More Contract For Deed Horror Stories - Texas Homebuyers Lose Home To Foreclosure Despite Making All Payments As Seller Pockets Cash & Stiffs Bank
In Edna, Texas, The Victoria Advocate reports on the story of Clara and Jose Carrera and their kids, a local family who just lost their home to foreclosure, despite paying in full all payments required under their purchase agreement and making significant improvements to their home:
- Although the family thought they had paid off their Edna home a year ago, a series of events put [the Carreras] in the precarious position they found themselves in [...]. It began in September 2000, when Clara and Jose Carrera decided to purchase the home off County Road 306 near Edna from James Glenn Whitley.
- They entered a contract for deed, meaning once they paid it off, the property was theirs, said Bobby Bell, Jackson County district attorney. The family paid the $53,000 they owed for the 10-year contract two years
early.(1)The family approached Whitley and asked for the title, Clara Carrera said, but Whitley always said he was working on it. "We waited three or four months," she said. "We waited and waited, but he never answered." The Carreras got their answer when the bank sent them a note in the spring alerting them of the pending foreclosure.
- Whitley had approached Prosperity Bank in 2006 and pledged the property. When he filed for bankruptcy, he listed the Carreras as leasees, limiting their legal rights, Bell
- The Carreras' property wasn't the only one up for sale. Jerry and Stacey Berry's home also went to auction. They too had been duped by Whitley. The couple paid $10,000 down for property they purchased from Whitley and paid $1,280 a month, Bell said. Of that, $200 was to go for taxes and insurance. When a grass fire on the Berrys' land damaged a neighbor's shed, they went to collect insurance money, said Brian Rogers, the family's attorney. The problem? There wasn't any insurance.
- Whitley didn't own the property when the family purchased it, Rogers said. After Whitley received the $10,000, he purchased it from someone else, Bell said, but never paid the insurance. Whitley borrowed the money to make the purchase from Bill and Miriam Ackley, who acted as private lenders, Rogers said.
For more, see Jackson County foreclosure auction brings tears, questions.
(1) Reportedly, Jose Carrera and his 14-year-old son, also named Jose Carrera, added their own touches on their home, building on a living room, car port and even remodeling the bathroom, the younger Jose said.
(2) According to this story, the Carreras entered into the contract for deed with Whitley in September, 2000. Presumably, they took possession of the property at that time; also presumably, they failed to record their contract in the county land records office. The story then goes on to state that it wasn't until about six years later (2006) that Whitley pledged the property as collateral for the loan that the lender ultimately foreclosed (presumably, the lender recorded its mortgage in the local land records office promptly after making the loan to Whitley). Based on these facts, it appears that the Carreras' legal interest in the home, albeit unrecorded, is actually superior to the lender's subsequently created, recorded interest (as a mortgagee) in the property.
The general rule when it comes to recording real property interests at the local land records office can be described as "first in time, first in right" (ie. an earlier recorded interest has priority over a later recorded interest, irrespective of when the interests were actually created). Based on this alone, it would appear to the uninitiated that the bank's recorded mortgage has priority over the Carreras' earlier created, but unrecorded, land contract. Those who assert this position generally point to their state recording statutes as support for their position.
However, the relevant legal analysis (as it would apply in this particlar story) does not end there. What is often (and regrettably) overlooked when reading the state recording statutes (particulary when it comes to undoing or unwinding foreclosure rescue and other real estate scams) is that those laws usually apply only when the party first recording its real property interest acquired it "for value" and "without notice" (ie. without actual notice of the claim of another, or without constructive notice of certain facts a party should have become aware of which, if investigated, would reveal the claim of another). Stated another way, the state recording statutes generally only serve to protect those acquiring interests in real property when acting as bona fide purchasers (in the case of real estate buyers) and bona fide encumbrancers (in the case of mortgage lenders). Therefore, if a party is not a bona fide purchaser/encumbrancer, the "first in time, first in right" rule does not apply. In that case, the owner of the earlier created real property interest has priority over any subsequently created interest, irrespective of when recording takes place.
Further, in this analysis, it is generally true that one acquiring an interest in real estate does so with notice of all the legal and equitable rights and claims in the premises, and in subordination to these rights and claims, of any person or persons, other than the record owner, in open, notorious (ie. visible), exclusive and unequivocal possession of the property.
