IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIFTH APPELLATE DISTRICT

Dietrich, Glasrud & Jones, Dietrich, Glasrud, Mallek & Aune, and Bruce A. Owdom for Plaintiffs and Appellants, Defendants and Appellants, and Petitioners.

Alborg, Veiluva & Cannata, Thomas E. Alborg and Michael J. Veiluva for Defendant, Cross-complainant, Cross-defendant, Appellant and Petitioner.

Albert J. Berryman, Caswell, Bell, Hillison, Burnside & Greer, Robert K. Hillison and Robert A. Werth for Defendant, Cross-complainant, Cross-defendant and Appellant.

Wild, Carter & Tipton and Steven E. Paganetti for Plaintiff and Respondent, Defendant and Respondent, and Real Party in Interest.

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The assignee of a security interest in a deed of trust unilaterally signed an agreement subordinating the deed of trust to a subsequent deed of trust. Thereafter, the assignor paid its secured debt and the earlier deed of trust was reconveyed to it. When the trustor of the subsequent deed of trust defaulted, the assignor asserted its lien had first priority. However, the beneficiary of the subsequent deed of trust contended, in reliance on the subordination agreement, that it had first priority. Among other findings, the trial court determined the subordination agreement was ineffective. It entered judgments and awarded attorney fees in accordance with this underlying finding. Various parties have appealed from different aspects of the judgment. We affirm the judgment in its entirety.

In 1988, Triple A Management Company, Inc. (hereafter Triple A) bought 140 acres near Kingsburg from Western Farm Credit Bank (hereafter Western). Western secured its purchase money loan of $504,000 to Triple A with a first deed of trust on the property. Triple A farmed the property.

Triple A agreed, in 1992, to sell 20.4 acres of the property to Greenwood Estates Associates (hereafter Greenwood) for $525,000. Greenwood promised to pay $100,000 as a down payment and to deliver a promissory note, secured by deed of trust on the property, in the amount of $425,000. As a condition of the sale, Triple A agreed to subordinate its security interest in favor of any future "development loan" not to exceed $1.6 million. Western agreed to release the 20.4 acres from its lien in return for assignment to it of the Greenwood promissory note and deed of trust as additional collateral for the original Triple A debt.

The parties opened an escrow at Stewart Title of Modesto (hereafter Stewart Title). We refer to this escrow as escrow 1, in keeping with the practice of the parties to this appeal. The escrow instructions directed Stewart Title "to prepare the necessary Assignment of Deed of Trust" so that Western’s interest in the Greenwood debt could be recorded.

While its escrow with Triple A was pending, Greenwood agreed to sell the 20.4-acre parcel to Mark Sullivan. The purchase price of $990,000 was to be paid by Sullivan’s assumption of the Greenwood promissory note to Triple A, his execution of a new note to Greenwood in the amount of $340,000 secured by a third deed of trust on the property, and by payment of $350,000 cash obtained from a new loan. Sullivan was to obtain the cash from the Frisones, private investment lenders who operated through several family trusts. The parties opened escrow for the resale of the 20.4 acres; that escrow was also with Stewart Title. Among the seller’s escrow instructions was one directing that title would vest in Sullivan subject to "Deed of Trust to be of record at close of escrow in favor of [Triple A] and collaterally assigned to [Western] securing a loan in the amount of $425,000.00 … shall be … subordinated to the loan in favor of [Frisones]." The Frisones’ escrow instructions directed Stewart to release the loan funds only when Frisones’ deed of trust would be the first priority lien on the property and when Stewart had issued a lender’s title insurance policy insuring Frisones’ first lien status. We will refer to this escrow as escrow 2, as do the parties.

After a time, both escrows were assigned to the same escrow agent at Stewart Title, Carol Wheeler.

On July 6, 1993, Greenwood signed the note and deed of trust called for in escrow 1 (both the note and the deed of trust are dated June 14, 1993). Triple A signed a security agreement granting Western a security interest in the Greenwood note and deed of trust, and on August 3, 1993, Triple A executed a recordable assignment of the Greenwood deed of trust. We set forth the operative portions of that assignment verbatim. The assignment is on a preprinted form and was prepared by Stewart Title; preprinted portions are rendered in normal typeface, portions inserted by typewriter are indicated in italics, and handwritten portions are rendered in boldface.

Documents from escrow 1 were recorded on August 17, 1993. Among those recorded were the Greenwood deed of trust and the Triple A assignment of that deed of trust to Western.

As escrow 1 moved forward, Greenwood attempted to obtain Triple A’s agreement to subordinate the Greenwood deed of trust to the proposed lien of the Frisones, although it is not clear exactly the level of detail of Greenwood’s request. Triple A categorically refused to subordinate its interest because it did not want to reopen negotiations with Western.

After Triple A refused to subordinate its interest to the Frisones, Stewart Title prepared a subordination agreement using its standard preprinted form for signature by Western. This document, dated August 4, 1993, was signed by O’Dell on behalf of Western on August 18, 1993, and recorded on August 23, 1993. The subordination agreement describes Western as the "present owner and holder of the [Greenwood] deed of trust and note" and states that the Frisones are expressly relying on the subordination in funding their loan to Sullivan. O’Dell testified that Greenwood’s principal, Roger Rule, represented to him Triple A had agreed to the subordination. O’Dell also said Wheeler of Stewart Title told him the subordination was that required by the original Greenwood/Triple A agreement. Nevertheless, the subordination agreement itself provides in boldface uppercase letters: "Notice: This subordination agreement contains a provision which allows the person obligated on your real property security to obtain a loan a portion of which may be expended for other purposes than improvement of the land." In addition, O’Dell signed a representation that he had read and approved the estimated closing statement for escrow 2, which had been delivered to him with the subordination agreement. The closing statement clearly disclosed the new loan was for the purchase of the property. O’Dell testified at trial that he merely glanced at the documents before he signed them, on the assumption that Triple A would carefully scrutinize the subordination agreement he assumed would be presented to it.

On August 18, 1993, Sullivan executed a promissory note and deed of trust in favor of the Frisones and a note and deed of trust in favor of Greenwood. Western’s subordination agreement was recorded and escrow 2 closed on August 23, 1993. Stewart Title issued to the Frisones a lender’s title insurance policy insuring that, as of August 23, 1993, the Frisones’ deed of trust enjoyed first priority among the deeds of trust recorded against the property.

