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Family Feud: A Real Property Lawsuit Among Family Members

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Family litigation over properties involves issue of fiduciary duties and cancellation of deeds.

Los Angeles Real estate litigation attorneys who handle family lawsuits relating to property often find themselves mired in complicated family relationships.  The complicated family relationships often lead to complicated legal issues.  In a recent unpublished California Court of Appeal opinion, the court dealt with a lawsuit among a husband, his wife (who was in the midst of divorcing him), his sister and his mother.  This contentious lawsuit involves allegations of theft, slander of title, constructive trust, quiet title, declaratory relief and cancellation of deeds.

A Family Quagmire:  The Family Litigation Background

Here is a quick background on the facts.  Joshua met Som in 2007 and they married that same year.  Joshua and Sarah are adult siblings.  Sharon is their mom.

In 2013 Som files for divorce from Joshua.

In 2015 Sharon sues Joshua (her son) and Som alleging theft, slander of title, constructive trust, declaratory relief, quiet title and cancellation of deeds.

Back in 2010 Sharon purchased a rental property in her own name.  Two months later she executed a notarized Grant Deed conveying the property to Joshua.  It was not recorded and Sharon testified that she instructed Joshua to hold the deed until she died or Joshua purchased the property from her.

Also in 2010 a revocable trust was created naming Joshua as the trustee and Sharon as the beneficiary.  This trust purchased another property.  Sharon wanted to refinance this property but was unable to.  She agreed with Joshua and Sarah that the property would be transferred to Sarah, Sarah would refinance the property and then the property would be transferred back to Sharon.  They agreed that Sharon would be the equitable owner of the property and the transfer was only to help refinance the property.  The property was transferred a number of times among the parties and a new trust.

In 2013, in anticipation of her divorce filing, Som recorded two of the unrecorded grant deeds “without Sharon’s knowledge or permission.”

Sharon alleged that Som, by virtue of these recordations, “feloniously stole and fraudulently appropriated property which was entrusted to her,” thereby defrauding Sharon of her property.  Sharon also labeled this slander of title since these two grant deeds were “void” and “false”, causing “doubt to be cast on Sharon’s title”.  Sharon also advanced causes of action for unjust enrichment and constructive trust since she claims these properties were solely owned by her and never purchased by Som and Joshua.  Finally, Sharon asked that the two deeds be cancelled.

Som cross-complained seeking to quiet title and to set aside fraudulent transfers.

The Trial Court’s Ruling After Trial

The trial court made the a thorough ruling, which included the following findings:

  • The trial court held that slander of title does not support the remedy of a constructive trust.  The remedy is monetary damages.  Quiet title results in a decree by the court.  But a constructive trust is a proper remedy for breach of fiduciary duty and the court’s analysis pertains to that theory.
  • One who receives the money of another to invest on that person’s behalf becomes a fiduciary.
  • Som owed fiduciary duties to Sharon because the “parties were family members and Sharon reposed trust and confidence in her daughter-in-law.”
  • Both Joshua and Som breached their fiduciary duties owed to Sharon by commingling her investment funds and by failing to account for $250,000.
  • Som breached her fiduciary duty by altering and recording the deed.
  • The deeds were taken by Som and recorded without permission of the grantors, thus title did not pass to the Grantees listed on either of those deeds.
  • The court deems that Joshua currently holds record title to the two properties in constructive trust for his mother.

Fiduciary Duty Among Family Members?

The first issue that the Court of Appeal addressed was the trial court’s amendment to convert the constructive trust cause of action into a breach of fiduciary duty cause of action.

Business litigation attorneys know that the elements of a cause of action for breach of fiduciary duty are (1) the existence of a fiduciary relationship, (2) breach of that fiduciary duty, and (3) damages.

Do Family Members Have Fiduciary Duties?  Not Necessarily.

The first issue is whether there was a fiduciary relationship between Som and Sharon.  At trial Sharon testified that she instructed Joshua to hold the deeds safe, that she entered into an agreement with Joshua and Sarah regarding the refinance of the property, and that she communicated with Joshua and Sarah about the properties.  However, the appellate court noted that “We see no conduct by Som toward Sharon that elevated their relationship from one of mother-in-law and daughter-in-law to one of beneficiary and fiduciary.

The trial court found Som owed fiduciary duties to Sharon “because the parties were family members and Sharon reposed trust and confidence in her daughter-in-law.”  However, the appellate court noted that “the trial court did not cite, and we have not found, any authority to support the notion that one owes fiduciary duties simply by being a trust in-law or soon-to-be ex-in-law.”

“Before a person can be charged with a fiduciary obligation, he must either knowingly undertake to act on behalf and for the benefit of another, or must enter into a relationship which imposes that undertaking as a matter of law.”

The appellate court noted that nothing in the record indicated that Sharon ever communicated with Som about investing money in the two properties.  All communications with with Joshua and Sarah.  There was therefore no fiduciary relationship.

On the other hand, the court found that Joshua was a fiduciary.  “One who receives the money of another to invest on that person’s behalf becomes a fiduciary.  A trustee has a duty to administer the trust, diligently and in good faith, in accordance with the terms of the trust and applicable law.”  Joshua did receive Sharon’s $250,000.

