Opinion
E080535
10-08-2024
CALVARY CHURCH OF GOD IN CHRIST, INC., Plaintiff, Cross-defendant and Respondent, v. BALBOA, LLC, Defendant, Cross-Complainant and Appellant.
Anderson, McPharlin & Conners and William R. Larr, for Defendant, Crosscomplainant and Appellant. Law Office of A. George Glasco and A. George Glasco, for Plaintiff, Crossdefendant and Respondent.
NOT TO BE PUBLISHED
APPEAL from the Superior Court of Riverside County. No. RIC1826920 Irma Poole Asberry, Judge. Affirmed in part; reversed in part with directions.
Anderson, McPharlin & Conners and William R. Larr, for Defendant, Crosscomplainant and Appellant.
Law Office of A. George Glasco and A. George Glasco, for Plaintiff, Crossdefendant and Respondent.
OPINION
RAPHAEL, J.
Fraud perpetrators convinced an elderly church pastor trying to refinance the mortgage on his church to form a private partnership and transfer title to church property to the partnership as a gift on the promise that the partnership would refinance and improve the property. The pastor, however, had no authority to transfer the church's title.
Months later, the pastor informed other church officials of the transaction. While they investigated, the pastor had a series of strokes and died. Though the church officials warned the fraud perpetrators not to obtain a loan against the property, they did so anyway. A title insurance company signed off on the loan, despite identifying the transfer by gift as a concern (but failing to identify other concerns). The loan closed three weeks before the church filed suit to recover title to their property and damages. The perpetrators used some loan funds to pay off the church's existing mortgage and outstanding property taxes but kept the rest.
After a bench trial, the court determined the grant deeds were void ab initio because the pastor lacked transfer authority and was induced to transfer by fraud. With the deeds voided, the court did not evaluate whether the lender was entitled to a bona fide encumbrancer defense. The court granted declaratory judgment for the church, awarded $1.6 million in damages from the fraud perpetrators, cancelled and rescinded the grant deeds, quieted title, and imposed a constructive trust. However, the court also issued declaratory judgment for the lender and imposed an equitable subrogation lien requiring the church to pay the lender as if the lender held the church's original mortgage.
In this appeal by the lender, we hold the trial court erred by finding the grant deeds void rather than voidable. As a result, the lender may be entitled to the bona fide encumbrancer defense. We reverse the judgment as to the lender and remand for the trial court to address whether the lender has established it was a bona fide encumbrancer even though the title investigation revealed information to the lender, the escrow agent, and the title insurer that could have led to the discovery of the problems with title before the loan issued. Because Balboa prevailing on the bona fide encumbrancer defense would necessarily alter the calculus on whether the equitable subrogation lien is an appropriate remedy, we also reverse that portion of the judgment.
I FACTS
A. The Transfer of Calvary's Property to the Partnership
Respondent Calvary Church of God, Inc. (Calvary) is in Banning, part of the national Church of God in Christ. Calvary is part of the organization's Metropolitan Jurisdiction of Southern California. Bishop Bernard Hackworth supervises 30 local churches in the jurisdiction.
Calvary was incorporated as a nonprofit religious corporation in 1983. Article VI of the church bylaws provides for officers, including a pastor, elders, deacons, and missionaries, and designates the pastor as the chief administrative officer. Article IV requires the election of a board of trustees by a vote of members of the congregation and directs that church "[p]roperty and business affairs shall be exercised and conducted by the Board of Trustees."
This lawsuit concerns the real property Calvary owned at 1415 E. Williams Street in Banning, where the church building is located, and an adjacent vacant lot.[ The church's articles of incorporation specify "[t]he property of this corporation is irrevocably dedicated to religious purposes and no part of the net income or assets of this corporation shall ever inure to the benefit of any director, officer or member thereof or to the benefit of any private person."
1415 E. Williams Street is sometimes called 1415 Ramsey Ave. The documents in this case use both street addresses. The inconsistency is unimportant, however, because only the legal description has legal significance, and the court incorporated the legal description into the judgment.
According to Bishop Hackworth, local churches must come to him to borrow money on or sell church property, and he must get permission from headquarters. Community Commerce Bank (CCB) held a mortgage against the Calvary church property with an original principal amount of $486,750 and a variable interest rate initially at 9.99 percent. Lucius Jones, who was Calvary's pastor and CEO, and Lillian McDowell, who was the Calvary secretary until her resignation in June 2015, agreed to the loan after obtaining approval from Calvary's board.
Pastor Jones and the board of trustees (the Board) grew unhappy with the interest rate on the CCB mortgage and its monthly payment of about $4,400, which they saw as burdening the congregation. Calvary's congregation was only 15 to 30 persons, and its revenue was modest. The Board therefore authorized Jones to look for a new mortgage. Jones and the church secretary attempted to qualify for refinancing, but the church was rejected as a borrower.
Later, still seeking to escape the CCB mortgage, Pastor Jones signed an agreement transferring the property's ownership. Defendant Perry Moore, an archbishop in the Church of God in Christ organization, led him to do so. Moore testified he and Jones were close friends, and Jones had been his mentor. Moore became a minister in 1977 and is the pastor at Flowers Temple Church of God in Christ and a professor of theology at two religious universities. He said he and Jones met in 1994 and had daily contact from 2016 to 2018. He was aware Jones was dissatisfied with the CCB mortgage. At Jones's request, Moore introduced him to defendant Reginald Charles[ to help refinance the church loan. Moore said he first met Charles in 2000 and Charles had prepared his tax returns. However, Moore said he did not know that Charles had training or experience in refinancing property.
Defendant Charles defaulted and did not testify at trial, as did defendant CO.TE.EN Corporation, which we will refer to as CO.TE.EN.
Still, Moore, Jones, and Charles met and discussed setting up a partnership for "bringing life back to the church" by developing the vacant lot into a media and entertainment facility. Charles proposed the partnership refinance the debt on the church property and improve it as a community center. Charles's plan became a General Partnership Agreement, identifying the partnership as involving "Reginald Charles of CO.TE.EN Corp.[, a] California Corporation, Bishop Perry Moore of a to be formed entity named Three Desert Streams, Inc., [a] California Corporation, and Bishop Lucius Jones of Calvary Church of God in Christ, Inc.[, a] California Non-Profit Corporation." The partnership was designated as "CO.TE.EN Corp. dba Three Desert Streams," a name that confusingly incorporates the names of two of the distinct corporate entities who would be partners.
The partnership agreement provided it would hold title to the church properties, unless the partners voted otherwise. Calvary would contribute "the Calvary Church of God in Christ located at 1415 Ramsey Avenue in Banning, CA 92220, the church's undeveloped lot #541-170-023 situated at 1396 Ramsey Avenue, Banning, CA 92220, and the Love/Outreach Center situated at 1387 Ramsey Avenue, Banning, CA 92220" as well as two apartment buildings located in Banning.[ CO.TE.EN Corporation and Three Desert Streams, Inc., were vaguely required to make a capital contribution "deriv[ing] from Institutional, Private Equity or other Financing opportunities." Moore testified his contribution to the partnership was "my presence." According to the agreement, CO.TE.EN, Three Desert Streams, Inc., and Calvary Church of God in Christ, Inc., would each own a one-third interest in the partnership. Moore testified that Three Desert Streams, Inc.'s name represented the coming together of Pastor Jones, Bishop Hackworth, and Reginald Charles.
These apartment buildings were owned by Jones individually. Their transfer was the subject of another case in which Jones's estate recovered ownership because he was a victim of elder abuse. (Lawson v. Charles, case No. RIC1901505.)
On May 22, 2018, Moore, Jones, and Charles met with a notary public and signed the partnership agreement and grant deeds purporting to transfer the church property to "CO.TE.EN Corporation, DBA Three Desert Streams." Jones signed the grant deeds as the "authorized signer," though both deeds have handwritten additions stating he was authorized to sign "for Calvary Church of God in Christ, A CA Corp." The grant deeds specify, "This is a bona fide gift and the grantor received nothing in return." The grant deeds were recorded the same day with the Riverside County Recorder, as Instrument 2018-0206472 and Instrument 2018-0206470, without the involvement of any escrow or title company. The notary public testified she notarized the signatures after seeing identification that establish the signatories' identities. She said nothing made her think Jones was impaired or under duress.
Paragraph four of the partnership agreement says the partnership's purpose was, among other things, "establish[ing] the financial security that would allow these parties to enhance and/or expand . . . the implementation of a real estate development/construction project entitled 'One Legacy Boutique' Banning," consisting of the church properties, as well as any future properties the organization purchased. Charles signed for CO.TE.EN, Moore signed for Three Desert Streams, Inc., and Jones signed for Calvary.
