Daily Development for
Tuesday, October 31, 2000
By: Patrick A. Randolph,
Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu
RECORDING ACTS; BONA FIDE PURCHASER; VOID/VOIDABLE DISTINCTION: Discharge
and reconveyance from trustee under deed of trust based upon forged request for
reconveyance is voidable, but not void, and bona fide purchaser relying upon such
discharge takes subject property free of deed of trust.
Schiavon v. Arnaudo
Brothers, 2000 WL 1586381 (Cal.App. 6 Dist.)
Grantors of deed of trust
forged a copy of a request for reconveyance to the trustee, forging the
signatures of the beneficiaries. The trustee, relying upon this document,
executed and recorded a reconveyance and soon thereafter the grantors of the
deed of trust transferred title to a BFP.
Subsequently, the grantors
declared bankruptcy. The beneficiary of the deed of trust filed a claim as an
secured creditor and discovered much later, when it received a small check as
an unsecured creditor, that the property did not appear in the inventory of the
bankruptcy estate.
Beneficiary pointed to the
general rule that a title based upon a forged deed is void, and confers no
title even upon a bona fide purchaser without knowledge of the forgery. The
court responded, however, that there is a distinction between forged
instruments and instruments obtained by fraudulent misrepresentations. In the
latter case, the instrument is voidable, and can be cancelled as between the
original parties and those having knowledge of the fraud, but is not void, and
will be valid in the hands of a BFP.
Although the request for
reconveyance was a forgery, the BFP's in this case did not rely upon the
request for reconveyance, but upon the reconveyance itself. The reconveyance
was executed by a party having authority to execute the instrument, and was not
itself a forgery, although it was obtained by a fraudulent act the forged
request.
The court concluded that
both common law and California statutes dictated that the reconveyance in this
case was voidable, but not void, and that therefore the purchasers of the
property took their interest free of the deed of trust.
Comment 1: Pretty standard
stuff, but nevertheless a bit frightening, indicating how vulnerable deeds of
trust are to fraudulent cancellation. The risk is greater than with mortgages
because a third party, the trustee, has the power to give a release.
Comment 2: The note, now
unsecured, was still valid, and undoubtedly the beneficiary also had a claim
based upon fraud that it could have pressed in the bankruptcy and that perhaps
is not discharged by the bankruptcy, but one suspects that the ability to
collect on that claim is akin to squeezing blood from a stone.
Comment 3: It is unlikely
that the trustee has any liability here unless the beneficiary had established
some special verification procedure. Typically a notarized release is all that
is necessary. In this case, perhaps to set up the fraud, the trustor had arranged
for the recorded copy of the deed of trust to be returned to it, rather than to
the beneficiary, but it was not clear what role this instrument played in the
scheme.
Comment 4: Note that,
properly exploited, the trend toward electronic transactions potentially can
provide greater security against forgery in such cases, because encrypted
digitized signatures are much less likely to be the subject of forgery. On the
other hand, the very broad definition of valid "electronic
signatures" described in the Federal Electronic Signatures Act (Esign)
includes electronic validations that in fact are not protected against forgery
and could easily be misused. Pretty much the only questions are: (1) Is it
electronic; and (2) Have the parties agreed to use it. Don't agree to the use
of electronic signatures unless you are confident that you have a secure protection
against forgery.
Readers are urged to respond, comment, and argue with the daily
development or the editor's comments about it.
Items in the Daily Development section generally are extracted from the
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