TWO DEEDS OF TRUST; NEITHER WAS RECORDED FIRST—A PRIMER IN THE LAW OF PRIORITIES, OR CALIFORNIA’S “RACE-NOTICE” STATUTES.

Who is First In Right when two deeds of trust that secured the same real property, were simultaneously time-stamped for recording, but, indexed at different times?  In First Bank v. East West Bank   (October 17, 2011) 199 Cal.App.4th 1309, the Second District Court of Appeal Division Three concluded the lenders have equal priority.

In the First Bank case, the Court reviewed undisputed evidence that outlined the procedure with most recorders across the state, which allows title insurance companies to deliver trust deeds to the recorder’s office in batches before 8:00 a.m. when the office opens. As in First Bank, trust deeds are deposited with the recorder’s office before business hours and as is the case for all documents and instruments deposited with the recorder’s office, one of the examiners reviews the title insurance companies’ trust deeds to determine whether they meet the requirements for recording.[1]

The examiner then enters the instruments into the enterprise recording archive system and sends the documents to a cashier to determine the applicable fees. The recorder stamps them with the date and time of recording. The practice of most of the recorder’s offices across the state is to give all instruments deposited before the offices open for business an 8:00 a.m. time stamp. Instruments are indexed roughly two days later.  In this case, although both deeds were time stamped at 8:00 a.m., the recorder indexed East West Bank’s trust deed at 11:26 a.m. and First Bank’s trust deed at 3:08 p.m.[2]

Because of the different indexing times, therefore, the Second District Court of Appeal, Division Three, was faced with a quandary as to which Bank had priority under California’s recording statutes.  First Bank provides a great discussion and overview of California’s “Law of Priorities” in order to decide who has priority and when, which is worth our review.

First Bank set forth the rule as follows: California starts with a “ ‘first in time, first in right’ system of lien priorities,” under which “a conveyance recorded first generally has priority over any later-recorded conveyance.” [3]  “An instrument is deemed to be recorded when, being duly acknowledged or proved and certified, it is deposited in the Recorder’s office, with the proper officer, for record.” [4]

This “ ‘first in time[,] first in right’ ” system is modified by the recording statutes, which allow subsequent purchasers to achieve priority under the “‘Race-Notice’ theory.” [5] Thereunder, “Every grant of an estate in real property is conclusive against the grantor, also against every one subsequently claiming under him, except a purchaser, or incumbrancer, who in good faith and for a valuable consideration acquires a title or lien by an instrument that is first duly recorded.” [6] Stating the rule differently, Civil Code section 1214 reads in relevant part, “Every conveyance of real property … is void as against any subsequent purchaser or mortgagee of the same property … in good faith and for a valuable consideration, whose conveyance is first duly recorded … .”

Under these “Race-Notice” rules, a subsequent purchaser obtains priority for a real property interest by (1) acquiring the interest as a bona fide purchaser for valuable consideration with neither actual knowledge nor constructive notice of (2) a previously created interest and (3) “first duly record[ing]” the interest, i.e., recording before the previously created interest is recorded.[7]

One may then ask, what is or what makes a “bona-fide purchaser?” ‘The elements of a bona fide purchase are (1) payment of value, (2) in good faith, and (3) without actual or constructive notice of another’s rights.’” “‘The absence of notice is an essential requirement in order that one may be regarded as a bona fide purchaser.’”[8]

Due to the “notice” requirement, the Court addressed the concept of one simply having knowledge of another’s right to real property, also referred to as “Constructive Notice.” First Bank, stated, however, that Constructive notice is a legal “‘fiction.’” “Constructive notice of an interest in real property is imparted by the recording and proper indexing of an instrument in the public records.[9]  Stated otherwise, the recording of a document does not impart constructive notice; “[t]he operative event [for purposes of constructive notice] is actually the indexing of the document …”[10]

Thus, the Court found that pursuant to Civ.Code §1170, both trust deeds were deemed recorded simultaneously. The Court reasoned that both trust deeds were executed on the same day and were deemed recorded simultaneously.  As such, neither bank was a subsequent purchaser for purposes of Civ.Code §§2897, 1107, 1214. The Court reasoned that it would have disrupted the statutory scheme to make priority turn on the random act of indexing, especially where banks and title insurers had no influence over when the recorder indexes trust deeds and the procedure was simply done to accommodate the sheer volume of title documents that enter the system on a daily basis.