Moore testified that two days after signing the agreement, Charles came to his house and told him that the corporation Three Desert Streams, Inc. had not been formed. Though the names of the entities are confusing, Moore understood the distinction and testified that "Reginal Charles came to my house and said Three Desert Streams could not be filed. That's what I knew. Three Desert Streams, Incorporated could not be filed." Moore said he had given Charles a check for the fees to set up the corporation, but he could not recall the amount and did not know what happened with the check. He testified that "Reginald Charles came back with Three Desert Streams dba. He took advantage to use that title. I didn't give him any permission to use that title."
Moore claimed he did not read the partnership agreement when he signed it but "just signed it in good faith." He said he first saw the whole document when Charles gave him a copy two days later. He said he read the document and disagreed with parts that he thought did not accurately reflect what Charles had represented. However, he did not inform Jones or other church officials of his reservations. Moore did not know that the agreement was ever presented to the church Board or members. Moore testified the parties to the partnership agreement intended to transfer property title back to Calvary after they obtained a loan, though that is not in the agreement.
The trial court found Moore was not credible on several points. Based on his testimony about his long relationship with the Church of God in Christ organization, the court concluded Moore knew that title to real property owned by the church could be transferred only if permitted by the national church organization. The court also rejected his claim that he did not read the partnership agreement or would not have signed it if he had known of all its terms. The court emphasized Moore's claims of being a close friend of Pastor Jones made it incredible that he would not relay his suspicions to Jones if he became suspicious after the transaction was completed.
B. Discovery of the Property Transfer by Calvary's Board and Church Leaders
Other officials from the church learned of Pastor Jones's transaction in September 2018. Desmond Gardner had been elected to the Board and appointed that month. He said he was familiar with the church bylaws, including the restriction of transferring ownership. According to Gardner, Jones approached him after a church service in September 2018 and told Gardner and another board member, George Powell, he had "messed up." Jones handed Gardner some papers he had signed and said he had given away the church. The papers had the name of CO.TE.EN, Moore, and Charles. Gardner testified that he saw only pages one, six, and seven of the agreement. Jones kept repeating that he was trying to help, and he had messed up. Powell corroborated Gardner's testimony.
The next day, Gardner called Church of God in Christ Superintendent Logan Westbrooks and told him what Jones had said. Westbrooks promptly set up a meeting with Bishop Hackworth. At the meeting, Gardner relayed his conversation with Jones to Hackworth, Westbrooks, Gardner, and Superintendent Robert Peters. Hackworth charged Westbrooks with investigating the matter. Jones did not attend the meeting because he was hospitalized after a stroke.
Westbrooks arranged a second meeting around September 20 and invited Moore and Charles. Both attended, as did Bishop Hackworth, Gardner, and other church superintendents from the area. Westbrooks and Gardner testified that at the meeting they learned Jones had transferred title to the church property. According to Gardner, they first saw the grant deeds at that meeting. The church's representatives told Charles and Moore that Pastor Jones lacked authority to give away church property. Charles tried to reassure the group and said he did "big deals" all the time but said he did not intend to return the property. Charles told the church representatives they planned to tear down the church building and construct a new building with a state-of-the-art entertainment center. Westbrooks pointed out the church is a nonprofit entity and questioned how it could be sold to a for-profit corporation. After an inconclusive back-and-forth, Charles said he was not going to take more questions from Westbrooks. According to Hackworth, he told Charles that the church objected to obtaining a loan on the church property, and Charles responded that he would not. Moore testified that the group was angry and accused Moore and Charles of perpetrating a fraud.
Westbrooks testified a loan for Calvary required a Board resolution and approval by the national church before Jones could sign the partnership agreement and deeds. Westbrooks said his investigation convinced him Charles had used false promises to persuade Jones to sign the deeds.
Gardner said after the second meeting, Bishop Hackworth and Superintendent Westbrooks decided the church needed to resolve the issue. However, Jones's death on October 1, 2018 impeded their actions. After Jones died, Gardner went to the church office for documents but found cabinets open and the office in disarray. He could not locate any documents about the business between Jones, Moore, and Charles. Gardner said he did not see a full copy of the partnership agreement until later. According to Westbrooks, the church learned later that CO.TE.EN and Charles had obtained a $799,000 loan using the church properties.
The trial court concluded this evidence "clearly established that Charles, Moore and CO.TE.EN. through its purported principals, Charles and Moore, [acted] with knowledge of the falsity of the deeds, maliciously, and in conscious disregard for the truth of the fact that Jones did not have authority to transfer title of the properties. Each of them [was] directly involved in the publication of the deeds by allowing the deeds to be recorded as part of the partnership scheme and refinance of the mortgage on the subject properties."
C. Originating the Balboa Loan to CO.TE.EN
About six months after the grant deeds to the church properties had been recorded and a little over a month after Jones passed away, defendant, cross-complainant, and appellant Balboa, LLC (Balboa), completed a bridge loan to CO.TE.EN with the church properties as collateral. The $799,000 loan paid off the CCB Loan and purportedly gave CO.TE.EN time to find more permanent financing.
The loan had been in the works for months. CO.TE.EN engaged a lender broker, Rushmyfile Inc., to market the loan. Andrew Dioli, the chief executive officer of Rushmyfile, contacted private lenders who might be interested in funding it. Defendant First American Title Company (First American) served as the title company and Hollywood Escrow as the escrow company. On July 17, Adam Hunzeker met Charles and Jones at the church for an appraisal. Jones offered him breakfast and Charles gave Hunzeker a tour. Hunzeker's appraised the property at $1.6 million.
First American prepared a preliminary title report. Chris Otten, the title officer, explained the process. "We receive requests for open orders, at which point [they] are sent off to an open order desk to be opened, . . . after that it's sent to the title production department for a title examiner to produce a report, that report is then sent to escrow." Title examiners research the chain of title on a public database to identify the owners, outstanding taxes, and claims like mortgages, liens, easements, and other interests affecting title. If there are any potential problems with the chain of title, the title examiner includes in the report an "exception" to coverage which will have to be resolved. The title officer does not usually examine title or participate in putting together the preliminary report, and Otten did not do so. Instead, the title insurer sends the report to the escrow company.
The preliminary report contained a few significant exceptions. The report, addressed to Angie Mendez at Hollywood Escrow, says First American would issue title insurance to insure the property "against loss which may be sustained by reason of any defect, lien or encumbrance not shown" or excluded from coverage by the policy. The report explains "[t]he exceptions and exclusions are meant to provide you with notice of matters which are not covered under the terms of the title insurance policy and should be carefully considered." The report said title was vested with Calvary Church, rather than CO.TE.EN, although only "Subject to Exception No. 18, 19, and 21." Exceptions 18 and 19 questioned the effect of the deeds Calvary had executed to "CO.TE.EN Corp., dba Three Desert Stream" recorded on May 23 and required "evidence that the deed[s] w[ere] . . . absolute conveyance[s] for value, and that there are no other agreements, oral or written, regarding the ownership of the land described herein." The reports noted of both that the title examiner was "[u]nable to verify if the above referenced 'uninsured' deed is a valid transfer." Exception number 21 asked for a certificate of good standing for "CO.TE.EN Corp." from the Secretary of State and a certified copy of its board of directors' resolution authorizing the loan and designating which corporate officers can execute it . Despite noting that the grant deeds identified "CO.TE.EN Corp. dba Three Desert Stream" (the partnership) as the title holder, the report did not flag as an exception that "CO.TE.EN Corp." was the potential borrower.
Jack Cohen, principal of Balboa, said Rushmyfile's Dioli approached him about the Calvary loan. As he explained, a broker like Rushmyfile "does most of the work and presents the investors with a loan opportunity. They gather the entire file together. They do the appraisal. They do a credit application on the borrower. They get [the] prelim[inary report] ordered. They open escrow. And they present you with different details on the loan. [¶] So when we're presented, as a lender, our role is to decide whether it's something that we would be interested in or we're going to pass." In this case, Cohen expressed interest in funding the Calvary loan, and Dioli sent him copies of the borrower documents, the appraisal report, the signed deeds that showed CO.TE.EN Corp. dba Three Desert Streams owned the properties, and the preliminary report from the title insurer, which included the exceptions requiring more information about the chain of title and loan approval.
Cohen testified he did not look at the preliminary report. He explained it was not his practice to review preliminary reports but to focus on the value of the property. He said he relied on Dioli as his agent, the escrow company, and the title company to look at documents and resolve issues. He testified he relied on the title insurance underwriters to determine validity of title to the property securing the loan, because he does not have the necessary legal education, training or qualifications to engage in a detailed legal analysis of title to real property. His primary concern was that if he lent money, he would get security in the form of a deed of trust in first position. He was also concerned about what an investment's loan-to-value ratio would be, in this case about 49 percent. Those factors ensured that if there was a default on the loan, he could foreclose and recover his investment.
