A 2009 case ruled upon by a Federal court in Chicago, Illinois dealt with the following facts:
- Homeowner Davis was facing foreclosure and entered into a transaction with a foreclosure rescue operator in which the homeowner unwittingly conveyed full, unconditional title to the operator, and received $18,000 upon consummation of the transaction, a transaction that Davis believed to be a mortgage refinancing.
- Davis retained possession of his home, and pursuant to a contemporaneously executed contract for deed, agreed to pay the operator $ 1,223.51 per month, with the option to repurchase his home in one year.
- At the end of the year, Davis, unable to purchase the home back, received an extension of the contract for another year.
- Before the end of the second year, Davis began having trouble making the monthly payments. At this point (and probably on the advice of legal counsel, who undoubtedly informed him that he unwittingly conveyed full title to the operator two years earlier, although the ruling is silent on this fact), Davis (or someone on his behalf) takes a stroll down down to the Cook County Recorder of Deeds and records a "Notice of Equitable Mortgage and Affidavit of Interest" setting forth his claim to the sole legal title to the property.
- Approximately three months later, the operator sells the home to a third party for $345,000, who financed the purchase with a mortgage loan from an institutional lender.
- Davis subsequently files a lawsuit to recharacterize his unwitting transfer to the operator as an equitable mortage, and to void both the operator's sale to the third party, and the mortgage obtained from the institutional lender to finance the third party's $345,000 purchase.
- The lender claimed that its mortgage has priority over any interest or equity Davis could establish in the home because it (the lender) acquired its mortgage interest as a bona fide purchaser, without having any actual knowledge of either (a) Davis' earlier dealings with the foreclosure rescue operator, or (b) Davis' continued possession in the home.
In this ruling, the court was asked to decide on the narrow issue of whether the institutional lender acquired its mortgage interest in the home as a bona fide purchaser, or whether its interest is subject to (and inferior to) any right or equity that Davis can establish in the premises.
The court decided that the institutional lender was not a bona fide purchaser and, accordingly, is subject to any right or equity in the home that Davis can estabilsh.
While alluding to the fact that Davis had recorded a "Notice of Equitable Mortgage and Affidavit of Interest" with the county Recorder of Deeds, the court relied primarily on the fact that the lender had constructive notice of Davis' possible rights or equities in the home by reason of his continued possession in the home. (It found this to be the case despite the fact that the lender may have lacked actual knowledge of the facts that led up to the home's sale to the third party.)
More specifically, the court ruled that Davis' visible, open, exclusive and unambiguous possession of the property, under Illinois law, imposes on the lender a duty to inquire into the nature of any rights or equities Davis may claim in the premises, and charges the lender with that knowledge when it fails to make said inquiry.
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In reaching its ruling, the court gave this recitation of the Illinois law that it applied to this case:
- Bona fide purchase is a valid affirmative defense for which the defendant bears the burden of proof. Independent Coal & Coke Co. v. United States, 274 U.S. 640, 650, 47 S. Ct. 714, 71 L. Ed. 1270 (U.S. 1927) (citing Wright-Blodgett Co. v. United States, 236 U.S. 397, 403, 35 S. Ct. 339, 59 L. Ed. 637); Daniels v. Anderson, 252 Ill.App.3d 289, 296, 624 N.E.2d 1151, 191 Ill. Dec. 773 (Ill. App. 1st Dist. 1993).
- "A bona fide purchase interest in property takes that interest free and clear from all claims except those of which [one] has notice." Daniels, 252 Ill. App.3d at 296. Notice may be actual or constructive and "contemplates the existence of circumstances or facts either known to a prospective purchaser or of which he is chargeable with knowledge which imposes upon such purchaser the duty of inquiry." Burnex Oil Co. v. Floyd, 106 Ill.App.2d 16, 21, 245 N.E.2d 539 (1st Dist. 1969).
- Under the doctrine of constructive notice, the law imputes to a buyer or lien claimant knowledge of the facts that a diligent inquiry would have brought to light. Miller v. Bullington, 381 Ill. 238, 44 N.E.2d 850 (1942). The Illinois Supreme Court has long held that a purchaser must inquire into "persons in possession of real estate and by what tenure they hold and by what interest they claim, and is put on notice of all claims, legal and equitable, which the pursuit of such inquiry would disclose." Ambrosius v. Katz, 2 Ill.2d 173, 182, 117 N.E.2d 69 (1954); Miller, 381 Ill. at 243; Stein v. Green, 6 Ill.2d 234, 242, 128 N.E.2d 743 (1955) (holding that it is the purchaser's responsibility to investigate the property and inquire as to the rights of any individual in possession of the property).
