In a recent story in The Philadelphia Inquirer on Chester County homeowner Melissa Miller who was victimized out of an estimated $140,000 in equity in a sale leaseback foreclosure rescue scam (see Mortgage scheme costing Chesco woman her home), a reference was made to her apparent failed attempt to undo the ripoff through the filing of a civil lawsuit:
- [Bruce] Baldwin, Miller's attorney, said the [straw buyers] did not respond to JPMorgan Chase's foreclosure action on [Miller's] house, or to a suit he filed in Chester County Court on Miller's behalf "against all the parties involved," including the [straw buyers] and Washington Mutual [the lender who, presumably unwittingly, financed the foreclosure rescue ripoff].
- Based on the evidence, Baldwin said, County Judge Robert Shenkin, while agreeing that both Miller and Washington Mutual had been "innocent victims of fraud," determined in December that the burden of loss fell on Miller because she had agreed to the arrangement.
It is arguable whether any mortgage lender who, albeit unwittingly, finances a foreclosure rescue ripoff where the victimized homeowner remains in possession of the premises is an innocent victim of the fraud.
The general rule in Pennsylvania, based on its state case law, is clear that, prior to making a loan secured by real estate, a mortgage lender has an obligation to determine whether the premises is in the possession of one other than the actual borrower/mortgagor and, if so, to make the appropriate inquiries into the legal rights and equities of those in occupancy. Failure to do so may lead to the imputation of constructive notice on the mortgage lender of the fraud.(1)
It appears that, in this case (and in most cases), the lender financing the scam failed to satisfy its obligation. In such an event, the mortgage lender is arguably not entitled to status as a bona fide purchaser and, accordingly, arguably not entitled to the recording statutes, thereby leaving its interest in the premises subject to being voided by the victimized homeowner.(2)(3)
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(1) In Woods v. Farmere, 7 Watts 382, 1838 Pa. LEXIS 94 (1838), the court stated:
- The duty of inquiring into the foundation of a notorious possession is not a grievous one, [... .] [T]he doctrine of constructive notice is undoubtedly a sharp one; but it is not more so in regard to a notorious possession than it is in regard to a registry. Nor is it less reasonable; for it certainly evinces as much carelessness to purchase without having viewed the premises, as it does to purchase without having searched the register.
In Kinch v. Fluke, 311 Pa. 405, 166 A. 905 (1933), the court observed:
- Such possession is evidence of title, and, in a certain sense, is a substitute for recording the agreement of purchase, and is sufficient to put a subsequent purchaser or mortgagee on inquiry: Hottenstein v. Lerch, 104 Pa. 454; Lord's App., 105 Pa. 451; Rowe v. Ream, 105 Pa. 543; White v. Patterson, 139 Pa. 429.
- A prospective purchaser is required to make inquiry of those in possession, and failing to do so, is affected with constructive notice of all that such inquiry would have disclosed: Stonecipher v. Keane, 268 Pa. 540; Lazarus v. Lehigh & W.-B. Coal Co., 246 Pa. 178; Ohio R. Junc. R.R. Co. v. Pa. Co., 222 Pa. 573; Jamison v. Dimock, 95 Pa. 52.
- The notice of possession which the law imposes on a subsequent vendee or mortgagee without regard to whether he has actual knowledge or not, is of such character that it cannot be controverted. The means of knowledge which possession affords is regarded as the legal equivalent of actual notice: Rowe v. Ream, supra, at 546.
In Sidle v. Kaufman, 345 Pa. 549, 29 A.2d 77 (1942), the court stated the following:
- It is well settled that purchasers and mortgagees of real estate are affected not only by matters of which they had actual knowledge and by what appeared in the office of the recorder of deeds and in the various courts of record whose territorial jurisdiction embraced the land in dispute, but as well "by what they could have learned by inquiry of the person in possession and of others who, they had reason to believe, knew of facts which might affect the title": Salvation Army Inc. Tr. v. Lawson, 295 Pa. 459, 463. See also Kinch v. Fluke, 311 Pa. 405, 408; Driebe v. Fort Penn Realty Co., supra, 318; Koubek v. Tenos, 343 Pa. 409, 412.
In Malamed v. Sedelsky, 80 A.2d 853, 367 Pa. 353 (Pa. 1951), this statement was made by the court:
- [I]t has long been settled that it is the duty of a purchaser of real property to make inquiry respecting the rights of the party in possession and failing to do so they are affected with constructive notice of such facts as would have come to his knowledge in the proper discharge of that duty: Lazarus v. Lehigh and Wilkes-Barre Coal Co., 246 Pa. 178, 184, 92 A. 121 (1914); Atlantic Refining Co. v. Wyoming Nat. Bank, 356 Pa. 226, 236, 51 A. 2d 719 (1947); Sidle v. Kaufman, 345 Pa. 549 557, 29 A. 2d 77 (1942); Kinch v. Fluke, 311 Pa. 405, 166 A. 905 (1933)
- This has been the law as far back at least as Woods v. Farmere, 7 Watts 382, 387 (1838), where it was said by Chief Justice GIBSON, at p. 387, "... it certainly evinces as much carelessness to purchase without having viewed the premises, as it does to purchase without having searched the register."
