More Contract For Deed Horror Stories - Texas Homebuyers Lose Home To Foreclosure Despite Making All Payments As Seller Pockets Cash & Stiffs Bank

In Edna, Texas, The Victoria Advocate reports on the story of Clara and Jose Carrera and their kids, a local family who just lost their home to foreclosure, despite paying in full all payments required under their purchase agreement and making significant improvements to their home:

• Although the family thought they had paid off their Edna home a year ago, a series of events put [the Carreras] in the precarious position they found themselves in [...]. It began in September 2000, when Clara and Jose Carrera decided to purchase the home off County Road 306 near Edna from James Glenn Whitley.

• They entered a contract for deed, meaning once they paid it off, the property was theirs, said Bobby Bell, Jackson County district attorney. The family paid the $53,000 they owed for the 10-year contract two years early.(1) The family approached Whitley and asked for the title, Clara Carrera said, but Whitley always said he was working on it. "We waited three or four months," she said. "We waited and waited, but he never answered." The Carreras got their answer when the bank sent them a note in the spring alerting them of the pending foreclosure.

• Whitley had approached Prosperity Bank in 2006 and pledged the property. When he filed for bankruptcy, he listed the Carreras as leasees, limiting their legal rights, Bell said.(2)

***

• The Carreras' property wasn't the only one up for sale. Jerry and Stacey Berry's home also went to auction. They too had been duped by Whitley. The couple paid $10,000 down for property they purchased from Whitley and paid $1,280 a month, Bell said. Of that, $200 was to go for taxes and insurance. When a grass fire on the Berrys' land damaged a neighbor's shed, they went to collect insurance money, said Brian Rogers, the family's attorney. The problem? There wasn't any insurance.

• Whitley didn't own the property when the family purchased it, Rogers said. After Whitley received the $10,000, he purchased it from someone else, Bell said, but never paid the insurance. Whitley borrowed the money to make the purchase from Bill and Miriam Ackley, who acted as private lenders, Rogers said.

For more, see Jackson County foreclosure auction brings tears, questions.

(1) Reportedly, Jose Carrera and his 14-year-old son, also named Jose Carrera, added their own touches on their home, building on a living room, car port and even remodeling the bathroom, the younger Jose said.

(2) According to this story, the Carreras entered into the contract for deed with Whitley in September, 2000. Presumably, they took possession of the property at that time; also presumably, they failed to record their contract in the county land records office. The story then goes on to state that it wasn't until about six years later (2006) that Whitley pledged the property as collateral for the loan that the lender ultimately foreclosed (presumably, the lender recorded its mortgage in the local land records office promptly after making the loan to Whitley). Based on these facts, it appears that the Carreras' legal interest in the home, albeit unrecorded, is actually superior to the lender's subsequently created, recorded interest (as a mortgagee) in the property.

The general rule when it comes to recording real property interests at the local land records office can be described as "first in time, first in right" (ie. an earlier recorded interest has priority over a later recorded interest, irrespective of when the interests were actually created). Based on this alone, it would appear to the uninitiated that the bank's recorded mortgage has priority over the Carreras' earlier created, but unrecorded, land contract. Those who assert this position generally point to their state recording statutes as support for their position.

However, the relevant legal analysis (as it would apply in this particlar story) does not end there. What is often (and regrettably) overlooked when reading the state recording statutes (particulary when it comes to undoing or unwinding foreclosure rescue and other real estate scams) is that those laws usually apply only when the party first recording its real property interest acquired it "for value" and "without notice" (ie. without actual notice of the claim of another, or without constructive notice of certain facts a party should have become aware of which, if investigated, would reveal the claim of another). Stated another way, the state recording statutes generally only serve to protect those acquiring interests in real property when acting as bona fide purchasers (in the case of real estate buyers) and bona fide encumbrancers (in the case of mortgage lenders). Therefore, if a party is not a bona fide purchaser/encumbrancer, the "first in time, first in right" rule does not apply. In that case, the owner of the earlier created real property interest has priority over any subsequently created interest, irrespective of when recording takes place.

Further, in this analysis, it is generally true that one acquiring an interest in real estate does so with notice of all the legal and equitable rights and claims in the premises, and in subordination to these rights and claims, of any person or persons, other than the record owner, in open, notorious (ie. visible), exclusive and unequivocal possession of the property.

In the case that the Carreras' find themselves in, the relevant question appears to be:

• Is the foreclosing mortgage lender (which acquired and recorded its interest in the Carrera home some six years after the Carreras acquired their interest and took possession of the home by reason of its unrecorded contract for deed from Whitley) entitled to the special protection of the recording statutes as a bona fide purchaser/encumbrancer, thereby giving its recorded interest priority over the Carreras' unrecorded contract for deed?

Even if one assumes, for sake of argument, that the foreclosing lender paid value for its interest, and had neither any actual knowledge of the scam perpetrated by Whitley on the Carreras, nor any actual knowledge of the Carreras' open, notorious, exclusive, and unequivocal possession of their home, the answer seems to be a definitive no. Further, since Carrera has paid off the contract for deed, it is Carrera who appears to be entitled to the home free and clear of any right the foreclosing lender may claim.

A review of some of the Texas case law appears to lend some support to this position.

The Texas Supreme Court, in Madison v. Gordon, 39 S.W.3d 604; 2001 Tex. LEXIS 5; 44 Tex. Sup. J. 410, (Tex. 2001), made this observation (some citations omitted, any bold text is my emphasis):

• Status as a bona fide purchaser is an affirmative defense to a title dispute. A bona fide purchaser is not subject to certain claims or defenses. To receive this special protection, one must acquire property in good faith, for value, and without notice of any third-party claim or interest. Notice may be constructive or actual. Actual notice rests on personal information or knowledge. Constructive notice is notice the law imputes to a person not having personal information or knowledge.

• 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. See Collum v. Sanger Bros., 98 Tex. 162, 82 S.W. 459, 460 (Tex. 1904); American Surety Co., 82 S.W.2d at 183. 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. Dixon v. Cargill, 104 S.W.2d 101, 102 (Tex. Civ. App.--Eastland 1937, writ ref'd); see also Flack, 226 S.W.2d at 632. The duty arises, however, only if the possession is visible, open, exclusive, and unequivocal. See Strong v. Strong, 128 Tex. 470, 98 S.W.2d 346, 350 (Tex. 1936).

***

• In Strong, we described the kind of possession sufficient to give constructive notice as "consisting 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." Strong, 98 S.W.2d at 350. Possession that meets these requirements--visible, open, exclusive, and unequivocal possession -- affords notice of title equivalent to the constructive notice deed registration affords. Strong, 98 S.W.2d at 348.