After making one quarterly interest payment on the Greenwood-Triple A note, Sullivan defaulted on that loan. Western recorded a substitution of trustee and notice of default in September of 1994; in these documents Western asserted it was "the present Beneficiary" under the Greenwood deed of trust. In 1995, Triple A satisfied its original debt to Western; Western’s assignee reconveyed to Triple A the Greenwood note and deed of trust.

On March 21, 1994, Triple A filed an action against the Frisones and Sullivan for a declaration that its lien on the 20.4 acres was superior to the Frisones’ lien. Its amended complaint also alleged causes of action for negligence and breach of fiduciary duty against Stewart Title and Western. The Frisones filed an action for declaration of the priority of their deed of trust on January 4, 1995. The complaint also included related causes of action for injunctive relief and damages against Triple A, Western and its related entities, Sullivan and his related entities, and the Greenwood interests. Various defendants filed cross-complaints for damages and indemnity against each other. Pertinent to this appeal are the cross-complaints of Stewart Title and Western against each other. All of the actions were consolidated.

The Frisones moved for a preliminary injunction to prevent Triple A and Western from nonjudicially foreclosing on the Greenwood deed of trust. Judge O’Neill denied the preliminary injunction and the Frisones appealed. (F023088) By nonpublished opinion filed June 18, 1996, this court reversed the trial court and ordered issuance of the preliminary injunction.

While the preliminary injunction appeal was pending, Western moved for summary adjudication of several of the Frisones’ causes of action. On June 20, 1996, Judge Quaschnick granted the motion in part, concluding that Western was entitled to judgment on the Frisones’ count three, breach of contract, because Western had not breached the subordination agreement.

Trial on the remaining counts began on September 10, 1996. Trial was before the court, sitting without a jury. Judge Kane bifurcated the issues for trial. The first portion of the trial concerned the declaratory judgment counts. On September 24, 1996, the court issued an oral statement of decision in favor of Triple A and against the Frisones. As restated in its October 18, 1996, memorandum of decision, the court concluded that the Frisones did not directly rely on Western’s subordination agreement, since they did not know about it. To the extent Stewart was the Frisones’ agent and did rely on the subordination agreement, that reliance was unreasonable because Stewart had actual knowledge that the assignment of the Greenwood deed of trust to Western was not a full assignment but was for security purposes only. Impliedly, the court concluded the security agreement did not empower Western unilaterally to subordinate the Greenwood deed of trust and Stewart would have discovered this if it had used due diligence to inquire about the "collateral" assignment of that deed of trust to Western.

The court then conducted the damages phase of the trial. After hearing from expert and other witnesses, the court filed a proposed statement of decision on December 3, 1996, which it made final on January 23, 1997. The court concluded Stewart Title was negligent in its preparation of the original collateral assignment and the subordination agreement. It held that Triple A was damaged by this negligence in that it was forced to incur attorney fees to protect its lien priority. The court concluded Western was negligent in executing the subordination agreement, but that this negligence did not proximately cause anyone loss. The court denied the new trial motions filed by Stewart Title and the Frisones by order dated March 5, 1997. The court denied Western’s request for attorney fees from Stewart but awarded a portion of its attorney fees against Triple A.

Stewart Title and the Frisones filed timely notices of appeal. Western filed a timely notice of appeal from the denial of its request for attorney fees against Stewart Title. The appeals were consolidated.

While the appeal was pending, Stewart Title and the Frisones filed a petition for writ of mandate in this court seeking to vacate the trial court’s order expunging a notice of lis pendens the Frisones had recorded on June 23, 1995. This court stayed the order expunging the lis pendens on July 31, 1997, and issued an order to show cause on September 26, 1997. Hearing on the order to show cause subsequently was ordered to occur at the time for oral argument on the merits of the appeal.

A. Issues Presented

Stewart Title and the Frisones (sometimes referred to collectively in this Section I as appellants) primarily contend they were entitled to rely on the recorded assignment of the Greenwood deed of trust in seeking subordination from Western only. They contend the trial court charged them with knowledge in escrow 2 of unrecorded documents that were part of the unrelated escrow 1 in order to bar them from reliance on the recorded assignment of the Greenwood deed of trust.

Appellants also contend Western actually had the power to execute the subordination agreement under the terms of its security interest in the Greenwood promissory note and deed of trust. Finally, they contend Western breached the subordination agreement by representing that it owned the Greenwood deed of trust, if and to the extent it did not have the full power under the security agreement to subordinate that deed of trust.

Stewart Title also contends it should not have been required to pay Triple A’s attorney fees under the "tort of another" doctrine since Triple A itself was at fault in creating the conflict that resulted in this litigation. This issue is addressed in the unpublished portion of this opinion.

B. Good Faith Encumbrancers for Value

The Frisones and Stewart Title both contend the Frisones were good faith encumbrancers for value and, as such, were protected by the conclusive presumption that the recorded state of title to the property reflected the true state of title. Accordingly, they contend, the Frisones were entitled to rely on the subordination agreement signed by Western, since the recorded assignment of the Greenwood deed of trust established Western as the owner of the beneficial interest under that deed of trust. Further, they claim the trial court erred in refusing to determine whether the Frisones were good faith encumbrancers; the trial court stated that such a determination was irrelevant.

"A good faith encumbrancer for value who first records takes its interest in the real property free and clear of unrecorded interests. (Civ. Code, §§ 1107, 1214; 3 Miller & Starr, Cal. Real Estate (2d ed. 1989) Recording and Priorities, §§ 8:2, 8:3, pp. 270, 273 [unrecorded instrument not enforceable against subsequent bona fide purchaser who first records].) ‘An encumbrancer in good faith and for value means a person who has taken or purchased a lien … and who has parted with something of value in consideration thereof. [Citation.] ... [A] "good faith" encumbrancer is one who acts without knowledge or notice of competing liens on the subject property. [Citations.]’ (Brock v. First South Savings Assn. (1992) 8 Cal.App.4th 661, 667 .…) If a trustee executes an unauthorized reconveyance and the trustor subsequently conveys the property, a grantee who does not have notice of the trustee’s lack of authority receives title free and clear of the lien. (Firato v. Tuttle (1957) 48 Cal.2d 136, 139 .…) Similarly, a junior lender has the right to rely on a state of record title which indicates that a senior lien will be satisfied out of the interests of all signatories to a senior promissory note. A secret agreement that the senior lien will be satisfied out of the interests of only some of the signatories is not binding upon the junior encumbrancer. (Caito v. United California Bank (1978) 20 Cal.3d 694, 702 .…)" (First Fidelity Thrift & Loan Assn. v. Alliance Bank (1998) 60 Cal.App.4th 1433, 1440-1441.)