In Mid-State Bank & Trust Co. v. Globalnet Int'l, Inc., 557 Pa. 555; 735 A.2d 79 (1999), the Pennsylvania Supreme Court continued its recognition of the duty of purchasers and mortgagees to make the appropriate inquiries of those in possession of the premises in which they are acquiring an interest in by making this statement:
- A party is on constructive notice of another's interest in real property where the party "could have learned by inquiry of the person in possession and of others who, they had reason to believe, knew of facts which might affect title, and also by what appeared in the appropriate indexes in the office of the recorder of deeds." Lund v. Heinrich, 410 Pa. 341, 346, 189 A.2d 581, 584 (1963).
(2) As recently as March 3, 2010, a U.S. Bankruptcy Court in Philadelphia (in applying Pennsylvania case law) ruled that a lender who (presumably unwittingly) financed a foreclosure rescue scam involving a sale leaseback arrangement was not a bona fide purchaser and not entitled to the protection of the Pennsylvania recording statute. Consequently, the court voided the lender's mortgage (although it did grant it an equitable lien to the extent of the approximate unpaid balance owed by the victimized homeowners on their existing mortgage loan immediately prior to the ripoff - no lien was granted for the amount by which the new loan that financed the scam exceeded the existing loan).
Among other things, the court, in In re Fowler, Chapter 13, Bky. No. 07-11692ELF, Adv. No. 07-00139ELF (Bankr. E.D. Pa. March 3, 2010), made this statement (among others) recognizing the following general rule in Pennsylvania on the bona fide purchaser doctrine:
- [i]t is well settled that purchasers and mortgagees of real estate are affected not only by matters of which they had actual knowledge and by what appeared in the office of the recorder of deeds and in the various courts of record whose territorial jurisdiction embraced the land in dispute, but as well by what they could have learned by inquiry of the person in possession and of others who, they had reason to believe, knew of facts which might affect the title. Sidle v. Kaufman, 345 Pa. 549, 29 A.2d 77, 82 (Pa. 1942) (emphasis added) (internal quotations omitted).
For more on the bona fide purchaser doctrine in Pennsylvania, see:
For other states, see Bona Fide Purchaser Doctrine, Possession Of Property By Occupants Other Than The Vendor & The Duty To Inquire.
(3) A 2009 ruling by a Federal District Court in Chicago ruled, in applying Illinois law, that a mortgage lender who financed a foreclosure rescue scam (where the victimized homeowner remained in possession of his home throughout the relevant time period) was not entitled to status as a bona fide purchaser and, consequently, not entitled to protection of the state recording statutes. See Lender's Failure To Inquire Into Possession Disqualifies It For Bona Fide Purchaser Protection In Suit To Undo Foreclosure Rescue Sale Leaseback Scam.
Support for imputing constructive notice in the application of the bona fide purchaser doctrine on a mortgage lender in situations where a property owner remains in possession of premises conveyed to another, after which the grantee obtains a mortgage loan secured thereby, has been around for over 140 years - it is certainly not a new phenomenon - as evidenced by this excerpt from a ruling from the California Supreme Court in Pell v. McElroy, 36 Cal. 268, 1868 Cal. LEXIS 186 (1868):
- An absolute deed divests the grantor not only of his legal title, but right of possession; and when such grantor is found in the exclusive possession of the granted premises long after the delivery of his deed, here is a fact antagonistic to the fact and legal effect of the deed; and we cannot appreciate the justice, sound reason, or policy of a rule which would authorize a subsequent purchaser, while such fact of possession continues, to give controlling prominence to the fact and legal effect of the deed, in utter disregard of the other notorious prominent antagonistic fact of exclusive possession in the original grantor. He cannot be regarded a purchaser in good faith who negligently or willfully closes his eyes to visible pertinent facts, indicating adverse interest in or incumbrances upon the estate he seeks to acquire, and indulges in possibilities or probabilities, and acts upon doubtful presumptions, when by the exercise of prudent, reasonable diligence he could fully inform himself of the real facts of the case.
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- The continued exclusive possession of a vendor after his formal conveyance of the legal title is a fact in conflict with the legal effect of his deed, and is presumptive evidence that he still retains an interest in the premises, and is sufficient to put a purchaser upon inquiry, and subject him to the general rule heretofore announced in case of the party in possession being a stranger to the title as of record.
