As an American, I have a genetic predisposition to cheering for the underdog. So when an elderly woman hustles Wells Fargo out of nearly half a million dollars, I think “Awesome.” And that’s pretty much what happened in this case. A fun opinion, with some novel arguments by counsel for Wells Fargo, this case also represents the intersection of archaic property holding schemes and sloppy loan processing. To cap it off, Justice Mosk’s closing paragraph is essentially a mic-drop citation to the California Maxims of Jurisprudence (Civil Code §§ 3509-3548) where he tells Wells Fargo that because you suck at your job, the heirs in question should not suffer.

The cast of characters are as follows.

·      Lawrence Peterson, the original owner of the property in question.

·      Jacqueline Peterson, Lawrence’s second wife and beneficiary of a life estate.

·      Mark & Paul Peterson, Lawrence’s sons and the plaintiffs in this matter.

·      Wells Fargo, the lender and defendant.

Lawrence bequeathed a life estate to Jacqueline in his will which allowed her to live in the property for the rest of her life. Lawrence died in 1986. The will contained additional provisions regarding Jacqueline’s power over the property. Jacqueline had the power to sell the property but the proceeds would be split three ways between her, Mark, and Paul. If she died before selling the house, the house would pass to Mark and Paul, in equal shares.

In 2008, Jacqueline obtained a loan from Wells Fargo for $410,000. Wells Fargo secured the loan with a deed of trust. In 2010, Jacqueline dies. When she dies, the mortgage payments to Wells Fargo stop. Wells Fargo then records a notice of default and election to sell, putting Mark and Paul on notice of their claim. Mark and Paul then bring an action against Wells Fargo for quiet title and cancellation of the instrument as to the deed of trust. On summary judgment, the trial court cancelled the deed of trust and notice of default and ordered the house to pass to Mark and Paul in fee simple, free of encumbrances.

The basic problem here is that Wells Fargo did not conduct a thorough title search prior to issuing the loan. If they had, they would have presumably seen an executor’s deed from the estate to Jacqueline imposing the life estate. In fact, any time property is transferred through probate great care should be taken to review the will and the order to ensure that there is no confusion as to what type of interest was transferred. The problem presented by the life estate is that Jacqueline did not have the power to encumber it with a deed of trust because that would "...create an estate that will extend beyond the duration of the life estate..." Slip Opinion, Pages 6-7. Essentially, the property was not hers to encumber, rendering the deed of trust void. Hence, this appeal.

It appears that they only relied on the last transaction in the title search, which occurred in 2003. What happened there was that Jacqueline illegally conveyed to herself a fee simple interest in the property in conjunction with a loan from a different lender. The timing of the filings is odd. Jacqueline’s grant deed to herself was recorded on the same day as the deed of trust benefitting the lender, California National Bank i.e. January 8, 2003. One take on this is that Jacqueline fooled California National Bank by recording an illegal grant deed. However, California National Bank would have conducted a title search and seen the executor’s deed prior to issuing the loan. Thus, they would have known the nature of the interest held by Jacqueline. Also, she executed the grant deed on the same day that she borrowed the funds and signed the grant deed i.e. January 2, 2003. This suggests that California National Bank put all these documents in front of her and then recorded them all simultaneously a few days later. Probably, they looked at the executor’s deed, didn’t understand it, and had Jacqueline sign a grant deed to herself in order to firm up title for the underwriter to approve the loan.

Wells Fargo first argues that Jacqueline received a fee estate subject to a condition subsequent with the subsequent conditions being the sale of the property, her remarriage, or her death before remarriage or sale. The court quickly disregards this sophistry and takes them back to law school by explaining the nature of a life estate, noting that: “Giving Jacqueline a rent-free residence during her lifetime established a life estate because that is a limitation on the duration of her estate, not a condition on the use of the property.” Slip Opinion, Page 10.

Wells Fargo next argues that the deed of trust executed in their favor was actually a sale of the property. This is another whopper. Basically, they argue that the deed of trust conveys the property to Wells Fargo because it transfers title to the trustee under the deed of trust. Taking them back to law school, Justice Mosk places a page long citation to a 1922 California Supreme Court case  (Bank of Italy etc. Assn. v. Bentley 12 (1933) 217 Cal. 644, 656-657 in case you were wondering) explaining the effect and nature of deed of trust and concluding that “although Wells Fargo acquired technical legal title to the Property through its trust deed, such acquisition did not constitute a permissible sale of the Property under the Probate Order.” Slip Opinion, Page 11-12.

