquired operating control of at least one-third of the timber situated in
parts of the Garcia tract. Appellants received $10,000 in cash, grazing rights and other considerations. According to
the affidavits of *525 William Buehler and Judge Timothy O'Brien (who had been appellants' attorney), the
easement holders had indicated to appellants during the contract negotiations that the easement could only be used to
haul timber originating within the Garcia tract. Appellants believed that these understandings were incorporated in
the road agreement.
In 1962, the Oregon-Washington Plywood Corporation (hereinafter Oregon-Washington) acquired the Campbell
easement, as well as substantially all of the Garcia tract property, from Moores and Smith, Cloverdale Redwood and
Rudolph Lumber. In 1965, Oregon-Washington sold virtually all of its Garcia tract property to Longview Fibre
Company (hereinafter Longview) while reserving timber rights for itself until December 31, 1971. Appellants first
learned in 1969 that Oregon-Washington was hauling timber originating from points outside the Garcia tract. This
action was then brought against Rudolph Lumber, Cloverdale Redwood, Moores and Smith, Oregon-Washington,
and Longview.
(1)(See fn. 1.) **The real issue in this case is the scope of the easement conferred by the road agreement.
FN1
Respondents make no claim of title to Campbell Ranch except for such rights as they may have under the
easement. No trespass can be said to have occurred if Oregon-Washington's rights under the road agreement were as
broad as Oregon-Washington has contended.
(2) Summary judgment may only be granted if no material fact issue remains in the case. Where affidavits have been
submitted by the opposing parties, any doubts as to whether summary judgment is proper should be resolved against
the moving party. ( Pettis v. General Tel. Co. (1967) 66 Cal.2d 503, 505 [ 58 Cal.Rptr. 316, 426 P.2d 884].)
Appellants contend that the trial court erred in determining that the language of the road agreement was clear, and in
disregarding extrinsic evidence which had been presented in opposition to summary judgment. (3) In determining
the scope of an easement, extrinsic evidence may be used as an aid to interpretation unless such evidence imparts a
meaning to which the instrument is not reasonably susceptible. ( Continental Baking Co. v. Katz (1968) 68 Cal.2d
512, [ ] [521-523 ( 67 Cal.Rptr. 761, 439 P.2d 889)]. [ ]
Although the agreement [which is set forth in relevant part in the margin FN[2] ] does not specifically state that the
easement holders are entitled *527 to use the Campbell right-of-way for hauling timber originating from any source,
respondents contend that no other interpretation is reasonable. They argue that a conveyance of an easement in
gross, as here, cannot possibly be construed as being subject to territorial restrictions. (4) It is true that the benefit of
an appurtenant easement attaches only to the land of the easement holder (see Civ. Code, § 1104; Moots v. Kasten
(1949) 90 Cal.App.2d 734, 736 [ 203 P.2d 537]; Burby, Land Burdens in California - Easements (1930) 4
So.Cal.L.Rev. 115, 118), while an easement in gross runs in favor of the persons specified in the grant. (See
Balestra v. Button (1942) 54 Cal.App.2d 192, 197 [ 128 P.2d 816]; 3 Witkin, Summary of Cal. Law (8th ed. 1973)
Real Property, § 341, [pp. 2041-2042.]) But territorial restrictions are not necessarily absent simply because the
parties have limited the use and enjoyment of the easement to a number of specified persons. [Such restrictions, for
example, may be directly relevant to the matter of the scope and extent of permitted use. (See generally 3 Miller &
Starr, Cal. Real Estate (1971) §§ 715, 722.)]
FN[2] This Agreement made and executed this 15th day of September, 1956, by and between William
Kenneth Buehler and Jessie Buehler, First Parties, and Cloverdale Redwood Co., a California corporation,
and Moores and Smith, a partnership, Second Parties,
Witnesseth:
1. First parties hereby grant to second parties, and to each of them severally, a permanent easement of right
of way over and across that certain real property owned by first parties in Mendocino County, California,
and lying in Sections 9, 10, 11, 14 and 15, Township 12 North, Range 15 West, MDB & M, to maintain
and use certain roads now existing thereon, the approximate location and route of said roads being as
shown upon the plot attached hereto as Exhibit A. In addition, second parties may construct a connecting
road between the points marked “A” and “B” in Sections 11 and 14.
.....
3. The easements hereby granted to second parties are easements in gross. Said easements may be used and
enjoyed by second parties, their employees, agents, and contractors and second parties may license the use
thereof to any partnership or corporation in which second parties (or the stockholders of Cloverdale
Redwood Co.) may have a fifty percent (50%) or greater interest. Said easements are assignable, but only
to a partnership or corporation which has acquired operating control of at least one-third of the timber
situated on the lands described in the Memorandum of Agreement dated April 15, 1954, between S. C.
Rudolph Lumber Corporation and W. M. Moores, et al., (recorded in Book 368, page 433, Mendocino
County Records) or at least one-third of the timber situated on the lands described in the Memorandum of
Agreement dated April 15, 1954, between S. C. Rudolph Lumber Corporation and W. M. Moores, et al.,
(recorded in Book 368, page 430, Mendocino County Records). Said easements may also be assigned to S.
C. Rudolph Lumber Corporation.
4. The easements hereby granted may be used and enjoyed for any purposes reasonably related to the
ownership, management and exploitation of timber and forest products which from time to time may be
owned or controlled by the owner or owners of said easements or by corporation or partnership in which
such owners, or if an owner of said easements be a corporation, the stockholder of said owners, have at
least a fifty percent (50%) interest. The use is limited to this purpose only. Said easements may also be used
and enjoyed in connection with timber owned or controlled by S. C. Rudolph Lumber Corporation for the
same purpose.