A Texas appeals court, in Cohen v. Hawkins, NO. 14-07-00043-CV, 2008 Tex. App. LEXIS 2647 (Tex. App. Houston [14th Dist] 2008, pet. denied), made the following observation (in footnote 6), describing a purchaser's duty to inquire of those in possession of the subject real estate:

• A purchaser of land is charged with constructive notice of all claims of a party in possession of the property that the purchaser might have discovered had he made proper inquiry. Apex Fin. Corp. v. Garza, 155 S.W.3d 230, 234 (Tex. App.--Dallas 2004, pet. denied); see also Madison, 39 S.W.3d at 606. More specifically, possession by a third party requires that the purchaser make such inquiries as a reasonable person would, and the failure to make such inquiries charges the purchaser with knowledge of the claims and facts such inquiry would have revealed. See Collum v. Sanger Bros., 98 Tex. 162, 82 S.W. 459, 460 (1904); Aldridge v. N.E. I.S.D., 428 S.W.2d 447, 449 (Tex. Civ. App.--San Antonio 1968, writ ref'd n.r.e.); Astin v. Martin, 289 S.W. 442, 444 (Tex. Civ. App.--Austin), rev'd on other grounds, 295 S.W. 584 (1926).

In Fletcher v. Minton, 217 S.W.3d 755; 2007 Tex. App. LEXIS 2225 (Tex. App. - Dallas 2007), a Texas appeals court made this statement:

• The unrecorded instrument is binding . . . on a subsequent purchaser who does not pay a valuable consideration or who has notice of the instrument. TEX. PROP. CODE ANN. § 13.001 (Vernon 2006). Thus, an unrecorded conveyance is binding on those who have knowledge of the conveyance. Burris v. McDougald, 832 S.W.2d 707, 709 (Tex. App.-Corpus Christi 1992, no writ). A person who acquires property in good faith, for value, and without notice of any third-party claim or interest is a bona fide purchaser. Status as a bona fide purchaser is an affirmative defense to a title dispute. Madison v. Gordon, 39 S.W.3d 604, 606, 44 Tex. Sup. Ct. J. 410 (Tex.2001).

• Notice will defeat the protection otherwise afforded a bona fide purchaser. City of Richland Hills v. Bertelsen, 724 S.W.2d 428, 429 (Tex.App.-Fort Worth 1987, no writ). "Notice" is broadly defined as information concerning a fact actually communicated to a person, derived by him from a proper source, or presumed by law to have been acquired. Flack v. First Nat'l Bank, 148 Tex. 495, 226 S.W.2d 628, 631 (Tex.1950). Notice may be actual or constructive. Id. Actual notice results from personal information or knowledge, as well as those facts which reasonable inquiry would have disclosed. Constructive notice is notice the law imputes to a person not having personal information or knowledge. Madison, 39 S.W.3d at 606; Flack, 226 S.W.2d at 631-632.

• A purchaser of land is charged with constructive notice of all claims of a party in possession of the property that the purchaser might have discovered had he made proper inquiry. Apex Fin. Corp. v. Garza, 155 S.W.3d 230, 234 (Tex.App.-Dallas 2004, pet. denied). This duty to ascertain the rights of a party in possession of the property arises when the possession is open, visible, exclusive, and unequivocal. Id. see also, Madison, 39 S.W.3d at 606.

In Morgan v. Chase Home Fin., LLC, No. 08-50288, 306 Fed. Appx. 49; 2008 U.S. App. LEXIS 26894 (5th Cir. 2008), a Federal appeals court gave the following discussion of In re Hayes, 2004 WL 2926006 (W.D. Tex. Dec. 15, 2004), which addressed the bona fide purchaser doctrine, and its application to mortgage lenders, under Texas law:

• There, Elizabeth Hayes sold her house to John Henderson but failed to transfer the property by general warranty deed. After payment had been made and Henderson had moved in, Hayes received a loan from a bank using the house as collateral. When Hayes later declared Chapter 7 bankruptcy, the bank asserted its lien. Henderson objected, arguing that he had superior equitable title; the bank responded that it had no notice of Henderson's claim to the house and so was a bona fide purchaser for value. Under Texas law, open, visible, exclusive, and unequivocal possession of property is constructive notice to any subsequent purchaser and triggers a duty of inquiry. Id. at *9. The bank in Hayes, however, argued that lenders should not be held to the same duty of inquiry as individual purchasers, because "the valuation model and desktop appraisal methods it used . . . did not require physical inspection of the subject real property." Id. at *12. The court disagreed, finding that Texas law did not distinguish between lenders and individuals regarding bona fide purchaser status.

Note: The Federal District Court ruling in In re Hayes, 2004 WL 2926006 was affirmed on appeal. Bank of Am., N.A. v. Schwartz (In re Hayes), 194 Fed. Appx. 217; 2006 U.S. App. LEXIS 21139 (5th Cir. 2006):

• Bank of America also argues that the lower courts imposed an effective duty of inquiry that exceeds industry standards; however, it provides no Texas law, and our independent review reveals none, that requires or permits banking industry standards to dictate the law of interests in real property. We decline to read any such rule into the law of the State of Texas.

(The lower Federal court's 23-page ruling in In re Hayes 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 the facts in this case).

In conclusion, the foregoing application of the doctrine of bona fide purchaser/encumbrancer when applying the protection of the state recording statutes, when property is occupied by a person or persons other than the seller or legal title holder, is not unique to Texas. See Bona Fide Purchaser Doctrine, Possession Of Property By Occupants Other Than The Vendor & The Duty To Inquire. See also, The Bona Fide Purchaser for Value of a Legal Estate Without Notice. rent to own lease purchase option scams yellowstone

Ownership Interest Under Equitable Mortgage Defeats Interest Of Subsequent Buyer; Lack Of Knowledge Not Enough To Sustain Bona Fide Purchaser Status

A February 14, 2008 decision of the Michigan Court of Appeals provides an illustration of how the equitable mortgage doctrine and the bona fide purchaser doctrine operate in a given case.

The case, Vernier v. Sipe (No. 276037, Mich. Ct. App., February 14, 2008), involved an arrangement whereby a real property owner ("Defendant" or "equitable mortgagor") executed a deed which, on its face, purported to convey absolute legal title to real property to another ("original grantee" or "equitable mortgagee"). The undisputed purpose of the conveyance was to provide collateral for a loan.

The original grantee subsequently conveyed its interest in the property by quit claim deed to another, and after another conveyance, the property interest ended in the hands of the Plaintiff. The Plaintiff had no knowledge of the original arrangement between Defendant/equitable mortgagor and the original grantee/equitable mortgagee.

Given the facts of the case, the trial court originally hearing the case ruled that:

• the conveyance from the Defendant did not convey absolute legal title to the original grantee. Because the conveyance was intended to secure a debt, the conveyance was treated as an equitable mortgage;

• because the Plaintiff had no knowledge of the original arrangement between the Defendant and original grantee, the Plaintiff was a bona fide purchaser without notice of the interest. Therefore, according to the trial court, despite that the original arrangement was ruled to be an equitable mortgage, the Plaintiff's property interest, acquired as a bona fide purchaser without notice, defeats the property interest of the Defendant under the equitable mortgage.

On appeal, the Michigan Court of Appeals ruled as follows:

• affirmed the trial court ruling that the arrangement was an equitable mortgage, and

• reversed the trial court ruling that the Plaintiff was a bona fide purchaser without notice, despite the fact that Plaintiff had no knowledge of the original arrangement giving rise to the equitable mortgage.

