Leach v. Home Savings & Loan Ass'n

Association, and others.^[1] The trial court also denied respondents’ motions for attorneys’ fees.

In consolidated appeals, Leach challenges the summary judgments, while the Prescotts challenge denial of their motion for attorneys’ fees. In the first appeal, Leach contends that the trial court erred (1) by finding that the lenders—Home Savings and the Prescotts—had no legal duty to investigate a probate court file; and (2) by granting summary judgment when disputed material facts existed about whether the lenders had knowledge of Charles Bell’s lack of authority to encumber trust property. In the second appeal, the Prescotts contend that, as prevailing parties, they were entitled to attorneys’ fees even though Leach was not a signatory to the contract on which the action was based. We find no merit in either appeal and affirm the judgments and order.

At Alma Bengard’s death in 1964, a testamentary trust was created for the benefit of her daughter, June Bengard Bell. June’s two children, defendant Charles Bell and plaintiff-appellant Nancy Bell Leach, are entitled to the remainder of June’s trust on her death, if there are trust assets remaining at that time. Under the terms of the trust, the trustee may encumber trust property.

In 1971, a former trustee used part of the trust assets to purchase a residence on Hawthorne Street in Salinas for June’s use. June holds a life estate in the residence and she continues to live there. The residence and some cash form the entire res of the trust.

In 1973, the former trustee resigned and the court appointed June’s son, Charles Bell (Bell), as successor trustee. All trust assets were transferred to Bell, including the trustee’s deed to the residence. In 1974, Bell prepared his first annual accounting for the trust.

By April 1975, the trust cash was almost exhausted. In May 1975, the probate court entered an order settling the second and final accounting of

Bell as successor trustee. An attorney testified at a deposition that this final accounting was prepared in order to terminate June’s trust so that she could become eligible to receive government assistance. He testified that the Salinas residence was not included in the list of trust assets and that Bell was intended to be discharged as trustee of the trust funds, but not the Salinas residence.

The May 1975 order provided that “after distributing the balance of the funds in this Trust, . . . Charles R. Bell is discharged as Trustee for June Bengard Bell.” Leach believes that Bell distributed the balance of the trust funds within 30 days after entry of this order. She also contends that the order was self-executing. In essence, she believes that the order effectively discharged Bell as trustee in 1975. At a deposition, Bell testified that he had not distributed the remaining trust funds and that he thought he was still the trustee of June’s trust. His attorney agreed with this conclusion at his own deposition. No final order discharging Bell as trustee was ever filed, nor was the 1975 order ever recorded. Bell, as trustee for June, remains the legal title holder of the Salinas residence.

In 1976, Bell, purportedly acting in his capacity as trustee, borrowed $33,600 from respondent Home Savings and Loan Association. The loan officer stated that she reviewed the trust instrument, a title report, and 1973 documentation of Bell’s authority to act as trustee before approving the loan. Bell gave the lender a promissory note, secured by a first deed of trust against the Salinas residence. Respondent Serrano Reconveyance Company was trustee of this deed of trust. Bell used part of the proceeds of this loan to pay off an existing Wells Fargo Bank deed of trust on the Salinas property. The record does not reveal what Bell did with the remaining loan proceeds.^[2] In 1977 and 1980, foreclosure proceedings were instituted against the Salinas residence in conjunction with this deed of trust, but each proceeding was subsequently rescinded. In 1981, Leach estimated that the balance due on this loan was $31,500.

In 1980, Bell, again purporting to act as trustee, borrowed a total of $42,000 from respondents James and Kathleen Prescott, Prospect Investment, Henry and Barbara Volkman, Karel and Jitka Cymbal, Victoria Hardtke, John and Judith Freire, and Lincoln Trust Company (as trustee for three individual pension plans). Bell gave them a promissory note, secured by a second deed of trust against the Salinas residence. Harry Cappel & Company, a real estate broker, arranged the loan. Cappel stated that, before approving the loan, he reviewed trust accountings and a preliminary title report showing Bell, acting as trustee, as legal title holder of the Salinas

residence. Respondent Santa Clara County Title Company was the trustee on the deed of trust. Bell used part of the proceeds of this loan to pay off yet another loan. Again, the record is silent on Bell’s use of the remaining new loan proceeds. In 1981, Santa Clara County Title Company transferred its interest in the deed of trust to successor trustee and respondent Pelkins Pacific, Inc., whose president is Harry Cappel. The same year, Leach estimated that the balance due on this loan was $41,500.

