The following compilation of cases is an extended version of the list of Arizona 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, 2009 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purchaser/encumbrancer status unavailable to them and, consequently, subjecting the deeds or mortgages to being voided/rescinded/set aside.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 Arizona statute, see Ariz. Rev. Stat. §§ 33-411 & 33-412.
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 Arizona state legislature has passed laws subsequent to these court rulings that either modifies or renders them obsolete in Arizona, the persuasiveness of the logic that underlies them may still be of value to those involved in litigation outside of Arizona (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 Arizona, but as generally applied in Arizona sister states as well).
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Arizona Supreme Court
Bianconi v. Smith, 3 Ariz. 320; 28 P. 880 (1892):
- From the complaint it appears that the fraud, if any, which was practiced upon appellant, related solely to the title of the property sold and conveyed to him by appellee. It is not alleged that the false representation made by appellee was to any matter within his peculiar knowledge or possession. On the contrary, the allegation of the complaint is that such title as appellee had was derived from a tax-deed to the property, and that at the time of the conveyance to appellant one White was in possession of the property, claiming it as his own. It is to be presumed that this tax-deed was of record at the time of purchase, and that any fact or facts which void its effect as a conveyance could have been ascertained by appellant by an inspection of the record of the proceedings which preceded its execution by the proper officer.
- From anything which appears to the contrary in the complaint, appellant might also have easily ascertained by simple inquiry that appellee was not in the possession of the property, and thus have been put upon his guard.
- Common, ordinary business prudence would have suggested some investigation as to the source of appellee's title, and some inquiry as to who was in possession, before purchasing the property; and appellant's neglect of these indicated either gross carelessness or a degree of credulity not usually exhibited by men of ordinary experience.
- Had some act of deceit or fraudulent concealment been alleged, other than the mere assertion of appellee that he had a good and perfect title to the property, which induced appellant to forego an investigation as to the title and the possession of the property, the case might have presented a different aspect, and its merits be more apparent. Not only was gross carelessness and lack of prudence shown by appellant in failing to make any investigation into appellee's title and his right of possession, but also in his failure to protect himself by a deed containing warranty of title. The facilities for obtaining information relative to this title and right of possession were open to appellant, from anything which appears to the contrary from the complaint; and, besides, he could have demanded and required such a conveyance as would have protected him from a failure of title. Will, then, relief, upon the ground of false and fraudulent representation, be granted a vendee, from the consequences of his folly in trusting implicitly in the naked assertions of his vendor that he has a good title, and in taking without investigation a conveyance without warranty? We think not. To use the language of Chancellor Kent in Clark v. Baird, 7 Barb. 66:
"The common law affords to every one reasonable protection against fraud in dealing; but it does not go to the romantic length of giving indemnity against the consequences of indolence and folly, or careless indifference to the ordinary and accessible means of information."
- From an examination of the authorities, we deduce the following as the true rule in such cases: A vendee may maintain an action for damages against his vendor, upon a sale of real property, upon the ground of false and fraudulent representations, when they relate to some matter collateral to the title and the right of possession, or relate to some matter connected with the title within the peculiar knowledge of the vendor, and not otherwise. Andrus v. Smelting Co., 130 U.S. 645, 9 Sup. Ct. Rep. 645; Peabody v. Phelps, 9 Cal. 213; 2 Kent's Commentaries, 285, 484. For the reasons stated, the judgment of the court below in sustaining the demurrer and dismissing the action is affirmed.
Roy & Titcomb, Inc. v. Villa, 37 Ariz. 574; 296 P. 260 (1931):
- If the circumstances were such that notice could be imputed, it is sufficient, and the particular fact relied on as having this effect is that appellee was at the time in actual, open, notorious and undisputed possession of the premises and had been since 1911.
- Practically all the authorities give assent to the proposition that the purchaser or mortgagee of land in possession of an occupant other than the holder of the record title is compelled to inquire of the occupant by what title he holds possession, or he will be held to have taken subject to whatever rights a proper inquiry would disclose the occupant had therein.