Even though the Plaintiff had no knowledge of the existence of the arrangement ultimately held to be an equitable mortgage, the Michigan appeals court (given the specific facts of the case), ruled that the Plaintiff nevertheless "had notice" of the equitable mortgage arrangement, and consequently, was not entitled to bona fide purchaser status.

The court based its ruling on the fact that Plaintiff had failed to satisfy his obligation of exercising due diligence in inquiring as to the possible existence of rights of others in the subject property. Given the specific facts of the case, the court ruled that had the plaintiff satisfied his obligation to exercise said due diligence and made the appropriate inquiries, it would have discovered the rights of the Defendant/equitable mortgagor under the equitable mortgage arrangement.

Given that the specific facts of the case are a bit convoluted, anyone interested in finding out exactly what transpired will have to read the case. What follows below are the observations of the Michigan Court of Appeals regarding the bona fide purchaser doctrine in the context of an equitable mortgage, as applied under the law of the state of Michigan (Note: For ease of reading, I made a couple of minor alterations to the excerpts from the original text of the decision below. For the exact text as it appears in the case, please refer to the court decision itself).

• However, if the [equitable] mortgagee, i.e., Holtz, transfers the property to a bona fide purchaser for value, the interest of the equitable mortgagor, i.e., Sipe, is defeated. MCL 565.32; In re Van Duzer, [390 Mich. 571, 578; 213 N.W.2d 167 (1973)]; 1 Cameron, Michigan Real Property Law (3d ed), § 18.8, p 685.

***

• A bona fide purchaser is one who has acquired a property interest for consideration and without notice of claims of interest in the property by a third party. Richards v Tibaldi, 272 Mich. App. 522, 539; 726 N.W.2d 770 (2006); 1 Cameron, Michigan Real Property Law (3d ed), § 11.20, pp 395-396. Notice may be actual or constructive and has been defined as follows:

"When a person has knowledge of such facts as would lead any honest man, using ordinary caution, to make further inquiries concerning the possible rights of another in real estate, and fails to make them, he is chargeable with notice of what such inquiries and the exercise of ordinary caution would have disclosed." [Richards, supra at 539, quoting Kastle v Clemons, 330 Mich. 28, 31; 46 N.W.2d 450 (1951).]

• A purchaser of real estate has a duty to investigate the seller's title as follows:

"It is the duty of a purchaser of real estate to investigate the title of his vendor, and to take notice of any adverse rights or equities of third persons which he has the means of discovering, and as to which he is put on inquiry. If he makes all the inquiry which due diligence requires, and still fails to discover the outstanding right, he is excused, but, if he fails to use due diligence, he is chargeable, as a matter of law, with notice of the facts which the inquiry would have disclosed." [American Fed S&L Ass'n v Orenstein, 81 Mich. App. 249, 252; 265 N.W.2d 111 (1978), quoting Schweiss v Woodruff, 73 Mich. 473, 477-478; 41 NW 511 (1889).]

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

To view the court decision, see Vernier v. Sipe (No. 276037, Mich. Ct. App., Per Curiam - Unpublished, February 14, 2008).

This is an UNPUBLISHED OPINION. In accordance with Michigan Court of Appeals rules, UNPUBLISHED OPINIONS are NOT PRECEDENTIALLY BINDING under the rules of STARE DECISIS. Michigan equitable mortgage alpha Michigan bona fide purchaser

Maryland High Court Revives Ex-Owner's Attempt In Civil Lawsuit To Undo Metropolitan Money Store Sale Leaseback Foreclosure Rescue Home Equity Ripoff

In Baltimore, Maryland, The Maryland Daily Record reports:

• Maryland’s top court has revived a woman’s attempt to retrieve the home she claims she lost in a foreclosure scam. The Court of Appeals said Harriette Julian can pursue her case even though she did not post a bond generally required in appeals of approved foreclosure sales. The instrument, called a supersedeas bond, stays execution of a circuit court’s approval while the appeal is pending.

• But the bond is required only when the foreclosed home is bought by a “bona fide purchaser” — one who has no reason to doubt the seller had clear title to the property, the Court of Appeals said. In this case, U.S. Bank knew of an alleged defect when it bid at the foreclosure sale, the court noted.(1)

• Julian had filed a notice of rescission in court, seeking to undo her transfer of title to the woman who took out the loan on which the bank was foreclosing. The bank admitted it knew of the notice before the foreclosure sale was held. “[B]ecause U.S. Bank, admittedly, had notice of an alleged defect prior to the foreclosure sale, its bona fide status at the time of the sale was in question,” Judge Lynne A. Battaglia wrote for the majority.

• In remanding the case to circuit court, the high court said Julian must persuade the judge her rescission notice complied with the law and put the bank on legally sufficient notice of a potential claim.

• Phillip Robinson, Julian’s attorney, called the court’s decision a warning to foreclosing lenders who, like U.S. Bank, take the property at a foreclosure sale. Lender-buyers must be diligent and make sure the foreclosed homeowner has no claim on the property under any consumer-protection law, or risk having a judge rule they are not a bona fide purchaser, said Robinson, executive director of Civil Justice Inc. in Baltimore.(2) “If I have a statutory claim and the lender proceeds to sale, the lender does so at his own peril,” Robinson said.

• Such statutes include the Maryland Protection of Homeowners in Foreclosure Act, which was the basis of Julian’s claim, as well as the Maryland Mortgage Fraud Act and the Maryland Consumer Protection Act, he said. U.S. Bank “had affirmative notice and chose to ignore it,” Robinson said.

• The court’s ruling contrasts with its Feb. 16 decision in Mirjafari v. Cohn,(3) which affirmed the general requirement that owners appealing a foreclosure sale must post a supersedeas bond. That case, however, did not involve an alleged foreclosure scam and a filed objection, Robinson said.

***

• Facing foreclosure, Julian agreed to convey her property to LaShawn Wilson. Wilson obtained a $482,000 mortgage from Wells Fargo Bank, N.A. The mortgage broker was Metropolitan Money Store, whose executives have been convicted of fraud in foreclosure scams, according to the Court of Appeals’ opinion. At settlement, Julian granted power of attorney to an investment firm, which was to put money from the sale in an account from which Wells Fargo would be paid. Wells Fargo assigned the loan to U.S. Bank. The lending institutions deny any knowledge of the alleged scam.

• No mortgage payments were made and U.S. Bank initiated a foreclosure action on Aug. 27, 2007, in Charles County Circuit Court. That day, Julian filed with the court a Notice of Rescission to revoke the power of attorney and rescind the conveyance. Trustees of U.S. Bank bought the property for $480,000 at the Sept. 20, 2007, foreclosure sale.

• Julian objected to the sale in circuit court, alleging U.S. Bank was not a bona fide purchaser because it had at least “inquiry notice” of her filed revocation notice. Circuit Judge Robert C. Nalley rejected the challenge. Julian appealed to the Court of Special Appeals, which did not address the bond issue but upheld Nalley’s ruling that U.S. Bank was a bona fide purchaser because it lacked knowledge of Julian’s objection on the date of its loan assignment from Wells Fargo.

