Importance of Being a BFP

The critical importance of being a bona fide purchaser (BFP) was demonstrated in the recent case of Vasquez v. LBS Financial Credit Union wherein the Second District Court of Appeal (with jurisdiction of Los Angeles County) affirmed a judgment entered after a court trial for Carlos and Libby Vasquez and mortgagee Brighten Lending (collectively, plaintiffs) in their action for quiet title and declaratory and injunctive relief regarding property the Vasquezes purchased in 2015 from Guillermo Guerrero and his wife.

Seven years before the purchase, Defendant LBS Financial Credit Union (LBS) obtained two money judgments against Guerrero and recorded abstracts of judgment (LBS abstracts) against Wilbert G. Guerrero, a name which does not appear in the chain of title for the property.

On appeal, LBS contended the trial court erred in finding the Vasquezes were bona fide purchasers, asserting the Vasquezes had constructive notice of the LBS abstracts based on Guerrero’s use of different variations of his name on multiple title and sale documents, including one handwritten reference in the 10-page purchase agreement to the name Wilbert Guillermo Guerrero. The Court of Appeal disagreed.

In 2015, Carlos and Libby Vasquez purchased real property located on Domo Street in Whittier (Domo property) from Guillermo Guerrero and his wife, Laura Guerrero. The Vasquezes made a down payment and borrowed the remainder from Brighten Lending. Brighten Lending recorded a deed of trust against the Domo property, securing a promissory note.

In 2016, attorneys representing LBS contacted the Vasquezes, Brighten Lending, and their title insurance company, Old Republic Title Company, and advised them LBS held two judgment liens against the Domo property based on money judgments it obtained in 2008 against Guerrero, for which it recorded abstracts of judgment against “Wilbert G. Guerrero” with the Los Angeles County Registrar-Recorder. LBS demanded plaintiffs pay the full amount of Guerrero’s judgment debt, $72,166.25, to avoid foreclosure proceedings.

In 2017, plaintiffs filed a complaint for quiet title and declaratory and injunctive relief, seeking a determination the Vasquezes owned the Domo property free and clear of LBS’s judgment liens.

Old Republic Title had provided a preliminary title report that stated the Guerreros’ interest in the property was vested in “Guillermo Wilbert Guerrero and Laura Olivia Guerrero, husband and wife as joint tenants.” The preliminary title report did not identify the LBS abstracts.

Plaintiffs testified they had no knowledge of LBS’s liens prior to receiving the 2016 demand letter.

Plaintiffs' expert, Kenneth Dzien, testified that in compliance with the Government Code, the Registrar-Recorder indexes property records based on the names of the grantor and grantee. If a prospective purchaser wants to search for encumbrances on a property, he or she must visit the Registrar-Recorder’s office in Norwalk and run a search of the grantor and grantee names in the computerized index maintained at the office. To perform an index search, Dzien would first look in the grantee index to confirm the seller of the property had obtained title to the property. He then would look in the grantor index to see what grants have been made and what liens have been placed on the property.

Dzien followed this procedure for the Domo property.  Although Dzien located dozens of indexed records under Guerrero’s names, he did not locate the LBS abstracts. Dzien testified the LBS abstracts did not attach as a lien onto the property through the grantor/grantee system because the name Wilbert G. Guerrero was not reflected in the monuments of title.

Therefore, the recorded LBS abstracts could not be located by a proper search of the grantor/grantee index. Dzien opined because LBS recorded its abstracts of judgment against Wilbert G. Guerrero, which is not a variation of a name in the chain of title, the Vasquezes did not have constructive notice of the LBS abstracts.

Dzien acknowledged the statement of information Guerrero provided to the escrow company, International City, included Guerrero’s driver’s license and Social Security numbers. However, the Registrar-Recorder’s grantor/grantee index cannot be searched by a driver’s license or Social Security number. Rather, the purpose of a statement of information is to help title insurance companies examine documents that come up during a title search for common names to eliminate names that do not relate to the people and transaction at issue.

Dzien recognized that, in preparing a preliminary title report, the title company does not use the official grantor/grantee index because they can’t wait in line at the recorder’s office. The title companies maintain a computer system called the general index, and that general index is not something that has anything to do with constructive notice. It is a proprietary system that they maintain to search names.

