Oregon Bona Fide Purchaser, Possession, Duty To Inquire

The following compilation of cases is intended as an addendum to the Sunday, July 3, 2011 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.
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As stated in my July 3, 2011 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purchaser/encumbrancer status unavailable to them and, consequently, subjecting the deeds or mortgages to being voided/rescinded/set aside.
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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.
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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. One must first check the Oregon recording statute.
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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 Oregon state legislature has passed laws subsequent to these court rulings that either modifies or renders them obsolete in Oregon, the persuasiveness of the logic that underlies them may still be of value to those involved in litigation outside of Oregon (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 Oregon, but as generally applied in Oregon's sister states as well).

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Oregon Supreme Court

Webb v. Stewart, 469 P. 2d 609 (Ore. 1970):

• We think that the ambiguity created by the conflicting statements in our cases as noted above should now be resolved, and in resolving it we adopt the rule that grantor's continued possession after the execution of a deed by him puts third persons upon inquiry as to the grantor's interest.[6]
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  It is well established that the possession of persons other than the grantor will put a purchaser upon inquiry as to the possessor's interest.[7]
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  As the court in Groff v. State Bank of Minneapolis, 50 Minn. 234, 238, 52 N.W. 651, 652 (1892) observed: "there is no good reason for making a distinction between possession by a stranger to the record title and possession by a 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."
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  Although there is more likelihood that the grantor's possession would be consistent with the unencumbered title in the grantee, there is still a sufficient possibility of the grantor retaining an interest in the property to warrant the imposition of a duty upon the purchaser to make inquiry. The fact that there are a substantial number of litigated cases in which the grantor in possession has a claim, indicates that inquiry will frequently disclose to the purchaser an adverse claim.[8]
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  Some courts have reasoned that the grantor has by his deed, in effect, declared to the world that he has divested himself of all interest in the property and that subsequent purchasers may, therefore, assume that grantor retains possession for some reason consistent with an unqualified title in the grantee. The answer to this reasoning is well stated in 5 Tiffany, Real Property § 1292, pp. 76-77 (3d ed 1939):
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  "* * * One difficulty, however, with this view is that it imputes to a conveyance an effect as a declaration by the grantor, for the purpose of raising an estoppel against him, which is not necessarily in accord with the understanding of the parties or with the legal effect of the conveyance. One executing, for instance, a conveyance of a fee simple title, may perfectly well acquire, by the same or a subsequent transaction, an equity against the grantee or a lease for a limited period, and it is difficult to see why his conveyance should be regarded as a declaration that he has not acquired, or will not acquire, such an interest, or why a subsequent purchaser should be justified in assuming, for the purpose of being relieved from any duty of inquiry, that the grantor's continuance in possession is wrongful rather than rightful."
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  After a careful review of the competing rules we believe that the conclusion reached by 1 Merrill on Notice, § 131, p. 160 (1952) is the most satisfactory and we adopt it:
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  "Upon the whole, I believe the most desirable solution of the problem is to regard the grantor's continued possession as a fact provoking inquiry from those subsequently dealing with the land, regardless of its duration. This seems more in harmony with the general policy of the law that possession arouses inquiry. It seems hardly sufficient investigation to content one's self with learning from the records or from some other source that the possessor has purported to part with his title. Non constat that he may have gained another in some way. Inquiry from him will involve little effort or expense, and should be required ere one can attain to the ancient and honorable position of a bona fide purchaser."
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  Having concluded that defendant Wilson was put on inquiry, it is necessary to determine whether adequate inquiry was made. There is no evidence that Wilson herself attempted to ascertain whether anyone was in possession of the property. Rowley visited the premises and observed that plaintiff was in possession.
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  Rowley testified that he "kind of jokingly said" to plaintiff, "`Well, it looks like you've sold your house,'" and that plaintiff "confirmed that he had sold it." Rowley also asked plaintiff if he intended to sell any of his furniture or appliances when he moved and plaintiff responded that he would probably dispose of some of the items and would move "`about the first of the month.'" Rowley then said, "`Here's my card, and when you move, be sure and call me because there is some furniture or appliances that I would be interested in.'"
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  The conversation Rowley had with plaintiff does not constitute a reasonable inquiry within the meaning of the rule. The questions put to plaintiff indicated only that Rowley was interested in purchasing plaintiff's household goods. Such questioning would not invite a grantor to explain the character of the "sale" transaction he had entered into thus revealing the conditions which the grantee was to meet before title would pass.
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  If, in that conversation, Rowley had revealed his primary interest in viewing the property, plaintiff would then have had reason to warn Rowley of the tentative character of the "sale." We hold that the inquiry was inadequate.
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  The cause is remanded to the trial court with directions to modify the decree consistent with this opinion.