(5) We have concluded that the foregoing provisions, through the manner in which they limit the use and
assignability of the subject easements, suggest an intention on the part of the contracting parties that the easements
be used solely for the purpose of logging operations relating to the utilization of timber rights in the Garcia basin.
Indeed, we can conceive of no reason for the subject limitations if this were not the case. In any event, the language
adverted to is in our view reasonably susceptible of the indicated meaning, and as such was subject to clarification
by means of extrinsic evidence. (See Continental Baking Co. v. Katz, supra, 68 Cal.2d 512, 522; Parsons v. Bristol
Development Co. (1965) 62 Cal.2d 861, 865 [ 44 Cal.Rptr. 767, 402 P.2d 839].) **In granting the motion for
summary judgment, and thereby precluding a trial to determine the instrument's true meaning in light of extrinsic
evidence adduced by the parties, the trial court was in error.]
The affidavits of William Buehler and Judge O'Brien [clearly support the meaning sought to be attributed to the road
agreement by plaintiffs], relating that the original grantees had indicated to appellants during the 1956 contract
negotiations that the easements conveyed would only authorize the hauling of timber originating within the Garcia
tract. (6) Respondents argue that the affidavits were insufficient in that both Buehler and Judge O'Brien admitted
that they could not recall the exact words spoken during the discussion. **Under Code of Civil Procedure section
437c, affidavits must set forth admissible evidence within the personal knowledge of the affiant. But the matters
stated in the affidavits were unquestionably within the personal knowledge of Buehler and Judge O'Brien. Their
inability to recall the exact words of the discussion goes only to the weight, not the admissibility, of their *529
evidence. (See Evid. Code, § 780, subd. (c); Wright v. Best (1942) 19 Cal.2d 368, 379-380 [ 121 P.2d 702].) A
triable issue of fact was presented as to whether the road agreement permits the hauling of timber originating outside
of the Garcia tract.
Appellants also challenge the trial court's determination that Longview was a bona fide purchaser. The trial court
had based this determination upon an uncontradicted showing that Longview “had no knowledge of any
interpretation other than the plain meaning of the document.” But the road agreement [had no “plain meaning.”]
Thus, the issue is whether Oregon-Washington (as Longview's grantor) or Longview are chargeable with notice of
appellants' claims. [ ] **It has been said that: “'In so far as a purchaser has actual or constructive notice of a
conveyance or other instrument executed by one previously owning or claiming to own the land, he is charged with
notice of all matters stated or referred to in such conveyance, which may possibly affect the title, and he is bound to
make any inquiries or researches suggested by such statements or references.”' ( Renden v. Geneva Development
Corp. (1967) 253 Cal.App.2d 578, 589, fn. 9 [ 61 Cal.Rptr. 463], quoting 5 Tiffany, The Law of Real Property (3d
ed. 1939) § 1293, p. 77.)
(7) When a “conveyance in a chain of title under which a purchaser for value claims shows on its face it is so
ambiguous as to leave room for reasonable difference of opinion as to what was granted, or when the grant contains
limiting or qualifying words sufficient to cast reasonable doubt on what was intended to be granted, the purchaser
will be chargeable with notice of this ambiguity, and the effect of these limiting or qualifying words, and his rights,
if controversy comes up, must be left to be determined by the courts, ...” ( Hudson & Collins v. McGuire (1920) 188
Ky. 712, 723-724 [223 S.W. 1101, 1105-1106; 17 A.L.R. 148, 155], cited in 8 Thompson, Commentaries on the
Modern Law of Real Property (1963) § 4310, p. 349; accord, Weniger v. Ripley (1930) 134 Ore. 265, 269 [293 P.
425, 427]. But see Richardson v. Lee Realty Corp. (1974) 364 Mass. 632 [307 N.E.2d 570, 573].)
**A triable issue of fact exists as to whether Oregon-Washington or Longview should have investigated any
competing claims under the road agreement. (See Renden v. Geneva Development Corp., supra, 253 Cal.App.2d at
p. 589; 8 Thompson, supra, § 4310, pp. 349-350.)
Ocean Shore R. Co. v. Spring Val. Water Co., 218 Cal. 86, 21 P.2d 588 (Cal., Apr 27, 1933)
WASTE, C. J.
Plaintiff brought this action to quiet its title to a certain right-of-way. At the conclusion of the trial *87 it was found
that plaintiff had abandoned the same. Judgment was accordingly entered denying relief. Upon appeal it was held
that the evidence did not warrant a finding of abandonment. The judgment was therefore reversed. ( Ocean Shore R.
Co. v. Spring Valley Water Co., 87 Cal. App. 188 [ 262 Pac. 53].)
Prior to the second trial of the action the defendant golf club, pursuant to stipulation, amended its answer so as to
specially plead that it was a bona fide purchaser for value without notice of plaintiff's right. It was further stipulated
that all of the evidence given at the first trial was to be considered as given at the second trial. None of the
defendants, except the golf club, introduced any further evidence. The golf club offered evidence touching the
special defense above mentioned. Findings were made adverse to the defendant water company on the issue of
abandonment and against the golf club on its special defense. The golf club alone appealed. The sole question
presented for determination has to do with the sufficiency of the evidence to support the finding that the defendant
golf club was not a bona fide purchaser for value without notice of plaintiff's right-of-way.
It appears that in 1909 the defendant water company conveyed to the plaintiff's predecessor in interest a surface
right-of-way for railroad purposes. In the latter part of the year 1920, or early in 1921, the plaintiff discontinued the
operation of its railroad over said right-of-way and removed all of its tracks and equipment therefrom. In October,
1921, the defendant golf club commenced negotiations with the defendant water company for the purchase of a tract
of land over which ran plaintiff's right-of-way. The contract for the purchase of this land was executed by the
defendant golf club in March, 1922, and $10,000 was paid on account of the purchase price. The golf club thereupon
entered into possession and improved the property. The contract of purchase contained no reference to plaintiff's
right-of-way and the deed conveying the right-of-way was not recorded until approximately one month after the
defendant golf club had executed such contract and paid a portion of the purchase price.
