Use Of Quiet Title & Slander Of Title In Undoing Real Estate Equity Ripoff, Voiding Deeds & Mortgages

(This post was originally published on July 6, 2011.)

The successful use of a quiet title and slander of title lawsuit in an effort to undo a real estate equity scam perpetrated on an elderly property owner by his nephew and a gang of others was the focus of a December, 2009 ruling of an Illinois appeals court.

The fact pattern involved, among other things, a purported sale leaseback, coupled with a repurchase option, of property and the recording of forged land documents.

For those in Illinois (and possibly elsewhere) in the business of undoing and unwinding these ripoffs on behalf of the victims, there may be some points of interest, including the following:

• action to quiet title,


• requirements for adequately proving slander of title,


• essential elements of a forgery,


• cloud on title ("is the semblance of title" which is "unfounded" or "which it would be inequitable to enforce"),


• authority of an agent (may be actual or apparent and, if actual, may be express or implied),


• ratification of agent's unauthorized acts,


• failed attempt by the bank that financed the ripoff to reinstate its mortgage lien that had been voided by the trial court (unsuccessfully argued judicial estoppel and unclean hands),


• imposition of punitive damages in a slander of title case,


• availability of an attorney fee award for the victim in a slander of title case,(1)


• factors in determining an appropriate award for attorneys fees for the victimized property owner (liability for which is imposed on the scammers),


• applicability of a contingency fee risk multiplier in calculating the award for attorneys fees(2) (court approved use of a multiplier of 3 to determine the total fee award of $595,574 for the contingent portion of the fee).

For the ruling, see Gambino v. Boulevard Mortg. Corp., 398 Ill. App. 3d 21, 922 NE 2d 380 (Ill. App. 1st Dist., 6th Div. 2009) (Appeal denied by Gambino v. Blvd. Mortg. Corp. (W.W. Funding, L.L.C.), 2010 Ill. LEXIS 909 (Ill., May 26, 2010)).

(1) With respect to the appropriateness of awarding attorneys fees in a slander of title action, the Illinois appeals court made this observation:

• Contrary to the Wolf defendants' argument, there is authority in Illinois providing that recovery for slander of title actions permit recovery of those costs and attorney fees which directly flow from the wrongful disparagement. Home Investments Fund v. Robertson, 10 Ill. App.3d 840, 844, 295 N.E.2d 85 (1973).
  
  Further, plaintiffs were entitled to recover those costs and attorney fees directly related to the quieting of title and to those damages directly related to a slander of title, i.e., loss of vendibility, etc. Robertson, 10 Ill.App.3d at 844, 295 N.E.2d 85.

(2) For more on the use of risk multipliers in calculating prevailing party attorney fees in pro bono and contingency fee cases, see:

• The Yale Law Jounal: The Contingency Factor In Attorney Fee Awards.


• Defending A Foreclosure Defense Case Pro Bono? Don't Forget The Contingency Risk Factor When Sticking Losing Lender With Tab.

Void vs. Voidable Deeds - Actions to Undo A Deed Scam; OK To Plead Inconsistent Facts - No Need To "Gamble On A Single Formulation Of [A] Claim", Says California Appeals Court

(This post was originally published on November 7, 2010.)

In a 2010 ruling addressing various issues raised in a lawsuit filed by apparent victims of an alleged deed ripoff (whether conveyances were void vs. voidable, effects on a bona fide purchaser, etc.),(1) a California appeals court said, among other things, that there was nothing disqualifying, as one Defendant asserted, for the Plaintiffs to plead alternative facts in an attempt to undo both the deed ripoff itself, and the mortgage that was placed on the subject properties subsequent thereto. (This appeal involved a reversal of a trial court's judgment of dismissal after sustaining one defendant's demurrer. The ruling, although unpublished, may nevertheless be instructive for those in the legal profession looking to unwind or undo a wide variety of deed ripoffs, particularly, as in this case, one of the defendants attempts to have the plaintiff's complaint the attorney dismissed on procedural/pleading technicalities.)

In addressing what the court referred to as one defendant's mischaracterization of the rules of pleading, the court stated that "where the exact nature of the facts is in doubt, or where the exact legal nature of plaintiff's right and defendant's liability depend on facts not well known to the plaintiff, the pleading may properly set forth alternative theories in varied and inconsistent counts." It went on to make this observation (all citations, internal quotations, etc. omitted for ease of reading, bold text is my emphasis, not in the original text):

• In such situations, the facts are inconsistently alleged because the plaintiff does not know which of the alternatives is true or can be established by the evidence. Tolerance for such pleading rests on the principle that uncertainty as to factual details or their legal significance should not force a pleader to gamble on a single formulation of his claim if the facts ultimately found by the court, though diverging from those the pleader might have considered most likely, still entitle him to relief.

***

• At this early stage of the proceedings, Plaintiffs cannot be faulted for failing to know exactly what occurred in this case.

In addition to the foregoing point, the balance of the ruling may contain some valuable insight to anyone (primarily those in the legal profession or real estate business) seeking a starting point in commencing the arduous process of undoing or unwinding a deed ripoff (ie. whether it be through forged deeds & other land documents, forged or improper use of powers of attorney, sale leaseback foreclosure rescue scams, or the otherwise duping of a property owner into signing over deeds and other land documents), including the voiding of any mortgage or other encumbrance placed on the property simultaneously with, or subsequent to, the deed ripoff.(2)

For the ruling, see Casonhua v. Wash. Mut. Bank, B218606, B218608, 2010 Cal. App. Unpub. LEXIS 8486 (Cal. App. 2nd Dist. Div. 7, October 26, 2010) (if link expires, TRY HERE).

(1) Some of the court's discussion of void vs. voidable conveyances follows:

• Although a bona fide encumbrancer is entitled to rely on a deed that is voidable, it will not retain title if the deed is found to be void. (Schiavon v. Arnaudo Brothers (2000) 84 Cal.App.4th 374, 378 (Schiavon); Wutzke v. Bill Reid Painting Service, Inc. (1984) 151 Cal.App.3d 36, 41 (Wutzke); Firato v. Tuttle (1957) 48 Cal.2d 136, 139 (Firato).) More specifically, our courts have explained that "[i]f [a] reconveyance [i]s voidable, . . . it may be subject to cancellation and rescission as against [the grantee], but could be relied upon by a subsequent bona fide [encumbrancer]. . . ." (Schiavon, supra, 84 Cal.App.4th at p. 378.) In contrast, "[i]nstruments which are wholly void cannot ordinarily provide the foundation for good title even in the hands of an innocent purchaser." (Firato, supra, 48 Cal.2d at p. 139.) Therefore, the Plaintiffs may only assert superior title against Washington Mutual if Berry's deed is found to be wholly void, but not if it is voidable.[6]
  
  Generally, "[a] deed is void if the grantor's signature is forged or if the grantor is unaware of the nature of what he or she is signing. [Citation.] A voidable deed, on the other hand, is one where the grantor is aware of what he or she is executing, but has been induced to do so through fraudulent misrepresentations. [Citation.]. The same rules apply to the reconveyance of the property interest under a deed of trust as to the conveyance of property by grant deed." (Schiavon, supra, 84 Cal.App.4th at p. 378.)
  
  Numerous holdings illustrate this legal distinction. For example, in Wutzke v. Bill Reid Painting Service, Inc., supra, 151 Cal.App.3d 36, the court held that "a forged document is void ab initio and constitutes a nullity; as such it cannot provide the basis for a superior title as against the original grantor." (Id. at p. 43.) Wutzke further explained that "[s]ince a trust deed obtained by means of forgery is void, it follows that any claim of title flowing from such a deed is void . . . [which includes] the title of a subsequent purchaser or encumbrancer." (Id. at p. 44.) Similarly, in Erickson v. Bohne (1955) 130 Cal.App.2d 553 (Bohne), the court ruled that a deed conveyed by an individual who alleged to be "mentally ill and wholly incapable of transacting business" was void and could not provide good title to a subsequent good faith purchaser. Other cases have recognized that documents procured through "`fraud in the factum-that is, the sort of fraud that procures a party's signature to an instrument without knowledge of its true nature or contents . . . render [an] instrument entirely void.'" (Wurzl v. Holloway (1996) 46 Cal.App.4th 1740, 1751; see also Bohne, supra, 130 Cal.App.2d at p. 556 ["`An illustration of a void transaction is afforded where one . . . is induced to sign a deed when in fact, he believes, because of fraudulent misrepresentations, that he is merely signing a letter addressed to a third person'"].)
  