Dioli testified that he looked to the escrow agent to work with the title company to obtain any documents to resolve exceptions and close escrow. He said it was First American's job to do this type of work. He did not research title issues or do anything to investigate the CO.TE.EN transaction with Calvary. He testified it was up to Cohen and Balboa to decide whether to issue the loan subject to any exceptions. He testified it is common to receive preliminary reports with exceptions and not unusual for a proposed insurer to be told it will have to take out the exceptions to close escrow.
Dioli said he informed Hollywood Escrow that Balboa would not close escrow unless the exceptions were removed and CO.TE.EN was shown as the vested title holder, as Balboa wanted a loan policy to show its deed of trust in first position. In instructions to Angie Mendez, dated October 16, 2018 and signed by Dioli on November 12, 2018, Rushmyfile permitted Hollywood Escrow to "record the deed of trust and any related documents provided you can ensure title is vested in the name of the Trustors/Borrowers, with the deed of trust as a valid lien recorded in the First position" and that "[i]tems contained in your preliminary report have been . . . eliminated as follows: . . . 18, 19, 20, 21." In other words, as Dioli testified, Balboa would fund the loan if escrow and the title company ensured Calvary had transferred ownership to CO.TE.EN Corporation dba Three Desert Streams, as the grant deeds indicated.
At the time, Sally Rowshan was the owner of Hollywood Escrow and the escrow officer working with Angie Mendez. Rowshan received the preliminary report from First American and sent it to Balboa. She later received the broker/lender instructions requiring the removal of the exceptions and, on October 23, 2018, sent them to First American. The October 23 communication included wire instructions, a copy of the original trust deed, a demand for payoff by CCB, an uninsured deed affidavit, and a statement of information concerning Calvary.
First American's title officers agreed it was their responsibility to investigate and attempt to resolve exceptions in the preliminary report. According to Otten, the title officer gets involved when an escrow company raises an issue, as Rowshan did in her letter. "When we're requested to review something . . . we review the prelim and go over it with escrow when they call." According to Otten, the title officer must "make the final decision on whether or not to remove or keep certain items from the preliminary report." Adam DeGrandis, identified as First American's person most knowledgeable about the loan at trial, agreed. "It's up to me as a title officer to underwrite, if you will, to make that determination if I'm going to eliminate it from the report, if you will, as an exception from coverage. If I remove an exception, then escrow doesn't have to worry about getting anything endorsed. It's up to me to review what's submitted to us in an effort to eliminate items, clear items."
Otten explained that the deeds transferring title from Calvary to CO.TE.EN "outside of a title transaction" prompted the lender's request to verify "that the party that signed those deeds signed those deeds." To address the question, he "requested an affidavit of uninsured deeds to be executed by the party that signed those deeds with a notary other than the notary notated on those deeds." Hollywood Escrow sent him an uninsured deed affidavit notarized by a different notary who was approved by the escrow company. The affidavit was signed by Jones much earlier-on May 29, 2018-and he signed as "one of the named Grantors who executed and delivered that certain Deed which was recorded on 5-23-2018 . . . which conveyed title to . . . 1415 E. Williams St., Banning, CA 92220." Otten said he also requested a statement of information on Calvary Church from the Secretary of State and verified that Jones was a CEO of the organization. According to Otten, this evidence was sufficient to address the questions raised in exceptions 18, 19, and 20, so he decided to remove those exceptions in the title report. He accordingly changed the vested owner from Calvary to CO.TE.EN Corporation. Otten also testified he received a copy of the CO.TE.EN Corp. bylaws, a certificate of corporate status from the Secretary of State, and evidence that the corporation had approved the loan, which resolved exception 21 in the report.
DeGrandis's testimony confirmed Otten's. He explained that an exception is like "an examiner's note to the title officer" telling the title officer, "Hey, we're unable to verify the validity of this deed. It's up to you now title officer." A title officer will often look up information directly through Secretary of State filings, recordings with the county records, and other sources. DeGrandis said the uninsured deed affidavit showed Jones had signed the uninsured grant deeds, and the statement of information, which listed Jones as the chief executive officer, contained the type of information a title officer would want to clear an exception.
DeGrandis said he never saw Calvary's articles of incorporation, initially required in exception number 20. However, he noted Calvary was not a party to the loan transaction. If Calvary had been a party, it would have been customary for First American to review the church's articles of incorporation and seek assurance it had approved the loan. Because CO.TE.EN was substituted as the vested owner, though, First American did not need to obtain documents from Calvary, so removing exception number 20 was justified. He said it was unnecessary to see a board resolution from Calvary authorizing Jones to transfer the properties. The uninsured transaction affidavit supported CO.TE.EN's ownership of the property, and exception number 20 sought a board resolution approving the Balboa loan, which was not necessary once it was determined CO.TE.EN was the property owner. Ultimately, he said, it was within Otten's discretion to decide whether the information he had seen justified removing the exceptions.
D. The Balboa Loan to CO.TE.EN Issues
Balboa's loan escrow closed on November 19, 2018, and was memorialized by a note and secured by a recorded deed of trust that day. These documents identified CO.TE.EN as the borrower and Charles as the co-borrower. Balboa's escrow instructions required title insurance to fund the loan. Balboa obtained a lender's policy of title insurance from First American, which listed CO.TE.EN as the owner and the Balboa deed of trust as a valid, first-priority lien. After the recording of the deed of trust, assignments to the five investors who funded the Balboa loan were also recorded.
Balboa disbursed the loan funds on the closing day. That included $460,109.75 to CCB to close the existing mortgage. CCB recorded a full reconveyance of its deed of trust. Balboa paid off Calvary's outstanding property taxes with $9,032.80. The remaining $291,732.78 was disbursed to CO.TE.EN. In 2019 and 2020, CO.TE.EN made payments on the new loan amounting to $111,772.
E. Calvary's Lawsuit
Just over three weeks after the loan closed, on December 11, 2018, Calvary sued CO.TE.EN, Three Desert Streams, Inc., Charles, Moore, and Does 1 through 10. Calvary alleged "Defendants successfully intentionally, willfully[,] and fraudulently caused Jones to transfer without consideration all of [Calvary's] real properties (including the church and the church's Love Center and vacant lots) and two additional real properties owned personally by Jones to a newly formed partnership[,] CO.TE.EN dba Three Desert Streams." They brought nine causes of action and sought a variety of remedies aimed at returning ownership and control over the church properties to Calvary.
On December 20, 2018, Calvary recorded a notice of the pending legal action (lis pendens) affecting the properties. Calvary served defendants CO.TE.EN, Charles, and Moore. The church did not serve Balboa then, but it later served Balboa with an amended notice. Jack Cohen testified Balboa would not have made its loan had there been a lis pendens of record when the deal closed. Balboa was joined as Doe 1 on June 28, 2019. First American was joined as Doe 4 on April 2, 2020.
On October 4, 2019, Balboa filed an answer. It alleged various defenses, including that it was a bona fide encumbrancer. "Balboa paid value for a deed of trust it holds against some of the properties that are the subject of this action, which deed of trust was recorded on November 19, 2018 . . . [and] secures a loan made by Balboa in good faith and without notice of any adverse claims of Plaintiff herein, and which loan refinanced the pre-existing mortgage loan which was secured by a deed of trust encumbering some of the properties that are the subject of this action, and by reason thereof, Balboa acquired its interest in the Balboa [deed of trust] as a bona fide encumbrancer, free and clear of any and all adverse claims of Plaintiff." Balboa also alleged defenses of laches, estoppel, waiver, unclean hands, and ratification. Balboa also filed a cross-complaint against Calvary, CO.TE.EN, and unknown cross-defendants Roes 1 through 20, alleging causes of action for imposition of an equitable subrogation lien and for declaratory relief.
On July 23, 2020, Calvary filed a first amended complaint-the operative complaint-naming First American, Balboa, CO.TE.EN, Charles, Moore, and Does 1 through 10 as defendants.[ The first amended complaint alleges 13 causes of action for (1) declaratory relief, (2) breach of written contract, (3) fraud, (4) breach of fiduciary relation, (5) rescission, (6) cancellation of deeds, (7) quiet title, (8) accounting, (9) constructive trust, (10) slander of title, (11) negligence, (12) fraud by concealment, and (13) unfair business practices. Calvary stated these causes against all defendants, except the breach of fiduciary relation claim, which was limited to CO.TE.EN, Charles, Moore, and First American.