“A trustee also owes a duty of loyalty in that he has a duty to administer the trust solely in the interest of the beneficiaries; this duty is frequently invoked as protection against creating conflicts between a trustee’s fiduciary duties and personal interests.”  The court found that the evidence and testimony at trial supported the finding that Joshua owed and breached a fiduciary duty to Sharon.

The Law of Conditional Delivery of Deeds

Switching to the next issue, the Court of Appeal found that the trial court erroneously determined that conditional delivery of the deeds was valid and reversed judgment on the causes of action for slander of title, quiet title, declaratory relief and cancellation of deeds.

A deed is effective only when delivered.  (Civ.Code §1054).  Delivery requires a present intention to pass title, and that is a question of fact upon which the grantor may testify.  However, under Civil Code section 1056, a grant deed cannot be delivered to the grantee conditionally.  Delivery to him, or to his agent as such, is necessarily absolute, and the instrument takes effect thereupon, discharged of any condition on which the delivery was made.

“If the grantor makes a deed, intending to divest himself or herself completely but delivers it to the grantee with the understanding that it is not to take effect until the grantee performs some condition, the complete divestment is inconsistent with the annexed condition, and the grantee takes absolutely, free from the condition.”

“A deed cannot be delivered to the grantee under any condition not expressed in the deed; any delivery to the grantee, or to the grantee’s agent, is absolute and the deed therefore takes effect upon delivery, and any purported condition is ignored.  If the grantor executes and delivers a deed to the grantee with the intent of divesting title, but imposes an oral condition on the transfer, the condition is disregarded and the grantee receives title free and clear of the condition.  If the condition does not occur, the grantor may be able to recover damages from the grantee, but the title cannot be recovered.”

“Cancellation of deeds is normally governed by Civil Code section 3412, which provides:  ‘A written instrument, in respect to which there is a reasonable apprehension that if left outstanding it may cause serious injury to a person against who it is void or voidable, may, upon his application, be so adjudged, and ordered to be delivered up or canceled.”

With regard to the first property, the trial court concluded Sharon never intended “legal” delivery of the deed.

The appellate court held that it did not question the trial court’s findings but held that the oral condition expressed between Sharon and Joshua that the grant deed would not be effective unless Joshua successfully obtained financing is nullified by Civil Code section 1056.  No condition was expressed in the instrument itself and therefore, under Civil Code section 1056, the oral condition was ineffective.  “Under such circumstances the delivery of the deed and vesting of such title occurs by operation of law even though the result may be contrary to the express stipulation of the parties.”

“The foregoing principle of law may appear to be harsh and in some cases it certainly is contrary to the wishes and intent of the parties.  The reason for the rule appears to be the reluctance of the law to permit or encourage the conditional manual delivery of a deed to a grantee which upon its face appears valid in all respects and thus open the way for fraud and misrepresentation as well as misunderstanding in regard to third parties who have no knowledge of the conditions imposed.”

In this case the court reversed the trial court saying that Sharon cannot have it both ways.  Sharon and Joshua misrepresented the ownership to the world, including the lender, when in reality they had a private, verbal understanding that the grant deed was only conditionally effective.  However, the deed, being absolute on its face, and having been physically delivered by Sharon to Joshua, took effect at once without the oral conditions.

The appellate court held the deed was delivered and is valid without the oral conditions.  Sharon was not entitled to a judgment quieting title in her name.  It was therefore ordered quieted in the name of Joshua.

Lessons for Los Angeles Real Estate Litigation Attorneys

With regard to fiduciary duties, it is possible for a family member to have fiduciary duties towards another family member.  But not based simply on their familial links.  More typical examples of fiduciary duties arise in a joint venture, a partnership, or an agency.  It is certainly possible that family members can enter in a joint venture, partnership or agency together.

It was interesting in this case that the trial court, on its own, decided to convert the request for a constructive trust into a fiduciary duty case when no one in the case was asserting a fiduciary duty case.

With regard to the conditional delivery of deeds, there is no discussion of the concept of resulting trust.  Resulting trust often arises in cases where someone has credit problems and therefore uses a straw buyer with good credit to help them purchase a property.  The straw buyer is typically a family member.  In those cases courts often recognize that, even though a deed has been executed in the name of the straw buyer, the equities support the notion that the true buyer (who may have paid the downpayment and the monthly mortgage payments and who may actually live in the property) is the true owner.

Of course the most important lesson here is that the transfer of deeds back and forth among family members with no written agreement explaining the purposes is a bad idea.  The use of a real estate lawyer to help structure these arrangements could have saved everyone a lot of heartache and family litigation expenses.  By the time this case went to litigation there were a number of sophisticated real estate law issues that required the knowledge of an experienced real estate litigation attorney.

 

Los Angeles real estate litigation lawyer Laine Wagenseller is the founder of Wagenseller Law Firm.  Wagenseller Law Firm handles real estate lawsuits, including many family lawsuits relating to property, in Los Angeles and Southern California.  For more information please visit www.wagensellerlaw.com or call us at (213) 805-7445.

 

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