There is testimony to the effect that at the time the defendant golf club was negotiating for the purchase of the *88
property, portions of plaintiff's right-of-way were being plowed and planted by farmers. Counsel for the defendant
golf club testified that while such negotiations were pending, there remained over a gulch in one part of the property
a portion of a trestle over which the railroad had formerly passed. The rails and the ends had been removed from this
trestle. It is conceded that the trestle was plainly visible to the eye. That the golf club was without actual notice or
knowledge of plaintiff's rights in the property and had expended approximately $30,000 before learning thereof,
may be admitted. This is not determinative of the case, however.
(1) An unrecorded instrument is valid as between the parties thereto and those who have notice thereof. (Civ. Code,
sec. 1217.)
(2) Every person having actual notice of circumstances sufficient to put a prudent man upon inquiry as to a
particular fact, is charged with constructive notice of the fact itself in all cases in which by prosecuting such inquiry
he might have learned such fact. (Civ. Code, sec. 19.)
(3) Examination of the evidence satisfies us that the defendant golf club, while lacking actual knowledge of
plaintiff's easement when negotiating for the purchase of the property, **had actual notice of circumstances
sufficient to put it upon inquiry which, if prosecuted, would have disclosed plaintiff's interest and right in the
property. **This being so, the defendant golf club is chargeable with constructive knowledge of the existence of
plaintiff's right-of-way. Its title to the property is, therefore, subject to plaintiff's easement.
**It is difficult to lay down a general rule as to what facts are sufficient to charge a party with notice, or put him
upon inquiry. It is safe to say, however, that if the information received is of such a character that it would arouse
the suspicions of an ordinarily prudent person, and suggest to him a source of information which, by the exercise of
ordinary and reasonable diligence, would, upon inquiry and investigation, lead him to the fact that a prior
conveyance had been made, then he will be deemed chargeable with knowledge of such conveyance. In Crawford v.
Chicago, B. & Q. R. Co., 112 Ill. 314, it was said that the rule is that if anything apprises a purchaser or
encumbrancer that a particular person claims the property, or an interest in it, the former must pursue that notice to
its source, and that, failing to do so, he will be charged with all he would have learned had he pursued and
investigated the matter to the full extent to which it led. In Indiana, B. & W. R. Co. v. McBroom, 114 Ind. 198 [15 N.
E. 831], the appellee knew at the time he bought *90 the land that the grade for a railroad track was constructed
thereon, and this was held to be sufficient to put him upon inquiry. And it was there said: ‘A person who is about to
purchase land upon which a grade for a railroad is constructed is warned that there is some claim of right, and if he
fails to make proper inquiry as to the nature of the claim he buys at his peril.’ In the case at bar the grade was a
plain, unmistakable monument, which notified the whole world that a railroad company had entered upon the land
and erected its roadbed thereon, and the legal presumption arose that it had done so under some claim of right.… It
must therefore be held that the title that he procured to the strip of ground in question is in subordination to the title
that is vested in appellant to its right-of-way.”
Indiana, B. & W. R. Co. v. McBroom, 114 Ind. 198 [15 N. E. 831], declares: “The appellee, in his testimony, says:
‘At the time that Wood conveyed to me there was a strip cut through the timber, and there were ditches. I had no
doubt but this work was grade for a railroad.’ At the time he bought the land he knew that the grade for a railroad
track was constructed, and this was sufficient to put him upon inquiry. ( Paul v. Connersville & N. J. R. Co., 51 Ind.
527; Jeffersonville, M. & I. R. Co. v. Oyler, 60 Ind. 383.)A person who is about to purchase land upon which a grade
for a railroad is constructed, is warned that there is some claim of right, and if he fails to make proper inquiry as to
the nature of the claim, he buys at his peril. A man cannot buy property where there are facts known to him
sufficient to put him upon inquiry, and hold it free from prior claims or equities of which due inquiry would have
given him information. ( Wilson v. Hunter, 30 Ind. 472; Singer v. Scheible, 109 Ind. 575 [10 N. E. 616].) This
familiar and long-settled rule is thus well stated in a recent case: ‘A party in possession of certain information will
be charged with a knowledge of the facts which an inquiry suggested by such information, prosecuted with due
diligence, would have disclosed to him.’ ”
In conclusion, we repeat that the defendant golf club is not a bona fide purchaser for value without notice of
plaintiff's easement. Prior to executing the contract of purchase or advancing any money thereunder, it had
knowledge of facts sufficient to indicate the existence, at one time or another, of a right-of-way across the land.
Reasonable inquiry would have disclosed plaintiff's interest in the property and dissipated any theory of
abandonment. Having failed to pursue the inquiry suggested by the facts of which it had knowledge, it necessarily
follows that the defendant golf club acted at its peril and its title to the property is therefore subject to plaintiff's
easement therein.
For the foregoing reasons, the judgment of the court below quieting plaintiff's title to such easement must be, and it
is hereby, affirmed.
Bank of Mendocino v. Baker, 82 Cal. 114, 22 P. 1037 (Cal. Dec 19, 1889)
APPEAL from a judgment of the Superior Court of Mendocino County, and from an order denying a new trial.
FOOTE, C.
This is an action in ejectment. A day or two before the trial of the cause, the defendants offered in writing to allow
the plaintiff to take judgment for all the land sued for except that described in paragraph 6 of the answer . This seems
to have been declined, and the result of the trial was, that the plaintiff obtained judgment for all the land except that
set out in said paragraph, and for costs. From that judgment, and an order denying a new trial, the plaintiff has
appealed.