LBS' expert witness admitted the LBS abstracts were outside the chain of title for the Domo property. He also admitted there was no evidence that the Vasquezes had actual knowledge of the LBS abstracts.

Following the close of testimony, the trial court filed a final statement of decision finding in favor of plaintiffs. The court found plaintiffs carried their burden of proving that the abstracts of judgment recorded in 2008 by LBS were improperly indexed and not locatable by a proper search. The testimony of Dzien that said recorded abstracts of judgment were essentially ‘outside the chain of title’ of the subject property were supportive of the credible showing that the plaintiffs and each of them had no actual or constructive notice of the abstracts of judgment.

The court concluded the Vasquez plaintiffs acquired the subject property as bona fide purchasers for value without notice of the LBS abstracts of judgment.

It is "black-letter law" that a bona fide purchaser for value who acquires his or her interest in real property without knowledge or notice of another’s prior rights or interest in the property takes the property free of such unknown interests.

The elements of bona fide purchase are payment of value, in good faith, and without actual or constructive notice of another’s rights.

Conversely, it is an equally well-established principle of law that any purchaser of real property acquires the property subject to prior interests of which he or she has actual or constructive notice.

“Actual notice" is defined as express information of a fact, while constructive notice is that which is imputed by law. 

A bona fide purchaser without notice may seek a legal determination through a quiet title action that the title it obtained remains free and clear of any adverse interest in the property. The general rule places the burden of proof upon a person claiming bona fide purchaser status to present evidence that he or she acquired interest in the property without notice of the prior interest.

Constructive notice of a lien or other interest in property arises from the proper recording of that interest.

Every duly recorded conveyance of real property, or recorded judgment affecting title to or possession of real property, is constructive notice of the contents thereof to subsequent purchasers and mortgagees from the time of recordation.

The law conclusively presumes that a party acquiring property has notice of the contents of a properly recorded document affecting such property. Civil Code § 1213 provides that recorded conveyance of real property provides constructive notice to subsequent purchasers. However, a bona fide purchaser of real property has constructive notice of only those matters that could be located by a diligent title search.

California courts have consistently reasoned that the conclusive imputation of notice of recorded documents depends upon proper indexing because a subsequent purchaser should be charged only with notice of those documents which are locatable by a search of the proper indexes.

A purchaser may also have constructive notice of a fact affecting his or her property rights where the purchaser has knowledge of circumstances which, upon reasonable inquiry, would lead to that particular fact. Every person who has actual notice of circumstances sufficient to put a prudent person upon inquiry as to a particular fact has constructive notice of the fact itself in all cases in which, by prosecuting such inquiry, he or she might have learned that fact.

If the purchaser neglects to prosecute such inquiry diligently he may not be awarded the standing of a bona fide purchaser.  This type of constructive notice is often described as inquiry notice.

In addition, notice of an adverse interest may be imputed to a purchaser from knowledge acquired by her or his agent acting within the course and scope of the agent’s authority. An escrow agent’s knowledge of discrepancy regarding debtor’s name on judgment lien is imputed to purchaser and is sufficient to give constructive notice of the lien. An escrow agent’s knowledge of information obtained in escrow may be imputed to purchaser under an agency theory.

The determination whether a party is a good faith purchaser ordinarily is a question of fact.

On appeal, LBS did not challenge the trial court’s finding the Vasquezes lacked actual knowledge of the liens.

Rather, LBS contended the Vasquezes had constructive notice of the LBS abstracts because they were on inquiry notice Guerrero used the name Wilbert G. Guerrero. The Court of Appeal found that substantial evidence supports the trial court’s finding to the contrary.

Although a purchaser may rely on the recorded chain of title, the purchaser may not ignore information that comes to him from outside the recorded chain of title, to the extent such information puts him on notice of information that reasonably brings into question the state of title reflected in the recorded chain of title. Though defrauded buyers will not be deemed to have constructive notice of public records, this does not insulate them from evidence of their actual knowledge of the contents of documents presented to them or from being charged with inquiry notice based on those documents. 

LBS argued the Vasquezes were on inquiry notice of Guerrero’s use of the first name Wilbert because the purchase agreement contained the handwritten name Wilbert Guillermo Guerrero. However, Guerrero signed the purchase agreement and the counteroffer as Guillermo Guerrero or Guillermo Guerrero W, and the typed name Guillermo Guerrero is listed three times on the counteroffer.

