The following compilation of cases is an extended version of the list of Minnesota cases contained in the February 1, 2009 post, Bona Fide Purchaser Doctrine, Possession Of Property By Occupants Other Than The Vendor & The Duty To Inquire, that address the issue of the effect of possession by an occupant of real property by one other than the seller/vendor on a prospective purchaser's status as a bona fide purchaser.
As stated in my February 1 post, these cases are presented here to remind the reader of the importance of giving this issue the serious consideration it deserves when attempting to undo/unwind/void an abusive real estate transaction (ie. foreclosure rescue sale leasebacks, fraudulent inducement in the execution of a deed, forgeries, other real estate swindles) where, after scamming or otherwise abusively relieving an unwitting homeowner of his/her title, the scammer either sells the property to an unwitting third party, or encumbers the property with a loan from an unwitting mortgage lender, neither of whom participated in the abusive transaction with the homeowner, nor having any actual knowledge thereof. Voiding the deeds and mortgages in these cases (in situations where the instruments are voidable, as opposed to being absolutely void - "void ab initio") will turn on whether the subsequent third party purchaser or encumbrancer, despite lacking in actual knowledge of the fraud or other abusive transaction, can otherwise be charged with notice of the fraud, thereby making bona fide purchaser/encumbrancer status unavailable to them and, consequently, subjecting the deeds or mortgages to being voided/rescinded/set aside.
(In a related post that addresses the distinction between deeds that are absolutely void (void ab initio), and deeds that are merely voidable, see Unwinding An Abusive Or Fraudulent Real Estate Transaction? Determining If The Deed Is Void, Or Merely Voidable?)
While certainly not purporting to be an exhaustive list of cases dealing with the issue of possession and the duty to inquire when attempting to establish (or attack) one's status as a bona fide purchaser, the following compilation of case law citations specifically address this issue.
One caveat: Any serious consideration of the bona fide purchaser doctrine should, first and foremost, begin with a reading of the state recording statutes, as they are currently constituted. Since there are over 50 jurisdictions in the U.S., each with their own recording statute, I certainly can't address them here (for the Minnesota recording statute, see Chapter 507 - Recording And Filing Conveyances, and Section 507.34, Minnesota Statutes - the so-called Recording Act). But after reading your state's recording statutes, you may want to consider how these cases, if at all, fit into making the legal analysis necessary when attempting to undo/unwind/void an abusive real estate transaction by attacking the bona fide purchaser status of a subsequent purchaser or encumbrancer/mortgage lender. Keep in mind that, even in the event that the Minnesota state legislature has passed laws subsequent to these court rulings that either modifies or renders them obsolete in Minnesota, the persuasiveness of the logic that underlies them may still be of value to those involved in litigation outside of Minnesota (don't lose sight of the fact that the doctrine of bona fide purchase is not a creature of state statute, but one of English common law, which is the starting point for this doctrine, not only as generally applied in Minnesota, but as generally applied in Minnesota's sister states as well).
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Minnesota Supreme Court Cases
West Concord Conservation Club, Inc. v. Chilson, 306 N.W.2d 893; 1981 Minn. LEXIS 1342 (Mn. 1981):
- A prospective purchaser of real estate has a duty not only to examine defects in the record chain of title but, also, to discover anyone who is in open possession of land. Flowers v. Germann, 211 Minn. 412, 1 N.W.2d 424 (1941). Constructive notice may arise from the presence of structures on the property which indicate the interest of another in the property. Southwest Pipe Line Co. v. Empire Natural Gas Co., 33 F.2d 248 (8th Cir. 1929).
- Accordingly, a purchaser is bound to inquire into the nature and extent of an occupant's interest. Konantz v. Stein, 283 Minn. 33, 167 N.W.2d 1 (1969). Possession will serve as notice to a purchaser of whatever rights the possessor has that would be discoverable upon reasonable inquiry. Id.
- Every person who undertakes to deal with an agent is put on inquiry and must discover whether the agent has the authority to complete the proposed act. Mooney v. Jones, 238 Minn. 1, 54 N.W.2d 763 (1952).
