U.S. Bank Nat. Assn. v. Lane





Filed 2/26/13 U.S. Bank Nat. Assn. v. Lane CA1/1







>NOT TO BE PUBLISHED IN OFFICIAL REPORTS

>

>

California Rules of Court, rule
8.1115(a), prohibits courts and parties from citing or relying on opinions not
certified for publication or ordered published, except as specified by rule
8.1115(b). This opinion has not been
certified for publication or ordered published for purposes of rule 8.1115



IN
THE COURT OF APPEAL OF THE STATE OF CALIFORNIA



FIRST
APPELLATE DISTRICT



DIVISION
ONE




>

U.S. BANK NATIONAL ASSOCIATION, Plaintiff and Respondent, v. JAMES LANE et al., Defendants and Appellants.

A132059 & A132386 (San Francisco City & County Super. Ct. No. CGC05446170)

INTRODUCTION

In
“All the President’s Men,” Deep Throat advises investigative reporter Bob
Woodward to “follow the money.” We do so
in this case to resolve a labyrinthine subprime loan scheme from the pre-2008
recession era.

U.S.
Bank sued to collect a debt of $1 million after the property that was
collateral for the loan was sold free and clear of a href="http://www.mcmillanlaw.us/">lien.
Due to an error in the legal description of the property in the deed of
trust, the lien had been erroneously recorded on a different property. A jury found for U.S. Bank, and the debtors,
coconservators of the Estate that owned the property, appeal. They argue the undisputed evidence shows (1)
the loan was made to the prior conservator, in her href="http://www.sandiegohealthdirectory.com/">individual capacity, and (2)
U.S. Bank was not a holder in due course.
They also argue the “one form of action rule” of Code of Civil Procedure
section 726 barred the action against them.

We
find substantial evidence to support the jury’s findings that U.S. Bank’s
predecessor in interest entered into a contract
with the prior conservator, in her representative capacity, for a mortgage loan
on an estate property. We also find
substantial evidence to support the jury’s finding that U.S. Bank was a holder
in due course. Finally, we find the
trial court properly denied defendants’ motion for judgment notwithstanding the
verdict, because substantial evidence supports the conclusion that the
exception to Code of Civil Procedure section 726’s one form of action rule
applied here. Therefore, we will affirm
the judgment.

FACTUAL AND
PROCEDURAL BACKGROUND

>The Parties

Plaintiff and
respondent U.S. Bank National Association, as Trustee for Credit Suisse First
Boston Adjustable Rate Mortgage Trust 2004-1 (U.S. Bank), is the holder of a href="http://www.fearnotlaw.com/">mortgage loan made to Alice
Lane by loan originator First City Funding
(FCF). The promissory note was signed by
Alice Lane and was
purportedly secured by a deed of trust on a property located at 2148
Pine Street in San Francisco,
California.
However, because the recorded deed of trust was defective, when that
property was subsequently sold, the mortgage was not paid off. U.S. Bank then sued the defendants for
collection of the debt.

Defendants
and appellants are the current coconservators of the Elizabeth G. Jamerson
Estate (the Estate) and cotrustees of the Elizabeth G. Jamerson Revocable
Living Trust, James Lane
(Lane) and Leonard Woolfolk (Woolfolk).
During her lifetime, Elizabeth Jamerson acquired several parcels of
residential real estate in San Francisco, California,
including 2148 Pine Street. She had a stroke in 1991 and became
incapacitated. Elizabeth’s
daughter, Alice Lane, was
appointed sole conservator of her mother’s estate in 1991 and served in that
capacity until 2003, when Lane and Woolfolk took over as coconservators.href="#_ftn1" name="_ftnref1" title="">[1] Elizabeth Jamerson died before trial. Alice Lane,
along with her older brother, Lafayette Jamerson, and her younger sister
Geraldine Woolfolk, are the beneficiaries of the Estate. Defendant James Lane
is Alice’s oldest son. Leonard Woolfolk is Geraldine’s oldest son.href="#_ftn2" name="_ftnref2" title="">[2]

>The Relationship Of >Alice Lane> And >Lafayette> Jamerson To The Estate

When Alice
Lane became conservator of her mother’s estate,
the letters of conservator
ship gave her the power to borrow money and give security for the repayment
of debt on behalf of the Estate. Alice
Lane understood that she was made conservator
instead of her brother to avoid a potential conflict of interest, since he was
going to be the contractor to the Estate.
Nevertheless, Lafayette made
all the decisions about loans and filled out all of the loan applications. He was the keeper of the checkbook, but not
the signer. He would pay the bills out
of his Jamerson Contractors account and get reimbursement from the Estate
account. Every payment out of the
Jamerson Contractors account was for the benefit of the Estate. “All the money went into the conservatorship
coffers.” The loans were made for the
Estate; it was not his intent that Alice
would be personally responsible for paying back the notes.

Barbara
deVries was appointed temporary conservator by the court after Alice
Lane failed to file a court-ordered
accounting. Ms. deVries served in that
capacity from June 16, 2003
to November 19, 2003 when Elizabeth’s
grandsons were appointed to succeed her as temporary successor conservators of
the Estate. Initially, Ms. deVries had
difficulty getting information from Alice Lane, Lafayette Jamerson, and the
loan servicers, but she eventually discovered that “Ms. Lane had in effect
ceded all responsibility for management of the estate to her brother, Lafayette
Jamerson,” and had “signed off on loans arranged by Mr. Jamerson substantially
increasing the debt on five of the estate’s seven properties” to the point that
“[t]he outstanding indebtedness on those properties now exceeds the market
value of the properties.”

The parties
agree that at the time Lane and Woolfolk took over as coconservators, the
Jamerson Estate was in dire financial shape:
the rental properties were in poor condition and unable to produce
sufficient income to service the debt on them.href="#_ftn3" name="_ftnref3" title="">[3]

On January 14, 2004, Lane and Woolfolk
were appointed as permanent coconservators.
The appointment gave them the same powers to handle Estate affairs,
including making loans and disposing of property, as Alice
Lane had previously enjoyed. It was James Lane’s
practice to handwrite his name, but not the titles conservator or trustee, when
signing documents in his capacity as representative of the Estate.

>Lafayette> Jamerson’s Relationship With >First> City Funding

FCF was a small mortgage bank
that funded its own loans through lines of credit with other financial
institutions, such as GMAC. FCF was
started by the late Mitchell Stewart and Nurit Petri, and specialized in making
alternative or low documentation, subprime loans, which it then sold to
investors.href="#_ftn4" name="_ftnref4" title="">[4] The underwriting was done by Stewart himself
on an ad hoc basis, depending on the investors’ guidelines. He did not follow Freddie Mac or Fannie Mae
underwriting requirements.

