Judge Gail Killefer, Case BC519769 2022-08-05 Tentative Ruling

This court entered a proposed Statement of Decision on June 15, 2022.[1] On June 22, 2022, Defendant filed a proposed Judgment After Trial and an Objection to the Proposed Statement of Decision. On June 30, 2022, Plaintiff filed Objections to the proposed Statement of Decision. On July 8, 2022, Defendant filed a Response to Plaintiff’s Objections and Requested a Hearing. On July 13, 2022, the court scheduled a hearing on the proposed Statement of Decision for August 5, 2022, at 10:00 a.m.

Having considered all of the evidence and testimony, Plaintiff’s Objections, Defendant’s Responses to Plaintiff’s Objections, and Defendant’s Objections (see Appendix A, attached), and all the matters of record, the court now rules as follows:

Forough Etelaei as Trustee of the Toufer Arrowroot Trust and Shahzad Khaligh (“Khaligh”) (collectively “Plaintiffs”) seek to cancel First General Bank’s (“FGB”) deed of trust and notice of default recorded on 6100 Arrowroot Lane, Rancho Palos Verdes, California (the “Arrowroot Property”). Khaligh purchased the Arrowroot Property, a single-family residence, in 2001 and has lived there ever since. In its cross-complaint, FGB seeks an adjudication of the validity of its deed of trust on the Arrowroot Property.

Khaligh claims that when the deed of trust and other loan documents for a home equity line of credit (HELOC) were executed on December 7, 2012, by Defendant Benjamin Toufer (“Toufer”), FGB knew or should have known that Toufer was neither the occupant nor the beneficial owner of the Arrowroot Property and was not a person entitled to encumber the property.

Khaligh sued both FGB and Toufer. A jury found that Toufer breached his fiduciary duty to Khaligh and acted with malice and oppression. The jury awarded $50,000 in damages against Toufer in favor of Khaligh. The trial court summarily adjudicated that Khaligh had ratified Toufer’s conduct and granted judgment on the pleadings to FGB. That matter was heard by the court of appeal and the trial court decision was reversed. Khaligh’s claim against FGB returned to this court for a court trial on May 10-13, 2022.

The court requested the parties submit closing briefs on or before May 23, 2022, at which time the court took the matter under submission before issuing a tentative ruling on June 15, 2022.

Khaligh is an electrical engineer with a Ph.D in aerospace engineering. She has worked in industry and with government agencies including NASA and the Air Force Space and Missile Systems Center.

In April 2004, after an arbitration involving a wrongful termination claim Khaligh brought against her former employer, Jet Propulsion Laboratory, and her former supervisor, Hadaegh, the court entered a judgment of $100,000 against Khaligh. Khaligh testified that she filed for bankruptcy which discharged her debts other than the $100,000 judgment. As she was concerned the judgment could hamper her career or security clearance, her sisters and family friend Toufer offered to help her.

Khaligh planned to refinance the Arrowroot Property in order to pay off the judgment.[2] (Trial testimony (“TT”) 5/10/22, 58.) In 2008, Khaligh already had two loans on the Arrowroot Property and knew that with her credit history, she would not qualify for a loan. Instead, she sold the Arrowroot Property to Toufer on February 6, 2008, for $952,000. (Trial Exhibit (“TE”) 106; 104.) Toufer paid Khaligh $457,000 from his own funds (taken from lines of credit Toufer opened on three properties under his name (TT, 5/10/22, p. 58)), borrowed $285,000 from a private lender, Schaefer Funds, LLC (TE 107), and borrowed the rest from Khaligh’s family members. She testified that she and Toufer had an agreement that Toufer would hold title of the Arrowroot Property in trust for her exclusive use and benefit.

On March 31, 2008, Toufer signed a Quitclaim Deed, conveying title of the Arrowroot Property to Khaligh. (TE 2.) Khaligh testified that this quitclaim deed was not recorded because Toufer wanted security for the money he had given her. (TT, 5/10/22, 63.) Khaligh testified that she always agreed and intended to repay Toufer and her family members the sums they had contributed towards Toufer’s purchase of the Arrowroot Property. She testified that she planned to repay Toufer with a loan from the Arrowroot Property.

Between 2008 and 2011, Khaligh did not attempt to repay Toufer. Each month, she made payments on the lines of credit Toufer had taken on three properties under his name in order to purchase the Arrowroot Property. When Khaligh left her job at Boeing in 2011, however, Toufer wanted the money he had loaned her returned. (TT, 5/10/22, 63.) As she was unemployed, Khaligh knew that it would be difficult for her to obtain a loan. (TE 126.9.) Together, Khaligh and Toufer agreed they would try to find a $500,000 loan against the Arrowroot Property which Khaligh could then use to repay Toufer. (TE 29; 111.7, 111.13-14, 111.21, 111.23; 120, ¶ 9.)

In December 2012, Toufer opened, on his own, a $990,000 line of credit with FGB which he secured with the deed of trust for the Arrowroot Property. The deed of trust in favor of FGB was recorded on December 13, 2012. (TE 44:294-304.) Toufer immediately withdrew $700,000, deposited that amount in his FGB bank account, and then immediately transferred that sum to his Citi checking account. Khaligh claims that she first learned of Toufer’s line of credit when she read the Closing Statement for Toufer’s loan (TE 9) on December 21, 2012, which had been mailed to the Arrowroot Property. In response, Khaligh immediately contacted FGB and told Jeanette Lin, Executive Vice-President and Chief Credit Officer of FGB, that the loan was fraudulent. She also demanded that Toufer transfer his title to a new trustee, Forough Etelaei, which Toufer did. (TE 117, 119.)