  In contrast, a deed is voidable, rather than void, when "the agreement was induced by fraudulent misrepresentation or concealments which in no degree make the instrument anything other than it purports to be." (Bohne, supra, 130 Cal.App.2d at p. 556.) For example, in Fallon v. Triangle Management Service, Inc. (1985) 169 Cal.App.3d 1103, the plaintiff sought to void a deed that he had signed while under duress. (Id. at p. 1106.) The court ruled that because the plaintiff was aware that the instrument he executed was a deed, the deed was merely voidable and could be relied on by a bona fide purchaser. Likewise, in Schiavon v. Arnaudo Brothers, supra, 84 Cal.App.4th 374, the court concluded that a reconveyance that was initiated after the trustee received a forged request for reconveyance was voidable, rather than void. The court explained that although the request for reconveyance had been forged, the actual reconveyance was signed by the trustee, who was entitled to convey the property and understood the nature of the instrument that he had executed. The court differentiated decisions in which the deed itself had been forged, explaining that, in the case before it, "the reconveyance was executed by the designated trustee . . . who was aware of the consequences of the act but was [induced by fraudulent misrepresentation]." (Schiavon, supra, 84 Cal.App.4th at p. 381.)

(2) The portion of the court's ruling on a Plaintiff's entitlement to plead alternative facts follows (omitting the court's footnote 7; bold text is my emphasis, not in the original text):

• 2. The Plaintiffs Were Entitled to Plead Alternative Facts
  
  Washington Mutual argues that, even if the trial court's ruling was erroneous, the demurrers should be sustained on the ground that the Plaintiffs' verified complaints contain inconsistent factual assertions that preclude them from alleging that Berry procured her deed through fraud. Specifically, Washington Mutual contends that because the fourth cause of action in the Florence Sims Complaint (which is pleaded against Berry only) alleges that Berry induced Florence to sign the grant deed through undue influence, Plaintiffs may not allege in the alternative that the deed was forged or that Florence lacked the mental capacity to sign the deed.7 Stated more simply, Washington Mutual argues that because Plaintiffs assert in one claim that the deed was procured through undue influence, which would render the deed voidable, we must ignore Plaintiffs' alternative claim that the deed was procured through fraud, which would render the deed wholly void.
  
  Washington Mutual's argument mischaracterizes the rules of pleading. The traditional rule is that "[w]here the exact nature of the facts is in doubt, or where the exact legal nature of plaintiff's right and defendant's liability depend on facts not well known to the plaintiff, the pleading may properly set forth alternative theories in varied and inconsistent counts." (Rader Co. v. Stone (1986) 178 Cal.App.3d 10, 29.) In such situations, "[t]he facts are inconsistently alleged because the plaintiff does not know which of the alternatives is true or can be established by the evidence." (4 Witkin, Cal. Procedure (4th ed. 1997) Pleading, § 364, p. 467.) "Tolerance for such pleading rests on the principle that uncertainty as to factual details or their legal significance should not force a pleader to gamble on a single formulation of his claim if the facts ultimately found by the court, though diverging from those the pleader might have considered most likely, still entitle him to relief." (Blickman Turkus, LP v. MF Downtown Sunnyvale, LLC (2008) 162 Cal.App.4th 858, 886.)
  
  In this case, the complaints plainly acknowledge that Plaintiffs pleaded alternative factual theories because they were not present when Berry's grant deed was executed, and, as a result, are uncertain what occurred. The Plaintiffs' first claim alleges that Berry forged the deed and describes circumstantial evidence that, in Plaintiffs' view, support their contention.8 Plaintiffs' additional claims, which allege that Berry procured the deed through other fraudulent means or undue influence, were pleaded "in the event the Court determines that Florence signed the [grant deeds."]. At this early stage of the proceedings, Plaintiffs cannot be faulted for failing to know exactly what occurred in this case. It would therefore be improper to limit Plaintiffs' factual allegations in the manner Washington Mutual proposes.
  
  Washington Mutual correctly asserts that if a party verifies a specific factual allegation in a complaint, it cannot simultaneously plead an inconsistent fact in the same pleading. (Alfaro v. Community Housing Imp. System & Planning Assn., Inc. (2009) 171 Cal.App.4th 1356, 1381 (Alfaro) ["[a] plaintiff may plead inconsistent counts or causes of action in a verified complaint, but this rule does not entitle a party to describe the same transaction as including contradictory or antagonistic facts"]; see also Beatty v. Pacific States S. & L. Co. (1935) 4 Cal.App.2d 692, 697 (Beatty).) The rules of pleading do "not permit the pleader to blow both hot and cold in the same complaint on the subject of facts of which he purports to speak with knowledge under oath." (Beatty, supra, 4 Cal.App.2d at p. 697; see also Manti v. Gunari (1970) 5 Cal.App.3d 442, 449["[t]o verify inconsistent facts alleged in a complaint indicates perjury in the matter"].) In this case, however, the operative complaints are verified only on information and belief. Therefore, although the Plaintiffs have verified that they believe the alleged information to be true, they have not claimed personal knowledge of the truth of the matters asserted. (See Black's Law Dictionary 795 (8th ed. 2004) [defining information and belief allegations as being "based on secondhand information that the declarant believes to be true"].) Moreover, as discussed above, the complaints repeatedly emphasize that because the Plaintiffs are unsure exactly what occurred when the deed was executed, they have pleaded alternative facts to encompass all possible theories of liability. As a result, the rule barring plaintiffs from pleading inconsistent facts that are based personal knowledge is inapplicable here.

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

footnote 8: The complaints contend that there is "strong circumstantial evidence" indicating that Berry forged the deeds, including the fact that: (1) Berry recorded the deeds two years after Florence purportedly signed them and seven months after Florence died; (2) the notary's journal does not contain Florence's thumbprint, as required under California law; (3) the notary's journal has an entry dated January 2, 2002, for a "Power of Attorney for Decedent," which is crossed out and interlineated with "Grant Deed" in a different type of ink; (4) during deposition testimony, the notary stated that he notarized a power of attorney and the two grant deeds on January 2, 2002, but his journal only shows that one document was notarized on that date.

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

Go here for more on void and voidable deeds. DeedVoidVoidable

Lien Priority Battle: Federal Appeals Court Says Bank's Later-Created, Unrecorded $1 Million Security Interest In Real Estate Trumps IRS' Earlier-Created, Recorded $60K Tax Lien

A case that was recently addressed by a federal appeals court provides an intriguing example of a situation where, in applying Maryland state law (ie. Maryland's doctrine of equitable conversion), an earlier-created, recorded lien on real estate was found to be inferior in priority to a later-created, unrecorded security interest. It is interesting to note that:

• the recorded lien found to be inferior was an IRS tax lien, and
• there was an absence of any bad faith on the IRS' part (bad faith being a typical factor disqualifying a party in a real estate transaction seeking the protection of the recording statutes),
• while the bank's security interest, unrecorded at the time the IRS recorded its tax lien, was ultimately recorded, the court stated that the bank's said security interest would have been protected anyway, regardless of its compliance with the recording statutes,
• the key in this case is that the bank's security interest, while not recorded until after the IRS recorded its lien, was created prior to the IRS' lien recordation (by six days).

The basic facts of the case, abstracted from the appeals court ruling, follow:

1. Restivo Auto Body failed to pay certain employment taxes relating to the calendar years 2002 and 2003, and the first and second quarters of 2004,
   .
2. The IRS issued notice and demand for payment of these deficiencies on or before September 20, 2004, giving rise to a tax lien on all property owned by Restivo Auto Body at that point (See 26 U.S. Code § 6322, stating that this type of lien "shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed (or a judgment against the taxpayer arising out of such liability) is satisfied or becomes unenforceable by reason of lapse of time.").
   .
3. On January 10, 2005 [after dragging its feet in recording its tax lien for almost four (4) months], the IRS filed notice of its federal tax lien for the relevant quarters in the appropriate county land records.
   .
4. On January 4, 2005, six days before the IRS filed notice of its federal tax lien, Restivo Auto Body borrowed $1 million from Susquehanna Bank, giving the Bank a note and a deed of trust on two adjacent parcels of real property to secure repayment of the loan.
   .
5. The deed of trust, however, was not recorded until February 11, 2005, more than a month after the IRS filed notice of its tax lien.
   .
6. In April, 2011, Restivo Auto Body filed for Chapter 11 bankruptcy protection and, in connection therewith, the IRS filed a proof of claim, stating that Restivo Auto Body owed it $62,438.99 in taxes, interest, and penalties (the lien was originally for $147,392.84, according to the lower court ruling) for the relevant quarters.
   .
7. Susquehanna Bank thereupon commenced an adversary proceeding against the IRS, seeking a declaratory judgment as to the relative priorities of the parties' secured interests.