Wells Fargo then goes for the Hail Mary. They argue that the probate order granting the property to Jacqueline actually gave her a hybrid 1/3 fee interest, 2/3 life estate because she could have sold the property during her lifetime and received 1/3 of the sale proceeds. Justice Mosk’s response is, essentially, “Do you even lawyer, bro?” The court notes that nothing in the probate order supports this contention. Next subject.

Wells Fargo’s final argument is one in equity, in that their loan should be construed as an advance against the 1/3 sale proceeds. Here is the mic-drop:

“Wells Fargo or its agent failed properly to determine that Jacqueline had a life estate and not fee interest in the Property prior to loaning her money. Plaintiffs were not involved in the loan. Wells Fargo or its agent, and not innocent third parties, should bear any loss resulting from Wells Fargo’s loan to Jacqueline. (Civ. Code, § 3543 [“Where one of two innocent persons must suffer by the act of a third, he, by whose negligence it happened, must be the sufferer”].)”

Boom shakalaka

First off, is the concept of the homestead. Although this may conjure up images of Little House on the Prairie or The Oregon Trail (which I played on a green screen Mac back in the day FYI), a homestead is simply someone’s principal place of residence (i.e. where they actually live) on the date that a judgment is recorded against them in the county where the home is located. Code of Civil Procedure § 704.710(c).

Second, is the declaration of homestead. The declaration of homestead is simply a document by the homeowner stating that a particular piece of property is his primary residence. CCP §§ 704.910–704.990. The specific requirements are that the document identify the homestead owner, describe the property that is claimed as the homestead, state that the property is the person’s principal place of residence, contain a statement that the facts stated are true, be acknowledged before a notary, and recorded with the county recorder. CCP § 704.930.

Third, what are the advantages of the homestead declaration? In order to explain the advantages, it is important to state the two types of homestead protections that are available when a judgment creditor seeks to force the sale of a judgment debtor’s home.

The first is called the statutory homestead exemption and the second is called the declared homestead exemption. The statutory exemption does not require the homeowner to do anything other than assert the exemption in the event of a forced sale.

The declared homestead exemption requires the homeowner to file a homestead declaration. In the event of a forced sale of the home, a certain amount of the equity will be reserved for the homeowner to use in the purchase of a new home. The funds will remain beyond the reach of the judgment creditor for 6 months while the judgment debtor looks for a new home. CCP §§ 704.710(c), 704.720(b), 704.960. In the event of a forced sale, the statutory exemption and the declared homestead work the same way.

The difference arises when the judgment debtor seeks to voluntarily sell the home while a judgment is recorded or if the judgment debtor declares bankruptcy. If the judgment debtor sells his home while there is a recorded abstract of judgment, his homestead exemption is treated as a junior lien to that of the judgment creditor. This also applies in the event that the judgment debtor records a homestead declaration after the recordation of the abstract of judgment, by which time it is too late.

To explain, imagine our homeowner as follows:

• 30-year-old male
• No disabilities
• Owns a home with a fair market value of $500,000 with $100,000 in equity
• $500,000 judgment recorded against him
  

He learns that if the home is sold through a foreclosure sale he may not obtain the fair market value of the home so he decides to sell it before the judgment creditor forces the sale. For our purposes, imagine that he could sell it for $500,000. If he were to sell, without filing a homestead declaration or filing a late homestead declaration, the judgment creditor would be able to capture all $100,000 of the equity from the sale. This is because the statutory homestead exemption only protects against forced sales, not voluntary sales. However, if our homeowner were to have filed a homestead declaration then the judgment creditor would only receive $25,000 from the sale, as the homestead exemption for our homeowner is $75,000. In the vent that the home could not be sold for more than pre-existing encumbrances and the homestead exemption (such as if the home could only be sold for $475,000 in the above example) then the court may not order the sale of the home. CCP § 704.800.