Plaintiff asks the court to order the cancellation of FGB’s deed of trust on the Arrowroot Property under Civil Code § 3412. Section 3412 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 whom it is void or voidable, may, upon his application, be so adjudged, and ordered to be delivered up or canceled.”

FGB asserts five defenses to Khaligh’s claims to set aside and cancel the deed of trust: 1) Common Law Bona Fide Encumbrancer; 2) Probate Code Bona Fide Encumbrancer; 3) Unclean Hands; 4) Estoppel; and 5) Ratification.

It is well established that a bona fide encumbrancer “who receives a legal interest in the property holds his or her interest free and clear of prior, unknown, unrecorded equitable liens, equitable interests, or constructive trusts.” (4 Miller & Starr, Cal. Real Estate (4^th ed. 2021) § 10:50.) A ‘bona fide encumbrancer’ is defined as:

an encumbrancer acting in good faith and for value who receives a lien or encumbrance on real property . . . and who has parted with something of value in consideration for the encumbrance. Absence of notice is an essential requirement in order that one may be regarded as a bona fide purchaser or encumbrancer.

The purchaser’s or encumbrancer’s status is determined at the time that the interest or lien is acquired and any information learned after he or she acquires an interest does not affect his or her status as a bona fide purchaser or encumbrancer.

Generally, the person claiming bona fide purchaser status has the burden of proving that it acquired its interest in the property without notice of the prior interest. When the prior party claims an equitable interest as opposed to a legal interest, however, the burden of proof shifts to the prior party to prove the subsequent party is not a bona fide encumbrancer. Thus, when the person claiming to be a bona fide encumbrancer establishes that he or she paid value for the title or lien, it is then “presumed the lien or interest was received in good faith and without notice, and the burden shifts to the other person to prove that the alleged bona fide encumbrancer had notice.” (4 Miller & Starr, Cal. Real Estate (4^th ed. 2021) § 10:51.)

Whether FGB is a bona fide encumbrancer “is a question of fact to be decided by the trial court.” (4 Miller & Starr, Cal. Real Estate (4^th ed. 2021) § 10:51; Melendrez v. D & I Investment, Inc. (2005) 127 Cal. App. 4^th 1238, 1254.) Here, it is undisputed that FGB paid Toufer valuable consideration -- $700,000 -- in exchange for the Deed of Trust on the Property. (TE 44.213-226; Trial Testimony of Hsu, Lin, Khaligh, Toufer.) Thus, the burden shifts to Plaintiffs to prove by a preponderance of the evidence that FGB had notice of Khaligh’s interest in the Arrowroot Property by the time FGB recorded the Deed of Trust on December 13, 2012. (TE 44:294-304.)

There are three types of notice that may defeat the status of the bona fide purchaser or encumbrancer: 1) knowledge or actual notice of a prior interest of lien; 2) constructive notice received by the recordation of the prior interest; and 3) implied notice “when the purchaser or encumbrancer has knowledge from possession of the property that is inconsistent with the record title, or of suspicious circumstances, or knowledge of a condition of the property that would prompt a reasonable person to inquire. Further, notice is imputed to a purchaser or encumbrancer from knowledge acquired by an agent within the course and scope of his or her authority.” (4 Miller & Starr, Cal. Real Estate (4^th ed. 2021) § 10:52.)

Plaintiffs presented no evidence that FGB had actual notice of Khaligh’s interest in the Arrowroot Property. Similarly, FGB did not have constructive notice of Khaligh’s interest because Khaligh did not record her quitclaim deed. Instead, Plaintiffs argue that the law implies notice here, where FGB had “knowledge from possession of the property that is inconsistent with the record title, or of suspicious circumstances, or knowledge of a condition of the property that would prompt a reasonable person to inquire.” (Plaintiffs’ Closing Brief, 9-10.) Plaintiff further argues that notice is imputed to FGB “from knowledge acquired by an agent (FGB Loan Officer Jerry Ho) within the course and scope of his or her authority.” (Id.)

At trial, Plaintiffs presented evidence of eleven “suspicious circumstances” that they argue reasonably placed FGB and its agent, Jerry Ho, on notice of a question in Toufer’s title and of Khaligh’s interest in the Arrowroot Property. The court addresses, inter alia, these alleged suspicious circumstances and FGB Loan Officer Jerry Ho’s trial testimony.

1. Toufer applied for an owner-occupied home equity line of credit (HELOC) and he supposedly lived at the Property. The address on his driver’s license, however, listed 22616 Burdon Street, Woodland Hills, CA. (TE 44.44.) Plaintiffs argue that Toufer supposedly lived at the property since 2008: “[a] request to send mail to his parents’ house would not affect the address on his driver’s license.” (Pl. Closing Bf., p. 12.)

2. FGB ran Toufer’s credit check through Experian, which reported a “Fraud Shield Summary” showing a “current address conflict.” (TE 112.)

3. The same Experian report showed all aspects of Toufer’s life as being in Woodland Hills: his residence, employment, and banking.

4. The Southern California Gas Company’s bill provided by Toufer to FGB had Dr. Khaligh’s email address at the top of the page under Toufer’s name. (TE 44.194.)

5. The Southern California Edison electric bill also listed Dr. Khaligh’s name at the top of the first page. (TE 44.193).

7. On the schedule of real estate, the mailing address for Toufer’s parents is shown as a rental property. (TE 44.84.).

8. Dr. Khaligh paid the property taxes, insurance, improvements, and all other expenses related the property – not Toufer.

9. Dr. Khaligh paid the county property tax bill. (TE 8.) FGB lending policy requests the most recent county tax bill. (TE 44.38.)