- "Actual possession of land," says 46 C.J. 547, "is such notice to all the world or to anyone having knowledge of such possession as will put upon inquiry those acquiring title or a lien on the land to ascertain the nature of the right that the occupant has in the premises." In Rowe v. Ream, 105 Pa. 543, the court quotes with approval this language:
"The possession of land is notice to the world of every title under which the occupant claims it, unless he has put a title on record inconsistent with his possession. When, as in this case, an individual is in possession under no recorded title, his possession is notice of every title which he can set up to protect himself, sufficient at least to put a purchaser on inquiry."
- In Oliver v. McWhirter, 112 S.C. 555, 100 S.E. 533, 536, is found this language:
"One in possession under an equitable title has nothing that he can record; and possession, open and unconcealed, is the only mode by which he can give notice to the world of his rights; and when this notice is given, in the only way in which it could be given, he should be protected."
- In Carolina Portland Cement Co. v. Roper, 68 Fla. 299, 67 South. 115, 116, the court says:
"Actual possession of land is such notice to all the world or to anyone having knowledge of such possession as will put upon inquiry those acquiring title to or a lien on the land to ascertain the nature of the rights the occupant really has in the premises. One who acquires title to or a judgment lien on land with constructive notice of the actual possession and occupancy of the land by one other than the vendor or judgment debtor takes subject to such rights as proper inquiry will disclose the occupant of the land actually has therein. Possession, in order to be constructive notice of a claim of title to the land occupied, must be open, visible, and exclusive; and such occupancy may be shown by any use of the land that indicates an intention to appropriate it for the benefit of the possessor."
- The following are to the same effect: Petrain v. Kiernan, 23 Or. 455, 32 Pac. 158; Follette v. Pacific Light & Power Corp., 189 Cal. 193, 23 A.L.R. 965, 208 Pac. 295; McVey v. McQuality, 97 Ill. 93; Moore v. Oates, 143 Ark. 328, 220 S.W. 657; Niles v. Cooper, 98 Minn. 39, 13 L.R.A. (N.S.) 49, 107 N.W. 744; Garbutt v. Mayo, 128 Ga. 269, 13 L.R.A. (N.S.) 58, 57 S.E. 495; Ross v. Hendrix, 110 N.C. 403, 15 S.E. 4; Wood v. Price, 79 N.J. Eq. 620, Ann. Cas. 1913A 1210, 38 L.R.A. (N.S.) 772, 81 Atl. 893.
- Appellee contends that it conclusively appears from the statement of Lorenzo Villa to appellant, when the note and mortgage were executed, that it had both actual and constructive notice of appellee's possession and occupancy of the premises. Whether this be true or not is immaterial because it was the duty of appellant to ascertain who was in possession of the property before purchasing an interest therein. As said by the court in Sheerer v. Cuddy, 85 Cal. 270, 24 Pac. 713, 714:
"Whether the respondent knew of the appellant's possession or not is immaterial. It was his duty to know who was in possession of the property before making the purchase, and his purchase without ascertaining the fact must be regarded as the strongest evidence of bad faith on his part. The burden of making the proper inquiry was cast upon him by the mere fact of actual possession on the part of the appellant. If it were allowed that, by failing to acquaint himself with the fact of possession on the part of another than the vendor, the vendee could avoid the effect of the rule above stated, he could purposely avoid any inquiry on the subject, and thereby evade the rule and its consequences entirely."
Phoenix Title & Trust Co. v. Smith, 101 Ariz. 101; 416 P.2d 425 (1966):
- In Roy & Titcomb, Inc. v. Villa, 37 Ariz. 574, 296 P. 260, the court said:
"* * * Practically all the authorities give assent to the proposition that the purchaser or mortgagee of land in possession of an occupant other than the holder of the record title is compelled to inquire of the occupant by what title he holds possession, or he will be held to have taken subject to whatever rights a proper inquiry would disclose the occupant had therein. * * *" 37 Ariz. at 577, 296 P. at 261.