Anderson v. Graham Inv. Co., 263 N.W.2d 382; 1978 Minn. LEXIS 1393 (Mn. 1978): In the following excerpt, the state Supreme Court makes a general observation on the bona fide purchaser doctrine:
- As successor in interest to the Houdes, Top King's rights in the premises depend upon the Houdes' rights as against Anderson as of the date she recorded her contract. It is beyond dispute that as to the Houdes conveyance the Anderson conveyance was first duly recorded.3 Section 507.34 declares the Houde interest void as against the subsequent purchaser, Anderson, if she was, as of the time of her purchase on September 9, 1972, a bona fide purchaser or, in the words of the Recording Act, a "subsequent purchaser in good faith and for a valuable consideration." Such a purchaser is defined as one who gives consideration in good faith without actual, implied, or constructive notice of inconsistent outstanding rights of others. Bergstrom v. Johnson, 111 Minn. 247, 250, 126 N.W. 899, 900 (1910). A purchaser who has either actual, implied, or constructive notice of such outstanding rights is not a bona fide purchaser entitled to the protection of the Recording Act. Ritchie v. Jennings, 181 Minn. 458, 461, 233 N.W. 20, 21 (1930) (actual notice); Henschke v. Christian, 228 Minn. 142, 36 N.W.2d 547 (1949) (implied or inquiry notice); Latourell v. Hobart, 135 Minn. 109, 113, 160 N.W. 259, 260 (1916) (constructive or record notice).
(Footnote 3 of the opinion states: The word "conveyance" as used in the so-called Recording Act, Minn.St. 507.34, has been held to include contracts for deed. Watts v. Lundeen, 165 Minn. 300, 206 N.W. 444 (1925); 16 Dunnell, Dig. (3 ed.) § 8272.)
In footnote 4 of the opinion, the court makes the following passing reference to the effect of possession of property by an occupant on the status of a subsquent purchaser as a bona fide purchaser:
- It has been held that knowledge of a tenant's open possession and use of property would put a subsequent purchaser on inquiry, charging the purchaser with notice of the tenant's claimed interest in the property. See, e.g., Konantz v. Stein, 283 Minn. 33, 42, 167 N.W.2d 1, 8 (1969); Johnson v. Mugg, 261 Minn. 451, 454, 113 N.W.2d 1, 3 (1962).
Further into the court's ruling, it quotes from its decision in Niles v. Cooper, 98 Minn. 39, 107 N.W. 744 (1906), where it offered this statement on the distinction between constructive notice and the type of notice involved when actual possession of property is involved:
- " * * * The authorities are uniform that actual possession of real property is notice to all the world of the title and rights of the person so in possession, and also of all facts connected therewith which reasonable inquiry would have developed. The rule in this respect differs from the rule of constructive notice, arising from the record of instruments affecting the title to land; for there the record is notice only of what appears upon its face, and such additional facts as its language directs attention to. In such cases the purchaser may rely upon the state of the title as shown by the record, without further search or inquiry. Bailey v. Galpin, 40 Minn. 319, 41 N.W. 1054."
Konantz v. Stein, 283 Minn. 33; 167 N.W.2d 1; 1969 Minn. LEXIS 1108 (Mn. 1969):
- A prospective purchaser dealing with realty in possession of one other than the vendor is bound to make inquiry of the occupant and to ascertain the nature and extent of the occupant's interest. Possession of realty by one other than the vendor is not only "prima facie evidence" of title in the possessor, but is also notice to a purchaser of whatever rights the possessor has which would be discoverable upon reasonable inquiry. Flowers v. Germann, 211 Minn. 412, 1 N.W. (2d) 424; Farmers State Bank v. Cunningham, 182 Minn. 244, 234 N.W. 320.
Thompson v. First Nat'l Bank, 180 Minn. 552; 231 N.W. 234; 1930 Minn. LEXIS 1283 (Mn. 1930):
- The finding that defendant had full notice of plaintiff's right of possession is sustained by the evidence. It may also be said that such actual possession was notice to the world of plaintiff's right to possession and of all facts connected therewith which reasonable inquiry would disclose. Niles v. Cooper, 98 Minn. 39, 107 N.W. 744, 13 L.R.A.(N.S.) 49; Gaertner v. Western Elev. Co. 104 Minn. 467, 116 N.W. 945; Teal v. Scandinavian-Am. Bank, 114 Minn. 435, 131 N.W. 486; Butterwick v. Fuller & Johnson Mfg. Co. 140 Minn. 327, 168 N.W. 18; Oxborough v. St. Martin, 142 Minn. 34, 170 N.W. 707; Hauger v. J.P. Rogers Land Co. 156 Minn. 45, 194 N.W. 95; Watts v. Lundeen, 165 Minn. 300, 206 N.W. 444.