Before trial, defendants Three Desert Streams, Inc., First American Title Insurance Company, and Anthony F. Geraci were dismissed, and the Geraci Legal Corporation filed a disclaimer; these defendants are not party to this appeal. First American Title Insurance Company is a different entity than First American Title Company, which remained a party after the trial court dismissed the latter.
Balboa answered the first amended complaint, repeating its original answer and defenses and adding affirmative defenses related to the new causes of action. First American answered the first amended complaint on January 19, 2021, after the trial court overruled its demurrer.
CO.TE.EN, Charles, and Moore did not respond to the first amended complaint, and the court entered a default against them on all causes of action on September 22, 2020. Calvary entered a notice of entry of default against CO.TE.EN, Charles, and Moore on November 2, 2020. Charles and CO.TE.EN never appeared nor testified. Moore testified at trial.
Several causes of action were not resolved on the merits at trial. Calvary abandoned its negligence claims against First American and Balboa. The trial court deemed Calvary to have abandoned its causes of action for breach of contract, breach of fiduciary relations, accounting, and fraud by concealment because it did not address them in closing arguments. Calvary does not challenge any of those determinations on appeal.[
The record does not disclose what happened with Calvary's unfair business practices claim. Since the parties do not raise it, we treat it as abandoned.
The trial court ruled for First American on its motion for judgment under Code of Civil Procedure section 631.8, filed after the close of Calvary's case-in-chief. The trial court issued a statement of decision on April 15, 2022, and entered judgment for First American as to all claims on May 12, 2022. Notice of entry of judgment was filed on May 16, 2022. That ruling is not at issue in this appeal.
F. The Trial Court's Statement of Decision
These rulings left Balboa as the sole party defending against Calvary's causes of action for declaratory judgment, fraud, rescission, cancellation of deeds, quiet title, constructive trust, and slander of title.
1. Calvary's Declaratory Judgment, Fraud, Rescission, Cancellation, Quiet Title, and Constructive Trust Claims
On all but the slander of title claim, the trial court ruled for Calvary. First, the trial court found "[t]here was no evidence that a board meeting had ever occurred giving Jones authority to transfer title to the Calvary properties. The evidence showed that the board of trustees had given Jones authority to look for a new mortgage with a lower interest rate than the CCB mortgage. There is no evidence that the Deacons or members close to Jones knew he had transferred the property until months after it was done. The only person who knew of this other than Jones, was Moore and Charles." The trial court explained that the reactions of other church officials when they learned of the transaction confirm the finding that Jones lacked authority to transfer the property. Moreover, the court found Jones signed the deeds "despite the fact that the Articles of Incorporation of Calvary Church precluded the transfer of its real properties."
Second, the trial court found the CO.TE.EN defendants acted with malice. "The evidence clearly established that Charles, Moore and CO.TE.EN through its purported principals, Charles and Moore, [acted] with knowledge of the falsity of the deeds, maliciously, and in conscious disregard for the truth of the fact that Jones did not have authority to transfer title of the properties. Each of them [was] directly involved in the publication of the deeds by allowing the deeds to be recorded as part of the partnership scheme and refinance of the mortgage on the subject properties."
Based on these findings, the trial court concluded Calvary had established the transfer of the properties was fraudulent (claim three) and that Calvary was entitled to declaratory judgment (claim one). Due to the fraud, the court concluded "Calvary suffered the loss of its real properties and is entitled to a judgment for fraud against Moore, Charles and CO.TE.EN" and "is entitled to damages jointly and severally against Moore, Charles and CO.TE.EN in the amount of $1.6 million." The court granted declaratory judgment against all defendants. "Calvary has established its claims as to declaratory relief. Jones did not have authority and the deeds must be cancelled."
The same findings that Jones acted without authority and the CO.TE.EN defendants committed fraud led the trial court to quiet title (claim seven) and order the rescission (claim five) and cancellation (claim six) of the deeds to the church properties. "Plaintiff has plead[ed] and proven the instruments and deeds are void due to Jones' lack of legal authority to transfer title and fraud . . . [and] that the invalid deeds have caused it pecuniary loss.... Plaintiff is entitled to judgment rescinding and cancelling the Exhibits 2 and 3 deeds. Thus, title to the subject properties is fully restored to [Calvary]." The court also concluded Calvary "has established that it is entitled to a judgment of Quiet Title against all remaining defendants."
Finally, the court imposed a constructive trust against CO.TE.EN, Charles, and Moore because they "wrongfully acquired title to Calvary's real properties . . . [and] received for their benefit at least $291,732.76, the amount stated on the Exhibit 311 Amended Borrower's Final Settlement Statement, after payment of the CCB loan and taxes."
2. Calvary's Slander of Title Claim
The trial court granted Balboa's motion for judgment on the slander of title claim after finding no evidence supported finding Balboa acted with malice or reckless indifference for the truth. Calvary did not file a cross-appeal to challenge that ruling. Nevertheless, Balboa relies on the findings resolving the claim in arguing that it established it was a bona fide encumbrancer, so we recount them here.
First, the trial court found Balboa did not have actual knowledge of the problems with title. The court found that "[w]hen Balboa made the loan, it did not know the invalidity of the deeds signed by Jones transferring title to CO.TE.EN." It found "[t]he unfortunate fact is that Balboa, without knowledge of Jones' lack of authority, but with knowledge that CO.TE.EN was the title owner of the property, gave a substantial sum of money to CO.TE.EN, and paid off the then existing mortgage balance owed to CCB, in return for an agreement that its loan would be secured by a deed of trust in first position against the property."
The trial court also found the evidence did not establish Balboa had any duty to conduct a further investigation to uncover the invalidity of the title. The court found Balboa engaged in customary and standard practices in the process of making the decision to go forward with its loan to CO.TE.EN. It protected itself from a defect in the title by conditioning its loan escrow instructions, and thus its obligation to fund the loan, upon the issuance of a lender's policy of title insurance assuring validity and enforceability of the Balboa deeds of trust, a standard custom and practice in the mortgage lending industry.
Though the court found Cohen received a copy of the preliminary report that included exceptions to coverage raising questions about the CO.TE.EN transfer, it also found it is customary for lenders to rely on title officers to investigate such issues. Consequently, it concluded the preliminary reports did not give rise to a duty for Balboa to conduct further investigations and, at the time of its loan, Balboa believed "in good faith" that CO.TE.EN was the owner of the property.
3. Balboa's Affirmative Defenses
The trial court next discussed Balboa's defenses. It concluded Balboa did not establish Calvary had unclean hands because Jones was never authorized to transfer the property and the evidence that the church had not kept the information on its corporate statement of information up to date was not sufficiently related to the deed transfer to invoke the defense. The court rejected Balboa's defense of laches because it found the responsible persons at the church acted without delay in investigating the fraud and bringing the lawsuit. It rejected Balboa's defenses of waiver and ratification for the same reasons.
The statement of decision does not expressly discuss Balboa's bona fide encumbrancer defense. It begins by saying the evidence does not support Balboa's defenses and notes "Balboa is not a purchaser of the real property for value. Instead it lent money to CO.TE.EN and obtained a deed of trust against the subject properties." The court then recounted the parties' stipulation that Balboa made a loan to CO.TE.EN for $799,000 in return for a deed of trust in the first position, Balboa paid off the CCB loan in the amount of $406,109.75 and outstanding taxes of $9,032.80 from those funds, and that CO.TE.EN had made payments on the loan in the amount of $111,772.18. The court found that "[w]hen Balboa made the loan, it did not know the invalidity of the deeds signed by Jones transferring title to CO.TE.EN. It has been established in this action that due to the invalidity of the deed between Jones and CO.TE.EN that the deed of trust of Balboa is unenforceable."
4. Balboa's Cross-claims for Declaratory Judgment and Imposition of an Equitable Subrogation Lien
Finally, the trial court found Balboa was entitled to a declaration of its right to recover funds it loaned on the property and should benefit from an equitable subrogation lien. The court explained an equitable subrogation lien should be imposed "when a lender's funds are used to pay off a pre-existing mortgage, but for some reason the refinancing lender's new mortgage is defective," a circumstance where "the property owner cannot equitably reap a windfall." In such a case, "the lender is entitled to an equitable lien to the extent of the undisputed prior lien that was paid off with the refinancing lender's funds."
The court concluded, "Since the Balboa deed of trust is found to be invalid and unenforceable because of the rescinding and cancellation of the . . . deeds, the facts mandate that Balboa receive and hold an equitable assignment of all rights under the CCB Note and deed of trust." The court imposed "an equitable subrogation lien in favor of Balboa upon the real property" and directed "[t]he terms of such lien are defined by the CCB Note and Deed of Trust [and] are equitably assigned to Balboa by operation of law." The court ordered the terms of the CCB note incorporated into the judgment.
