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Alterations Don’t Always Render a Deed Void (or How NOT to do Foreclosure Investing)

Most real estate investors assume that when a deed is altered by someone other than the grantor, without the grantor’s knowledge or consent, before it is recorded, then the deed is void and conveys no title, even as to bona fide purchasers.

But this “general rule” isn’t always true.  A recent decision by the California Court of Appeal (Second District in Los Angeles), Lin v. Coronado, illustrates that only material alterations of a deed — i.e., those changing the deed’s legal effect — can render the deed void.

Aside from this straightforward holding, the case also presents a lesson in how NOT to invest in foreclosure properties.

The foreclosure “pooling” investment

The plaintiff, Helen Lin, alleged that she “pooled” her $150,000 cashier’s check with $100,000 contributed by two separate entities, River Forest Financial LLC and Elevation Investments LLC “in partnership” for the purchase of a residential property at a foreclosure auction.

Their bid totaling $250,000 was successful, and a Trustee’s Deed was prepared reciting the conveyance of the property “to RIVER FOREST FINANCIAL LLC 75%, ELEVATION INVESTMENTS 25% HELEN LIN.”

Alteration of the Deed

Before recordation, the Trustee’s Deed was sent to a general partner of Elevation Investments, and was altered so that it omitted Lin’s name and simply read “to RIVER FOREST FINANCIAL LLC 75%, ELEVATION INVESTMENTS 25% (herein called Grantee).”

Lin wasn’t aware of the alteration.  The altered deed was recorded.

Sale of property to bona fide purchaser

After recordation of the altered deed, River Forest quitclaimed its interest in the property to Elevation Investments, and Elevation in turn sold the property to a bona fide purchaser, Mireya Coronado.

Lin received no proceeds from the sale.

The lawsuit

Lin sued Coronado to quiet title to the property, alleging that “her name was erased off of the Trustee’s Deed” before it was recorded, and therefore the deed was void and any subsequent deed could not convey title to Coronado.  Lin argued that the 75/25% split reflected on the deed was intended to apply only to the interests of River Forest and Elevation Investments, and not as to 100% of the property.

Lin also sued River Forest, Elevation Investments, and Elevation’s general partner for fraud relating to the alteration of the deed.

Addressing only Lin’s claim against Coronado, the trial court sustained Coronado’s demurrer and dismissed the claim.  Lin appealed.

Court of Appeal’s holding

The Court of Appeal affirmed the trial court’s judgment and rejected Lin’s quiet title claim against Coronado.  The court confirmed that material alterations without a grantor’s knowledge or consent can render a deed void and ineffective, even as to subsequent bona fide purchasers.  But the court held that “Lin cannot state a cause of action to quiet title because the alleged alteration of the deed was, as a matter of law, not material.”

The alteration to the deed was not material, the court held, because it did not change the deed’s legal effect.  Put simply, before the alteration, the deed unambiguously specified that River Forest was obtaining a 75% interest in the property and Elevation Investments was obtaining a 25% interest in the property.  Lin was identified, but with no percentage interest in the property.  As such, leaving Lin’s name off the recorded, altered deed had no legal effect.

Because the deed was not void, Lin could not quiet title to the property, and could not reform the deed in order to quiet title.

The court observed that its ruling applied only to Lin’s claims against Coronado, the bona fide purchaser.  Lin could continue to pursue her separate claims against her “partners” for her share of the proceeds from the sale of the property to Coronado.

Lesson

Don’t assume that any alteration of a deed without the grantor’s knowledge will render the deed void.  Alterations must be material (i.e., change the deed’s legal effect) to render the deed void.

If you participate in a foreclosure sale, make an effort to obtain and inspect any resulting Trustee’s Deed to ensure its accuracy.

And, perhaps most obvious, before making any sort of “pooling investment” in a foreclosure property, make sure that the investment is properly documented.

Here, had Lin simply taken the basic precaution of documenting her relationship with River Forest and Elevation Investments (e.g., as an individual member of either LLC, or perhaps as a co-member along with those LLCs in a newly formed entity), she would have had a much easier pathway to recover her share of the sale proceeds.  The right to an LLC membership distribution after a sale of the LLC’s assets (as set forth in the LLC Operating Agreement) is much easier to prove than a general claim for fraud.

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