Hauger v. J. P. Rogers Land Co., 156 Minn. 45; 194 N.W. 95; 1923 Minn. LEXIS 477 (Mn. 1923):
- Actual possession of real property is notice to all the world of the title and rights of the person in possession. Also of all facts connected therewith which reasonable inquiry would disclose, and a purchaser thereof, knowing the possession to be in a third person, is chargeable with notice of such facts. Niles v. Cooper, 98 Minn. 39, 107 N.W. 744, 13 L.R.A. (N.S.) 49; see also note 13 L.R.A. (N.S.) 49. The case comes within the rule announced in Teal v. Scandinavian-American Bank, 114 Minn. 435, 131 N.W. 486, where it is held that
- "The court will not speculate in cases of this character upon what might happen or be discovered if inquiry were made, but will presume, in the absence of evidence conclusively showing the contrary, that upon inquiry the true situation and claims of the possessor would be made known. The only way of overcoming this presumption is to produce the conclusive evidence, or make the inquiry. The conclusive evidence does not appear, and as no inquiry was made, the presumption must be applied. The defendant was not, therefore, an innocent mortgagee. The rule applies with particular force to those dealing in lands with actual knowledge of the possession of some third person, as in the case at bar."
- It was held in Ludowese v. Amidon, 124 Minn. 288, 144 N.W. 965, that a failure to make inquiry may be regarded as an intentional avoidance of the truth which it would have disclosed.
Ludowese v. Amidon, 124 Minn. 288; 144 N.W. 965 (Mn. 1914):
(Editor's Note: This case could be extremely helpful towards undoing a sale leaseback, foreclosure rescue scam or a real estate swindle by deed forgery where title or home equity is ripped off. It provides direct support for the proposition that "clear, actual, exclusive possession of the granted premises by the grantor [ie. typically, the screwed-over homeowner], even after delivery and recording of the deed, is notice against purchasers [ie. typically, the foreclosure rescue operator or a straw buyer acting as the operator's alter ego] and mortgagees [ie. typically, the mortgage lender/financial institution that, albeit unwittingly, finances the scam and provides the funds that constitutes the equity strpping proceeds ending up in the scammer's pocket] of the grantor's possible interest in the property"):
- There is no need of citing authorities in support of the prevailing doctrine in this country that possession is notice to purchasers of land of the possessor's rights therein and that this is applicable to a grantor who remains in possession after conveying. Teal v. Scandinavian Am. Bank, 114 Minn. 435, 131 N.W. 486. It is also well settled in this state ever since Morrison v. March, 4 Minn. 325 (422) that "the actual possession of a tenant not only protects him in the enjoyment of his term but is notice of his landlord's title." Groff v. Ramsey, 19 Minn. 24 (44); Wilkins v. Bevier, 43 Minn. 213, 45 N.W. 157, 19 Am. St. 238; Wolf v. Zabel, 44 Minn. 90, 46 N.W. 81; Groff v. State Bank, 50 Minn. 234, 52 N.W. 651, 36 Am. St. 640; see also note to Miles v. Cooper, 13 L.R.A. (N.S.) title, "American Rule," p. 100.
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- It may be urged, however, that even if she had taken notice of the tenant's possession and inquired of him she would have learned nothing of the facts which went to establish plaintiff's rights to a rescission. A purchaser is only chargeable with such knowledge as a proper inquiry would furnish. He must act reasonably, however, and cannot stop on the threshold of what would most likely lead to full information. This requires not only an inquiry from the tenant but from his landlord. Deetjen v. Richter, 33 Kan. 410, 6 Pac. 595. "The possession of land by a party, through his tenants, is notice to all the world of his rights in the premises, and without inquiry of him no one can claim to be an innocent purchaser as against him." Whitaker v. Miller, 83 Ill. 381; Mallett v. Kaehler, 141 Ill. 70, 130 N.E. 549; Dickey v. Lyon, 19 Iowa, 544.