Miler v. Condon, No. 4866, 66 Ariz. 34; 182 P.2d 105 (1947):
- Upon purchasing this property the defendants had notice, or by the occupancy of plaintiffs were put upon notice, of the claims of plaintiffs. Roy & Titcomb, Inc. v. Villa, 37 Ariz. 574, 296 P. 260, and cases cited.
Davis v. Kleindienst, 64 Ariz. 251; 169 P.2d 78 (1946):
- We call attention to the case of Adams Oil & Gas Co. v. Hudson, 55 Okl. 386, 155 P. 220, 222. In that case the defendant, a subsequent purchaser, claimed to be a bona fide purchaser. The deed recited a consideration of $ 10,000. It offered no other evidence except the recital in the deed as to the consideration paid. The court held this to be insufficient. We quote from the opinion:
"This being true, what constitutes a bona fide purchase? Three things must exist: (a) A purchase in good faith; (b) for value; and (c) without notice. Where a subsequent purchaser establishes a purchase for value, good faith and lack of notice are presumed, and the burden shifts to the party attacking the transfer to show bad faith and notice, actual or constructive. The recital in a deed that the consideration has been paid is prima facie evidence as between the parties and those claiming under them, but as to strangers and persons claiming in opposition the recital is no evidence as to the consideration paid. To them it is mere hearsay, and is no evidence of a purchase for value. (Citing cases). There is no proof in the record, as against the plaintiffs, even tending to show that the defendant company purchased for value. In the absence of such proof, good faith cannot be presumed. Indeed, the defendant company might be termed a bad-faith purchaser. At least it cannot be said to be a bona fide purchaser, and is therefore not entitled to the benefits thereof. The defendant company and its grantor, Adams, knew what consideration, if any, actually passed for this property. Adams and the officers of the defendant company, and some of its directors, testified as witnesses for the defendant company, but it did not see proper to advise the court what consideration, if any was actually paid. If, as a matter of fact, any consideration was paid, the nature, amount of it, and the facts with reference thereto were within the breasts of Adams and the officers and directors of the defendant company. It was the company's duty to advise the court fully with reference to these matters. This it failed to do, and, in the absence of a showing that it is a purchaser for value, it has no right to invoke the aid of a court of equity. Its hands are not clean. A bona fide purchaser is favored by the courts, but until one brings himself within the rule of a bona fide purchaser a court of equity will not extend its aid. We therefore conclude that the defendant company was not a bona fide purchaser. * * *"
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- The law seems to be settled that a person who fails to exercise due diligence to avail himself of information which is within his reach is not a bona fide purchaser. University of Richmond v. Stone, 148 Va. 686, 139 S.E. 257. Thus a purchaser who has brought to his attention circumstances which should have put him on inquiry which if pursued with due diligence would have led to knowledge of an adverse interest in the property, is not a bona fide purchaser. Shephard v. Van Doren, 40 N.M. 380, 60 P.2d 635.
Condon v. Arizona Hous. Corp., Civil No. 4703, 63 Ariz. 125; 160 P.2d 342 (1945):
- Since the individual defendants acquired their interest in the property after the plaintiffs took possession, whatever interest they may have is subordinate to plaintiffs' rights. Their actual possession was notice to the individual defendants. They have no greater nor better rights than the corporate defendant. This is settled by the decision of this court in Roy & Titcomb, Inc., v. Villa, 37 Ariz. 574, 296 Pac. 260, 261, wherein it was said:
". . . Practically all the authorities give assent to the proposition that the purchaser or mortgagee of land in possession of an occupant other than the holder of the record title is compelled to inquire of the occupant by what title he holds possession, or he will be held to have taken subject to whatever rights a proper inquiry would disclose the occupant had therein. . . ."
Maricopa Utilities Co. v. Cline, 60 Ariz. 209, 134 P.2d 156 (1943):
- The rule is declared in the following:
"Notice of facts and circumstances which would put a man of ordinary prudence and intelligence on inquiry is… equivalent to knowledge of all of the facts a reasonably diligent inquiry would disclose." Schneider v. Henley, 61 Cal. App. 758, 215 Pac. 1036, 1038.
