R.I.P. - Bankruptcy Strip Offs Of Underwater 2nd Mortgages In Chapter 7 Proceedings; Supremes Sound Death Knell For Slick, But Short-Lived Way To Wipe Out Subordinate Home Loans By Some Financially Distressed Homeowners Seeking Fresh Start; 'Green Light' Remains Steady For Similar Lien Stripping In Chapter 13, "Chapter 20" Reorgs

In Washington, D.C., Forbes reports:

• The U.S. Supreme Court reversed a lower-court decision allowing debtors to “strip off” underwater second liens in Chapter 7 bankruptcy, saying precedent required it to keep such mortgage claims intact.
  
  Justice Clarence Thomas, caught between his usual adherence to the strict wording of statutes and the competing doctrine of stare decisis, ruled that a prior decision carved out an exception from bankruptcy law for mortgage liens.
  
  The unanimous decision in Bank of America v. Caulkett is a victory for lenders who said it would be unfair to require them to give up potentially valuable claims simply because a home’s current value is depressed. It’s a defeat for consumer advocates who favor using bankruptcy to reduce the amount borrowers owe against their houses, although borrowers can still strip underwater second liens through the more costly and time-consuming process of Chapter 13 bankruptcy.(1)
  
  
  ***
  
  The Supreme Court already has ruled that in Chapter 13 reorganizations, where debtors with reliable income set up a plan to repay creditors over time, second mortgages with no collateral value to back them up can be stripped.(2)

For more, see Debtors Can't Void Underwater Mortgages In Bankruptcy, Supreme Court Rules.

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(1) See Why the Supreme Court Might Actually Rule Against the Corporate Interest:

• The reason it matters that you can strip off a second loan in Chapter 13 bankruptcy but not Chapter 7 is that Chapter 7 is a much more affordable part of the bankruptcy code.
  
  “Chapter 13 has a payment plan, you only get the strip-off if you complete the plan,” said bankruptcy expert Bob Lawless. Only about 40 percent of Chapter 13 cases complete the payment plan, which is three times as expensive as in Chapter 7.

Editor's Note: Strip-offs in so-called "Chapter 20" bankruptcies (the colloquialism for a debtor who first files Chapter 7 bankruptcy to get a discharge of his/her debts, then files Chapter 13 bankruptcy to obtain the lien strip off) also appear to remain unaffected by this Supreme Court ruling.

It notes reminding that, in the "Chapter 20 bankruptcy" context, while the law precludes a debtor from receiving a new discharge of his/her debts in a Chapter 13 bankruptcy within four years of a Chapter 7 petition that ultimately resulted in a discharge, a debtor can still file the Chapter 13 petition without seeking discharge, but to gain the other benefits that Chapter 13 offers - automatic stay, ability to cure arrearages, the ability to adjust interest rates under plan payments, ability to strip off liens that are completely underwater, among other benefits. See generally:

• Todd, Timothy M., To Lien Strip or Not to Lien Strip: Fourth Circuit Blesses Controversial 'Chapter 20' Valueless Lien Stripping in In re Davis (July 24, 2014). South Carolina Law Review, Vol. 65, Issue 4, p. 963 (2014). Available at SSRN: http://ssrn.com/abstract=2471249
  .
• Spector, Arthur J; Homer, Ilyse M; Avron, Paul A. Eleventh Circuit: "Chapter 20" Debtors Can Strip Off Liens. American Bankruptcy Institute Journal33.8 (Aug 2014): 54-55.
  .
• National Consumer Bankruptcy Rights Center: Debtors Enjoying Growing Consensus on Chapter 20 Lien Strip Cases.

(2) Ibid.

Despite Lack Of Actual Knowledge Or Record Notice, Sloppy Lender Should Have Known Of Victimized Homeowner's Unrecorded Equitable Mortgage Rights To Home Sold Out From Under Her, Says Illinois Appeals Court

A 2012 case decided by an Illinois appellate court (see U.S. Bank Nat. Ass'n v. Villasenor, 979 NE 2d 451 (Ill. App. 1st Dist., 6th Div. 2012)) involves another situation where a mortgage lender unwittingly found itself financing an equity stripping ripoff orchestrated by the typical band of bad actors, and perpetrated against an elderly homeowner who owned her home of over thirty years free and clear of any mortgage.

Not surprisingly, the scammers were nowhere to be found when this lawsuit was brought, leaving a victimized homeowner to fight it out in court (not only to undo the equity stripping scam by having it recharacterized it as an equitable mortgage, but to undo a subsequent foreclosure sale that she wasn't a party to in connection with a loan that was borrowed out from under her by using her home's equity) with an unwitting but careless lender which claimed that, not only did it lack actual notice of the ripoff, but that it also lacked constructive notice as well.

Despite the fact that the mortgage lender wasn't in on the scam, the court granted summary judgment on the victimized elderly homeowner's intervenor's complaint and quiet title lawsuit, finding that the lender had constructive notice of occupants in possession of the home securing its loan, but failed to inquire of said occupants as to the nature of their possession. The court found that, had it done so, the lender would have discovered that there was a problem with the title to the home (ie. that the victimized homeowner may hold an unrecorded equitable interest) and wouldn't have granted the mortgage loan to one of the bad actors who, through the mechanics of the equity stripping ripoff, ended up as the purported record owner of the home.

Following below is an over-simplified summary of the facts - much detail has been omitted (ie. references to land trusts, transfers between related entities, excerpts from depositions of the victimized homeowner and both of her two grandsons, among other things have been left out):

Ownership/Possession By The Victimized Elderly Homeowner:

1. Ruthie Lee Ellis ("Ellis"), the intervenor, age 73, alleges in her intervenor's complaint, affirmative defense, and complaint to quiet title that she had owned the home since 1972 and lived in the home with her son, Andre Ellis, until 1985.
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2. Ellis then moved out and Andre, or other relatives, continued to reside in the home until 2003.
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3. Later, Andre moved out and Michael Ellis, a grandson, moved in and resided in the home until 2009.
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4. From 2009 through the commencement of the instant action, Martez Knox, another of Ellis' grandsons, has lived in the home.

Events Leading Up To The Dispute:

1. In 2004, Ellis became aware that her 2000 Cook County real estate taxes had been sold in a tax sale. To avoid losing the property, Ellis sought a loan to pay off the overdue taxes. She began searching for loan providers and was contacted by Property Tax Counselors, Inc. (PTC).
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2. On September 23, 2004, Ellis signed a written agreement drafted by PTC (the PTC agreement) and, pursuant to the agreement, executed a warranty deed in trust on the same day, conveying title to the home to First Suburban as trustee of a land trust.
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3. The PTC agreement outlined the terms of a $10,210.63 loan in which Ellis alleges, in her affirmative defense and complaints, that her property served as security for the loan. It required periodic payments, and a right to repurchase the home.
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4. On June 7, 2005, record title to the home was sold to one, Villasenor, who was ostensibly connected to the outfit orchestrating the scheme. Villasenor obtains a mortgage loan secured by the theretofore free and clear home in the amount of $99,000 shortly thereafter.
   .
5. On April 1, 2007 (almost two years after title to the home was ostensibly sold out from under her and encumbered with a $99,000 mortgage), Ellis secured a second loan from PTC for $3,764.19, alleging in her deposition that she needed the money to pay off water bills and property taxes. An identical agreement was executed for that loan. Ellis alleges in her complaints, affirmative defense, and motions that she made all payments due under both PTC loans until October of 2007 when her mailed payments were returned by the United States post office showing that PTC was not located at the address and had left no forwarding address. All efforts to locate PTC were unsuccessful.
   .
6. On May 1, 2007 (one month after securing the second loan from PTC), Villasenor (the then-ostensible owner of record) defaulted on his mortgage and the mortgage lender filed a complaint to foreclose on August 21, 2007.
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7. In October, 2007 (two months after the mortgage lender filed its foreclosure action), Ellis' mailed payments to PTC on account of her two loans were returned to her by the post office showing that PTC was not at that address and had left no forwarding address (as referenced in #5, above),
   .
8. On November 7, 2007, the mortgage lender filed a motion for an order of default and for judgment for foreclosure and sale for Villasenor's failure to file an appearance and answer or otherwise plead.
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9. On December 10, 2007, an order of default and judgment for foreclosure and sale was entered.
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10. The notice of sale was mailed to two separate addresses, one of which was the subject property. At the time the notice was mailed to the subject property, Michael Ellis, one of Ellis' grandsons, was the occupant of the home.
    .
11. On April 24, 2008, after the judicial sale had taken place, the foreclosing mortgage lender filed a motion to approve the report of sale and for the entry of an order of possession, which was granted the same day.
    .
12. On April 28, 2008 (four days later), Ellis learned of a cloud on her title after receiving notice that her property had been foreclosed and that an eviction action had commenced (as alleged in her motion for leave to intervene).
    .
13. On May 21, 2008, Ellis responded by filing a motion for leave to intervene in the Villasenor foreclosure and a motion to vacate the judgment for foreclosure and the order confirming the sale.
    .
14. On August 7, 2008, the court permitted Ellis to intervene and granted her request to vacate the April 24 order approving the report of sale and possession order, and the December 10 judgment of foreclosure and order confirming the sale. The court granted Ellis leave to file an answer, affirmative defense, and complaint to quiet title.
    .
15. Among Ellis' allegations was that the warranty deed was represented to her and in the PTC agreement as only security for her loan. Ellis claimed that the agreement and warranty deed she executed created an equitable mortgage. Ellis also alleges that PTC would be required to foreclose on her mortgage in accordance with Illinois Mortgage Foreclosure Law (735 ILCS 5/15-1101 et seq. (West 2004)) before title could pass to a third party.
    .
16. The mortgage lender claimed that, as a matter of law, Ellis's equitable mortgage claim could not defeat the bank's mortgage because the bank was first to record its interest in the property and had no notice of Ellis's equitable claim.
    .
17. Further, it claimed that because the tenancy relationship between Ellis and her grandson was not inconsistent with the public record, this relationship did not place the bank on notice of Ellis's interest as a matter of law. The bank denied Ellis's claim that it had a duty to inquire further to satisfy inquiry notice. U.S. Bank also alleges that, had it inquired further, there was nonetheless no certainty that it would be led to Ellis's purported interest.