The bankruptcy court ruled in favor of Susquehanna Bank, saying its lien, despite being unrecorded at the time the IRS recorded its lien, had priority over the IRS lien. On initial appeal to the U.S. District Court affirmed the bankruptcy court ruling. The district court's affirmance was based on its appluication of the existing statute, and as an alternative basis for affirmance, it applied Maryland's doctrine of equitable conversion, stating that Susquehanna Bank's security interest would have taken priority under Maryland law even if the lien had never been recorded.

The appeals court, despite rejecting the reasoning of the district court based on the reading of the applicable statute, nevertheless affirmed the lower court's ruling, accepting its alternative basis for affirmance in applying Maryland's doctrine of equitable conversion.

In this regard, the court stated:

• Apart from its application of Md. Code Ann., Real Prop. § 3-201, the district court also concluded that Susquehanna Bank had a prior security interest under § 6323(h)(1)(A), based on the Maryland doctrine of equitable conversion. The court explained that under Maryland law, "the holder of an equitable title or interest in property, by virtue of an unrecorded contract of sale, has a claim superior to that of a creditor obtaining a judgment subsequent to the execution of the contract." Susquehanna Bank, 2013 WL 4067624, at *7 (quoting Stebbins-Anderson Co. v. Bolton, 117 A.2d 908, 910 (Md. 1955)) (internal quotation marks omitted). And it pointed out that the doctrine applies to lenders whose interests are secured by mortgages or deeds of trust. Construing § 6323(h)(1)(A), the court concluded that "an IRS tax lien is entitled only to the protection due under state law to `a subsequent judgment lien arising out of an unsecured obligation'" id. (quoting § 6323(h)(1)(A)), and that, under Maryland law, as made applicable by § 6323(h)(1)(A), judgment liens are "subject to prior, undisclosed equities," id. (quoting Wash. Mut. Bank v. Homan, 974 A.2d 376, 389 (Md. Ct. Spec. App. 2009)) (internal quotation marks omitted).
  
  We agree with the district court that § 6323(h)(1)(A) incorporates Maryland law insofar as it protects equitable security interests against subsequent judgment-creditor liens.
  
  The Maryland doctrine of equitable conversion "emanates from the maxim that `equity treats that as being done which should be done.'" Noor v. Centreville Bank, 996 A.2d 928, 932 (Md. Ct. Spec. App. 2010) (quoting Himmighoefer v. Medallion Indus., Inc., 487 A.2d 282, 286 (Md. 1985)).
  
  Pursuant to that doctrine, upon contracting to buy land, "in equity the vendee becomes the owner of the land, the vendor of the purchase money." Id. (quoting Himmighoefer, 487 A.2d at 286). Although the seller retains legal title during the executory period, he has "no beneficial interest in the property" apart from his "right to the balance of the purchase money." Watson v. Watson, 497 A.2d 794, 800 (Md. 1985). Rather, he holds his legal title "in trust for the purchaser." Wolf Org., Inc. v. Oles, 705 A.2d 40, 45 (Md. Ct. Spec. App. 1998).
  
  By contrast, a holder of equitable title "retains a significant interest in the enforcement of a land sales contract." Wash. Mut. Bank, 974 A.2d at 388. Consistent with these principles, Maryland courts have repeatedly held that a land purchaser's equitable title is superior to any judgment lien subsequently obtained against the seller. See, e.g., Watson, 497 A.2d at 800; Wolf Org., 705 A.2d at 46-47. As Maryland's Court of Appeals explained in Himmighoefer:
  
  
  It is a general rule that the holder of an equitable title or interest in property, by virtue of an unrecorded contract of sale, has a claim superior to that of a creditor obtaining judgment subsequent to the execution of the contract. . . . The right of the vendee to have the title conveyed upon full compliance with the contract of purchase is not impaired by the fact that the vendor, subsequently to the execution of the contract, incurred a debt upon which judgment was recovered. A judgment creditor stands in the place of his debtor, and he can only take the property of his debtor subject to the equitable charges to which it is liable in the hands of the debtor at the time of the rendition of the judgment. 
  
  487 A.2d at 287 (quoting Stebbins-Anderson Co., 117 A.2d at 910) (internal quotation marks and citations omitted). A judgment creditor's lien cannot attach to a seller's bare legal title in the property after the seller has conveyed equitable title, because the seller's legal title is a mere "technicality." Wolf Org., 705 A.2d at 46. Nor can the judgment creditor's lien attach to the seller's equitable interest in the property, because that interest has already become "vested in another." Id.
  
  Moreover, the Maryland doctrine of equitable conversion protects the security interest of a purchaser regardless of the purchaser's compliance with the recordation statutes. The recordation statutes protect only bona fide purchasers. See Lewis v. Rippons, 383 A.2d 676, 680 (Md. 1978) (holding that because a party was not a bona fide purchaser, "the recording statute avail[ed] him not"); see also Greenpoint Mortg. Funding, Inc. v. Schlossberg, 888 A.2d 297, 308 (Md. 2005); In re Careful Laundry, 104 A.2d 813, 818 (Md. 1954).
  
  And Maryland law is clear that "a judgment creditor is not in the position of a bona fide purchaser." Kolker v. Gorn, 67 A.2d 258, 261 (Md. 1949); see also, e.g., Himmighoefer, 487 A.2d at 287; Stebbins-Anderson Co., 117 A.2d at 910; Chi. Title Ins., 988 A.2d at 1050; Wash. Mut. Bank, 974 A.2d at 389; Chambers v. Cardinal, 935 A.2d 502, 511 (Md. Ct. Spec. App. 2007). Thus, a judgment creditor's claim "is subject to prior, undisclosed equities" and "must stand or fall by the real, and not the apparent rights of the defendant in the judgment." Kolker, 67 A.2d at 261 (quoting Ahern v. White, 39 Md. 409, 421 (1874)) (internal quotation marks omitted).
  
  This traditional scheme of real property law and equity does not render Md. Code Ann., Real Prop. § 3-201's recordation requirement a nullity, as the district court recognized. Bona fide purchasers remain incentivized to record their interests to achieve priority against other bona fide purchasers. See Md. Code Ann., Real Prop. § 3-203.
  
  While Susquehanna Bank did not sign a contract to purchase Restivo Auto Body's real property, it did receive a conditional deed to secure repayment of its loan. And Maryland principles in equity "treat lenders who secure their interests with a mortgage or deed of trust as entitled to the protections available to bona fide purchasers for value," so long as those lenders act in good faith. Wash. Mut. Bank, 974 A.2d at 396; see also Silver v. Benson, 177 A.2d 898, 902 (Md. 1962) ("It is well settled that in circumstances where a deed is set aside for fraud, a mortgagee not a party to the fraud is entitled to the protection afforded a bona fide purchaser by a court of equity, to the extent of his interest"). Consequently, a lender's equitable interest in secured property is superior to the interest of subsequent judgment lienholders. Taylor Elec. Co., Inc. v. First Mariner Bank, 992 A.2d 490, 502 (Md. Ct. Spec. App. 2010) ("The overwhelming weight of authority is that once a bona fide purchaser or lender for value acquires title by way of execution of a contract for sale or valid mortgage, the purchaser or mortgagee takes title free and clear of any subsequent lien" (emphasis added and omitted)).
  
  These principles are not unique to Maryland, which applies traditional equitable principles to traditional real property law. See Hellmann v. Circle C Props. I, Ltd., No. 04-03-00217-CV, 2003 WL 22897220, at *2-3 (Tex. Ct. App. Dec. 10, 2003) (holding that a lender who held a deed of trust had priority over a debtor's subsequent judgment creditor); Suffolk Cnty. Fed. Sav. & Loan Ass'n v. Geiger, 57 Misc. 2d 184, 186 (N.Y. Sup. Ct. 1968) (holding that a mortgagee had priority over a subsequent judgment lienholder).
  
