Ruth v. Lytton Sav. & Loan Ass'n of Northern Cal.

• Decision Date: 28 October 1968
• Citation: 72 Cal.Rptr. 521,266 Cal.App.2d 831
• Court: California Court of Appeals Court of Appeals
• Parties: Howard RUTH, Jr., and Martha Ann Ruth, Plaintiffs and Appellants, v. LYTTON SAVINGS & LOAN ASSOCIATION OF NORTHERN CALIFORNIA, a corporation, and Transamerica Title Insurance Company, Jeremy M. Ets-Hokin and Judith Ets-Hokin, doing business under the fictitious name of Riviera Properties, Defendants and Respondents. Civ. 24737.

Page 521

72 Cal.Rptr. 521

266 Cal.App.2d 831

Howard RUTH, Jr., and Martha Ann Ruth, Plaintiffs and Appellants, v. LYTTON SAVINGS & LOAN ASSOCIATION OF NORTHERN CALIFORNIA, a corporation, and Transamerica Title Insurance Company, Jeremy M. Ets-Hokin and Judith Ets-Hokin, doing business under the fictitious name of Riviera Properties, Defendants and Respondents.

Civ. 24737.

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

Oct. 28, 1968.

Rehearing Denied Nov. 21, 1968.

Hearing Denied Dec. 24, 1968.

Roger L. Mosher, Theodore C. Carlstrom, McCloskey, Wilson, Mosher & Martin, William I. Cohen, Palo Alto, for appellants.

Edmund L. Regalia, Miller, Starr & Regalia, Oakland, for respondents Lytton Savings and Loan Assn. of Northern California and Lytton Financial Corp.

John J. Hopkins, Oakland, Carr, McClellan, Ingersoll, Thompson & Horn, by Luther M. Carr, Quentin L. Cook, Burlingame, for respondents Transamerica and Ets-Hokin.

ELKINGTON, Associate Justice.

Plaintiffs Howard and Martha Ruth lost their interest in certain real property upon foreclosure of trust deeds held by defendant Lytton Savings and Loan Association (herein called 'Lytton'). Seeking declaratory and other relief from Lytton, Transamerica Title Insurance Company, successor to City Title Insurance Company (herein called 'City Title'), Seabreeze Construction Company, Inc. (herein called 'Seabreeze'), Lytton Financial Corporation (trustee of Lytton's trust deed) and Jeremy Ets-Hokin, doing business as Riviera Properties (herein called 'Ets-Hokin'), they commenced this action. As to City Title they sought damages for breach of trust, breach of contract and negligence 'to the extent that any remedy against the other defendants is inadequate to fully compensate plaintiffs for damages sustained,' and for attorney fees. As to the remaining defendants plaintiffs sought relief under various 'alternative' theories of action. The trial was to the court. From a judgment in favor of all defendants except Seabreeze, ¹ plaintiffs appeal.

The following facts were uncontroverted at the trial.

Plaintiffs were the equitable owners of two unimproved lots of land held in the name of City Title, subject to plaintiffs' order. They entered into an agreement with defendant Seabreeze to sell the land for $158,000. The terms were $40,000 down with the balance of $118,000 to be secured by first trust deeds for $59,000 on each of the two lots. Plaintiffs agreed to subordinate this trust deed security to trust deeds securing 'construction and/or take out loan(s)' ² at an interest rate not to exceed 7.2 percent per annum and in amounts limited to 66 2/3 percent of the lender's appraisal of the total value of the land and improvements to be constructed.

Thereafter Seabreeze negotiated with Lytton for the needed loans. Lytton agreed to make two loans of $310,000 each at an interest rate of 6 3/4 percent Plus 2 percent additional interest in case of default. Each of the loans would be for 68.8 percent of Lytton's appraisal of the land and projected improvements. From the loan funds Lytton was to make a 'land advance' of $46,400.

Seabreeze thereupon delivered a set of building plans to plaintiffs. By letter it requested and obtained their approval of the plans and of loans in the amount of $620,000 for 22 years at 6 3/4 percent interest for 'financing for the construction of the projects.' Soon thereafter plaintiffs deposited in escrow with City Title copies of their agreement and the letter of Seabreeze describing the contemplated loans as 'financing for the construction of the projects.' These papers constituted, and were accepted by City Title as, plaintiffs' escrow instructions. They also provided for the issuance by City Title, at the close of the escrow, of a title insurance policy in favor of Seabreeze and plaintiffs guaranteeing that title to the property stood in Seabreeze subject to plaintiffs' above mentioned trust deeds. Plaintiffs agreed to pay the title insurance premium.

Thereafter Seabreeze submitted its buyer's escrow instructions to City Title, which thereupon prepared the trust deeds to be taken by plaintiffs as security. These trust deeds contained the subordination provisions of plaintiffs' contract with Seabreeze. Lytton then submitted its escrow instructions, which expressly prohibited subordination of any existing lien and also prohibited secondary financing. Faced with this conflict City Title contracted Lytton, asking if it would permit 'secondary financing consisting of two loans, each in the amount of $59,000, and each payable $400 monthly, 7 percent interest.' Lytton amended its instructions to allow such secondary financing.