Further, some form of Guillermo Guerrero appeared repeatedly on the documents in the chain of title and those relating to the sale of the Domo property to the Vasquezes, without any other reference to Wilbert as a first name. The name Guillermo Guerrero appeared on the grant deeds recorded in 1999 and 2015, and the name Guilleromo Wilbert Guerrero was on the grant deed recorded in 2004.

The preliminary title report stated title to the Domo property is to be vested in “Guillermo Wilbert Guerrero and Laura Olivia Guerrero.” The preliminary title report also listed three tax liens against Guerrero Guillermo and an abstract of judgment recorded against “Guerrero Construction and Development, Inc. et al. and Guillermo Guerrero.”

In addition, the Vasquezes were not sophisticated in property transactions, and they relied on their realtor and the escrow to prepare the documents. Libby had no recollection of the realtor pointing out the use of the name Wilbert on the purchase agreement. The realtor likewise did not discuss variations in Guerrero’s name with Carlos.

LBS relied on a decision that held an undisputedly valid judgment lien recorded against a judgment debtor under one name imparts constructive notice of the lien to a subsequent purchaser to whom the same judgment debtor sells real property under a different name, where while acting within the course and scope of his or her agency, the purchaser’s escrow agent gains actual knowledge of both of the names used by the seller.

However, in this case, there was no evidence the Vasquezes’ realtor or escrow had any knowledge beyond what is shown on the face of the documents. There was no testimony at trial as to who prepared the purchase agreement.

The question was not whether the Vasquezes were bound by the purchase agreement, but whether information on the purchase agreement, in light of other contrary information, provided the Vasquezes constructive notice Guerrero used the first name Wilbert.

Finally, LBS contended Guerrero’s statement of information, which included his driver’s license and Social Security numbers, placed Old Republic Title, International City, and the Vasquezes on constructive notice Guerrero’s legal name was Wilbert Guillermo Guerrero because they could have performed a search of recorded documents using the numbers.

But the statement of information on its face listed Guerrero’s name as Guillermo Guerrero, with no mention of the name Wilbert other than the initial “W” at the end of Guerrero’s signature.

Further, as both experts testified, the purpose of the statement of information is to help the title company eliminate documents that do not belong to a seller with a common name, not to expand the universe of documents to be searched.

Moreover, the Registrar-Recorder’s grantor/grantee database cannot be searched by driver’s license or Social Security number. Although title companies have proprietary computer systems that can search for information by driver’s license and Social Security numbers, there is no authority for charging a purchaser with knowledge of what the proprietary search would reveal.

Further, it is a well-settled rule that a title insurance company is not the agent of its insured, and the insurer’s knowledge is not imputed to its insured.

Whatever knowledge the title company had about Cloney’s identity and the state of his title as a matter of actual or constructive notice, or which it arguably should have had as a matter of its duties as a title insurer, was essentially irrelevant to the case.

LBS contended Guerrero’s use of different names on the sales documents and the “additional names and variations of Mr. Guerrero’s name” in the chain of title placed the Vasquezes on constructive notice of the LBS abstracts.

The Court of Appeal held they did not. Contrary to LBS’s argument, the variations in Guerrero’s name were consistent with his use of the first name Guillermo (or Guilleromo) and the last name Guerrero. The names appearing in the title history are Guillermo Guerrero in 1999; Guilleromo Wilbert Guerrero in 2004; and Guillermo Guerrero in 2015. The purchase agreement, counteroffer, statement of information, additional escrow instructions, and preliminary title report all reflected the name Guillermo Guerrero or Guillermo Wilbert Guerrero, except for the single handwritten name Wilbert Guillermo Guerrero on a page of the purchase agreement.

LESSONS:

1.         The status of being a bona fide purchaser is critically important in determining if real property is subject to a creditor lien against the seller.

2.         Brokers/agents for buyers should be careful to recognize the names of the parties on the various documents, and should question any discrepancies in the names, as the buyer may be denied BFP status depending upon the details in the case.

3.         Creditors should be careful to use all names of a debtor in preparing and recording an abstract of judgment to ensure the judgment lien attaches to any real property owned by the debtor.