Memorandum of Decision Re: Real Estate

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re GEORGE JERCHICH,                                                   No. 5-86-02611      Debtor. ___________________________/ CARMEL FINANCIAL GROUP II,      Plaintiff,    v.                                                                                  A.P. No. 870458 GEORGE JERCICH, et al.,      Defendants. ______________________________/
Memorandum of Decision
     The facts in this unfortunate case are fairly simple. All of the litigants with an active interest in this case are investors who gave their money to George Jercich, a free-wheeling entrepreneur now serving a prison term for defrauding investors.      In 1983, Jercich was the owner of the Crown Center Building in Aptos, California. He financed the property with loans from investors, who were given notes secured by deeds of trust to the building. The trustee under the deed of trust was Pajaro Valley Securities, Inc.; Jercich was its president.      Plaintiff Carmel Financial Group II was a limited partnership formed by Jercich to purchase the lower floor of the building. Jercich was the sole general partner and one of the limited partners. Jercich represented to the other limited partners that the partnership would be purchasing the lower floor free and clear of the deeds of trust held by defendants.      The transaction was consummated without using an independent escrow holder. A deed in favor of CFG II was recorded, but no reconveyances were ever recorded; the deeds of trust are still of record as encumbering the entire building. CFG II has brought this action seeking a judgment that the deeds of trust do not encumber the lower floor notwithstanding the state of record title.      During the course of the Jercich's bankruptcy proceedings, the building was sold by the trustee free and clear of all liens and interests. Thus, the parties are now fighting over about $1 million in cash rather than the building itself. Now before the court is defendants' motion for summary judgment.
I. Equitable Argument of CFG II
     If CFG II prevails in this action, all parties will recover the approximate principal amount of their investments. If CFG II loses, than all of the proceeds will go to the deed of trust holders (their notes bear high interest) and the CFG II investors will get nothing. CFG II argues that all of the parties are equally victims of Jercich so that this court, as a court of equity, should divide the pie equally.      While the argument certainly appeals to the court as the fairest resolution of this unhappy situation, the result CFG II seeks cannot be reached on equitable principals alone. Courts of equity are bound to follow the law to the same extent as law courts. Bankruptcy courts are no more entitled to ignore the law than are other courts of equity. In re Shoreline Concrete Co., Inc. (9th Cir.1987) 831 F.2d 903, 905. Therefore, whatever its equitable urges, this court must resolve the issues according to California law.
II. Statute of Limitations Defenses
     CFG II argues that the statute of limitations as to its claims was tolled because its limited partners were told by representatives of the bankruptcy estate that if they agreed to the sale free and clear of their interests that they would be paid in full from the proceeds. While this representation was probably made before the present problems were recognized, even if the problems were known there can be no merit to the argument because the limited partners were in no way prejudiced by the sale. They were in fact benefitted, in that their interests were transferred from a building subject to depreciation, damage, taxes, and management and insurance expenses, to cash sitting in an insured bank account and earning interest. The ability of the CFG II limited partners to hinder a sale as a litigation tactic is not a cognizable right, the waiver of which would estop other parties from asserting the statute of limitations as a defense. Accordingly, the breach of contract and negligence causes of action must be summarily dismissed. Nonetheless, the court will address the merits of CFG II's principal assertions.
III. Fraud and Agency
     There is no doubt that the limited partners of CFG II were defrauded. The question here is whether any of Jercich's fraud can be imputed to defendants. Since this matter has been pending for some time, summary judgment must be granted to defendants, notwithstanding the applicability of the statute of limitations, if CFG II has failed to make a showing sufficient to establish that Jercich's fraud is attributable to defendants. Celotex Corp. v. Catrett (1986) 477 U.S. 317, 322-23.      A principal can be held liable for the fraud of his agent only if the principal has placed the agent in a position of having apparent authority. 3 Cal.Jur.3d, Agency, section 134. The only asserted grounds for attributing Jercich's fraud to defendants are that Jercich was an officer of the corporate trustee under the deed of trust and that he was an officer of Carmel Financial Services, which was contractually authorized to service defendants' loans. As a matter of law, neither relationship created the appearance of authority necessary to impute Jercich's fraud to defendants.      A trustee under a deed of trust does not have any sort of authority to reconvey a deed of trust without the authorization of the beneficiary. He is not a trustee in the fullest sense of the word, and his powers are no more than those set out in the deed of trust. 4 Augustine & Zarro, California Real Estate Law and Practice, section 111.05[2]. Since there was no extraordinary language placed in the deed of trust, there is no basis for using Jurcich's status as trustee to impute his fraud to defendants.      The loan servicing agreement between defendants and Carmel Financial Services does not give Jercich or any of his entities the apparent authority to reconvey without the express authorization of the defendants. It specifically provides that the investor retains all decision-making authority. No reasonable interpretation of the document would lead anyone to assume that Carmel Financial Services was authorized to exercise any sort of ownership rights in the notes.
IV. Good Faith Reliance
     Any misrepresentation Jerchich made regarding his authority to reconvey does not, absent actual reconveyance, give CFG II rights superior to those of defendants. If the trustee reconveys without authority, the reconveyance protects subsequent good faith purchasers. Huckell v. Matranga (1979) 99 Cal.App.3d 471. However, in order to be a good faith purchaser, the property in question must in fact be transferred. 60 Cal.Jur.3d, Trusts, section 361, p. 553.      Contrary to the assertions of CFG II, the declaration of Marguerite Richardson does not create a triable issue of fact. All she says is that she thinks the reconveyances were prepared; she does not assert any of them were signed, delivered, or shown to defendants. Under these circumstances, CFG II cannot claim to be a good faith purchaser even if the knowledge of its general partner is disregarded.
V. Consent and Authorization
     The declaration of Marguerite Richardson and the deposition testimony of two defendants fall far short of creating a triable issue of fact as to whether defendants consented to reconveyance or authorized Jercich to release their interest in the lower floor. Richarson's use of the terms "consistent with my recollection," "there is no doubt in my mind," and "would have been informed" make her declaration utterly worthless in creating a truly triable issue. The mere fact that two defendants cannot remember if they received a letter which Richardson cannot say for certain was sent does not establish a triable issue as to whether a letter was sent and received. While Richardson's declaration may have created an issue early in the case, after more than two years of litigation it does not rise to the level under Celotex necessary to create a true triable issue of fact.
VI. Attorneys' Fees and Costs
     Since CFG II never assumed liability under defendants' notes, it is not liable for attorneys' fees pursuant to California Civil Code section 1717. Cornelison v. Kornbluth (1975) 15 Cal.3d 590, 596-97. However, defendants may add the amount of their attorneys' fees to the amount due to them under their notes. See Saucedo v. Mercury Sav. & Loan Assn. (1980) 111 Cal.App.3d 309, 314.      Defendants shall recover their costs of suit from plaintiff.
VII. Conclusion
     For the foregoing reasons, defendants' motion for summary judgment will be granted. Counsel for defendants shall submit an appropriate form of order granting their motion for summary judgment, and a separate form of judgment.
Dated: November 22, 1989                                                                                _______________________                                                                                                                            Alan Jaroslovsky                                                                                                                            U.S. Bankruptcy