Dozens Of Would-Be Illinois Home Buyers Under 'Rent To Own' Deals May Face The Boot Over Landlord's Pending Foreclosure

In Sangamon County, Illinois, The State Journal Register reports:

• A Sangamon County judge has appointed a receiver to take over stewardship of nearly 130 homes, most in Springfield, while foreclosure actions are pending. The order issued Thursday by Circuit Judge Patrick Londrigan effectively takes the properties away from JSP Investments while State Bank of Lincoln, which says it is owed nearly $6.8 million, attempts to gain title to the properties via a foreclosure action filed in March. That could take several months, according to Phillip Montalvo, the bank’s attorney.
• In the meantime, The Apartment Mart of Springfield will manage the properties, performing maintenance, collecting rents and evicting tenants when necessary, according to the court order.

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• Dozens of the tenants have contracts-for-deed or rent-to-own agreements with JSP, according to court documents. Montalvo said he is not certain just how many tenants have contracts to purchase homes. The bank has discovered that some tenants who had contracts have moved, he said. “The records we have are very, very old,” Montalvo said. Montalvo said he cannot guarantee that tenants still in their homes with rent-to-own agreements will be able to have rent money paid to JSP apply toward purchase.
• One problem, he said, is most of the rent-to-own contracts were never filed with the Sangamon County recorder’s office. If contracts were recorded before JSP obtained bank financing, tenants have a better shot of having claims honored, he said.(1)

***

• Montalvo said there are two lessons to be drawn from the case. One is to have rent-to-own contracts filed with the county recorder’s office so tenants can be in a position to have contracts honored. Another is to keep all receipts for rental payments, he said.
• Linda Stephenson, who signed a rent-to-own agreement for a JSP house on North Ninth Street, said she has receipts, but never had her contract filed with the recorder’s office. She said she signed a rent-to-own contract four years ago and stopped paying rent to JSP two months ago, after learning that her home was in foreclosure through no fault of her own.
• “Nobody knows what’s going to happen,” said Stephenson, whose home with a neatly kept yard and flowerbeds is a bright spot on a street where several houses are in disrepair. "We don’t know if we’re going to lose our home. “I love living here.”

For the story, see Receiver appointed to oversee 130 JSP properties.

(1) If the would-be buyers under the unrecorded rent-to-own deals and contract for deed arrangements took possession of their homes prior to the seller-landlord getting the mortgage loan from the bank, and if said possession was actual, open, and notorious, it may be that the earlier-created, but unrecorded, interests held by the would-be buyers in their homes will trump the lender's later-created, recorded interest in the mortgage.

When determining the priority of competing interests and equities in real estate, the general rule is that the interest that is recorded in the public records first will have priority over later-recorded or unrecorded interests. The determination is made without regard to when the interest was actually created.

However, a frequently overlooked exception to this rule exists where the holder of a later-created, but earlier-recorded interest fails to qualify for status as a bona fide purchaser. Such failure will disqualify the holder of the earlier-recorded interest for the protection afforded by the state recording statutes. In such a case, the holder of the earlier-created, but unrecorded or later-recorded interest will have priority.

Whether the mortgage lender in this case would qualify as a bona fide purchaser (assuming the loan was made after the renters took possession of their homes) would turn on whether or not the lender had 'notice' of the latter's unrecorded rights. If the lender is found to have had 'notice' of the would-be buyers possession, protection as a bona fide purchaser would be unavailable to it (note that, under the law, one can be found to have had 'notice' of a fact, even if he/she did not have actual knowledge of the fact).

In most states, one seeking to acquire an interest in the real estate (either as a buyer or lender) generally has the duty to know who was in possession of the property before making the purchase or secured loan, and to inquire of the occupants into any rights or equities they may hold. In this regard, when an ordinary inspection of the premises by a purchaser or mortgage lender, followed by reasonable inquiry, would reveal the existence of unrecorded rights or equities, then that purchaser or mortgage lender is charged with notice of those rights. Whether or not the buyer or secured lender had actual knowledge (to be distinguished from 'actual notice') of the occupant's possession is generally immaterial. As many courts have observed, if it were allowed that by failing to acquaint oneself with the fact of possession, the buyer or lender could avoid the effect of this rule, one could purposely avoid any inquiry on the subject, and thereby evade the rule and its consequences entirely.

A U.S. Bankruptcy Judge (In Re Polo Builders, Inc., 433 B.R. 700 (Bankr. N.D. Ill. E. Div. 2010)) recently observed that "[i]t has long been settled in Illinois ... that possession of property is notice of whatever rights to the property the party in possession claims ...", and emphasized this point in a footnote by adding: "So long, in fact, that more than a century ago the Illinois Supreme Court described the rule as "too well settled to call for the citation of authorities" citing Mason v. Mullahey, 145 Ill. 383, 388, 34 N.E. 36, 36 (1893)." Cases too numerous to list here support this proposition in the state. See:

• Illinois Bona Fide Purchaser, Possession, Duty Of Inquiry - State Supreme Court Cases,
• Illinois Bona Fide Purchaser, Possession, Duty Of Inquiry - State Appellate Cases, Federal Cases,

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For those in neighboring Missouri, support for this proposition can be found in (bold text is my emphasis):

Obernay v. Chamberlin, 506 SW 2d 446 (Mo. 1974):

• The leading Missouri case on this subject is Drey v. Doyle, 99 Mo. 459, 12 S.W. 287, wherein the court stated: "Now from the line of former adjudications of this court it is plain to be seen that the notice which will postpone a recorded instrument, affecting real estate, to a prior unrecorded one, must be actual notice. Such notice may be shown by direct evidence, or it may be inferred from facts and circumstances. The question is one of fact, and is to be determined like any other fact.
  