Beginning in
1999, Lafayette Jamerson initiated loans made through FCF on the various rental
properties owned by the Estate, including 2148 Pine
Street. FCF
would FedEx the loan documents to his address (3200
Harrison Street) and he would then call Alice
Lane to have her sign them. This was his pattern of doing business with
FCF.

Settlement
statements for the various loans made on Estate properties show that FCF
charged the Estate very high loan origination and settlement fees. In addition, sometimes there were payments to
the lender that were made in the same amounts as the cash to borrowers, and
once there was a loan to Stewart himself, but Lafayette
denied making the arrangements for that loan.
Lafayette did not complain
to anybody at FCF about the terms of the loans because “[b]eing a Black
American I’m accustomed to paying more than would be normal.” He agreed to huge interest reserves because
“that’s what the market was doing.”
Asked if he couldn’t get another loan, he said: “If I changed my color I would.”

Lafayette
never told anyone at FCF Alice was personally obligated on the loans. He told FCF the loans were for the Estate;
that’s why he faxed them the conservatorship papers. No one at FCF ever told him they intended Alice
Lane to be personally responsible for the
loans. His understanding was that FCF
intended to make the loans to the Estate.

The
Subject Loan

In 2003,
Lafayette Jamerson arranged for two loans on 2148 Pine
Street, and two loans on 2140
Pine Street.
In each case, one loan was for $1 million, and a new second mortgage was
for $280,000. The cash to borrower from
each of those transactions was $168,789.71, and $168,700.52 respectively, plus
$86,334.

Alice Lane
signed a deed of trust “as conservator of the [E]state” on the property at 2148
Pine Street on April 4, 2003 as security for a promissory note of $1 million,
signed by her the same day. She
understood that the deed of trust was a mortgage for the Estate on 2148
Pine Street.
At the time she signed the deed of trust, she understood that it was for
the Estate and not for herself, personally.
In fact, that was true for every single document that was put before her
in connection with any of the loans on the rental properties.

She also
signed a second deed of trust, dated April 4, 2003 on 2148 Pine Street, to
secure an additional indebtedness of $278,000; an adjustable rate note for $1
million at an interest rate of 5.875 on behalf of the Estate; an interest only
addendum to the adjustable rate promissory note; and a balloon payment addendum
to the note for 2148 Pine Street. It was
Alice Lane’s custom, when
she was signing on behalf of the Estate, to simply sign “Alice
Lane.” It
was not her practice to write out “as conservator.” When she signed anything personally, she also
signed “Alice Lane.” She never put any of the money from any of
the loans she signed into any of her personal accounts. She made sure all of the money went to the
Estate, and as far as she knew, it did.

The deed of
trust on 2148 Pine Street
recorded at the request of the Chicago Title Company by the San Francisco
Assessor Recorder is dated April 4,
2003 and names the borrower as “Alice R.
Lane, as conservator of the Estate of Elizabeth G.
Jamerson, a Conservatee.” It is signed “Alice
R. Lane.”
The property is described in “Exhibit ‘A’ ” as “Lot
011, Block 0652.” However, Lot 011,
Block 0652 actually describes 2140 Pine Street. This property secured a different loan for $1
million, also made on April 4, 2003,
to borrower “Alice R. Lane.”

The
preliminary title report prepared as of March 19, 2003 by Chicago Title Company
regarding 2148 Pine Street correctly described the property in “Schedule A” as
Lot 012, Block 0652. However, it
describes the title as vested in “Alice R. Lane,
a single women [sic].” An unrecorded
deed of trust similarly describes the borrower as “Alice
R. Lane, a single woman.” It was signed by Alice
R. Lane.href="#_ftn5" name="_ftnref5" title="">[5]
href="#_ftn6" name="_ftnref6" title="">[6]

Ruth
Anderson was an escrow officer for FCF from 2003 to 2006. She is Nurit Petri’s sister and Mitchell
Stewart’s sister-in-law. As an escrow
officer, she handled recordable documents, sent them to the title company,
estimated the closing statements, disbursed the loan proceeds, and prepared
final statements. She was the escrow
officer on four different Alice Lane
escrow transactions, including 2148 Pine Street. She was the first person to receive a copy of
the preliminary title report, and the copies of the preliminary title report
she received did have a vesting in Alice Lane
as conservator of the Estate. She did
not remember seeing a preliminary report from Chicago Title Company at the time
with vesting in “Alice Lane,
a single women [sic].” The first time
she saw it was at her deposition. She
had no idea why there were two preliminary title reports with different vesting
information.

FCF
Sells the Subject Loan

In addition
to charging its borrowers large fees, FCF was in the business of reselling
loans it originated to large mortgage companies which would, in turn, bundle
them with other loans and sell them to securities companies for ultimate sale
to public and private investors. Anne
Tramble was in charge of “shipping” the loan to the investor, which means
putting the documents in a certain order, and sending the file to a certain
place for the investor’s review.href="#_ftn7"
name="_ftnref7" title="">[7] After the investor reviewed it, FCF would get
a list of documents or items from the investor that FCF needed to produce “in
order to make the loan of investment quality to them.” Typically, the investor engaged a third party
to review the collateral file package (i.e., the note, deed of trust, allonge,
corporate assignments, and preliminary title report or final title policy).

FCF entered
into a seller’s purchase and interim servicing agreement with DLJ Mortgage
Capital, Inc. (DLJ)href="#_ftn8" name="_ftnref8"
title="">[8]
pursuant to which DLJ bought loans that FCF originated. DLJ purchased four
Alice Lane loans, including the subject loan, on June 6, 2003. It purchased a second loan to Alice
Lane on 2148 Pine Street
for $280,000 on June 13, 2003.

Bruce
Kaiserman, president and managing director of CSFB, as well as vice president
and board member for DLJ and executive vice president of Select Portfolio
Servicing, Inc., reviewed the Alice Lane loan at the time DLJ purchased the
loan from FCF and he “didn’t see any issues or problems” with it. La Salle Bank, the document custodian for DLJ
from 2001 to the present, already had the legal file in its possession before
the purchase transaction was completed.
The legal file contained the bogus note, mortgage, assignment,
endorsement and evidence of title vesting title in the name of Alice
R. Lane, a single woman.

DLJ
Sells The Loan To CSFB

Pursuant to
an assignment and assumption agreement dated September 1, 2004, DLJ sold 4,000 loans, including the Alice
Lane loans, with an aggregate purchase price of
more than $1 billion, 250 million, to CSFB for $10. The subject loan to Alice
Lane for $1 million on the property at 2148
Pine Street was subsequently assigned from CSFB to
a trust and ultimately securitized in a transaction that closed at the end of
September 2004. That trust is The
Adjustable Rate Mortgage Trust 2004-1 (plaintiff here). U.S. Bank was the trustee of the 2004-1
Trust.