The court set out the amount of debt due to Balboa as the "amount that [Calvary] would have owed to CCB as of the date of entry of judgment," which amounted to $656,780.80 and set payments to resume on December 1, 2022. The court also held Calvary and Balboa are entitled to attorney fees and costs, which neither party has appealed.
The trial court entered judgment on November 28, 2022.
II ANALYSIS
A. The Grant Deeds Were Transferred Without Authority and Due to Fraud.
Balboa argues the trial court erred by concluding that Jones was not authorized to transfer the property and that CO.TE.EN, Charles, and Moore committed fraud. Balboa argues "[n]either of those conclusions is supported by substantial evidence." We disagree.
1. Substantial evidence supported finding Jones lacked authority
Balboa relies on two theories to undermine the court's conclusion that Jones was not authorized to transfer the properties. First, it argues the Calvary Board authorized Jones to act as he did by approving him to seek to refinance the CCB loan. Balboa points to the testimony of Calvary's former secretary that she and Jones unsuccessfully submitted applications for a refinance loan with Board authorization. It also argues that Board minutes lost upon Jones's death would have confirmed that the Board granted that authority.
We do not agree the trial court was obligated by this evidence to find the Board authorized Jones to transfer ownership of the church's property. Giving someone the authority to refinance a loan does not allow them to sell the property to achieve that end. Balboa's position appears to be that Jones agreed to transfer ownership of the property, encumbered by the CCB mortgage, to the CO.TE.EN partnership on the understanding that the partnership could qualify for a refinance loan where Calvary, acting alone, could not. Obtaining a new loan by selling property to another party is obviously not the same thing as a loan refinance, which means the loan holder replaces the loan on their property with one with new terms. The post-transfer new loan to the new owner was not a refinance within the Board's grant of authority. Balboa's unstated premise may be that the partnership would return ownership to the church after the refinancing plan was complete. But there is no evidence that a second transfer was contemplated. The partnership agreement embodied the plan concocted by Charles and Moore, but it says nothing about returning ownership to Calvary. Balboa's interpretation of the Board's grant of authority to refinance the mortgage does not make sense, much less show the trial court was required to find Jones was authorized to transfer title.
Leaving that problem aside, the testimony at trial cut strongly against Balboa's understanding of the Board's authority. As the trial court noted, the church's articles of incorporation barred transfer of church property to a private party. Church officials testified that any transfer of property would have to be approved by a resolution of the Board and by headquarters. And as Balboa is forced to concede, there is no evidence that the Board specifically authorized Jones to give the property to CO.TE.EN.
What happened after the transaction confirms Jones acted without authority. Months after the purported transfer, Jones confessed to two Board members that he had "messed up" and handed them papers saying he had given away the church. The church officials responded as you would expect. One Board member called the superintendent and reported what Jones had done. The superintendent set up a meeting with Bishop Hackworth, and Hackworth charged the superintendent with investigating the matter. The church continued its investigation, confronted Moore and Charles, and ultimately filed this lawsuit. Thus, even if we could get beyond the conceptual problems with Balboa's theory, this testimony constitutes substantial evidence to support the trial court's finding that the transfer of the church property was not in fact approved.
Balboa's second theory is that under Corporations Code section 313 CO.TE.EN was entitled to the presumption that Jones, as CEO and CFO of the church, had the authority to transfer church property. That statute provides, "Subject to the provisions of subdivision (a) of section 208, any note, mortgage, evidence of indebtedness, contract, share certificate, initial transaction statement or written statement, conveyance, or other instrument in writing, and any assignment or endorsement thereof, executed or entered into between any corporation and any other person, when signed by the chairperson of the board, the president or any vice president and the secretary, any assistant secretary, the chief financial officer or any assistant treasurer of such corporation, is not invalidated as to the corporation by any lack of authority of the signing officers." (Corp. Code, § 313.) However, the same statute directs that the presumption shall apply only "in the absence of actual knowledge on the part of the other person that the signing officers had no authority to execute the same." (Ibid., italics added; see Saks v. Charity Mission Baptist Church (2001) 90 Cal.App.4th 1116, 1141["Corporations Code section 313 applies so long as the other party does not have actual knowledge that the executing officers lack authority"].)
Here, the trial court found precisely that Moore and Charles knew Jones lacked the power to transfer church property. After observing Moore's testimony, including his testimony about his long history as an official with the Church of God in Christ, the court found that Moore was aware of the church's restrictions that title to real property owned by the church could be transferred only upon receiving permission of the national church organization. The court also concluded "[t]he evidence clearly established that Charles, Moore and CO.TE.EN, through its purported principals, Charles and Moore, [acted] with knowledge of the falsity of the deeds, maliciously, and in conscious disregard for the truth of the fact that Jones did not have authority to transfer title of the properties." These findings were supported by substantial evidence and preclude applying the Corporations Code section 313 presumption that Jones was authorized to make the property transfers.
2. Substantial evidence supported finding fraud
Balboa argues there was no substantial evidence to support the trial court's finding that CO.TE.EN, Charles, and Moore committed fraud and entered an illusory agreement. In Balboa's view, the trial court "simply relied on the content of the [partnership agreement] to presume fraud, apparently because the trial court believed the [agreement] was an improvident transaction." This argument misconstrues the trial court's ruling and its basis.
"The elements of fraud are misrepresentation, knowledge of falsity, intent to induce reliance on the misrepresentation, justifiable reliance on the misrepresentation, and resulting damages. [Citation.] Promissory fraud is a subspecies of fraud, and an action may lie where a defendant fraudulently induces the plaintiff to enter into a contract, by making promises he does not intend to keep. [Citation.] 'In such cases, the plaintiff's claim does not depend upon whether the defendant's promise is ultimately enforceable as a contract.'" (Reeder v. Specialized Loan Servicing LLC (2020) 52 Cal.App.5th 795, 803.)
The basis of the fraud determination was that Moore and Charles, and by imputation CO.TE.EN, knew Pastor Jones was not authorized to transfer title to the church property, knew that the church property could not be passed on to a private entity, induced Jones to sign the grant deeds and a partnership agreement nevertheless, and did so on the false promise of creating a partnership that would leave Calvary with a one-third ownership interest and Three Desert Streams, Inc. with a one-third ownership interest. Moore and Charles never formed the corporation Three Desert Streams, Inc. Moore testified that Charles told him the corporation had not been formed. The grant deeds they induced Jones to sign placed title in CO.TE.EN Corp. dba Three Desert Streams, and then Charles used the confusion over names to obtain a loan he had no authority to seek. The trial court correctly concluded the agreement was illusory and Moore's and Charles's conduct established they were engaged in promissory fraud.
Moore and Charles at minimum used the agreement and ruse of a partnership that was supposed to maintain the church's ownership interest while refinancing the mortgage to give Charles control over the property. The court as trier of fact could infer their knowledge of the falsity and their intent to induce Jones's reliance on the promise from the testimony of several witnesses. Though the trial court did not credit his attempt to deflect culpability, Moore himself testified he knew something was not right when Charles showed him the agreement two days after the signing. Moore testified (and it is uncontested) that they never acted to form Three Desert Streams, Inc., an entity that turned out to be fictional, though it was said to represent the coming together of Bishop Hackworth, Pastor Jones, and Charles, and the agreement said, like the church, that corporate entity would own one-third of the church property. According to Moore, despite failing to incorporate Three Desert Streams, Inc., "Reginald Charles came back with Three Desert Streams dba. He took advantage to use that title."
Moore testified that he had not read the partnership agreement at the notary's office when he signed it. He claimed instead that he had signed it "in good faith" based on Charles's representations. But he said the agreement Charles delivered two days after signing was not consistent with what Charles had told him. He also claimed he learned that day from Charles that he had not formed the Three Desert Streams corporation, but he admitted he did not tell Jones even though he claimed to be suspicious of Charles at that point. The trial court found Moore lacked credibility, and that serves as a basis for finding Moore himself was aware of the falsity of the agreement and the plan to induce Jones into parting with the church property, as well as his own personal property. The court also concluded Moore knew the property transaction was itself based on the false premise that Jones had the authority to transfer the property. Moore's own testimony established his deep involvement in the Church of God in Christ and his close relationship with Jones. These facts warranted the court's finding that Moore knew Jones could not execute valid grant deeds. And the evidence of Moore's and Jones's close relationship and of Jones's interest in refinancing the CCB mortgage was sufficient to establish Jones's justifiable reliance that the refinance plan was real.