• But the Court of Appeals said the date of assignment is irrelevant in determining if the assignee is a bona fide purchaser. The relevant date is the purchase date(4) and by then — as U.S. Bank acknowledged during high-court arguments — the lender had discovered Julian’s filed notice, the court said.

Source: Foreclosure appeal revived by Maryland Court of Appeals despite failure to post bond.

For the court ruling, see Julian v. Buonassissi, CA No. 37 (Md. Ct. App. June 16, 2010).

(1) The Maryland high court also agreed with the state intermediate appellate court that a foreclosure rescue scam victim’s conveyance of her home by Deed of Trust is merely voidable, and not absolutely void (ie. void ab initio), upon proof of violations of Maryland's Protection of Homeowners in Foreclosure Act. Finding the conveyance to be voidable necessitates a determination of whether the foreclosure purchaser was entitled to the protections accorded to a bona fide purchaser. An earlier conveyance obtained through fraud, deceit or trickery is voidable as between the parties thereto, but not as to a subsequent bona fide purchaser for value and without notice of any unrecorded rights and equities claimed by others.

Had the court ruled that the foreclosure rescue scam victim’s conveyance to be absolutely void, no determination of the foreclosure purchaser's bona fide purchaser status would have been necessary because a subsequent purchaser who would otherwise qualify as a bona fide purchaser for value and without notice of any unrecorded rights and equities claimed by others receives no protection where an earlier conveyance in the chain of title is void ab initio (ie. as in the case where an earlier conveyance involves a forged deed).

(2) According to their website, Civil Justice Inc. is a Maryland not-for-profit corporation formed for the purpose of increasing the delivery of legal services to clients of low and moderate income while promoting a statewide network of solo, small firm and community based lawyers who share a common commitment to increasing access to justice through traditional and non-traditional means.

(3) 412 Md. 475 (Md. Ct. App. 2010).

(4) The date of the foreclosure sale at which the lender acquired title to the home.

Arizona Bona Fide Purchaser, Possession, Duty To Inquire - State Court Cases

The link below contains a compilation of Arizona state court cases addressing, either directly, indirectly, or in passing, the effect of possession by an occupant of real property by one other than the seller/vendor thereof on a prospective real estate purchaser's status as a bona fide purchaser.

More specifically, the cases deal with the effect of on a purchaser's status as bona fide purchaser in situations where the occupancy and possession of the real property by someone other than the owner/seller triggered a duty to inquire on the part of the purchaser as to possible unrecorded property rights of the persons in possession of the real estate.

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 a third party, or encumbers the property with a loan from a mortgage lender, whether or not said 3rd party purchaser or mortgage lender had any actual knowledge of the fraud.

Voiding the deeds and mortgages in these cases (in situations where the instruments are voidable, as opposed to being absolutely void - "void ab initio") will turn on whether the subsequent third party purchaser or encumbrancer, despite lacking in actual knowledge of the fraud or other abusive transaction, can otherwise be charged with notice of the fraud, thereby making bona fide purchaser/encumbrancer status unavailable to them and, consequently, subjecting the deeds or mortgages to being voided/rescinded/set aside.

This case law compilation represents raw research only, but I post it 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 the cases, see Effect Of Persons In Possession Of Real Estate Other Than The Owner/Vendor On A Buyer's Status As A Bona Fide Purchaser - Arizona State Court Cases.

See Arizona Bona Fide Purchaser, Possession, Duty To Inquire for excerpts from some of these cases.

For 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.

C. Florida Man Seeks To Recover Home By Overturning Foreclosure Sale Resulting From Sloppy Paperwork, Despite Resale By Bank To Unwitting Third Party

In Pinellas County, Florida, the St. Petersburg Times reports:

• Michael D. Carlson recently filed a motion in Pinellas Circuit Court seeking to undo a foreclosure judgment against him from 2008, saying he never knew about the legal proceeding until it was over. As part of the motion, the 42-year-old divorced father of three also wants his home in Dunedin back.

• The problem is, Carlson's lender, Bank of America, sold it more than a year ago to another couple, who thought they had bought the foreclosed property free and clear. Legal experts say that in trying to reverse a foreclosure after the home has been sold to a third party, Carlson's case may be the first of its kind but it's unlikely to be the last.(1)

• Whether it's robo-signed documents, falsified affidavits or failure to properly notify defendants, as claimed in the Carlson case, shortcuts by lenders' law firms could prove to be land mines in the legal system. When triggered by homeowners who feel their cases were improperly handled, such issues could raise ownership questions for years to come.

***

• Carlson contacted Mark Stopa, a St. Petersburg foreclosure defense attorney, and his motion to vacate the foreclosure judgment, cancel the sale and regain possession of his house was filed last month. Stopa said that everyone, even a homeowner behind on his payments, has the right to defend his property from foreclosure in court. [...] Stopa bets that more foreclosures will boomerang back to the courts.

• "This is perhaps the best example yet of the problems that transpire when foreclosures are done too hastily," he said. "You have to do things right from the very outset. If not, the cleanup will be far worse."

For more, see Dad tries to reverse foreclosure on his former Dunedin home.

See also Re-Claiming Your Home After Foreclosure – Improper Service.

For the above-referenced motion, see Verified Motion To Vacate Foreclosure Judgment, Cancel Foreclosure Sale, And Return Defendant To Possession.

(1) The initial analysis of whether a foreclosure sale of real estate can be undone after a third party acquires title to the home requires a determination as to whether the foreclosure judgment and the sale thereunder is void (also referred to as absolutely void, wholly void, void ab initio), or merely voidable (meaning that a foreclosure sale or judgment, while containing minor defects, is nevertheless valid until challenged by the injured party).

If the judgment or sale is found to be absolutely void, it is treated as a nullity (as if it never happened), and any title acquired by a subsequent purchaser, irrespective of how innocent or bona fide, will have acquired no title. A challenge to an absolutely void judgment or foreclosure sale can be brought at any time, and is not subject to any statute of limitations or other procedural time frames.

Alternatively, a finding that a foreclosure sale or judgment is merely voidable will then trigger a second analysis requiring a determination as to whether the subsequent party acquiring title to the real estate qualifies for protection as a bona fide purchaser (also referred to as a good faith purchaser or innocent purchaser). A bona fide purchaser is generally considered as one who purchases property without actual or constructive knowledge of competing interests and pays the vendor valuable consideration. A purchaser is generally considered to be on notice if he has knowledge of facts sufficient to put an ordinarily prudent man on inquiry and a reasonably diligent inquiry would lead to the discovery of title or sale defects.

Where a foreclosure sale or judgment is found to be merely voidable (as opposed to absolutely void), a subsequent 3rd party purchaser having bona fide purchaser status will be able to defeat the attempt to undo the foreclosure sale. The interest acquired by a subsequent 3rd party purchaser not having this status, however, can be defeated, subject to compliance with the applicable time frames within which a challenge to the judgment or foreclosure sale can be brought.

