Unwinding An Abusive Or Fraudulent Real Estate Transaction? Determining If The Deed Is Void, Or Merely Voidable
In attempting to unwind/undo/void an abusive or fraudulent real estate transaction (ie. foreclosure rescue sale leasebacks, fraudulent inducement in the execution of a deed, forgeries, other real estate swindles), the case will turn on whether the deed involved in a contested conveyance is void, or whether it is merely voidable. Further, in the case of a deed that is merely voidable, whether that deed can be cancelled will turn on whether the current grantee qualifies as a bona fide purchaser.(1)
In applying California law, a 2000 court decision by a California appeals court, Schiavon v. Arnaudo Bros., 84 Cal. App. 4th 374; Cal.Rptr.2d 801 (Cal. App 6th Dist. 2000), addressed this issue. The following excerpt gives a cogent analysis of the applicable California law when determining whether a deed is void, or merely voidable, and how the equitable doctrine of bona fide purchaser interacts therewith. (Case law links to FindLaw.com - may require free registration; bold text is my own added emphasis, which does not appear in the opinion itself; text broken up for ease of reading; footnote added - not in the original):
- A deed is void if the grantor's signature is forged or if the grantor is unaware of the nature of what he or she is signing. (Erickson v. Bohne, supra, "130 Cal.App.2d at pp. 555-556.)
- A voidable deed, on the other hand, is one where the grantor is aware of what he or she is executing, but has been induced to do so through fraudulent misrepresentations. (Fallon v. Triangle Management Services, Inc. (1985) 169 Cal.App.3d 1103, 1106 [215 Cal.Rptr. 748].) The same rules apply to the reconveyance of the property interest under a deed of trust as to the conveyance of property by grant deed. (Wutzke v. Bill Reid Painting Service, Inc. (1984) 151 Cal.App.3d 36, 43 [198 Cal.Rptr. 418] (Wutzke).)
- Several cases will illustrate these principles.
- In Erickson v. Bohne, supra, 130 Cal.App.2d 553, the plaintiff was mentally and physically incapable of understanding and transacting business and was taken advantage of by her daughter and her daughter's friend, who fraudulently procured the execution and delivery of a deed by the plaintiff to the daughter.
- The daughter then conveyed the property to her friend, who conveyed it for valuable consideration to a third party, who did not know of the fraud. The plaintiff did not know that she was signing a deed, had no intention to convey property, and received no consideration.
- The court found that the plaintiff stated a cause of action against the third party purchaser for cancellation of all three deeds on the ground that her original grant deed was void.
"[P]laintiff'sdeed was void because it is alleged ... that she was wholly without understanding ... Under such circumstances there was no effective execution or delivery of the deed, ... it was void ab initio and an action to avoid it could be brought at any time .... 'A void deed passes no title and cannot be made the foundation of a good title even under the equitable doctrine of bona fide purchase.' " (Id. at p. 557.)
- In Wutzke, supra, 151 Cal.App.3d 36, the plaintiff sold property to the Millers and took back a promissory note and a deed of trust. Unbeknownst to the plaintiff, the trustee designated by the Millers was an escrow company owned by the Millers themselves. Miller later executed and recorded a deed of reconveyance eliminating the plaintiff's security interest in the property. The reconveyance falsely represented that the trustee had received a written request to reconvey from the trustor (the plaintiff) and that all sums secured by the deed of trust had been paid. Miller signed the reconveyance with the fictitious names of the executive officer of the escrow company and a notary. Having cleared the property of debt, Miller then borrowed money from a third party, who knew nothing of the fraud, and executed a promissory note secured by a new first deed of trust on the property.
- As between the plaintiff in Wutzke and the bona fide encumbrancer for value, the court found that the plaintiff had a superior interest. In that case the deed of reconveyance itself had been forged, with the intent to defraud. Although the law protects innocent purchasers and encumbrancers, "that protection extends only to those who obtained good legal title. [Citations.] ... [A] forged document is void ab initio and constitutes a nullity; as such it cannot provide the basis for a superior title as against the original grantor." (Wutzke, supra, 151 Cal.App.3d at p. 43; see also cases cited ibid.)