The court also found the entire plan was a conspiracy to deprive the church of ownership of the property and determined on that basis that both Moore and Charles could be held liable in tort for the acts of the other. Thus, Moore could be liable for the fraud even if, as he testified, Charles took most of the steps to realize its completion, such as drafting the partnership agreement and misrepresenting its contents. (See IIG Wireless, Inc. v. Yi (2018) 22 Cal.App.5th 630, 652.) The trial court therefore had substantial evidence that Moore, Charles, and CO.TE.EN were engaged in a fraudulent scheme to get Jones to transfer title of church property.
These findings supported the trial court's rulings against Charles, Moore, and CO.TE.EN, which resulted in a declaratory judgment, cancellation and rescission of the grant deeds, a constructive trust in Calvary's favor, and a judgment for $1.6 million in damages for fraud. Those aspects of the ruling, which no party has appealed, remain in full force and effect regardless how we resolve Balboa's appeal concerning its defenses.
B. The Effect of the Problems with Title on Balboa's Deed of Trust
Balboa's primary argument is that the problems with the transfer of title from Calvary to CO.TE.EN have no effect on its interest in the property because it entered the transaction in good faith and without knowledge of the problems in the title chain.
They point to the trial court's findings made in rendering judgment in Balboa's favor on the slander of title claim to show they were bona fide encumbrancers. The trial court found that "[w]hen Balboa made the loan, it did not know the invalidity of the deeds signed by Jones transferring title to CO.TE.EN." And though the evidence establishes that title examiners flagged the purported transfer of title as requiring further investigation, the court concluded Balboa itself "had no duty to investigate the circumstances regarding the transfer of title from Calvary to CO.TE.EN. Balboa in good faith, lent money in consideration of the promise to repay the funds and provide security against the subject real property pending repayment of the funds." Balboa argues these findings, though related to judgment on Calvary's slander of title claim, show Balboa was a bona fide encumbrancer for value and its deed of trust remains enforceable.
1. Ridec LLC v. Hinkle and Code of Civil Procedure section 764.060
Balboa's lead argument is that we should follow the recent decision in Ridec LLC v. Hinkle (2023) 92 Cal.App.5th 1182 (Ridec), where the Court of Appeal held a trial court erred by disregarding the rule protecting bona fide purchasers and bona fide encumbrancers against void claims set out in Code of Civil Procedure section 764.060. In Ridec, the trial court refused to apply the statutory rule on the ground that the common law rule was better policy. Here, Balboa faults the trial court for ignoring the rule entirely.
The trial court had good reason for not discussing the rule in Code of Civil Procedure section 764.060. It applies only to those who acquire title in reliance on an in rem quiet title judgment subsequently discovered to be invalid. (Code Civ. Proc., § 764.060.) The Ridec court expressly acknowledges the limitation. "As to persons who did not have claims in the property at the time of the quiet title judgment and who instead 'reli[ed] on the [quiet title] judgment' when subsequently acquiring rights in the property, those persons shall retain those 'rights' in the property pursuant to Code of Civil Procedure section 764.060-even if the quiet title judgment is later invalidated 'based on lack of actual notice to a party or otherwise'-as long as that person was a 'purchaser or encumbrancer for value . . . without knowledge of any defects or irregularities in the [quiet title] judgment or the proceedings." (Ridec, supra, 92 Cal.App.5th at p. 1197, alterations in original.)
Ridec explained that the Legislature enacted robust quiet title procedures to make it fair "to replace the common law version of a quiet title action-which was not in rem and hence typically only valid against the parties to that action . . . with an in rem quiet title action that was '"' good against all the world'"' and hence had more resilience when later attacked." (Ridec, supra, 92 Cal.App.5th at p. 1201.) As a result, "[t]he Act is careful to accord its greater resilience only to those quiet title judgments obtained under the Act's more stringent procedures. Thus, a trial court may logically apply the Act's rule regarding the effect of void judgments only to Act-compliant quiet title judgments, while still applying the common law rule to all other judgments." (Id. at p. 1202.)
Since Balboa did not agree to the loan and obtain its deed of trust in reliance on a quiet title judgment, the bona fide encumbrancer defense embodied in Code of Civil Procedure section 764.060 does not apply. Consequently, the trial court did not err by failing to address that issue. As the Ridec opinion itself entails, whatever rights Balboa has as a bona fide encumbrancer are determined under common law principles.
2. The determination that the CO.TE.EN grant deed was void
Balboa argues the trial court erred by treating the grant deeds Jones signed as void rather than voidable. The distinction is important because, as Balboa correctly states, "the rights of a bona fide purchaser or bona fide encumbrancer survive and remain intact even if those rights were acquired as a result of a 'voidable' transaction." "Whether defendant's status as a bona fide [encumbrancer] defeats plaintiffs' claim under the deed . . . depends on whether the . . . reconveyance of plaintiffs' deed . . . was void or voidable. If the reconveyance was void, it would have no effect even against a subsequent bona fide purchaser." (Schiavon v. Arnaudo Bros. (2000) 84 Cal.App.4th 374, 378.)
We have reviewed the statement of decision with care and, though the discussion is limited, it appears the trial court did conclude the grant deeds were void rather than voidable. The court addressed the question only in ruling on Calvary's cancellation claim, where it noted that a written instrument such as a deed may be "ordered to be delivered up or canceled" in favor of "a person against whom it is void or voidable." (Italics added.) The court concluded that Calvary had "proven the instruments and deeds are void due to Jones's lack of legal authority to transfer title and fraud" and is "entitled to judgment rescinding and cancelling the . . . deeds." (Italics added.) Later in the statement of decision, the court concluded that "due to the invalidity of the deed between Jones and CO.TE.EN that the deed of trust of Balboa is unenforceable."
The trial court was correct that the proof Jones acted without authority and transferred the property in reliance on Charles's and Moore's fraudulent misrepresentations entitled Calvary to cancellation and rescission as against those defendants and CO.TE.EN. As the court noted, cancellation and rescission are available for voidable instruments. The court was mistaken, however, in determining the deeds were void.
Our Supreme Court long ago held deeds with defects due to lack of corporate authority are voidable, not void. (Robertson v. Hartman (1936) 6 Cal.2d 408, 412.) In Robertson, the trial court determined a defendant's claim of title was invalid because "the execution of the notes and trust deed . . . were unauthorized and void because the meeting [of the board of directors]" where the execution occurred "was in fact no meeting of the board of directors and was illegally held." (Id. at p. 411.) The Supreme Court disagreed, holding the execution of the deeds was "an act which was not void, but at the most voidable at the behest of the corporation or its stockholders." (Id. at p. 412.) Though case authority along these lines is limited, we are required to follow decisions of the California Supreme Court, and, in any event, this pronouncement is consistent with the general proposition that "[i]f a trustee executes an unauthorized reconveyance and the trustor subsequently conveys the property, a grantee who does not have notice of the trustee's lack of authority receives title free and clear of the lien." (First Fidelity Thrift &Loan Assn. v. Alliance Bank (1998) 60 Cal.App.4th 1433, 1441 (First Fidelity); see also Firato v. Tuttle (1957) 48 Cal.2d 136, 139.)
That Charles, Moore, and CO.TE.EN procured the grant deeds by promissory fraud also makes them voidable rather than void. California courts have consistently concluded, "If a grantor is aware that the instrument he is executing is a deed and that it will convey his title, but is induced to sign and deliver by fraudulent misrepresentations or undue influence, the deed is voidable and can be relied upon and enforced by a bona fide purchaser." (Fallon v. Triangle Management Services, Inc. (1985) 169 Cal.App.3d 1103, 1106.) There is no suggestion in the evidence that Jones was not aware he was giving away title to the church property. He signed the grant deeds and the uninsured deed affidavit, which expressly acknowledged the transfer by gift. Nor is there any suggestion that he was himself involved in the fraud. Instead, the trial court found Charles and Moore induced him to sign away the church's property rights in return for the false promise of refinancing the loan and returning ownership to the church. The trial court erred by determining the grant deeds were void.
3. Balboa's bona fide encumbrancer defense
The trial court did not address Balboa's bona fide encumbrancer defense despite Balboa raising the issue in its request for a statement of decision. When requested, a trial court must issue a statement of decision "explaining the factual and legal basis for its decision as to each of the principal controverted issues at trial upon the request of any party appearing at the trial." (Code Civ. Proc., § 632.) "Failure to determine a material issue in a statement of decision can, in some circumstances, be reversible error if there is evidence that would support a finding in the opposing party's favor." (Triple A Management Co. v. Frisone (1999) 69 Cal.App.4th 520, 536 (Triple A Mgmt.).)