Essentially, the judgment will only encumber the amount of equity after all other encumbrances and exemptions are applied. A “judgment lien may … attach to a declared homestead in the amount of any surplus over the total of prior liens and encumbrances plus the amount of the homestead exemption.” Fidelity Nat’l Title Ins. Co. v Schroeder (2009) 179 CA4th 834, 844 citing CCP § 704.950(c) and Smith v. James A. Merrill, Inc. (1998) 64 Cal.App.4th 94, 99.) Thus, any equity over the amount of the exemption and mortgage is fair game.

·      Another benefit of the declared homestead is that it is still valid even if the property is transferred into a revocable living trust. Fisch, Spiegler, Ginsburg & Ladner v Appel (1992) 10 Cal.App.4th 1810. As a side note, the Fisch case presents an interesting issue where the law firm that prepared a trust for the defendant and counseled the defendant to record a homestead declaration on the property in trust, subsequently obtained a judgment against the defendant. Id. The law firm claimed that no homestead exemption was available to the defendant because the property was held by the trust, not the individual defendant. The appellate court ultimately affirmed the finding of a homestead exemption in the subject property because the defendant held a reversionary interest in the property, a recognized property interest for homestead purposes. Thus, homeowners can rest safe knowing that they can have their property in trust and receive some financial relief via a homestead declaration. Bear in mind that only a natural person can obtain the benefit of the homestead exemption i.e. a real, human being. This means that if you transfer title to a corporation or an LLC then that home will be ineligible for a homestead exemption. California Coastal Comm’n v Allen (2008) 167 Cal.App.4th 322, 329.

While there are many benefits of the homestead declaration beware of homestead filing services that promote the homestead declaration as a miraculous defense against all creditors foreclosing on your home. I have included a link to the California Department of Consumer Affairs website which has a very informative guide on homestead filing services and some of the outrageous claims they make in order to gull homeowners into purchasing their services.

The homestead declaration is a basic component of any asset protection plan. Because they both involve the structuring of the way an individual holds property, a homestead declaration should occur as a normal part of estate planning, as well. By recording this document you can ensure that if you suffer the slings and arrows of outrageous economic fortune, you can still preserve a small portion of your equity to use on a subsequent home. If you wish to prepare and record your own homestead declaration, the Sacramento County Law Library has a decent sample. Just make sure that when you notarize the document, the acknowledgment has the new warning required to be on all acknowledgments. Otherwise, the recorder will reject it.

There is a whole lot going on this case. First, is the “alleged” abuse perpetrated by the son upon his parents. Second, are the perils of trust deed investing. Third, are the consequences of sloppy drafting in a motion for summary judgment. 


It is hard to tell if this case is a tragedy or an elaborate scheme on the behalf of the Plaintiffs/Appellants. In a nutshell the Plaintiffs claim that their son forged their names on a loan and a deed of trust related to their property in Bakersfield. The loan goes into default in 2005 and the Salazars tell the lender that the loan was a forgery. Payments continue. For some reason, in 2009, the Salazars start paying the loan even though they claim it is the result of forgery.  Three years go by and the Salazars decide that maybe they should not be paying this loan. They file an action for declaratory relief and quiet title on the grounds that the note and deed are forgeries.

Big surprise, defendants counter with a defense of the statute of limitations, waiver, and ratification because the payments by Plaintiff were made pursuant to a forbearance agreement between Plaintiff and the lender. They also cross-complain. But, in an additional twist, the daughter of Plaintiffs signs the Salazars' names on the forbearance agreement. As will be discussed, this created significant problems for the lender down the road.

The main issue in the case is whether the initial notice of default in 2005 disturbed Plaintiff’s possession sufficient to start the statute of limitations on the quiet title action.  This is important because the “statute of limitations does not bar an action to quiet title by an owner in undisturbed possession of the land ....” (Mayer v. L&B Real Estate (2008) 43 Cal.4th 1231, 1238.) Since the Salazars owned the Brundage property and rented it out they were in possession of the property.

What makes this an interesting issue is that it was a matter of first impression of this state as to whether a notice of default triggers the statute of limitations on a quiet title action.

The court reasoned that the notice of default did not trigger the statute of limitations because the notice was a demand for money and not a claim as to title.