Thus, it clearly is the law that, in the absence of conflicting knowledge, a good faith encumbrancer is entitled to rely on the recorded chain of title in determining from whom he needs to obtain a subordination agreement in order to establish his lien as the first priority deed of trust. The fact that the encumbrancer searches and evaluates the record through an escrow or title agent does not in any manner diminish his right to rely on the state of the record title. (See Civ. Code, § 1214.) Indeed, given the pervasive role of title companies as escrow agents in California, a contrary conclusion would substantially eviscerate Civil Code section 1214. We conclude the trial court erred in finding the Frisones did not rely on the state of the recorded chain of title.

Several limitations are inherent in the protection afforded a good faith encumbrancer for value, however; two such limitations are relevant in the present case. First, the subsequent encumbrancer is permitted only to rely on the recorded state of title as that state of title objectively presents itself: the subsequent encumbrancer is not entitled to view the record either through "rose colored glasses" or with blinders on. That is, he is not entitled to interpret ambiguities in his own favor nor is he entitled to ignore reasonable warning signs that appear in the recorded documents. Second, a lender is not entitled to ignore information that comes to him from outside the recorded chain of title, to the extent such information puts him on notice of information that reasonably brings into question the state of title reflected in the recorded chain of title. (First Fidelity Thrift & Loan Assn. v. Alliance Bank, supra, 60 Cal.App.4th at pp. 1443, 1445.)

In First Fidelity, an earlier lender erroneously reconveyed its deed of trust and that reconveyance was duly recorded. A new lender knew that the borrower had listed the earlier loan as an encumbrance of the property on his loan application, but its review of the record title disclosed the reconveyance. The new lender contacted the borrower’s bank (which was not the earlier lender) and was told the earlier loan had been paid off. The new lender funded its loan and recorded its deed of trust. At no time did it contact the earlier lender to inquire about the status of the loan. (First Fidelity Thrift & Loan Assn. v. Alliance Bank, supra, 60 Cal.App.4th at pp. 1436-1438.) The earlier lender eventually discovered its mistake, filed a lis pendens, and successfully obtained an order rerecording its deed of trust as of the date of the lis pendens.

After the borrower defaulted on both outstanding loans, the earlier lender sued the new lender to establish the priority of its deed of trust. Losing in the trial court on summary judgment, the earlier lender appealed. The Court of Appeal recognized that in some circumstances information outside the chain of title (in this case, the borrower’s loan application listing the earlier encumbrance) can operate to put a subsequent lender on notice of an unrecorded interest in the property if he has "knowledge of circumstances which, upon reasonable inquiry, would lead to that particular fact." (First Fidelity Thrift & Loan Assn. v. Alliance Bank, supra, 60 Cal.App.4th at p. 1443.) The court concluded, however, that this was a limited duty of inquiry that the new lender had discharged by its additional inquiry to the borrower and his bank. Accordingly, the court held, the new lender was entitled to first priority. (Id. at p. 1445.)

First Fidelity involved information generated by the subsequent lender outside the chain of title. In Buehler v. Oregon-Washington Plywood Corp. (1976) 17 Cal.3d 520 the issue was whether parol evidence was admissible to establish a limitation on a recorded easement that was not explicit on the face of the recorded document. The easement, granted by appellants’ predecessor in interest to respondents’ predecessor in interest, granted a right to transport harvested timber across appellants’ property. The easement was "in gross," but the easement could only be transferred to an entity that owned at least one-third of the timber on certain surrounding lands. (Id. at pp. 527-528.) A dispute arose when appellants learned that one respondent was transporting across appellants’ property timber harvested at remote locations. Appellants contended the original grantors and grantees had intended the easement to be limited to the transport of timber harvested on the grantors’ lands and those immediately surrounding. In granting summary judgment, the trial court concluded respondents were entitled to rely on the easement as recorded, since the language of the easement was clear and did not contain any such limitation. (Id. at p. 526.)

The Supreme Court reversed. It stated:

The court concluded that a triable issue of fact existed "as to whether [respondent] should have investigated any competing claims" under the easement. (Ibid.)

Thus, the state of the law, as exemplified by Buehler and First Fidelity, is clear: if the reference to "collateral" in the title of the assignment of the Greenwood deed of trust and the reference to the assignment as additional security in the instructions provided to Stewart Title in connection with escrow 2 were sufficient to give the Frisones knowledge that they should have investigated Western’s authority to subordinate that deed of trust, then the Frisones are chargeable with what a reasonable investigation would have revealed. "The constructive notice imparted by the recording of a document has been extended to charge an intending purchaser [or encumbrancer] with a duty to investigate the rights afforded by an unrecorded document referred to in that recorded document." (Gates Rubber Co. v. Ulman (1989) 214 Cal.App.3d 356, 365.)

Accordingly, we must determine whether these two documents -- the recorded "collateral assignment" and the escrow instruction identifying the assignment of the Greenwood deed of trust as "collaterally assigned … securing a loan" -- placed upon the Frisones a duty to inquire about the nature of Western’s interest in the Greenwood deed of trust. If so, we must then determine what they would have found had they inquired: if Western actually had the power to subordinate the Greenwood deed of trust, the knowledge with which the Frisones are chargeable merely authorizes the transaction that in fact occurred.

However, before we reach those issues, we must address two intervening points. First, both Stewart Title and the Frisones argue that knowledge obtained by Stewart Title should not be imputed to the Frisones. Second, the Frisones contend the trial court failed to make a finding that they were not good faith encumbrancers for value and the matter initially must be remanded for such a finding. We turn to those issues.