In early 1981, the holder of yet another lien against the Salinas residence instituted foreclosure proceedings. At this time, Leach discovered that Bell had repeatedly mortgaged the Salinas residence. In May 1981, she filed this action against Bell, the respondents, and others in order to clear title to the Salinas property by having the various deeds of trust declared void. She also applied for and obtained a preliminary injunction halting the foreclosure proceedings. In July 1981, the trial court dismissed the action against Santa Clara County Title Company. Two months later, a default judgment entered against Charles Bell.^[3]

In the portion of the action directed against the respondents—trustees and beneficiaries of the first and second deeds of trust—Leach contends that Bell had no authority to act as trustee at the time of the 1976 and 1980 loans. Based on information and belief, she also contends that each respondent had actual or constructive notice of this fact and that none were bona fide encumbrancers. The respondents filed motions for summary judgment in 1984. Each respondent^[4] filed a declaration denying any actual or constructive knowledge of Bell’s purported lack of authority to act as trustee at the time that the loans were made. Bell also testified at a deposition that he did not know most of the respondents. At her deposition, Leach stated that she had no actual or personal knowledge that the respondents knew that Bell had no authority to act as trustee when the loans were made.

After a hearing on the motions for summary judgment, the trial court found that Leach did not substantiate her claim that the respondents had actual knowledge of Bell’s discharge as trustee, assuming that he was actually so discharged. It also found that Leach must establish the respondents’ actual knowledge of this fact in order to prevail. (Civ. Code, § 2281.) The trial court granted the motions and entered judgments accordingly. Leach filed a timely notice of appeal from the judgments.

After summary judgment, the Prescotts and Home Savings petitioned the trial court for a declaration that, as prevailing parties, they were entitled to receive attorneys’ fees from Leach. The trial court denied these motions because Leach was not a signatory to the deeds of trust and notes that included attorneys’ fees clauses. The trial court found that the Prescotts and Home Savings could seek these fees from either the trust or Bell, in a separate proceeding. The Prescotts^[5] filed a timely notice of appeal from the order denying the motion for attorneys’ fees.^[6]

H. Lender’s Duty to Investigate

In her appeal, Leach first contends that the trial court committed reversible error when it held that the lenders had no duty to investigate the public records contained in the probate court file. In essence, she argues that Home Savings and the Prescotts had constructive notice of the 1975 order, which she contends reveals that Bell had no authority to act as trustee.

Civil Code section 2281^[7] makes binding any bona fide transaction between a discharged trustee and one who has no actual knowledge of the discharge. Under this provision, constructive knowledge of the sort Leach contends that the lenders had would not be sufficient to void the transaction. Leach argues, however, that the “bona fide transaction” statutory language should be interpreted to read “bona fide purchaser.” A bona fide purchaser is held to both actual and constructive notice (see Hansen v.G & G Trucking Co. (1965) 236 Cal.App.2d 481 , 498-499 [ 46 Cal.Rptr. 186 ]; Muller v. Hallenbeck (1962) 200 Cal.App.2d 366 , 373 [ 19 Cal.Rptr. 251 ]; see also Black’s Law Dict. (4th ed. 1968) p. 224, col. 1); therefore, she contends that, using her interpretation, section 2281 does not validate the subject transactions if Home Savings and the Prescotts had even constructive notice of Bell’s lack of authority to act as trustee. (See §§ 18, 19.) However, we do not agree that a “bona fide transaction” within the meaning of section 2281 is a transaction involving a bona fide purchaser.

A bona fide transaction is a transaction which the parties operate “[i]n or with good faith; honestly, openly, and sincerely; without deceit or fraud.”

