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The Collateral Source Rule and Title Insurance: Broker Accused of Fraud by Lender May Show it Obtained Title Insurance as Defense

By Bill S. Shiber on June 4, 2013 Posted in Coverage, Litigation, Loss, Secured Transactions, Uncategorized

In Chanda v. Federal Home Loans Corp. (2013) 215 Cal.App.4th 746, the court analyzed application of the so-called “collateral source” rule to preclude evidence of title insurance, in the context of a claim by a lender against a broker for negligence and breach of fiduciary duty. Specifically, the lender argued that the broker had failed to properly protect it against fraud and forgery in connection with certain loans made by the lender and arranged by the broker. The notary, who was the sole point of contact for the broker with the ostensible borrowers, told the broker that the borrowers were unavailable to meet in person, but that she (the notary) would obtain the necessary signed and notarized loan documents. The broker agreed. The notary then forged the names of the borrowers to the loan documents, including deeds of trust, and forged their signatures again on a subsequent, larger, replacement loan. When the ostensible borrowers/property owners learned that their signatures had been forged, they sued the lender and the loan broker, among others, to cancel the fraudulently obtained trust deeds and recover damages. The lender in turn sued the broker, alleging negligence and breach of fiduciary duty in failing to protect against the notary’s fraud.

The trial court excluded all evidence that title insurance was obtained by the broker for the lender, on the basis that it was irrelevant to any of the issues and inadmissible under the collateral source rule. The collateral source rule is a rule of evidence and substantive law that provides that if an injured party gets payment for his or her injury from a collateral source such as insurance, that payment should not be deducted from the damages that he or she can collect against the tortfeasor. The policy is to encourage parties to protect themselves by obtaining insurance coverage and avoid the risk that evidence of plaintiff’s insurance coverage may diminish its recovery.

The broker argued that the fact that it had arranged for title insurance for the lender was relevant because it provided protection against forgery, and tended to rebut the lender’s claim that the broker did nothing to mitigate against the risk of fraud or forgery. The trial court excluded the evidence, even though lenders’ counsel argued to the jury that the broker had no policies, procedures or practice manuals relative to protecting clients or investors from fraud, and had in fact done nothing to protect the lender against potential fraud.

The broker appealed, and the Court of Appeal held that the trial court had made an error in excluding evidence of the title insurance. First, there is nothing that prevents reference to the existence of insurance if the evidence is otherwise admissible. Here, the evidence of the existence of title insurance was clearly relevant here because it could be used by the broker to argue that it had in fact taken some steps to protect the lender against fraud and forgery, namely, obtaining title insurance. Second, any risk that the lender’s chance of recovery would be diminished by reference to title insurance – which is what the collateral source rule seeks to avoid – could be minimized by appropriate instructions to the jury. For example, the jury could be instructed that it is not to consider any recovery under the title insurance policy in assessing damages as this is a matter for the judge to address after the verdict.

The Court also determined that the fact that the notary had forged the borrower’s name was not a “superseding” cause which absolved the brokers of liability. One of the requirements in applying the doctrine of “superseding cause” is that the third party conduct occur after the defendant’s (i.e., broker’s) conduct. In this case, that could not be established because the broker’s involvement and the notary’s involvement were contemporaneous and intertwined events. Accordingly, the trial court was correct not to instruct the jury on the doctrine of superseding cause, because it was not applicable.

Trustee Empowered To Void Foreclosure Sale Where Error Discovered Before Delivery Of Trustee’s Deed

By Tara C. Narayanan on May 21, 2013 Posted in Lenders, Quiet Title

Biancalana v. T.D. Service Co., — Cal.App.4th — (May 16, 2013)

California’s Supreme Court affirmed a trustee’s right to void a non-judicial foreclosure sale based on mistakes in the foreclosure process discovered before delivery of a trustee’s deed to the successful bidder. The case affirms existing California law that there is a conclusive presumption that the foreclosure sale was conducted properly and regularly, but only after the sale has concluded and the trustee’s deed has been delivered to the buyer.