C. Stewart Title as the Frisones’ Agent

We agree, as Stewart Title and the Frisones argue, that the trial court attributed too broad a scope to the agency relationship between the two appellants. Thus, the trial court impermissibly imputed to the Frisones the knowledge Stewart Title obtained in escrow 1, as we will discuss below. Nevertheless, the trial court was correct in concluding that Stewart Title was indeed the Frisones’ agent; the parameters of that agency relationship, although narrower than described by the trial court, are well established in California law. The limited question of importance to this appeal is whether, within the true scope of Stewart Title’s agency, Stewart Title’s knowledge of the contents of the escrow 2 instructions and the recorded documents in the chain of title for the property conveyed in escrow 2 are properly to be imputed to the Frisones. We will conclude such knowledge must be imputed to them.

The well-regarded treatise on California real estate law by Miller and Starr contains a detailed and extensive summary of the law of agency as it applies to real estate transactions and escrow agents. (See 2 Miller & Starr, Cal. Real Estate (2d ed. 1989) ch. 3, p. 2 et seq. [agency generally]; id. at § 5:21, pp. 438-442 [escrow agents]; 3 Miller & Starr, Cal. Real Estate (2d ed. 1989) § 8:56, p. 378; id. at § 8:61, p. 387 [notice imputed through agent].) The authors state:

This rule concerning knowledge obtained in separate escrows is not merely one based on practical considerations, as Triple A suggests in attempting to distinguish cases cited by appellants. Thus, in discussing LaMancha Dev. Corp. v. Sheegog (1978) 78 Cal.App.3d 9 and Far West Savings & Loan Assn. v. McLaughlin (1988) 201 Cal.App.3d 67, Triple A argues the separate escrows in those cases occurred months apart and may not even have involved the same employee of the escrow company. In the present case, Triple A argues, the simultaneity of the escrows and the singularity of the escrow officer render imputation of the knowledge permissible.

We disagree. The basis for imputing knowledge to the principal is that the agent has a legal duty to disclose information obtained in the course of the agency and material to the subject matter of the agency, and the agent will be presumed to have fulfilled this duty. (Cf. Contini v. Western Title Ins. Co. (1974) 40 Cal.App.3d 536, 547; Jaffe v. Heffner (1959) 173 Cal.App.2d 512, 518.) The scope of the imputation of knowledge is directly related to the scope of the duty arising from the agency agreement; it has nothing to do with whether the agent actually has the information in question or has it only constructively (see Kirby v. Palos Verdes Escrow Co. (1986) 183 Cal.App.3d 57, 65), or whether it is practical to expect the agent to remember something that happened months ago (see 2 Miller & Starr, supra, § 5:21, pp. 439-441).

Similarly, we reject Triple A’s contention that the trial court did not in fact impute Stewart Title’s knowledge gained in escrow 1 to the Frisones in escrow 2. The trial court stated: "Stewart was the Frisones’ agent and to the extent [Western] misrepresented things to Stewart [in escrow 2], which Stewart reasonably relied upon, Frisones could properly seek damages against [Western] based on those misrepresentations. [¶ ] In this case, however, Stewart’s reliance on [Western] was not reasonable at all. Stewart, through Wheeler, knew that [Western] was not the owner and holder of the Greenwood Note and deed of trust. Wheeler knew this because [Western’s] escrow instructions [in escrow 1] so indicated." (Capital lettering omitted.)

Nevertheless, on appeal we review the trial court’s result, not its reasoning. (Belair v. Riverside County Flood Control Dist. (1988) 47 Cal.3d 550, 568.) In this case, it is correct to impute to the Frisones knowledge of the two critical facts we have identified above. One fact, that Triple A had "collaterally assigned to [Western] securing a loan …" the Greenwood deed of trust, was contained in the escrow instructions in escrow 2. Subordination of that deed of trust to its own deed of trust was an express precondition to release of the Frisones’ funds; the Frisones instructed Stewart Title to release the funds only if this precondition were accomplished. Accordingly, Stewart Title obtained that knowledge in the course of the agency for which the Frisones had employed it. The second fact, that the assignment to Western was a "collateral assignment," was reflected in the chain of title to the property being transferred in escrow 2. As such, the statutes impose constructive knowledge of the contents of the assignment on Stewart Title as the Frisones’ agent and on the Frisones directly. (See Civ. Code, § 1213.)

Accordingly, we conclude the Frisones had imputed and constructive knowledge of the two facts that we deem critical to the resolution of this case. We agree with appellants that the law does not permit us to impute to the Frisones the actual knowledge Stewart Title may have had concerning the content of the underlying, unrecorded security agreement between Triple A and Western, nor of the content of the escrow instructions in escrow 1, because Stewart Title’s actual knowledge of those matters was obtained outside the scope of its agency on behalf of the Frisones.

In response to Stewart Title’s request for statement of decision, the court issued a proposed statement of decision on December 3, 1996. It subsequently reiterated that statement of decision after considering the parties’ objections. Of particular relevance is the following passage (the format of the statement of decision is a restatement of Stewart Title’s statement of the issue followed by the court’s resolution of the issue):

The determination whether a party is a good faith purchaser or encumbrancer for value ordinarily is a question of fact; on appeal, that determination will not be reversed unless it is unsupported by substantial evidence. (Hochstein v. Romero (1990) 219 Cal.App.3d 447, 451.) Further, Code of Civil Procedure section 632 requires the court, upon request, to issue a statement of decision "explaining the factual and legal basis for its decision as to each of the principal controverted issues at trial." Failure to determine a material issue in a statement of decision can, in some circumstances, be reversible error if there is evidence that would support a finding in the opposing party’s favor. (Sperber v. Robinson (1994) 26 Cal.App.4th 736, 745.)

Since, in our view, the Frisones’ status as good faith encumbrancers for value is a key issue in this case -- dispositive, if it is resolved in the Frisones’ favor -- we tread very cautiously in this area. If we took the trial court’s conclusion that "this is not a relevant issue" literally and in isolation, we would be constrained to reverse the judgment and remand for a statement of decision on this issue if there was substantial evidence to support a finding in the Frisones’ favor. (See Miramar Hotel Corp. v. Frank B. Hall & Co. (1985) 163 Cal.App.3d 1126, 1130.)

