A look at recent court cases affecting real estate.

Constructive trust imposed on title wrongfully retained by agent

A buyer of real estate and his agent agreed the agent’s daughter would take title to help the buyer qualify for a purchase-assist loan. Accordingly, the agent prepared a purchase agreement naming both the agent’s daughter and the buyer as purchasers. The buyer and agent orally agreed that title to the property would be quitclaimed to the buyer at close of escrow. Prior to the close of escrow, the escrow instructions were amended to remove the buyer as a purchaser. The buyer provided the entire down payment. On close of escrow, the buyer occupied the property and began making payments on the loan, but title was never transferred to the buyer. Later, the buyer defaulted on the loan. Acting on behalf of the daughter, the agent had the buyer evicted and rented out the property. The buyer sought to quiet title to the property in his name, claiming the agent’s daughter acquired the property through the agent’s deceit since the agent failed to transfer title to the buyer at close of escrow. The agent claimed the buyer was not misled since the buyer signed an escrow amendment to remove himself from the purchase transaction. A California appeals court imposed a constructive trust on the title to the property held by the agent’s daughter and ordered it be transferred to the buyer, holding the agent had acquired the property through deceit since the agent’s daughter failed to transfer title to the buyer as promised. [Warren v. Merrill (2006) 143 CA4th 96]

Editor’s note – An agent is subject to punitive measures if he breaches the fiduciary duty to his client by failing to act in his client’s best interest.

Sub-escrow owed no duty to owner for reconveyance

An owner originally purchased a property by executing a carryback note and trust deed in favor of the seller. The owner arranged for payoff of the seller’s note by refinancing the property through a bank. The bank instructed the title company insuring the trust deed securing the bank’s loan to disburse the payoff funds for the carryback note and handle the reconveyance of the seller’s trust deed. The seller handed the title company his beneficiary’s demand for payoff and request for reconveyance, which were addressed to the trustee named in the seller’s trust deed. The title company disbursed the amount requested on the seller’s payoff demand, which the seller endorsed and deposited into his account. Neither the request for reconveyance nor the trustee’s fee for the reconveyance were forwarded to the trustee. The title company later informed the seller it intended to reconvey the seller’s trust deed using its statutory authority to clear title. The seller then claimed the note had not been paid off, causing the title company not to reconvey. The seller then commenced a foreclosure under his trust deed, causing the owner to sustain financial losses protecting his title. The owner sought compensation from the title company for losses resulting from the seller’s foreclosure, claiming the title company acted as an escrow and breached its duty owed to the owner by not causing the reconveyance of the seller’s trust deed when it disbursed his payoff funds. The title company claimed it owed no duty as an escrow holder to the owner, since the bank, not the owner, had given instructions to the title company regarding use of the loan funds. A California appeals court held the title company owed no duty to the owner as an escrow holder to cause the seller’s trust deed to be reconveyed since the instructions received by the title company were given by the bank, not the buyer. [Markowitz v. Fidelity National Title Co. (May 31, 2006) 142 CA4th 508]

Editor’s note—Even if the owner had instructed the title company, the title company might not have been liable to compensate the owner for losses resulting from the seller’s foreclosure since it was the responsibility of the trustee on the seller’s trust deed to record the reconveyance, not the title company; the trustee’s duty to reconvey was never shifted to the title company by a substitution of the trustee. More properly, the title company should have sent the request for reconveyance to the trustee named in the trust deed, who in turn would have prepared the reconveyance and caused it to be recorded. But then, the title company would not have been entitled to keep the trustee’s reconveyance fee or recording fee paid by the owner.