Arizona Court of Appeals
Keck v. Brookfield, 409 P.2d 583 (1965):
- A.R.S. § 33-412 provides:
"A. All bargains, sales and other conveyances whatever of lands, tenements and hereditaments, whether made for passing an estate of freehold or inheritance or an estate for a term of years, and deeds of settlement upon marriage, whether of land, money or other personal property, and deeds of trust and mortgages of whatever kind, shall be void as to creditors and subsequent purchasers for valuable consideration without notice, unless they are acknowledged and recorded in the office of the county recorder as required by law, or where record is not required, deposited and filed with the recorder.
"B. Such unrecorded instruments, as between the parties and their heirs, and as to all subsequent purchasers with notice thereof, or without valuable consideration, shall be valid and binding."
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- A.R.S. § 33-412, subsec. B as hereinabove set forth provides that unrecorded instruments conveying an estate for a term of years is binding upon subsequent purchasers with notice thereof. The trial court held, and we believe properly, that appellants were purchasers with notice and therefore bound by the equitable lease. It is undisputed that the appellees were in open, notorious and exclusive possession of the subject premises. The appellants, however, according to Mr. Keck's testimony at the trial never made inquiry of the appellees as to the extent of their possessory interest. Mr. Keck, when examined by appellees' counsel, testified:
"Q. Did you ever go on the premises when you bought the property or before you bought the property?
A. I did.
Q. You inspected the premises?
A. I have.
Q. Did you ever notice the sign 'Brookfield's Tucson Mattress Factory' on the large barn?
A. I did.
Q. You weren't curious as to by what right they were in that barn, Mr. Brookfield and Mr. Jenkins?
A. By what right?
Q. Yes.
A. No.
Q. You knew that was part of the property that you were purchasing?
A. Yes."
- Mr. Keck further testified that his predecessor in interest told him that there was a lease which was to end January 1, 1959, and that he felt it unnecessary to inquire further as to the tenants' right of possession. We are of the opinion that the appellants were derelict in their duty.
- A purchaser of land in possession of one other than the holder of the record title is compelled to inquire of the possessor by what title he holds possession, or he will be held to have taken subject to whatever rights a proper inquiry would disclose that the possessor had. Roy & Titcomb, Inc. v. Villa, 37 Ariz. 574, 577, 296 P. 260 (1931).
- In Frame v. Frame, 32 W.Va. 463, 9 S.E. 901, 907, 5 L.R.A. 323 (1889), the court said:
"The earth has been described as that universal manuscript, open to the eyes of all. When, therefore, a man proposes to buy or deal with realty, his first duty is to read this public manuscript; that is, to look and see who is there upon it and what are his rights there." The law does not permit a person to close his eyes to facts that he cannot otherwise fail to see for the purpose of remaining in ignorance of them and thus acquire an unjust advantage. See Rogers v. Dumas, 166 Kan. 519, 203 P.2d 165, 169 (1949).
- Appellants claim that they had no duty to inquire since there appeared of record an assignment of rents and profits executed by the Stegmeiers which referred to a lease between the Stegmeiers and the Brookfields and Jenkins dated December 1, 1951. This recorded assignment, however, does not relieve appellants of the duty to ascertain appellees' interest. Even if the terms of the 1951 lease were described in the recorded assignment, which they were not, the rule that, where one is in possession under a known right of possession, such possession is referable to such right and a purchaser is not required to inquire further, is inapplicable to lessees who rent for short periods of time and often renew their leases. See Golden v. Bilbo, 192 Iowa 319, 184 N.W. 643, 645 (1921).
- Appellants knew that the appellees were in open and actual possession of the subject premises and knew of prior lease arrangements. Under these facts ordinary business prudence should have prompted them to pursue such reasonable inquiry as would have disclosed the terms and conditions of the tenancy. Therefore they must be charged with full knowledge of the terms of the lease and the appellees' rights thereunder.
