CMA Persuades Court to Publish Major Opinion on Forged Property Transfers

by
T. Robert Finlay, Esq.
Wright, Finlay & Zak, LLP

 

The CMA is pleased to announce that it was able to persuade the California Court of Appeals to publish its recent opinion in WFG National Title Ins. Co. v. Wells Fargo Bank, N.A., Second Appellate District Case No. B294249 [ordered published July 7, 2020].

The WFG National Title Insurance Co. opinion addresses a significant and, unfortunately, all too often occurring problem affecting the rights and interests of secured collateral lenders, servicers, title insurers, foreclosure trustees and – perhaps most significantly, consumer borrowers. Specifically, the case puts a neat pin into arguments regarding the effect of fraudulent transfers of real property interests on the rights of the parties affected by those transactions, deflating the efforts to essentially steal the property from those with legitimate right, title and interest in the property.

In this case, some of the defendants had set up a sham transaction by which a seller purported to sell a property to a buyer who obtained a mortgage loan from a third party lender to fund the purchase. As it turned out, the seller did not own the property because the recorded trustee’s deed upon sale that appeared to convey title from the original lender to the seller was forged. When the buyer subsequently defaulted on the mortgage loan, the third party lender discovered that its deed of trust, purportedly secured by the property, was based on a forged trustee’s deed upon sale and, hence, worthless.

The third party lender then sued the persons involved in the fraudulent scheme but also sued the original lender and its loan servicer, arguing that they had a duty to have discovered and prevented the forgery before the third party lender could get defrauded. The third party lender claimed that, as a result of the breach of that duty, the original lender’s deed should be deemed to be junior to the third party lender’s deed as a matter of equity.

The court disagreed, holding that the original lender and its servicer had no ongoing duty to monitor public records in order to detect, and correct, a fraudulent or erroneous recording to protect third parties who might rely on those fraudulent or erroneous recordings. Unfortunately, the original decision was not published.

Why does publication of this decision matter? As an unpublished decision, this case would not have been able to be cited as authority in any future case raising similar issues. The last published opinion clearly reaching the same conclusion was issued in 1871. The recording of forged deeds and reconveyances in an attempt to steal property or thwart a foreclosure is nothing new but there has been an uptick in such cases in recent years (including more by strangers to the loan looking to take advantage, sometimes even without the borrowers’ knowledge) and we anticipate even more such attempts once the moratorium on foreclosures ends and borrowers scramble for forbearances and refinances in the wake of the pandemic. This will set up future disputes between the legitimate original lienholder and subsequent third parties who were defrauded into making loans on the same property under the belief they would be in senior position. Publication of this opinion will help stem the flow of such cases or, at least, expedite their resolution.