It is important to note here that, contrary to what the rhetoric put out by the title insurance industry may imply (see American Land Title Association: Comments regarding title insurance on foreclosed properties), bona fide purchaser status:

• is not automatically granted to a subsequent buyer of a foreclosed property,

• is only relevant when the foreclosure sale and/or foreclosure judgment is found to be merely voidable (there is no such thing as bona fide purchaser protection when the foreclosure judgment and/or sale pursuant thereto is found to be absolutely void), and

• is not necessarily available to a subsequent purchaser merely because said purchaser has a complete lack of actual knowledge of any of the relevant facts surrounding the defects in the sale or judgment; being 'deemed' to 'have notice' of the relevant facts is sufficient to render bona fide purchaser protection inapplicable.

For more information on some of these points, one need not go further back than a September 28, 2010 court decision from the Washington State Court of Appeals (Division II) in which a number of the foregoing points are generally addressed.

In a nutshell, the court in Albice v. Premier Mortgage Services Of Washington, Inc. (go here for .pdf, and if these links expire, TRY HERE), No. 39265-8-II, 157 Wn. App. 912; 239 P.3d 1148; 2010 Wash. App. LEXIS 2199 (Wn. Ct. of App., Div. II, September 28, 2010) found that a technical defect in following the applicable statute rendered a foreclosure sale void, despite any claim of bona fide purchaser status made by the 3rd party foreclosure sale buyer. The court further went on to hold that, given the specific facts of the case, the 3rd party foreclosure sale buyer did not qualify as a bona fide purchaser anyway, thereby allowing the foreclosed homeowner to undo the foreclosure sale regardless.

For the briefs filed in Albice, see:

• Albice - Opening Brief,
• Albice - Respondent's Brief,
• Albice - Reply Brief.

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

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.

(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.

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.

Pennsylvania Bona Fide Purchaser, Possession, Duty To Inquire - Federal Cases

The following compilation of cases is a continuation of an earlier post, Pennsylvania Bona Fide Purchaser, Possession, Duty Of Inquiry, and which represents a selected group of cases from various Federal courts that apply Pennsylvania case law addressing 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.

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

U.S. Court of Appeals - 3rd Circuit

Stewart v. Shubert, No. 08-2360, 325 Fed. Appx. 82 (unpublished) (3rd Cir. 2009):

A summary of the facts in this case follow:

1. Stewart obtained title to the Property in 1951 when she purchased it jointly with her husband, who died in 1990.
2. On December 9, 2002, Stewart executed a deed to the Property to the Debtor for the sum of one dollar ("First Deed"). Stewart had the First Deed prepared in an attempt to minimize inheritance taxes on her estate.
3. The Bankruptcy Court credited testimony by Stewart and the Debtor that both understood that the First Deed was conveyed for estate planning purposes and that Stewart, not the Debtor, would remain the owner of the Property until Stewart died. Stewart v. Shubert (In re Stewart), 368 B.R. 445, 448 & n.4 (Bankr. E.D. Pa. 2007).
4. Several months later, Stewart realized that she had inadvertently omitted her daughter, Susan Harris ("Harris"), from her estate-planning effort. She therefore requested that the Debtor transfer half of his interest to Harris, and the Debtor did so by executing a deed on March 6, 2003, which purported to transfer the Property jointly to the Debtor and Harris for the sum of one dollar ("Second Deed").
5. Notwithstanding these conveyances, Stewart continues to reside at the Property and pay all of the bills and taxes associated with the Property out of her own funds.
6. In September 2005, after the Debtor's son had incurred substantial credit card debt for which the Debtor was liable, the Debtor voluntarily filed for bankruptcy under chapter 7.
7. In his bankruptcy filings, the Debtor listed his ownership interest in the Property as "1/2 Bare Legal Title of Caroline Stewart's property." App. II at 211.
8. The Trustee subsequently filed a motion to sell the Debtor's interest in the Property pursuant to 11 U.S.C. § 363(h).
9. The Debtor contested that motion and filed an adversary complaint seeking to enjoin the Trustee from selling the Property.
10. After holding a trial, the Bankruptcy Court held that the Trustee could not sell the Property. According to the Bankruptcy Court, under Pennsylvania law Stewart's transfer of the Property to the Debtor was subject to a resulting trust in favor of Stewart, who was therefore the equitable owner of the Property.
11. Accordingly, the bankruptcy estate succeeded only to bare legal title in the Property and the Trustee's proposed sale was not appropriate under § 363(h). Stewart, 368 B.R. at 457.
12. Finally, the Trustee appealed to the District Court, which affirmed.
13. Among other things, the bankruptcy trustee asserted that, even if a valid resulting trust existed, the trustee should be allowed to avoid Stewart's interest because it did not have notice (either actual or constructive) thereof.

In affirming both lower courts in ruling that the home belonged to Stewart and, therefore, not property of the bankruptcy estate, the 3rd Circuit made this observation on the issue of the bankruptcy trustee's asserted lack of notice:

• However, under Pennsylvania law, Stewart's clear and open possession of the Property put the Trustee on constructive notice of Stewart's equitable interest therein, and therefore the Trustee may not avoid that interest under § 544(a)(3). See McCannon v. Marston, 679 F.2d 13, 16-17 (3d Cir. 1982).

In re Graves, No. 93-1709, 33 F.3d 242 (3rd Cir. 1994):

• In Pennsylvania, clear and open possession of real property constitutes constructive notice to subsequent purchasers of the rights of the party in possession. See McCannon v. Marston, 679 F.2d 13, 17 (3d Cir. 1982); Overly v. Hixson, 169 Pa. Super. 187, 82 A.2d 573, 575 (Pa. Super. Ct. 1951).

***

• The bankruptcy court correctly stated Pennsylvania's general rule for constructive notice; however, an exception to the rule provides that where a possessor lives with a record owner in a manner consistent with the record ownership, no constructive knowledge is imputed. Overly, 82 A.2d at 575. The Pennsylvania Superior Court explained the rule, stating:
  
  There can be no doubt whatever of the proposition that where the land is occupied by two persons . . . and there is a recorded title in one of them, such joint occupation is not notice of an unrecorded title in the other. *** The rule is universal that, if the possession be consistent with the recorded title, it is no notice of an unrecorded title.
  
  Indeed, this conclusion is but an application of the general principle that, in the absence of proof to the contrary, actual possession is presumed to be in him who has the record title. It would be intolerable to require an intending purchaser or incumbrancer to ask every person living in a property, be they many or few, whether or not he has a better title than the record owner, who is also in possession.
  
  Overly, 82 A.2d at 575 (citations omitted).

***

• Under Pennsylvania law actual or constructive knowledge of an unrecorded deed defeats a subsequent claimant's interest. See Long John Silver's, Inc. v. Fiore, 255 Pa. Super. 183, 386 A.2d 569, 573 (Pa. Super. Ct. 1978) ("to qualify as a bona fide purchaser, the subsequent buyer must be without notice of the prior equitable estate)(citation omitted); Overly v. Hixson, 169 Pa. Super. 187, 82 A.2d 573, 574 (Pa. Super. Ct. 1951); see also United States v. Purcell, 798 F. Supp. 1102, 1116 (E.D. Pa. 1991), aff'd 972 F.2d 1334 (3d Cir. 1992).

