Mortgage lenders tend to pay a lot of attention to the real property securing their loans, as they should.
Before the loan is made, lenders scrutinize the property to evaluate whether its fair market value will support the preferred loan to value ratio (LTV). After the loan is made, lenders often keep tabs on the property for potential waste and monitor the public records for potential new junior liens recorded against the property.
But do lenders have a duty to monitor and correct the public records affecting the real property security?
A recent opinion from California’s Second District Court of Appeal — WFG National Title Insurance Company v. Wells Fargo Bank, N.A. — answered this question with a clear “No.”
Facts: a mortgage fraud scheme and a defrauded lender
Wells Fargo held the senior deed of trust recorded in 2005 on real property in Sherman Oaks, California. The borrowers defaulted on the loan, and Wells Fargo (through its foreclosure trustee) recorded a notice of default and election to sell under the deed of trust. Wells Fargo then recorded a notice of trustee’s sale followed by a second notice, setting the sale date for April 26, 2016.
But no sale took place. Then the “sham transaction” occurred.
Although the property had not been sold by Wells Fargo’s foreclosure trustee, a fraudulent “trustee’s deed upon sale” was recorded on July 8, 2016. The trustee’s deed was forged. The forged deed recited that on June 8, 2016, Adeliya Timirova Investments (ATI) purchased the property at the trustee’s foreclosure sale, purportedly extinguishing Wells Fargo’s deed of trust.
In the scheme’s next phase, ATI sold the property to Tatiana Vovk. Relying on representations made by Vovk and a preliminary title report showing, by way of the forged deed, that title was vested in ATI, a lender called Alviso Funding loaned Vovk $850,000 in exchange for a first deed of trust on the property.
The sham purchase closed on October 7, 2016, and Alviso recorded a deed of trust on the same date. But no payments on the loan were ever made. The sham borrowers took the money and ran. Alviso first learned it had been scammed after its title insurer was contacted by the Los Angeles Police Department in late October 2016.
Wells Fargo, after learning of the sham transactions affecting its real property security for its senior deed of trust, recorded a rescission of the forged deed on November 16, 2016.
Alviso sued Wells Fargo and others. In its claims directed at Wells Fargo, Alviso argued that Wells Fargo was required to immediately discover the forged deed and promptly record a rescission of it in order to protect third parties such as Alviso. Alviso argued that because Wells Fargo failed to do so, Alviso’s security interest in the property should be senior to Wells Fargo’s interest as a matter of equity.
Trial court: summary judgment for Wells Fargo
The trial court granted summary judgment in favor of Wells Fargo.
The court ruled that the forged trustee’s deed relied on by Alviso was void as a matter of law and could not provide a basis for superior title against a prior valid interest in real property. Rejecting Alviso’s equitable arguments, the court held that Wells Fargo was under no obligation to discover forged documents relating to the property.
The appeal followed.
Court of Appeal: affirmed; no duty to monitor and correct public records
The Court of Appeal affirmed the trial court’s judgment.
First, the court confirmed that Alviso’s deed of trust was void. It was undisputed that the July 8, 2016 trustee’s deed was forged and void. And a void instrument “infects” the entire chain of title, so Alviso’s deed of trust — which was derived from the forged trustee’s deed — was likewise void. The court held: “Because the entire transaction was fraudulent and predicated on the forged deed, Vovk did not obtain a valid interest in the property. Accordingly, neither did Alviso.”
Next, the court held that since Wells Fargo was not negligent, equitable principles could not be used to elevate Alviso’s deed of trust over Wells Fargo’s long-standing senior deed of trust. Wells Fargo was not negligent, the court held, because it had no duty to monitor and correct public records relating to the property.
The court concluded:
Consistent with general negligence principles, our Supreme Court held long ago that ‘a party whose conveyance is duly recorded is not obliged to thereafter keep constant watch of the records, lest some party, without his consent or authority, should fraudulently or feloniously attempt to convey away his property.’
Under the holding of the WFG National Title Insurance case, a lender has no duty to monitor and correct public records affecting its real property security. A lender’s failure to do so will not subject its senior lien to equitable attacks.