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Following below is the Illinois appeals court's recitation of the relevant Illinois law, its application to the facts of the case, and the court's conclusion, in its entirety:

• ¶ 58 The primary issue we are to consider is whether U.S. Bank had notice of Ellis's interest prior to granting the Villasenor mortgage. The law measures bona fide purchasers and mortgagees under the same standards. US Bank must qualify as a bona fide mortgagee to retain an interest in the property. In order to successfully foreclose on the property, U.S. Bank must establish that it acquired an "interest in [the] property for valuable consideration without actual or constructive notice of another's adverse interest in the property." In re Ehrlich, 59 B.R. 646, 650 (Bankr.N.D.Ill.1986) (citing Life Savings & Loan Ass'n of America v. Bryant, 125 Ill.App.3d 1012, 1019, 81 Ill.Dec. 577, 467 N.E.2d 277 (1984)). If U.S. Bank meets these requirements it would obtain the role of a bona fide mortgagee. In the case at bar, U.S. Bank denies that it had actual or constructive notice of Ellis's interest.
  
  ¶ 59 Actual notice is that knowledge the purchaser had at the time of the conveyance. Bryant, 125 Ill.App.3d at 1019, 81 Ill.Dec. 577, 467 N.E.2d 277. The parties agree that U.S. Bank did not have actual notice.
  
  Thus, the next inquiry is whether the bank had constructive notice. Constructive notice is knowledge that the law imputes to a purchaser, whether or not he had actual knowledge at the time of the conveyance. See generally In re Application of Cook County Collector for Judgment & Sale Against Lands & Lots Returned Delinquent for Nonpayment of General Taxes for the Year 1985, 228 Ill. App.3d 719, 734-35, 170 Ill.Dec. 649, 593 N.E.2d 538 (1991); City of Chicago v. Cosmopolitan National Bank, 120 Ill.App.3d 364, 368, 75 Ill.Dec. 843, 458 N.E.2d 11 (1983); In re Application of County Treasurer, 30 Ill.App.3d 235, 240, 332 N.E.2d 557 (1975); Landis v. Miles Homes Inc., 1 Ill.App.3d 331, 273 N.E.2d 153 (1971).
  
  There are two kinds of constructive notice: record notice and inquiry notice. LaSalle Bank v. Ferone, 384 Ill.App.3d 239, 245, 322 Ill.Dec. 948, 892 N.E.2d 585 (2008) (citing In re Ehrlich, 59 B.R. 646, 650 (Bankr.N.D.Ill.1986)). Both parties agree that U.S. Bank did not have record notice because Ellis's interest in the property was not recorded because the PTC agreement prevented recordation. Thus the chain of title does not impute record notice on U.S. Bank. The bank relies on section 30 of the Conveyances Act (765 ILCS 5/30 (West 2004)) to explain in relevant part that all mortgages:
  
  
  "which are authorized to be recorded, shall take effect and be in force from and after the time of filing the same for record, and not before, as to all creditors and subsequent purchasers, without notice; and all such deeds and title papers shall be adjudged void as to all such creditors and subsequent purchasers, without notice, until the same shall be filed for record." 765 ILCS 5/30 (West 2004).
  
  US Bank argues that, "the first mortgage recorded has priority. Firstmark [Standard Life Insurance Co. v. Superior Bank FSB], 271 Ill.App.3d [435,] 439 [208 Ill. Dec. 409, 649 N.E.2d 465] [(1995)]. An unrecorded interest in land is not effective to a bona fide purchaser without notice. Schaumburg State Bank v. Bank of Wheaton, 197 Ill.App.3d 713, 720 [144 Ill.Dec. 151, 555 N.E.2d 48] (1990)." Federal National Mortgage Ass'n v. Kuipers, 314 Ill. App.3d 631, 635, 247 Ill.Dec. 668, 732 N.E.2d 723 (2000).
  
  U.S. Bank points to the chain of title to prove that it recorded an interest before Ellis. However, Ellis argues that U.S. Bank is on inquiry notice, yet failed to uphold its duty to inquire. In effect, she argues that, "where a party has constructive notice of a prior interest in real estate, the failure to record is not necessarily fatal to the rights of the prior interest holder. See Dana Point Condominium Ass'n, Inc. v. Keystone Service Co., 141 Ill.App.3d 916, 922 [96 Ill.Dec. 249, 491 N.E.2d 63] (1986)." Kuipers, 314 Ill. App.3d at 635, 247 Ill.Dec. 668, 732 N.E.2d 723.
  
  
  "The title of a purchaser whose deed has been recorded will not be postponed to a prior unrecorded conveyance except upon clear proof of actual notice of the earlier deed or of circumstances which should have induced an honest and prudent purchaser to make inquiry which would have disclosed the truth. Mere suspicion will not establish an inference of fraudulent intent. The proof must be so clear that the inference of bad faith is a necessary conclusion." Cessna v. Hulce, 322 Ill. 589, 597, 153 N.E. 679 (1926) cited in Reed v. Eastin, 379 Ill. 586, 592, 41 N.E.2d 765 (1942)).
  
  See also Blake v. Blake, 260 Ill. 70, 102 N.E. 1007 (1913); In re Cutty's-Gurnee, Inc., 133 B.R. 934, 949 (Bankr.N.D.Ill. 1991). Ellis argues that U.S. Bank acted in bad faith by ignoring clear proof of her equitable interests.
  
  She relies most heavily on Michael Ellis's presence as an occupant of the home, and the inadequate consideration recorded in her initial conveyance evidenced in the chain of title, as proof of her interests. She argues that had U.S. Bank inquired of Michael Ellis, inquiry would have led to Ellis's interests since Michael was her grandson. Regardless of the bank's actions, Ellis argues that the law imputes U.S. Bank with this duty to inquire. She relies on Cessna, once again stating that, "[i]t is true that one having notice of such facts as would put a prudent man on inquiry is chargeable with the knowledge of other facts which he might have discovered by diligent inquiry. Whatever is notice enough to excite attention, put the party on his guard and call for inquiry is notice of everything to which such inquiry might have led." Cessna, 322 Ill. at 595, 153 N.E. 679. See also Reed v. Eastin, 379 Ill. at 592, 41 N.E.2d 765.
  
  It is important to note that the law does not concern itself with whether an inquiry is actually carried out; rather, "notice is imputed to the subsequent purchaser, on account of his negligence in not prosecuting his inquiries in the direction indicated." Anthony v. Wheeler, 130 Ill. 128, 135, 22 N.E. 494 (1889). See also Smolek v. K.W. Landscaping, 266 Ill.App.3d 226, 229, 203 Ill. Dec. 415, 639 N.E.2d 974 (1994); Bryant v. Lakeside Galleries, Inc., 402 Ill. 466, 477, 84 N.E.2d 412 (1949); Reed v. Eastin, 379 Ill. 586, 592, 41 N.E.2d 765 (1942) (citing Cessna v. Hulce, 322 Ill. 589, 597, 153 N.E. 679 (1926)); Doll v. Walter, 305 Ill.App. 188, 192, 27 N.E.2d 231 (1940). See generally Aurora National Loan Ass'n v. Spencer, 81 Ill.App. 622, 622-25 (1898); Robertson v. Wheeler, 162 Ill. 566, 580, 44 N.E. 870 (1896); Grundies v. Reid, 107 Ill. 304 (1883); Slattery v. Rafferty, 93 Ill. 277 (1879).
  
  ¶ 60 Both parties rely on Ehrlich to explain the tenets of inquiry notice. In re Ehrlich, 59 B.R. 646, 649-50 (Bankr. N.D.Ill.1986). Ehrlich, in turn relies on Illinois Supreme Court and Appellate Court cases Miller v. Bullington, 381 Ill. 238, 44 N.E.2d 850 (1942), and Burnex Oil Co. v. Floyd, 106 Ill.App.2d 16, 245 N.E.2d 539 (1969), respectively.
  
  We will first consider the precedent set forth in Miller by reviewing the relevant case history that spans over 50 years.
  
  ¶ 61 We begin our review with Miller v. Bullington, but first must lay Miller's foundational precedent in Whitaker v. Miller, 83 Ill. 381 (1876), and Mallett v. Kaehler, 141 Ill. 70, 73-74, 30 N.E. 549 (1892). In Whitaker, our supreme court found that a complainant's right of possession was evidenced by her tenants. "Her possession was notice to all the world of her rights in the premises, and inquiry of her would have disclosed a knowledge of the truth. Without inquiry, no one can claim to be an innocent purchaser of lands in actual possession of another, as against such party." Whitaker v. Miller, 83 Ill. 381, 386 (1876). This tenet was reinforced when the Illinois Supreme Court found, yet again, that:
  
  
  "[W]hen one purchases land in the possession of a third party, he is bound to take notice of whatever facts an inquiry as to the right of such possession would lead to. We said in Whitaker v. Miller, 83 Ill. 381 [(1876)], (and in substance in many other cases,) that `the possession of land by a party, through his tenants, is notice to all the world of his rights in the premises, and without inquiry of him, no one can claim to be an innocent purchaser, as against him.'" Mallett v. Kaehler, 141 Ill. 70, 74 [30 N.E. 549] (1892).
  
