Drafting Better Assignments of Deeds of Trust

SMS Fin. XXIII, LLC v Cornerstone Title Co. (2018) 19 CA5th 1092

Bank made a business loan to a technology service company (Borrower), which was guaranteed by its principals and secured by a second deed of trust on the principals’ property. Years later, Bank assigned the note and deed of trust to Investment Firm. Investment Firm, Borrower, and its principals later executed a “Forbearance Agreement,” stating the loan was in default and agreeing Investment Firm would not exercise its rights as long as Borrower made payments as scheduled in the agreement.

Months later, Borrower failed to make the required payments. In 2014, Investment Firm began the foreclosure process when it learned that in 2007, without the knowledge of Bank, Title Insurance Company had recorded a release of the obligation secured by the deed of trust under CC §2941(b)(3). In court, Investment Firm alleged that Title Insurance Company had no authority to do so and that, contrary to Title Insurance Company’s release language, the secured obligation had not been satisfied or discharged.

The court of appeal reversed the trial court’s dismissal of Investment Firm’s suit against Title Insurance Company. Civil Code §2941(b)(6) imposes broad liability on any title insurance company that issues and records a release under §2941(b)(3). Under §2941(b)(3), a title company may record a release of the obligation only after the beneficiary has delivered a reconveyance to the trustee, after the trustee has failed to record the reconveyance in 75 days, and after the title company gives written notice to all parties. Investment Firm, as the unqualified assignee of Bank, received all Bank’s rights and remedies and, as beneficiary and holder of the obligation, had the statutory right to prove tort damages against Title Insurance Company, which allegedly had improperly recorded a release of the obligation. CC §2941(b)(6). Because CC §2941 is to be liberally construed, it is irrelevant that Investment Firm acquired the obligation from a bank.

THE EDITOR’S TAKE: Heritage Pac. Fin., LLC v Monroy (2013) 215 CA4th 972, reported at 36 CEB RPLR 84 (July 2013), much discussed in this decision, held that purchase of an existing loan did not automatically transfer to the loan purchaser rights that the loan seller had to sue the borrower for fraud in her loan application, because that kind of claim could still be asserted by the original lender (the one deceived) despite its nonretention of the loan, and was not essential to collection of the loan. To escape the consequences of the Heritage holding, I advised attorneys representing potential loan purchasers to employ assignment language that was as inclusive as possible, so as to enable their clients to argue that the assignment included even rights that could otherwise have been regarded as being automatic incidents of the loan transfer, and thus were carried along by the improved transfer language. See Bernhardt, Dangerous Assignments, 36 CEB RPLR 79 (July 2013), also available on my website at RogerBernhardt.com.

The newer SMS decision technically allows the required better language of assignment to be a bit briefer, because the case has created a carveout to the Heritage holding for wrongful release of a mortgage. By virtue of the CC §2941(b)(6) provision that a title company that improperly releases a mortgage “shall be liable to any party” (emphasis added), an injured assignee is relieved from having to show that claims for an improper release were included in the assignment to him, since he qualifies as “any party,” regardless of what the assignment to him provides (although only when complaining of an improper release).

However, there is not much danger in seeking the “double protection” of utilizing an assignment whose language includes claims for improper releases, on top of the statutory liability provided, even though such claims may be already protected by the “any party” carveout of §2941(b)(6). When a purchase money mortgage is involved (as it was in the Heritage case), we have yet to learn whether either strategy will get a plaintiff around the bar of CCP §580b. Roger Bernhardt

 

41 Real Property Law Reporter 43 (Cal CEB March 2018), © The Regents of the University of California, reprinted with permission of CEB.

 

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