CSFB
Deposits The Loan In The 2004-1 Trust

The 2004-1
Trust is a real estate mortgage conduit established under the Internal Revenue
Code to eliminate corporate level tax for the benefit of investors. Other parties to the transaction included a
handful of loan servicers. The
2004-1Trust closed on September 29,
2004.

U.S. Bank’s
trust department provides trustees services for trusts organized by CSFB. Charles Pedersen, a vice president in U.S.
Bank’s corporate trust department and account manager in charge of U.S. Bank’s
portfolio of structured finance bond issues (such as mortgage backed
securities), personally administered the 2004-1 Trust involved in this lawsuit.

When U.S.
Bank agrees to act as trustee it signs a pooling and servicing agreement for
managing the trust. On the closing date,
Pedersen gets reports from the various loan custodians that tell him how many
loan files they are holding and the dollar amounts of those loans. La Salle Bank sent U.S. Bank a certification
that it was holding 2,885 loan files with a principle balance of
$798,054,938.60. These loan files
include the original promissory notes.
Pedersen confirmed that the subject loan to Alice
Lane on 2148 Pine Street
was listed in U.S. Bank’s electronic data file for the 2004-1 Trust. As part of La Salle Bank’s certification, one
William Dohr represented that “ ‘[w]ith respect to these mortgage loans,
such mortgage note has been reviewed by . . .’ [La Salle Bank] ‘and
appears regular on its face and relates to such mortgage loan.’ ”

The 2004-1
Trust receives the collateral (i.e., the individual mortgage loans) through the
certification of the custodians. In this
case, the trust received the collateral from CSFB. Once the trust has the “collateral file in
hand,” U.S. Bank authorizes the “Depository Trust Company to go ahead and
release the securities in exchange for that collateral.”

Before
Pedersen authorizes the trust to close, he makes sure that the number of loans
La Salle Bank says it has corresponds to what the trust is supposed to be
getting. He did that with the 2004-1
Trust, and it was an exact match. Pedersen
then communicates his readiness to close to the closing office, and they put
together “all the signature pages with the documents.” When the closing office finishes its work,
they call him and get him on a conference call with the Depository Trust
Company. “[T]he Depository Trust Company
will go through a listing of the securities that are being issued to the public
and I will verify with them that I have the information I need to authorize
them to release those securities.”
Pedersen authorized the Depository Trust Company to issue the securities
certificates and close the trust on September
29, 2004. The closing date
is the actual formation date of the 2004-1 Trust.

U.S. Bank is
the nominal trustee, meaning that all the underlying collateral is assigned in
its name, although the various servicers actually handle the individual
loans. Prior to closing, it is required
and fairly typical for a custodian bank to send U.S. Bank an exceptions report
after it has reviewed the mortgage file.
An exceptions report indicates certain documents in the trustee
custodial file are not being held in the prescribed form. For example, holding a copy instead of an
original is an exception. In this case,
U.S. Bank received an exceptions report with respect to the Alice
Lane loan on 2148 Pine
Street. It
showed there was a certified copy of the deed of trust in the file, not an
original. There is a lag time between
the time a document is sent to the county recorder’s office until the time the
original document, now recorded, is returned to the custodian. The lag time can be from six months to two
years. Virtually every loan has this
exception initially.

In addition,
there was a preliminary title report rather than the actual title policy. Typically, title policies take three to six
months to show up in the custodian’s file.
This exception also applies to virtually every loan in the trust.href="#_ftn9" name="_ftnref9" title="">[9] Normally, Pedersen does not go back and check
on individual loans, unless there is a lawsuit.
The day-to-day administration of a loan is not handled by U.S. Bank as
nominal trustee.

Pedersen was
not privy to information about what was done in the way of any due diligence
review of the Alice Lane loans. “You’d
have to ask the buyer, the DLJ, whoever bought the loan.” At the time of trial, there was no title
insurance policy in the trustee mortgage file, nor was there an original of the
deed of trust. Both the preliminary
title report and the deed of trust showed title vesting in Alice
R. Lane, a single woman. Other than in connection with the litigation,
Pedersen had never come across any information indicating that the owner of the
property was someone other than Alice R. Lane,
a single woman.

Pedersen
learned for the first time during cross-examination that there were two
original notes and two original allongeshref="#_ftn10" name="_ftnref10" title="">[10]
with different dates. Both referred to
loans of $1 million to the same borrower, Alice R.
Lane, for 2148 Pine
Street. The
deed of trust in the trustee mortgage file is different from the deed of trust
that is attached to U.S. Bank’s first amended complaint in that the property
described in the document attached to the first amended complaint is Lot 011,
whereas the property described in the deed of trust in the mortgage file is Lot
012. Also, the deed of trust attached to
the first amended complaint, unlike the deed of trust in the trustee mortgage
file, refers to the borrower as Alice R. Lane,
as conservator for the Jamerson Estate.
In addition, one deed of trust had two riders, and the other had three
riders. Pedersen had not seen copies of
either deed of trust prior to these proceedings and was at a loss to explain
why U.S. Bank, as trustee for the 2004-1 Trust, had a different deed of trust
from the one sued upon.

DLJ’s
Due Diligence Review

Kaiserman
maintained that DLJ did a due diligence review of FCF before agreeing to do
business with FCF. Further, every loan
that FCF sold to DLJ was sent to a company called Lydian Data (Lydian) for
review of the files to insure that each of the loans met the underwriting
criteria.href="#_ftn11" name="_ftnref11"
title="">[11] One of DLJ’s underwriting guidelines is that
it will only purchase mortgages made to natural persons, with title in the
property vesting in the name of the individual borrower. All of the Alice
Lane loans were in the name of Alice
Lane as an individual borrower. DLJ would not have purchased the loans
otherwise. He first learned the
properties associated with the Alice Lane
loans were owned by the Jamerson Trust after the lawsuit was filed.

Kaiserman
did acknowledge that as early as January
14, 2003, CSFB was informed of fraud allegations against FCF
involving altered credit reports, falsified appraisals, altered title
commitments and inflated balances of mortgages to be satisfied. CSFB investigated the matter and concluded
that the allegations were likely a litigation strategy in a lawsuit involving
FCF and GMAC, and “did not believe that the reasons were . . .
fraud-based or appraisal-related.”
Kaiserman admitted DLJ negotiated a settlement agreement with FCF
related to DLJ’s requests that FCF repurchase loans that had defaulted within
the first few months. At least as of March 25, 2004, DLJ and CSFB knew the
four Alice Lane loans,
including the one on 2148 Pine Street,
were among the loans that had defaulted.