Background: At a foreclosure of property in Santa Cruz County, the Trustee accepted the winning bidder’s cashier’s check for $21,895. The only event that had not yet occurred was delivery of the trustee’s deed. The trustee returned the check to the winning bidder two days later after discovering that the trustee had mistakenly communicated to the auctioneer an incorrect opening bid that was too low: rather than submitting the specified credit bid of $219,105 by the lender beneficiary, the trustee mistakenly submitted an opening bid of $21,894.17, which was less than 10% of the lender’s credit bid. The trustee declared the sale void. The winning bidder brought a quiet title action to enforce the foreclosure sale and his successful bid.

Holding: The California Supreme Court reversed judgment in favor of the bidder. There were three key factors evaluated by the Court in reaching this conclusion.

1. No delivery of the Trustee’s Deed. The Court acknowledged California’s rule: If a “trustee’s deed recites that all statutory notice requirements and procedures required by law for the conduct of the foreclosure have been satisfied, a rebuttable presumption arises that the sale has been conducted regularly and properly; this presumption is conclusive as to a bona fide purchaser.” Biancalana, supra, — Cal.App.4th at *4 (quoting Moeller v. Lien, 25 Cal.App.4th 822, 831 (1994)). The presumption of a properly-held sale is not conclusive until the trustee’s deed is delivered. Id. This means that, if there is a defect in the process that is discovered after a winning bid is accepted, but before delivery of the trustee’s deed, the trustee may void the sale—even to a bona fide purchaser—return the price paid, and restart the foreclosure process. Id. (citing Moeller, supra, 25 Cal.App.4th at 832.) That is what occurred here: “[T]he trustee discovered its error before it delivered the deed, so the conclusive presumption [of a properly conducted sale] does not apply.” Id. at *4 (citations omitted).

2. Inadequate Price. The California Supreme Court noted that “ample cases have stated the applicable rule as follows: gross inadequacy of price coupled with even slight unfairness or irregularity is a sufficient basis for setting the sale aside.” Id. (citations omitted). Inadequacy of price was clear from the fact that the winning bid of $21,896 was less than 10% of the true opening bid of $219,105 that the lender beneficiary had submitted to the trustee. Id. (citing Millennium Rock Mortgage, Inc. v. T.D. Service Co., 179 Cal.App.4th 804 (2009)). But for the trustee’s mistake, the property would have sold for $219,105. Because a trustee bears the duty to secure the highest possible price for the borrower and the lender beneficiary (see id. at *3), it is consistent with such goals to void a foreclosure sale that results in an unfair price due to discovered error.

3. Irregularity Within Foreclosure Process. The third factor requires the trustee’s mistake to be part of the foreclosure sale process because of a trustee’s statutory “duty to conduct the sale fairly and openly, and to secure the best price for the trustor’s benefit.” Id. at *7 (citations omitted). The Court held that processing a duly-submitted credit bid pursuant to California Civil Code § 2924h is a key function of a trustee within the statutory framework regulating foreclosure sales. A point of a non-judicial foreclosure sale is to allow the lender beneficiary to make a credit bid through the trustee. Id. at *5 (citations omitted). Because of the trustee’s error, the opening bid given at the auction did not reflect the $219.105 credit bid to which the lender was entitled. “This qualifies as an irregularity occurring within the statutory foreclosure sale process.” Id.

Negligence by Trustee Not Imputed to the Beneficiary. While a trustee is considered an agent of the beneficiary and trustor, it is only an agent in a limited sense and its negligence cannot be imputed to the beneficiary. The Court analogized a trustee (under a deed of trust) as “a kind of common agent for the trustor and the beneficiary,” with “neither the powers nor the obligations of a strict trustee….” Id. at *7. Such a trustee’s duties are defined by contract—the deed of trust. Id.