- A failure to make inquiry may be "regarded as an intentional avoidance of the truth which it would have disclosed." Betts v. Letcher, 1 S.D. 182, 194, 46 N.W. 193.
Teal v. Scandinavian-American Bank, 114 Minn. 435, 131 N.W. 486 (Minn. 1911):
(See Editor's Note for Ludowese v. Amidon, above. Further, the case the application of the bona fide purchaser doctrine in the context involving an equitable mortgage):
- Plaintiff, a farmer, was heavily in debt. A bank at Crookston held mortgages upon his land, aggregating several thousand dollars, which plaintiff was unable to pay. He had known Johnson for many years, and had had numerous business transactions with him. Plaintiff testified, in substance and effect, that Johnson was somewhat familiar with his situation, and was aware of the incumbrances against the land. At a meeting or conference between the two, it was agreed that plaintiff would convey the property to Johnson in consideration that he (Johnson) would pay off the mortgages, and, upon being reimbursed by plaintiff, reconvey the property. Johnson paid no consideration for the property. The sole purpose of the transaction was to give to him security for whatever money he might advance in payment and discharge of the existing incumbrances. Plaintiff's testimony upon the subject is clear, and, if true, fully justified the court in reaching the conclusion that the deed was in equity a mortgage, conveying no absolute estate or title to Johnson.
- It is not important, and is not decisive in such cases, that the relation of debtor and creditor did not exist at the time of the conveyance. Stitt v. Rat Portage Lumber Co., 96 Minn. 27, 104 N.W. 561. It is sufficient if it appear that the purpose was to secure the payment of future advances. Madigan v. Mead, 31 Minn. 94, 16 N.W. 539. Nor is it conclusive against plaintiff that he may have also intended by the transaction the defeat of efforts of other creditors to enforce their claims against him. Livingston v. Ives, 35 Minn. 55, 27 N.W. 74; Over v. Carolus, 171 Ill. 552, 49 N.E. 514; Halloran v. Halloran, 137 Ill. 100, 27 N.E. 82.
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- At the time the mortgages were given to defendant by Johnson, plaintiff was in the actual possession and occupancy of the property. This was notice to all the world of his rights. Niles v. Cooper, 98 Minn. 39, 107 N.W. 744, 13 L.R.A.(N.S.) 49; Groff v. Bank, 50 Minn. 234, 52 N.W. 651, 36 Am. St. 640. Defendant was expressly informed before the mortgages were executed that plaintiff was so in possession, yet made no inquiry concerning his rights, relying wholly upon statements made by Johnson. Having made no inquiry, defendant is chargeable with notice of the actual condition of the title to the land. Randall v. Lingwall, 43 Ore. 383, 73 Pac. 1; Canfield v. Hard, 58 Vt. 217, 2 Atl. 136. Nor does the evidence sustain the claim that inquiry of plaintiff would not have brought to light the truth, or the rights now asserted by him.
- The trial court found that, had defendant informed plaintiff that Johnson was about to mortgage the land, plaintiff would have disclosed the fact that Johnson had no interest in the land and no right to incumber it by mortgage or otherwise. The further finding that, had defendant made inquiry without disclosing its purpose, or the fact that Johnson was about to mortgage the land, plaintiff would not have disclosed his interest in the property, in no essential way changes the situation or the rights of the parties. The court will not speculate in cases of this character upon what might happen or be discovered if inquiry were made, but will presume, in the absence of evidence conclusively showing the contrary, that upon inquiry the true situation and claims of the possessor would be made known.
- The only way of overcoming this presumption is to produce the conclusive evidence, or make the inquiry. The conclusive evidence does not appear, and as no inquiry was made, the presumption must be applied. The defendant was not, therefore, an innocent mortgagee. The rule applies with particular force to those dealing in lands with actual knowledge of the possession of some third person, as in the case at bar. The authorities are all collected in a note to Niles v. Cooper, supra, 13 L.R.A.(N.S.) 49.
Niles v. Cooper, 98 Minn. 39; 107 N.W. 744; 1906 Minn. LEXIS 507 (Mn. 1906):
- The authorities are uniform that actual possession of real property is notice to all the world of the title and rights of the person so in possession, and also of all facts connected therewith which reasonable inquiry would have developed.
