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.

Shameless Bankster Fails (But Nearly Succeeds) In Attempt To Invoke Statute Of Limitations To Establish Viability Of Its Mortgage Based On Forged Deed; BoA Nearly Gets NYS Courts To Set Aside Over A Century Of Case Law In Close Call

Legal Issues:

• forged deeds,
• void ab initio (meaning a legal nullity at its inception) vs. voidable,
• effect upon real property of of encumbrances (ie. mortgages, etc.) based on a forged deed,
• inapplicability of New York's recording statute (NY Real Property Law § 291) to a forged deed,
• inapplicability of the statute of limitations (CPLR 213 (8) [NY Law]) to foreclose a claim against parties (ie. title holders, mortgagees, other lien holders) claiming under a forged deed,
• prevailing approach in other jurisdictions.

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From an Opinion Summary from Justia US Law:

• Plaintiff filed a complaint against Bank of America and related entities seeking to set aside and cancel, as null and void, the Bank’s mortgage interest in real property conveyed on the authority of an allegedly forged deed.
  
  The Bank moved to dismiss the complaint under N.Y. C.P.L.R. 3211(a)(5) as untimely under N.Y. C.P.L.R. 213(8). Supreme Court dismissed the complaint in its entirety as time-barred.
  
  The Appellate Division affirmed as to the Bank, concluding that Plaintiff’s forgery-based claim against the Bank was subject to the six-year statute of limitations for fraud claims set forth in N.Y. C.P.L.R. 213(8).
  
  The Court of Appeals reversed, holding that the statute of limitations in section 213(8) did not foreclose Plaintiff’s claim against Defendant because, under prior case law, a forged deed is void ab initio, and as such, any encumbrance upon real property based on a forged deed is null and void.(1)

Source: Opinion Summary - Faison v. Lewis.

See also, NY appeals court holds statute of limitations does not bar action to cancel mortgage.

For the court ruling, see Faison v. Lewis, 2015 NY Slip Op 04026 (May 12, 2015).

(1) From the court ruling:

• The legal question raised in this appeal is whether plaintiff Dorothy Faison is time-barred under CPLR 213 (8) from seeking to set aside and cancel, as null and void, defendant Bank of America's mortgage interest in real property conveyed on the authority of a forged deed.
  
  Under our prior case law it is well-settled that a forged deed is void ab initio, meaning a legal nullity at its inception. As such, any encumbrance upon real property based on a forged deed is null and void.
  
  Therefore, the statute of limitations set forth in CPLR 213 (8) does not foreclose plaintiff's claim against defendant. As the Appellate Division affirmed the dismissal of plaintiff's claims as time-barred, we now reverse.
  
  
  ***
  
  [W]e will not impose statutes of limitations on forged deeds because the resulting prejudice to the "rights of the true owner of real estate" only "open[s] the door for the destruction of all titles, and makes[s] it much easier for the criminal to purloin real than personal property" (see Marden, 160 NY at 57-58).
  
  
  ***
  
  For over a century, since this Court's decision in Marden, a forged deed has been treated in New York as void ab initio. As the Court recognized in Riverside, a statute of limitations cannot validate what is void at its inception. Therefore, a void deed is not subject to a statutory time bar. The defendant's arguments are in contravention of Marden and Riverside, and would subject a claim of deed forgery to a six-year statute of limitations under CPLR 213 (8), with the result that a forged deed may be relied upon to convey title and for purposes of encumbering real property.
  
  However, under well-established real property principles, because only a holder of legal title may convey an interest in real property, no property interest can be conveyed by a forged deed, and no person may be a bona fide purchaser of real estate on the force of such deed. Moreover, our recording statute does not apply to a forged deed, with the consequence that recording a forged deed cannot transfer title. We, thus, decline the defendant's invitation to unsettle this established doctrine to the detriment of our state's real property recording system.
  
  To adopt defendant's position is to permit a forged deed to accomplish, by the mere passage of time, what has always been forbidden — the encumbrance and transfer of title. Neither law nor public policy nor common sense dictates such outcome.
  
  Defendant fails to present a compelling reason to overturn or ignore our prior case law in the area of real property because as we have recognized, "parties in business transactions depend on the certainty of settled rules, `in real property more than any other area of the law, where established precedents are not lightly to be set aside'" (172 Van Duzer Realty Corp. v Globe Alumni Student Assistance Ass'n, Inc., 24 NY3d 528, 535 [2014], citing Holy Properties Ltd., L.P. v Kenneth Cole Productions, Inc., 87 NY2d 130, 134 [1995]). No less so with respect to forged deeds, because landowners, banks, mortgagees, insurers, and a myriad of others depend on the simple rule that a forged deed is a legal nullity that cannot divest ownership or serve to encumber real property.
  
  Accordingly, the order of the Appellate Division, insofar as appealed from, should be reversed and defendant Bank of America, N.A.'s motion to dismiss the complaint against it pursuant to CPLR 3211 (a) (5) denied.

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Editor's Note: What merits highlighting in this case is how close the bankster (ie. Bank of America) came to winning this case by getting the New York judiciary to completely disregard over a century of case law. They won in the trial court; they won a unanimous decision in a state intermediate appeals court (in a 4-0 ruling - see Faison v. Lewis, 966 N.Y.S.2d 198, 106 A.D.3d 1047 (App. Div. 2nd Dept. 2013)); and they persuaded three judges on the New York Court of Appeals (the state's highest court) to buy into their argument - falling one vote short of winning - losing in a split, 4-3 decision. In other words, Bank of America got a total of eight trial and appellate level judges to buy into its argument that would, as the 4-judge majority conclusively stated, "permit a forged deed to accomplish, by the mere passage of time, what has always been forbidden — the encumbrance and transfer of title. Neither law nor public policy nor common sense dictates such outcome."

Fans of the law on forged deeds may find the court's ruling to be interesting reading as it reviews the case law in New York on forged deeds (ie. void vs. voidable, effect on bona fide purchasers, effect of recording a forged deed (or an instrument based on a forged deed), applicability of statute of limitations in attempts to cancel void instruments, etc.) dating back over a century, beginning with the venerable Marden v Dorthy, 160 NY 39 [1899]).