Under the facts as found by the court, the plaintiff was defeated in its efforts to recover the land mentioned in the
paragraph referred to, because it appeared upon the trial that the title and right of possession to that portion of the
land in dispute was in the Garcia and Point Arena Railroad Company, a corporation not a party to the suit, and that
the defendants only have possession of it as the agents of that company.
**The evidence on which the findings were based, that the title and right of possession so existed, was, in brief, that
the railroad company had been for many years in the open and notorious possession of the land, and that a deed in
fee-simple had been executed to it about the time that it assumed such possession, in the year 1870, from one
Campbell, from whom the plaintiff also claims to derive its title by mesne conveyance.
It further appears that the deed to the railroad company had never been recorded, and was lost.
The plaintiff claimed title by virtue of a sheriff's deed on a foreclosure sale, under a mortgage executed by one
Abbott, to whom Campbell had made a deed of the land, long after the deed to the railroad company was executed.
*116 In the brief of its counsel, appellant claims the evidence shows that the plaintiff was a bona fide purchaser,
without notice of the unrecorded deed from Campbell to the railroad company, and that the findings to the contrary
are wrong; and seems to rely mainly upon this point for a reversal of the judgment and order appealed from.
It is said the evidence shows that the possession of the railroad company was initiated under a deed of a mere right
of way from two persons, Whitmore and Stevens, to whom there was no deed of record from Campbell; that, having
taken possession in such manner and placed such a deed upon record, the railroad company had an apparent
possession under that deed, and that such possession, long continuous, open and notorious, as it might be, did not
and should not have put the plaintiff, when it came to take a deed to the land, upon inquiry as to the true nature of
the possession of the railroad company. In other words, the plaintiff contends that the possession of the railroad
company was consistent with the deed from Whitmore and Stevens, although, by the record, they were strangers to
the title of Campbell, the common source of title, and that the company cannot be heard to say the plaintiff should
have inquired diligently as to whether the company held a deed from Campbell of prior date, although unrecorded,
to that made to Abbott, from whom the plaintiff claims.
The real question in the controversy, then, is, whether an open and notorious possession, under the deed of one who
apparently never had any connection with or conveyance from the real holder of the title, is such as that an
individual desiring to purchase the land from one who by the record seems to be the true owner may safely do so
without any further inquiry as to the true nature of the occupant's possession, and may conclude that he has
possession of the true owner's land by no other conveyance *117 than that of one who has no shadow of title to the
premises.
The position of the appellant is to the effect that no inquiry would be necessary; that the purchaser would have a
right to assume that the possession was under one who had no title whatever,--was that of a mere trespasser as to the
true owner of the land,--and that a purchaser might with safety take a deed from the owner.
The case of Fair v. Stevenot, 29 Cal. 490, cited by the appellant, does not sustain his contention.
The rule as to the matter is very aptly stated in Pell v. McElroy, 36 Cal. 277, where the appellate court quotes
approvingly from the opinion in the case of Williamson v. Brown, 15 N. Y. 355, to this effect: “The true doctrine on
this subject is, that when a purchaser has knowledge of any fact sufficient to put him on inquiry as to the existence
of some right or title in conflict with that he is about to purchase, he is presumed to have made the inquiry and
ascertained the extent of such prior right, or to have been guilty of a degree of negligence equally fatal to his claim
to be considered as a bona fide purchaser.”
**The fact of open and notorious possession for so many years, as in this case, would certainly be sufficient to put a
purchaser upon inquiry as to the existence of a deed. (3 Washburn on Real Property, 5th ed., 337.)
The disclosure by the record of a deed which was made by a stranger to the title would not clear up the doubt to a
prudent man desiring to purchase. It would hardly be presumed that a person would have had open and notorious
possession of another man's land for years without any disturbance under a deed which amounted to nothing. That
kind of possession under such a deed is equivalent to an open and notorious possession without any deed upon
record, and inquiry should be made as to whether a deed from the owner existed. **Where there is such possession
held under no record title, it is *118 clear from the authorities that the intending purchaser is at least put upon
inquiry as to whether the party in possession has a deed from the rightful owner or not. ( Hellman v. Levy & Arpin,
55 Cal. 118, and cases cited; Patten v. Moore, 32 N. H. 384.)
**It was an easy matter to inquire of those in possession, without any record title from Campbell, under what claim
they were in open and notorious possession of his land; **and the mere fact that the parties in possession had a deed
upon record which did not appear to be from any one connected with the title did not absolve the plaintiff from this
inquiry.
The possession of the railroad company by its agents, as it seems to us, was consistent with its unrecorded deed from
Campbell, and the plaintiff should have inquired of them about the actual claim of title by the railroad from the true
owner. The plaintiff had no right to believe that the railroad company was maintaining open, notorious, and long-
continued possession of land under a claim of title exclusively derived from one who, by the record, had no title or
claim to the land held by the corporation. Fairly considered with reference to the different defenses set up in the
answer, we do not think that the defendants' admissions, that they were the successors “in interest” of the railroad
company, should be held to preclude the court from finding, from the evidence as presented, that the title was still in
the railroad company.
Neither do we perceive that the court committed prejudicial error in its rulings as to the exclusion of evidence of
which the plaintiff complains.
The other matters adverted to do not require special attention, and we advise that the judgment and order be
affirmed.
Olson v. Cornwell, 134 Cal.App. 419, 25 P.2d 879 (Cal.App. 1 Dist., Sep 29, 1933)
and it is the general rule that whatever is sufficient to direct the attention of a purchaser or encumbrancer to the prior
rights or equities of third persons, and to enable him to ascertain their nature by inquiry, will operate as a notice of
the facts ( Lawton v. Gordon, 37 Cal. 202; Montgomery v. Keppel, 75 Cal. 128 [19 Pac. 178, 7 Am. St. Rep.