The
Disposition Of 2148 And 2140 Pine Street

In a report
to the court dated June 2004, coconservators Lane and Woolfolk proposed to
“stop the cash drain on the Estate” in part by selling some properties and
thereby eliminating $16,101.40 in monthly mortgage payments. To avoid possible capital gains taxes, they
proposed “utilize[ing] the 1031 Exchange program allowed by the IRS” which
“entails taking any proceeds, or gain on sale, and reinvesting the proceeds in
a like property or like properties.”
Under this plan, the properties at 2140 and 2148
Pine Street were among those slated for sale. On June
17, 2004, James Lane
signed a coconservator’s report that listed the Estate’s then current assets
and mortgages, including a mortgage of $1 million on 2148
Pine Street and a monthly mortgage payment of
$6,031.77.

As of December 1, 2004, Wells Fargo Bank
(dba America’s
Servicing Company) became the loan servicer of the $1 million loan secured by 2148
Pine Street pursuant to a pooling and servicing
agreement with respect to the 2004-1 Trust.
At that time, the loan was not current.
The prior loan servicer was Select Portfolio Servicing, Inc. which
forwarded to Wells Fargo funds it had received prior to the transfer, as well
as correspondence it had received from Alice Lane.href="#_ftn12" name="_ftnref12" title="">[12] Wells Fargo also received a copy of a letter
dated October 20, 2004
from Select Portfolio Servicing, Inc. to Alice Lane
informing her that she was in default on the note and deed of trust secured by 2148
Pine Street due to her failure to make the
mortgage payments for September and October 2004. Wells Fargo also received a fax from Alice
Lane informing the servicer that loan payments
were being made by the new coconservators, Lane and Woolfolk, and attaching
copies of checks totaling $12,063.54.
Wells Fargo subsequently received payments of $25,702.53 and $14,439.30
in January 2005. Later payments were
returned for insufficient funds. After
the last payment was reversed, Wells Fargo received no more payments.

At that
point, the loan was considered to be in default and a breach letter was sent
informing the borrower that the bank would proceed with foreclosure if the
default was not cured. When no further
payments were made for 60 days, Wells Fargo would have instructed Loanstar
Mortgage Services, L.L.C. (Loanstar), to “pull title to determine appropriate
ownership” in connection with filing a notice of default. A notice of default was filed on Wells
Fargo’s behalf by sub entity Loanstar with the assessor’s office on April 29, 2005. Unlike the deed of trust in Wells Fargo’s
file, which identified the owner of 2148 Pine Street
as Alice R. Lane, a single
woman, the notice of default identified the owner of 2148
Pine Street as Alice R.
Lane, conservator for the Jamerson Estate.

After the
notice of default is recorded, there is a waiting period of 90 days to see if
there is a response to the notice of default.
If no response is received, the bank proceeds into foreclosure. In this case, after the 90-day period had
expired without the receipt of any funds, Wells Fargo proceeded with
foreclosure. However, “[u]nder the
foreclosure action, it was determined that the deed of trust had not been
recorded.” Wells Fargo was also informed
by the Estate that the property was possibly being sold. No foreclosure occurred and the loan secured
by 2148 Pine Street was
never repaid. Subsequently, a demand for
payment was made through local counsel, but no response was received. The total pay-off amount through February 28, 2010 was $1,327,400.78.

On June 9, 2005, the Estate relinquished
the property at 2148 Pine Street
to an Internal Revenue Code section 1031 exchange escrow account with
Investment Property Exchange Services, Inc., and had 45 days to identify a
replacement property. On June 12, 2005,
Woolfolk was informed by someone at the escrow company handling the sale of
2148 Pine Street that there was no million-dollar deed of trust securing the
loan that had been made in connection with 2148 Pine Street and that 2140 Pine
Street had two million-dollar deeds of trust on its title. Woolfolk signed the Seller’s Escrow
Instructions on June 13, 2005. The property at 2148
Pine Street sold for $1,250,003.24. According to the Seller’s Final Closing
Statement, there was no pay-off for a $1 million loan. Instead, the net proceeds of $809,187.75 went
into an Internal Revenue Code section 1031 investment property exchange account
for the benefit of the Estate. Those
proceeds, as well as some other assets, were used to purchase a rental property
in Tulsa, Oklahoma
for $5 million, with a $1,325,000 down payment.

In the
meantime, the property at 2140 Pine Street
went into foreclosure and was sold at a trustee’s sale on August 22, 2005.
The trustee was Loanstar, apparently the same sub entity used by Wells
Fargo Bank to attempt foreclosure on the property at 2148
Pine Street.

The
Litigation

On October 28, 2005, U.S. Bank, as
trustee for the Trust 2004-1, filed suit against coconservators Lane and
Woolfolk in their representative capacities, and Alice
Lane, in both her individual and representative
capacities, for collection of the note.
The complaint alleged various equitable theories of recovery, as well as
breach of contract against Alice Lane. A first amended complaint added a breach of
contract claim against the Estate and its coconservators.

Defendants
cross-complained for damages, restitution and rescission against U.S. Bank,
FCF, an FCF appraiser, an FCF loan broker, Lafayette Jamerson, and others,
alleging conspiracy to commit mortgage fraud, elder abuse, and unfair business
practices by virtue of subprime, predatory and racially targeted lending and
fraudulent loan applications, appraisals and loan documentation.

Trial by
jury commenced February 3, 2010. On April
9, 2010, the jury returned a general verdict and special findings,
as follows: (1) on U.S. Bank’s breach of
contract claim against the Estate, the jury found for U.S. Bank and awarded it
$980,864.14; (2) on U.S. Bank’s breach of contract claim against Alice
Lane, the jury found for Alice
Lane.

On U.S.
Bank’s claim to be a holder in due course, the jury’s special findings were
that: (1) a valid allonge was attached
to the promissory note when it left the hands of FCF and thereafter; (2) U.S.
Bank obtained the promissory note for value; (3) when U.S. Bank obtained the
promissory note it was free from apparent evidence of forgery or alteration, and
did not appear so irregular and incomplete as to call into question its
authenticity; (4) U.S. Bank obtained the note in good faith; (5) U.S. Bank
obtained the promissory note without notice that it was overdue; (6) U.S. Bank
obtained the promissory note without notice that it had been altered; and (7)
U.S. Bank obtained the promissory note without notice that any party had a
defense to payment.

With respect
to the Estate’s claim for conspiracy to commit fraud, the jury found that FCF
and Out of BK.Com had participated in a conspiracy to defraud the Estate, but
that Lafayette Jamerson, the appraiser, the loan broker, and U.S. Bank had
not. The jury found by clear and
convincing evidence that FCF and Out of BK.Com acted with oppression, fraud or
malice.href="#_ftn13" name="_ftnref13" title="">[13]
The jury also found the cross-defendants
had established a defense to the conspiracy claim by proving that the
conspiracy was no longer ongoing by April
20, 2004, and that the Estate proved that it did not discover the
facts constituting the conspiracy until after April 20, 2004, and could not have discovered those facts
sooner.