10. FGB sent an appraiser to the property. Plaintiff argues that because the appraiser asked Dr. Khaligh questions regarding the extensive remodeling that had been done, “it was obvious that he thought she was the owner.” (Pl. Closing Bf., p. 14.)

11. Toufer did not provide the Property Insurance Declaration, as required by FGB lending policy.

Plaintiffs argue that with “the exercise of reasonable care, inquiry and diligence” FGB “would have discovered that the application and the documents were lies or had enough suspicious items that further inquiry was necessary.” (Pl. Closing Bf., p. 14.)

But testimony at trial from the FGB representatives and documents in the loan file revealed that FGB did follow up when Toufer’s application revealed inconsistencies. With Toufer’s explanations, however, FGB reasonably concluded that there were no “red flags” on his loan file. Cliff J. Hsu (“Hsu”), President and CEO of FGB, testified that the loan application process typically involved FGB asking the borrower to explain information on his or her application.

For example, Hsu testified that it was not unusual for a borrower to give different addresses in a loan application. In this circumstance, FGB would ask for an explanation, as FGB did here. With respect to Toufer’s driver’s license listing an address different than that of the property (TE 44.44), Toufer explained to FGB that his identification was stolen so he changed his mailing address to his parents’ house. (TE 41.1.)

Hsu and Jeannette Lin testified that FGB checked utility bills to ensure the loan applicant's name was listed on the account. Here, the utility bills included Toufer’s name and the property address. The electric bill listed Toufer’s name by the “customer account” and the “service account” listed the address of the Arrowroot Property. That the name “Khaligh, Shahzad” was at the top of the bill, unrelated to the customer account or address, was not relevant to FGB’s inquiry. (TE 44.193.) The gas bill provided the address of the property and listed Toufer’s name under “My Profile.” Again, the fact that the gas bill included an email address smkhaligh@yahoo.com under Toufer’s name was not relevant to FGB’s inquiry. (TE 44.194.)

The Experian Credit Report also failed to reveal “suspicious” information. The “Fraud Shield Summary,” showing a “current address conflict” (TE 112), was not relevant to the question of ownership of the property. Toufer owned several properties. It was not unusual that Toufer’s real estate license listed a Woodland Hills address rather than the address of the Arrowroot Property. (TE 44.85.)

With respect to Toufer’s low credit score of 592 on the Experian Credit Report, Mr. Hsu testified that a credit score was not meaningful to him as just one bill could lower a borrower’s score. For example, FGB’s Credit Approval Memorandum reveals that Toufer’s low credit score “was primarily due to an existing delinquency in the amount of $1,150 with Lien Enforcement Inc.” The Memorandum further explained: “(p)er Benjamin’s written explanation, this past due amount appears to be a dental work done” which was then double charged, so Toufer refused to pay. (Trial Ex. 44.20.) Mr. Hsu did not consider one problematic medical bill that lowered a borrowers’ credit score to be a problem or “suspicious.”

Jerry Ho testified that FGB reviewed the property taxes to ensure that the taxes were current: they were. FGB’s lending policy requested the most recent county tax bill for purposes of calculating the loan applicant’ debt-to-income ratio (TE 44.38), but it was not FGB’s practice to check to see who was paying the property taxes.

FGB retained a real estate appraiser, Jack Storey, to appraise the Arrowroot Property in November 2012. Storey has been a licensed real estate appraiser since 1992 and conducts some 300 appraisals a year. Storey testified that he has conducted some 100 appraisals for FGB over the last twenty years.

Storey testified that when he arrived at the Arrowroot Property in the early afternoon of November 10, 2012, he was met by Khaligh and Toufer. They walked through each room of the house together; both answered his questions. Neither Khaligh nor Toufer said they lived there or owned the property. Storey testified that he appraised the value of the house based upon factors such as the improvements made. His engagement letter with FGB would typically identify the prospective borrower; he was not concerned with identifying the borrower and he has never requested utility bills during his appraisal. Storey testified that his appraisal does not concern personal items or clothing. He did not recall the details of the house. He recalled nothing unusual about the appraisal or the house except for the view.

Finally, although Plaintiffs argue that Toufer did not provide a property insurance declaration page, the loan file includes a document entitled Evidence of Property Insurance which states Travelers Insurance insured Toufer for the Arrowroot Property. (Trial Ex. 44.165.)

Jerry Ho testified that he was employed by FGB from June 2012 through June 2016 as a loan officer and credit officer. After receiving a credit application and essential information, Ho began the underwriting process and eventually submitted a credit package to Jeannette Lin and Cliff Hsu for approval.

Ho testified that he was the underwriter for Toufer’s HELOC. Ho testified that the preliminary title report showed Toufer as the owner of the Arrowroot property (TE 44.236-252); the evidence of property insurance showed Toufer was insured at the property (44.165); and the utility bills reflected Toufer’s name as the account holder at the Arrowroot Property address.

Ho did not remember seeing the address on Toufer’s driver’s license that differed from the Arrowroot Property or the Experian Fraud Shield. Ho testified that if he had learned that an applicant for a HELOC did not live at the subject property, he would have reported this to Hsu or Lin. At trial, ten years after his review of Toufer’s FGB loan application, Ho testified that he remembered little about the application. In reviewing Toufer’s explanations in the loan file regarding his addresses and low credit, Ho testified that FGB considered the borrowers’ explanations during the loan application process.

Ho’s testimony neither revealed that he was, nor should have been, aware of suspicious circumstances in Toufer’s application in 2012. The court finds that Toufer gave reasonable explanations for the seeming inconsistencies in his loan application. Ho’s testimony at trial in 2022 regarding “suspicious circumstances” in Toufer’s loan application in 2012 was speculative and not relevant.