  Circumstances coming to the knowledge of the subsequent purchaser, which would put a prudent person upon inquiry, should go to the jury as evidence of notice. In short any evidence tending to show knowledge of the prior unrecorded instrument should be received as evidence of notice. The inference to be drawn from the facts and circumstances is one of fact and not of law.
  
  Possession and knowledge thereof will, in ordinary cases, be good proof of notice of the title under which the party in possession claims. Such evidence, under other circumstances, will be of little value."
  
  The Missouri cases on this subject are treated at length in an article on possession as notice, appearing in 16 Mo.L.Rev. 142 (April, 1951).

Hayward v. Arnold, 779 SW 2d 342 (Mo. App. W.D. 1989):

• Furthermore, the purchaser of the property takes subject to the rights of anyone in actual possession. Karsznia v. Kelsey, 262 S.W.2d 844, 846 (Mo.1953); Hallauer v. Lackey, 188 S.W.2d 30, 34 (Mo. 1945); Woodbury v. Connecticut Mutual Life Insurance Co., 166 S.W.2d 552, 554-55 (Mo.1942); Langford v. Welton, 48 S.W.2d 860, 863 (Mo.1932); Ballenger v. Windes, 99 S.W.2d 158, 159 (Mo.App.1936).
  
  A purchaser may not plead lack of notice of the claims of an occupant.

Janss v. Pearman, 863 SW 2d 643 (Mo. App. S.D. 1993):

• A purchaser of real estate takes it subject to the rights of anyone in actual possession. Karsznia v. Kelsey, 262 S.W.2d 844, 846 (Mo.1953); Willett v. Centerre Bank of Branson, 792 S.W.2d 916, 919 (Mo.App.S.D.1990); Hayward v. Arnold, 779 S.W.2d 342, 345 (Mo.App.W.D.1989).
  
  A purchaser is charged with such knowledge as he could have obtained from the party in possession upon reasonable inquiry. Hallauer v. Lackey, 353 Mo. 1244, 188 S.W.2d 30, 34 (1945); Woodbury v. Connecticut Mutual Life Ins. Co., 350 Mo. 527, 166 S.W.2d 552, 555 (1942).

See also, Hart v. Parrish, 244 SW 2d 105 (Mo. 1951):

• Plaintiff Hart was familiar with property and knew defendant-respondent Lillian Parrish, widow of Charles H. Parrish, was in possession, "living on the property." In these circumstances, it should not be held Mittler had no notice of the fraud upon which defendant Lillian has relied for cancellation.

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For other states, see Bona Fide Purchaser Doctrine, Possession Of Property By Occupants Other Than The Vendor & The Duty To Inquire.

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By the way, a discussion that may be helpful in understanding the concepts of 'actual notice', 'actual knowledge', and the 'duty to inquire' can be found in this excerpt from Hatcher v. Hall, 292 SW 2d 619 (Mo. App. S.D. 1956) (bold text is my emphasis):

• It is true that, as our courts have reiterated many times, notice is regarded in law as actual where the person sought to be charged therewith either knows of the existence of the particular fact in question or is conscious of having the means of knowing it, even though such means may not be employed by him;[12] and that, since notice does not mean positive information brought directly home to the person sought to be affected thereby, whatever fairly is sufficient to put an ordinarily prudent person on inquiry constitutes notice to him of such facts as would be disclosed by reasonable pursuit and proper inquiry.[13]
  
  For, justice is not so indulgent as to encourage one to shut his eyes to circumstances which would excite the zetetic impulse in an ordinarily prudent individual [Drey v. Doyle, 99 Mo. 459, 469, 12 S.W. 287, 289] or to throw away the key to the door of exploration through which the facts reasonably might be ascertained [Barrett v. Davis, 104 Mo. 549, 561, 16 S.W. 377, 380; James v. Hutchinson, Mo.App., 211 S.W.2d 507, 511]; and, from early times, our courts "have always recognized that the still small voice of suggestion, emanating as it will from contiguous facts and surrounding circumstances, pregnant with inference and provocative of inquiry, is as potent to impart notice as a presidential proclamation, or an army with banners." Connecticut Mut. Life Ins. Co. v. Smith, 117 Mo. 261, 292-293, 22 S.W. 623, 629; Adams v. Gossom, 228 Mo. 566, 583, 129 S.W. 16, 21.
  
  However, one is put on inquiry and charged with notice of the facts which would be disclosed thereby, only when "`the inquiry becomes a duty, and the failure to make it a negligent omission'" [Laughlin v. Findlay, 324 Mo. 1021, 1024, 25 S.W.2d 464, 465(1)];[14] or, as otherwise stated, "`(w)here there is a duty of finding out and knowing, negligent ignorance has the same effect in law as actual knowledge.'"[15]
  
  Whether the circumstances are sufficient to give rise to a duty of further inquiry is ordinarily a question of fact[16] [at least where the evidence is conflicting or is such that more than one inference of fact might be drawn therefrom (Merrill on Notice, Vol. 1, Section 64, p. 61)], frequently fraught with appreciable difficulty and always determinable in the light of the circumstances of the particular case under consideration;[17] and whether, when one is put on inquiry, the exercise of common prudence and ordinary diligence [Edwards v. Carondelet Milling Co., 108 Mo. App. 275, 287, 83 S.W. 764, 768; Kitchen v. St. Louis, K. C. & N. Ry. Co., 69 Mo. 224, 265] in further investigation would have led to discovery of the information, knowledge of which is sought to be charged, likewise usually becomes a question of fact.[18]