FOR THE NORTHERN DISTRICT OF CALIFORNIA
GEORGE JERCHICH, No. 5-86-02611
CARMEL FINANCIAL GROUP II,
v. A.P. No. 870458
GEORGE JERCICH, et al.,
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
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
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.,
(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.
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
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. 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.
(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
Defendants shall recover their costs of suit from plaintiff.
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 _______________________