  These two 19th-century cases lay the foundation upon which the 20th-century Miller v. Bullington decision stands. The court in Miller found:
  
  
  "Again, possession of premises by a landlord through his tenant is notice of the landlord's rights. (Mallett v. Kaehler, 141 Ill. 70 [30 N.E. 549 (1892)]). One having notice of facts which would put a prudent man on inquiry is chargeable with knowledge of other facts which he might have discovered by diligent inquiry. Whatever is notice enough to excite attention and put the party on his guard is notice of everything to which such inquiry might have led and every unusual circumstance is a ground of suspicion and demands investigation. Reed v. Eastin, [379 Ill. 586, 41 N.E.2d 765 (1942)]; Struve v. Tatge, 285 Ill. 103 [120 N.E. 549 (1918)]; Blake v. Blake, 260 [Ill.] 70 [102 N.E. 1007 (1913)]." Miller v. Bullington, 381 Ill. 238, 243, 44 N.E.2d 850 (1942).
  
  See also LaSalle Bank v. Ferone, 384 Ill. App.3d 239, 246, 322 Ill.Dec. 948, 892 N.E.2d 585 (2008).
  
  ¶ 62 U.S. Bank ignores the importance of these three holdings in protecting the rights of landlords through their tenants. Ellis repeatedly asserts that Michael, as occupant and tenant, represents her equitable interests in the property. "Such occupancy has been repeatedly held to charge a purchaser or incumbrancer with notice, and all that it would lead to, if pursued." Crawford v. The Chicago, Burlington & Quincy R.R. Co., 112 Ill. 314, 321 (1884). See Doll v. Walter, 305 Ill. App. 188, 192, 27 N.E.2d 231 (1940).
  
  ¶ 63 U.S. Bank supports its position by noting that Michael's tenancy is not inconsistent with the record owner. The bank persistently argues that when Villasenor applied for a loan and mortgage, First National remained the record owner in a land trust. US Bank argues that Michael's tenancy is not inconsistent with this relationship and thus it is not on notice of Ellis's interests. However, U.S. Bank reaches this conclusion only after misinterpreting Burnex Oil Co. v. Floyd and thus we do not find its argument persuasive. Burnex was decided after the trio of supreme court cases discussed above and clearly supports their conclusions:
  
  
  "Where real estate is in the possession of someone other than the record owner, such possession is generally regarded as notice to the world of the interest represented thereby and is legally equivalent to the recording of such interest. Carnes v. Whitfield, 352 Ill. 384 [185 N.E. 819 (1933), cited in Beals v. Cryer, 99 Ill.App.3d 842, 845, 55 Ill.Dec. 278, 426 N.E.2d 253 (1981); Bryant v. Lakeside Galleries, Inc., 402 Ill. 466, 477, 84 N.E.2d 412 (1949); Chicago Title & Trust Co. v. Darley, 363 Ill. 197, 204, 1 N.E.2d 846 (1936)]], and Slinger v. Sterrett, 283 Ill. 82 [118 N.E. 1008 (1918)].

  
  A purchaser is bound to inquire of the person in possession by what tenure he holds and what interest he claims in the premises." Burnex Oil Co. v. Floyd, 106 Ill.App.2d 16, 21-22 [245 N.E.2d 539] (1969). Even if First Suburban was the record owner at the time Villasenor's mortgage was recorded, the home was still in Ellis's possession via Michael. Thus, this situation matches the criteria described in Burnex. Following the logic of Burnex, Ellis's equitable mortgage has all the effects of recordation because the land was in possession by someone other than the record owner. Not only does the equitable mortgage have the effects of recordation, but this also requires that U.S. Bank foreclose on Michael's interests as occupant and tenant of the house. We note that while Burnex is instructive, it continues the long precedent our supreme court set forth in Miller v. Bullington, Carnes, Slinger, Mallett, and Whitaker.
  
  ¶ 64 Therefore, U.S. Bank was imputed with inquiry notice of Ellis's interest based on Michael Ellis's possession of the home. Had the bank, or their appraisers, dutifully inquired of Michael, he surely would have responded that he rented the property from his grandmother, Ruthie Lee Ellis, who was the owner of the home.
  
  Then U.S. Bank would have searched the chain of title further to find the recorded conveyance with inadequate consideration. These facts in tandem would have led U.S. Bank to learn of Ellis's interest and PTC's misrepresentation and fraud. These facts are imputed to U.S. Bank regardless of their decision to actually question Michael Ellis. The ruling in Burnex is certainly not an anomaly based on ancient case law; rather, the same precedent from Miller v. Bullington is evidenced in the 21st century as well:
  
  
  "[S]ee also Atwood v. Chicago, Milwaukee & St. Paul Ry. Co., 313 Ill. 59, 62 [144 N.E. 351] (1924) (as long as possession is not occasional or temporary, it amounts to constructive notice, viable against the world, of any rights person in that possession may have). This may include improvements on the property, signs posted thereon, or possession by a tenant of the person claiming possession. See Carnes, 352 Ill. at 390 [185 N.E. 819] (possession of tenant is constructive notice of rights of landlord in property, even if legal title to property indicates another) * * *"
  
  Banco Popular v. Beneficial Systems, Inc., 335 Ill.App.3d 196, 211, 269 Ill.Dec. 389, 780 N.E.2d 1113 (2002).
  
  ¶ 65 In Banco Popular, George and Helena Kaltezas owned property which contained a building that had fallen into disrepair. Banco Popular, 335 Ill.App.3d at 199, 269 Ill.Dec. 389, 780 N.E.2d 1113. The City of Chicago instituted a building code violation case against the Kaltezases, which resulted in the filing of a lis pendens notice with the recorder's office in 1995. Banco Popular, 335 Ill.App.3d at 199, 269 Ill.Dec. 389, 780 N.E.2d 1113. The Kaltezases hired Morris Reynolds to do work on the property, but he eventually filed a claim for breach of contract against the Kaltezases and sought a lien on the property. Banco Popular, 335 Ill.App.3d at 199, 269 Ill.Dec. 389, 780 N.E.2d 1113. Reynolds was awarded judgment against the Kaltezases, and the judgment was recorded in the Cook County recorder of deeds office on May 3, 1996. Banco Popular, 335 Ill.App.3d at 199, 269 Ill.Dec. 389, 780 N.E.2d 1113.
  
  ¶ 66 Before the judgment was entered, the Kaltezases executed a quitclaim deed conveying all interest in the property to Marsha Azar, through her nominee Saul Azar. Banco Popular, 335 Ill.App.3d at 199, 269 Ill.Dec. 389, 780 N.E.2d 1113. The deed was delivered on March 13, 1995, and stated that Marsha Azar had the right of equitable ownership in the property and the building, "`even if it [was] not recorded by way of deed conveying and vesting such legal ownership.'" Banco Popular, 335 Ill.App.3d at 199, 269 Ill.Dec. 389, 780 N.E.2d 1113. The Azars paid taxes on the property, paid the water bill and brokers' commissions, placed a sign in the building's window stating that their company was managing the property, changed the name of the tax addressee to their company, dealt with the local police department and alderman's office in rehabilitating the property, and leased the property to new tenants. Banco Popular, 335 Ill.App.3d at 199, 269 Ill.Dec. 389, 780 N.E.2d 1113. Saul Azar told Reynolds' attorney that he and Marsha had purchased the property. Banco Popular, 335 Ill.App.3d at 199, 269 Ill.Dec. 389, 780 N.E.2d 1113. Saul Azar also appeared in open court to defend the building code case instituted by the City of Chicago, and the case was eventually dismissed when the Azars completed all necessary repairs on the property. Banco Popular, 335 Ill.App.3d at 200, 269 Ill.Dec. 389, 780 N.E.2d 1113. However, the Azars did not record the quitclaim deed. Banco Popular, 335 Ill.App.3d at 200, 269 Ill.Dec. 389, 780 N.E.2d 1113.
  
  ¶ 67 After the judgment in favor of Reynolds was rendered, he assigned the judgment to Benefit Systems, Inc. Banco Popular, 335 Ill.App.3d at 200, 269 Ill.Dec. 389, 780 N.E.2d 1113. Benefit Systems' president searched the records and found the lis pendens notice, but did not review the court file or inspect the property. Banco Popular, 335 Ill.App.3d at 200, 269 Ill.Dec. 389, 780 N.E.2d 1113. On August 6, 1996, Marsha Azar recorded the deed she received from the Kaltezases and recorded a deed in trust on the property and a mortgage. Banco Popular, 335 Ill. App.3d at 200, 269 Ill.Dec. 389, 780 N.E.2d 1113.
  
  ¶ 68 Benefit Systems delivered the judgment to the Cook County sheriff for levy and sale on August 16, 1996. Banco Popular, 335 Ill.App.3d at 200, 269 Ill.Dec. 389, 780 N.E.2d 1113. Benefit Systems successfully purchased the property at the sheriff's sale, and Benefit Systems notified Marsha Azar of the sale. Banco Popular, 335 Ill.App.3d at 200, 269 Ill.Dec. 389, 780 N.E.2d 1113. Marsha Azar, and Banco Popular as trustee, brought suit against Benefit Systems to set aside the sheriff's deed. Banco Popular, 335 Ill.App.3d at 200, 269 Ill.Dec. 389, 780 N.E.2d 1113. Benefit Systems filed a counterclaim to quiet title and establish its priority in the mortgage. Banco Popular, 335 Ill.App.3d at 200, 269 Ill.Dec. 389, 780 N.E.2d 1113. The trial court granted summary judgment to Marsha Azar and Banco Popular. Banco Popular, 335 Ill.App.3d at 201, 269 Ill.Dec. 389, 780 N.E.2d 1113.
  