125], Pellissier v. Title Guarantee & Trust Co., 208 Cal. 172 [280 Pac. 947]). As the rule is stated by Pomeroy (Eq.
Jur., 4th ed., sec. 608), whenever a party has information or knowledge of certain extraneous facts which of
themselves do not amount to or tend to show actual notice but which are sufficient to put a reasonably prudent man
upon inquiry respecting a conflicting interest, claim or right, and the circumstances are such that the inquiry, if made
and followed up with reasonable care and diligence, would lead to the discovery of the truth or to a knowledge of
the interest, claim or right which really exists, then the party is absolutely charged with constructive notice of such
interest, claim or right. Where a plaintiff asserts title under a prior unrecorded deed, and the defendant claims under
a recorded deed, the burden is upon the latter to prove that he is a purchaser in good faith for a valuable
consideration and without notice, actual or constructive, prior and down to the time of payment ( Kenniff v.
Caulfield, 140 Cal. 34 [73 Pac. 803]; Bell v. Pleasant, 145 Cal. 410 [78 Pac. 957,104 Am. St. Rep. 61]). A mortgage
comes within the same rule, and the law protects or defeats both alike (18 Cal. Jur., Mortgages, sec. 421, p. 114;
Prouty v. Devin, 118 Cal. 258 [50 Pac. 380]).*429 [11] One of the plaintiffs resided in Pasadena, the place of
business of the loan company. The evidence shows that Mrs. Cornwell was in possession of the property, and the
president of the loan company testified that he ascertained this before the loans were made, and that she claimed the
land as her separate property. He further testified in substance that he had no information that plaintiffs had or
claimed any interest therein except such as was contained in letters from the title company. These letters contained
the information that the quiet title action was pending but that the title company would insure the loan against it.
With the above exceptions the record discloses no inquiry by the loan company. It might be inferred from the letters
that some investigation was made by it, but the extent thereof or the result do not appear. The trial court made no
finding with respect to the diligence or good faith of either the loan or title company, or upon the question of
constructive notice. It found merely that neither company had “any knowledge of the existence of said property
settlement agreement prior to the recordation thereof on June 29, 1928, and dealt with said Ella H. Cornwell and
with said property on the assumption that said Ella H. Cornwell was the owner of said real property”. While the
question whether one is an innocent purchaser for value without notice is for the jury ( California Packing Corp. v.
Lopez, 207 Cal. 600 [279 Pac. 664, 64 A. L. R. 1412]), as held in Prouty v. Devin, supra, if there is evidence upon
the question of constructive notice it is not sufficient to find merely that a defendant had no actual notice of the
existence of an unrecorded instrument, but the court must also find upon the question of constructive notice;
otherwise the judgment in favor of a defendant cannot be sustained. With the exception of the testimony of the
president of the loan company as to what he knew, neither company has disclosed the extent of its information at the
time the last loan was made. The burden being upon defendants to show that the loan company was not in
possession of information amounting to constructive notice we are satisfied that the evidence adduced was
insufficient to support a finding in their favor on this question.*430 [12] Defendants claim that the delay in
recording the settlement contract should bar a recovery by plaintiffs. Negligence in recording an instrument may
constitute an estoppel to question the title of a bona fide purchaser ( Schumacher v. Truman, 134 Cal. 430 [66 Pac.
591]). Here twenty-one days elapsed between the execution of this agreement and the recordation of the last trust
deed. According to the findings defendants had no knowledge of this agreement at the time, but, as stated, there was
no finding with respect to constructive notice; and we cannot say as a matter of law that plaintiffs' delay was
sufficient to estop them from asserting their claims. [13] The court also found that plaintiffs' action was barred by
the provisions of section 164 of the Civil Code. This could only be true if the land was community property, or if the
plaintiffs succeeded to an interest therein, and could have no application to the enforcement of their rights under the
settlement contract. [14] The same may be said of the contention that the acts of the decedent were such as to estop
those claiming under him from asserting an interest in the property. [15] Mrs. Cornwell executed three deeds of trust
upon the property to secure the repayment of money borrowed from the loan company, the dates and amounts of
these encumbrances being as follows: September 12, 1925, $12,500; January 4, 1927, $21,000, and August 29,
1927, $24,500. The proceeds of the second and third loans were used to pay off the one which immediately preceded
them, respectively. As found by the court, plaintiffs had acquired no interest in the land before the first and second
loans were made; and should it be finally determined that the loan company had constructive notice of the contract
before its third loan was made it will then be a question for the trial court as to whether under the circumstances the
prior encumbrances should in the interest of justice be kept alive. That this may be done in a proper case appears to
be well settled. (18 Cal. Jur., Mortgages, sec. 490, p. 197.)
The finding and conclusion of the trial court that the land was separate property is sustained by the evidence, and it
will be unnecessary to litigate this issue further. However, there remain to be determined the questions whether the
*431 loan company had constructive notice of plaintiffs' rights when the last deed of trust was executed and the loan
secured thereby was made; and if it had, whether that portion of its loan which was used to pay off the loan or loans
which preceded it should in equity be chargeable against the interest which plaintiffs acquired under the settlement
contract.
The judgment is accordingly reversed and the cause remanded for a determination of these questions.
Lawton v. Gordon, 37 Cal. 202, 1869 WL 881 (Cal. Apr Term 1869)
*202 APPEAL from the District Court, Eleventh Judicial District, Amador County.
The plaintiffs sued to recover possession of an undivided three fifths of the mine, and recovered an undivided one
fifth.