In the case that the Carreras' find themselves in, the relevant question appears to be:
- Is the foreclosing mortgage lender (which acquired and recorded its interest in the Carrera home some six years after the Carreras acquired their interest and took possession of the home by reason of its unrecorded contract for deed from Whitley) entitled to the special protection of the recording statutes as a bona fide purchaser/encumbrancer, thereby giving its recorded interest priority over the Carreras' unrecorded contract for deed?
Even if one assumes, for sake of argument, that the foreclosing lender paid value for its interest, and had neither any actual knowledge of the scam perpetrated by Whitley on the Carreras, nor any actual knowledge of the Carreras' open, notorious, exclusive, and unequivocal possession of their home, the answer seems to be a definitive no. Further, since Carrera has paid off the contract for deed, it is Carrera who appears to be entitled to the home free and clear of any right the foreclosing lender may claim.
A review of some of the Texas case law appears to lend some support to this position.
The Texas Supreme Court, in Madison v. Gordon, 39 S.W.3d 604; 2001 Tex. LEXIS 5; 44 Tex. Sup. J. 410, (Tex. 2001), made this observation (some citations omitted, any bold text is my emphasis):
- Status as a bona fide purchaser is an affirmative defense to a title dispute. A bona fide purchaser is not subject to certain claims or defenses. To receive this special protection, one must acquire property in good faith, for value, and without notice of any third-party claim or interest. Notice may be constructive or actual. Actual notice rests on personal information or knowledge. Constructive notice is notice the law imputes to a person not having personal information or knowledge.
- One purchasing land may be charged with constructive notice of an occupant's claims. This implied-notice doctrine applies if a court determines that the purchaser has a duty to ascertain the rights of a third-party possessor. See Collum v. Sanger Bros., 98 Tex. 162, 82 S.W. 459, 460 (Tex. 1904); American Surety Co., 82 S.W.2d at 183. When this duty arises, the purchaser is charged with notice of all the occupant's claims the purchaser might have reasonably discovered on proper inquiry. Dixon v. Cargill, 104 S.W.2d 101, 102 (Tex. Civ. App.--Eastland 1937, writ ref'd); see also Flack, 226 S.W.2d at 632. The duty arises, however, only if the possession is visible, open, exclusive, and unequivocal. See Strong v. Strong, 128 Tex. 470, 98 S.W.2d 346, 350 (Tex. 1936).
- In Strong, we described the kind of possession sufficient to give constructive notice as "consisting of open, visible, and unequivocal acts of occupancy in their nature referable to exclusive dominion over the property, sufficient upon observation to put an intending purchaser on inquiry as to the rights of such possessor." Strong, 98 S.W.2d at 350. Possession that meets these requirements--visible, open, exclusive, and unequivocal possession -- affords notice of title equivalent to the constructive notice deed registration affords. Strong, 98 S.W.2d at 348.
A Texas appeals court, in Cohen v. Hawkins, NO. 14-07-00043-CV, 2008 Tex. App. LEXIS 2647 (Tex. App. Houston [14th Dist] 2008, pet. denied), made the following observation (in footnote 6), describing a purchaser's duty to inquire of those in possession of the subject real estate:
- A purchaser of land is charged with constructive notice of all claims of a party in possession of the property that the purchaser might have discovered had he made proper inquiry. Apex Fin. Corp. v. Garza, 155 S.W.3d 230, 234 (Tex. App.--Dallas 2004, pet. denied); see also Madison, 39 S.W.3d at 606. More specifically, possession by a third party requires that the purchaser make such inquiries as a reasonable person would, and the failure to make such inquiries charges the purchaser with knowledge of the claims and facts such inquiry would have revealed. See Collum v. Sanger Bros., 98 Tex. 162, 82 S.W. 459, 460 (1904); Aldridge v. N.E. I.S.D., 428 S.W.2d 447, 449 (Tex. Civ. App.--San Antonio 1968, writ ref'd n.r.e.); Astin v. Martin, 289 S.W. 442, 444 (Tex. Civ. App.--Austin), rev'd on other grounds, 295 S.W. 584 (1926).