Viewing the trial court’s conclusion in context, however, we must conclude the trial court did not simply refuse to decide the critical issue of the Frisones’ status as good faith encumbrancers. Rather, the court decided a "sub-issue" of the good faith issue against the Frisones, and only then concluded the broader question was "not a relevant issue." We explain.

As noted in our earlier exposition of the good faith encumbrancer question, one cannot be afforded that status if he fails to investigate the state of title after he is put on notice (constructively) by recorded documents in the chain of title or (actually) by information acquired from any source that the state of title is questionable. (See pp. 10-11, ante.) There was no evidence whatsoever that Stewart Title or the Frisones attempted in any way to investigate the meaning of the "securing a loan" and "collateral" information in their actual and constructive possession. Thus, there was no issue of fact to resolve concerning the diligence of any investigation by appellants. (See First Fidelity Thrift & Loan Assn. v. Alliance Bank, supra, 60 Cal.App.4th at p. 1445.)

The trial court did expressly find, both in its memorandum of decision following trial and in its statement of decision that Stewart Title, as the Frisones’ agent, could not reasonably conclude that the collateral assignment of deed of trust conveyed to Western the full beneficial interest in the Greenwood deed of trust, which is the only circumstance that would permit the Frisones to have good faith encumbrancer status without further inquiry. Accordingly, on the state of the evidence in this case, the court’s finding is in all practical respects a finding that Stewart Title and the Frisones were on reasonable notice of the need to investigate further the true meaning of the assignment to Western that appeared of record. (See Buehler v. Oregon-Washington Plywood Corp., supra, 17 Cal.3d at p. 529.)

For these reasons, we conclude the trial court’s express finding on the reasonableness issue constitutes, by necessity, an implied finding that the Frisones were not good faith encumbrancers for value. As such, the court’s failure to make an express finding on the good faith encumbrancer issue is harmless. (Manson v. Reed (1986) 186 Cal.App.3d 1493, 1504; see Sperber v. Robinson, supra, 26 Cal.App.4th at p. 745.) We therefore return to the question whether there was substantial evidence to support the finding the trial court impliedly and of necessity made, namely, that the Frisones were not good faith encumbrancers for value because they had sufficient information to impose upon them a duty of inquiry concerning Western’s power to subordinate the Greenwood deed of trust.

E. The Circumstances Should Have Prompted

There are very few published cases addressing the question of what facts constitute sufficient notice to raise a duty of inquiry (see, e.g., Kirby v. Palos Verdes Escrow Co., supra, 183 Cal.App.3d at pp. 65-66; Greiner v. Kirkpatrick (1952) 109 Cal.App.2d 798, 801), and none of those cases involves the meaning to be attributed to a "collateral assignment" of a deed of trust. (See 3 Miller & Starr, Cal. Real Estate, supra, § 8.62, pp. 388-390 [collecting cases]; see generally Annot., Recorded Real Property Instrument as Charging Third Party With Constructive Notice of Provisions of Extrinsic Instrument Referred to Therein (1979) 89 A.L.R.3d 901.)

In Bank One Texas v. Pollack (1994) 24 Cal.App.4th 973, the issue concerned a creditor’s duty of inquiry under Civil Code section 19. The case involved a Texas bank that obtained a judgment in Texas against one Pollack for $1.2 million. Six years before entry of the judgment, Pollack had transferred all of his assets to an inter vivos trust over which he retained the power of revocation until his death. (Id. at p. 976.) Pollack died in 1989 leaving an insolvent estate. In December of 1989, the Texas bank obtained a California judgment based on the Texas judgment; it duly recorded an abstract of the judgment against Pollack in Los Angeles County. (Id. at p. 976.)

Also in December of 1989, the Bank of Montreal settled certain claims against the inter vivos trust and Pollack’s estate by accepting a promissory note secured, in part, by a deed of trust on Pollack’s Los Angeles County residence, owned by the trust. (24 Cal.App.4th at p. 977.) After the trust defaulted on the Bank of Montreal loan and the bank conducted a foreclosure sale of the residence, a dispute arose between the two banks over the proceeds of the sale. (Ibid.)

The appellate court noted that pursuant to Probate Code section 18201 (repealed by Stats. 1991, ch. 992, § 2), a creditor of an insolvent estate is entitled to levy directly on any assets held by a trust that the decedent had the power to revoke during his lifetime. The court further noted that "one is presumed to know the law" and, therefore, the Bank of Montreal was to be "charged with actual knowledge of Probate Code section 18201." (24 Cal.App.4th at p. 981.) The Bank of Montreal also had actual knowledge Pollack’s estate was insolvent and that the trust was revocable during Pollack’s lifetime. (Ibid.) "Armed with this knowledge, a prudent person would ascertain whether there were liens recorded against the decedent or his estate [in addition to any liens recorded against the trust itself]. Accordingly, [the Bank of Montreal] is charged with constructive notice of the lien recorded by [the Texas bank against Pollack’s estate], and it thus took the [deed of trust on the residence owned by the trust] with notice of another’s rights." (Id. at p. 982.)

While the Bank One case obviously has many dissimilarities to the case now before us, it is similar to the present case with respect to the interaction between constructive knowledge of the law and actual knowledge of certain facts. In this case, the security transaction between Western and Triple A was governed by division 9 of the California Uniform Commercial Code (hereafter UCC). (Com. 4, 23C West’s Ann. Com. Code (1990 ed.) § 9102, subd. (3), p. 297; Black v. Sullivan (1975) 48 Cal.App.3d 557, 564.) Accordingly, the Frisones and Stewart Title are charged with constructive knowledge of the relevant provisions of the UCC. (See Bank One Texas v. Pollack, supra, 24 Cal.App.4th at p. 981.) Section 9207, subdivision (1), of the UCC provides:

Armed with the knowledge that Western owned only a collateral or security interest in the Greenwood deed of trust, and charged with the knowledge that, unless otherwise agreed, the secured party had no power to subordinate the security interest against Greenwood (i.e., to fail "to preserve rights against prior parties"), a reasonable and prudent lender would have inquired about the exact nature of the security interest held by Western. (Bank One Texas v. Pollack, supra, 24 Cal.App.4th at p. 982; see also Citizens Nat. Bank v. Davisson (1913) 229 U.S. 212, 223.) There is no evidence in the record that the Frisones or Stewart Title, as their agent, conducted such an inquiry. Accordingly, the Frisones are chargeable with notice of the terms of the security agreement; they were not entitled to rely on an interpretation of the collateral assignment that would impute to Western the authority to unilaterally subordinate the Greenwood deed of trust. (Buehler v. Oregon-Washington Plywood Corp., supra, 17 Cal.3d at p. 529; see Radunich v. Basso (1965) 235 Cal.App.2d 826, 835.) We now turn to the final question in this part of the inquiry, whether Western in fact -- that is, based on what appellants would have discovered had they made reasonable inquiry -- had the power under the security agreement to unilaterally subordinate the Greenwood deed of trust.