  ¶ 69 On appeal, we found that Beals and Miller found that possession of a property can "be equivalent to the recording of a deed as to a judgment creditor who claims an interest in the property of which another has possession when the creditor secured the judgment." Banco Popular, 335 Ill.App.3d at 210, 269 Ill.Dec. 389, 780 N.E.2d 1113 (citing Beals v. Cryer, 99 Ill.App.3d 842, 844, 55 Ill.Dec. 278, 426 N.E.2d 253 (1981); and Miller, 381 Ill. at 243, 44 N.E.2d 850). Possession must provide some measure of notice to the outside world of the possessor's interest. Banco Popular, 335 Ill.App.3d at 211, 269 Ill.Dec. 389, 780 N.E.2d 1113 (citing Beals, 99 Ill. App.3d at 844, 55 Ill.Dec. 278, 426 N.E.2d 253). Evidence of possession includes making improvements on the property, posting signs on the property, and possession of the property by a tenant of the person claiming possession. Banco Popular, 335 Ill.App.3d at 211, 269 Ill.Dec. 389, 780 N.E.2d 1113.
  
  ¶ 70 What constitutes possession in this respect will depend on the facts of the case and is thus a question of fact. Banco Popular, 335 Ill.App.3d at 211, 269 Ill.Dec. 389, 780 N.E.2d 1113. Therefore, the Azars' actions created questions of fact about whether or not they "possessed" the property and whether or not their actions put Reynolds and Benefit Systems on constructive notice of Marsha Azar's interest in the property. Banco Popular, 335 Ill. App.3d at 211-12, 269 Ill.Dec. 389, 780 N.E.2d 1113. Therefore, we reversed the grant of summary judgment and remanded for further proceedings. Banco Popular, 335 Ill.App.3d at 214, 269 Ill.Dec. 389, 780 N.E.2d 1113.
  
  ¶ 71 In summation, U.S. Bank had before it a series of facts that should have led it to inquire further before issuing its loan and mortgage. This is a duty imputed by the law. US Bank relies on Connor v. Wahl in alleging that Illinois precedent requires that "[w]here one of two innocent persons must suffer by reason of fraud or wrong conduct of another the burden must fall upon him who put it in the power of the wrongdoer to commit the fraud or do the wrong." Connor v. Wahl, 330 Ill. 136, 146, 161 N.E. 306 (1928). US Bank urges us to find that Ellis should be held responsible for placing the power in PTC to commit fraud. However, we find that that U.S. Bank is not without fault for the reasons noted. Thus U.S. Bank is not a bona fide mortgagee without notice. We come to this conclusion without considering Villasenor's role in any fraud that may have been committed upon Ellis.
  
  ¶ 72 III. Conclusion
  
  ¶ 73 For the reasons noted above, U.S. Bank is not a bona fide mortgagee without notice. Therefore we affirm the trial court in denying the U.S. Bank's motion to reconsider and affirm the grant of summary judgment in favor of Ruthie Lee Ellis.
  
  ¶ 74 Affirmed.

For the ruling, see U.S. Bank Nat. Ass'n v. Villasenor, 979 NE 2d 451 (Ill. App. 1st Dist., 6th Div. 2012).

Go here for a collection of decisions from the Illinois Supreme Court, and here for a collection of decisions from the Illinois appellate courts. on the issue of possession, duty to inquiry, and notice.

Go here for a collection of decisions from courts of other states on the issue of possession, duty to inquiry, and notice.

Bank's Failure To Inquire Into Rights Of Persons In Possession Prior To Giving Mortgage Loan In Connection With Sale Leaseback Ripoff Leaves It Holding The Bag

(This is a reprint of a post originally posted on July 24, 2012.)

In another court ruling that has come down in recent years applying the age-old legal doctrine of bona fide purchase to a situation involving some form of home equity ripoff, the Minnesota Court of Appeals concluded that a mortgage lender that provided financing in connection with a sale leaseback equity stripping racket was not entitled to protection as a bona fide purchaser and, accordingly, voided its mortgage, when:

1. it failed to prove that it received purported lienholder's interest without notice of a violation of the state's anti-foreclosure rescue ripoff statute (Minn. Stat. §325N) and
2. it failed to fulfill its duty of inquiry as to the rights or interests of persons in possession [ie. the screwed-over homeowner in this case] of the residential real property in foreclosure.

In this case, the lower court found that, because the screwed-over victim was still in possession of his recently-foreclosed home when the mortgage lender extended credit to the then-title holding sale leaseback peddler, and it (the lender) failed to inquire into what rights or equities in connection with the home the victim may have had, the lender was deemed to be on notice of the violations of law committed against the victim by the sale leaseback operator.

The bottom line here was the lender was found not to be entitled to its purported lienholder's interest in the home it thought it received when it loaned money to the sale leaseback operator and, accordingly, was left holding the bag.

For the court ruling, see Graves v. Wayman, 816 N.W.2d 655 (Minn. App. 2012) (for publication) - (includes court syllabus, but no embedded links). Go here for Google version (includes embedded links, but no court syllabus).

Representing the successful homeowner was Jeramie R. Steinert, Steinert P.A., Minneapolis, Minnesota.

See Minnesota Bona Fide Purchaser, Possession, Duty Of Inquiry for some Minnesota case law addressing the duty to inquire of persons in possession of real estate that subsequent purchasers and encumbrancers are burdened with prior to taking title to property or taking a lien as a security interest for a loan.

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

************

For other posts on the application of the bona fide purchaser doctrine by the courts in recent years in connection with some type of a home equity ripoff where the victim's title is scammed out from under, see:

• Indiana: Failure To Inspect Property & Inquire Into Rights Of Parties In Possession Prior To Making Loan Leaves Indiana Lender With Voided Mortgage,
  .
• Colorado: Lack Of Knowledge Or Partcipation In Fraud Not Enough To Sustain Bona Fide Purchaser Status In Equity Stripping, Foreclosure Rescue Deal,
  .
• Illinois: Lender's Failure To Inquire Into Possession Disqualifies It For Bona Fide Purchaser Protection In Suit To Undo Foreclosure Rescue Sale Leaseback Scam,
  .
• Pennsylvania: Pennsylvania B'kruptcy Court Voids Sale Leaseback Scam; Victimized Homeowners' Continued Possession Leads To Invalidation Of Subsequent Deed, Mortgage,
  .
• Minnesota: Minn. Sale Leaseback, Equity Stripping Victim Wins Back Free & Clear Home With Help From Non-Profit Law Firm As Judge Voids Sale & Subsequent Mortgage,
  .
• Texas: In re Hayes, Civil Action No.: SA-03-CA-1228-XR (W.D. Tx. 2004), (gives an extensive analysis on the Texas law involving the effect of the bona fide purchaser doctrine to subsequent purchasers and mortgage lenders where one is in possession of land under an unrecorded instrument and how it was applied to a case where a buyer who bought and took possession of a home under an oral contract (yeah, an oral contract!) for the purchase of real estate; subsequently, the former owner (and then-still ostensible owner of record) pledged the property as collateral for a loan; lender failed to inspect the property and otherwise made no diligent effort to discover if someone was in possession of the home and, if so, to inquire of the occupant as to any rights or equities in the home the occupant may have had); aff'd per curiam Bank of Am., N.A. v. Schwartz (In re Hayes), 194 Fed. Appx. 217; 2006 U.S. App. LEXIS 21139 (5th Cir. 2006) (unpublished).

Failure To Inspect Property & Inquire Into Unrecorded Rights Of Parties In Possession Prior To Making Loan Leaves Indiana Lender With Voided Mortgage

(This post is a reprint of an entry posted March 21, 2010.)

The following facts have been extracted from a recent ruling by the Indiana Court of Appeals:

1. Benjamin purchased his home in Gary, Indiana in 1965 and has lived there ever since.
2. In July of 1987, as part of his retirement planning, Benjamin conveyed his home to son David Thomas by quit claim deed with the understanding that it remained Benjamin's home and that he could recover title at any time upon request.
3. In October of 1995, David conveyed Benjamin's home by quit claim deed to another of Benjamin's sons, Richard Thomas.
4. Benjamin and Richard agreed that Richard would return title to the home to Benjamin upon request.
5. At no time did Benjamin relinquish possession of the home.
6. In June of 2001, following a family dispute, Benjamin requested that Richard convey title of the home back to him, but Richard refused to do so.
7. On August 1, 2001, Benjamin filed a notice of intention to hold a mechanic's lien on the home for $200,000.
8. On September 12, 2001, Benjamin filed a quiet title suit against Richard but did not record a lis pendens notice at the time or at any time thereafter.
9. On December 6, 2001, Richard obtained a $118,000 loan from Trustcorp in exchange for a mortgage on the home. Richard was unemployed and living in Georgia at the time and, in connection with the loan application process, submitted a release of mechanic's lien that bore what purported to be Benjamin's signature but was not.
10. Additionally, the release instrument indicates only the presence of Richard as signatory and refers to the lien instrument as bearing the designation "2001 003334" when the actual designation on the notice was "2001 060516."
11. Trustcorp did not contact Benjamin regarding the purported release, and the loan agreement was completed.
12. As it happened, Richard never made any payments on the mortgage loan.
13. On July 3, 2002, Benjamin filed suit to foreclose his mechanic's lien on the home, a suit that included Trustcorp as a defendant.

Question:

Does Trustcorp's recorded security interest in Benjamin's home as a mortgagee have priority over Benjamin's unrecorded interest in the home that he has occupied since 1967 (remember that Benjamin is not the owner of record, and he failed to record a lis pendens against the home when he initiated an action to quiet title in order to recover the title from his deadbeat son, Richard, who was the title holder of record)?