  Applying these principles in this case, Susquehanna Bank took equitable title to Lots 17 and 39 when Restivo Auto Body executed a deed of trust and delivered it to the Bank on January 4, 2005. That equitable title gave Susquehanna Bank priority over all of Restivo Auto Body's subsequent judgment-creditor lienholders. And because federal tax law subordinates a federal tax lien to a deed of trust that has become protected "against a subsequent judgment lien arising out of an unsecured obligation," 26 U.S.C. § 6323(h)(1)(A), Susquehanna Bank's equitable security interest, which had become protected on January 4, 2005, had priority over the IRS's lien under § 6323(a).[*]

For the ruling, see In re Restivo Auto Body (Susquehanna Bank v. U.S.)  No. 13-2249 (4th Cir. October 31, 2014).

See also, In Re: Restivo Auto Body, Inc.: 4th Circuit Rules Executed But Unrecorded Security Interest Has Priority Over IRS Tax Lien.

Texas Bona Fide Purchaser: Occupants In Possession & The Duty To Inquire Into Their Unrecorded Rights & Equities

The excerpt below from a 2004 case from a U.S. District Court in San Antonio, Texas may provide a useful primer for making a case under Texas state law on behalf of a homeowner who is in open, exclusive, possession of real estate under unrecorded rights to claim that said possession constitutes notice to subsequent prospective buyers or encumbrancers of any unrecorded rights or equities he/she may have.

The district court, sitting in an appellate capacity (reviewing a ruling emanating from a U.S. Bankruptcy Court in San Antonio), provides an extensive survey and analysis on the Texas case 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 ("Henderson") 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 ("Hayes") (but 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 unrecorded rights or equities in the home the occupant may have had.

• [T]he only issues presented on appeal are whether the nature of Henderson's possession was sufficient to impose a duty of inquiry on the Bank, if so, whether the Bank satisfied the duty, and whether Henderson's lien has priority over the Bank's.
  
  The Texas Property Code provides for the recording of real property transfers and provides consequences for the failure to record:
  
  (a) A conveyance of real property or an interest in real property or a mortgage or deed of trust is void as to a creditor or to a subsequent purchaser for a valuable consideration without notice unless the instrument has been acknowledged, sworn to, or proved and filed for record as required by law.
  
  (b) The unrecorded instrument is binding on a party to the instrument, on the parties' heirs, and on a subsequent purchaser who does not pay a valuable consideration or who has notice of the instrument.
  
  TEX. PROP. CODE § 13.001.
  
  Thus, the recording of a deed is not essential to an effective conveyance of title, and an unrecorded instrument is binding on the parties to the instrument, the parties' heirs, and all who have notice of the instrument. However, the law requires the recording of title to land for the protection of innocent purchasers and creditors who act without notice of the prior conveyance.
  
  Although the statute states that a conveyance is void as to "a creditor," it has long been construed to provide protection only to creditors who have acquired liens without notice of the prior conveyance. Paris Grocer Co. v. Burks, 105 S.W. 174, 175 (Tex. 1907); Omohundro v. Jackson, 36 S.W.3d 677, 682 (Tex. App.-El Paso 2001, no pet.).
  
  Although Henderson failed to record the conveyance, that failure did not affect the validity of the transaction. Once Henderson paid the consideration for the property and took possession, he became the owner of the superior equitable title to the land, and Hayes was the holder of the naked legal title. See Fed. Life Ins. Co. v. Martin, 157 S.W.2d 149, 152 (Tex. Civ. App.-Texarkana 1941, writ ref'd); Tex. Am. Bank/Levelland v. Resendez, 706 S.W.2d 343, 346 (Tex. App.-Amarillo 1986, no writ).
  
  Thus, the Bankruptcy Judge correctly found that Henderson had an equitable claim to the property. The question that remains is what the consequence of Henderson's failure to record must be.
  
  Under the recording statute, an unrecorded conveyance is void as against a subsequent bona fide purchaser or creditor without notice. However, Texas courts have construed the statute strictly as applicable only to "writings that convey an interest in land." Gaona v. Gonzales, 997 S.W.2d 784, 786 (Tex. App.-Austin 1999, no pet.); see also Johnson v. Darr, 272 S.W. 1098, 1101 (Tex. 1925) ("The decisions of this state uniformly hold that the registration statutes do not apply to equitable titles.").
  
  Thus, where, as here, the parties enter into an oral contract to sell land, and the buyer pays full value, but the seller does not convey a deed, the contract does not fall within the recording statute. Resendez, 706 S.W.2d at 346 (holding that equitable title that results after complete payment under contract for sale of land is not subject to recordation and is outside the scope of the recording statute).
  
  Nevertheless, the rule under the recording statute is essentially the same as the common-law rule, which protects bona fide purchasers against the assertion of prior unrecorded interests under equitable principles and the doctrine of estoppel. Under the common law, when one with an equitable claim to property allows the naked legal title to remain in the vendor, his equitable rights become inferior to those of an innocent purchaser or mortgagee for value without notice. Martin, 157 S.W.2d at 152; see also Johnson, 272 S.W. at 1101 ("That bona fide purchasers for value are protected against the assertion of [an unrecorded equitable title] is because of the doctrine of estoppel, and not the registration statutes.").
  
  Thus, the question under either the statute or the common law is whether the Bank had constructive notice of Henderson's prior equitable title. To answer this question, and to determine the scope of the duty of inquiry triggered by such constructive notice, the Court will review the relevant Texas authorities.
  
  In Collum v. Sanger Brothers, 82 S.W. 459 (Tex. 1904), the Texas Supreme Court considered whether possession of real property by the owner's tenants was notice to a subsequent judgment lien holder. The Court held that it was, stating: "We think it a safe and salutary rule to require of a prospective purchaser of land to ascertain whether any other be in occupancy of it; and, if there be such possession, to go to the possessor and ascertain the nature and extent of his claim. Possession is evidence of title, and, it seems to us, that common prudence and common honesty demand this course. If so, the possession should be notice to him; and, if notice to a purchaser, it is notice to a creditor." Id. at 460.
  
  However, in 1916, the Court distinguished between the rights of a judgment lien holder and an innocent purchaser for value without notice and emphasized that an innocent purchaser for value without notice is entitled to priority over an unrecorded interest: "A judgment lien holder is not in the same attitude as an innocent purchaser for value without notice. The latter has expended his money in good faith to the amount of the purchase price of the land, and is justly entitled to be held harmless. It is right that the loss under such circumstances should be visited upon the landowner whose negligence, in failing to give notice through the deed records of his ownership, occasioned the loss, rather than that it should fall upon the innocent purchaser who was without fault." First State Bank of Amarillo v. Jones, 183 S.W. 874, 876 (Tex. 1916).[3]
  
  Thus, in Jones, the Court expressed the long-standing equitable estoppel principle that, as against an innocent party without notice, the loss should fall upon the one whose negligence contributed to the loss.[4] However, one who has actual or constructive notice of a prior sale or contract for the sale of land cannot be an innocent purchaser thereof and cannot claim ignorance of such prior sale as a basis of estoppel against a prior purchaser who has not actually misled the subsequent purchaser. Tex. Consol. Oils v. Bartels, 270 S.W.2d 708, 712 (Tex. Civ. App.-Eastland 1954, writ ref'd).
  
  Thus, to enjoy the equitable protections of innocent purchaser status, the Bank must demonstrate the absence of notice. See id.; Strong v. Strong, 98 S.W.2d 346, 347 (Tex. 1936); see also Neeley v. Intercity Mgmt. Corp., 623 S.W.2d 942, 953 (Tex. App.-Houston [1st Dist.] 1981, no writ) ("In order for the appellants to establish title superior to the equitable title claimed by the appellees under the unrecorded instruments it was necessary for them to be bona fide purchasers for value without notice of the appellees' claims.").
  
