Corrective Deed of Trust in California- Is It Enforceable?

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Title insurers often discover defects in transactions after escrow has closed. When this occurs, they regularly request that parties to a real estate transaction execute “corrective” trust deeds or grant deeds. However, parties should consult with counsel before doing so, as the title insurer may have a bigger problem on its hands than it is causing the owner to believe.

For example, in the 2015 case of Whitmore v. Wells Fargo, the Chapter 7 Trustee of a bankruptcy estate filed an adversary complaint contending that what the title insurer labeled a “corrective deed of trust” signed shortly before the bankruptcy was in fact an unenforceable obligation. Specifically, the title insurer covenanted to the lender that the debtor owned certain real property when the lender provided a trust deed signed by the debtor in refinancing the property. In fact, the debtor’s wholly-owned corporation owned the property at that time and at all times thereafter. In other words, the debtor’s trust deed was worthless, meaning the property was free and clear of any valid, enforceable liens. Before the bankruptcy, the lender, through the title insurer, filed a lawsuit and demanded a corrective deed of trust, which the debtor signed as president of his wholly-owned corporation.

After the Chapter 7 bankruptcy was filed, the Trustee alleged that this made the debtor a guarantor of the corporation’s debt, and that such a guarantee was unenforceable for lack of contemporaneous consideration. Specifically, under California Civil Code § 2787, a guarantor is “one who…hypothecates property as security” “for the debt of another,” and that guarantor/surety relationship is created when one party executes a mortgage/deed of trust on their own property to secure the debt of another. See Bull v. Coe, 77 Cal. 54, 61-62 (Cal. 1888).

In turn: “Where a suretyship obligation is entered into at the same time with the original obligation, or with the acceptance of the latter by the creditor, and forms with that obligation a part of the consideration to him, no other consideration need exist. In all other cases there must be a consideration distinct from that of the original obligation.” Cal. Civ. Code §2792. Indeed, in Rusk v. Johnston, 18 Cal.App. 2d 408, 409 (Cal. App. 1930), the court invalidated a guarantee of a deed of trust and note for lacking consideration when there was no evidence that the guarantee was given for any consideration separate from that in the underlying transaction, noting that “the guaranty was not requested nor given until after the note was executed and the consideration for the note passed.” See Rancho Santa Fe Pharmacy, Inc. v. Seyfert, 219 Cal. App. 3d 875, 878 (1990) (citing Rusk for the proposition that “where a promissory note is given for consideration, a later guaranty of the note lacks consideration and cannot be enforced”).

The court agreed with  the Trustee, issuing a ruling that the trust deed was invalid. As of 2016, the lender’s appeal to the District Court for the Central District of California is still pending.

If you have been asked to sign a corrective trust deed, corrective grant deed or otherwise, or have already signed such a document, you may wish to seek the advice of a qualified real estate attorney in California. Indeed, sometimes, the loss may fall to the title insurer, not the borrower.

This post describes Central District of California Bankruptcy Adv. No.: 6:15-ap-01047-WJ / Case No. 6:14-bk-18815-WJ.

About Scott Talkov

Scott Talkov is a real estate lawyer, business litigator and bankruptcy lawyer in California. He founded Talkov Law Corp. after of experience with one of the region's oldest law firms, where he served as one of the firm's partners. He has been featured on ABC 7, CNN, KCBS, and KCAL-9, and in the Los Angeles Times, the Orange County Register, the San Diego Union-Tribune, the Press-Enterpise, and in Los Angeles Lawyer Magazine. Scott has been named a Super Lawyers Rising Star every year since 2013. He can be reached about new matters at info@talkovlaw.com or (844) 4-TALKOV (825568). He can also be contacted directly at scott@talkovlaw.com.

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