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THE CALIFORNIA COURT OF APPEAL RULES THAT THE TITLE INSURANCE RELEASE OF OBLIGATION PROVISION OF CIVIL CODE ß 2941(b) IS NOT A CO-EQUAL METHOD OF RECONVEYANCE OF TITLE.

By: Steven B. Haley, Esq.
Adleson, Hess & Kelly

The California Court of Appeal, Second District, has issued its long awaited ruling in the closely watched case of Trustors Security Service v. Title Recon Tracking, et al. (1996) 49 Cal.App.4th 592, 56 Cal.Rptr.2d 793, 96 C.D.O.S. 7065. The Court of Appeal ruled that Civil Code ß 2941(b) reflects a legislative preference for trustee reconveyances of deeds of trust, and ruled that the provision for title company releases of obligations is not a co-equal method of reconveyance.

The decision is of enormous significance to the trustee industry, and will have a dramatic impact on the manner in which reconveyances of deeds of trust are processed. Due to the significance of the issues raised in the case, the California Trustee's Association was permitted to file an amicus curiae brief on behalf of the trustee (Trustors Security Service), while the California Land Title Association was permitted to file an amicus brief on behalf of the defendant TRT and title companies.

In 1988, California Legislature amended Civil Code ß 2941 in order to address numerous problems associated with the reconveyance of deeds of trust following payment of the underlying loan obligations. Section 2941(a) concerns reconveyances of mortgages. Section 2941(b) concerns reconveyances of deeds of trust. Section 2941(c) concerns circumstances where the reconveyance is not be recorded. Section 2941(d) sets forth penalties for violation of the statute. Section 2941(e) concerns fees the may be charged for reconveyances.

Between 1989 and 1992, the experience of Trustors Security Service ("TSS") under the revised Civil Code ß 2941 was that title companies which handled an escrow in which a loan was paid off would tender the promissory note, the deed of trust and the request for full reconveyance ("the reconveyance documents") to TSS if TSS was listed as trustee under the deed of trust.

However, commencing in 1992, the title companies changed the manner in which they handled reconveyance documents. Working in conjunction with Title Recon Tracking Service ("TRT"), the title companies and TRT would not transmit the reconveyance documents to TSS. Rather, the title companies and TRT would hold the reconveyance documents for a 75 day period. On the 65th day, TRT would mail a notice of intent to issue a release of obligation to TSS. TSS would request, in writing, that TRT and the title companies deliver the reconveyance documents to TSS so that TSS could perform its statutory and contractual duties to reconvey the deeds of trust. TRT and the title companies would ignore the written request from TSS and would proceed with issuing the release of obligation. The title companies and TRT would split the $65.00 reconveyance fee.

In November, 1992, TSS filed suit against TRT and numerous title companies, seeking damages for interference with business and contractual relationship, and seeking injunctive and declaratory relief regarding the parties' respective rights under Civil Code ß 2941. (All references hereafter will be to the Civil Code, unless otherwise noted.) TRT cross-complained for declaratory relief and for damages for intentional and negligent interference with economic advantage.

Prior to trial, the defendant title insurers stipulated for entry of judgment in favor of TSS on its cause of action for interference with business and contractual relationship, and paid agreed upon damages to TSS. The case proceeded to trial on the TSS cause of action for declaratory relief and request for injunctive relief. The matter was tried to the court on specific stipulated facts:

The trial court ruled in favor of the title insurers and TRT. The trial court found that TSS had neither a contractual nor a statutory right to execute and record reconveyances in those situations where TRT or the title insurers had possession and control of the reconveyance documents. TSS appealed from the judgment.

On appeal, the issue presented to the court was whether the 1988 amendment to ß 2941 creates a co-equal competing alternative to clear title which authorizes title insurers to bypass trustees in the reconveyance process.

The California Court of Appeal, Second District, concluded that the trial court's interpretation of ß 2941 was not supported by statutory language or by legislative history of the 1988 amendments, and reversed the judgment and remanded the case to the trial court for further proceedings.

On appeal, TSS argued that ß 2941 creates a hierarchical system in which title insurers are only permitted to record a release of obligation if both the lender/beneficiary and the trustee, after proper request, have failed or refused to comply with their respective statutory duties within the specified time periods. TRT and the title insurers argued that the amendment creates a co-equal competing alternative for clearing title and that they need only wait 75 days after satisfaction of the obligation before recording the release of obligation.

