Huckell v. Matranga

• Court: California Court of Appeals
• Writing for the Court: COLOGNE; GERALD BROWN, P. J., and WORK
• Citation: Huckell v. Matranga, 160 Cal.Rptr. 177, 99 Cal.App.3d 471 (Cal. App. 1979)
• Decision Date: 21 November 1979
• Parties: John HUCKELL et al., Plaintiffs and Respondents, v. Mary Jane MATRANGA, etc., et al., Defendants, Cross-Complainants and Respondents, Bank of America, Defendant, Cross-Defendant and Appellant. Civ. 18484.

Page 177

160 Cal.Rptr. 177

99 Cal.App.3d 471

John HUCKELL et al., Plaintiffs and Respondents, v. Mary Jane MATRANGA, etc., et al., Defendants, Cross-Complainants and Respondents Bank of America, Defendant, Cross-Defendant and Appellant.

Civ. 18484.

Court of Appeal, Fourth District, Division 1, California.

Nov. 21, 1979.

Roark & Legler and Thomas Tomlinson, Chula Vista, for John and Evelyn Huckell, plaintiffs and respondents.

Stanley G. Lerner, Carmichael, for Mary Jane Matranga, etc., et al., defendants, cross-complainants and respondents.

Harris B. Taylor, Alfred T. Twigg and Kenneth H. Wechsler, Los Angeles, for Bank of America, defendant, cross-defendant and appellant.

COLOGNE, Associate Justice.

Bank of America National Trust and Savings Association (Bank) appeals a judgment against it which awarded attorney's fees to John and Evelyn Huckell in their quiet title action.

On February 10, 1969, Huckells bought a parcel of real property from Belle Scofield and opened an escrow at the Bank's branch in Chula Vista. To evidence the unpaid balance of the purchase price, Huckells signed a promissory note in the amount of $7,000 payable to Scofield and also executed a deed of trust designating the Bank as trustee and Scofield as beneficiary. The trust deed was duly recorded.

Scofield died leaving her interest in the note to certain heirs whose interests eventually devolved to Mary Jane Matranga, individually and as conservator of the person and estate of Nell P. Zick, and to Emmett W. Horton (sometimes referred to collectively as beneficiaries). In time the note was paid in full and Huckells sought reconveyance of the interest of the trustee. The original note could not be found.

Before it would execute a reconveyance, the Bank demanded a request for reconveyance executed by the beneficiaries, the original note, a copy of the trust deed and a $25 reconveyance fee. Since the note had been lost, the Bank offered to accept a "Lost Instrument Indemnity Bond" in lieu of the original note.

Huckells delivered to the Bank the request for reconveyance executed by the beneficiaries, a copy of the note and deed of trust and an indemnity agreement signed by the beneficiaries and their counsel. The Bank refused to accept a personal indemnity agreement, demanding instead a bond executed by a corporate surety company. Huckells brought this action to quiet title and sought attorney's fees. Summary judgment quieting title to the real property was granted on motion and the only issue which went to trial was the matter of damages. The trial court made a finding the Bank acted with "vexation and oppressive conduct" when it insisted on a corporate surety bond "without even making inquiry into the adequacy of the security presented." The court awarded the Huckells $1,400 attorney's fees plus a $300 penalty pursuant to Civil Code section 2941, and costs, and awarded the beneficiaries $1,400 as against the Bank by way of indemnity under the cross-complaint.

When the note with a deed of trust is satisfied, the beneficiaries are required to execute a request for reconveyance and deliver it to the trustor together with the note and deed of trust marked paid or satisfied (Civ.Code, § 2941). ¹ The purpose of this requirement is to provide the trustors the proof they need to be sure the debt has been fully paid and free them from the liability if the original note was transferred to a bona fide purchaser for value.

The note subject of this action carried the legend printed in bold letters at the top:

"DO NOT DESTROY THIS NOTE:

"When paid, This note, with Deed of Trust securing same, Must be surrendered to Trustee for cancellation and retention, before reconveyance will be made." (Italics added.)

At the top of the reverse side of the trust deed, there is the following language:

"To obtain a Full Reconveyance of this Deed of Trust Present to the trustee this request properly executed, the Deed of Trust, The original Note secured by said Deed of Trust and any other evidence of indebtedness secured thereby, together with reconveyance fee." (Italics added.)

Thus, it should be noted the parties knew or should have known that the original note would be required in order to secure a reconveyance. The trustee's reconveyance without obtaining the original note would certainly be deemed to be an act contrary to the terms of the deed of trust.