- The rule in this respect differs from the rule of constructive notice, arising from the record of instruments affecting the title to land; for there the record is notice only of what appears upon its face, and such additional facts as its language directs attention to. In such cases the purchaser may rely upon the state of the title as shown by the record, without further search or inquiry. Bailey v. Galpin, 40 Minn. 319, 41 N.W. 1054.
- But possession is not only prima facie evidence of title, but also notice of whatever rights the possessor may have in the land, and imposes upon the purchaser, with notice of such possession, the duty of making all reasonable inquiry concerning the state of the title. Essex v. Harrison, 57 N.J. Eq. 91, 40 Atl. 209; Joiner v. Duncan, 174 Ill. 252, 51 N.E. 323; Ambrose v. Huntington, 34 Ore. 484, 56 Pac. 513. If proper inquiry be made, and information concerning the rights of the possessor be withheld or concealed possession will be notice only of the fact. 21 Am. & Eng. Enc. (2d Ed.) 588; Wade, Notice, § 286. Or, if a specific title be disclosed, further investigation is unnecessary. Thompson v. Lapsley, 90 Minn. 318, 96 N.W. 788.
Groff v. State Bank of Minneapolis, 50 Minn. 234; 52 N.W. 651; 1892 Minn. LEXIS 287 (Mn. 1892):
(See Editor's Note for Ludowese v. Amidon, above):
- Creditors may be postponed or defeated by notice of claims of third parties to property the record and title of which is in their debtor; and possession may be notice to them, as well as to a purchaser, so as to preclude them from obtaining a lien on the estate or interest of the occupant. Lamberton v. Merchants' Nat. Bank of Winona, 24 Minn. 281. The general rule is that possession of land is notice to a purchaser of the possessor's title.
- The only question in this case is whether this rule applies where the grantor remains, after the delivery of his deed, in possession of the granted premises. This is a question upon which the authorities are not agreed.
- Some cases hold that the deed is conclusive that the vendor has reserved no interest in the land; that having, in effect, so declared by his conveyance, he is estopped from setting up any secret arrangement by which his grant is impaired; that, although he remains in possession, a person seeking to obtain an interest in the premises has a right to assume, without inquiry, that he is in possession merely for a temporary purpose, as tenant at sufferance of his grantee. But it seems to us that, inasmuch as the law allows possession to have the effect of notice, there is no good reason for making a distinction between possession by a stranger to the record title and possession by the grantor after delivery of his deed.
- In either case the possession is a fact inconsistent with the record title, and, if possession by the stranger is sufficient to make it obligatory upon a purchaser to ascertain his right, possession by the grantor is a circumstance entitled to equal consideration.
- An absolute deed divests the grantor of the right of possession as well as of the legal title, and when he is found in possession after delivery of his deed it is a fact inconsistent with the legal effect of the deed, and is suggestive that he still retains some interest in the premises. Under such circumstances, a purchaser has no right "to give controlling prominence to the legal effect of the deed," in disregard of the other "notorious antagonistic fact," that the grantor remains in possession just as if he had not conveyed. To say that the grantor is estopped by his deed is begging the question; for, if his possession is notice to third parties of his rights, there is no principle of estoppel that would prevent him from asserting against purchasers or creditors any claim to the premises which he might assert against his grantee. This view is abundantly sustained by authority. See Devl. Deeds, §§ 761-765; note to Le Neve v. Le Neve, 2 Lead. Cas. Eq. pt. 1, p. 180, et seq.; Pell v. McElroy, 36 Cal. 268.
Groff v. Ramsey, 19 Minn. 44; 1872 Minn. LEXIS 3 (Mn. 1872):
- It has been distinctly held by this court that "when a purchaser buys land or takes an incumbrance on it when it is in the actual possession of one other than the vendor, he is required to communicate with such tenant or occupant, and find out the particulars of his claim and interest, and also from whom he holds;" and that "the actual possession of a tenant not only protects him in the enjoyment of his term, but is notice of his landlord's title." Morrison v. March, 4 Minn. 422, (Gil. 325.) The question was directly presented in the case cited, and the authorities upon the point underwent a considerable examination, the conflict of decisions thereon being clearly recognized, and the conclusion arrived at was determined by the court to be the better rule.