With respect
to the Estate’s claims for conspiracy to commit financial elder abuse, the jury
found FCF and Out of BK.Com had participated in such a conspiracy, but that
Lafayette Jamerson and the two employees had not; by clear and convincing
evidence, that FCF and Out of BK.Com acted with oppression, fraud, malice or
recklessness; that Lafayette Jamerson had established a defense to the elder
abuse claim by proving that the conspiracy was no longer ongoing by April 20,
2004; and the Estate proved it did not discover the conspiracy to commit elder
abuse until after April 20, 2004, and could not have done so sooner. The jury awarded the Estate damages in the
amount of $755,825.72.

Judgment in
favor of Alice Lane against
U.S. Bank was entered on June 7, 2010. Judgment in favor of U.S. Bank against the
Jamerson Estate, and in favor of the Jameson Estate against FCF and Out of
BK.Com, was entered on February 14,
2011. Defendants’ motions
for new trial (as to U.S. Bank and Lafayette Jamerson) and judgment
notwithstanding the verdict (JNOV) were denied by order filed April 20, 2011.

Defendants
timely appeal the judgment and the denial of the JNOV motion. This court ordered consolidation of the
appeals.

DISCUSSION

Substantial Evidence Supports The
Jury’s Implied Finding That FCF Entered Into A Contract With >Alice Lane>, In Her Representative Capacity As
Conservator Of The Jamerson Estate.

>Standard Of Review

Defendants Lane and
Woolfolk assert this court should independently review the contract judgment
against them de novo, rather than apply the substantial evidence rule, because,
on the question whether FCF intended to contract with Alice Lane in her
individual or representative capacity, the evidence adduced at the jury trial
indisputably proved FCF intended to loan Alice Lane $1 million in her
individual capacity. Defendants cite >California Assn. of Medical Products
Suppliers v. Maxwell-Jolly (2011) 199 Cal.App.4th 286 (Maxwell-Jolly) in support of the proposition that we should ignore
the substantial evidence rule on appeal from a judgment rendered after a jury
trial. We find the cited case is
inapposite and does not support independent review in this case.href="#_ftn14" name="_ftnref14" title="">[14] We will, therefore,
review the jury’s express and implied findings of fact under the familiar
substantial evidence rule. Under that
deferential standard, our review begins and ends with a determination as to
whether there is any substantial evidence, contradicted or uncontradicted, to
support the findings below. We view the
evidence in the light most favorable to the prevailing party, giving it the
benefit of every reasonable inference and resolving all conflicts in its favor. And, we are not at liberty to reweigh the
evidence or judge the credibility of witnesses.
(Tesoro del Valle Master
Homeowners Assn. v. Griffin
(2011) 200 Cal.App.4th 619, 634, and cases cited therein.)

The evidence before the jury was
theoretically susceptible of conflicting inferences on the question whether Alice Lane
signed the loan documents in her individual or representative capacity. On the one hand, the unrecorded deed of trust
vested title in Alice Lane
as a single woman, and she signed everything simply as Alice R. Lane. On the other hand, the letters of
conservatorship gave Alice Lane
“[t]he power to borrow money and give security for the repayment thereof”
without further order of the court. The
evidence showed Alice Lane
used her power as sole conservator to sign for loans that encumbered the
Estate, but that it was her older brother who arranged for numerous loans on
the various properties owned by the Estate through FCF, which he then presented
to Alice Lane
for her signature as conservator. This
evidence gave rise to the reasonable inference that when Alice Lane
signed and authorized the subject loan, she was acting in conformity with her
usual practice and was once again acting in her representative capacity. And, of course, Alice Lane
testified she signed the promissory notes and deeds of trust at issue in her
capacity as conservator of the Estate and not
in her individual capacity. She
testified when she signed for the Estate, she always signed as Alice R. Lane,
without adding conservator. Finally, the
recorded deed of trust identified the borrower as “Alice R. Lane,
as Conservator” of the Jamerson Estate.

Defendants maintain, however, that
the alternate set of loan documents showing Alice R. Lane, a single woman,
demonstrate indisputably there was “no intent on FCF’s part to contract with the Jamerson Estate,” and “the
controlling intent here is FCF’s.” We
disagree. Both Ruth Anderson and Ann
Tramble disavowed any knowledge of how there came to be two sets of
documentation, one for Alice Lane as conservator and one for Alice Lane as a
single woman. But there was evidence
someone named Ruth at FCF faxed the letters of conservatorship to the title
company with a facsimile cover sheet asking the title company to mask the
conservatorship in the preliminary title report. Ruth Anderson, FCF’s escrow officer,
testified that all the title reports she received and processed on FCF’s behalf
indicated that Alice Lane
as conservator was the borrower, not Alice Lane,
as a single woman. And, it is undisputed
that FCF obtained and recorded a deed of trust against a property owned by the
Jamerson Estate, not by Alice Lane
personally. Viewed as a whole, the
evidence amply supported the inference that FCF intended to encumber Estate
property, and did so by contracting with Alice Lane in her capacity as the
conservator for the Estate, and that the phony “Alice R. Lane, a single woman”
documents, which found their way into the collateral files of La Salle Bank,
DLJ, Lydian, CSFB and ultimately U.S. Bank and Wells Fargo, were concocted by
someone at FCF for the purpose of meeting DLJ/CSFB’s underwriting requirement
that the borrower be an individual.

Furthermore, the jury was separately
instructed about contract formation.href="#_ftn15" name="_ftnref15" title="">[15] Defendants do not argue on appeal these
instructions were in any way faulty. Based
on the instructions and the evidence before it, the jury was entitled to find
credible Alice Lane’s testimony that she signed the loan papers in her
representative capacity; to infer reasonably that when Alice Lane signed the
promissory note at issue, she was acting solely as an agent for the Jamerson
Estate; and to further infer that when FCF contracted with Alice Lane, it
understood that she was acting as an agent on the conservatorship’s behalf and
agreed to lend $1 million to the conservatorship, and not to Alice Lane
personally. Substantial evidence
supports the jury’s general and special verdicts reflective of that conclusion.

In light of our resolution of
defendants’ contract formation claim, we need not discuss in detail defendants’
argument there was insufficient evidence to support the jury’s implied finding
the Jamerson Estate ratified the contract after the fact. However, our conclusion would be the same as
above, in any event. The jury was
correctly instructed with respect to the elements of ratification. There was ample evidence adduced at trial
from which the jury could infer that each of the elements was met: the Estate accepted the loan proceeds, made
payments on the loan and, at best, was silent about being a party to the loan
after it knew or should have known the owner of the loan believed the Jamerson
Estate was a party to the loan.
Substantial evidence supports the jury’s general verdict.

Substantial Evidence Supports
The Jury’s Determination That U.S. Bank Was A Holder In Due Course.