In the words of the court:

“The notices of default did not call into question the validity of plaintiffs’ control of the property by claiming plaintiffs’ possession was improper or illegal. Also, the notices of default did not indirectly question plaintiffs’ control of the property by asserting defendants were entitled to possess the Brundage Property. Rather, the notices of default presupposed that plaintiffs were the rightful owners of the Brundage Property and their ownership interest gave them an incentive to pay the amount of the indebtedness that was in default. Therefore, we conclude the notices of default did not dispute plaintiffs’ possession of the Brundage Property.”

The court does go on to say that the notice of trustee’s sale would have challenged the possession of the property, thereby triggering the statute of limitations.

The other big issue dealt with in the opinion were the defendants defenses as laid out in their separate statement of undisputed material facts.

The court takes defendants out behind the woodshed for their cutting and pasting in the same 70 paragraphs of material facts for each of their defenses. This led to the omission of important facts regarding their unclean hands, waiver, and ratification defenses. Starting with the unclean hands defense.

The defendants claim that the Salazars knew the note and deed were forged and didn’t do anything about it. The defendants failed to state material facts that the Salazars had knowledge of the forgery, remained silent and the silence resulted in prejudice to an innocent party i.e. the defendants.

Probably because the defendants did not consult an attorney, they committed two huge blunders, not counting the fact that they didn’t confirm that the correct people actually signed the note and deed. First, they worked up a forbearance agreement, which essentially waived the issue of the forged signatures and created a payment plan. This is a big problem because you cannot ratify a void contract by any subsequent act. Black Hills Investments, Inc. v. Albertson's, Inc. (2007) 146 Cal.App.4th 883, 896.

Second, defendant doesn’t ensure that Plaintiffs actually sign the forbearance agreement. Not that it would have made a difference but there is a reason the saying “once bit, twice shy” exists. You would think the lender would have learned their lesson after the underlying note and deed were forged by the Plaintiffs’ son. You would think that they wouldn’t just mail them an agreement, in English, to people who cannot read English, and then accept whatever signed document comes back to them in the mail. You would be wrong. Plaintiffs’ daughter signs her parents’ names on the agreement and mails it back to PLM. So now the lender has two problems. Ratifying a void contract and overcoming the statute of frauds and the equal dignities rule. As you can imagine, it doesn’t go so well for them. Win for the Salazars.

The defendants also try an unclean hands defense on the basis that the Salazars had a duty to disclose the forgery once they discovered it and, because they failed to do so, they should be estopped from claiming the deed and note were forgeries. Through sloppy drafting, they fail to state that they were an innocent party and that they were prejudiced by the Salazars’ silence. Once again, win for the Salazars.

Conclusion

I wonder if this was some kind of elaborate, Spanish Prisoner-style con to bilk this trust deed company. However, the fact that the Salazars paid on the note for so long argues against this. The only nefarious scheme I can come up with is that allowing the son to forge their names and having the daughter sign the forbearance agreement were both ploys to allow them to escape from the obligation in the event they couldn’t pay.  At least, I think it’s more fun that way as opposed to a corrupt son screwing over his parents, who are too decent to suspect that they shouldn’t have to pay on a forged note until years later. That’s just depressing.

It’s also a wonder how the deed was notarized in the first place. Generally, the signer has to appear in front of the notary, acknowledge their signature, and then prove their identity, either by card or witness. Civil Code § 1185. The only time the signer does not appear is when the notarization is accomplished by proof of execution by a subscribing witness. Civil Code § 1195. Looking at the notary handbook for 2005, however, it was still the case that a proof of execution could not be used with a deed of trust. Government Code § 27287.  This suggests either an incompetent or corrupt notary. It also strikes me as very careless of the lenders, who are not institutional lenders, to not be present for the signing of these documents. I get it, they don’t want to go over the Grapevine to Bakersfield from their offices in LA but they ended getting fooled twice by the same family.

We’ll see how it goes but now the lender has to take it to trial and prove either that the Plaintiffs did sign it or that their silence was prejudicial, thereby estopping them from challenging the validity of the deed of trust. Otherwise, they are going to have to pursue a cause of action for constructive trust to completion.