***

• When a purchaser buys real property with knowledge of an unrecorded interest, the purchaser's interest is subject to that of the unrecorded interest holder. See, e.g., Long John Silver's, 386 A.2d at 572-73; Purcell, 798 F. Supp. at 1116-17. For example, in Long John Silver's, when two purchasers had actual notice of an unrecorded equity interest in a piece of property, the court held the equity interest was superior to that of the subsequent purchasers. 386 A.2d at 572-73. The Superior Court explained, "if the subsequent purchaser has notice of the first agreement of sale or deed, he has no protection as a bona fide purchaser and his title is subject to the interest vested in the first purchaser." Id. at 573.

• The Pennsylvania Supreme Court has stated "a fundamental rule in construing recording laws generally [is] that actual notice of an unrecorded instrument, if received by a subsequent lienor before his interest attaches, is equivalent to the constructive notice which recording provides." Purcell, 798 F. Supp. at 1117 (quoting In re 250 Bell Road, 388 A.2d 297, 299-300 n.1 (Pa. 1978)). Because a purchaser's knowledge of the unrecorded interest subordinates the purchaser's interest to that of the unrecorded interest holder, Fleet's knowledge of an outstanding unrecorded ownership interest prevents it from being a bona fide purchaser.

McCannon v. Marston, 679 F.2d 13 (3rd Cir. 1982):

A summary of the facts in this case follow:

1. On March 19, 1973, Miriam H. McCannon entered into an agreement with a partnership doing business as The Drake Hotel (the debtor) for the sale of a condominium apartment and of a certain percentage of the common areas in that hotel.
2. The agreement contained a contingency that the hotel, located in Philadelphia, be declared a valid condominium according to the terms of the then applicable Unit Property Act. That contingency was satisfied later in 1973.
3. Pursuant to the agreement, McCannon paid a deposit of $ 500 toward the purchase price of $ 17,988.
4. She began residence in the apartment in April of 1975 and remained in residence through the relevant times.
5. The bankruptcy court found, however, that "for a variety of reasons, settlement on the property has never taken place."
6. McCannon never recorded her agreement for sale.
7. In November of 1979, the debtor filed a Chapter 11 bankruptcy petition.
8. McCannon filed a complaint in February of 1981 seeking relief from the automatic stay imposed by Section 362 of the Code and requesting specific performance of the agreement to purchase the apartment that she entered into with the debtor/The Drake Hotel on March 19, 1973, almost eight (8) years earlier.
9. Holding that the trustee, as a bona fide purchaser without regard to any knowledge on his part, may avoid McCannon's interest in the property pursuant to Pennsylvania law and to Section 544(a)(3) of the Code, the bankruptcy court granted the trustee's motion for judgment at the close of the plaintiff's case.
10. The district court affirmed the bankruptcy court's judgment, employing the same interpretation of Section 544 and concluding that Section 365(i) did not apply.
11. McCannon then appealed.

In reversing both lower court rulings, the 3rd Circuit found that the bankruptcy trustee was not a bona fide purchaser and that McCarron was entitled to specific prerformance on her March 19, 1973 purchase contract with The Drake Hotel.

The court made the following statements in reviewing and enforcing the applicable Pennsylvania case law [bold text is my emphasis, not in the original]:

• The law of Pennsylvania considers a purchaser under a written agreement for the sale of real property to be the equitable owner of that property. E.g., Allardice v. McCain, 375 Pa. 528, 101 A.2d 385 (1953); Dubin Paper Co. v. Insurance Co. of North America, 361 Pa. 68, 63 A.2d 85 (1949). After reviewing the contract, we find no fault with the conclusion of the bankruptcy court that McCannon acquired such an equitable interest once the condition that a valid condominium be created was satisfied.

• Pennsylvania law gives subsequent purchasers of real property priority over the rights of prior purchasers if the subsequent purchasers are bona fide purchasers for value without notice. Record notice defeats the claims of a subsequent purchaser. McCannon's equitable interest was unrecorded.

• However, in Pennsylvania, clear and open possession of real property generally constitutes constructive notice to subsequent purchasers of the rights of the party in possession.

• Such possession, even in the absence of recording, obliges any prospective subsequent purchaser to inquire into the possessor's claimed interests, equitable or legal, in that property. See, e.g., Kinch v. Fluke, 311 Pa. 405, 166 A. 905 (1933); Long John Silver's, Inc. v. Fiore, 255 Pa. Super. 183, 386 A.2d 569 (1978).

• Thus in Pennsylvania the rights of a subsequent purchaser do not take priority over those of one in clear and open possession of real property.

***

• The trustee argues that the circumstances of McCannon's possession, as the occupant of one of many condominium apartments, a number of which were leased, are not constructive notice obliging a subsequent purchaser to inquire as to her interests. The only Pennsylvania cases cited, however, find no obligation to inquire in circumstances where the grantor was both record owner and in possession and where the one in possession was sharing possession with the record owner. Salvation Army Incorporated Trustees v. Lawson, 293 Pa. 459, 143 A. 113 (1928); Overly v. Hixson, 169 Pa. Super. 187, 82 A.2d 573 (1951).

• We believe that were the Pennsylvania Supreme Court asked to consider whether a subsequent purchaser of a condominium building had a duty to make inquiry as to the rights of persons in possession of apartments in that building, it would hold that such possession provides constructive notice, as a matter of law, no different than in the case of possession of a single family home.

Federal District Courts

U.S. v. Purcell, No. 89-3642, 798 F. Supp. 1102 (E.D. Pa. 1991):

• Under Pennsylvania law, either actual or constructive notice of a prior deed may defeat a subsequent claimant's interest. In Long John Silver's, Inc. v. Fiore, 255 Pa. Super. 183, 386 A.2d 569 (1978), the Pennsylvania Superior Court stated that at the time of signing an unconditional agreement for the sale of land the buyer acquires an equitable interest in the land, see Byrne v. Kanig, 231 Pa. Super 531, 332 A.2d 472 (1974), which can be defeated by a subsequent purchaser without notice of a prior transaction pursuant to the recording act:

• However, in order to qualify as a bona fide purchaser, the subsequent buyer must be without notice of the prior equitable estate. Overly v. Hixson, 169 Pa. Super. 187, 82 A.2d 573 (1951). If the subsequent purchaser had notice of the first agreement of sale or deed, he has no protection as a bona fide purchaser and his title is subject to the interest vested in the first purchaser.

• Either actual or constructive notice is sufficient to prevent the subsequent purchaser from acquiring the status of a bona [fide purchaser.]

• Because constructive notice is not limited to instruments of record, a subsequent purchaser may be bound by constructive notice of a prior unrecorded agreement. Overly v. Hixson, supra; Smith v. Miller, 296 Pa. 340, 145 A. 901 (1929). This is true because the subsequent purchaser could have learned of facts that may affect his title by inquiry of persons in possession or others who the purchaser reasonably believes know such facts. Lund v. Heinrich, [410 Pa. 341, 189 A.2d 581 (1963)]; Sidle v. Kaufman, 345 Pa. 549, 29 A.2d 77 (1942).