The defendants first answered, denying the plaintiffs' right to more than one undivided tenth of the mine. They
afterwards filed an amended answer, in which they admitted the plaintiffs' right to an undivided one fifth of the
mine, and denied having ousted them from said one fifth. The Court found as a fact that the plaintiffs were entitled
to the possession*203 of an undivided one fifth of the mine, and were entitled to judgment for restitution of said one
fifth, and gave judgment accordingly, and allowed the plaintiffs their costs up to the time the amended answer was
filed, and gave defendants judgment for an undivided two fifths and their costs after the amended answer was filed.
The plaintiffs appealed.
Barron conveyed the same premises to Reichling on the *205 20th of September, 1864, and the deed was filed for
record the same day. Reichling, while negotiating the purchase, went to the Recorder's office to search the records,
and was there told by the Deputy Recorder that there was a deed from Barron to Reed for the property, which had
been filed for record, but withdrawn before it was recorded. The plaintiffs claim under Reichling, and the defendants
under Reed.
The question presented is, whether Reichling purchased with notice of Reed's deed. That deed having been
withdrawn by the direction of the grantee from the Recorder's office before it was recorded, and before Reichling
purchased, we shall assume, without discussion, that the withdrawal of the deed suspended the operation, as to that
deed, of the provision of the twenty-fifth section of the Act concerning conveyances, which declares that the
conveyance, from the time it is filed for record in the Recorder's office, shall impart notice of its contents to
subsequent purchasers and incumbrancers. The rule, in respect to notice, that whatever is sufficient to direct the
attention of a purchaser to the prior rights and equities of third parties, and to enable him to ascertain their nature by
inquiry, will operate as notice, is not questioned by counsel, and it has been so often affirmed that a citation of
authorities is unnecessary. The purchaser received definite and certain information of the existence of Reed's deed,
and this information was worthy of credit, for it came from one who had seen the deed and filed it for record. Would
any reasonable man, who was contemplating the purchase of property, after having received that information, doubt
as to his duty to pursue the inquiry, in order to ascertain the true condition of the title? He certainly would not
hesitate, unless he was laboring under the mistake of law that a recorded deed always took precedence of an
unrecorded deed.
The information itself being sufficient in all respects to put the purchaser upon his inquiry, the only remaining
question is, whether the information must come from a person *206 interested in the property? Upon this question
the plaintiff cites Leading Cases in Equity, notes to LeNeve v. LeNeve, in which the writer says: “And this rule has
been stated so positively, and in such unqualified terms, under the sanction of names of great authority, as to lead to
the inference that notice cannot be binding unless it proceed from a person interested in the property and in the
course of a treaty for its purchase.” The rule alluded to was, that the notice must be certain; and the rule, it was said,
applied emphatically to all statements which do not proceed directly from parties in interest or their agents. “But this
doctrine,” he continues, “must be understood as applying to notice in its limited sense, as distinguished from
knowledge or such information as is substantially equivalent to knowledge. It is evident that, if it be shown that the
purchaser knew of the existence of an adverse claim or title, it cannot be necessary to prove notice, and that it must
be immaterial whether his knowledge was obtained from the parties interested or from third persons. * * * The true
rule, therefore, with regard to the statements of strangers and of parties in interest would seem to be, that the general
statement of the existence of an adverse title, to which no weight would be due when proceeding from a stranger,
will be notice when coming from the party interested; and not that distinct and positive information can be
disregarded because the person who gives it has no interest in the property to which it relates. A purchaser cannot go
on with safety to complete a purchase after learning the existence of a prior conveyance of the property by the
vendor, from a person present as a witness, or even as a bystander, at the execution of the deed by which it was
conveyed. And it can hardly be doubted that the same result will follow from the statement of any fact within the
knowledge of the party who stated it which shows that the title purchased is subject to the legal or equitable claims
of other persons.”
The rules in respect to notice to purchasers of adverse titles or claims, other than such as is imparted by the *207
records, are not founded upon any arbitrary provisions of law, but have their origin in the considerations of prudence
and honesty which guide men in their ordinary business transactions. **No man, on being told by the Recorder that
a certain deed had been filed in his office and that it had been withdrawn, would doubt that the deed existed; and if
he was intending to purchase the property, common prudence would dictate to him the necessity of making inquiry
of the grantee for the deed, unless he was incorrectly advised that deeds took precedence solely from priority of
record.
Montgomery v. Keppel, 75 Cal. 128, 19 P. 178, 7 Am.St.Rep. 125 (Cal. Feb 16, 1888)
ID.--MEANS OF KNOWLEDGE--NOTICE.
**A mortgagee, having readily accessible means of acquiring knowledge of a fact affecting the title to the
mortgaged property, which he might have ascertained by inquiry, is charged with notice and knowledge of such fact.
ID.--ESTOPPEL--STATEMENTS WHEN OPERATE AS.
Statements to operate as an estoppel must be made with the express intention to deceive, or with such carelessness
or culpable negligence as to amount to constructive fraud. **In accordance with this rule, the statements of the
secretary of the defendant corporation, relied on as estopping it from setting up the priority of its mortgage, held, not
to operate as an estoppel.
APPEAL from a judgment of the Superior Court of Butte County, and for an order refusing a new trial.