Hsu testified that FGB confirmed ownership of the property by reviewing the preliminary title report and the utility bills. Here, the Preliminary Title Report, dated November 13, 2012, listed Toufer as the owner of the property since 2008. (TE 44.236.) The utility bills listed Toufer as the customer at the Property. (TE 193, 194.) The recorded Grant Deed was also reliable evidence concerning ownership. (TE 1.) Plaintiffs presented no evidence at trial that FGB had notice of Khaligh’s quitclaim deed.

Plaintiffs’ argument relied heavily on Jack Storey’s appraisal of the Arrowroot Property. Plaintiffs contend that Storey, after observing the Arrowroot Property and talking with Khaligh and Toufer, must have known that Khaligh owned and lived at the Arrowroot Property. Khaligh testified: “It didn’t even cross my mind to tell him [Storey] do you know I’m the owner. It’s it was obvious to me.” (TT, 5/12/22, p.98.) The court finds Khaligh’s testimony not credible. There was no admissible evidence at trial that Storey knew Khaligh owned the Arrowroot Property; she never told him and the public records would identify the Toufer as the owner.

Even if Storey knew that Khaligh lived at the Arrowroot Property, there was no evidence Storey knew Toufer did not live there. Joint possession, by Khaligh and Toufer, did not give Storey notice of Khaligh’s unrecorded interest. “When property is occupied jointly by the true owner who has no recorded title and a person who has the recorded title, there is no notice of the true owner’s interest because the occupancy of the person with record title is consistent with the record.” (4 Miller & Starr, Cal. Real Estate (4^th ed. 2021) § 10:89.)

The court finds that FGB had no implied notice of Khaligh’s interest in the property. With Toufer’s explanations to seeming inconsistencies in his loan application, there were no “suspicious circumstances” or “red flags” in his loan application.

Even a more aggressive inquiry by FGB in this case, however, would not have revealed Khaligh’s ownership interest. Indeed, Khaligh testified at trial that in November 2012, she was hoping to get a loan with Toufer for $500,000. (Khaligh Trial Test., 5/12/22.) Her interactions with the appraiser, Jack Storey, were consistent with her desire to obtain a loan on the Arrowroot Property with Toufer. Given that goal, there was no incentive for Khaligh to disclose her ownership interest. If she had wanted to protect her interest in the Arrowroot Property, she would have recorded her quitclaim deed and/or revealed her ownership interest to the appraiser, Jack Storey, or both.

Finally, the court notes that after reviewing an exhaustive investigation of the loan by FGB, even the FDIC found no reason to criticize FGB’s actions with respect to Toufer’s loan. After this court granted FGB’s motion for summary adjudication on October 29, 2015, Khaligh filed a consumer complaint with the FDIC on March 29, 2016. (TE 129.) At the request of the FDIC, FGB investigated Khaligh’s complaint and prepared an extensive investigative report for the FDIC (TE 136). FGB provided the FDIC with Toufer’s Consumer Loan Application, the Experian report, a preliminary title report on the property, Toufer’s signed personal financial statement and Chase Bank account statement, verification of Toufer’s real estate salesperson license, evidence of property insurance, and utility bill. Mr. Hsu testified that, in response, FGB never received any criticism or further scrutiny from the FDIC on Toufer’s loan in response.

Plaintiff further argues that “[a]n encumbrancer who does not investigate further will hold its interest subject to the estate of a third-party, but only an innocent third-party,” (Pl. Closing Bf., 10, citing Chalmers v. Raras (1962) 200 Cal.App.2d 682, 686-688). Plaintiff argues that “the innocent party must prevail over a negligent party who did not make a reasonable investigation,” that Dr. Khaligh is the innocent party here, and that the “bank was a negligent party, overlooking a plethora of suspicious documentation and only focusing on the equity in the home to the exclusion of all else.” (Pl. Closing Bf., p. 10.)[3]

The court finds that that this case is easily distinguished from Chalmers. In Chalmers, the seller signed a deposit receipt agreement to convey 3 1/2 acres of his ten-acre plot. The seller then sold his entire ten acres to another purchaser with a provision in the sales contract stating that the buyers' rights were subject to the rights of the earlier party who offered to buy the smaller parcel. The subsequent purchaser never inquired as to the name of the prior party or the nature of that party's transaction but instead relied on statements of a salesman that the prior party was no longer interested. The court ruled that the prior purchaser must prevail unless the subsequent purchaser could show he bought the property in good faith and without notice of the prior sale.

The Chalmers court found the subsequent purchaser was not a bona fide purchaser because they had sufficient facts to compel further inquiry but chose not to investigate the other party's interest. The “sufficient facts” in that case was a provision in the sales contract that stated the buyers’ rights were subject to the rights of another party who offered to buy a smaller parcel. Here, in contrast, FGB did not have sufficient facts to compel further inquiry regarding Toufer's ownership of the Arrowroot Property. To the extent they found inconsistencies in Toufer’s loan application, FGB required explanations from Toufer. His explanations were reasonable. Plaintiffs failed to prove by a preponderance of the evidence that FGB had notice of Khaligh's interest in the Arrowroot Property.

Moreover, even if FGB were found negligent for not further investigating Toufer’s loan application – and the court finds that FGB was not negligent in this way -- Plaintiff would not prevail on this theory because Khaligh was not an innocent party.