- Because possession has "substantial significance and consequences," it must be "visible, open, exclusive and unambiguous." Burnex, 106 Ill.App.2d at 21-22; Millikin Trust Co. v. Gregory, 292 Ill. App. 28, 29, 10 N.E.2d 853 (3d. Dist. 1937) ("Possession, before it can be held to operate as notice of an unrecorded deed, must be open, visible, exclusive, and unambiguous, such as it is not liable to be misunderstood or misconstrued."). The occupation of property by a party other than the record owner is "legally equivalent to the recording of such interest." Burnex, 106 Ill. App.2d at 21.
In addition to the foregoing, the court, in a footnote, made this observation relating to Davis' exclusive possession of the home:
- NovaStar's argument that the fact that plaintiff's nephew lived with him during the relevant period somehow destroys plaintiff's "exclusive" possession is specious. If co-residence by family members negated exclusivity only single occupants would qualify for possession of real estate. No court has never reached such an absurd result.
For the ruling, see Davis v. Elite Mortg. Servs., 592 F. Supp. 2d 1052 (USDC N.D.Ill., East. Div. 2009).
Representing the homeowner is John S. Elson, Lead Attorney, Northwestern University School Of Law, Legal Clinic, Chicago , IL.
For some of the related court documents, see:
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Grantors-In-Possession
(Illinois Supreme Court)
While not addressed in this ruling, Illinois case law has specifically addressed the scenario where a grantor of a deed remains in possession of the premises:
- Ambrosius v. Katz, 2 Ill. 2d 173; 117 N.E.2d 69; 1954 Ill. LEXIS 321 (Ill. 1954): This rule protects a grantor whose grant was induced by fraud, but who, remaining in possession, can show such possession as notice of his equity against a subsequent grantee. (White v. White, 89 Ill. 460; Ronan v. Bluhm, 173 Ill. 277.) The purchaser cannot excuse himself by merely obtaining information as to how possession was obtained or inquiring of the grantor or of other persons as to the rights of the person in possession, but he is bound to inquire of the person in possession by what tenure he holds and what interest he claims. Open possession is sufficient to charge such purchaser with notice of all legal and equitable claims of the occupant. German-American Nat. Bank v. Martin, 277 Ill. 629.
- McDonnell v. Holden, 352 Ill. 362, 185 N.E. 572 (Ill. 1933): Where a grantor does not deliver possession to the grantee but remains in the open, exclusive possession of the premises, a party taking a deed from the grantee during such occupancy is charged with notice of all the rights and equities of the first grantor. (Ronan v. Bluhm, 173 Ill. 277; Bruner v. Manlove, 3 Scam. 339.).
- Ford v. Marcall, 107 Ill. 136, 1883 Ill. LEXIS 237 (Ill. 1883): The law is, as this court has declared in White v. White, 89 Ill. 460, that when the grantor of real estate remains in possession, all persons acquiring title from the grantee are chargeable with notice of all the claims of the grantor.
- White v. White, 89 Ill. 460, 1878 Ill. LEXIS 448 (Ill. 1878): Then, were appellants protected as innocent purchasers for value? Most clearly they were not. The grantors were in possession, and all persons purchasing the property must be held charged with all of their claims, legal and equitable. If appellants did not employ Williams to thus procure the title, or if they had no actual notice of his fraud in obtaining the conveyance, they took it charged with notice as though they had seen their father, and he had informed them of all the particulars of the fraud perpetrated by Williams; and it is for the reason that a party purchasing real estate in the possession of another should see him, and learn what claim he has.
- Smith v. Heirs of Jackson, 76 Ill. 254; 1875 Ill. LEXIS 615 (1875): (Editor's Note: Reference below to "Jackson" is a reference to a prior owner of the premises) :It is true, this fact was not known to Smith, but he, according to his own testimony, purchased without even going or employing an agent to see the land, or make inquiry of the persons in occupation. Had inquiry been made, the fact would readily have been ascertained that they were paying rents to Jackson. The counsel who appear for him in this court were his legal advisers, he says, and to whom he presented the abstract for examination. It is not likely that counsel of such eminence would have failed to advise him of the necessity of inquiry whether there was any tenancy by others; for the law had been laid down by this court, as early as the case of Pittman v. Gaty, 5 Gilm. 186, that possession by the tenant was the possession of the landlord, and constructive notice of the landlord's title. That is the settled law in Pennsylvania, also in Iowa. See Dickey v. Lyon, 19 Iowa 544, where the principal cases upon both views of the question are collected and ably commented upon.