The plaintiff brought this action to foreclose a mortgage against the mortgagor, **Garret Keppel, and the Spring
Valley Mining and Irrigating Company. Other persons were made parties, which need not be here especially
mentioned. As to all these defendants except Keppel, the general allegation is made that they have, or claim to have,
some interest in or claim upon said lands, or some part thereof, as purchasers, mortgagees, judgment creditors, or
otherwise, which interests or claims are subsequent to and subject to the lien of plaintiff's mortgage. **The
defendant corporation above named set up a mortgage upon a portion of the land covered by the plaintiff's mortgage
executed by Keppel to it; and which of these mortgages was prior in right, as appears from the transcript, was the
principal question tried and determined by the court. It appears from the findings of fact that the mortgage to the
corporation defendant was executed on the twenty-second day of November, 1883, acknowledged by the mortgagor
on the same day, and filed for record in the office of the county recorder of Butte County (where *130 the
mortgaged property was situate) at 10:25 o'clock, on the twenty-sixth day of November, 1883. It further appears that
the land mortgaged to the corporation was conveyed by it to the common mortgagor on the same day on which the
mortgagor executed to the defendant above named the mortgage just mentioned; that the mortgage was executed to
secure to the defendant a part of the purchase-money of the said land, the other portion having been paid by Keppel,
the purchaser, in cash prior to the delivery of the conveyance to him by the defendant; that on the 24th of November,
1883, the deed of conveyance of the land sold to Keppel was delivered to him by defendant, and was recorded in the
proper office in Butte County, on the twenty-sixth day of November, 1883. The mortgage to plaintiff was executed
on the 22d of November, 1883, and was recorded in the proper office in Butte County on the twenty-second day of
November, 1883. This last mortgage was executed to secure a loan of a large sum of money made by plaintiff to
Keppel. While Keppel was negotiating with plaintiff for this loan, it became known to plaintiff that the title of a
portion of the land which he (Keppel) offered as security was in the corporation defendant, for the purchase of
which Keppel was then negotiating with the corporation. This purchase was consummated by the delivery of the
deed above mentioned, executed to Keppel by the corporation, a payment of a portion of the purchase-money by
Keppel, and, concurrently with the execution of the deed, the execution to the corporation by Keppel of the
mortgage above mentioned to secure the payment of the remainder of the purchase-money. All the above constituted
parts of the transaction of purchase by Keppel of the corporation of the land above referred to. Of this negotiation of
Keppel to purchase, the plaintiff, at the time of making the loan to him, was aware; and he must be held to have
known that the mortgage conveyed*131 to him no interest in this land until the delivering of the deed by the
corporation to Keppel. Being aware of the purchase by Keppel of this land of the defendant, plaintiff must be held to
have known of the terms of the purchase, and all of them; and if he did not know them, he must have deliberately
abstained from knowing. The evidence shows that the plaintiff was in communication with Keppel all the time that
the purchase was pending, knew all the terms of it, and it would be most strange if they were not communicated to
plaintiff by Keppel. Having readily accessible means of acquiring knowledge of a fact, which he might have
ascertained by inquiry, is equivalent to notice and knowledge of it. This is well settled by repeated decisions of this
court. ( Fair v. Stevenot, 29 Cal. 486; Smith v. Yule, 31 Cal. 184; Pell v. McElroy, 36 Cal. 272; Thompson v. Pioche,
44 Cal. 516.)Under these circumstances, we must hold that plaintiff knew that a part of the purchase-money was not
paid when the deed was executed to Keppel by the corporation, and that a mortgage was executed by Keppel to the
corporation to secure this unpaid portion of the purchase-money at the same time that the deed was executed. This
being the state of the case, we must hold that the plaintiff had notice of defendant's mortgage when the mortgage to
him on the land mentioned became operative, and that, therefore, his mortgage as to this land must be postponed to
that of the corporation defendant. The finding to the contrary of the above is not sustained by the evidence.
But it is urged that the corporation is by the conduct of one of its officers estopped from setting up the priority of its
mortgage to that of plaintiff. This contention is based on the following facts found by the court below: “That in
making said loan of eighty thousand dollars to defendant Garret Keppel, and during the time negotiations and
granting of said loan, F. W. Goad, Esq., was *132 the agent and attorney for plaintiff, and was authorized to
examine into the title of the land described in plaintiff's mortgage; that said Goad was informed that the legal title to
the land described in said deed, dated October 23, 1883, from defendant Spring Valley Mining and Irrigating
Company, to defendant Garret Keppel, was in said defendant corporation, grantor; that said Goad, as such agent and
attorney, after obtaining said information, and on or about the tenth day of November, 1883, with defendant Garret
Keppel called at the principal office of said corporation defendant, which was in San Francisco; that said Goad there
met Willis E. Davis, the secretary of the Spring Valley Mining and Irrigating Company, and told said secretary that
plaintiff, A. Montgomery, had employed him to examine the title to said land to see whether it was satisfactory; that
he (said Goad) was employed to do so by said plaintiff, and was plaintiff's agent in such matters; that he wanted to
see that the title was perfect; that plaintiff, A. Montgomery, wanted to know how much money he would have to pay
the defendant Spring Valley Mining and Irrigating Company in order to get a perfect title, as plaintiff was taking a
mortgage; that said secretary then gave as such sum $12,978; that said Goad then informed said secretary that if he
found the title perfect in other respects at Oroville, where he was going, he should put plaintiff's mortgage on record,
and upon his return to San Francisco would pay the $12,978,--give a check for it,--and take the deed of the Spring
Valley Mining and Irrigating Company, which deed, being that hereinbefore referred to, had been prepared in form,
and was shown to said Goad by said secretary; that said Goad went to Oroville on or about the nine-teenth day of
November, 1883, and staid until the 22d, when plaintiff's mortgage was acknowleged and recorded; that said Goad
returned to San Francisco, and on his way back, on the 23d, paid, at the request of *133 defendant Garret Keppel, to
the Marysville Savings Bank, $61,138.70; that upon his return to San Francisco, and upon the twenty-fourth day of
November, 1883, said Goad, at his office, delivered a check in payment of said sum, $12,978, in the presence of
defendant Garret Keppel, to said Davis, the secretary of the corporation defendant, of which check the following is a
copy:--
Pellissier v. Title Guarantee & Trust Co., 208 Cal. 172, 280 P. 947 (Cal. Sep 23, 1929)
APPEAL from a judgment of the Superior Court of Los Angeles County. Lucien Shaw, Judge pro tem. Affirmed.