Khaligh’s actions, beginning in 2008, belie the characterization of Khaligh as an innocent party. In 2008, she entered into a Residential Purchase Agreement with Toufer. (TE 104.) This Agreement provides that the Buyer intends to “occupy the Property as Buyer’s primary residence” and that “[o]ccupancy shall be delivered to Buyer” at 5:00 p.m. on the date of Close of Escrow. (TE 104.1, ¶¶ 3(A & B). Neither statement is true. Khaligh testified that she did not read this provision before she signed it – an excuse the court heard repeatedly from Khaligh during the trial when Khaligh did not want to be accountable for documents she signed (e.g., TE 114, Agreement on the letterhead of David Gibson Escrow Co., Inc., dated December 31, 2012; Pl. Closing Brief, p. 18.)[4]

In 2012, it was undisputed that Khaligh was searching for loans with Toufer. (TE 29, 111.7, 111.13-14, 111.21, 111.23, 111.32-33.) She agreed with Toufer to try and get a loan on the property – using his name as the title owner because she believed she could not get a loan given her credit history and unemployment. (TE 126.9; Khaligh Dec., 10/12/15, ¶ 17.) Her only disagreement with the loan was that Toufer obtained a loan for $990,000 rather than the $500,000 to which she thought they had agreed.

Khaligh advised Toufer that she called a financial institution, Kinecta Financial Credit Union, pretending to be her sister Hayedeh who had an account with Kinecta. She told the Kinecta representative that Toufer’s credit was above 720. She suggested to Toufer that they reclassify payments she was making on Toufer’s lines of credit as “rental payments.” (TE 111.16.) Indeed, Toufer followed her suggestion and falsely listed rental payments on the three properties under his name on his loan application with FGB. (TE 44.84.)

Toufer repeatedly lied to FGB about owning the Arrowroot Property and residing there. It was undisputed that Toufer had never lived there. He signed an occupancy statement (TE 5), stating that he intended to occupy the Arrowroot Property. (TE 5). Khaligh gave Toufer copies of her utility bills and the property tax receipts to accompany his loan application. (TE 120.5-6, ¶ 16.) She participated with Toufer in the appraisal conducted by Jack Storey on the Arrowroot Property in November 2012 without ever mentioning that she owned the Property and that Toufer did not. These are not the statements and actions of an innocent party.

Khaligh’s testimony at trial that she was interested in finding a loan but not getting a loan, and that she never imagined Toufer would get a loan without her, was not credible. The parties introduced substantial evidence at trial that Khaligh did not want her name recorded with the Arrowroot Property: from her 2008 conveyance of the property to Toufer through 2013 when she insisted Toufer transfer the property to the “Toufer Arrowroot Trust,” even after she alleged Toufer had defrauded her. (TE 117, 119.) To address her debt, Khaligh needed Toufer to obtain a loan on the Arrowroot Property. That Toufer obtained a line of credit for $990,000 rather than the $500,000 that Khaligh wanted does not make Khaligh an innocent party.[5]

The doctrine of unclean hands demands that a plaintiff act fairly in the matter for which he seeks a remedy. He must come into court with clean hands, and keep them clean, or he will be denied relief, regardless of the merits of his claim.” (Kendall-Jackson Winery, Ltd. v. Superior Court (1999) 76 Cal.App.4th 970, 978.) This doctrine exists to promote the court's interest in “protect[ing] judicial integrity and promot[ing] justice” by preventing a wrongdoer from benefitting from his or her misconduct. (Id.)

The primary requirement for application of the “unclean hands” doctrine is that the misconduct must relate directly to the “cause at issue.” (Kendall-Jackson, supra, 76 Cal.App.4th at p. 979.) “The misconduct which brings the clean hands doctrine into operation must relate directly to the transaction concerning which the complaint is made, i.e., it must pertain to the very subject matter involved and affect the equitable relations between the litigants.” (Fibreboard Paper Products Corp. v. East Bay Union of Machinists (1964) 227 Cal.App.2d 675, 728.)

Whether the misconduct relates directly to the cause at issue is often a complex factual question. (DD Hair Lounge, LLC v. State Farm General Ins. Co., 20 Cal.App.5^th 1238, 1246.) Here, however, it is a straightforward question requiring an affirmative response. Khaligh’s misconduct here, as described above, relates to her efforts to assist Toufer in obtaining a loan on the Arrowroot Property, which he did not own. The court finds that Khaligh used Toufer to get a loan and that she concealed her own ownership interest. She is guilty of unclean hands.

For the reasons set forth above, the court finds that Defendant proved by a preponderance of the evidence that FGB is a bona fide encumbrancer, that Khaligh was not an innocent party, and is guilty of unclean hands. Plaintiffs failed to rebut the presumption that FGB had no notice of Khaligh’s interest in the Arrowroot Property as of December 13, 2012, when the deed of trust was recorded. Accordingly, the court need not reach the issues of estoppel, ratification, and probate code bona fide encumbrancer.

The court finds for FGB and against the Plaintiffs on the complaint and cross-complaint and deems the Deed of Trust and Notice of Foreclosure valid and enforceable against the Arrowroot Property. FGB is the prevailing party and is entitled to recoverable and allowable costs.

a. Where a Deed of Trust was obtained with Fraud the Deed of Trust is VOID. A void deed is effective even against a Bona Fide Encumbrancer;

Court’s response: The court did not find evidence at trial supporting the legal theory that the deed of trust was void.

b. A void deed passes no title and cannot be made the foundation of a good title even under the equitable doctrine of a bona fide purchase.

Court’s response: As noted above, the court did not find evidence at trial supporting the legal theory that the deed of trust was void.

c. If the Court deems the DEED is voidable it is subject to rescission, when Plaintiff proves that: 1) a deed is obtained by Fraud; and 2) there is a reasonable apprehension of serious injury including pecuniary loss or the prejudicial alteration of one’s position.