No variance by estoppel for building code violation

A property owner obtained a building permit from the city for an improvement project. After he started construction, the owner altered the plan of improvement without a revised building permit and in violation of the building code. On initial inspections, the city did not comment on the altered improvement, but a final inspection found the altered improvement was in violation of the building code. To cure the violation, the owner applied for a building code variance for the altered improvement, claiming the city was estopped from denying the owner’s application for a variance since the city knew about the violation and allowed them to proceed prior to the final inspection. The city claimed estoppel did not apply regardless of when the violation was discovered since the improvements violated the building code, and approving the owner’s variance application would allow the owner to unfairly benefit from the building code violation. A California appeals court held the city was not estopped from refusing the owner a variance from the building code since the altered improvement violated the building code and for the city to be estopped would unfairly benefit the owner. [Ciraulo v. City of Newport Beach (January 17, 2007) __CA4th___]

Lender violates automatic stay on property in foreclosure

A lender commenced foreclosure on property which was securing a trust deed loan. The property owner filed a petition in bankruptcy which, by an automatic stay, prohibited the lender from holding its foreclosure sale. The lender obtained relief from the automatic bankruptcy stay. The relief covered later bankruptcy filings by future owners of the property prior to the foreclosure sale. No hearing was held regarding whether the bankruptcy petition was part of a scheme to delay, hinder, and defraud the lender with repetitive bankruptcy filings by co-owners or successor owners. The owner then transferred title to another individual, who filed a bankruptcy petition, again automatically staying the foreclosure sale. The lender proceeded to hold the trustee’s sale without obtaining relief from the new owner’s bankruptcy stay. The lender acquired the property at the trustee’s sale. The new owner sought to vacate the foreclosure sale and recover title to the property, claiming the trustee’s deed was void since the lender failed to obtain relief from the new bankruptcy stay before holding the foreclosure sale. The lender claimed the trustee’s deed was valid since the relief from the prior owner’s bankruptcy stay applied to any bankruptcy case involving the property prior to holding the trustee’s sale. A Federal bankruptcy court held the foreclosure sale and trustee’s deed were void as a violation of the new owner’s bankruptcy stay since the relief from stay in the prior owner’s bankruptcy, which purported to cover future stays of the foreclosure, was granted without first holding a hearing on the existence of a fraudulent scheme to abuse the bankruptcy stay process. [Johnson v. TRE Holdings (9th Cir. BAP 2006) 346 BR 190]

Re-engineered development plans render an EIR needless

A developer petitioned a county to approve a building project calling for a well to supply the project’s water needs in an area with an overburdened ground water supply. The county reviewed the project for any significant environmental impacts to determine if the project posed a significant environmental impact requiring an environmental impact report (EIR). If no significant impact was found, the county was to adopt a negative declaration. A geologist’s soil and water report on the ability of the land’s water to supply the needs of the project found a significant environmental impact would exist unless offset by specific revisions to the proposed project. The developer included these revisions in modified plans he submitted. In lieu of ordering an EIR, the county then approved the project which now included the geologist’s recommended revisions by adopting a mitigated negative declaration (MND). A citizens’ group claimed an EIR was necessary under the California Environmental Quality Act (CEQA) since the area’s water supply was already overburdened. The county claimed no EIR was necessary since the project, as re-engineered and approved, would result in no negative impact to the area’s water supply. A California appeals court held no EIR was necessary since the county’s adoption of the MND was supported by sufficient evidence of steps taken by the developer to eliminate any significant environmental impact on the area’s water supply, leaving nothing for an EIR to review. [Landwatch Monterey County v. County of Monterey (January 23, 2007) __CA4th___]

Developer’s insurer compensates HOA for construction defects

An insurance company issued an occurrence-based commercial general liability (CGL) policy to a developer who had, prior to issuance, constructed a condominium project (CID). Due to defective construction, the project suffered physical damage during the policy period. After the policy period expired, a homeowners’ association (HOA) was formed to manage the CID. The HOA made a demand on the developer for the cost of repairing the damages. The developer tendered the claim to the insurance company, which denied coverage, claiming the HOA could not have suffered losses from the property damage since it did not then have an interest in the property. The HOA claimed the insurance company was required to indemnify the developer for the losses by paying the HOA since the occurrence-based CGL policy covered property damages occurring during the policy period. A California appeals court held the insurance company was required under its occurrence-based CGL policy to indemnify the developer for the losses due to the defective construction by making payment to the HOA since the property damage did occur during the policy period, and the HOA was the entity now entitled to the recovery. [The Standard Fire Insurance Co. v. The Spectrum Community Association (2006) 141 CA4th 1117]