  As early as 1883, the Texas Supreme Court recognized that "[m]any cases can be found in our reports in which it is said that possession is notice of whatever title the possessor has." Eylar v. Eylar, 60 Tex. 315 (Tex. 1883). In Eylar, the person in possession had conveyed the property to another but intended the conveyance to operate only as a mortgage. [Editor's Note: ie. an equitable mortgage]
  
  However, the deed was recorded, and the Court had to consider whether the rule of possession as notice would apply to one purchasing the property from the grantee when the person in possession had conveyed the property to the grantee and the conveyance had been recorded. The Court noted that application of the rule should be limited to cases in which the possessor is not knowingly at fault in permitting a deed divesting the possessor of his interest to be recorded or to cases in which the possessor has not voluntarily aided in misleading a purchaser. Id.; see also Ramirez v. Smith, 59 S.W. 258, 260 (Tex. 1900) ("There are cases which, while recognizing the proposition that possession is sufficient to incite inquiry, hold that where the possessor has done something, such as making a deed to another, which is of record, which furnishes a sufficient answer to the inquiry arising, the possession does not impose the duty of further investigation.").
  
  The Court emphasized that "[t]he policy of the law, as evidenced by our statutes, requires all conveyances of land or interests therein for a term longer than one year to be evidenced by writing" and that the law requires all persons, for the protection of innocent purchasers and creditors, to register their titles to land. Thus, in that case, the purchaser who searched the records of the county and found on record a deed from the person in possession to the person who offers to sell had satisfied the duty of inquiry imposed by the possession. The Court held that the purchaser from the record title holder "was not bound to inquire of the [possessor] what right they had in the land; that the inquiry was sufficiently prosecuted; prosecuted as far as a prudent man, having due regard to the rights of others, and to his own protection, would be bound to prosecute it, when he looked to the record and there found that [the vendor] was declared by the very persons in possession to be the true and absolute owner of the land."[5]
  
  In 1917, in another case involving a purported conveyance of property by the possessor, the Supreme Court held that the fact of possession by tenants placed a purchaser on inquiry, as a matter of law, as to whether the deeds were absolute or intended only as mortgages. Moore v. Chamberlain, 195 S.W. 1135, 1137 (Tex. 1917).
  
  In 1990, the Fifth Circuit noted that the reconciling principle between Eylar and Moore was that a purchaser's or lender's duty of inquiry must be "prosecuted as far as a prudent man, having a due regard to the rights of others and to his own protection, would be bound to prosecute it." In the Matter of Rubarts, 896 F.2d 107, 112 (5th Cir. 1990). Thus, the Fifth Circuit held that a prudent lender, in the context of a potential "sham" conveyance like that involved in Eylar and Moore "will not rely upon the representations of husband and wife to the contrary; instead, the lender or purchaser must investigate the circumstances under which the purported sale was made, the status of the purchaser, the arrangements made by the original owners for other housing, or any affirmative actions indicating abandonment." Id.
  
  Although this case does not involve the same "sham conveyance" scenario as Eylar, Moore, and Rubarts, those cases establish that possession acts as constructive notice of the possessor's claims, which puts upon a potential purchaser or lender a duty of inquiry. The duty of inquiry must be prosecuted as far as a prudent man would be bound to prosecute it. Thus, in the face of a possible sham conveyance where one conveys the land to another but remains in possession, the Fifth Circuit has construed the duty of inquiry to reach so far as to require the lender or purchaser to investigate the circumstances of the sale, the purchaser's status, the arrangements made by the original owners for other housing, or any affirmative actions indicating abandonment. In addition, as discussed below, numerous Texas cases with facts analogous to this one impose a duty of inquiry on a potential purchaser to inquire of one in possession of the property what his rights are.
  
  In Paris Grocer Co. v. Burks, 105 S.W. 174 (Tex. 1907), the Court recognized the well-settled rule that a creditor's lien would prevail over an unrecorded deed unless the creditor "is affected with notice." Id. at 175. It was equally settled, held the Court,
  
  that an open, exclusive, and visible possession, maintained by the holder of the unrecorded deed when the right of the creditor attaches, is notice of the right under which it is held. This is so, for the reason that one who seeks to acquire an interest in or with respect to land is expected, in the exercise of common prudence, to learn of a possession held by others than him whose rights he purposes to acquire, and to make inquiry of the possessor as to the nature of the claim under which he holds. Having such opportunities of which prudence dictates that he shall avail himself, one who has omitted to do so will not be heard to deny that he had notice of a fact of the existence of which he was thus put upon inquiry.
  
  Id. However, the Court also limited the facts that would trigger the duty of inquiry to those in which the possession sufficiently appears to be that of a third person:
  
  [T]he fundamental fact essential to the application of this doctrine is that of a possession visibly that of some one who is not the person with whom the purchaser or creditor purposes to deal. He is not required to institute inquiries as to the existence of rights of which there is no evidence upon the records, unless there be some fact which he knows or should know sufficient to excite inquiry in the minds of prudent persons. A possession openly that of one other than his debtor or vendor is such a fact; but is a possession sufficient which does not appear to be that of a third person? The reason upon which the doctrine is founded does not warrant an affirmative answer. The authorities lay it down that the possession must be open and visible and unequivocal, meaning that it must be openly, visibly, and unequivocally that of the claimant under the unrecorded instrument. Id.
  
  Similarly, in 1927, in a writ refused case, the Court stated:
  
  Generally speaking, possession of real estate "is equivalent to registration" (Mainwarring v. Templeman, 51 Tex. 205), and is constructive notice of the possessor's right or claim, in that, as a matter of law, it puts a purchaser upon inquiry as to the nature of the claim of right of the possessor, and in the absence of proper inquiry the law charges the purchaser with notice of that claim upon the presumption that proper inquiry would disclose it. This rule is elementary.
  
  Ramirez v. Bell, 298 S.W. 924, 927 (Tex. Civ. App.-Austin 1927, writ ref'd).
  
  In 1936, the Supreme Court further discussed possession and its relation to a purchaser's inquiry requirement:
  
  A purchaser of land must search the records, for they are the primary source of information as to title and he is charged with knowledge of the existence and contents of the recorded instruments affecting the title. He must also make inquiry as to the rights or title of the possessor, for possession is equivalent to registration, in that it gives constructive notice of the possessor's rights. "The rationale seems to be, that as the occupant's title is a good one, and as his possession is notorious and exclusive, a purchaser would certainly arrive at the truth upon making any due inquiry. The purchaser cannot say, and cannot be allowed to say, that he made a proper inquiry, and failed to ascertain the truth. The notice, therefore, upon the same motives of expediency, is made as absolute as in the case of a registration." Pomeroy's Equity Jurisprudence (4th Ed.) § 615, Vol. 2, pp. 1166, 1167.
  
  The value and effectiveness of the registration statutes are to an extent impaired by the rule that possession gives constructive notice of title, but the rule is justified, or at least supported, as suggested by Mr. Pomeroy, by the fact that ordinarily the truth as to title may be readily obtained from the person in possession. ... So it may safely be said that the `character of possession' referred to as constituting constructive notice, with respect to the character of case we have under consideration, must consist of open, visible, and unequivocal acts of occupancy in their nature referable to exclusive dominion over the property, sufficient upon observation to put an intending purchaser on inquiry as to the rights of such possessor; and that ambiguous or equivocal possession which may appear subservient or attributable to the possession of the holder of the legal title is not sufficiently indicative of ownership to impute notice as a matter of law of the unrecorded rights of such possessor. . . . . . . A fact or circumstance, other than facts of record or possession visible and exclusive, will not put a purchaser on inquiry unless it is a fact or circumstance that he knows or should know. In other words, one is not put on inquiry by a fact or circumstance of which he knows nothing, unless it can be said that notice of it is imputed to him as a matter of law. Strong v. Strong, 98 S.W.2d 346, 348 (Tex. 1936).
  
  Thus, in Strong, the Court noted that open, visible, exclusive, and unequivocal possession would suffice as constructive notice, just as if title had been recorded, and that a purchaser had a duty to inquire as to the possessor's rights, despite the fact that such constructive notice would impair the effectiveness of the registration statutes.
  
  In 1968, the Supreme Court refused the writ in Aldridge v. N.E. Indep. Sch. Dist., 428 S.W.2d 447 (Tex. Civ. App.-San Antonio 1968, writ ref'd), in which the Court stated, "As a general rule, possession of real estate is equivalent to registration and is constructive notice of the possessor's right or claim, in that, as a matter of law, it puts a purchaser upon inquiry as to the nature of the claim of right of the possessor, and in the absence of proper inquiry the law charges the purchaser with notice of that claim upon the presumption that proper inquiry would disclose it." Id. at 449.
  