F. The Security Agreement

The parties agree that Western’s actual rights in the Greenwood promissory note and deed of trust are those rights that exist as described in or as a result of the unrecorded security agreement executed by Triple A upon its assignment of the deed of trust to Western. After a brief historical digression, we will turn to the content of that security agreement.

Prior to the adoption of the UCC in 1963, it clearly was the law that, in the absence of an agreement between the parties (Johnson v. Mortgage Guarantee Co. (1931) 117 Cal.App. 416, 421-422), a secured party did not have the power to "sell, compromise, or otherwise discharge the pledged debt, or the security therefor, without the consent of the pledgor." (Revert v. Hesse (1920) 184 Cal. 295, 300; see former Civ. Code, § 3006 [repealed at the time of adoption of UCC].) (The secured party could, of course, assign his own interest in the collateral. (Ibid.)) These rules reflected both the state of the common law and the law under former Civil Code section 3006. (Traders Bank v. Wilcox (1919) 42 Cal.App. 24, 27; see generally Rest., Security (1941) §§ 20-23.) The rule was applicable both before any default by the pledgor (see generally Knudsen v. Hill (1964) 227 Cal.App.2d 639) and after default. That is, even after default by the pledgor, the secured party was not entitled to sell the pledged note at a foreclosure sale, but instead was entitled only to collect the pledged note as it came due (Traders Bank v. Wilcox, supra, 42 Cal.App. at pp. 27-28 [noting certain exceptions not relevant here]), so long as the pledged note was not itself in default (Beatty v. Pacific States S. & L. Co. (1935) 4 Cal.App.2d 692, 699).

Where the secured party attempted to dispose of or impair the pledged debt, the pre-UCC rights of the pledgor were summarized as follows: "[I]f the pledgee sells or releases the debt or security otherwise than upon collection, the pledgor may set aside the sale or release, if other circumstances permit, or hold the pledgee for conversion." (Beatty v. Pacific States S. & L. Co., supra, 4 Cal.App.2d at p. 699; see generally Rest., Security, supra, § 24.)

With the adoption of the UCC in 1963 (see Stats. 1963, ch. 819), Civil Code section 3006 was repealed (Stats. 1963, ch. 819, § 2) and a new rule was adopted: under UCC section 9504, regardless of the nature of the collateral pledged by a debtor, "[a] secured party after default may sell, lease or otherwise dispose of any or all of the collateral .…" (UCC, § 9504, subd. (1).) "When collateral is disposed of by a secured party after default, the disposition transfers to a purchaser for value all of the debtor’s rights therein …," subject to certain conditions concerning good faith. (UCC, § 9504, subd. (4).)

Nevertheless, in order for a secured party to exercise its right to sell or otherwise dispose of the collateral under the UCC, the debtor must be "in default under a security agreement" for which the collateral is security. (UCC, § 9501, subd. (1); see Meadows, Warranties of Title, Foreclosure Sales, and the Proposed Revision of UCC § 9-504: Has the Pendulum Swung to Far? (1997) 65 Fordham L.Rev. 2419, 2419, fn. 2; see also Riebe v. Budget Financial Corp. (1968) 264 Cal.App.2d 576, 588 [discussing similar restrictions on powers of pawn broker who receives notes as collateral].)

The parties have not cited any cases containing a modern, post-UCC statement of the powers of a pledgee of promissory notes when the pledgor is not in default. Our own research has not disclosed any case specifically discussing this issue. The novel question we must address is, after adoption of the UCC, what is the relationship between the pledgor and pledgee prior to any default by the pledgor?

UCC section 1103 states: "Unless displaced by the particular provisions of this code, the principles of law and equity … shall supplement its provisions." The UCC affirmatively changed the law regarding postdefault sale or disposition of pledged debt instruments, permitting such sale where it had been previously prohibited. (See Cal. Annot. to Proposed U. Com. Code (1960) Deerings Ann. Cal. U. Com. Code, § 9504 (1986 ed.) p. 578.) However, the national and California official comments to section 9207 both state that the code carries forward the common law in the predefault situation. (See id. at pp. 447-448.) Further, the purposes of and rationale for the prior law continue unabated under the UCC. (See, e.g., Knudsen v. Hill, supra, 227 Cal.App.2d at p. 645 [absence of ready market and difficulty of valuation of private debt obligations]; Traders Bank v. Wilcox, supra, 42 Cal.App. at p. 27 [same, and adequacy of other remedies].)

Accordingly, we conclude the common law restriction on predefault sale (Traders Bank v. Wilcox, supra, 42 Cal.App. at p. 29) of a pledged debt instrument continues to govern California security transactions. (See Ibrahim v. Ford Motor Co. (1989) 214 Cal.App.3d 878, 896-898; Atlas Thrift Co. v. Horan (1972) 27 Cal.App.3d 999, 1008.) Thus, in the absence of an agreement between Triple A and Western to the contrary, Western did not have the right unilaterally to sell, release or subordinate the Greenwood deed of trust.

Appellants contend the security agreement does in fact contain agreements that permitted Western to dispose of (subordinate) Triple A’s interest in the Greenwood deed of trust. We reject this argument for three reasons.

First, the duty of reasonable care imposed by UCC section 9207, subdivision (1) "may not be disclaimed by agreement." (Com. 1, West’s Ann. Com. Code, supra, § 9207, p. 405.) No one involved in this appeal has contended Western acted with reasonable care in executing the subordination agreement, and the trial court expressly found to the contrary. Therefore, even if the security agreement in some circumstances may have permitted Western to subordinate the deed of trust for legitimate purposes, as a matter of law the security agreement could not validly permit Western to subordinate the deed of trust with the lack of care it exercised in this case.