Here, it appears the trial court did not address the bona fide encumbrancer defense because it concluded the grant deeds signed by Jones were void and the rule expanding protections for bona fide encumbrancers who relied on quiet title judgments did not apply. We understand the trial court to have implicitly determined as a matter of law that Balboa was not entitled to protection as a bona fide encumbrancer. Thus, we need not reverse based solely on the trial court's omitting the issue in its statement of decision. Nevertheless, because the grant deeds were merely voidable, rather than void, Balboa was not foreclosed as a matter of law from a successful bona fide encumbrancer defense. We must therefore decide whether to reverse and remand for the trial court to consider the applicability of that defense, or to decide the issue based on the record before us.
A bona fide or good faith encumbrancer is one who acts without knowledge or notice of competing liens on the property. (Brock v. First South Savings Assn. (1992) 8 Cal.App.4th 661, 667.) Either actual or constructive notice of title defects can defeat bona fide encumbrancer status. (612 South LLC v. Laconic Limited Partnership (2010) 184 Cal.App.4th 1270, 1278.) The issue of whether a party is a bona fide encumbrancer is generally a question of fact. (Triple A Mgmt., supra, 69 Cal.App.4th at p. 536.)
The trial court made some findings related to Balboa's knowledge about the problems with the CO.TE.EN grant deeds in the context of resolving Calvary's slander of title claim. The court found neither Cohen nor Balboa had actual knowledge of the facts which ultimately led the trial court to determine the grant deeds were obtained without authority and through fraudulent inducement. We see no purpose in remanding on that issue, as those findings are well settled in the trial evidence. There is no factual dispute about whether Balboa, its principal, or even First American and Hollywood Title were aware of the fraudulent scheme Charles and Moore carried out or even aware that Jones signed the grant deeds without authority to do so. We therefore affirm the trial court's finding that Balboa lacked actual knowledge of the problems with the grant deeds.
The question whether Balboa had constructive knowledge of those problems is, however, a more difficult one. In addressing Balboa's knowledge and its responsibility to investigate the quality of the grant deeds, the trial court was evaluating whether Calvary had established its slander of title claim. Thus, the court was addressing the question whether the evidence "support[s] that [First American] or Balboa knew factual statements were false or acted with reckless disregard for truth or falsity." It was in that setting that the court concluded "Plaintiff has not established by a preponderance of the evidence that Balboa by instructing [First American] to record the deeds acted with malice." It was in the same legal context that the court determined "[n]either Balboa nor [First American] bear any obligation to investigate the problems with title" and noted '[t]here is no case law or statute cited by Plaintiff to show that either Balboa or [First American] bore such a responsibility."
Deciding whether Balboa slandered Calvary's title implicates different legal standards than deciding whether Balboa should be charged with constructive knowledge of the defects in title as subsequent encumbrancer. First, Calvary had the burden of establishing its slander of title claim, whereas Balboa has the burden for establishing it was a bona fide encumbrancer. (First Fidelity, supra, 60 Cal.App.4th at p. 1442 ["The general rule places the burden of proof upon a person claiming bona fide purchaser status to present evidence that he or she acquired interest in the property without notice of the prior interest"].) Second, Calvary needed to prove Balboa acted with "reckless disregard for the truth" in ignoring the warning signs identified in the preliminary title report, the affidavit of uninsured deed, and the corporate statement of information. By contrast, to establish it was a bona fide encumbrancer, Balboa needed to establish it did not "ignore reasonable warning signs that appear in the recorded documents" or have "notice of information that reasonably brings into question the state of title reflected in the recorded chain of title." (Triple A Mgmt., supra, 69 Cal.App.4th at p. 531.)
Thus, in its findings on Balboa's response to the warning signs about CO.TE.EN's title, the trial court concluded Calvary had not established that Balboa acted with reckless disregard for the truth of the problems with title. It did not find whether Balboa showed it had conducted a reasonable inquiry in view of the warning signs. The court's findings are therefore not conclusive of whether Balboa was a bona fide encumbrancer for value.[
Balboa's request for a statement of decision on the slander of title claim illuminates this point. Balboa asked the court to decide (i) "[w]hether the Balboa DOT was recorded with malicious intent of Balboa, or as a result reckless disregard by Balboa of the truth or falsity of whether CO.TE.EN was the owner of the Subject Property" and (ii) "[w]hether 'Mere negligence, without more, is not a basis for the tort' [of slander of title], and 'Proof of malice is required to prevail on a slander of title claim.' "
The bottom line is that something less than recklessness, and more akin to negligence, would justify denying Balboa the benefit of a bona fide encumbrancer, and the trial court did not make that determination in its statement of decision. Since Balboa's "status as good faith encumbrancers for value is a key issue in this case-dispositive, if it is resolved in the [lender's] favor-we tread very cautiously in this area." (Triple A Mgmt., supra, 69 Cal.App.4th at p. 536.) Moreover, the determination of whether a party is a bona fide encumbrancer is generally a question of fact. (Ibid.; Asisten v. Underwood (1960) 183 Cal.App.2d 304, 311.) The lack of developed factual findings interferes with our ability to decide the issue on appeal. If the trial court had addressed the issue, we would review its determination for support by substantial evidence. (Melendrez v. D & I Investment, Inc. (2005) 127 Cal.App.4th 1238, 1254.) As the court observed the witnesses, the trial court is best situated to make the findings in the first instance. We conclude the better course, therefore, is to remand for the trial court to do so.
Balboa argues we should hold that it acted reasonably as a matter of law because it was entitled to rely on the decisions of the title insurance company and the escrow company. It argues their employees investigated the transfer of title from Calvary to CO.TE.EN and determined it was legitimate for insuring Balboa's loan. We do not agree the evidence cited establishes Balboa and its agents acted reasonably as a matter of law. Arguably, the red flags identified in the initial title search-indicators which it turns out warned of a fraudulent and unauthorized transfer-could support a different conclusion.
The initial investigation identified Calvary as the vested title holder but noted the May 23, 2018 transfer of title from Calvary to "CO.TE.EN Corporation, dba Three Desert Streams." The title examiner marked that transaction as needing verification because it was not insured so had not gone through the underwriting process. In October, the escrow company contacted the would-be borrowers (CO.TE.EN and Charles) and obtained an uninsured deed affidavit signed by Jones and a statement of information showing Jones was an officer of Calvary. The escrow company forwarded those documents to the title insurer on October 23, 2018, and the title insurance officer testified that he relied on them to change the vested title holder from Calvary to CO.TE.EN and remove the exceptions to coverage related to the grant deeds.
However, the documents the title officer relied on themselves contained several red flags. First, the uninsured deed affidavit was by that point quite old. Jones signed it on May 29, 2018, only a week after he signed the grant deeds. Though there is nothing to suggest the title officer knew this, Jones had died before the escrow company sent the affidavit to First American. Second, Jones signed the affidavit on his own behalf as grantor, not on behalf of Calvary Church, which is not mentioned in the document. Third, the transaction purported to be a gift of church property valued at $1.6 million dollars, which expressly excluded any option for the church to repurchase the property.[ It thus was not a transaction for value. Fourth, the purpose of the title insurer's inquiry was to establish that the true owner of the property was CO.TE.EN Corporation dba Three Desert Streams-as listed on the grant deeds-but the borrowers seeking to encumber the property were CO.TE.EN and Charles. The affidavit did not resolve that issue because it does not identify the grantee. Thus, the title insurer accepted a months-old affidavit signed by Jones that did not mention Calvary, Three Desert Streams, or CO.TE.EN as verification that Calvary had transferred title to CO.TE.EN Corporation dba Three Desert Streams.
The affidavit contradicts the partnership agreement by representing that the grantor retained "no ownership interest in the property." The title officer would have known this only by asking more questions about the status of the partnership and the partnership agreement.
Nor did the information the title officer relied on to verify CO.TE.EN's corporate status resolve the inconsistency between the owner named on the grant deeds and the borrower seeking to encumber the property with a loan. The title officer requested and relied on a certificate of good standing for "CO.TE.EN Corp.," a certified copy of a resolution of that entity's board of directors authorizing the loan, and other evidence relating to CO.TE.EN. None of those items mentioned either Three Desert Streams, Inc., the corporation that was never formed, or the partnership confusingly and misleadingly named "CO.TE.EN Corp. dba Three Desert Streams." Should Balboa have agreed to issue a loan to "CO.TE.EN Corporation," with Charles as a co-borrower, when the grant deeds on their face list "CO.TE.EN Corporation dba Three Desert Streams" as the title holder? It appears this difference was designed to realize the fraudulent scheme and was another warning sign Balboa missed.
"Whether a party has notice of 'circumstances sufficient to put a prudent [person] upon inquiry as to a particular fact,' and whether 'by prosecuting such inquiry, he might have learned such fact' (Civ. Code, sec.19), are themselves questions of fact to be determined by the jury or the trial court." (Northwestern P.C. Co. v. Atlantic P.C. Co. (1917) 174 Cal. 308, 312.) The apparent discrepancy between the title and the loan application was a substantial warning sign and could support a finding that Balboa and its agents should have investigated the state of the title more thoroughly.