  The Texas Supreme Court recently set forth the same rules in Madison v. Gordon, 39 S.W.3d 604 (Tex. 2001). The Court stated:
  
  One purchasing land may be charged with constructive notice of an occupant's claims. This implied-notice doctrine applies if a court determines that the purchaser has a duty to ascertain the rights of a third-party possessor. When this duty arises, the purchaser is charged with notice of all the occupant's claims the purchaser might have reasonably discovered on proper inquiry. The duty arises, however, only if the possession is visible, open, exclusive, and unequivocal.
  
  Id. at 606. The Court noted that in the case of Strong v. Strong, 98 S.W.2d 346 (Tex. 1936), the Court "described the kind of possession sufficient to give constructive notice as `consist[ing] of open, visible, and unequivocal acts of occupancy in their nature referable to exclusive dominion over the property, sufficient upon observation to put an intending purchaser on inquiry as to the rights of such possessor.' Possession that meets these requirements — visible, open, exclusive, and unequivocal possession — affords notice of title equivalent to the constructive notice deed registration affords." Id. at 607.
  
  Thus, Texas law for over a century has consistently held that visible, open, exclusive, and unequivocal possession is constructive notice of title equivalent to the constructive notice that deed registration affords. Moreover, in addition to the cases cited previously, Texas courts have consistently held that this constructive notice places upon a potential purchaser a duty to inquire as to the possessor's rights. See Ramirez v. Smith, 59 S.W. 258, 260 (Tex. 1900); Tex. Am. Bank/Levelland v. Resendez, 706 S.W.2d 343, 346 (Tex. App.-Amarillo 1986, no writ); Investors Syndicate v. Mayfield, 96 S.W.2d 247, 250 (Tex. Civ. App.-Fort Worth 1936, writ dism'd) (holding that possession placed upon lender a duty of inquiry and that the "simplest inquiry would have disclosed, immediately, the fraud and deceit practiced by Ryan, Inc., and Snebold, and there would have been no renewal note—no deed of trust, and no money paid by appellant").
  
  The Bank contends that the Bankruptcy Judge erred in concluding as a matter of law that Henderson's possession of the property was open, visible, exclusive, and unequivocal. In Madison v. Gordon, the Texas Supreme Court noted previous cases that seemingly supported the possessor's position that possession alone gives rise to constructive notice, but criticized those cases because they did not mention the requirements that the possession be visible, open, exclusive, and unequivocal. However, the Court acknowledged that, in each of those cases, the occupant lived in a single-unit dwelling. Thus, the Court did not question the ultimate outcome in those cases, noting that an occupant's sole possession of a single-unit dwelling "arguably" implicates visibility, openness, exclusivity, and unequivocality, but stressed that a Court should nevertheless assess the requirements of visibility, openness, exclusivity, and unequivocality. Id. These elements are essential because the doctrine of notice by possession is justified only by possession that would be sufficient upon observation of a subsequent purchaser to put him on inquiry as to the rights of the possessor.
  
  The Court concludes that the summary-judgment evidence conclusively established that Henderson's possession was open, visible, exclusive, and unequivocal, and that the Bank has failed to create an issue of material fact. The evidence establishes that Henderson occupied the property, a single-unit dwelling, continuously after April 1997, and that Henderson "came and went out of the house as is usual and customary for any person who lives in a house to do." Henderson parked his truck in the driveway and allowed his children and dog in the front yard. Thus, Henderson has shown that his possession was visible and open. No one occupied the property other than Henderson and his family, and thus the possession was exclusive. With regard to unequivocality, the Court concludes that there was nothing equivocal about Henderson's possession, which was continuous from the April 1997 through the time the loan was made, and was not compatible with an ownership claim by Hayes, a woman who purported to be single and using the property as her homestead. Compare Collum, 82 S.W. at 459 (holding that continuous possession of property marked by a fence was sufficient for inquiry notice) and Moore, 195 S.W. at 1137 (holding that possession by tenants of alleged vendors was sufficient to place duty of inquiry as to whether conveyance was absolute or intended only as a mortgage) with Burks, 105 S.W. at 176 (holding that portion of land that was fenced off but used only for garden was too uncertain or equivocal to provide notice) and Boyd v. Orr, 170 S.W.2d 829, 834 (Tex. Civ. App.-Texarkana 1943, writ ref'd) (holding that the fact that minor children were living with their mother, who was the vendor and apparent title holder, is not the character of possession as would constitute constructive notice of their equities arising from the undisclosed fact that their father had paid for a portion of the land with his separate funds).[6]
  
  The Bank contends that the valuation model and desktop appraisal methods it used, which were within industry standards, did not require physical inspection of the subject real property, However, it is Texas law that imposes a duty of inquiry based on Henderson's open, visible, exclusive, and unequivocal possession, regardless of whether the valuation model chosen by the Bank includes such a requirement. Thus, whether the valuation model or desktop appraisal method chosen by the Bank and the industry requires a physical inspection is not the relevant inquiry. Rather, given that the duty of inquiry was triggered by Henderson's open, visible, exclusive, and unequivocal possession as a matter of law, the only question that remains is whether the Bank prosecuted the inquiry as far as a prudent man would be bound to prosecute it, as delineated by relevant Texas authorities. As demonstrated by the Texas authorities cited above, Texas law has consistently held that a prudent man must inquire of the possessor regarding his claim and he will be deemed to have knowledge of the facts that such inquiry would disclose.
  
  The Bank argues that it should not be held to the same standard as a purchaser of real property and should not be required to inspect the real property because lenders are interested only in record title and valuation, and imposing such a requirement would make the lending process much more onerous and costly.
  
  However, the Texas Supreme Court has not distinguished between purchasers and creditors. Paris Grocer, 105 S.W. at 175 (refusing to hold that possession that was not notice to a purchaser would be notice to a creditor, when both take their rights under the same statute); Collum, 82 S.W. at 460 (holding that, if possession is notice to a purchaser, it is notice to a creditor); Ramirez v. Smith, 59 S.W. 258 (Tex. 1900) (holding that a mortgagee was put on constructive notice that triggered a duty of inquiry concerning the possessor's claim).
  
  Texas courts of appeals also have not imposed a lesser burden on mortgagees than on purchasers of real property, instead applying the same standard to both. See, e.g., Boyd v. United Bank, 794 S.W.2d 839, 841 (Tex. App.-El Paso 1990, writ denied) (noting that one who accepts a mortgage may be charged with knowledge as to the possessor's interest and be held to have acquired a lien that is inferior to the possessor's interest); Tex. Life Ins. Co. v. Tex. Bldg. Co., 307 S.W.2d 149, 152-53 (Tex. Civ. App.-Fort Worth 1957, no writ); Brown v. Moss, 265 S.W.2d 613, 616 (Tex. Civ. App.-Fort Worth 1954, writ ref'd n.r.e.); San Antonio Loan & Trust Co. v. Rabb, 155 S.W.2d 981, 982 (Tex. Civ. App.-San Antonio 1941, writ ref'd w.o.m.) (possession of the property at the time the deed of trust was executed and the loan made was sufficient to place the loan company on notice of possessor's rights, and the loan was therefore made subject to her prior title).
  
  Federal district courts have also applied the same standard to mortgagees. See, e.g., Ontiveros v. Mbank Houston, N.A., 751 F.Supp. 128, 130 (S.D. Tex. 1990) (holding that bank was charged with constructive notice of tenant's rights in property by tenant's possession).[7] Thus, because the Texas Supreme Court and the recording statute fail to differentiate between purchasers and mortgage lenders with regard to constructive notice, the Bank's argument that it should be held to a lesser standard fails.
  
  The Court is sympathetic to the Bank's position, recognizing that it may be burdensome for Banks to determine whether a third party is in possession of the property and, if so, to inquire as to the nature of their claim. This cost surely will be passed on to mortgagors, rendering the process more costly for all. In addition, whether applicable to purchasers or mortgagees, the Court is concerned that the rule of possession as constructive notice sufficient to defeat one's rights under the recording statute defeats the purpose of the recording statute to encourage recordation and create stability of titles. See Cox v. RKA Corp., 753 A.2d 1112 (N.J. 2000) (because the integrity of the recording scheme is paramount, absent any unusual equity, the stability of titles and conveyancing requires the judiciary to follow that course that will best support and maintain the integrity of the recording system).
  