Answer:

Even though Trustcorp presumably had no actual knowledge of the oral understanding between Benjamin and his sons about the ownership of the home, and presumably had no actual knowledge of Richard's intent to drain the equity out of the home by pocketing the proceeds of the mortgage loan from Trustcorp. (and thereby screwing over his father out his home of 35+ years), the Indiana appeals court affirmed the lower court in ruling that Benjamin's earlier-acquired, but unrecorded, ownership rights in the home pursuant to the oral understanding he had with his sons trumped Trustcorp's later-acquired recorded mortgage, and further, ruled that Trustcorp's mortgage was invalid.

The Trial Court Ruling

The trial court concluded that Trustcorp's mortgage was a product of a fraud (specifically, the forged mechanic's lien release) and therefore invalid. The trial court also concluded that, despite Benjamin's failure to file a lis pendens, Trustcorp had constructive notice of his claims due to Benjamin's pending litigation with Richard and the irregularities in the mechanic's lien release.

The Appeals Court Ruling

In affirming the lower court ruling, the Indiana Court of Appeals possibly could have focused on the fact that the forged release of the mechanics' lien was absolutely void, a nullity (ie. void ab initio), and support its ruling that Trustcorp's mortgagee's interest was void on that basis.

Instead, the appeals court attacks the forged mechanics' lien release by ostensibly treating it as a voidable instrument (in which case it then becomes necessary to attack Trustcorp's claimed status as a bona fide purchaser in order to void its interest as a mortgagee in Benjamin's home) as opposed to an absolutely void instrument (in which case the bona fide purchaser doctrine is inapplicable, which consequently leaves subsequent purchasers without the recording statute protection).

In doing so, the appeals court appears to take a "belt & suspenders approach" in upholding the lower court ruling.

First, it focuses on Benjamin's continued possession of his home while his son went behind his back and obtained the mortgage loan from Trustcorp to rule that Trustcorp is not entitled to the protection of the state recording statute as a bona fide purchaser.

Next, it focuses on the irregularities that appeared on the face of the forged mechanics' lien release that enabled Benjamin's son Richard to go forward and pocket the proceeds from the mortgage loan from Trustcorp. On this basis, it ruled (again) that Trustcorp had constructive notice of Benjamin's ownership interst and accordingly, was not entitled to the protections afforded by the recording statutes to bona fide purchasers.

(While the court could have found support for the lower court's decision to void Trustcorp's mortgage on either basis to find that Trustcorp was not a bona fide purchaser, I guess it just wanted to be extra sure that it isn't overruled in a possible appeal of its ruling should the case be appealed further. Accordingly, it used both approaches to invalidate the mortgage - hence, a "belt & suspenders approach," so to speak.)

Benjamin's Continued Possession Of His Home

With regard to Benjamin's continued possession of the home and its effect on Trustcorp being placed on notice of his ownership interest in it, the Court of Appeals made this statement [bold text is my emphasis, not in the original text; text broken up for ease of reading]:

• "[T]o qualify as a bona fide purchaser,[Footnote 1: The law regarding bone fide purchasers applies with equal force to mortgagees. See, e.g., Weathersby v. JPMorgan Chase Bank, N.A., 906 N.E.2d 904, 910 (Ind. Ct. App. 2009).] one has to purchase in good faith, for a valuable consideration, and without notice of the outstanding rights of others." Kumar v. Bay Bridge, LLC, 903 N.E.2d 114, 116 (Ind. Ct. App. 2009) (citation omitted). "The theory behind the bona fide purchaser defense is that every reasonable effort should be made to protect a purchaser of legal title for a valuable consideration without notice of a legal defect." Id. (citation omitted).

• There is no dispute that Benjamin failed to file a lis pendens notice when he filed his quiet title action against Richard on September 12, 2001. The trial court, however, concluded that Trustcorp did not qualify as a bona fide mortgagee because it did not act in good faith and had constructive notice of Benjamin's lawsuit. Trustcorp contends that these conclusions were erroneous.

• The record supports conclusions that Trustcorp did not act in good faith and can be imputed with notice of Richard's fraud and Benjamin's lawsuit. The Indiana Supreme Court has squarely held that "one who fails to examine land which he is about to purchase, and to inquire as to the rights of one in possession, is not acting in good faith and will not be treated as a bona fide purchaser." Mishawaka-St. Joseph Loan & Trust Co. v. Neu, 209 Ind. 433, 443, 196 N.E.2d 85, 90 (1935).

• Regarding notice of competing claims, the Court also held that "means of knowledge, with the duty of using them, are equal to knowledge itself." Id. The Indiana Supreme Court has also held that possession of land puts the world on notice that the possessor may have a claim of ownership and right to possession. See Olds v. Hitzemann, 220 Ind. 300, 308, 42 N.E.2d 35, 38 (1942) ("[Appellees] were still in possession of their land, and their possession was notice to the world of their claims to ownership and right to possession.").

• Quite simply, it is undisputed that Benjamin was in possession of the property in question and that Trustcorp nonetheless did nothing to ascertain his rights to it. It is apparent that even a cursory investigation would have quickly uncovered both Richard's fraud and Benjamin's claims on the home. Under the circumstances, Trustcorp cannot have been a bona fide mortgagee, and we therefore affirm the trial court's judgment in this regard.

-------------------------

Irregularities Appearing on Face of Forged Mechanics' Lien Release

The court said the following in this respect [bold text is my emphasis, not in the original text; text broken up for ease of reading]:

• Moreover, even in the absence of a duty to inspect the property, we believe that irregularities on the face of the forged release of mechanic's lien would have put a reasonably prudent person on inquiry notice that something was amiss.

• The law recognizes two kinds of notice, constructive and actual. Constructive notice is provided when a deed or mortgage is properly acknowledged and placed on the record as required by statute. However, an otherwise valid instrument which is not entitled to be recorded, improperly recorded, or recorded out of the chain of title does not operate as constructive notice, although binding upon persons having actual notice. Notice is actual when notice has been directly and personally given to the person to be notified. Additionally, actual notice may be implied or inferred from the fact that the person charged had means of obtaining knowledge which he did not use. Whatever fairly puts a reasonable, prudent person on inquiry is sufficient notice to cause that person to be charged with actual notice, where the means of knowledge are at hand and he omits to make the inquiry from which he would have ascertained the existence of a deed or mortgage. Thus, the means of knowledge combined with the duty to utilize that means equates with knowledge itself. Whether knowledge of an adverse interest will be imputed in any given case is a question of fact to be determined objectively from the totality of the circumstances. Keybank Nat. Ass'n v. NBD Bank, 699 N.E.2d 322, 327 (Ind. Ct. App. 1998) (citations omitted).

• As an initial matter, it is clear to us that the trial court, although purporting to find that Trustcorp had constructive notice of Richard's fraud and Benjamin's quiet title lawsuit, actually found that it had inquiry notice of those things. Trustcorp cannot have had constructive knowledge of the quiet title action because Benjamin never filed his lis pendens notice. Nonetheless, we will affirm the trial court's judgment on this point if the record contains sufficient evidence to support a finding of inquiry notice. "The Court of Appeals may affirm the trial court's ruling if it is sustainable on any legal basis in the record, even though it was not the reason enunciated by the trial court." Moore v. State, 839 N .E.2d 178, 182 (Ind. Ct. App. 2005), trans. denied.

• As for the purported lien release, first, the instrument was improperly notarized in that it indicates that only Richard was present when it was notarized, even though it was supposedly executed by Benjamin. A notary public is prohibited from acknowledging any instrument unless the person executing it signs it in her presence or affirms to her that the signature on the instrument is the person's own, and there is no indication that either of those things happened in this case. Ind. Code § 33-16-2-2 (2001) (now Ind. Code § 33-42-2-2 (2009)). Indeed, it occurs to us that the whole purpose of a notary public acknowledgment is to prevent just the sort of forgery and fraud that occurred here.

• Second, and perhaps even more compelling, was the fact that the lien the instrument was purporting to release was designated "2001 003334" when the actual notice of intention to hold mechanic's lien filed by Benjamin was designated "2001 060516." Plaintiff's Exs. 3, 4. Trustcorp clearly had the means to discover that the lien the forged instrument purported to release did not exist under that designation, and yet did not use those means. In light of the amount of the loan, $118,000, we believe that a reasonably prudent lender would have taken the simple steps necessary to verify that a superior $200,000 mechanic's lien had indeed been released, especially when the release instrument had been improperly notarized.

-----------------------------

The Court of Appeals concluded its opinion as follows:

• The trial court specifically found that the mechanic's lien release Richard provided to Trustcorp was forged, a finding that has ample support in the record. Benjamin contended below that Trustcorp's mortgage was rendered invalid by virtue of Richard's fraud, and the trial court agreed. "It is a fundamental principle, worthy of the rank of a maxim, that what fraud creates equity will destroy."[Footnote 2: The version of this citation found in the www.westlaw.com database places quotation marks around the phrase "what fraud creates equity will destroy." While this error does not seem to alter the meaning of the citation, we will continue to exercise caution in citing to non-official authorities.] Ralph v. George, 78 Ind. App. 491, 495, 136 N.E. 44, 45 (1922) (citation omitted).

• On appeal, Trustcorp counters that Indiana courts have recognized a bone fide purchaser exception to the above rule, and we agree that this is indeed the case. See, e.g., Scott v. Davis, 117 Ind. 232, 233, 20 N.E. 139, 139-40 (1889) ("A purchaser who buys land and pays a consideration for it will hold the land against the creditors of the vendor, unless the creditors affirmatively show that the purchaser had notice of the intention of the vendor to defraud his creditors, or that he participated in his grantor's fraud. It is not enough to show fraud on the part of the vendor, where the purchaser is not a mere volunteer, but pays a consideration for the land. To set aside the conveyance as fraudulent, much more must be shown.") (citations omitted). As in the lis pendens context, the question here is whether Trustcorp qualifies as a bona fide mortgagee. As we previously decided, however, Trustcorp could not have been a bona fide mortgagee due to its failure to investigate Benjamin's interest in the home. Consequently, we affirm the trial court's judgment in this respect as well.