Court’s response: If the title is voidable, title may be enforced by a bona fide purchaser.

2. Objection to the tentative Statement of Decision’s failure to discuss CCP § 3412 and the applicability to this case.

Court’s response: OVERRULED. The court briefly addressed Civil Code § 3412 in the proposed Statement of Decision, p.3, before discussing FGB’s defenses to Khaligh’s claim to set aside and cancel the deed of trust.

3. Objection to the tentative Statement of Decision’s failure to address the issue regarding FGB not bringing an action against Toufer for fraud.

Court’s response: OVERRULED. The court does not find this issue relevant to the dispute between Plaintiff and FGB.

4. Objection to the tentative Statement of Decision’s omission of testimony by Hayedeh Khaligh.

Court’s response: OVERRULED. The court did not address FGB’s ratification defense and did not find Hayedeh Khaligh’s testimony relevant to the issues the court considered.

5. Objection to the tentative Statement of Decision’s omission of testimony by Cliff Hsu regarding FGB’s usual initial response of freezing the account in cases of fraud.

Court’s response: OVERRULED. The court found this testimony by Mr. Hsu not relevant to the court’s decision because by the time Khaligh called Ms. Lin about the alleged fraud, Toufer had already withdrawn $770,000. FGB froze the remaining funds in Toufer’s home equity line of credit.

6. Objection to the tentative Statement of Decision’s omission of testimony by Cliff Hsu regarding FGB’s decision to pursue the equity in the Arrowwood Property rather than preventing Toufer’s fraud.

Court’s response: OVERRULED. As noted above, FGB froze the remaining funds in Toufer’s home equity line of credit immediately after receiving Khaligh’s telephone call. FGB attempted to re-verify Toufer’s ownership of the Arrowroot Property by seeking a signed Affidavit from Toufer and Khaligh. (TE 15-16.) The Court did not find Hsu’s testimony in this regard relevant to the issue before the court.

7. Objection to the tentative Statement of Decision’s omission of a discussion “over whether the appraiser Jack Storey, FGB’s Agent, should have notified FGB that there was another person living in the house or whether he should have asked if the owner is at the house during the appraisal process.”

Court’s response: OVERRULED. There was no evidence presented at trial that the appraiser should have notified FGB that “there was another person living in the house or whether he should have asked if the owner is at the house during the appraisal process.” No expert testified that this was the standard of care for appraisers; Story testified that he was not concerned with identifying the borrower.

8. Objection to the tentative Statement of Decision’s omission of addressing FGB’s issuance of “a $1M HELOC on a stated income and no-doc application” and “approved the raising of a $500,000 limit to a $1M limit for an owner-occupied loan.”

Court’s response: OVERRULED. There was no evidence that FGB violated common industry policy, as no expert testified as to the standard of care in the industry. Moreover, Hsu testified that FGB honored and approved the program that was in place when Toufer first approached FGB for a loan.

9. Objection to the tentative Statement of Decision “for either omitting or misstating Ms. Khaligh’s entire testimony.”

10. Objection to the tentative Statement of Decision “for omitting any decision on whether FGB acted in good faith.”

Court’s response: OVERRULED. The Court addressed FGB’s conduct throughout the tentative Statement of Decision. Plaintiff objects to the court’s reasoning and conclusions.

11. Objection to the tentative Statement of Decision for omitting whether the court considered the credibility of FGB representatives after their allegedly contradictory testimonies regarding the verification in question.

Court’s response: OVERRULED. This objection is vague and ambiguous. Generally, the Court found the testimony of witnesses Hsu, Lin, and Ho to be credible and generally knowledgeable.

12. Objection to the tentative Statement of Decision for omitting Jeannette Lin’s testimony on May 11, 2022, “that revealed the bank performed the appraisal before the application was even turned in.”

Court’s response: OVERRULED. Given Hsu’s testimony that FGB could define a loan application as a customer’s first contact with the bank, the court did not find this “fact” relevant to its analysis.

13. Objection to the tentative Statement of Decision for omitting Jerry Ho’s testimony that “a loan application was needed before performing an appraisal.”

Court’s response: OVERRULED. Given Hsu’s testimony that FGB could define a loan application as a customer’s first contact with the bank, the court did not find this testimony relevant to its analysis.

14. Objection to the tentative Statement of Decision’s omission of Jeannette Lin’s testimony “that revealed the bank started the underwriting process before even receiving Toufer’s application.”

15. Objection to the tentative Statement of Decision’s omission of Jeannette Lin’s testimony “that revealed the bank only took the information as stated on Toufer’s application with no further follow up or verification.”

Court’s response: OVERRULED. Ms. Lin testified she was not involved in underwriting the loan and her testimony in this area was speculative and inconsistent with the documents in the loan file.

1. Objection to the court’s finding that “between 2008 and 2011 Khaligh did not attempt to repay Toufer.” OVERRRULED. This is an objection to the court’s reasoning and conclusions.

2. Objection to the court’s finding that Plaintiffs presented no evidence that FGB had actual notice of Khaligh’s interest in the Arrowroot Property. OVERRRULED. This is an objection to the court’s reasoning and conclusions.

3. Objection to the court’s finding that “FGB did follow up when Toufer’s application revealed inconsistencies.” OVERRRULED. This is an objection to the court’s reasoning and conclusions.

5. Objection to the court’s finding that Toufer’s explanation to FGB that his identification was stolen so he changed his mailing address is vague, ambiguous, incomprehensible, irrational, and lacking supporting evidence. OVERRRULED. This is an objection to the court’s reasoning and conclusions.