Federal Bankruptcy Courts

In re Fowler, 425 B.R. 157 (Bankr. E.D. Pa. March 3, 2010):

• [i]t is well settled that purchasers and mortgagees of real estate are affected not only by matters of which they had actual knowledge and by what appeared in the office of the recorder of deeds and in the various courts of record whose territorial jurisdiction embraced the land in dispute, but as well by what they could have learned by inquiry of the person in possession and of others who, they had reason to believe, knew of facts which might affect the title. Sidle v. Kaufman, 345 Pa. 549, 29 A.2d 77, 82 (Pa. 1942) (emphasis added) (internal quotations omitted).

• As one court explained:
  
  A purchaser of real property must exercise ordinary diligence to qualify as a bona fide purchaser. Knowledge of every fact which "the exercise of ordinary diligence would have put him in possession" is imputed to that purchaser. Constructive knowledge . . . consists of what a purchaser . . . would have discovered from inspecting the public record in the office of the recorder of the deeds as well as from inquiring of the person in possession of the property or anyone else the purchaser has reason to believe has knowledge of facts which might affect title to the property. Lauver, 372 B.R. at 760 (emphasis added); see also Ingomar, 2008 U.S. Dist. LEXIS 17668, 2008 WL 660099, at *6.

***

• As our Court of Appeals observed in reviewing Pennsylvania law:
  
  in Pennsylvania, clear and open possession of real property generally constitutes constructive notice to subsequent purchasers of the rights of the party in possession. Such possession, even in the absence of recording, obliges any prospective subsequent purchaser to inquire into the possessor's claimed interests, equitable or legal, in that property. McCannon v. Marston, 679 F.2d 13, 16 (3d Cir. 1982) (emphasis added) (citing Kinch v. Fluke, 311 Pa. 405, 166 A. 905 (Pa. 1933)); see also Long John Silver's, Inc., 386 A.2d at 573.

• Consistent with our Court of Appeals' observation, a long line of Pennsylvania courts have held that, as part of the duty to exercise ordinary diligence in the purchasing process, a buyer of real property is obliged to ask those in physical possession of property (who are not also the current record titleholders) if they have some title to, or interest in, the occupied property that is adverse to the prospective buyer's title. 60 Pennsylvania imposes the same duty of inquiry on a mortgagee. 61 A purchaser or mortgagee who fails to make such inquiry concerning the basis of the possessor's interest takes title subject to the possessor's interest. 62

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

Case Footnotes 60-62

60 See, e.g., Malamed v. Sedelsky, 367 Pa. 353, 80 A.2d 853, 855 (Pa. 1951) ("it has long been settled that it is the duty of a purchaser of real property to make inquiry respecting the rights of the party in possession and failing to do so[,] they are affected with constructive notice of such facts as would have come to [their] knowledge in the proper discharge of that duty"); Smith v. Miller, 289 Pa. 184, 137 A. 254, 256 (Pa. 1927) ("One about to purchase land, either at sheriff's or private sale, is bound to inquire of those in possession of the premises and is charged with what such inquiry would have disclosed."); Stonecipher v. Keane, 268 Pa. 540, 112 A. 233, 234 (Pa. 1920)("A prospective purchaser of land is required to make inquiry of those in possession thereof, and failing to do so, is affected with constructive notice of all that such inquiry would have disclosed."); Bugbee's Appeal, 110 Pa. 331, 1 A. 273 (Pa. 1885) (same); Rowe v. Ream, 105 Pa. 543, 14 Week. Notes Cas. 293 (Pa. 1884) (same); Hood v. Fahnestock, 1 Pa. 470, 1845 WL 5137, at *4 (Pa. Sept. Term 1845) ("every purchaser of land must be presumed to know, whether the possession be vacant or not" and the purchaser of real property "in the possession of tenants is chargeable with notice of the extent of their interests as tenants" and must "inform himself of the conditions of the lease").

61 See, e.g., Sidle, 29 A.2d at 82 ("[i]t is well settled that purchasers and mortgagees of real estate are affected not only by matters of which they had actual knowledge and by what appeared in the office of the recorder of deeds . . . but as well by what they could have learned by inquiry of the person in possession") (internal quotations omitted) (emphasis added).

62 See, e.g., Malamed, 80 A.2d at 855-856; Hunter v. Hunter, 20 Pa. D. & C.3d 96, 100 (Cumberland Cty. C.P. Ct. 1981); Crowell v. Bell, 40 Pa. D. & C. 326, 56 Mont. County L. Rep. 322 (Montgomery Cty. C.P. Ct. 1940).

End Case Footnotes 60-62

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

In re Best, 417 B.R. 259 (Bankr. E.D. Pa. 2009):

• In McCannon v. Marston, the Third Circuit held that under Pennsylvania common law a bona fide purchaser of real estate does not defeat the property interests of one in open possession of the realty:
  
  [I]n Pennsylvania, clear and open possession of real property generally constitutes constructive notice to subsequent purchasers of the rights of the party in possession. Such possession, even in the absence of recording, obliges any prospective subsequent purchaser to inquire into the possessor's claimed interests, equitable or legal, in that property.
  
  Id., at 16. Furthermore, the Third Circuit also instructed that Pennsylvania statutory law provides that "[r]ecord notice defeats the claims of a subsequent purchaser." Id. This follows because, pursuant to state law, a purchaser has constructive notice of all properly recorded interests. See, e.g., 21 P.S. § 357 3 (recording of deed places a party upon constructive notice of property interest); Mid-State Bank & Trust Co. v. Globalnet Int'l, Inc., 557 Pa. 555, 565, 735 A.2d 79 (1999) ("A party is on constructive notice of another's interest in real property where the party 'could have learned by inquiry of the person in possession and of others who, they had reason to believe, knew of facts which might affect title, and also by what appeared in the appropriate indexes in the office of the recorder of deeds.'") (quoting Lund v. Heinrich, 410 Pa. 341, 346, 189 A.2d 581 (1963)); Volunteer Fire Co. of New Buffalo v. Hilltop Oil Co., 412 Pa. Super. 140, 150, 602 A.2d 1348 (1992).

In re Aulicino, 400 B.R. 175 (Bankr. E.D. Pa. 2008):

• In Malamed v. Sedelsky, 367 Pa. 353, 80 A.2d 853, (Pa. 1951), the Pennsylvania Supreme Court observed the long held view that it is just as careless to purchase without having viewed the premises as it is to purchase without having searched the register, and held that "it is the duty of the purchaser of real property to make inquiry regarding the rights of the party in possession and failing to do so they [sic] are affected with constructive notice of such facts as would have come to his knowledge in the proper discharge of that duty." Id. at 855.

In re Lauver, 372 B.R. 751 (Bankr. W.D. Pa. 2007):

• Under Pennsylvania law, a purchaser of real property having no notice or knowledge of a prior interest in the property is protected against that interest. Long John Silver's, Inc. v. Fiore, 255 Pa. Super. 183, 190, 386 A.2d 569, 573 (1978). This principle is codified in the recording statute found at 21 Pa. C.S.A. §351. Either actual or constructive notice of the prior interest will disqualify one from becoming a bona fide purchaser. Id., 255 Pa. Super, at 190-91, 386 A.2d at 573.

