Triple A Management Co. v. Frisone
By Robin Meadow, Esquire of Greines, Martin, Stein & Richland
Re: Collateral Assignments & Imputed Knowledge
Triple A arose from a complicated series of transactions that created confusion over lien priorities. Triple A bought land from Western Farm Credit, which secured the purchase money loan to Triple A with a first trust deed on the property. Triple A then sold 20 acres of the land to Greenwood Estates Associates, which financed the purchase in part through a promissory note secured by a second trust deed. As a condition of the sale, Triple A agreed to subordinate its security interest in favor of any future "development loan." Western then agreed to release the 20 acres from its lien in return for assignment to it of the Greenwood promissory note and trust deed as additional collateral for the Triple A debt.
The parties opened an escrow at Stewart Title, which was instructed to prepare and record a "collateral assignment" of the second trust deed to Western. The heart of the litigation that later ensued was whether this "collateral assignment" was a full assignment, conveying the beneficial interest in the property to Western, or simply an assignment for security only.
During escrow, Greenwood agreed to sell the 20 acres to Mark Sullivan, who arranged to pay for the land in part through a new promissory note to Greenwood secured by a third trust deed on the property plus cash. Sullivan planned to obtain the cash from the Frisones (private investment lenders). The Frisones, however, would only agree to the loan if their trust deed would be the first priority lien on the property. The parties opened a second escrow at Stewart Title, which received an instruction that title would vest in Sullivan subject to subordination of the trust deed "in favor of [Triple A] and collaterally assigned to [Western] securing a loan."
To facilitate the conveyance, Greenwood attempted to obtain Triple A's agreement to subordinate the Greenwood trust deed to the proposed lien of the Frisones, but Triple A categorically denied the request. Stewart Title then approached Western with a subordination agreement it had prepared, representing that Triple A had agreed to the subordination. Western signed it.
Sullivan defaulted, and litigation ensued to settle the lien priorities. The Frisones contended that they were good faith encumbrancers for value and, as such, were protected by the conclusive presumption that the recorded state of title reflected the true state of title. Accordingly, they contended that they were entitled to rely on the subordination agreement signed by Western, since the recorded "collateral assignment" of the Greenwood trust deed established Western as the owner of the beneficial interest under the trust deed.
The Court of Appeal disagreed, making two initial observations:
"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 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." (Id. at p. 676.)
The court then reviewed the two leading cases, discerning two factual contexts in which the bona fide encumbrancer problem arises: (1) when the ambiguity about the state of title arises from "information generated by the [person claiming bona fide encumbrancer or purchaser status] outside the chain of title," and (2) when a recorded document in the chain of title is "not explicit on [its] face." (Id at p. 676.) With regard to the former context, a prospective encumbrancer or purchaser is charged with a "limited duty of inquiry," which is discharged after reasonable, additional inquiry. The illustrative case is First Fidelity Thrift & Loan Assn. v. Alliance Bank (1998) 60 CaI.App.4th 1433, summarized in Triple A as follows:
"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." (Triple A, 81 Cal.Rptr.2d at p. 676.)
Although the new lender could easily have discovered the first lender's mistake by a simple phone call to the first lender, the First Fidelity court concluded that the new lender had discharged its limited duty of inquiry by asking the borrower and his bank.
On the other hand, when title ambiguity arises from a recorded instrument in the chain of title that is not explicit on its face, the duty of inquiry is apparently broader. Buehler v. Oregon Washington Plywood Corp. (1976) 17 Cal. 3 d 5 20 is the illustrative case. There, a recorded easement purported to create an easement "in gross," but it limited use of the easement to owners of neighboring property. In such a case, the would-be bona fide purchaser "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." (Triple A, 81 Cal.Rptr.2d at p. 677, quoting Buehler, 17 cal.3d at p. 529.)
As a preliminary matter, the Triple A court concluded that the Frisones should be charged with the knowledge of the second escrow instruction, since Stewart Title was acting as the Frisones' agent for that transaction. (Triple A, 81 Cal.Rptr.2d at pp. 678-679.) Thus, the Frisones' case presented a hybrid First Fidelity/Buehler situation where the Frisones had both an ambiguous recorded document and information from other sources outside the chain of title. Applying the First Fidelity/Buehler principles, the court held that "one cannot be afforded [bona fide encumbrancer) 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." (Id. at p. 680.) In the Frisones' case, "[t]here 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." (Ibid.)
The Frisones' duty of inquiry was particularly acute because as a matter of law, the possessor of a collateral or security interest does not have the power to unilaterally subordinate the security interest to another, absent an agreement to the contrary. (Id. at pp. 681-682.) Since parties are "presumed to know the law," the Frisones should have suspected that Western probably did not have the authority to unilaterally subordinate the Greenwood trust deed and should then have made reasonable inquiry to confirm or deny that suspicion. Having failed to do so, they were not entitled to bona fide encumbrancer status.
Triple A is significant because of the court's willingness to look behind a chain of title that at least superficially appeared secure and probe the intentions, assumptions, and knowledge of the parties to transactions along the chain. While Triple A did not, on its facts, need to discuss the scope of the investigation required in the Frisones' circumstances, it erects First Fidelity and Buehler as the framework on which future courts can hang their determinations.
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