California Appellate Court Holds Lender’s Deed of Trust Was an Enforceable First-Priority Lien Despite the Borrower Having Obtained Title Via a “Sham Transaction”

The California Court of Appeals recently held that a deed of trust was a first-priority lien on a property even though the borrower who executed the deed of trust obtained title via a “sham transaction” because the lender was a bona fide encumbrancer for value.  See Bank of New York Mellon v. Nazaryan, 2018 WL 1736622 (Cal. Ct. App. 2018).  There, defendant and her husband purchased the subject property in 1998.  In 2002, defendant transferred her interest in the property to her husband, and her husband executed a deed transferring the property to his sister that same day.  In 2003, defendant filed a petition for dissolution of her marriage and recorded a lis pendens naming herself and her husband, but not the sister.  Later that year, she allegedly discovered the transfer of the property to the sister and named the sister in the dissolution action, but never amended the lis pendens.  In 2004, the sister executed a deed of trust encumbering the property.  In the dissolution action, the court found that the husband had defrauded defendant out of her interest in the property through a “sham transaction” with the sister, and awarded defendant sole ownership of the property.  Defendant continued making payments on the deed of trust for about six years.  In 2012, plaintiff was assigned the deed of trust and brought this action, seeking a declaratory judgment that it was a bona fide encumbrancer for value because its assignor did not have notice of the title dispute, and that defendant took title subject to the deed of trust.  Defendant opposed, arguing plaintiff knew or should have known about the sham transaction because she had filed a lis pendens.  The trial court granted plaintiff’s motion for summary adjudication. 

On appeal, the Court affirmed.  It held that plaintiff was a bona fide encumbrancer for value despite defendant’s filing of the lis pendens because the lis pendens would not have appeared either in a search of the grantor/grantee index under the sister’s name (because she was not named in the lis pendens) or under the husband’s name (because he did not have title when the lis pendens was recorded).  Thus, the assignor did not have notice of defendant’s interest in the property, the deed of trust was an enforceable first-priority lien on the property, and defendant took title to the property subject to plaintiff’s deed of trust.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Michael Crowley at mcrowley@riker.com, or Dylan Goetsch at dgoetsch@riker.com.