Defendants argue that because CSFB
knew FCF’s loans to Alice Lane
were in default at least as of March
25, 2004, that knowledge should be
imputed to U.S. Bank. “As a matter of
law and public policy, [CSFB] should not be permitted to launder this note by
the artifice of depositing it in trust so as to manufacturer a holder in due
course,” i.e., U.S. Bank. Defendants
again argue that de novo review obtains, citing Maxwell-Jolly, supra, 199 Cal.App.4th at page 303. For the following reasons, we reject that
contention and apply the substantial evidence rule.

The jury was instructed in
accordance with Commercial Code section 3302 on the requirements of a holder in
due course and defendants do not challenge the correctness of those
instructions.href="#_ftn16" name="_ftnref16"
title="">[16] Nor do they appear to dispute there was no
evidence “that U.S. Bank itself had actual knowledge it was receiving
fraudulent, overdue mortgages to hold in trust.” Instead, defendants claim essentially that
CSFB’s guilty knowledge should be imputed to U.S. Bank because of its “close
connection” with CSFB. Defendants
acknowledge they “have found no authority” that so holds, and so they urge us
to rely on “sound public policy” to “hold that good faith, for purposes of acquiring
holder in due course status, cannot exist when one who knows an instrument is
fraudulent and overdue conveys that instrument in a less than arm’s length
transaction.” Defendants’ public policy
argument is better addressed to the Legislature and could result in the
proverbial slippery slope under the circumstances of this case.

Defendants also argue U.S. Bank did
not qualify as a holder in due course because it received duplicate original
promissory notes. They argue, without
citing to any authority, that the duplicate promissory notes were “so irregular
. . . as to call into question [their] authenticity,” apparently as a matter of
law. (Com. Code, § 3302, subd.
(a)(1).) We disagree because the
apparent authenticity of the promissory note here was a question of fact for
the jury. The jury was specifically
asked: “When plaintiff 2004-1 Trust
obtained the promissory note was it free from apparent evidence of forgery or
alteration, and did it appear so regular and complete so as not to call into question
its authenticity?” The jury answered
that question affirmatively, and that answer was amply supported by the
testimony of Bruce Kaiserman and Charles Pedersen who looked
at the duplicate promissory notes and were not alarmed by them. The evidence adduced at trial supported the
inference there were two sets of loan documents, but only one set―the one
identifying the borrower as Alice Lane, a single woman—was sent on to DLJ and
others in the investor chain of possession, and that the documentation sent to
them was sufficiently ordinary looking that it fooled everyone, duplicate
promissory notes notwithstanding.

Defendants argue that U.S. Bank does
not qualify as a holder in due course because the name “Alice R. Lane,”
and the phrase “A Single Woman,” are misaligned on the unrecorded version of
the deed of trust included in the loan documents that FCF sold to CSFB and that
CSFB deposited in the trust. According
to defendants, the misalignment proves the name and the description “>must have been placed on this document
at different times,” thereby demonstrating an apparent forgery, alteration or
other irregularity as to call into question the document’s authenticity. The existence of duplicate promissory notes,
as well as typographical errors in spelling and spacing, were brought out at
trial, but did not persuade the jury these minor irregularities were sufficient
to render the bogus promissory note apparently inauthentic. The jury’s conclusion is supported by
substantial evidence.

Finally, defendants argue U.S. Bank
is not a holder in due course because the allonge included in one of the
duplicate promissory notes had “no staple holes at all, nor any other indicia
that it was ever attached to anything.”
However, one of the duplicate original promissory notes >did have an allonge stapled to it. Defendants note they repeatedly and
strenuously objected to the introduction of the duplicate promissory note. However, their objections were overruled, and
they do not argue on appeal that the court’s ruling was in error. The promissory note with the allonge stapled
to it was admitted into evidence for the jury’s consideration. The jury was specifically asked: “Was a valid allonge attached to the
promissory note when it left the hands of First City Funding and
thereafter?” The jury answered that
question in the affirmative. Evidence
admitted at trial which the jury found credible supported that finding. The fact there was contradictory evidence
does not make it insubstantial. In sum,
substantial evidence supports the jury’s findings that U.S. Bank qualified as a
holder in due course.

Code Of Civil
Procedure Section 726 Did Not Bar U.S. Bank’s Lawsuit

Defendants argue U.S. Bank should
not have been allowed to proceed on its contract claim against defendants
because U.S. Bank could have corrected the error in the recording of the deed
of trust against the wrong property and, if it had done so, it would have been
required to foreclose against the deed of trust and sell the encumbered
property to satisfy the debt. Defendants
unsuccessfully made this same argument in a motion for JNOV. Once again, defendants argue that the
standard of review is de novo, claiming the facts are undisputed. We disagree under the applicable standard of
review.

“ ‘Well-settled standards
govern judgments notwithstanding the verdict:
“When presented with a motion for JNOV,
the trial court cannot weigh the evidence [citation], or judge the credibility
of witnesses. [Citation.] If the evidence is conflicting or if several
reasonable inferences may be drawn, the motion for judgment notwithstanding the
verdict should be denied.
[Citations.] A motion for
judgment notwithstanding the verdict of a jury may properly be granted only if
it appears from the evidence, viewed in the light most favorable to the party
securing the verdict, that there is no substantial evidence to support the
verdict. If there is any substantial
evidence, or reasonable inferences to be drawn therefrom in support of the
verdict, the motion should be denied.
[Citation.] [Citation.] The same standard
of review
applies to the appellate court in reviewing the trial court’s granting [or
denying] of the motion.
[Citations.] Accordingly, the
evidence . . . must be viewed in the light most favorable to the
jury’s verdict, resolving all conflicts and drawing all inferences in favor of
that verdict.” [Citation.]’ (Osborn v. Irwin Memorial Blood Bank
(1992) 5 Cal.App.4th 234, 258–259[.])” (Ajaxo
Inc. v. E*Trade Group Inc. (2005) 135 Cal.App.4th 21, 49.)

Defendants’ argument, that U.S. Bank
is barred from suing and recovering on the promissory note by the “one form of
action rule,” is based on Code of Civil Procedure section 726, subdivision
(a). That section states in relevant
part: “There can be but one form of
action for the recovery of any debt or the enforcement of any right secured by
mortgage upon real property . . . which action shall be in accordance with the
provisions of this chapter. In the
action the court may, by its judgment, direct the sale of the encumbered real
property . . . .”

Defendants do not dispute that the
subject loan “was apparently supposed to be secured by 2148 Pine Street.” And they agree the deed of trust recorded as
security for the subject loan “contained an apparent error.” Defendants posit that because of the error,
the subject loan became “attached to the 2140 Pine Street
[property].” Defendants reason from this
premise that 2140 Pine
Street was thus
encumbered by two loans (totaling $2 million) that were co-equal in priority,
leaving 2148 Pine Street
unencumbered. (First Bank v. East
West Bank (2011) 199
Cal.App.4th 1309, 1315.)