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Editor's Note: It should be noted that, in footnote 8 of the Oregon Supreme Court ruling, the court observed that there are a number of situations in which this rule may be applicable, including the case where the transaction is deemed an equitable mortgage (ie. where the deed/conveyance is treated as a mortgage; typically arising in the context of an equity stripping, sale leaseback foreclosure rescue scam):

• In addition to the cases already mentioned involving fraudulent inducement or the transfer of the instrument before the conditions are fulfilled are the frequently recurring situations where the deed is in fact a mortgage, or where there is a lien for the unpaid purchase price, or where grantor is a lessee, or where the grantee holds the legal title upon a resulting or constructive trust, etc.

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Stevens v. American Sav. Institution, Inc., 289 Or. 349, 613 P. 2d 1057 (Or. 1980):

• Possession of real property by a prior grantor or by someone other than his seller is a fact that provokes the duty on the part of a purchaser to inquire. See Webb v. Stewart, supra 255 Or. at 536-38, 469 P.2d 609; Merrill, supra at 122 § 97. Merrill explains:
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  "* * * [T]he dictates of ordinary prudence are regarded as impelling one buying real estate to inspect it. Accordingly, possession is held to be effective notice of its own existence, whether it is known or not. * * *. This notification charges the prospective purchaser or incumbrancer with notice that the possession exists. The effect of this as notice of the possessor's claim to the land depends upon whether, if it were actually known to him, it would be sufficient to challenge his inquiry. In other words, the unknown possession serves as notification of its existence and also, in law, as a stimulus to investigation concerning the possessor's title. It has no greater effect than known possession. The function of the holding in either case in not to affect one contemplating acquisition of an interest with conclusive notice of the possessor's claim but merely to furnish an occasion for inquiry. * * *" Id. (Emphasis added.)

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• In the present case, had Publishers made a reasonable inquiry and informed Stevens that the inquiry was in preparation for its purchase of the timberland from Fernandez, then Stevens would have informed Publishers that plaintiffs held a mortgage on the timberland and had a "standard timber restriction" clause covering the land.
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  The discovery of these facts would have immediately informed both parties that Fernandez was defrauding plaintiffs. Publishers is therefore charged with knowledge of the fraud because it would have learned of the fraud had it made a reasonable inquiry. Murray v. Wiley, supra 169 Or. at 407, 127 P.2d 112.
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  We therefore, conclude that Publishers failed to sustain its burden of proving its affirmative defense. Publishers was not entitled to the status of a bona fide purchaser without notice.
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  Affirmed.

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Minnesota Supreme Court

Groff v. State Bank of Minneapolis, 50 Minn. 234; 52 N.W. 651; 1892 Minn. LEXIS 287 (Mn. 1892): Inasmuch as the Oregon Supreme Court, in Webb v. Stewart, 469 P. 2d 609 (Ore. 1970), supra, cites this case with approval when establishing the rule on the effect of possession by one other than the grantor or someone other than the seller, the Minnesota high court ruling in the Groff case arguably merits attention here when construing Oregon law on this issue:

• 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.
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  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.
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  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.
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  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.
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  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.

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Oregon Court of Appeals

Neff v. Sandtrax, Inc., 08CV0610, A142518 (Or. App. 2011):

• In the analogous context of boundary by agreement, we have held that an agreement is "binding on the parties' successors in interest, as long as they have actual or constructive notice of it." Eidman v. Goldsmith, 149 Or App 7, 14, 941 P2d 1045, rev den, 326 Or 62 (1997) (citations omitted); see also Clark, 46 Or at 76 (estoppel applies to the person who made the representation and to those in privity with him).
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  A purchaser has constructive notice of a claim to property if, with reasonable observation and intelligence, he should have had notice of the claim at the time he purchased; whether or not the inquiry actually is made, the purchaser is charged with notice of every fact that a reasonable inquiry would have disclosed. Vandehey Development Co. v. Suarez, 108 Or App 154, 157, 814 P2d 1094, rev den, 312 Or 235 (1991).
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  Furthermore, "the possession of persons other than the grantor will put a purchaser upon inquiry as to the possessor's interest." Webb v. Stewart, 255 Or 523, 536, 469 P2d 609 (1970) (footnote omitted).

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U.S. Bankruptcy Court (District of Oregon)

In re Roman Catholic Archbishop of Portland, 335 BR 868 (Bankr. D. Or. 2005):

• Inquiry notice has been the law of Oregon for many years; it was referred to as "well settled" law in 1927. Belt v. Matson, 120 Or. 313, 320, 252 P. 80 (1927). There is no language in ORS 93.643(1) that indicates a legislative intent to change well-settled Oregon law on inquiry notice. I conclude, therefore, that the enactment of ORS 93.643(1) did not abolish inquiry notice in Oregon.
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  This conclusion is supported by the fact that, despite the enactment of ORS 93.643 in 1987, Oregon courts have continued to consider and apply the rules of inquiry notice. E.g., Akins v. Vermast, 150 Or.App. 236, 945 P.2d 640, adhered to on reconsideration, 151 Or.App. 422, 950 P.2d 325 (1997); Vandehey Dev. Co. v. Suarez, 108 Or.App. 154, 814 P.2d 1094 (1991). See also Spady v. Graves, 307 Or. 483, 488 n. 3, 770 P.2d 53 (1989) (explaining that constructive notice can be either record notice under the statutes or inquiry notice).
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  "Inquiry notice . . . arises when the existence of a claimed interest in real property may be determined through investigation based on facts available to the claimant that would cause a reasonable person to make such inquiry." Gorzeman v. Thompson, 162 Or.App. 84, 93, 986 P.2d 29 (1999). The purchaser is "charged with notice of every fact that a reasonable inquiry would have disclosed." Vandehey Dev. Co., 108 Or.App. at 157, 814 P.2d 1094.
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  In order to be charged with notice of facts a reasonable inquiry would have disclosed, there first must be facts that would cause a reasonable person to make such inquiry. In other words, there must be a duty to inquire before the purchaser is charged with notice of what she would have learned had she made the inquiry.