The Court of Appeal has explained that "the subsequent encumbrancer is not entitled to view the record either through rose-colored glasses or with blinders on. That is, he is not entitled to interpret ambiguities in his own favor nor is he entitled to ignore reasonable warning signs that appear in the recorded documents." (Triple A Mgmt., supra, 69 Cal.App.4th at pp. 530-531.) Nor is a lender "entitled to ignore information that comes to him from outside the recorded chain of title, to the extent such information puts him on notice of information that reasonably brings into question the state of title reflected in the recorded chain of title." (Id. at p. 531.) And a lender may be held to have notice of information uncovered by an escrow agent acting within the scope of its employment as the lender's agent. (Id. at p. 535.) Here, the lender knew the borrowers were CO.TE.EN Corporation and Charles, and the escrow agent had information that the title holder may be a different entity, CO.TE.EN Corporation d/b/a Three Desert Streams LLC. In addition, the escrow agent obtained the questionable uninsured deed affidavit which raised further questions about the ownership of the property. It is a factual question whether the escrow agent's notice of any information is imputable to Balboa.[ (In re Marriage of Cloney (2001) 91 Cal.App.4th 429, 442-443.)
Information within the exclusive possession of First American and not shared with the escrow agent or Balboa would not be imputed to Balboa because "a title insurance company is not the agent of its insured." (In re Marriage of Cloney, supra, 91 Cal.App.4th at pp. 438-439.)
We therefore conclude the record contains substantial, but not conclusive, evidence that Balboa did not act reasonably in investigating CO.TE.EN's title. We will therefore remand to the trial court to decide that question, considering the entire record and applying its own determinations of witness credibility. (See Gates Rubber Co. v. Ulman (1989) 214 Cal.App.3d 356, 366 ["The circumstances of each case dictate whether an inquiry should be made, a determination which ordinarily involves a question of fact"].) We leave it in the trial court's discretion whether to hold additional proceedings before making these determinations.
At oral argument, Balboa asked us to leave in place the portion of the judgment imposing an equitable subrogation lien because Calvary did not file a cross-appeal. "The well recognized rule is that there may be an appeal from a part of a judgment only if that part is severable." (American Enterprise, Inc. v. Van Winkle (1952) 39 Cal.2d 210, 216 (American Enterprise).) When an appeal is taken from a portion of a judgment which cannot be separated from the remainder of it, the appeal brings before the reviewing court all of the nonseverable portions. (Id. at p. 217.)
"The test of whether a portion of a judgment appealed from is so interwoven with its other provisions as to preclude an independent examination of the part challenged by the appellant is whether the matters or issues embraced therein are the same as, or interdependent upon, the matters or issues which have not been attacked." (American Enterprise, supra, 39 Cal. 2d at p. 217.) Here, the issues of the bona fide encumbrancer defense and the equitable subrogation lien are interwoven. The trial court imposed an equitable subrogation lien because "the Balboa deed of trust is found to be invalid and unenforceable." If Balboa prevails on its bona fide encumbrancer defense on remand, that basis for imposing the lien will no longer obtain. We therefore reverse the portion of the judgment awarding an equitable subrogation lien against Calvary, subject to the trial court revisiting the issue after deciding whether Balboa is a bona fide encumbrancer.
C. Balboa's Defenses of Laches, Estoppel, Unclean Hands, and Waiver
Balboa argues the trial court erred by refusing to apply the equitable defenses of laches, waiver, estoppel, and unclean hands, which it argues are available even if the grant deeds were void because it entered the loan without actual or constructive knowledge of the problems with title.
We agree equitable defenses were available to Balboa. (Merry v. Garibaldi (1941) 48 Cal.App.2d 397, 402; Commonwealth Ins. Systems, Inc. v. Kersten (1974) 40 Cal.App.3d 1014, 1024-1025.) The trial court did not disagree with the legal point, but instead found Balboa did not establish they applied. Whether laches, waiver, or estoppel apply is ordinarily a factual question dedicated to the discretion of the trier of fact whose "determination is binding on appeal unless the contrary conclusion is the only one to be reasonably drawn from the facts." (Merry v. Garibaldi, at p. 401 [laches]; Commonwealth Ins. Systems, Inc., at p. 1026 [estoppel]; Rubin v. Los Angeles Fed. Sav. & Loan Assn. (1984) 159 Cal.App.3d 292, 298 [waiver].)
The defense of laches applies when a party fails to assert its rights promptly, resulting in delay which is prejudicial to the defendant. (Stafford v. Ballinger (1962) 199 Cal.App.2d 289, 296; Cedars-Sinai Medical Center v. Shewry (2006) 137 Cal.App.4th 964, 985.) Waiver is the voluntary relinquishment of a known right. (Rubin v. Los Angeles Federal Sav. & Loan Assn., supra, 159 Cal.App.3d at p. 298.) The trial court found Calvary had not delayed in bringing its lawsuit against Charles, Moore, and CO.TE.EN after finding out about the transfer of church property in September, investigating the situation in September and October, and filing their lawsuit on December 17, 2018.
We find the trial court's determination reasonable and supported by substantial evidence. Calvary took immediate action to protect its rights and acted promptly in its investigation and in asserting its rights. The process was no doubt slowed to an extent because Jones suffered a series of strokes, was incapacitated, and then died shortly after making church officials aware of the transaction. That delay was not enough to show Calvary was sleeping on its rights. Church officials promptly investigated, met with Charles and Moore, and told them Jones lacked authority to transfer the property, that church property could not be transferred to a private for-profit entity, and warned them to abandon any plan to take out a loan on the property. Unfortunately for both Calvary and Balboa, Charles and Moore continued the fraud, passing off the grant deeds signed by Jones as legitimate and completing the loan.
Balboa argues "the trial court ignored that Calvary is charged with notice the Grant Deeds empowered CO.TE.EN to refinance the CCB Loan," and that "notice must be imputed to Calvary as of the date of execution of the [partnership agreement] and Grant Deeds," which would mean Calvary delayed its action for seven months. We disagree with this characterization, which Balboa asserts without citation to any authority, and which ignores the trial court's findings that the partnership agreement was illusory, Jones never had authority to sign the deeds, and the entire transaction was accomplished through fraud. The trial court's determination that the defenses of laches and waiver do not apply was therefore reasonable and supported by substantial evidence.
Balboa's argument that Calvary should be estopped from asserting the invalidity of the deeds is a variation on its laches and waiver arguments. Balboa argues the trial court should have held Calvary is estopped because it had "no legal or evidentiary grounds to dispute any of the[] facts" related to the transfer of title and their delay in filing a lis pendens. (City of Oakland v. Oakland Police &Fire Retirement System (2014) 224 Cal.App.4th 210, 239-240.) However, the evidence supported finding Calvary did not learn of the transfer of title until September 2018, when Jones told his colleagues he believed he had messed up, a statement that also supports the trial court's finding that Calvary acted promptly to assert their rights, including by telling Charles and Moore not to obtain a loan. That those defendants completed the loan with Balboa only a few weeks before Calvary filed its lawsuit does not establish that Calvary should be estopped from asserting the title transfer was fraudulent and invalid.
Balboa argues Calvary had unclean hands because "it is inequitable for Calvary to attempt to benefit from . . . put[ting] Pastor Jones in the position to unilaterally transfer the Subject Property," and then "seek to renege on a transaction it enabled Pastor Jones to carry out." The equitable defense of unclean hands applies when a party has engaged in inequitable conduct in the transaction in issue. (Aguayo v. Amaro (2013) 213 Cal.App.4th 1102, 1110.) We review the trial court's decision to apply the unclean hands defense for abuse of discretion and review the trial court's factual findings under the substantial evidence test. (Aguayo, at p. 1109.) It is Balboa's burden to show the findings are unsupported. (Ibid.)
The trial court found Calvary did not have unclean hands because the church's bylaws, articles, and church conventions all established Jones lacked authority to enter the transaction, and the evidence supported finding Jones was induced by fraud to sign the partnership agreement and the deeds despite lacking authority to do so. The findings are well supported, and we find no abuse of discretion in the trial court's refusal to apply the defense under these facts.
III
DISPOSITION
We reverse the judgment as it affects Balboa and remand for the trial court to issue a statement of decision as to whether Balboa is entitled to a bona fide encumbrancer defense and whether to impose to an equitable subrogation lien in Balboa's favor. In all other respects, we affirm the judgment. The parties shall bear their own costs on appeal.
We concur: MILLER, Acting P. J. MENETREZ, J.