- In addition to the authorities cited in the case in support of the rule laid down by the court, we may refer also to the following cases which hold the same doctrine: Sailor v. Hertzog, 4 Whart. 259; Hood v. Fahnestock, 1 Pa. 470, in which the point is elaborately discussed by Rogers, J., delivering the opinion of the court; Met. Bank v. Godfrey, 23 Ill. 579; Morrison v. Kelly, 22 Ill. 610; Dickey v. Lyon, (1865,) 19 Iowa 544, in which Morrison v. March is favorably commented on.
- Principles of law affecting the title to real estate, when once settled, should not be changed except for very weighty reasons. The decision in Morrison v. March may properly be regarded as a rule of real property. It was rendered soon after the formation of our state government, and has remained unreversed, and doubtless acted upon, ever since. Under such circumstances we do not feel at liberty to regard the question as an open one. Bidwell v. Coleman, 11 Minn. 78, 89, (Gil. 45;) Propeller Genesee Chief v. Fitzhugh, 12 How. 443, 13 L. Ed. 1058.
Minnesota Court of Appeals
Stone v. Jetmar Props., LLC, A06-851, 733 N.W.2d 480; 2007 Minn. App. LEXIS 80 (Minn. App. 2007):
- Public policy generally favors allowing a degree of reliance on the title shown in public records. See Nussbaumer v. Fetrow, 556 N.W.2d 595, 599 (Minn. App. 1996), review denied (Minn. Feb. 26, 1997) (stating policy of allowing judgment creditors to rely on record). But the reliance allowed is not absolute. A "party attempting to invoke the doctrine [of equitable estoppel] cannot be negligent and cannot have knowledge of the defect in the title." W. Concord Conservation Club, Inc. v. Chilson, 306 N.W.2d 893, 896 (Minn. 1981).
- A prospective purchaser is obligated to discover anyone in possession of the land at issue and to "inquire into the nature and extent of the occupant's interest." Id. As a result of this obligation, the purchaser is held to have knowledge of all the "rights of the [possessor] and also of all facts connected therewith which reasonable inquiry would have developed." Claflin v. Commercial State Bank, 487 N.W.2d 242, 248 (Minn. App. 1992), review denied (Minn. Aug. 4, 1992). "In order to have status as a bona fide purchaser the mortgagee's inquiry must be directed to the person in possession; inquiry of the mortgagor, who may have reason to conceal the truth, is not sufficient." Id.
Deming v. Scherma, (unpublished) 2001 Minn. App. LEXIS 988 (Mn. Ct. of App. 2001):
- A bona fide purchaser is one who does not have "actual, implied, or constructive notice of inconsistent outstanding rights of others." Anderson v. Graham Inv. Co., 263 N.W.2d 382, 384 (Minn. 1978) (citation omitted).
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- A purchaser has implied notice if one has "actual knowledge of facts which would put one on further inquiry." Id. For example, a subsequent purchaser is put on inquiry if another person exhibits actual, open possession and use of the property. Miller v. Hennen, 438 N.W.2d 366, 370 (Minn. 1989).
Nussbaumer v. Fetrow, 556 N.W.2d 595; 1996 Minn. App. LEXIS 1406, (Mn. Ct. of App. 1996):
- The recording act serves to shield a record owner's judgment creditors against claims to the real estate of which the creditors have no notice. Lowe, 201 Minn. at 285, 276 N.W. at 226; see also 6A Richard R. Powell, Powell on Real Property § 82.01(1), at 82-3 (Patrick J. Rohan, ed. 1996) (recognizing one object of recording statutes is to establish priority system to resolve conflicting claims to real estate).
- Therefore, the protection of the act is lost to creditors with actual, constructive, or inquiry notice of a third party's rights in the property inconsistent with the judgment debtor's. See Oxborough v. St. Martin, 142 Minn. 34, 35, 170 N.W. 707, 708 (1919) (holding unrecorded prior deed takes precedence if judgment creditor chargeable with notice before judgment attaches); Northwestern Land v. Dewey, 58 Minn. 359, 363-64, 59 N.W. 1085, 1085-86 (1894) (disallowing judgment creditor protection of recording act where creditor was on inquiry notice of tenant's rights in property); Hentges v. P.H. Feely & Son, 436 N.W.2d 488, 492 (Minn. App. 1989) (assigning priority to unrecorded prior interest holders where judgment creditors had inquiry notice of unrecorded conveyance), review denied (Minn. Apr. 26, 1989).