For the court ruling, see Thomas v. Thomas, 923 N.E.2d 465 (Ind. App., 2010).(1)

For case law in other states addressing the effect of possession and a real estate purchaser's or lender's duty to inquire into the rights of the occupants when seeking the protection of the recording statutes as a bona fide purchaser, see Bona Fide Purchaser Doctrine, Possession Of Property By Occupants Other Than The Vendor & The Duty To Inquire.

For some of the basics on the bona fide purchaser doctrine, generally, see The Bona Fide Purchaser for Value of a Legal Estate Without Notice.

Footnotes

(1) For other court cases on the application of the bona fide purchaser doctrine where real estate buyers/lenders end up screwing themselves by failing to inspect the subject property and inquiring into the rights of persons in possession prior to closing on the purchase/mortgage loan (and risked having their interests ultimately voided), see:

• Illinois: Lender's Failure To Inquire Into Possession Disqualifies It For Bona Fide Purchaser Protection In Suit To Undo Foreclosure Rescue Sale Leaseback Scam,
  .
• Colorado: Lack Of Knowledge Or Partcipation In Fraud Not Enough To Sustain Bona Fide Purchaser Status In Equity Stripping, Foreclosure Rescue Deal,
  .
• Minnesota: Stone v. Jetmar Props., LLC, 733 N.W.2d 480 (Minn. App. 2007) ("A prospective purchaser is obligated to discover anyone in possession of the land at issue and to inquire into the nature and extent of the occupant's interest"),
  .
• Minnesota: Claflin v. Commercial State Bank, 487 N.W.2d 242; 1992 Minn. App. LEXIS 532 (Mn. App. 1992) (Lender's mortgage voided due to failure to inspect premises and failure to inquire into rights of persons in occupancy),
  .
• United Kingdom: Mortgage Voided As Lender Fails To Make Inquiries Of Persons In Possession; Unrecorded Rights Of Occupants Take Priority Over Lender's Recorded Lien.

Arkansas Bona Fide Purchaser: Occupants In Possession & The Duty To Inquire Into Their Unrecorded Rights & Equities - State Court Decisions

The following compilation of cases from the Arkansas Supreme Court address, either directly or tangentially, 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.

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, and who attempt to invoke the protection of the recording statutes by claiming bona fide purchaser status.

Voiding or setting aside 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 disqualifying the subsequent purchaser or encumbrancer from bona fide purchaser/encumbrancer status and, consequently, subjecting the deeds or mortgages to possibly being voided/rescinded/set aside.

This case law compilation represents raw research only, and certainly does not purport 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.

I post it, however, with the view that some readers may find a part of the contents a helpful starting point for additional legal research in an effort to void certain abusive real estate transactions involving unwitting, financially strapped homeowners who have been screwed out of the equity in their homes by unscrupulous real estate operators.

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

See the National Consumer Law Center's Dreams Foreclosed: The Rampant Theft of Americans' Homes Through Equity-stripping Foreclosure 'Rescue' Scams for an extensive review of one type of home equity ripoff to which the bona fide purchaser doctrine may apply.

See Foreclosure Rescue Scams (a chapter in a longer publication from the National Consumer Law Center) for a lawyer's guide to making a case on behalf of a victimized homeowner in attempting to void or set aside an abusive transaction.

-----------------------------------

Arkansas Supreme Court Decisions

Walls v. Humphries, 2013 Ark. 286, 428 S.W.3d 517 (Ark. 2013):

• Generally, an instrument in writing that affects real property shall not be valid against a subsequent purchaser unless it is filed of record in the county where the real estate is located. Wetzel v. Mortg. Elec. Registration Sys., Inc., 2010 Ark. 242. However, in order to be a bona fide purchaser of land in Arkansas, one must take property in good faith, for valuable consideration, and without notice of a prior interest. Bill's Printing, Inc. v. Carder, 357 Ark. 242, 161 S.W.3d 803 (2004); Wilkins v. Jernigan, 195 Ark. 546, 113 S.W.2d 108 (1938).
  
  A subsequent purchaser will be deemed to have actual notice of a prior interest in the property if he is aware of such facts and circumstances as would put a person of ordinary intelligence and prudence on such inquiry that, if diligently pursued, would lead to knowledge of those prior interests. Killam v. Tex. Oil & Gas Corp., 303 Ark. 547, 798 S.W.2d 419 (1990); Bowen v. Perryman, 256 Ark. 174, 506 S.W.2d 543 (1974).
  
  Whatever is notice enough to excite attention, put a party on guard, and call for inquiry is notice of everything to which the inquiry might lead, and whenever one has sufficient information to lead him to a fact he shall be deemed conversant with it. Henderson v. Ozan Lumber Co., 216 Ark. 39, 224 S.W.2d 30 (1949); Millman Lumber Co. v. Bryant, 213 Ark. 277, 209 S.W.2d 878 (1948). Clearly, the "actual notice" exception to the protection afforded by section 14-15-404 was intended to cover situations in which a property interest does not appear in the records. Massey v. Wynne, 302 Ark. 589, 592, 791 S.W.2d 368, 370 (1990).
  
  As part of this exception, this court has long recognized that possession of property by someone other than the record owner is the equivalent of actual notice of the title, rights, or equities of the possessor. Midland Sav. & Loan Co. v. Brooks, 177 Ark. 470, 6 S.W.2d 828 (1928); Naill v. Kirby, 162 Ark. 140, 257 S.W. 735 (1924); Barrett v. Durbin, 106 Ark. 332, 153 S.W. 265 (1913); Atkinson v. Ward, 47 Ark. 533, 2 S.W. 77 (1886); Sisk v. Almon, 34 Ark. 391 (1879); Hamilton v. Fowlkes, 16 Ark. 340 (1855).
  
  In American Building & Loan Association v. Warren, 101 Ark. 163, 169, 141 S.W. 765, 767 (1911), we observed,
  
  Ordinarily, possession by a person under a contract of purchase, although unrecorded, is notice of his equitable rights and interests in the property. Actual possession is evidence of some title in the possessor, and puts the subsequent purchaser or mortgagee on notice as to the title which the occupant holds or claims in the property.
  
  Generally, actual, visible, and exclusive possession is notice to the world of the title and interest of the possessor in the property, and it is incumbent upon the subsequent purchaser or mortgagee to make diligent inquiry to learn the nature of the interest and claim of such possessor, and if he does not do so, notice thereof will be imputed to him. Hamilton v. Fowlkes, 16 Ark. 340; Shinn v. Taylor, 28 Ark. 523; Rockafellow v. Oliver, 41 Ark. 169; Atkinson v. Ward, 47 Ark. 533, 2 S.W. 77; Strauss v. White, 66 Ark. 167, 51 S.W. 64; Thalheimer v. Lockard, 76 Ark. 25, 88 S.W. 591; Sproull v. Miles, 82 Ark. 455, 102 S.W. 204; Hughes Bros. v. Redus, 90 Ark. 149, 118 S.W. 414; 1 Jones on Mortgages (6th Ed.) § 589.
  
  See also Clinton Special Sch. Dist. No. 1 of Van Buren Cnty. v. Henley, 212 Ark. 643, 645, 207 S.W.2d 713, 714 (1948) (stating that "actual possession of real estate is notice to the world of the claim or interest of the one in possession, regardless of whether such claimant has on record a written interest creating an interest or title"). This court has even commented that possession of property provides sufficient notice as to relieve the possessor of the necessity for filing under the recording statute in order to protect against a subsequent purchaser. Strauss v. White, 66 Ark. 167, 51 S.W. 64 (1899).
  
  This doctrine rests on the premise that possession of a third person is said to put a subsequent purchaser upon an inquiry, and such a purchaser is charged with notice of all that he might have learned by a due and reasonable inquiry of the occupant with respect to every ground, source, and right of his possession. First Nat'l Bank v. Gray, 168 Ark. 12, 268 S.W. 616 (1925). By 1931, we considered this rule of law to be so well settled that there was hardly a need for citation to authority. Scott v. Carnes, 183 Ark. 650, 37 S.W.2d 876 (1931).
  
  Even so, appellees contend that the rule does not apply unless the subsequent purchaser has actual knowledge that a third person is in possession of the property. Thus, they assert that the rule does not inure to appellants' benefit here because they did not inspect the property, and thus, did not actually know of Hernandez's possession.
  
  However, we rejected this precise argument in 1855 with our decision in Hamilton v. Fowlkes, supra. After surveying a number of cases from other jurisdictions, we quoted with approval the following passage from the Supreme Court of Alabama's opinion in Scroggins v. McDougald, 8 Ala. 382 (1845):
  
  The admissions of the counsel for McDougald, as well as the evidence, &c., establish that the complainant and Bagly, under whom she claims, had the actual possession of the lot at the time when McLean assigned the certificate of the commissioners to McDougald, by means of which he subsequently obtained the title. The only question, therefore, in this aspect of the case, is whether the possession so held was a sufficient matter to put the defendant, McDougald, on inquiry as to the title of the occupants, and thus affect him with notice, although in point of fact, he had no information that the possession was thus held. It is laid down very generally in the books, that whatever is sufficient to put the purchaser upon inquiry, is good constructive notice. Atk. on Mark. Titles, 573; 2 Sug. on Vend. 290. It is difficult to conceive what circumstance can be more strong to induce inquiry, than the fact that the vendor is out of possession and another is in. Accordingly it has been held, that information to a purchaser, that a tenant was in possession, is also notice of his interest. 13 Vesey 120. And if any part of the estate purchased is in the occupation of a tenant, it is considered full notice of the nature and extent of his interest. Atk. on Mark. Titles, 574. In the American courts, the rule is very generally recognized, that if a vendee is in possession of lands, a subsequent purchaser or mortgagee has constructive notice of his equitable right. 1 Monroe 201; 4 Litt. 317; 5 John. Chan. 29; 2 Paige 300; 3 ib. 421. As the complainant in this case was in the occupancy of the land at the time when McDougald acquired it by purchase or transfer from McLean, it is immaterial whether knowledge of the occupancy can be traced to him, because the law casts on him the duty of ascertaining how that fact is. If a different rule is admitted, a purchaser residing at a distance from the land, would rarely be charged with notice on this account.
  