In Fletcher v. Minton, 217 S.W.3d 755; 2007 Tex. App. LEXIS 2225 (Tex. App. - Dallas 2007), a Texas appeals court made this statement:
- The unrecorded instrument is binding . . . on a subsequent purchaser who does not pay a valuable consideration or who has notice of the instrument. TEX. PROP. CODE ANN. § 13.001 (Vernon 2006). Thus, an unrecorded conveyance is binding on those who have knowledge of the conveyance. Burris v. McDougald, 832 S.W.2d 707, 709 (Tex. App.-Corpus Christi 1992, no writ). A person who acquires property in good faith, for value, and without notice of any third-party claim or interest is a bona fide purchaser. Status as a bona fide purchaser is an affirmative defense to a title dispute. Madison v. Gordon, 39 S.W.3d 604, 606, 44 Tex. Sup. Ct. J. 410 (Tex.2001).
- Notice will defeat the protection otherwise afforded a bona fide purchaser. City of Richland Hills v. Bertelsen, 724 S.W.2d 428, 429 (Tex.App.-Fort Worth 1987, no writ). "Notice" is broadly defined as information concerning a fact actually communicated to a person, derived by him from a proper source, or presumed by law to have been acquired. Flack v. First Nat'l Bank, 148 Tex. 495, 226 S.W.2d 628, 631 (Tex.1950). Notice may be actual or constructive. Id. Actual notice results from personal information or knowledge, as well as those facts which reasonable inquiry would have disclosed. Constructive notice is notice the law imputes to a person not having personal information or knowledge. Madison, 39 S.W.3d at 606; Flack, 226 S.W.2d at 631-632.
- A purchaser of land is charged with constructive notice of all claims of a party in possession of the property that the purchaser might have discovered had he made proper inquiry. Apex Fin. Corp. v. Garza, 155 S.W.3d 230, 234 (Tex.App.-Dallas 2004, pet. denied). This duty to ascertain the rights of a party in possession of the property arises when the possession is open, visible, exclusive, and unequivocal. Id. see also, Madison, 39 S.W.3d at 606.
In Morgan v. Chase Home Fin., LLC, No. 08-50288, 306 Fed. Appx. 49; 2008 U.S. App. LEXIS 26894 (5th Cir. 2008), a Federal appeals court gave the following discussion of In re Hayes, 2004 WL 2926006 (W.D. Tex. Dec. 15, 2004), which addressed the bona fide purchaser doctrine, and its application to mortgage lenders, under Texas law:
- There, Elizabeth Hayes sold her house to John Henderson but failed to transfer the property by general warranty deed. After payment had been made and Henderson had moved in, Hayes received a loan from a bank using the house as collateral. When Hayes later declared Chapter 7 bankruptcy, the bank asserted its lien. Henderson objected, arguing that he had superior equitable title; the bank responded that it had no notice of Henderson's claim to the house and so was a bona fide purchaser for value. Under Texas law, open, visible, exclusive, and unequivocal possession of property is constructive notice to any subsequent purchaser and triggers a duty of inquiry. Id. at *9. The bank in Hayes, however, argued that lenders should not be held to the same duty of inquiry as individual purchasers, because "the valuation model and desktop appraisal methods it used . . . did not require physical inspection of the subject real property." Id. at *12. The court disagreed, finding that Texas law did not distinguish between lenders and individuals regarding bona fide purchaser status.
Note: The Federal District Court ruling in In re Hayes, 2004 WL 2926006 was affirmed on appeal. Bank of Am., N.A. v. Schwartz (In re Hayes), 194 Fed. Appx. 217; 2006 U.S. App. LEXIS 21139 (5th Cir. 2006):
- Bank of America also argues that the lower courts imposed an effective duty of inquiry that exceeds industry standards; however, it provides no Texas law, and our independent review reveals none, that requires or permits banking industry standards to dictate the law of interests in real property. We decline to read any such rule into the law of the State of Texas.
(The lower Federal court's 23-page ruling in In re Hayes gives an extensive analysis on the Texas law involving the effect of the bona fide purchaser doctrine to subsequent purchasers and mortgage lenders where one is in possession of land under an unrecorded instrument and how it was applied to the facts in this case).
In conclusion, the foregoing application of the doctrine of bona fide purchaser/encumbrancer when applying the protection of the state recording statutes, when property is occupied by a person or persons other than the seller or legal title holder, is not unique to Texas. See Bona Fide Purchaser Doctrine, Possession Of Property By Occupants Other Than The Vendor & The Duty To Inquire. See also, The Bona Fide Purchaser for Value of a Legal Estate Without Notice. rent to own lease purchase option scams yellowstone