- Third-party possession of property constitutes inquiry notice to a judgment creditor if it is an "actual, open, visible, and exclusive possession," inconsistent with the title of the record owner. Farmers State Bank, 182 Minn. at 246, 234 N.W. at 321; accord Powell, supra, §82.02(1), at 82-57 (requiring that actual possession be "clearly hostile" to record title owner); see Henschke v. Christian, 228 Minn. 142, 146-47, 36 N.W.2d 547, 550 (1949) (imputing notice when creditor has knowledge of facts that "ought to have put him on an inquiry" and would have led to knowledge of prior conveyance); see also Northwestern Land, 58 Minn. at 364, 59 N.W. at 1086 (attributing to judgment creditor inquiry notice equivalent to that of bona fide purchaser); cf. Wilkins v. Bevier, 43 Minn. 213, 218, 45 N.W. 157, 158 (1890) (declining to impute notice of facts to which pertinent inquiries might possibly, but would not naturally, lead). The objective circumstances must indicate that someone other than the record owner has rights in the property; equivocal or temporary possession does not put a creditor on notice of an unrecorded conveyance. Farmers State Bank, 182 Minn. at 246, 234 N.W. at 321 (finding no inquiry notice where outsider would not have seen change in possession).
Claflin v. Commercial State Bank, 487 N.W.2d 242; 1992 Minn. App. LEXIS 532 (Mn. Ct. of App. 1992)
Editor's Note: This case could be extremely helpful towards undoing a sale leaseback, foreclosure rescue scam or a real estate swindle by deed forgery where title or home equity is ripped off. It involves a son who fraudulently induced his mother into signing over title to her home, afterwhich he pocketed the proceeds from bank loans that he took out, secured by two mortgages on his mother's home. The mother maintained possession of the home thoughout, and was in possession when the loan was made by the bank to her son.
This case provides direct support for the proposition that "clear, actual, exclusive possession of the granted premises by the grantor [ie. typically, the screwed-over homeowner; in this case, the mother; ], even after delivery and recording of the deed, is notice against purchasers [ie. typically, the foreclosure rescue operator or a straw buyer acting as the operator's alter ego, in this case, the son] and mortgagees [ie. typically, the mortgage lender/financial institution that, albeit unwittingly, finances the scam and provides the funds that constitutes the equity strpping proceeds ending up in the scammer's pocket] of the grantor's possible interest in the property"):
- Minnesota law requires every conveyance of real estate to be recorded; unrecorded conveyances shall be void against any subsequent purchaser in good faith for valuable consideration. Minn. Stat. §507.34 (1990). Under the recording act, a purchaser in good faith is one who gives consideration without actual, implied or constructive notice of the inconsistent outstanding rights of others. Miller v. Hennen, 438 N.W.2d 366, 369 (Minn. 1989). The purpose of the recording act is to protect those who purchase real estate in reliance upon the record. Id. "Implied notice has been found where one has 'actual knowledge of facts which would put one on further inquiry.'" Id. at 370 (quoting Anderson v. Graham Inv. Co., 263 N.W.2d 382, 384-85 (Minn. 1978)).
- If one is aware that someone other than the vendor is living on the land, one has a duty to inquire concerning the rights of the inhabitant of the property and is chargeable with notice of all facts which such inquiry would disclose. Id. One is not a bona fide purchaser if one had knowledge of facts which ought to have put one on an inquiry that would have led to knowledge of a conveyance. Id.
- A purchaser who has actual, implied or constructive notice of the outstanding rights of another is not a bona fide purchaser entitled to the protection of the recording act. Miller, 438 N.W.2d at 370. Actual, open possession and use of property puts a subsequent purchaser on inquiry notice of the possessor's rights in the property. Id. at n.4; Konantz v. Stein, 283 Minn. 33, 42, 167 N.W.2d 1, 8 (1969); Farmers State Bank of Eyota v. Cunningham, 182 Minn. 244, 246, 234 N.W. 320, 321 (1931). Actual possession of real property is notice to all the world of the title and rights of the person so in possession and also of all facts connected therewith which reasonable inquiry would have developed. Anderson, 263 N.W.2d at 385. Implied notice differs from constructive notice arising from the record of instruments because the record is notice only of what appears upon its face. Id.