- Metropolitan Bank v. Godfrey, 23 Ill. 531; 1860 Ill. LEXIS 276 (Ill. 1860): In Williams v. Brown, 14: Ill. 205, we say: A person who buys land in possession of another, is bound to inquire of the person in possession, by what tenure he holds possession, and what interest he claims in the premises. See also Prettyman et al. v. Wilkey et al., 19 Ill. 235, 238. So it is held that possession of lands by the grantor in a deed, absolute on its face, but intended as a mortgage, was notice, to a purchaser from the grantee, of the equities of the grantor. Wright v. Bates and Niles, 13 Vt. 341; Roberts v. Anderson, 3 Johns. Ch. 380-1; Grimstone v. Carter, 3 Paige's Ch. 437.
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Grantors-In-Possession
(Illinois Courts of Appeals)
- Fidelity Trust & Savings Bank v. Williams (1936), 285 Ill. App. 131, 1 N.E.2d 739: The rule of law which seems to control in a like situation is that the retention of possession by the grantor of the property conveyed is notice of his or her interest in the property, and to those claiming under the grantee, and such rule is laid down in the case of Ford v. Marcall, 107 Ill. 136, wherein the court said: "The law is, as this court has declared in White v. White, 89 Ill. 460, that when the grantor of real estate remains in possession, all persons acquiring title from the grantee are chargeable with notice of all the claims of the grantor." This rule was followed and approved in the case of Ronan v. Bluhm, 173 Ill. 277, where the court said: "It is proper we should remark, in answer to the discussion upon the point, that as it is conceded by all parties that the said Thomas Ronan did not deliver possession of the premises in question to the grantee, Carbine, but remained in the open and exclusive occupancy thereof, appellee, Bluhm, is deemed, as matter of law, to have taken the conveyance from Carbine with full notice of all the rights and equities of said Ronan in the premises. Illinois Central Railroad Co. v. McCullough, 59 Ill. 166; White v. White, 89 id. 460; Ford v. Marcall, 107 id. 136."
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- It has been held also in this State, that if the grantor remains in possession after conveyance, purchasers from the grantee are affected with notice of the grantor's rights in the land. White v. White, 89 Ill. 460; Ford v. Marcall, 107 id. 136."
- Rea v. Croessman, 95 Ill. App. 68; 1900 Ill. App. LEXIS 422 (Ill. Ct. App., 4th Dist. 1900): That possession of land by a grantor of it, is notice of his retained equitable rights in the land, see McConnell v. Reed, 4 Scam. 117; Metropolitan Bank v. Godfrey et al., 23 Ill. 579; I. C. R. R. Co. v. McCullough, 59 Ill. 166; White v. White, 89 Ill. 460; Ford v. Marcall, 107 Ill. 136; Pomeroy's Eq. Jur., 2d Ed. Sec. 115.
- Porter v. Clark, 23 Ill. App. 567, 1887 Ill. App. LEXIS 53 (Ill. Ct. App., 1st Dist. 1887) (alterations added, not in the original): We have carefully considered all the evidence in this record, and we are unable to conclude from it that appellee Clark [ie. the grantor-in-possession] was estopped by anything that he did from asserting his vendor's lien against the land in the hands of Porter [ie. the purchaser from one, Parker, Clark's grantee]. [...] The evidence is not satisfactory with reference to the contract under which Clark paid rent after his deed to Parker [ie. Clark's grantee]. It would seem from Parker's letter to Clark, introduced in evidence, that the rent was applied on the notes for the purchase money from Parker to Clark. If that was the understanding, we could not say that Clark's possession as tenant was inconsistent with his claim of lien for the purchase money It would Seem to be the rule in this State that possession of land is notice of all rights of whatever nature, that the possessor has in the land.
Go here and go here for more on Illinois Bona Fide Purchaser, Possession, Duty Of Inquiry.
For other states, see Bona Fide Purchaser Doctrine, Possession Of Property By Occupants Other Than The Vendor & The Duty To Inquire. foreclosure rescue sale leaseback