Comments: This case does not change existing law that provides for a conclusive presumption of propriety where the sale price is within the ballpark of fairness and the trustee’s deed has been delivered to the winning bidder without the discovery of mistakes in the process. The winning bidder at an unfair foreclosure sale will, no doubt, be unhappy about losing the windfall he would have obtained if the sale were upheld. However, such a buyer is hardly prejudiced by rescission of the sale when “[v]oiding the sale and then conducting a proper sale would put the bidder in no worse position than if the trustee had made no mistake in the first place.” Id. at *9. The end result is to protect both the goals and effects of the conclusive presumption of a bona fide sale once a trustee’s deed is delivered, promoting the finality sought in real estate transactions.

NEW CASE ALERT: California Affirms Equitable Exceptions To The “Merger Doctrine”

By Kenneth R. Styles on April 17, 2013 Posted in Claims, Quiet Title, Secured Transactions

The merger doctrine is not absolute and its application will depend upon the equities and the parties’ intentions, the California Court of Appeal recently held in Hamilton Court, LLC v. East Olympic, L.P., 2013 WL 1613269 (2nd Dist., April 16, 2013). The court reversed the application of the merger doctrine to an easement that was pledged as security for a deed of trust that was ultimately foreclosed upon.

Although this case involved a deed of trust, its holding is consistent with olderCaliforniadecisions that have addressed equitable considerations when considering the merger doctrine. In short, simply because the merger doctrine could apply does not mean that it will be applied. InCalifornia, the court will consider the intent of the parties and the equities in each case to determine whether to apply, or not apply, the merger doctrine.

Facts: Prior to 1983, the defendant owned an entire city block inLos Angeles that contained multiple lots, several buildings and parking lots. In 1983, the defendant sold most of the block to a third party (“Angelus Property”) and retained a portion of the block (“Wilder Property”).

Unfortunately, buildings on each respective property encroached onto the other property and the parties never completed lot line adjustments as intended. In 1994, the parties entered into an Easement Agreement “in lieu of entering lot splits. . .to provide for mutual easements with respect to such encroachments. . .” The Easement Agreement essentially created exclusive easements for each party with respect to their property and improvements.

In 2005, the Angelus Property was conveyed to plaintiffs. Two months later, defendant sold the Wilder Property to one of the plaintiffs and a third party (who later quitclaimed its interest to the other plaintiff). As part of the sale of the Wilder Property, the purchasers executed a promissory note and a “Deed of Trust” that created a security interest in both the Wilder Property and the easement. Thus, as of July 2005 the plaintiffs held fee title to both the Angelus Property and the Wilder Property subject to the Deed of Trust that encumbered the Wilder Property and the easement.

In 2008, Plaintiffs ceased making payments on the note and defendant foreclosed on its Deed of Trust. Plaintiffs later filed suit arguing that the defendant did not reacquire its easement rights through the foreclosure because, under the merger doctrine, the easements were extinguished in 2005 through plaintiffs’ joint ownership of both properties.

Merger Will Depend Upon The Equities Of Each Case:

The court acknowledged the “merger doctrine,” codified in Civil Code sections 805 and 811, that prevents a property owner from holding a servitude over that same property. For example, if an easement over Blackacre exists to access Whiteacre, and the title to the properties are later held by the same owner, then under the merger doctrine the easement is extinguished. The court noted that a “simple reading” of these statutes would support plaintiffs’ merger argument.

However, the court stated that the union of a lesser and greater estate, “does not always result in a merger.” Citing to Miller &Starr,Cal.Real Estate (3d ed. 2006) 10:41, the court held that the doctrine of merger applies only when it prevents an injustice and serves the interests of the person holding the two estates absent evidence of contrary intent.

Here, the court concluded that the doctrine of merger did not apply because (1) the parties agreed otherwise and (2) the easement was pledged as security for the promissory note. Also, the transfer the Wilder Property to the plaintiffs was based on an agreement not to jeopardize the collateral securing the loan. The court concluded that the plaintiffs in effect stipulated that the merger doctrine would not apply so long as the Deed of Trust remained in effect.

