Wednesday, May 20, 2015

Title Insurer's Failure To Read, Properly Interpret Probate Order Leads To Security For Lender's $416K Mortgage Loan Being Limited To Life Estate In Home; Both Left Holding The Bag When Borrower Died As Remaindermen Come Forward, Claiming Free & Clear Title To Collateral

The following facts have been adapted from a recent California Appeals Court ruling:
  1. In 1965, Lawrence Peterson (Lawrence) and his first wife acquired title to a home in Culver City, California.
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  2. In 1985 (some twenty years later), Lawrence acquired sole title to the home by a quitclaim deed.
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  3. In 1986, Lawrence, who was then married to his second wife, Jacqueline, died. At the time of his death, Lawrence owned the Property as his sole and separate property.
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  4. Shortly thereafter in 1986, in a probate proceeding, the trial court admitted Lawrence's last will and testament.
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  5. Later on during the probate proceeding, the trial court entered an order allowing, among other things, final distribution of the estate (Probate Order) that provided that, subject to certain conditions, Lawrence's home be distributed to Jacqueline.
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  6. The relevant conditions of the property distribution of the home were as follows:
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    .....(a) Jacqueline may reside in the home rent free for her lifetime; provided, however, that if she shall remarry, the home shall thereupon be sold, and the proceeds therefrom shall be distributed one-third to Jacqueline and one-third each to Lawrence's two sons, Mark and Paul;
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    .....(b) Jacqueline may at her option sell the home at any time, whereupon the proceeds therefrom shall be distributed in the same manner set forth above (one-third each);
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    .....(c) Upon Jacqueline's death prior to a sale of the home, the home shall pass in equal share to Lawrence's two sons, Mark and Paul (Editor's Note: I wonder if Lawrence's children were from his first wife; the court is silent as to this point and, apparently, was not relevant in the disposition of this matter. Lawrence sure took great pains to make sure his two sons would not be squeezed out of their share of the home  (ie. their inheritance) he acquired with his first wife in the event he predeceased Jacqueline, his second wife, and she were to remarry),
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  7. On April 8, 1987, the Probate Order was recorded in the Official Records, Recorder's Office of Los Angeles County, California (ie. recording the probate order has the effect of making such order a part of the home's chain of title, and constitutes notice to the world of the status of the title to the premises, no different than a deed).
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  8. In January, 2003, and notwithstanding the restrictions in the Probate Order, Jacqueline purported to transfer title to the home to "Jacqueline C. Peterson, a Widow." Contemporaneously therewith, Jacqueline borrowed $165,000 from California National Bank (apparently, the title insurer failed to read and/or understand the terms of Probate Order, which was recorded and, consequently, made a part of the chain of title).
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  9. In March, 2008, Jacqueline refinanced the 2003 mortgage and obtained a loan from defendant and appellant Wells Fargo of $416,900 (again, the title insurer apparently failed to read and/or understand the terms of the Probate Order, which was recorded and, consequently, made a part of the chain of title. I suppose it should be noted that during the years 2003 through 2008 (the period leading up to the great real estate crash of less than a decade ago), there was big frenzy to make mortgage loans which were then packaged up and securitized by Wall Street financial institutions. It may be that, at the point where this $416,900 loan was originated, no one involved therewith wanted to be bothered with reading probate orders and the like when underwriting real estate titles and title insurance. They just wanted to pump out the mortgages and were readily willing to ignore the significance of the Probate Order in this case, hoping no one will catch the issue and, if caught, letting someone else down the road deal with the consequences of its significance, which is what ended up happening here).
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  10. On March 25, 2010 (about two years later) Jacqueline died. The home loan from Wells Fargo went into default shortly thereafter and, consequently, a notice of default and election to sell the home was recorded, thereby commencing the foreclosure process..
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  11. In response to the notice of default and election to sell the home, Lawrence's two sons brought an action for cancellation of Jacqueline's 2003 deed to herself, and for cancellation of the subsequent written instruments relating to the subsequent mortgages and notice of default. They also requested a preliminary and permanent injunction, and brought an action to quiet title against the relevant parties.
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  12. Despite the fact that the term "life estate" was not used in the Probate Order to describe Jacqueline's interest in the home, the trial court found that the terms of the order were sufficient to establish Jacqueline's interest was not a fee interest, but was limited to a life estate in the home, with Lawrence's two sons holding a remainder interest therein.
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  13. Consequently, the trial court voided Jacqueline's 2003 deed and all the subsequent instruments (ie. the $416,000 Wells Fargo mortgage, the notice of default, etc.), and quieted title to the home in the names of the two sons.
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  14. For the reasons set forth in the appeals court ruling, the appellate court affirmed the trial court ruling.
For the court ruling, see Peterson v. Wells Fargo, No. B250925 (Cal. App. 2d Dist. Div. 5, May 8, 2015) (certified for publication).

Editor's Note: Representing Wells Fargo in the case was Fidelity National Law Group (the in-house litigation department of Fidelity National Title Group, one of the largest title insurance providers in the world), undoubtedly in response to a title claim filed by Wells Fargo with the title insurer.

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