Valley Nat'l Bank v. Avco Dev. Co., 14 Ariz. App. 56, 480 P.2d 671 (Ariz. Ct. App. 1971):
- We believe the rule in Arizona to be that there is a duty to inquire when the land is in possession of an occupant other than the holder of record title, but when that occupant's possession is consistent with record title no duty of further inquiry arises. Roy & Titcomb, Inc. v. Villa, 37 Ariz. 574, 296 P. 260 (1931); Keck v. Brookfield, supra.
Johnson v. Cavan, 152 Ariz. 452; 733 P.2d 649 (1986):
- The evidence is also uncontradicted that appellees were on notice of appellant's claim of an exclusive right to use the parking spaces for his business. Appellees were obligated to inquire of appellant by what right or title he claimed possession. Keck v. Brookfield, 2 Ariz.App. 424, 409 P.2d 583 (1965). They could not rely solely upon the silent lease to resolve the uncertainty about parking spaces.
Federal Court Cases
Jubber v. Hatfield (In re Briggs), 1999 Bankr. LEXIS 790 (B.A.P. 10th Cir. 1999) (unpublished; applying Arizona law):
- The debtor and appellant jointly owned two parcels of residential real property in Arizona. One property was located in Phoenix and the other in Glendale. In May of 1993 the debtor transferred her half interest in both properties to the appellant. The deeds were delivered approximately a year before the debtor filed her bankruptcy petition, but they were not recorded at that time. The appellant continued to live in the Glendale property and rented the Phoenix property. He paid the utility and insurance bills. The debtor filed her bankruptcy petition on January 14, 1998 and one week later the appellant recorded the deeds. Subsequently, the trustee-appellee filed his complaint, pursuant to 11 U.S.C. § 544, to avoid the transfers. The appellant defended under a theory of constructive notice and also argued he had the right to the Glendale property pursuant to the Arizona homestead statutes.
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- The appellant argues that his open, obvious, and notorious occupancy of the Glendale property and the rental tenant in the Phoenix property imparted notice to the trustee sufficient to require further inquiry as to the true owners.
- In response, the trustee argues that where the occupancy is consistent with the recorded title, additional inquiry is not required. See Valley Nat'l Bank v. Avco Dev. Co., 14 Ariz. App. 56, 480 P.2d 671, 676 (Ariz. Ct. App. 1971). The trustee also cites to several Arizona cases and treatises which support the posture that occupation of the whole property by one co-tenant is never presumed to be adverse to the other co-tenant and, thus, is not inconsistent with the recorded titles. See, e.g., Morga v. Friedlander, 140 Ariz. 206, 680 P.2d 1267, 1269 (Ariz. Ct. App. 1984); Compton v. Compton, 128 Ariz. 148, 624 P.2d 345, 346 (Ariz. Ct. App. 1981). See also 6A R. Powell & P. Rohan, Powell on Real Property, § 905[1] (1994); 8 Thompson on Real Property, § 4330 (1963).
***
- It is undisputed that he, as a co-tenant with the debtor, had the right to occupy the entire property. Nor is it disputed that as sole owner or co-tenant, he acted as the landlord over the Phoenix property. Thus, his occupancy, and the occupancy of the tenant, was not inconsistent with his alleged sole ownership and, thus, was not sufficient to place the trustee on notice to perform additional inquiries.
- The appellant claims that the decisions of Roy & Titcomb, Inc. v. Villa, 37 Ariz. 574, 296 P. 260 (Ariz. 1931), and Keck v. Brookfield, 2 Ariz. App. 424, 409 P.2d 583 (Ariz. Ct. App. 1966), were improperly ignored by the bankruptcy court and that these cases stand for the proposition that possession of property by third parties requires additional inquiry as to true ownership. Although these cases do support this general rule, they do not recognize the well-established exception to the rule that occupancy which is consistent with recorded title does not require additional inquiry. See supra.
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- It is apparent that, as a matter of law, the trustee did not have notice at the commencement of the bankruptcy case, actual or constructive, and the transfers of property from the debtor to the appellant were properly avoided.