  Hamilton, 16 Ark. at 374-75 (emphasis supplied).
  
  In Hamilton, this court concluded that it is not unreasonable to expect a purchaser to inquire whether his vendor or another person is in possession of land that he is about to purchase, and because a third person was in actual possession of the property, we held that the subsequent purchaser was not an innocent purchaser for value.
  
  In Moore v. Oates, 143 Ark. 328, 220 S.W. 657 (1920), we also noted that a subsequent purchaser is bound to take notice of another's possession whether or not he actually knows of the occupancy. Thus, our law is clear that a subsequent purchaser is charged with notice when the land is in possession of someone other than the record owner, even though the subsequent purchaser may not be aware of the third person's possession. Accordingly, appellees' contention based on their lack of actual knowledge of Hernandez's possession is without merit.
  
  Alternatively, appellees argue that Hernandez's possession of the property was not exclusive and thus did not impute notice of his interest. They point out that Hernandez did not reside on the property and that Humphries retained the right to enter the property to use the equipment.
  
  It is true that the possession of land that will impart notice of title must be adverse, exclusive, unequivocal, and inconsistent with the claim of any other person. Scott, supra.
  
  Where possession is not exclusive but is in connection with the occupancy of another who sustains the relation of parent or who is the owner of the record title, the possession of others will be referable to the possession of the parent or owner of record title and is not such as would require the purchaser to make inquiry as to the nature of their possession or any hidden equities that might exist in their favor. Story v. Grayson, 208 Ark. 1029, 185 S.W.2d 287 (1945); Rubel v. Parker, 107 Ark. 314, 155 S.W. 114 (1913). However, this court has said that actual occupancy is not necessary in all cases for possession to be considered exclusive. Story, supra. When the evidence is viewed in the light most favorable to appellants, we are not convinced that appellees are entitled to judgment as a matter of law.
  
  Through the deposition testimony of Mr. Hernandez, appellants presented evidence tending to demonstrate Hernandez's actual and exclusive possession of the property. Summary judgment is not proper where the evidence reveals aspects from which inconsistent hypotheses might reasonably be drawn and reasonable minds might differ. Koch v. Adams, 2010 Ark. 131, 361 S.W.3d 817. Also, the object of summary-judgment proceedings is not to try the issues, but to determine if there are any issues to be tried, and if there is any doubt whatsoever, the motion should be denied. Bomar v. Moser, 369 Ark. 123, 251 S.W.3d 234 (2007).
  
  On this record, we hold that a question of fact remains as to whether Hernandez was in exclusive possession of the property. Therefore, we reverse the order of summary judgment and remand for proceedings consistent with this opinion.

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Modern Am. Mortg. Corp. v. Nelson, 250 Ark. 928, 469 S.W.2d 124 (Ark. 1971):

***** (Editor's Note: In this case, the court voided a mortgage lien given by a home builder ("Jones") to a lender ("appellant") in connection with the construction of a new home for builder's customer, a couple (the "Nelsons") inexperienced in the home building process; the couple already owned and resided on the land upon which the new home was to be constructed, and unwittingly signed over the title to the premises to the builder in the course of signing unfamiliar paperwork relating to the construction; the premises was then used by the builder as security for the mortgage loan obtained from the lender with the couple remaining in possession of the premises throughout; before home was completed, builder went bankrupt):

• POINT I. Appellant argues that this was a normal business transaction and that the circumstances of the execution of the warranty deed as related by the Nelsons cannot be construed as an attempt on the part of the builder to deceive. We disagree. It appears from the testimony that the Nelsons were ignorant of the papers necessary to secure the FHA commitments required to comply with the contract and that these details were gratuitously undertaken by the builder who apparently had had some experience in the matter. The representation that the execution of the papers was necessary to get on with the building was a misrepresentation, for by the express terms of the bargained contract a conveyance of the premises to the builder was not necessary to get on with the building.
  
  POINT II. In arguing that the Nelsons are estopped to deny the conveyance to Jones, appellant relies upon Upton v. Tribilcock, 91 U.S. 45, 23 L.Ed. 203 (1875) and Stewart v. Fleming, 105 Ark. 37, 150 S.W. 128 (1912).
  
  In Upton it was pointed out that "a contractor must stand by the words of his contract, and, if he will not read what he signs, he alone is responsible for his omission." The same rule was applied in Stewart v. Fleming, supra, but in doing so the court pointed out that there was no misrepresentation as to any matter of inducement to the making of the lease, which, from the relative position of the parties, the one could be presumed to contract upon the faith and trust reposed in the other party.
  
  However, in the first appeal of Stewart v. Fleming, 96 Ark. 371, 131 S.W. 955 (1910), the applicable law was stated in this manner :
  
          "`It is true that when the means of information are open to both parties alike, so that with ordinary prudence and vigilance each may be informed of the facts and rely upon his own judgment in regard to the thing to be performed or the subject-matter of the contract, if either fails to avail himself of his opportunities, he will not be heard to say he has been deceived. * * * But when the representation is made of a fact that has nothing to do with opinion, and is peculiarly within the knowledge of the person making it, the one receiving it has the absolute right to rely upon its truthfulness, though the means of ascertaining its falsity were fully open to him. It does not lie in the mouth of the declarant to say it was folly in the other party to believe him.'"
  .
• Thus it can be seen from the record that Jones was an experienced builder. The Nelsons who were building their first house had no knowledge of the papers necessary to be signed to get on with the construction. While it may have been folly for the Nelsons to sign without reading whatever Jones or his agent stuck in front of them, we cannot agree that as between them and Jones, Jones is in a position to argue that the Nelsons are estopped to say that they believed the representations made by Jones' agent. Of course appellant as assignee of Jones stands in no better position than Jones, unless it stands in the position of a bona fide purchaser for value without notice.
  
  POINT III. The question of whether a subsequent purchaser or mortgagee can be a purchaser for value and without notice as against a grantor continuing in possession after the execution of a conveyance has been before us a number of times. See Turman v. Bell, 54 Ark. 273, 15 S.W. 886 (1891); Morgan v. McCuin, 96 Ark. 512, 132 S.W. 459 (1910); American Bldg. & Loan Assn. v. Warren, 101 Ark. 163, 141 S.W. 765 (1911); and Temple v. Tobias, 186 Ark. 851, 56 S.W.2d 585 (1933).
  
  In American Bldg. & Loan Assn. v. Warren, supra, the applicable rule was stated:
  
           "Ordinarily, possession by a person under a contract of purchase, though unrecorded, is notice of his equitable rights and interests in the property. Actual possession is evidence of some title in the possessor, and puts the subsequent purchaser or mortgagee on notice as to the title which the occupant holds or claims in the property. Generally, actual, visible and exclusive possession is notice to the world of the title and interest of the possessor in the property, and it is incumbent upon the subsequent purchaser or mortgagee to make diligent inquiry to learn the nature of the interest and claim of such possessor; and if he does not do so, notice thereof will be imputed to him. (Citing cases.) "But it is urged that this rule does not obtain in cases where the grantor continues in possession of the property at the time of the grant and after the execution of the conveyance. It is urged that in such cases the law presumes that the grantor holds in subordination to the title which he has conveyed, and not in opposition to it; and that third persons dealing with property may presume that the possession of the grantor is only by sufferance of the grantee."
  .
• Here appellant had obtained an FHA commitment insuring a loan to be made by appellant to the Nelsons upon completion of the building. Appellant, as a prerequisite to making the construction loan, required not only the FHA commitment but also a copy of the builder's contract with the Nelsons. The contract showed that the Nelsons owned the lot upon which the house was to be built. Furthermore appellant relied upon the FHA inspections on the commitment to the Nelsons to advance the construction money to Jones. It would be illogical to say that appellant under the circumstances could presume that the possession of the Nelsons was at the sufferance of Jones.
  
  Since appellant cannot come within the exception to the rule that possession is notice to the world, it follows that appellant was not a purchaser for value without notice as against the Nelsons.
  
  For the reasons herein stated, the decree is affirmed.

Editor's Note:

Apparently, in Modern Am. Mortg. Corp. v. Nelson, in addition to the grantor's retained possession of the conveyed premises, the Arkansas Supreme Court saw fit to look to additional factors to support the position that the subsequent third-party encumbrancer (ie. the lender) was on notice sufficient to impose a duty upon it to inquire into any unrecorded legal or equitable rights of the occupant in possession (ie. the grantor - the Nelsons).

But see Turman v. Bell, 54 Ark. 273, 15 S.W. 886 (1891), below, in which the Arkansas high court concluded that a grantor's retained possession, standing alone, was sufficient to impose a duty upon a downstream, or third party purchaser, to make inquiry as to the grantor/occupant's unrecorded rights and equities.