Defendants assert: “There was no evidence that U.S. Bank took
any action to stop the sale of 2148 Pine Street,
or any action to reform the deed of trust securing this loan.” Thus, when U.S. Bank foreclosed on 2140 Pine
Street to satisfy Loan 03-5570, U.S. Bank deliberately “wipe[d] out its
co-equal security on [the subject] Loan.”
The nub of this argument appears to be that, having thus voluntarily
divested itself of 2140 Pine
Street, the asserted
security, by its own act or neglect, U.S. Bank waived the right to proceed on
the note. (Pacific Valley Bank v. Schwenke (1987) 189 Cal.App.3d 134, 140–141;
Ghirardo v. Antonioli (1996) 14
Cal.4th 39, 48.)

Defendants’ argument flies in the
face of the facts and the law. Civil
Code section 1624, subdivision (a)(6) requires that the security interest in a
deed of trust be stated in writing with sufficient clarity to identify it. (4 Miller & Starr, Cal. Real Estate (3d ed. 2003)
Deeds of Trust, § 10:17, p. 70.) The property description
can be in an incorporated document, as it was here. But the reference to the document must be
clear and unequivocal. (Calvi v.
Bittner (1961) 198 Cal.App.2d 312, 316; Saterstrom v. Glick Bros. Sash
etc. Co.
(1931) 118 Cal.App. 379, 381 (Saterstrom).) “ ‘ “To be valid on its face, a name="SR;3272">deed
must contain such a description of the real
property thereby intended to be conveyed as will enable the property to be
readily located by reference to the description.” [I]f the writing itself does “name="SR;3307">not
furnish the means whereby the description
may be made sufficiently definite and certain readily to locate the property,
then the instrument must be held void, since the imperfections of the name="SR;3338">description
cannot be supplied through evidence extrinsic to the writing itself without
running up against the positive mandate of the rule that a conveyance of real
property must be in writing.” ’
[Citation.]” (Saterstrom,
supra, at pp. 380–381.)

The recorded deed of trust identified 2148 Pine Street
by street address and 2140 Pine
Street by legal
description, rendering the reference less than clear and unequivocal. If the disconnect in the deed of trust
between the street address and the legal description of the property was
sufficient to defeat the creation of a perfected security interest in 2148 Pine
Street, logic dictates that the same disconnect likewise defeated the creation
of a perfected security interest in 2140 Pine Street. In this case, despite the ambiguity in the
deed of trust, it was erroneously recorded against the property identified in
the legal description. Contrary to
defendants’ assertion, the subject loan did not become “attached to” 2140 Pine
Street by virtue of the defect in the deed of trust any more than it became
“attached to” 2148 Pine Street by virtue of the same defect. Instead, the defect in the deed of trust gave
rise to an equitable mortgage in 2148 Pine Street,
as we discuss below.

The evidence adduced at trial
established the parties intended to
secure the subject loan with a deed of trust on 2148 Pine Street,
and never intended to secure that
loan with a deed of trust on 2140 Pine Street. Defendants acknowledge placing the legal
description of 2140 Pine
Street in the deed of
trust for 2148 Pine Street
was a mistake. The law is clear, “ ‘ “[a] promise
to give a mortgage or a trust deed on particular property as security for a
debt will be specifically enforced by granting an equitable mortgage. [Citations.]
An agreement that particular property is security for name="sp_226_444">name="citeas((Cite_as:_206_Cal.App.3d_438,_*44">a debt also gives rise to an
equitable mortgage even though it does not constitute a legal mortgage. [Citations.]
If a mortgage or trust deed is defectively executed, for example, an
equitable mortgage will be recognized.
[Citations.] Specific mention of
a security interest is unnecessary if it otherwise appears that the parties
intended to create such an interest.
[Citations.]”
[Citation.]’ ” (>Clayton Development Co. v. Falvey (1988)
206 Cal.App.3d 438, 444–445 (Clayton).)

Clayton
provides a similar fact pattern, and the court’s analysis of the issues raised
by such facts is instructive. In that
case, the purchaser, Falvey, decided to buy a condominium as an investment
property. He executed a first deed of
trust to secure a note in favor of Pacific Federal Savings and Loan (Pacific
Federal), and a second deed of trust to secure an additional note in favor of
Clayton Development Company, the vendor.
However, because the vendor’s agent “gave the escrow company an
incorrect legal description the second trust deed actually encumbered a
condominium unit other than Falvey’s.
Clayton and Falvey did not know of the mistake.” (Clayton,
supra, 206 Cal.App.3d at p. 442.)
Falvey subsequently defaulted on the notes to Pacific Federal and
Clayton. When the mistake was finally
discovered, Falvey was asked to execute a new deed of trust containing the
correct legal description, but did not do so.
Clayton then sued Falvey on the note.
Some months later, Pacific Federal foreclosed on the property. (Ibid.) In the lawsuit, Falvey asserted the Code of
Civil Procedure sections 726 and 580bhref="#_ftn17" name="_ftnref17" title="">[17]
as affirmative defenses. In a motion for
summary judgment, Falvey argued that “the second deed’s mistaken legal
description created an equitable mortgage favoring Clayton with the result that
direct action on the second note was barred under section 726’s one-action rule
and section 580b’s antideficiency provision.”
(Clayton, supra, at
p. 443.) The Court of Appeal
agreed, and affirmed the trial court’s grant of summary judgment.

The court found that the parties
clearly “intended their deal to be a secured transaction. Indeed, Clayton concedes ‘[t]he debt was to
have been secured by a 2nd trust deed on real property sold to Defendants by
Plaintiff.’ Falvey executed a trust deed
intended and believed by all parties to encumber the property purchased. The trust deed’s description of the property
was faulty. However, given the parties’
undisputed intent, the erroneous trust deed constituted a security interest in
the property and an equitable mortgage was created.” (Clayton,
supra, 206 Cal.App.3d at p. 444, citing Kaiser Industries Corp. v. Taylor,
supra, 17 Cal.App.3d at pp. 350–353.) The court rejected Clayton’s argument that
since the deed of trust was defective, Falvey merely held unsecured notes that
were not subject to Code of Civil Procedure section 580b, which refers only to
security transactions. (>Clayton, supra, at p. 444, fn. 3.)