- In Fallon v. Triangle Management Services, Inc., supra, 169 Cal.App.3d 1103, the court explained the distinction between a void and a voidable deed. In that case, Register executed a grant deed conveying property to Tolbert. Tolbert then borrowed money against the property, secured by a deed of trust. Tolbert defaulted on payments and the lenders took over the property at a foreclosure sale. Meanwhile, Register had obtained a judgment against Tolbert which determined that the deed from Register to Tolbert was void because it was procured by undue influence. The plaintiffs then purchased from Register, knowing of the lenders' claim to the property. In consolidated quiet title actions, the issue was who had superior title as between the plaintiffs and the lenders.
- The court in Fallon found that the original Register/Tolbert deed was voidable but not void and that the subsequent lender thus had a superior claim. "A deed obtained as a result of fraud committed against the grantor or by use of undue influence by the grantee may be rescinded by the grantor. [Citation.] 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., supra, 169 Cal.App.3d at p. 1106.)
- Even closer to our facts is Firato v. Tuttle, supra, 48 Cal.2d 136. In Firato, the plaintiffs loaned money to the Tuttles and received a promissory note and deed of trust on the Tuttles' property. The trust deed named a real estate broker, McCormick, as trustee. Although the loan was not paid off, McCormick executed a reconveyance of the deed of trust without authority and upon a false recitation that the loan had been paid in full. The Tuttles then sold the property. Before the plaintiffs discovered the fraud, the property had been conveyed several times. The subsequent grantees were bona fide purchasers for value and knew nothing of the unauthorized act of McCormick. The plaintiffs sued to cancel the purported reconveyance by McCormick and to have their deed of trust reinstated. Demurrers were sustained and judgment entered against the plaintiffs.
- The Supreme Court affirmed the judgment. The court found that the unauthorized reconveyance of a trust deed by the trustee, while voidable, was not necessarily void as to a subsequent bona fide purchaser of the property for value. The court drew a distinction between conveyances that are merely unauthorized and those that are "wholly void ... [such] as where a deed has been forged or has not been delivered." (Firato v. Tuttle, supra, "48 Cal.2d at p. 139.) In the case of unauthorized reconveyances, such as the one in the case before it, the court found that former Civil Code section 2243 fn. 2 "would protect innocent purchasers for value who take without any notice that the conveyance by the trustee was unauthorized ...." ("48 Cal.2d at p. 139.) The defendants in Firato were innocent purchasers for value and the plaintiffs could not plead otherwise. Consequently, the plaintiffs could not state a cause of action and the demurrers were properly sustained.
Go here for more on void and voidable deeds.
(1) For case law on the doctrine of bona fide purchaser & the duty to inquire, in the context where a stranger to the recorded title is in possession of property being purchased, see
- California Bona Fide Purchaser, Possession, Duty Of Inquiry, and
- Bona Fide Purchaser Doctrine, Possession Of Property By Occupants Other Than The Vendor & The Duty To Inquire.
(2) In some jurisdictions (including California), a deed can be considered a forgery and void ab initio (as opposed to being merely voidable) even if the signature on the deed is genuine. See:
- Forgery Conviction In Foreclosure Rescue Scam Can Be Based On Document With Genuine Signature, Says California Appeals Court,
- New York Court Decisions A Reminder That Viable Forgery Claim May Arise When Homeowner Is Tricked Into Signing Deed.
In the context of equity stripping, foreclosure rescue scams, just think of all the unchallenged void deeds there are out there that were unwittingly signed without first being read by desperate, financially strapped homeowners where the deed was strategically buried in a stack of legal documents that was presented for the homeowners' signatures, said documents being fraudulently represented to them by foreclosure rescue operators as being part of a refinancing transaction. DeedVoidVoidable