City Title thereupon telephoned plaintiff, Howard Ruth, Jr. He was told that 'everything was all in and signed, and the only thing they needed me to do was come down and sign the necessary document for their authorization to disburse the funds, and for me to go over the figures and to bring my checkbook, and the deed and notes and everything were all drawn and signed by all the parties.'

Mr. Ruth went to the office of City Title and as requested signed the 'necessary document.' The paper was entitled 'Seller's Instructions.' It contained many recitals, some printed, some handwritten and some both. Several items were inserted by interlineation; others, both printed and handwritten, were crossed out in ink. At issue at the trial (and here) is a partly printed and partly handwritten line reading 'By Second Trust Deed (New) 59,000 & 59,000--118,000.' Ruth, as indicated, was told that the paper was a 'necessary document for their authorization to disburse the funds.' No other explanation of the document or any of its entries was asked for or given. ³

City Title thereupon caused the escrow to be closed, recording plaintiffs' trust deeds as second and inferior to those of Lytton. Lytton's trust deeds as recorded, and as agreed with Seabreeze, secured loans of $620,000, with interest at 6 3/4 percent plus 2 percent additional interest in case of default. The loans included the 'land advance' of $46,400. City Title was of course a paid escrow holder.

City Title then disbursed the loan funds deposited by Lytton. From these funds plaintiffs were paid, less certain deductions, Seabreeze's promised down payment of $40,000. Seabreeze was paid $6,400, the balance of the 'land advance.' 'Good faith' deposit checks of Seabreeze totaling $2,000 which had been deposited in the escrow were returned to Seabreeze uncashed. City Title thereupon issued to Seabreeze and plaintiffs the previously requested title insurance policy. However, the policy guaranteed title to be in Seabreeze, subject to Lytton's First trust deeds and plaintiffs' Second trust deeds. The premium, $501, was deducted from cash which would otherwise have been payable to plaintiffs under the escrow. The amount of the policy was $158,000.

Plaintiffs testified that it was not until some time later that they learned that their security consisted of second trust deeds and that Seabreeze's $40,000 down payment was made from the Lytton loans. They also testified to a lack of knowledge until after the close of the escrow that Lytton's interest charge was 2 percent additional in case of default, and that the ratio of the loans to Lytton's appraised value (68.8%) was in excess of that called for by their instructions to City Title. There was no evidence to the contrary.

Several months after completion of the escrow Seabreeze defaulted on its obligations to plaintiffs and Lytton. Plaintiffs commenced foreclosure proceedings in which a trustee sale was held, themselves purchasing the property. Thereafter Lytton conducted foreclosure proceedings on its superior trust deeds. In these proceedings the property was sold to Lytton for the claimed amount of its advances, $571,208. Two months later Lytton sold the property to defendants Ets-Hokin.

The trial court found that 'Lytton Savings was a bona fide encumbrancer for value of the subject property, without actual or constructive notice of plaintiffs' rights under the (agreement with Seabreeze) or deeds of trust of which plaintiffs were beneficiaries.' This finding, we conclude, was based on substantial evidence.

In its judgment the court, among other things, quieted title to the property in question in Lytton (and its transferee, Ets-Hokin).

Plaintiffs contend that since City Title did not comply with their instructions it was not authorized to pass title to Seabreeze. It follows as a matter of law, we are told, that Seabreeze took no title and was therefore unable to create a lien in Lytton's favor. Accordingly, it is urged, since Lytton's (and Ets-Hokin's) claimed title was derived from the ineffective trust deeds, the judgment quieting title was error.

Although the point was strongly urged by them at the trial, plaintiffs here overlook the fact that City Title held title to the lots in question As trustee for their benefit and subject to their order.

It is established law that a trustee, although it be in violation of the trust, may nevertheless transfer good title to a bona fide purchaser or encumbrancer in good faith for a valuable consideration. Civil Code section 2243 states: 'Every one to whom property is transferred in violation of a trust, holds the same as an involuntary trustee under such trust, Unless he purchased it in good faith, and for a valuable consideration.' (Emphasis added.) An encumbrancer comes within the rule relating to purchasers in good faith for value. (Schut v. Doyle, 168 Cal.App.2d 698, 701, 336 P.2d 567, 33 Cal.Jur.2d, § 317, p. 704.)

In Firato v. Tuttle, 48 Cal.2d 136, 139, 308 P.2d 333, 335, the court stated: 'The rule indicated by (Civil Code) section 2243, which would protect innocent purchasers for value who take without any notice that the conveyance by the trustee was unauthorized, is in accord with the rule protecting such purchasers who acquire their interests from one...