6. Objection to the court’s finding that “FGB reasonably concluded that there were no ‘red flags’ on his loan file.” OVERRRULED. This is an objection to the court’s reasoning and conclusions.

7. Objections to the court’s finding that the fact that “Khaligh, Shahzad” at the top of the Southern California Edison electricity bill, “unrelated to the customer account address, was not relevant to FGB’s inquiry” (TE 44.193.) and, similarly, the court’s finding that the gas bill included Khaligh’s email address under Toufer’s name on the gas bill (TE 44.194) was not relevant to FGB’s inquiry. OVERRRULED. These are objections to the court’s reasoning and conclusions.

8. Objection to the court’s finding that “[t]he Experian Credit Report also failed to reveal ‘suspicious information. The ‘Fraud Shield Summary,’ showing a current address conflict’ (TE 112), was not relevant to the question of ownership of the property.” Plaintiff argues this finding “is unsupported and goes against common sense.” OVERRRULED. This is an objection to the court’s reasoning and conclusions.

9. Objection to the court’s finding on page 6, fourth paragraph, third line of the proposed Statement of Decision. OVERRULED. It is unclear to what Plaintiff’s are objecting. If they are objecting to the fact that FGB’s Credit Approval Memorandum explained why Toufer had a low credit score, that explanation is set forth in the Memorandum itself.

10. Objection to the court’s ”Proposed Statement of Decision for omitting facts and testimonies of key witnesses.” Specifically, Plaintiff objects to the court’s omission of testimony by the loan officer, Jerry Ho, when he responded “Yes” to the question of whether “the totality of the evidence would have set off a Red Flag in his mind.” OVERRRULED. As noted in the proposed Statement of Decision, p. 7, Ho testified at trial that he remembered little about Toufer’s FGB loan application ten years later. He also testified that there were documents in the loan file that explained or mitigated any concerns with Toufer’s loan. Plaintiff’s objection goes to the court’s reasoning and conclusion.

11. Objection to the court’s finding, based upon Jerry Ho’s testimony, that it was not FGB’s practice to check to see who paid the property taxes. OVERRULED. Plaintiff’s objection goes to the court’s reasoning and conclusions.

12. Objection to the court’s characterization of a document entitled Evidence of Property Insurance (TE 44.165.) OVERRRULED. Plaintiff’s objection goes to the court’s reasoning and conclusions.

13. Objection to the court’s finding that “Ho’s testimony neither revealed that he was, nor should have been, aware of suspicious circumstances in Toufer’s application in 2012.” OVERRRULED. Plaintiff’s objection goes to the court’s reasoning and conclusions.

14. Objection to the court’s finding that Mr. Ho’s testimony at trial regarding Toufer’s loan application ten years earlier was speculative and not relevant. OVERRULED. Plaintiff’s objection goes to the court’s reasoning and conclusions.

15. Objection to the court’s finding that Khaligh’s testimony regarding the appraiser was not credible. OVERRULED. The objection goes to the court’s credibility findings and lacks legal merit.

16. Objection to the court’s finding that “Toufer gave reasonable explanations for the seeming inconsistencies.” OVERRULED. This objection goes to the court’s reasoning and conclusions.

17. This objection is unintelligible. OVERRULED. The court found that “there was no evidence that Story knew Toufer did not live there.” Plaintiff suggests no evidence regarding what Story knew or did not know – rather Plaintiff goes off on a tangent and argues that the parties do not dispute that Toufer did not live at the Arrowroot Property.

18. Objection to the court’s finding that “FGB had no implied notice of Khaligh’s interest in the property . . .” on the grounds that this finding “defeats the fairness of trial, deprives a party from fair trial, and mischaracterizes the evidence and testimony.” OVERRRULED. This objection goes to the court’s reasoning and conclusions.

19. Objection to the court’s finding that “even a more aggressive inquiry by FGB in this case would not have revealed Khaligh’s ownership interest” on the grounds that it is speculative and unsupported by the evidence. OVERRRULED. This objection goes to the court’s reasoning and conclusions.

20. Objection to the court’s statement that “[g]iven that goal [of obtaining a loan on the Arrowroot Property with Toufer], there was no incentive for Khaligh to disclose her ownership interest” on the grounds that it is unsupported by the evidence, unproven, and irrelevant and it does not apply to the circumstances here.” OVERRRULED. This objection goes to the court’s reasoning and conclusions.

21. Objection to the court’s statement “that after reviewing the exhaustive investigation of the loan by FGB even FDIC found no reason to criticize FGB’s action with respect to Toufer’s loan” on the grounds that it misstates the facts, is unsupported, and is an ambiguous and wholly unrelated contention. Plaintiff contends, without citation, that “[e]vidence revealed that the FDIC placed the action pending due to existing litigation of the matter in the Court.” OVERRRULED. This objection goes to the court’s reasoning and conclusions.

22. Objection to the court’s finding that Toufer’s provided reasonable explanations in response to FGB’s questions regarding the inconsistencies in his loan application on the on the grounds that the statement is not supported by the evidence. OVERRRULED. This objection goes to the court’s reasoning and conclusions.

23. Objection to the court’s finding that “Khaligh was not an innocent party” and the court’s characterization of the 2008 loan. OVERRULED. This objection goes to the court’s reasoning and conclusions.

24. Objection to the court’s statement that the court heard from Khaligh on several occasions that she did not read documents before signing them, ie., in reference to the Schaefer loan in 2008 and the Agreement on David Gibson Escrow Co., Inc. letterhead, dated December 31, 2012. (TE 114.) OVERRULED. This objection goes to the court’s assessment of Khaligh’s credibility.