The court first noted that ß 2941(b)(1) requires the beneficiary or the assignee of the beneficiary to execute and deliver to the trustee the original note, deed of trust, and request for full reconveyance when the obligation secured by the deed of trust has been satisfied. The court next noted that ß 2941(b)(1)(A) requires that the trustee shall execute the full reconveyance and shall record, or caused it to be recorded, within 21 calendar days after receipt of the reconveyance documents and the reconveyance fee, recorder's fees, and other necessary documents.

The court then discussed ß 2941(b)(2), setting forth the first alternative to the prescribed method of reconveyance (i.e., the requirement that a lender/beneficiary substitute itself or another trustee at the request of the trustor in the event the original trustee fails to perform its obligations). The court noted that this alternative requires the use of a trustee and a reconveyance rather than a title insurance company release of obligation, which the court considered to be a legislative preference for trustee reconveyance.

The court next addressed ß 2941(b)(3), which provides for a title insurance company issued "release of obligation." The court referred to the procedure set forth in ß 2941(b)(3) as "essentially a second fall back provision to be employed as a last resort after the preferred methods have failed to reconvey title." The court observed that ß 2941(b)(3) requires ten days prior written notice to the trustee, the trustor and the beneficiary. The court concluded that, if the legislator intended to create a co-equal method of clearing title, there would be no requirement of a ten day notice to the trustee and beneficiary to urge them to perform their statutory duties.

The court further observed that ß2941 provides penalties for the trustee or the beneficiary in the event that they fail to comply with the requirements of the code section. The court considered these potential penalties as inconsistent with the intention of the legislature to create a competing and co-equal method of clearing title by using title insurers.

The court next reviewed the legislative history of the 1988 amendments to ß 2941. The court noted that Assembly Bill 3893 had been introduced at the urging of the California Attorney General's Office to resolve a number of problems related to closing out loans that had been paid in full. The court noted that AB 3893 was analyzed and ultimately supported by a number of groups, including the California League of Savings Institutions, the California Association of Realtors, the California Mortgage Brokers Association, the California Bankers Association, and the two groups which filed amicus curiae briefs before the courts, i.e., California Land Title Association and the California Trustee's Association.

Both the California Association of Realtors and the California League of Savings Institutions took the position before the Legislature that the title insurance release of obligation provision would be a fall back position when all else failed. In addition, with regard to the California Land Title Association, the court noted that the CLTA had, in a letter written to the legislative consultant to the assembly judiciary committee, advocated the position that a title company should be a "reconveyance of last resort" where the trustee and the beneficiary had failed to issue the reconveyance. The Court noted that CLTA was taking the opposite position in its amicus brief filed with the court.

The court also discussed the fact that ß 2941(e) provides only that the trustee, the beneficiary or the mortgagee may collect a $65.00 fee for issuing reconveyances. The statute does not provide that the title insurer may charge and collect a fee for issuing a release of obligation. The court noted that the California Land Title Association had proposed such a provision, but that this proposal failed to be enacted. The appellate court viewed this as a further indicia of the legislative preference for trustee reconveyance.

The title insurers and TRT had argued that they should be able to compete for the reconveyance business and that they should be entitled to the reconveyance fee. However, the court dismissed this argument on the basis that what constitutes fair competition "simply has no bearing on the proper interpretation of ß 2941."

The court concluded by holding that ß 2941 gives trustees both the statutory right and the obligation to issue reconveyances as the preferred method of clearing title. The court further concluded that, under ß 2941, title insurers may only record releases of obligation after lenders/beneficiaries and trustees have first had the opportunity and then failed within the specified time periods to request, execute and issue a reconveyance on full payment of the underlying obligation. The court held that neither TRT nor the title insurers could withhold reconveyance documents supplied to them from lenders/beneficiaries in situations where TSS is the named trustee on the deed of trust and has requested the documents in order to issue a reconveyance.

COMMENTS: The Court of Appeal decision was based strictly upon the statutory interpretation. The court specifically did not discuss or base its opinion on the issue of whether the deed of trust created contractual rights for the trustee.

It is also important to bear in mind the limited scope of the stipulated facts upon which the case was tried, and upon which it was presented to the Court of Appeal. The court noted that this case does not involve a situation where the lender/beneficiary has exercised its option to substitute trustees under ß 2934a, nor did the case involve a situation where the lender/beneficiary or the trustee could not be located in time to perform its statutory duties because it was either located out of state, had since gone out of business or its location was otherwise unknown. Finally, this case does not involve interpretation of Civil Code ß 2941 in circumstances where the beneficiary/lender has failed to provide the original note and deed of trust, the request for reconveyance and the reconveyance fee.