When a trustee improperly reconveys a deed of trust to the trustor before the secured obligation is satisfied, and the trustor subsequently conveys the property to a bona fide purchaser, the grantee receives his title free and clear of the lien (Firato v. Tuttle, 48 Cal.2d 136, 308 P.2d 333; 1 Cal.R.E.Rev., § 376, p. 465). In such cases, the beneficiaries' interests in the property are terminated and their recourse is limited to the collection of an unsecured debt from the trustor and/or damages against the Trustee for the loss of the security (Doyle v. Surety Title & Guar. Co., 261 Cal.App.2d 525, 528, 68 Cal.Rptr. 177). Knowing the note has been paid and is not in the hands of a bona fide purchaser for value is, therefore, essential to keep the trustee free of liability.

Standard practice established by the record in this case and noted by text writers generally is for the trustee to require the presentation of the original note (California Land and Security Development, C.E.B., § 13.2, p. 307; 1 Cal.R.E.Rev., Miller & Starr, § 3.76, p. 466; Ogden's Rev. Cal. Real Property Law, vol. II, § 17.61, p. 936). By the terms of the note and the deed of trust, and in the face of liability for improper transfer the trustee is justified in demanding the original note.

Where the original note is lost or destroyed, however, the parties are faced with a difficult problem.

The law is settled in California that where a negotiable promissory note is lost or destroyed, proof of its destruction is not enough to protect the maker. The person paying off the obligation has a right to the note and it is unjust to force the risk of the note's reappearance upon a party totally innocent of fault, and who has not bargained with a view to any mischance which may in the future result in his injury (Welton v. Adams & Co., 4 Cal. 37, 40-41). The negligence or misfortune of the holder ought not to give him the right of casting such a burden upon the maker (Ibid., at p. 41).

Requiring security as a condition of cancelling of record a lost mortgage or lien has been held proper in at least one other state (Hope v. Hicky (1948) 23 La. 966, 36 So.2d 5, 2 A.L.R. 1062; cf. Lecoste v. Hicky, 203 La. 794, 14 So.2d 639). We hold by way of analogy it is proper for the trustee to demand and obtain adequate indemnity before being required to execute a reconveyance of its interests where the original note is not delivered marked paid.

In the case at bar, the Bank, as trustee, insisted on receiving an indemnity bond by a corporate surety rather than the proffered private indemnity agreement.

In the case of Price v. Dunlap, 5 Cal. 483, 484, the rule of Welton v. Adams & Co., supra, 4 Cal. 37, was affirmed for the protection and safety of the commercial community, holding the party to whom the note is made must accept tendered indemnity or state why it is insufficient so that the maker could comply with his demand. This principle has not been overruled in more recent authority and we believe it equally applicable to the trustee who finds himself in the same position as the maker.

In the case at bar, the Bank, as trustee, advised the parties exactly what was required so they could comply, and we are called upon to determine if its demand for a corporate surety bond was reasonable.

An indemnity agreement by individuals differs markedly from an indemnity bond by a corporate surety. First and foremost is the fact that the life of a signator to an indemnity agreement is uncertain and on his death claims against the estate must be asserted or they may be lost. The party seeking to assert the protection afforded by the agreement would be compelled to maintain a constant vigil on the life of the indemnitor, know his residence and, in the event of his death, obtain the information about any probate proceedings instituted. ² The life of a corporate surety, on the other hand, continues indefinitely and successors in interest are easily traced.

Second, the financial ability of the individual indemnitor is not always known or established and, even if it were, could change with the fortunes of time. The real value of the agreement may be lost. More importantly, there is no control over the indemnitor to assure his investments will be prudently managed. The corporate surety, on the other hand, must maintain certain paid-in capital and surplus (see Ins.Code, § 12050 et seq.), and is closely regulated in policy matters by the Insurance Commissioner of the State of California (Ins.Code, § 1170 et seq.). The law of California gives the person holding an indemnity bond executed by a corporate surety protection with minimum supervision or followup expense. Thus the trustee need not assume this burden simply because of the fault of another who lost the document. In absence of its fault, the Bank should not be saddled with such an obligation. We find it reasonable for a trustee to insist on a corporate surety indemnity bond for his own protection prior to the execution of a trust deed reconveyance where the original note has not been delivered up for proof of discharge. ³ In view of the obvious differences in the indemnity agreement as opposed to a corporate surety bond, it was unnecessary for the Bank to detail any "reasons" why it wanted the corporate form of surety protection or make inquiry of the sufficiency of the proffered indemnity agreement of individuals. The Bank did not violate the terms of the trust deed nor did it violate the provisions of Civil Code section 2941, and judgment must be reversed as it imposes liability on the Bank...