The facts are stated in the opinion of the court.
The plaintiff's complaint in this action sets forth the incorporation of the Title Guarantee & Trust Company; that
prior to the date hereinafter mentioned the plaintiff was the owner in fee simple of all that certain real property
described as the west half of the northwest quarter of section 25, township 1 south, range 14 west, S. B. M., *174 in
the county of Los Angeles; that on or about the -- day of February, 1913, the plaintiff executed and delivered to the
defendant Title Guarantee & Trust Company an instrument absolute in form, conveying all of said property to the
Title Guarantee & Trust Company; that upon the same date an agreement in writing was entered into between the
plaintiff and the Title Guarantee & Trust Company, wherein and whereby it was agreed that said conveyance,
though absolute in form, was made in trust; that no consideration was paid therefor; that the title to said property
was held in trust by the Title Company for the benefit of the plaintiff; that the conveyance was made by the plaintiff
to the Title Company for the purpose of enabling the Title Company to subdivide and make sales of lots in said tract,
to such persons, at such prices, and upon such terms as the Title Company should be thereafter instructed by the
plaintiff; that said trust agreement has, since the date thereof, remained in full force and effect, and was in full force
and effect at the time of the institution of this action. It is further set forth in the complaint that after the execution of
the instruments just referred to the Title Company proceeded to subdivide said real property into city lots, and had a
map of the subdivision thereof duly recorded; that in said subdivision and upon said map there were two lots
described as lots 188 and 189 of Tract Number 2189, commonly known as Pellissier Square. The complaint further
alleges that on or about the 1st day of February, 1923, and while said trust agreement referred to was in full force
and effect, the Title Company executed a written contract for the sale of said lots 188 and 189 to one Francis W.
Henry, for the total purchase price of $27,500. It is further alleged in the complaint that the defendant Emma
Summers was the real party in interest, and that the contract executed in the name of Francis W. Henry was for her
uses and purposes. The complaint then alleges that the defendants Summers and Henry, and each of them, knew and
had actual notice that the defendant Title Guarantee & Trust Company held only the naked legal title to said
property; that it was held in trust for the plaintiff; that the plaintiff was the real owner thereof, and that her consent
and approval were required before the Title Company could make any conveyance or agreement *175 for the sale of
said lots, or either of them. **It is then alleged that the plaintiff never instructed the Title Company to make any sale
of said property, or to execute or deliver the contract of sale therefor, and never consented to or approved the
making of any such sale or such contract, and had no prior knowledge of the execution of said contract, and
immediately upon learning thereof, informed the Title Company that she did not consent to or approve the same, and
forthwith caused defendants Summers and Henry, to be advised of such fact, and demanded a return and
cancellation of the contract. The prayer of the complaint is for a decree declaring said contract void; that it be
delivered up and canceled; that the defendants Summers and Henry be held as involuntary trustees for the benefit of
the plaintiff, if any rights they have under said contract. A copy of the contract referred to is attached to the
complaint, marked exhibit "A," bearing date of February 1, 1923, purporting to have been executed between the
Title Guarantee & Trust Company and Francis W. Henry, whereby the Title Company agrees to convey to Francis
W. Henry lots 188 and 189 of Tract Number 2189, known as Pellissier Square, for the sum of $27,500, payable in
instalments, the first instalment being the sum of $2,500, to be paid on the execution of the contract; the other
instalments to be paid at stated times and in the amount set forth in the contract. A number of restrictions are set
forth in the contract, not necessary to be particularly referred to herein. The contract is signed by the Title Guarantee
& Trust Company, by A. F. Morlan, vice-president, and A. R. Kilgore, secretary, and by Francis W. Henry;
approved by W. H. Taggert, assistant trust officer. The answer of the defendants Summers and Henry denies each
and every of the allegations of the plaintiff's complaint.
Wilkerson v. Thorp, 128 Cal. 221, 60 P. 679 (Cal. Mar 26, 1900)
Bad case
Fallon v. Triangle Management Services, Inc., 169 Cal.App.3d 1103, 215 Cal.Rptr. 748 (Cal.App. 2 Dist.,
Jul 09, 1985)
Cook v. Huntley, 44 Cal.App.2d 635, 112 P.2d 889 (Cal.App. 4 Dist. May 02, 1941)
Case is distinguished because it is one involving fraudulent
conveyance.
But analogous
**The important question for decision is: Did F. E. and Thelma H. Davis, the judgment debtors, have any interest in
the property after the trustee's sale and deed to Eddy on November 15, 1930, almost two years before the judgment
was rendered on which the execution was issued and over three years before the execution was issued and the sale
had through which plaintiff claims?
.** Further, it is clear that Mr. and Mrs. Davis, the judgment debtors, had no interest in the **892 property either at
the time that Ulrich recovered his judgment in November, 1934, or at the time of the execution sale in April, 1936,
so no interest in the property was passed to the purchaser by that sale. North v. Evans, supra.**It is also true that any
possible lien on the property arising from either of the abstracts of judgment *641 was destroyed by the trustee's sale
under a deed of trust which deed of trust antedated both of them several years. The lien of a judgment only attaches
to real property in which the judgment debtor has a vested legal interest. § 674, Code Civ.Proc.; People v. Irwin, 14
Cal. 428.It will not attach to a mere equitable interest of the judgment debtor in real property ( Belieu v. Power, 54
Cal.App. 244, 201 P. 620;
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