Thursday, October 20, 2011

FYI: Cal App Opinion Demonstrates Peril of Depositing Trust Deeds for Recording Before Business Hours

The California Court of Appeal (Second District) recently held that
competing liens of two lenders secured by the same property have equal
priority, where the respective deeds of trust were recorded simultaneously
but were indexed at different times.

A copy of the opinion can be found at:

A borrower obtained loans from two different banks and secured both loans
with the same property. The executed deeds of trust were delivered to the
county recorder's office on the same date before business hours, were
time-stamped with the exact same date and time, but were indexed (that is,
placed into the public records) at different times on the same day.
Specifically, the defendant bank's deed of trust was indexed a few hours
before the plaintiff's.

The plaintiff bank subsequently brought a declaratory relief action
seeking a determination as to the priority of the banks' respective liens.
Both parties moved for summary judgment. The plaintiff bank argued that
the trust deeds had equal priority, because they were recorded
concurrently. The defendant bank argued that its lien should have
priority because its trust deed had been indexed first. The trial court
granted summary judgment in favor of the plaintiff bank. The defendant
bank appealed, and the Court of Appeal affirmed.

The appellate court first reviewed California law governing priorities.
The Court noted that California generally follows the "first in time,
first in right" system of lien priorities whereby a conveyance recorded
first takes priority over instruments recorded later. Under this system,
an instrument is deemed recorded when it is "deposited in the Recorder's
office." See Cal. Civ. Code § 1170 ("instrument is deemed recorded when,
being duly acknowledged . . . it is deposited in the Recorder's office . .
. for record") ("Section 1170").

The Court further noted that California's recording statutes establish a
"race-notice" system of recording that gives priority for a subsequent
purchaser who, among other things, acquires a real property interest
without actual or constructive notice of a previously-created interest in
the property and who records that property interest before the
previously-created interest is recorded. See Cal. Civ. Code § 1214
("conveyance of real property . . . is void as against any subsequent
purchaser . . . whose conveyance is first duly recorded)".

The appellate court then examined the elements of "constructive notice"
for purposes of establishing one's status as a subsequent purchaser. The
court noted that in order to give constructive notice, an instrument must
be "recorded as prescribed by law," meaning indexed, so that it can be
located in the public records. See Cal. Civ. Code § 1213 (subsequent
purchaser has constructive notice of conveyances "recorded as prescribed
by law from the time [the instrument] is filed with the recorder). Citing
previous appellate court opinions, the court stated that an instrument
"not indexed as required by statute . . . does not impart constructive
notice because it has not been recorded 'as prescribed by law.'" Thus,
the Court of Appeal reasoned that the mere recording of an instrument does
not impart constructive notice because constructive notice hinges on the
indexing of the instrument in the public records.

However, the Court rejected the defendant bank's argument that its lien
had priority because its deed of trust was indexed first, and thereby
imparted constructive notice for purposes of the race-notice statute. The
appellate court noted that California statutes treat recording and
indexing as two distinct functions and that recording is treated as a
time-sensitive task whereas indexing is not. The Court concluded that
neither bank could have had constructive notice of the other's lien
because neither trust deed had been indexed even though they had been
recorded simultaneously.

The appellate court also rejected the defendant bank's argument that the
plaintiff bank had failed to show when its trust deed had actually been
deposited for recording. Relying on evidence as to the procedures
followed by the recorder's office, the court concluded that pursuant to
Section 1170 the trust deeds were "deemed" recorded simultaneously when
the recorder's office opened for business, and that accordingly neither
bank was entitled to priority under the race-notice statute.

Thus, although both banks were bona fide purchasers who took without
notice, neither bank was a "subsequent purchaser," as neither bank had a
"previously-created" interest that was "first duly recorded." Stressing
the importance of indexing for imparting constructive notice, the Court
stated, "while title insurance companies are permitted to deposit trust
deeds with the recorder before commencement of business hours to be
certain of the 8:00 a.m. recording time, those insurers also take the risk
they will not have notice of other instruments deposited at the same time
and not yet indexed."

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874

NOTICE: We do not send unsolicited emails. If you received this email in
error, or if you wish to be removed from our update distribution list,
please simply reply to this email and state your intention. Thank you.

Our updates are available on the internet, in searchable format, at:
CONFIDENTIALITY NOTICE: This communication (including any related attachments) is intended only for the person/s to whom it is addressed, and may contain confidential and/or privileged material. Any unauthorized disclosure or use is prohibited. If you received this communication in error, please contact the sender immediately, and permanently delete the communication (including any related attachments) and permanently destroy any copies.

IRS CIRCULAR 230 NOTICE: To the extent that this message or any attachment concerns tax matters, it is not intended to be used and cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed by law.