Second, it is irrelevant whether the security agreement may have permitted Western to subordinate the deed of trust if Triple A was in default on its promissory note to Western. There was no evidence Western was acting to foreclose on its interest in the collateral. In the absence of any evidence Western’s actions were an attempt to enforce its postdefault rights, we decline to consider whether those rights, if exercised, would have been sufficient to justify Western’s actions in executing the subordination agreement in the manner it did.

Third, as we have seen, in the absence of an express provision in the security agreement between a secured party and a debtor, the secured party does not have the power to sell, release, or otherwise impair a debt obligation pledged to it as collateral. Accordingly, in the absence of some showing to the trial court that the security relationship had been modified by agreement of the parties, a finding by the trial court that Western had only a collateral security interest in the Greenwood note and deed of trust was conclusive of the issue of Western’s predefault power, unilaterally, to subordinate the deed of trust to the Frisones’ lien.

On appeal, the Frisones assert that "[n]o provision of the security agreement … precluded the Bank’s power to subordinate the deed of trust." They then attempt to show that the security agreement granted similar powers to Western, powers that in some instances might be viewed as broader than the power to subordinate the deed of trust. The Frisones do not, however, point to anything in the security agreement or elsewhere that granted to Western the power to subordinate, unilaterally, the Greenwood deed of trust. In the absence of such an affirmative showing, for the reasons stated above, Western’s status as a "secured party" prevented it from validly subordinating the deed of trust. Triple A was entitled to have the subordination agreement declared void (Revert v. Hesse, supra, 126 Cal. at p. 300) and that is, in effect, the relief the court granted. As a result, the judgment in this regard must be affirmed.

G. Triple A’s Attorney Fees as Damages

Stewart Title acknowledges that, pursuant to the doctrine of Prentice v. North Amer. Title Guar. Corp. (1963) 59 Cal.2d 618, 621, an escrow agent is liable to a third party if its negligence or breach of contract causes injury to the third party. Damages in such circumstances can include attorney fees the third party has incurred in litigation necessary to protect its interest in real property where such interest has been threatened by the actions of the escrow agent. (See generally 7 Witkin, Cal. Procedure (4th ed. 1997) Judgment, § 147, pp. 661-662; 4 Witkin, Summary of Cal. Law (9th ed. 1987) Real Property, §185, p. 393.)

Stewart Title also implicitly acknowledges Triple A was required to sue the Frisones and defend against their suit in order to protect its first-priority lien on the 20.4-acre parcel.

Stewart Title contends, however, that it was either not negligent or not solely negligent in causing Triple A’s injury. Accordingly, claims Stewart Title, the award of damages in favor of Triple A should be reversed or, in the alternative, the case should be remanded for apportionment of such damages among Triple A, Western and itself, as fault may appear. We reject these contentions and affirm the award from Stewart Title to Triple A.

As an initial matter, we note our minor disagreement with the way the trial court phrased its ruling on this issue. The trial court stated in its memorandum of decision :

Our disagreement with the trial court centers around this fact: the specific tort that Stewart Title committed was the recording of the Frisones’ deed of trust with Western’s subordination agreement, thereby creating an implication of record that the Frisones’ deed of trust was in first position. The facts recited by the trial court were explanatory of Stewart Title’s actions -- that is, they explained how Stewart Title misled itself into seeking, and being satisfied with, Western’s sole execution of the subordination agreement -- but those facts were not, in themselves, the cause of Triple A’s injury. We explain.

First, based on our earlier discussion, the "collateral assignment" document was sufficient -- although far from perfect -- as the "necessary assignment" called for in the escrow 1 instructions to Stewart Title. We have concluded above that the collateral assignment was sufficient, in the circumstances, to put Stewart Title and the Frisones on notice that Western was not the sole beneficial owner of the Greenwood deed of trust. Further inquiry was required by this notice, and further inquiry would have disclosed Triple A’s interest. Thus, the collateral assignment was legally sufficient to fulfill its apparent purpose in the circumstances of this case.

Second, Stewart Title did not "fail" to obtain Triple A’s signature on a subordination agreement: there was no evidence whatsoever that Triple A was willing to sign such an agreement and there was clear evidence it had refused to renegotiate with Greenwood to facilitate Greenwood’s resale of the property. Presumably, if the Frisones had proved Triple A agreed to subordinate and had proved their own reliance on such an agreement, the Frisones would have been able to enforce that agreement by estoppel or otherwise even in the absence of an executed subordination agreement. Thus, in our view, it was not Stewart Title’s mere failure to obtain all the necessary documentation that led to Triple A’s damages; rather, it was the creation of a chain of title that affirmatively misrepresented the true ownership interests.

In light of these two clarifications of the trial court’s findings, it becomes clear that Stewart Title’s first line of attack on the damages award is meritless. Triple A was not at fault, wholly or partially, so as to preclude its recovery of damages from Stewart Title. The "collateral assignment" it executed was legally sufficient (at least in the present circumstances) to put Stewart Title and the Frisones on notice of its continuing interest in the Greenwood deed of trust. Nothing Triple A did after execution of the assignment, as far as the record shows, caused Stewart Title, the Frisones, or Western to believe that Triple A agreed to subordinate its interests to the interest of the Frisones.

Stewart Title’s second line of attack on the judgment is a claim that Western was negligent in signing the subordination agreement, since that agreement misrepresented the nature of Western’s interest in the deed of trust. Stewart Title contends Western should, therefore, be liable for all or some of Triple A’s attorney fee damages.

It is clear from our discussion above that Stewart Title negligently prepared the subordination agreement and requested Western to sign it. Foreseeably, Western did so and then Stewart Title negligently recorded the subordination agreement. Accordingly, at the least, Stewart Title is jointly and severally liable for the injuries of which its conduct was a substantial cause, since the foreseeable conduct of Western, even if negligent, could not be a supervening cause of the injuries. (See Hardison v. Bushnell (1993) 18 Cal.App.4th 22, 28-29.)