  Nevertheless, that is the result dictated by the case law and by the language of the recording statute, which protects only those without notice. Moreover, this Court cannot make its own policy in this case. Rather, the Court is bound to apply Texas law as established by the Texas Supreme Court. Texas law regarding possession by constructive notice despite the existence of and policy underlying the recording statute has remained unchanged for almost a century, and was affirmed by the Texas Supreme Court as recently as 2001. Accordingly, this Court must apply that well-settled law.
  
  Because Henderson's possession is deemed by law to be notice of what would have been disclosed by inquiry, the Bank is deemed as a matter of law to have had notice of Henderson's prior equitable claim. Accordingly, the Bank does not enjoy the protection of the recording statute or other equitable principles. The Court therefore AFFIRMS the Bankruptcy Court's summary judgment in favor of Henderson.

For the ruling, see In re Hayes, Civil Action No.: SA-03-CA-1228-XR (W.D. Tx. 2004).

This ruling, affirming an earlier ruling of the U.S. Bankruptcy Court, was subsequently affirmed by a U.S. Appeals Court in an unpublished opinion. 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).

Go here for the appellate brief filed on behalf of the homeowner.

See this post, footnote 2 more on the duty to inquire into the rights of occupants in possession of land when applying the bona fide purchaser doctrine under Texas law.

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

NYC Homebuyer Who Failed To Ascertain Status, Rights Of All Persons In Possession Of Premises Discovers 'Phantom' Tenant Holding Unrecorded 60-Year, $10/Month Lease On 2-Bedroom, West Village Duplex; Resorts To Lawsuit To Boot Renter, Claiming He Either Forged Elderly Ex-Owner's Signature Or Took Advantage Of His Dementia, Alcoholism When Obtaining Lease

In New York City, the New York Post reports:

• It’s the best lease in the city. In 2009, Jud Parker got a West Village landlord to give him a ­duplex apartment on tony Minetta Street for $10 a month — for 50 years!
  
  Now new landlord Pari Dulac is challenging the sweetheart deal and claiming the old owner, who died in 2010, had dementia when it was allegedly signed. “When I saw the lease, I couldn’t believe it,” said Dulac, a longtime Village resident. “I thought it was a joke.” Wilfred Schuman, a German-born ballet dancer, had owned a pair of three-story town houses at 12 and 14 Minetta St. since 1993. He lived in the basement of 12 Minetta St.
  
  According to the August 2009 lease, Parker and gal pal Stefanie Tyler pay just $10 a month for the 1,400-square-foot duplex at 14 Minetta St., which has two bedrooms and a back yard. The 50-year lease has a 10-year renewal option.
  
  In a lawsuit filed in Manhattan Supreme Court Friday, Dulac claims Parker bamboozled Schuman, who was in his 70s — then subletted the apartment for $2,500 a month after his death. The suit claims Parker manipulated Schuman into signing the lease or forged his signature.
  
  Dulac bought the buildings from Schuman’s estate last week for $2.75 million. She believes she could rent Parker’s pad for $6,000 a month — which, ironically, is equal to what Parker would pay over the course of his entire half-century lease. But Parker, 47, who was making repairs to the apartment Friday, said the lease was a “gift.” “I was a surrogate son. I took care of him my whole life,” Parker said. “[Dulac] wants me out because she’s greedy.”
  
  Parker, who declined to comment further, grew up across the street from Schuman. He bought a condo in Davie, Fla., in 2006, rec­ords show. His lease also lists the Florida address.
  
  Schuman was admitted to hospitals from 2007 to 2009 for alcoholism, dementia and bleeding of the brain after a fall, the lawsuit alleges. Dulac also has an affidavit from Schuman’s brother, Volkmar, who lives in Berlin and corroborates his brother’s dementia.
  
  In affidavits, residents described Schuman as paranoid, reclusive and “often drunk by late afternoon.” He ate little, “besides cans of tuna fish, which he shared with his cats,” one tenant said. David Burnett, who lived above Schuman, opened a bank account in the ailing landlord’s name so tenants could deposit monthly rent checks that Schuman was ­incapable of accepting.
  
  Schuman refused to offer tenants formal leases beginning in 2007, and residents lived month to month. In an affidavit, Burnett said he encountered Parker in his building in 2009, but had seen him only twice before over a period of 20 years. Burnett grew suspicious after Parker and Tyler started hanging around Schuman’s pad for three weeks in 2009. He didn’t see Parker again until June 2010 — when he asked where the rent should be paid.
  
  Laurie Dowdeswell, who lived at 14 Minetta St., said Parker asked for Schuman in August 2010, unaware that he had died, according to the lawsuit. A day later, Parker presented her with the lease and claimed it was his apartment, according to the suit.
  
  Parker allegedly demanded she sublet for $1,500 a month or vacate the apartment. Her rent increased to $2,500 two years later — which was $350 cheaper than what she paid Schuman. Parker didn’t have keys to the apartment until October 2014 ­after Dowdeswell and her husband left, the lawsuit alleges.
  
  “This lease is outrageous and unconscionable,” said Dulac’s ­attorney Steven Sladkus.

Source: Manhattan apartment is $10 a month … for 50 years.

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).

Screwed Over Florida Homeowners Score Trial Court Reversals In Three Cases As Appeals Court Rejects Use Of 'Robo-Witnesses' Giving Inadmissible Heresay To Support Bankster Foreclosures; Cases Now Subject To Dismissal, May Create Statute Of Limitations Problem For Banksters Thinking Of Re-Filing Cases

The South Florida Daily Business Review (via The Real Deal/South Florida) reports:

• In three cases over two days, the First District Court of Appeal threw out evidence submitted in foreclosure actions and ruled the lenders' witnesses were unqualified.
  
  In what appears to be a trend, the court said the trial courts in two of the three cases should dismiss the lawsuits altogether in favor of the homeowners.
  
   The Oct. 13 and 14 decisions are believed to be the first to strike down so-called robo-witnesses in a homeowner's case with a lender as plaintiff, said foreclosure defense attorney Thomas Ice of Ice Legal in Royal Palm Beach.
  
  The decisions should become effective statewide if the 30-day deadline for filing a motion for rehearing expires without further action by the lender.(1)
  
  Ice said bank attorneys often come to trial in foreclosure cases with a single witness who lacks first-hand knowledge of the origin and accuracy of the mortgage records they describe.
  
  "It's the same in almost every single bank case because they are always transferring these loans around. The loan servicers change at least once and very often several times between the time of the loan and the trial," Ice said.
  
  In the years following the housing crash, Florida courts were flooded with home foreclosure filings. Defense attorneys protested plaintiffs firms were circumventing evidentiary rules by submitting forged assignments and other documents to prove standing. The so-called robo-signing scandal led to an attorney general's challenge in 2010 that forced lenders and servicers to stop filing new foreclosure cases.
  
  When the banks resumed litigating cases, often under deadline pressures imposed by the chief circuit judges, they often relied on witnesses with limited knowledge of the mortgage documents.
  
  In August 2013, the Fourth District issued a decision in a case involving a condominium owner and her association (see Yang v. Sebastian Lakes Condo. Ass'n Inc., 123 So. 3d 617 (Fla. 4th DCA 2013)). The owner, Connie Yang, got a reversal against Sebastian Lakes Condominium Association because it didn't lay the proper foundation to admit evidence from an accounting ledger.
  
  Ice said foreclosure defense lawyers have used Yang's case to argue against unqualified lender witnesses, but judges have repeatedly told them the Fourth District case applied only to homeowner associations, not banks.
  
  "I didn't realize they had different rules," Ice said facetiously. "That's why I kept waiting for a bank case. We needed a flat-out, on-point bank case."
  
  'Burdeshaw v. BNY Mellon'
  
  First District Judge Nikki Ann Clark in Tallahassee wrote the lengthiest opinion, a 17-page ruling against Bank of New York Mellon. In that case, Lloyd and Teresa Burdeshaw of Lynn Haven in Bay County appealed a final judgment of foreclosure by arguing the evidence to support the amount of indebtedness was inadmissible hearsay.
  
  Clark noted that the bank's witness—loan servicer employee Nancy Johnson of SunTrust Mortgage Inc.—did not know where any information on payments made before SunTrust's acquisition of the account came from. She never testified whether the entries were made at the time of the event; by a person with knowledge; kept in the ordinary course of business; and as a regular business practice—all crucial elements for laying the foundation.
  