25. Objection to the court’s statement that the Agreement drafted on December 31, 2012, in David Gibson’s office on David Gibson Escrow Co., Inc. letterhead (TE 114) was prepared by David Gibson. SUSTAINED. The court agrees that this was an inference made by the court with an understanding that the parties did not dispute who prepared the document. The Statement of Decision will be amended accordingly.

26. Objection to the court’s finding that Khaligh knew Toufer was getting a loan. OVERRULED. This objection goes to the court’s reasoning and conclusions. Moreover, the proposed Statement of Decision does not state that Khaligh knew Toufer was getting a loan with FGB.

27. Objection to the court’s statement that Khaligh “suggested to Toufer that they reclassify payments she was making on Toufer’s lines of credit as ‘rental payments.’” OVERRULED. This objection goes to the court’s reasoning and conclusions.

28. Objection to the court’s finding that Dr. Khaligh is not an innocent party because “…she participated in the appraisal of Jack Story . . . without ever mentioning that she owned the property and Toufer did not.” OVERRRULED. This objection goes to the court’s reasoning and conclusions.

29. Objection to the court’s statement that “Khaligh gave Toufer copies of her utility bills and the property tax receipts to accompany his loan application . . . these are not the statements and actions and actions of an innocent party.” OVERRRULED. This objection goes to the court’s reasoning and conclusions.

30. Objection to the court’s statement that “Toufer repeatedly lied to FGB, on the grounds that the Court is inconsistent and ignores this fact about Toufer when it comes to the bank having knowledge of fraud.” OVERRRULED. This is not a legal objection.

31. Objection to the court’s statement that Dr. Khaligh was not credible that “she never imagined that Toufer would get a loan without her.” OVERRRULED. This objection goes to the court’s assessment of Khaligh’s credibility.

32. Objection to the court’s finding that Khaligh did not want her name recorded with the Arrowroot Property. OVERRULED. This objection goes to the court’s reasoning and conclusions.

33. Objection to the court’s finding that Khaligh used Toufer to obtain a loan in his name. OVERRRULED. This objection goes to the court’s reasoning and conclusions.

34. Objection to the court’s finding that “Khaligh used Toufer to obtain a loan and that she concealed her own ownership interest” and therefore had unclean hands. Plaintiff argues this finding ignores the evidence and testimony, is unwarranted and unsupported, and ignores the findings of the Appellate Court that stated “Ms. Khaligh transferred title to Toufer in order to acquire funds to settle the judgment against her.” OVERRRULED. This objection goes to the court’s reasoning and conclusions. Moreover, the facts are not inconsistent with the Court of Appeal findings that Khaligh “transferred title to Toufer in order to acquire funds to settle the judgment against her.” The purpose of the transfer of title to Toufer was for Toufer to obtain a loan.

35. Objection to the court’s statement that “Khaligh’s misconduct here, as described above, relates to her efforts to assist Toufer in obtaining a loan on the Arrowroot Property, which he did not own,” on the grounds that “it is unsupported, unwarranted, irrational and wholly contradictory to testimonies and evidence.” OVERRRULED. This objection goes to the court’s reasoning and conclusions.

36. Objection to the court’s finding that “Khaligh used Toufer to get a loan and that she concealed her ownership interest.” Plaintiff objects to the court’s omission of evidence showing that “Khaligh was devastated when she found out that Toufer had pulled a loan in his name unbeknownst to her,” and argues that the finding of unclean hands based on this evidence is unsupported. OVERRULED. This objection goes to the court’s reasoning and conclusions. Khaligh was devastated by the amount of the loan obtained by Toufer, not the fact that he finally obtained a loan.

37. Objection to the court’s statement that the Notice of Foreclosure is valid on the gound that the Notice of Foreclosure was cancelled in 2014.” The court requests argument on this issue.

Defendant objects to the failure of the proposed Statement of Decision to identify FGB as the prevailing party entitled to recoverable and allowable costs.

[1] The proposed Statement of Decision filed on June 15, 2022, was mistakenly named an “Order for Entry of Judgment.” By minute order dated June 16, 2022, the court set aside and vacated the June 15, 2022, Judgment and explained that the Order for Entry of Judgment was a tentative ruling, a proposed Statement of Decision.

[2] FGB claims that Khaligh transferred title of the Arrowroot Property out of her name in order to avoid enforcement of Hadaegh’s 2004 judgment against her. Khaligh denies that she has avoided paying the judgment – and argues that her “first priority was paying off the judgment.” (Pl. Closing Bf., p.4) The court notes, however, that as of May 2021 Khaligh has never paid off the judgment. The court need not decide this factual dispute to resolve the issues presented by this case.

[3] Both parties cite Civ.Code § 3543, which provides: “Where one of two innocent persons must suffer by the act of a third, he, by whose negligence it happened, must be the sufferer.” (Pl. Closing Bf., 15; FGB Closing Bf., 18, 20.)

[4] “Generally, a person who signs an instrument may not avoid the impact of its terms on the ground that she failed to read it before signing. (Citation omitted.)” Jimenez v. 24 Hour Fitness USA, Inc. (2015) 237 Cal. App. 4^th 546, 563. “A party cannot avoid the terms of a contract on the ground that he or she failed to read it before signing. [Citations.]” (Marin Storage & Trucking, Inc. v. Benco Contracting & Engineering, Inc. (2001) 89 Cal.App.4th 1042, 1049.)

[5] Khaligh testified she first learned of Toufer’s HELOC with FGB when she received the Closing Statement (TE 9) on approximately December 21, 2012. There was also evidence, however, that Khaligh told Toufer one day after the deed of trust was recorded that she did not want to cancel the line of credit. (TE 111.34.)