Note that if a court is unwilling to find that a grantor's retained possession of conveyed property, standing alone, is enough to impose upon a "downstream" purchaser a duty to inquire into the rights of the occupant/party in possession, it may be helpful to examine the circumstances surrounding the conveyance and determine if other factors that courts typically consider badges or indicia of fraud (ie. any facts tending to throw suspicion on a questioned transaction) are present in the transaction to support an assertion that the "downstream" purchaser had a duty to make inquiry of the parties to the questionable conveyance (ie. the grantor in possession and his/her/its grantee) as to the nature of the transaction.

For some examples of those badges or indicia of fraud, see Harris v. Shaw, 224 Ark. 150, 272 S.W.2d 53 (Ark. 1954):

• insolvency or indebtedness of the grantor,
• inadequate or fictitious consideration,
• retention by the grantor of the property,
• the pendency or threat of litigation,
• secrecy or concealment, and
• the fact that the disputed transactions were conducted in a manner differing from the usual business practice.

See, generally, Fraudulent Conveyance/Badges of Fraud (note that there is no all-inclusive list of every badge of fraud as the circumstances surrounding each case must be examined individually for facts that tend to throw suspicion on a questioned transaction; at least one court has observed: "The possible indicia of fraud are so numerous that no court could pretend to anticipate or catalog them." Payne v. Gilmore, 382 P.2d 140 (Okl. 1963)).

Note that in the typical foreclosure rescue home equity ripoff, the scammer idenifies potential homeowner/victims by searching for notices recorded in the public record (ie. notice of pendency/lis pendens, notice of default, and the like) against property on which the foreclosure process has been initiated.

Inasmuch as these recorded notices reflect the existence of pending litigation or some other non-judicial legal process, and may well reflect upon the grantor's insolvency/financial distress at the time of a questionable conveyance, it may be wise to assert in the grantor/scam victim's defense that these recorded notices (in addition to the grantor's retained possession of the conveyed premises, as well as any other badge of fraud that may be apparent) are enough notice to "excite attention" and "put on guard" a downstream purchaser, "calling for inquiry" into the circumstances surrounding the conveyance of the premises by the grantor in possession.

While these badges or indicia of fraud are typically considered in cases where the grantor is suspected of defrauding creditors (ie. fraudulent conveyances), as opposed to cases where the grantor is being defrauded, it can be said that:

• the fundamental principles of notice implicated by these factors are nevertheless at the core of the case. (See, for example, Perimeter Development Corp. v. Haynes, 234 Ga. 437, 216 SE2d 581 (Ga. 1975), a case in which the Georgia Supreme Court speaks of a badge of fraud in the context of a grantor who retains possession of conveyed property ("While this case does not involve the question of defrauding creditors, yet the fundamental principles of notice implied from possession is at the core.")), and
  .
• "Whatever is notice enough to excite attention, put a party on guard, and call for inquiry is notice of everything to which the inquiry might lead, and whenever one has sufficient information to lead him to a fact he shall be deemed conversant with it." Walls v. Humphries, 2013 Ark. 286, 428 S.W.3d 517 (Ark. 2013), among other Arkansas cases, as well as cases elsewhere.

(End of Editor's Note.)

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Dean v. Freeze, 213 Ark. 264, 209 S.W.2d 876 (1948):

• The testimony is conflicting as to whether Mrs. Dean had actual knowledge of the existing lease when she purchased. The decree indicates the finding that she had this knowledge.
  
  However, she had knowledge of the fact that an occupant was in possession and it was her duty to inquire of the occupant by what right he was in possession and she is charged with the knowledge of the facts which the inquiry would have developed. Hughes Bros. v. Redus, 90 Ark. 149, 118 S. W. 414; Cupp v. Cady, 190 Ark. 700, 81 S. W. 2d 417. It was expressly held in the Hughes Bros. case, supra, to quote a headnote that "One's actual possession of land is notice to the world of the title under which he claims." Here Mrs. Dean bought the tract of land of which Freeze had actual possession, and she was not therefore an innocent purchaser.

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Story v. Grayson, 208 Ark. 1029, 185 S.W.2d 287 (1945) :

• In Ellis v. Nickle, 193 Ark. 657, 101 S. W. 2d 958, the late Judge Butler, speaking for the court, said: "Where possession is not exclusive, however, but in connection with the occupancy of another who sustains the relation of parent or who is the owner of the record title, the possession of others will be referable to the possession of the parent or the owner of the record title and is not such as would require the purchaser to make inquiry as to the nature of their possession or any hidden equities which might exist in their favor." Citing Rubel v. Parker, 107 Ark. 314, 155 S. W. 114, and cases there cited; Chaddick v. Morris, 137 Ark. 467, 208 S. W. 589; Scott v. Carnes, 183 Ark. 650, 37 S. W. 2d 876.

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Turman v. Bell, 54 Ark. 273, 15 S.W. 886 (1891):

(Editor's Note: The Arkansas Supreme Court conducted a careful analysis of the rulings of a number of sister states in connection with the application of the rule that possession is notice of the rights of the occupant in the case of a grantor who continued in possession of property at the time of the grant and after the execution of the conveyance, pursuant to some unrecorded right or equity.

After careful analysis of the precedent from the courts of its sister states, it reached the conclusion that a grantor's continued possession will give rise to notice --- but only that notice that imposes a duty upon the subsequent purchaser to make inquiry as to the rights of the occupant, the grantor. The court's analysis and conclusion, follows below.)

• Possession of grantor is notice of equities reserved when.
  
  Turman continued in the possession of the lands from the date of his deed to Gilbreath in August, 1884, until the execution of the mortgage to the bank in February, 1885--in fact, until the trial of this cause in the court below; and it is contended that this gave notice of all his rights. As a general rule the possession of land gives notice to all the world of the rights of the occupant, when there is no record evidence of his right of possession; but to this rule there are well-established exceptions. Whether the continuing possession of a grantor, after he has executed a deed of general warranty, comes within the rule or its exceptions, was suggested but not decided by this court in the case of Gill v. Hardin, 48 Ark. 409, 3 S.W. 519.
  
  We know of no other case in which the question has been alluded to by this court. Between the appellate courts of other States there is an irreconcilable conflict of ruling, and upon either side are to be found courts of the highest authority.
  
  Those that sustain the application of the rule say that, by the terms of the deed, the grantor has not the right of possession, and that his continuing possession gives notice that he has rights reserved not expressed in the deed; that, inasmuch as the records disclose no right of possession, it is but reasonable to conclude that the continuing possession rests upon some right not disclosed by the records, and that the reasonableness of such conclusion imposes upon persons about to deal with the land the duty to make inquiry. Illinois Central R. Co. v. McCullough, 59 Ill. 166; Daubenspeck v. Platt, 22 Cal. 330; New v. Wheaton, 24 Minn. 406; Hopkins v. Garrard, 46 Ky. 312, 7 B. Mon. 312; Webster v. Maddox, 6 Me. 256; Seymour v. McKinstry, 106 N.Y. 230, 12 N.E. 348; Wright v. Bates, 13 Vt. 341.
  
  On the other side it is said that the execution of a warranty deed without reservation is a most solemn declaration by the grantor that he has parted with all his rights in the property, and directly negatives the reservation of any right. That those who see the deed are warranted in relying upon such declaration as much as if it had been made to them orally upon an inquiry, and that if they acquire interests in faith of such reliance, the grantor in possession will be estopped to assert any right secretly reserved from the grant. That as the grantor has declared that he parted with his entire estate, strangers about to deal with the property would reasonably refer his continuous possession to the sufferance of the grantee, and would not reasonably think to refer it to a reserved right. Eylar v. Eylar, 60 Tex. 315; Van Keuren v. Central R. Co., 38 N.J.L. 165; Scott v. Gallagher, 14 S. & R. 333; Jaques v. Weeks, 7 Watts 261; Koon v. Tramel, 71 Iowa 132, 32 N.W. 243; Bloomer v. Henderson, 8 Mich. 395.
  
  If the possession has continued after the making of the deed but a short time, it might be reasonably referred to the sufferance of the grantee; but where it was long continued, it would much more strongly imply a right in the occupant, and the implication would be sufficient to cast upon strangers the duty of inquiry. Where the lands were used for agriculture and sold during a crop season, it would not be reasonable to presume that the grantee would permit the grantor to hold by sufferance after the time when lands were usually entered upon for the purpose of the next year's cultivation; and possession continued after that time could not be explained upon the presumption of sufferance.
  
  We think, with all deference to those who deny the application of the rule in such cases, that the controlling fact upon which their argument proceeds is assumed.
  
  Ordinarily the terms of a general warranty deed import a declaration that the grantor has reserved no rights in the subject of the grant, and by themselves may always bear such implication. But possession is ordinarily notice of a claim of right; and where a grantor continues in possession at the time of the grant and for a considerable time thereafter, should not the fact of possession be construed as an assertion of reserved rights, and as a limitation upon the provisions of the deed? True, the deed alone denies the reservation of equities, but it denies equally the right to continue in possession. If the grantor then holds open possession against the terms of his deed, is it not a reasonable implication that he has rights not expressed in it? If possession thus qualifies the terms of the deed, and it is open and continued, then the doctrine of estoppel cannot apply, for the grantor may as well expect persons to take notice of his possession as of his deed.
  
  We conclude that open and notorious possession of the lands by Turman from the date of his deed till the date of the bank's mortgage would give notice to the bank. But such notice only imposes a duty to make inquiry as to the rights of the occupant; and if he explain his possession in consonance with the right of his grantee to convey, he cannot attack the conveyances of the latter. If Turman held out Gilbreath as authorized to convey the land, either expressly or by a recognized course of dealing, then the bank would have been warranted in treating Turman's possession as in subordination to Gilbreath's right to convey, and would not be prejudiced by the notice.