  "BNY Mellon failed to establish any foundation qualifying the printout Ms. Johnson read as a business record and failed to establish any foundation qualifying Ms. Johnson as a records custodian or person with knowledge of the four elements required for the business records exception," Clark said. The Burdeshaw v. BNY Mellon panel included Judges William Van Nortwick and L. Clayton Roberts.
  
  The panel also found the trial court should have dismissed the case in Burdeshaw's favor years ago because a 2010 motion to dismiss for inactivity was valid. Under judicial rules, a motion or other plea must be filed within 60 days to keep a case active; otherwise, it is subject to dismissal.
  
  "This case does not present a reason to afford BNY Mellon additional time and another opportunity to prove its case. As the Second District has held, 'appellate courts do not generally provide parties with an opportunity to retry their case upon a failure of proof,' "(2) Clark said.
  
  Clark's opinion was all the more remarkable because it was one of three issued by the First District in two days that reversed foreclosures and sided with homeowners based on hearsay testimony, said Jeffrey Whitton of Panama City, Burdeshaw's attorney.
  
  "What I find interesting here is they didn't just vacate and remand, they vacated with instruction to dismiss. If I'm reading the tea leaves, the message here is that district courts are not in the business of giving second chances," Whitton said.
  
  "I would think the First District was trying to face the problem of some of the quality of evidence involving foreclosure cases. If you just looked at that as a coincidence, three opinions in two days involving a number of different judges, you have to realize there is some trending there," he added.
  
  Two More Rulings
  
  Although Clark's was the lengthiest, all of the opinions were detailed. Kiefert v. Nationstar Mortgage, a six-page opinion by Judge Robert Benton II, reversed because the bank witness was only able to establish that its predecessor, Aurora Loan Services LLC, was in possession of the note when the complaint was filed, "not that the note had been endorsed at the time the complaint was filed."
  
  And in Lacombe v. Deutsche Bank National Trust, an unsigned, the appeals court concluded the bank's witness was "incoherent."
  
  As in Burdeshaw, the Lacombe court refused to remand the case for the presentation of additional evidence, citing the length of time—more than five years—that Deutsche Bank National Trust Co. had to prepare and instead instructed the trial court to dismiss the case.(3)
  
  If the First District opinions stand, Ice said foreclosure courts should at last be treating evidence like other courts do.
  
  Long frustrated with what he sees as a double standard, Ice said judges in medical malpractice and other areas of law would not tolerate the coaching that goes on in foreclosure trials.
  
  "They're just feeding witnesses with hearsay so that they can regurgitate these magic words in court," Ice said. "That's improper. It's one thing to be trained for the job, to be able to say, 'I'm trained to put these records into the computer when I get a check from the customer.' That qualifies you to testify about the record. But to be told how it works for litigation purposes is the very worst kind of hearsay that there is."
  
  He added, "If that's enough to get records in, then why have witnesses at all? Just toss these records up on the bench and tell the judge, 'Here, read them.'"
  
  Austin Brown of Parker & DuFresne in Jacksonville represented the Lacombes.
  
  Thomas Pycraft of Pycraft Legal Services in St. Augustine represented the Kieferts.

Source: Foreclosure Reversal Issued in Case With 'Robo-Witness'.

Editor's Note: Now that the screwed over homeowners are considered the prevailing parties in these successful appeals, their attorneys are entitled to an award for legal fees, even if the case was taken on a pro bono basis, with the losing banksters being on the hook for picking up the tab to be awarded by the trial judge (go here for earlier posts on prevailing party attorney fees).

Further, to the extent these cases were taken by the attorneys on a contingency fee or pro bono basis, they may also be entitled to apply a contingency fee risk multiplier / enhancement to the amount the trial judge ultimately awards in prevailing party legal fees, serving to increase the total tab to be paid by the losing bankster. See, for example, Bank of New York v. Williams, 979 So.2d 347 (Fla. 1st DCA 2008), where Florida's 1st District Court of Appeal ok'd a multiplier of 2.5 in a successful foreclosure defense. Go here for earlier posts on the contingency fee risk multiplier.

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Footnotes

(1) Unless and until the Florida Supreme Court addresses this issue, and to the extent there are no conflicting rulings from sister Florida appeals courts, the rulings by Florida's 1st District Court of Appeal in these cases will, upon the expiration of the 30-day period for requesting a re-hearing, be binding, not only on all trial courts within the 1st District, but on all trial courts throughout the state of Florida. See:

Gross v. State, 765 So. 2d 39 (Fla. 2000):

• A trial court is obligated to follow decisions of the district court of appeal, and where there is no decision on point from the district court for the circuit in question, the trial court is bound to follow precedents of other district courts of appeal. See Pardo v. State, 596 So.2d 665, 666-67 (Fla.1992) ("[I]n the absence of interdistrict conflict, district court decisions bind all Florida trial courts.").

Pardo v. State, 596 So. 2d 665 (Fla. 1992):

• This Court has stated that "the decisions of the district courts of appeal represent the law of Florida unless and until they are overruled by this Court." Stanfill v. State, 384 So.2d 141, 143 (Fla. 1980).
  
  Thus, in the absence of interdistrict conflict, district court decisions bind all Florida trial courts. Weiman v. McHaffie, 470 So.2d 682, 684 (Fla. 1985).
  
  The purpose of this rule was explained by the Fourth District in State v. Hayes:
  
  "The District Courts of Appeal are required to follow Supreme Court decisions. As an adjunct to this rule it is logical and necessary in order to preserve stability and predictability in the law that, likewise, trial courts be required to follow the holdings of higher courts--District Courts of Appeal.
  
  The proper hierarchy of decisional holdings would demand that in the event the only case on point on a district level is from a district other than the one in which the trial court is located, the trial court be required to follow that decision.
  
  Alternatively, if the district court of the district in which the trial court is located has decided the issue, the trial court is bound to follow it. Contrarily, as between District Courts of Appeal, a sister district's opinion is merely persuasive."
  
  333 So.2d 51, 53 (Fla. 4th DCA 1976) (footnote and citations omitted).[See generally Taylor Mattis, Stare Decisis Among and Within Florida's District Courts of Appeal, 18 Fla.St.U.L.Rev. 143, 155-160 (1990).]

See also:

Ansin v. Thurston, 101 So.2d 808 (Fla. 1958), where the Florida Supreme Court made clear that its jurisdiction to hear appeals is extremely narrow, and commented on the finality of the rulings of the lower Florida appellate courts:

• We have heretofore pointed out that under the constitutional plan the powers of this Court to review decisions of the district courts of appeal are limited and strictly prescribed. Diamond Berk Insurance Agency, Inc., v. Goldstein, Fla., 100 So.2d 420; Sinnamon v. Fowlkes, Fla., 101 So.2d 375.
  
  It was never intended that the district courts of appeal should be intermediate courts. The revision and modernization of the Florida judicial system at the appellate level was prompted by the great volume of cases reaching the Supreme Court and the consequent delay in the administration of justice. The new article embodies throughout its terms the idea of a Supreme Court which functions as a supervisory body in the judicial system for the State, exercising appellate power in certain specified areas essential to the settlement of issues of public importance and the preservation of uniformity of principle and practice, with review by the district courts in most instances being final and absolute.
  
  To fail to recognize that these are courts primarily of final appellate jurisdiction and to allow such courts to become intermediate courts of appeal would result in a condition far more detrimental to the general welfare and the speedy and efficient administration of justice than that which the system was designed to remedy.

Johns v. Wainwright, 253 So.2d 873 (Fla. 1971):

• The District Courts of Appeal were never intended to be intermediate courts. It was the intention of the framers of the constitutional amendment which created the District Courts that the decision of those courts would, in most cases, be final and absolute.

Go here for links to Federal cases following this proposition when applying Florida law.

(2) See Wolkoff v. American Home Mortg. Servicing, Inc., ___ So. 3d ___, 39 Fla. L. Weekly D1159, 2014 WL 2378662 (Fla. 2d DCA May 30, 2014).

(3) Inasmuch as Florida's statute of limitations for commencing foreclosure cases is five years (see Sec. 95.11(2)(c), Florida Statutes), I wonder if this means that the mortgage on this home can no longer be foreclosed (ie. Did the homeowner just win a 'free' house???).