(Black’s Law Dict., supra, p. 223, col. 2.) This definition of “bona fide” is consistent with other definitions of the term, used in other contexts. (See, e.g., Merrill v. Department of Motor Vehicles (1969) 71 Cal.2d 907 , 920-922 [ 80 Cal.Rptr. 89 , 458 P.2d 33 ] [bona fide dealer means dealer who is honest or reliable]; Raysinger v. Peoples Inv. & Loan Assn. (1973) 36 Cal.App.3d 248 , 251 [ 112 Cal.Rptr. 163 ] [bona fide loan is one in which principal amount is what it purports to be]; Helton v. Stewart (1961) 198 Cal.App.2d 114 , 120 [ 17 Cal.Rptr. 524 ] [bona fide sale is actual sale made in good faith, for value, without fraud].) To interpret a “bona fide transaction” as one in which no fraud, bad faith, or collusion is involved is also consistent with early case law that limits the showing a purchaser must make in order to validate a transaction with a trustee. (See Purdy v. Bank of America N. T. & S. Assn. (1935) 2 Cal.2d 298 , 303-304 [ 40 P.2d 481 ]; see also Stats. 1961, ch. 1042, § 1, p. 2725 [amending § 2281].) Finally, this interpretation does not create a conflict between the “actual knowledge” language of section 2281 and the constructive notice provision typically read into statutes referring to a bona fide purchaser. (See §§ 18, 19, 2281.) For all these reasons, we find that section 2281 makes binding any bona fide transaction—that is, any transaction entered into without fraud, bad faith, or collusion—between a discharged trustee and a purchaser without actual knowledge of the fact of discharge.

Leach’s interpretation of section 2281 is not the only flaw in her reasoning, however. Even if we adopted her interpretation, she has not established that actual notice of the 1975 conditional order would have revealed to Home Savings or the Prescotts that Bell was no longer trustee. As the trial court indicated, in practice the discharge of a trustee occurs after the trial court signs a final discharge order. No such order was ever filed in this case. The trial court stated that if it had looked at the order, it would have assumed that Bell was still trustee. This is a reasonable interpretation of the provisions of the order. As Leach is unable to establish that the 1975 order would provide anyone with notice of Bell’s lack of authority to act as trustee, it could not give Home Savings or the Prescotts constructive notice of this “fact” even if the lender’s duty of inquiry (see § 19) were extended to the 1975 order. In light of these findings, we need not address the other contentions Leach raises regarding notice.^[8]

III. Knowledge of Lack of Authority

Leach also contends that the trial court erred in granting summary judgment when disputed material facts existed on the question of whether the

his three depositions. As there is no triable issue of fact, the trial court had no choice but to grant the motions for summary judgment. (Code Civ. Proc., § 437c, subd. (c); see Girard v. Ball (1981) 125 Cal.App.3d 772 , 780 [ 178 Cal.Rptr. 406 ] [summary judgment stands if affidavits state facts sufficient to sustain it and counteraffidavits do not proffer competent and sufficient evidence to present triable issue of fact].)

Finally, in her reply brief, Leach also suggests that Home Savings and the Prescotts had actual knowledge of Bell’s lack of authority to act as trustee because Bell was not the trustee named in the trust instrument. However, this contention overlooks the declarations of the parties approving the two loans that they each obtained some proof of Bell’s status as successor trustee before approving the loans. The loan officer for Home Savings reviewed both a title report and 1973 documentation of Bell’s authority to act as trustee; the broker for the Prescott loan reviewed trust accountings and a preliminary title report showing Bell as title holder of the Salinas property in his capacity as trustee. Having obtained evidence of Bell’s appointment as successor trustee and considering the state of the title at the time of the loans—title having been held in his name as successor trustee— we believe that the lenders satisfied their obligation to inquire into Bell’s authority to encumber trust assets at the time of the loans. (See Purdy v. Bank of America N. T. & S. Assn., supra, 2 Cal.2d at p. 304 [limiting lender’s duty to inquire]; Huntoon v. Southern T. & C. Bank (1930) 107 Cal.App. 121 , 126-129 [ 290 P. 86 ] [no duty to inquire beyond determining whether trust instrument conveys power to trustee]; see also Bogert, Trusts and Trustees (2d ed. rev. 1980) ch. 42, Bona Fide Purchaser Rule, § 894, p. 238 [duty to examine trust instrument]; § 897, pp. 253-255 [only reasonable inquiry required; no duty to inquire arising from statements in recorded documents outside chain of title].) In addition, as Leach did not provide any evidence to support the allegations—made on the basis of information and belief—that the lenders had actual knowledge of the alleged fact that Bell was not trustee at the time of the loans, the trial court properly granted the motions for summary judgment. (Code Civ. Proc., § 437c, subd. (c); Girard v. Ball, supra, 125 Cal.App.3d at p. 780.)

F

inally, the Prescotts contend that, as prevailing parties in the litigation, they are entitled to have Leach pay their attorney’s fees. (§ 1717.)^[9] They