In a concurring opinion, Justice Mosk argued for the creation of a “deed of trust exception” to the merger doctrine, though he noted that no priorCaliforniadecision had adopted that position.

Editorial Comment: This case also highlights the difficulty in applying the merger doctrine, that was developed from common law over hundreds of years, to land parcels regulated by the Subdivision Map Act (SMA) and other land use regulations. Simply because an owner holds title to adjacent lots does not automatically merge those lots, thereby negating a fundamental presumption of the merger doctrine. As a practical matter, title investigators should not rely on absolute application of the merger doctrine inCalifornia.

Beware of Deed of Trust Securing Multiple Loans: Priorities May Not Be as They Appear!

By Bill S. Shiber on April 10, 2013 Posted in Lenders, Lien Priority, Litigation, Secured Transactions

In R.E. Loans LLC v. Investors Warranty of America, Inc. (2013) 212 Cal.App.4th 1432, the court of appeal decided that a subordination agreement was enforceable even though the new deed of trust (“subordinating loan”) to which the existing deed of trust (“subordinated loan”) had been subordinated secured not just the $4 million loan to which the subordinated lender had agreed to subordinate, but two additional loans for a combined total principal balance of $21 million. In a conclusion that may surprise transactional attorneys, the Court further held that the subordination agreement did not preclude the deed of trust securing the subordinating loan from being used to secure additional loans. The Court held that a secured lender which has agreed to subordinate to only one of the three secured loans secured by a single deed of trust is junior only to that loan for priority purposes. Thus the two loans not mentioned in the subordination agreement were inconsequential because their position would be junior to that of the subordinated loan, a “split priority” result that the new loan documents did not expressly dictate. How a single trust deed containing a single power of sale could effectively secure three separate loans with different priorities was not discussed.

The Lesser of Two Evils? Court Holds that Statutory Measure of Recovery Under a Mechanic’s Liens Is the Lesser of Reasonable Value of Services and Materials Furnished or Contract Price

By Matthew C. Henderson on April 8, 2013 Posted in Claims, Lien Priority, Litigation

In Appel v. Superior Court (No. B244590, 3/11/13), California’s Second District Court of Appeal held that the proper measure of a mechanic’s lien claim is the lesser of the reasonable value of the services and materials provided, or the contract price, even where the person defending against the mechanic’s lien claim was not a party to the contract. This decision helps clarify how mechanics lien claims are to be evaluated and quantified, which should be of interest to underwriters, claims counsel, and litigators handling construction cases.

One-Stop Shop? Court Finds No Violation Of California’s Notary Statute Limiting Fees Charged For “Taking An Acknowledgement” Where Additional Services Provided

By Tara C. Narayanan on February 8, 2013 Posted in Escrow

Hutton v. Fidelity National Title Co., ___ Cal.App.4th ___ (Jan. 31, 2013) (See opinion, here.)

A California court has confirmed that notaries who provide services additional to notarizations may charge for such services without violating the fee limitations in Government Code § 8211.

The Allegations: Homeowner Brent Hutton (“Hutton” or “plaintiff”) sued his escrow holder (“Escrow”) for charging a “notary fee” in excess of the amount permitted by California Government Code § 8211 when he refinanced a loan. Section 8211 allows a notary to charge only $10 per signature for “taking an acknowledgement.” In the Hutton transaction, only two acknowledgements were taken, but Escrow charged $75 for “notary services” on the settlement statement. Hutton alleged that Escrow violated § 8211 by charging more than $20 for the two acknowledgements, asserting causes of action for (1) violation of California’s unfair competition law (Bus. & Prof. Code, §§ 17200 et seq.) and (2) unjust enrichment in a complaint styled as a statewide, multi-year class action that had not yet been certified.