On the other hand, it is not clear that Stewart Title raised in the trial court the apportionment argument it now advances on appeal. Instead, as far as we can find in the record, Stewart Title contended it should suffer no liability for Triple A’s damages: "Stewart is not properly charged with liability for Triple A’s attorney’s fees in this action since the findings that Stewart was negligent are … not supported by substantial evidence and are contrary to the law. Any loss suffered by Triple A, if caused by wrongful conduct, was caused by [Western’s] superseding breach of contractual duty to the Frisones and Triple A" when it executed the subordination agreement.

This latter theory, of course, is erroneous. As noted above, where the acts of party A are the reasonably foreseeable consequence of the negligent acts of party B, party B remains liable for injuries caused to party C notwithstanding the acts of party A, with exceptions not relevant in this case. (Hardison v. Bushnell, supra, 18 Cal.App.4th at pp. 28-29.)

Even if we assume that Stewart Title’s more modest theory, that Western should share responsibility for Triple A’s injuries, was preserved in the court below, we conclude that theory is precluded by findings made by the trial court based on substantial evidence. Thus, the court found that Stewart Title did not act reasonably when it accepted Western’s subordination agreement as sufficient to place the Frisones’ deed of trust in a position of first priority. As we have concluded above, the information in Stewart Title’s possession in escrow 2 placed upon it a duty of inquiry concerning Western’s power to subordinate the deed of trust unilaterally. It failed in any way to discharge that duty of inquiry. The trial court was justified in its implied finding that this failure by Stewart Title was the sole proximate cause of Triple A’s injury (or, as the trial court phrased the matter, that "the connection" between Western’s conduct and Triple A’s damages was "remote"). Accordingly, no apportionment of damages or finding of joint liability was required by the evidence; the judgment in this regard must be affirmed.

Western sought an award of attorney fees from Stewart Title. The trial court declined to award such fees. Western now contends it was entitled to such fees as a matter of law pursuant to Code of Civil Procedure section 1021. That section provides, in relevant part: "Except as attorney’s fees are specifically provided for by statute, the measure and mode of compensation of attorneys and counselors at law is left to the agreement, express or implied, of the parties .…" Western contends it had an express agreement with Stewart Title for payment of attorney fees to the prevailing party in any litigation arising out of the escrows involved in this case.

Western’s contention founders on an elementary point: it had no "agreement, express or implied," with Stewart Title to shift responsibility for fees. It is true that Triple A and Greenwood had such an agreement in escrow 1; Greenwood and Sullivan had such an agreement in escrow 2. Western had such an agreement in neither escrow.

Paragraph 15 of Stewart Title’s printed form of "General Instructions" states the following (the instructions are written in a form directed to Stewart Title): "If a dispute arises between you and Buyer and/or Seller out of this transaction, or if you are named as a party in any action arising out of this transaction, the prevailing party(ies) shall be awarded reasonable attorneys’ fees and legal costs from the losing party(ies)." The "General Instructions" are expressly incorporated by reference into the escrow instructions that established escrows 1 and 2.

In order to evaluate Western’s argument on appeal, it will be helpful to place its participation in this escrow in a broader context. Normally, and in this case, the transferor and the transferee open an escrow. (See Civ. Code, §§ 1053, 1057.) The principals -- the seller and buyer, the borrower and lender, whatever grantor and grantee may be involved in a particular transaction -- give escrow instructions to the escrow agent stating the terms upon which the agent will take certain actions. The principals and the escrow agent then request from various other persons and entities documents that are deemed necessary to accomplish the purposes of the escrow. (See generally 2 Miller & Starr, supra, Escrows § 5.1, p. 394 and passim.) In this case, the original instructions provide:

Consider, hypothetically, the case of a title company offering escrow services that informed its potential escrow principals that, as a condition of receipt of any document from any third party, the title company would require the third party to sign an undertaking to pay the title company’s attorney fees as prevailing party in any litigation concerning the third party’s document. (Compare Rooz v. Kimmel (1997) 55 Cal.App.4th 573, 585-586 [escrow company required hold harmless agreement before providing courtesy services to third party].) No reasonable purchaser of escrow services would hire such a title company, since it would reasonably anticipate that many persons who might otherwise cooperate in the escrow transaction would refuse to sign the title company’s attorney fees undertaking.

Western would have us impose upon third-party document providers a similar but even broader obligation: Western would have us hold that merely by submitting a document with instructions to an escrow agent a third party agrees to all provisions of an undisclosed, unsigned contract with the escrow agent. In this case, the undisclosed, unsigned putative contract includes an attorney fee provision. In addition, it provides: "4. We, jointly and severally, agree to save and hold you harmless by reason of any misrepresentation or omission by Seller or Buyer or their agent(s) as to Seller’s compliance with rules and/or regulations of any governmental agency .…" Paragraph 16 gives the title company the right to compel binding arbitration if it is named as a party "in any action arising out of this transaction." These would certainly be significant contractual undertakings to impose upon an unsuspecting third party; we can but imagine Western’s outraged response if, as prevailing party, Stewart Title tried to assert against Western an attorney fee obligation under these circumstances.

Western has provided no legal authority -- and we are quite sure there is no such authority it could provide -- for this wholly novel reconfiguration of normal contract law. (Cf., e.g., Civ. Code, §§ 1549, 1550, 1565, 1585, 1635.) "Establishing [such] a rule … would damage a valuable business procedure. Manifestly, appellants’ contention, if adopted by judicial fiat, would effectively discourage a reasonable and prudent man or company" from cooperating in any escrow to which it was not a direct party. (Lee v. Title Ins. & Trust Co. (1968) 264 Cal.App.2d 160, 163 [rejecting imposition of broad duty of disclosure on escrow agents].)

There was no evidence whatsoever before the trial court that Stewart Title attempted to obtain Western’s agreement to be bound by the "general instructions" and there was no evidence Western agreed to be so bound. The trial court did not err in concluding that Stewart Title was not responsible for Western’s attorney fees under Code of Civil Procedure section 1021.

The judgment is affirmed. Costs and attorney fees on appeal are awarded to Triple A from Stewart Title; costs on appeal are awarded to Triple A from the Frisones; costs on account of Western’s appeal are awarded to Stewart Title as respondent from Western. As a result of our disposition of their appeals, the Frisones and Stewart Title’s petition for writ of mandate or other appropriate relief is moot. The petition is denied.

Vartabedian, J.

WE CONCUR:

Ardaiz, P. J.

Wiseman, J.