Recognizing that both “[Code of
Civil Procedure sections] 580b and 726 are part of a statutory scheme
protecting defaulting borrowers from being disadvantaged by lenders,” and that
an equitable mortgage is a form of security interest, the court held that
“[b]oth statutes should be read as applying to equitable, as well as legal,
mortgages. . . . If in
fact an equitable mortgage exists, the creditor has no choice of remedy. [Citation.]
Construing section 580b as not embracing equitable mortgages would
undermine the purpose of the antideficiency statutes by permitting the creditor
an election between either enforcing an equitable lien and being treated as a
secured creditor or circumventing the antideficiency statutes and suing on the
underlying note if such better suited the creditor’s needs. Such construction here would result in
Clayton receiving an unmerited windfall simply because Clayton’s predecessor’s
agent fortuitously misdescribed the property to be encumbered. Accordingly, we hold section 580b bars a
deficiency judgment where, as here, an equitable mortgage exists securing
payment of the balance of a real property purchase money note favoring the
vendor.” (Clayton, supra, 206 Cal.App.3d at p. 445.)

Although the Clayton court did not decide to what extent Code of Civil Procedure
section 726 also applied to the facts before it, the court recognized there was
an exception to the general rule that “when the parties intend a secured
transaction and an equitable mortgage is created, the creditor is required to
follow the procedure specified in section 726 and foreclose on that security. [Citation.]
Where the debtor successfully raises section 726 as an affirmative
defense, the creditor must exhaust the security before he may obtain a money
judgment against the debtor for any deficiency.
[Citation.] However, where the security has been exhausted or rendered valueless
through no fault of the creditor, the creditor may bring action on the debt
‘[o]n the theory that the limitation to the single action of foreclosure refers
to the time the action is brought rather than when the trust deed was made, and
that if the security is lost or has become valueless at the time the action is
commenced, the debt is no longer secured.
[Citations.]’ ” (>Clayton, supra, 206 Cal.App.3d at pp.
445–446, italics added.) The court noted
that in the case before it, “the security became valueless only after Clayton
commenced its action on the note,” but it declined to decide “[w]hether under
these circumstances section 726 might not be an obstacle to Clayton’s
proceeding with its action on the note.”
(Clayton, supra, at p. 446;
see also Brown v. Jensen (1953) 41
Cal.2d 193, 197; Security-First Nat. Bank
v. Chapman (1939) 31 Cal.App.2d 182, 194; Pacific Valley Bank v. Schwenke, supra, 189 Cal.App.3d at pp.
140–141; Bank of America v. Graves
(1996) 51 Cal.App.4th 607, 611.)

Defendants acknowledge the exception to
the one form of action rule set forth above.
They maintain, however, the exception does not apply here because “U.S.
Bank was aware [of the] error well before the intended security, 2148 Pine Street,
was sold.” They point to evidence that
Loanstar, a sub entity of Wells Fargo, filed a notice of default on the subject
loan on April 29,
2005, and that Loanstar “pulled title”
before doing so and learned of the property’s true ownership. They infer that in that process, U.S. Bank must
have learned through its agents “that there was no security interest
encumbering 2148 Pine.” We disagree.

The Clayton
rationale teaches that the legal misdescription of the property known as 2148
Pine Street in the deed of trust created an equitable mortgage in 2148 Pine
Street, because the evidence overwhelmingly proved that FCF and the Jamerson
Estate intended to create a security interest in that property for the subject
loan of $1 million, and there is no evidence that the parties ever intended to
encumber 2140 Pine Street with a second million-dollar loan. “The trust deed’s description of the property
was faulty. However, given the parties’
undisputed intent, the erroneous trust deed constituted a security interest in
the property and an equitable mortgage was created.” (Clayton,
supra, 206 Cal.App.3d at p. 444.)

First
Bank v. East West Bank, supra, 199 Cal.App.4th 1309, cited by defendants
for the proposition that the two liens recorded on a single property at the
same time have equal priority, does not compel a different result. In that case, the borrower and the two
lenders intended both deeds of trust
would be secured by the same property. (>Id. at pp. 1311–1312.) Here, the parties never intended to create
two security interests (worth $2 million) in 2140 Pine Street. They intended to create and, through the
implication of an equitable mortgage did create, a security interest in 2148 Pine Street.

In
this case, unlike Clayton, the facts
adduced at trial established the equitable lien holder, U.S. Bank, never had
the chance to foreclose on property intended as security because the borrower
sold the property before it could do so.
Alice Lane
testified that on December 14, 2004,
she signed a letter which was faxed to America’s
Servicing Company. In it, she
acknowledged she received information that the loan on 2148
Pine Street had been transferred to a new loan
servicer, America’s
Servicing Company, as of December 1,
2004, and she informed the new servicer of the change in
conservators, and also stated that several loan payments had been sent to the
previous servicer in early December. She
attached to the fax transmission copies of checks signed by Woolfolk as proof
of payment, mailing and delivery. Erin
Hirzel Roesch, an employee of Wells Fargo, which serviced the subject loan
under the name of America’s
Servicing Company, acknowledged receiving Alice Lane’s
fax. Wells Fargo subsequently received
more payments on the loan in January 2005, but later payments were returned for
insufficient funds, after which Wells Fargo received no more payments.

At that
point, the loan was considered to be in default and a breach letter was sent
informing the borrower that the bank would proceed with foreclosure if the
default was not cured. When no further
payments were made for 60 days, a notice of default was entered on Wells
Fargo’s behalf by sub entity Loanstar.

At some
point, Roesch was told the property might be sold. A notice of default on the subject loan was
recorded on April 29, 2005. Roesch testified that after the notice of
default is recorded, there is a waiting period of 90 days to see if there is a
response to the notice of default. If no
response is received, the bank proceeds into foreclosure. In this case, Roesch testified, Wells Fargo
waited for the 90-day period to expire, and then proceeded with the
foreclosure. Only then was it determined
that the deed of trust held in their files (i.e., the deed of trust naming the
borrower as Alice R. Lane,
a single woman) had never been recorded.

But by July 28, 2005 (i.e., 90 days after
April 29th), 2148 Pine Street
had long since been sold and the proceeds disbursed. On June 9,
2005, the Estate had relinquished the property at 2148
Pine Street to an Internal Revenue Code section
1031 Exchange escrow account with Investment Property Exchange Services,
Inc. On June 13, Woolfolk signed the
seller’s escrow instructions, knowing that no lien had been recorded against 2148
Pine Street.
According to the Seller’s Final Closing Statement, there was no pay-off
for a $1 million loan. By June 30 or July 1, 2005, the net proceeds of
$809,187.75 had gone into an Internal Revenue Code section 1031 investment
property exchange account for the benefit of the Estate.

Although
U.S. Bank did not try to stop the sale, the foregoing facts and the inferences
therefrom provide substantial evidence in support of the conclusion that it
would have been futile for U.S. Bank to pursue reformation of the deed or
foreclosure of the property, even if it could have done so. Even though Alice
Lane had told Roesch that 2148
Pine Street was owned by her mother’s
conservatorship estate, that assertion was not confirmed until Loanstar “pulled
title” for the purpose of filing the notice of default on April 29, 2005.
But, so far as this record shows, at that point Wells Fargo had not yet
discerned the recorded deed (naming the borrower as A