California Court Holds That A Tripartite Attorney-Client Relationship Exists Between A Title Insurer, Its Insured And Counsel Retained By The Title Insurer

By Kenneth R. Styles on January 24, 2013 Posted in Claims, Coverage, Lien Priority, Litigation, Quiet Title

Ten years ago, a California Court of Appeal took a relatively narrow view of the attorney-client privilege in conjunction with claims investigation and analysis conducted by a title insurer’s in-house counsel. (2,022 Ranch, LLC v. Superior Court (2003) 113 Cal.App.4th 1377.) That case parsed the functions of the in-house attorney, holding that in certain functions (e.g., factual claim investigation), the attorney-client privilege may not apply.

A Cautionary Tale On Holding Title: Marriage License Does Not Override Domestic Partnership Agreement

By Tara C. Narayanan on January 22, 2013 Posted in Escrow

Estate of Wilson, 2012 WL 6216869 (1st Dist. 2012)

A recent case, the Estate of Wilson, 2012 WL 6216869 (1st Dist. 2012), illustrates generally why escrow holders should avoid giving advice to parties to an escrow on how to take title to real property: Choosing the manner in which to hold title may be impacted by other agreements that are not even a part of the escrow and of which the escrow holder is entirely unaware.

Background: The Wilson case arose because of a claim brought by a man, Konou, who was both registered as a domestic partner and married to the decedent; he claimed an interest in the decedant’s estate as an “omitted spouse.” The will was executed by the decedent decades before meeting Konou. Both parties had signed a domestic partnership agreement that included waivers of any rights, claims, or interest in future property, income, or estate of the other. The domestic partnership agreement required a signed writing to amend or terminate the domestic partnership agreement. Konou asserted that the marriage license, entered into a few years after they became domestic partners, operated as such a writing, terminating the property arrangement set forth in the domestic partnership agreement.

Failure to Conduct Face-To-Face Interview With Borrower Precludes Nonjudicial Foreclosure Sale Under FHA Loan – Pfeifer v. Countrywide Home Loans, et al. 2012 WL 6216039 (Cal.App. 1st Dist.) (rev. filed January 2, 2013)

By Bill S. Shiber on January 18, 2013 Posted in Lenders, Litigation, Secured Transactions

California courts have to date been reluctant to inject themselves into the comprehensive nonjudicial foreclosure scheme enacted by the Legislature at Civil Code section 2924 et seq. This reluctance extends to claims that the foreclosing party does not have a beneficial interest in or physical possession of the underlying note. (See, for example, Debrunner v. Deutsche Bank Nat. Trust Co. (2012) 204 Cal.App.4th 433, 440-441.) In large part, this is in recognition of the “bargain” the nonjudicial foreclosure process represents: In exchange for an expedited and predictable “out of court” process to recover their security through a trustee’s sale, lenders give up the right to seek a “deficiency judgment” (i.e., the difference between what is owing and what is bid at the sale) against the borrower. The nonjudicial foreclosure remedy would lose its luster if at each juncture the borrower could obtain court supervision of the process. In that case, (and assuming a deficiency is otherwise permissible) a lender may as well file a judicial foreclosure action under Code of Civil Procedure section 726, allowing it to obtain a money judgment against the borrower for any deficiency.

Neither Failure to Name Trustee In Deed of Trust Nor Absence of The Original Note Will Invalidate A Nonjudicial Foreclosure Sale – Shuster v. BAC Home Loan Servicing, L.P. (2012) 211 Cal.App.4th 505

By Bill S. Shiber on January 14, 2013 Posted in Lenders, Litigation, Secured Transactions

In this recent Court of Appeal opinion, an issue of first impression in California was addressed: That is, can a borrower seek to set aside a nonjudicial foreclosure under a deed of trust which initially failed to identify a trustee? The court said “no” and made two further holdings of interest. First, the assignee lender can foreclose even if it does not have the beneficial interest in, or physical possession of, the note. Second, the borrower’s failure to make a tender of amounts allegedly due precludes a claim seeking to invalidate the foreclosure sale.