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• Under Oregon law, possession of real property by a third party other than the grantor puts "a purchaser upon inquiry as to the possessor's interest." Webb v. Stewart, 255 Or. 523, 536, 469 P.2d 609 (1970). This is because the possession by someone other than the grantor "is a fact inconsistent with the record title[.]" Id. (quoting Groff v. State Bank of Minneapolis, 50 Minn. 234, 238, 52 N.W. 651 (1892)).

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In Re: Michael A. Grassmueck, Inc., Trustee v. Wurst, No. 09-6130-fra (Bankr. Or. 2009):

• "Under Oregon law, possession of real property by a third party other than the grantor puts a `purchaser upon inquiry as to the possessor's interest.'" In re Roman Catholic Archbishop of Portland, 335 B.R. at 885 (citing Webb v. Stewart, 255 Or. 523, 536, 469 P.2d 609 (1970)). "This is because the possession by someone other than the grantor `is a fact inconsistent with the record title[.]'" Id. (internal citation omitted).

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In re Kennedy, Bankruptcy Case No. 09-64432-fra7, Adversary Proceeding No. 10-6029-fra (Bankr. D. Or. 2011):

• A bona fide purchaser for value without notice (BFP) is an affirmative defense which must be pleaded, thereby placing the burden of proof in such cases upon the party relying thereon. Stevens v. American Savings Institution, Inc., 43 Or.App. 191, 195, 602 P.2d 669, 671 (1979).
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  The BFP rule applies to lenders as well as purchasers. Akins v. Vermast, 150 Or.App. 236, 242, 945 P.2d 640 (1997).
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  "Generally, a [BFP] is not affected by the transferor's fraud against a third party and has a superior right to the transferred property as against the transferor's creditor to the extent of the consideration the purchaser has paid." Black's Law Dictionary 1271 (8th ed. 2004). In other words, if Defendant CitiMortgage has BFP status, its interest in the Property has priority over Plaintiff's pre-existing unrecorded leasehold interest.
  
  The court in Stevens held that the consequence of the failure of a purchaser from grantor's grantee to make a reasonably diligent inquiry as to who had actual possession of the premises combined with the fact that the grantor of the deed retained possession of such premises was to charge the purchaser with constructive notice of grantor's interest in the property purchased. Failure to make a reasonably diligent inquiry vitiated purchaser's claim to be a BFP.
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  In Webb v. Stewart, 255 Or. 523, 536, 469 F.2d 609, 615 (1970), the Oregon Supreme Court adopted the rule that "grantor's continued possession after the execution of a deed by him puts third persons upon inquiry as to the grantor's interest." The court also held that "[i]t is established that the possession of persons other than the grantor will put a purchaser upon inquiry as to the possessor's interest." Id. The court felt there was no justification for distinguishing between possession by a stranger and by the grantor after delivery of his deed.
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  In Hooker v. Dunster, 74 Or.App. 636, 704 P.2d 515 (1985), the plaintiff deeded her residential property to the defendant Dunster. Dunster falsely told plaintiff that he had destroyed the deed. Instead, he approached defendant Transamerica with the deed and a title report showing him as sole owner and obtained a loan against the property. The court held that Transamerica was under inquiry notice of grantor/plaintiff's continued possession of the property. Grantor/plaintiff's continued possession of the property warranted the imposition on Transamerica of a duty to inquire as to the nature of the interest claimed. Failure to do so meant that Transamerica could not claim the status of a BFP and its right in the property was inferior to that of the grantor.
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  In the present case, CitiMortgage's predecessor in interest, Northwest Mortgage Group, knew at the time it granted the loan to Mr. Kennedy that he was not in possession of the property himself and that the property was in the possession of a tenant who had negotiated an arrangement with Mr. Kennedy. Pursuant to the caselaw cited above, Northwest Mortgage Group was put on inquiry notice of Ms. Schoor's continued possession of the property and had a duty to inquire as to the nature of the interest claimed by Ms. Schoor. Had it done so, it would have learned of the lifetime lease. Having failed to do so, Defendant is charged with constructive notice of Ms. Schoor's prior interest and cannot now claim the status of a BFP with respect to Ms. Schoor's interest in the property.

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Go here and Go here for other Oregon cases involving bona fide purchasers and the duty to inquire in the context of real estate transactions.