- In Minnesota, clear, actual, exclusive possession of the granted premises by the grantor, even after delivery and recording of the deed, is notice against purchasers and mortgagees of the grantor's possible interest in the property. See Teal v. Scandinavian-American Bank, 114 Minn. 435, 441, 131 N.W. 486, 488 (1911).
- In that case, Teal deeded property to Johnson, but retained a repurchase right which was not recorded. Teal remained in possession of the property. Johnson executed a mortgage to borrow money from the bank. Johnson told the bank that he had bought the land but that Teal, the grantor, would remain in possession for the summer. Johnson later reconveyed the property to Teal and the bank began foreclosure proceedings. Teal sought injunctive relief and cancellation of the mortgages.
- In deciding the case, the Minnesota Supreme Court noted that when the mortgages were given to the bank by Johnson, Teal was a grantor still in actual possession of the property and that this was notice to all the world of his rights. Id. at 441, 131 N.W. at 408 (citing, inter alia, Groff v. State Bank, 50 Minn. 234, 52 N.W. 651 (1892)). The court stated that the bank was expressly informed before the mortgage was executed that Teal was in possession and yet it made no inquiry concerning his rights, relying wholly upon statements made by Johnson. Teal, at 441, 131 N.W. at 488.
- In order to have status as a bona fide purchaser the mortgagee's inquiry must be directed to the person in possession; inquiry of the mortgagor, who may have reason to conceal the truth, is not sufficient. The supreme court stated, "Having made no inquiry, [the bank] is chargeable with notice of the actual condition of the title to the land." Id. (citations omitted).
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- The instant case is distinguishable from Olson v. Olson, 203 Minn. 199, 281 N.W. 367 (1938). That case involved a similar fraud with one important distinction: the father and son lived together in the property both before and after the deed from father to son. Because possession by the grantor was not exclusive, the supreme court held that the living arrangements were not such to put a third party on inquiry notice. Id. at 204, 281 N.W. at 368. In reaching its decision, the supreme court distinguished the holding of Groff upon which the court had relied in Teal. In Groff, the grantor remained in possession, with a reserved but unrecorded interest, after giving a deed to another. The supreme court held that possession of the granted premises by the grantor after delivery of his deed is as much notice of the interest of the occupant as possession by a stranger to the record title. Id. at 238, 52 N.W. at 652. In the present case, Greg lived in his own home both before and after obtaining his mother's deed. Her continued possession was as effectual as notice of her rights as possession by a stranger would have been. Olson is distinguishable on its facts; the rule of Groff and Teal governs this case.
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The following excerpts from Claflin v. Commercial State Bank provides a brief summary of the key events that led the court to rule in favor of the screwed-over homeowner (the mother) against the bank who provided the mortgage loans to the son. The court held that bank was not entitled to the protections of bona fide purchaser status and, accordingly, the mother's rights to the home that was swindled from her had priority over the bank's mortgage (alterations added; not in the originals):
- Schwanke [the vice president for the bank providing the mortgae loan] testified that he never contacted Margaret [the mother], although he knew she was living on the Property. Schwanke also acted to ensure that only Greg [the son who defrauded his mother] would be contacted by the others involved. Schwanke knew the title opinion contained an exception for the rights of occupants but he ignored it as "boilerplate." The Bank argues that it satisfied its duty of inquiry by asking Greg what interest his mother had in the Property. We disagree. Greg told the Bank that his mother was simply living there with his permission. The Bank knowingly prevented and avoided inquiry directed to Margaret. The evidence demonstrates that, had the Bank inquired of Margaret, it could have learned that she asserted a superior interest. The Bank is therefore chargeable with notice of Margaret's unrecorded interests.
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- The fact that Margaret was a grantor-in-possession gave rise to a duty that the Bank inquire of her as to her rights. The trial court in this case considered Groff, Olson and Teal, but erred in deciding that the Bank had no duty to investigate beyond the state of the record title. The Bank had a duty to inquire of Margaret and is charged with notice of all facts which such inquiry would have disclosed; thus, it is not a bona fide purchaser in good faith for value without notice. Miller, 438 N.W.2d at 370.