***

• Under the law of Pennsylvania, a purchaser of real property without actual or constructive notice of a third party's claim with respect to the property takes it free of the claim of that party. Lund v. Heinrich, 410 Pa. 341, 346, 189 A.2d 581, 584 (1963)

• A purchaser of real property must exercise ordinary diligence to qualify as a bona fide purchaser. Knowledge of every fact which "the exercise of ordinary diligence would have put him in possession" is imputed to that purchaser. Fidelity-Philadelphia Trust Co. v. Lehigh Valley Coal Co., 294 Pa. 47, 58, 143 A. 474, 478 (1928).

• Constructive knowledge in the present context consists of what a purchaser of debtors' property would have discovered from inspecting the public record in the office of the recorder of deeds as well as from inquiring of the person in possession of the property or of anyone else the purchaser has reason to believe has knowledge of facts which might affect title to the property. See Sidle v. Kaufman, 345 Pa. 549, 557, 29 A.2d 77, 81 (1942). A purchaser will not be adversely affected by facts which could not be discovered by inquiring, Salvation Army v. Lawson, 293 Pa. 459, 143 A. 113, 114 (1928).

• To qualify as a bona fide purchaser under Pennsylvania law, a prospective purchaser has a duty to so inquire of one who is in possession of the property. A purchaser who fails to do is "affected" with constructive knowledge of any salient facts which might have been discovered had such inquiry been made. Malamed v. Sedelsky, 367 Pa. 353, 357, 80 A. 228, 231 (1951).

D'Antonio v. Bella Vista Assocs., LLC (In re Bella Vista Assocs., LLC), 2007 Bankr. LEXIS 4348 (Bankr. D. N.J. 2007) (applying Pennsylvania law):

• Other cases have taken a substantially broader view of constructive notice requirements, emphasizing the duty of a purchaser to exercise ordinary diligence in the purchasing process, and to inquire of one who has possession of the property about encumbrances or obstacles to obtaining clear title. See, e.g., Mid-State Bank & Trust Co. v. Globalnet Int'l, Inc., 557 Pa. 555, 735 A.2d 79, 85 (Pa. 1999); Roberts v. Estate of Pursley, 718 A.2d 837, 843 (Pa. Super. 1998). These cases hold that if such an inquiry is not made, but would have alerted the purchaser to such problems, the purchaser is charged with constructive notice of the encumbrance. Id.

• See also Malamed v. Sedelsky, 80 A.2d 853, 855, 367 Pa. 353 (Pa. 1951) (purchaser must inquire of parties in actual possession); Sidle v. Kaufman, 345 Pa. 549, 29 A.2d 77, 82 (Pa. 1942) (purchaser failed to inquire further despite knowing someone else had been in actual possession of the property); Volunteer Fire Co. of New Buffalo v. Hilltop Oil Co., 412 Pa. Super. 140, 602 A.2d 1348, 1353-54 (Pa. Super. 1992) (a gap in the title required the purchaser to inquire further); Long John Silver's, Inc. v. Fiore, 255 Pa. Super. 183, 386 A.2d 569, 573 (Pa. Super. 1978) (purchaser had actual knowledge of a prior interest and should have inquired further).

• Still other Pennsylvania courts have recognized an exception to the duty of a purchaser to inquire where the party in possession is also the record owner. See McCannon v. Marston, 679 F.2d at 17 ("The only Pennsylvania cases cited . . . find no obligation to inquire in circumstances where the grantor was both record owner and in possession and where the one in possession was sharing possession with the record owner."); In re Lauver, 372 B.R. 751, 762 (Bankr. W.D.Pa. 2007) ("Such duty of inquiry normally does not arise when the person in possession of the property also is the title owner thereof."); Incorporated Trustees of Salvation Army in Pennsylvania v. Lawson, 293 Pa. 459, 143 A. 113, 114 (Pa. 1928). See also Schell v. Kneedler, 359 Pa. 424, 59 A.2d 91, 92 (Pa. 1948); Stewart v. Freeman, 22 Pa. 120 (Pa. 1853) (verifying possession and record ownership, the purchase "is required to look no further"); Lefever v. Armstrong, 15 Pa. Super. 565 (1900). Here, the land was comprised of unimproved lots, but the debtor held both possession and record ownership.

In re Johnston, 333 B.R. 724 (Bankr. W.D. Pa. 2005):

• Although Pennsylvania law considers a mortgage to be a conveyance, in some contexts and a security interest in others, a mortgage is treated as a conveyance for purposes of actions involving Pennsylvania recording statues. Pines v. Farrell, 577 Pa. 564, 574, 848 A.2d 94, 100 (2004).

***

• A subsequent purchaser of real property having actual or constructive notice of the prior rights of another in the property is disqualified from obtaining the status of a bona fide purchaser. Long John Silver's, Inc. v. Fiore, 255 Pa. Super. 183, 189, 386 A.2d 569, 573 (1978). An innocent purchaser of such property for value without such notice of the right or interest of a third party, however, acquires the property free and clear of such secret right or interest. Lund v. Heinrich, 410 Pa. 341, 346, 189 A.2d 581, 584 (1963).

• Where one of two innocent parties must suffer, the one whose neglect makes the injury possible must bear the responsibility. Puharic v. Novy, 317 Pa. 199, 203, 176 A. 233, 234 (1934). The purpose of this principle is to discourage secret liens against or secret equities in real property where the holder of the secret interest or lien may record it to secure its permanent record and place it in a position from which those who deal with the property thereafter may learn that the owner of the property does not hold perfect title to the land. Id. Puharic v. Novy, 317 Pa. at 202-03, 176 A. at 234.

• One has constructive notice of another's interest in real property if one could have inquired of a person in possession of the property or could have inquired of another whom they had reason to believe had knowledge of facts which might affect title to the property. Constructive notice also is provided by what appears in the appropriate indexes of the office of the Recorder of Deeds in the county where the property is located. Lund, 410 Pa. at 346, 189 A.2d at 584.

In re Mitchell, 80 B.R. 350; (Bankr. W.D. Pa. 1987):

• On the other hand, a trustee is bound by any constructive notice he has. See R.A. Beck Builders, Inc. v. Schmitt, 66 B.R. 666 (Bankr. W.D. Pa. 1986). The law in Pennsylvania provides that in order for a buyer to hold the status of a bona fide purchaser, he must take title to the property without notice, actual or constructive, of any claim to the property. R.A. Beck Builder, supra; Long John Silver's, Inc. v. Fiore, 255 Pa. Super. 183, 386 A.2d 569 (1978).

• The question in the case at bar is not whether the Trustee had actual knowledge of the unrecorded Contract. Rather, the question is whether the Trustee had constructive notice that Debtor's title to the property might be flawed.

***

• The law in Pennsylvania states:
  
  "Clear and open possession of real property generally constitutes constructive notice to subsequent purchasers of the rights of the party in possession. Such possession . . . . obliges any prospective subsequent purchaser to inquire into the possessor's claimed interests, equitable or legal, in that property."
  
  R.A. Beck Builder, supra at 671, quoting McCannon v. Marston, 679 F.2d 13 (3rd Cir. 1982); Long John Silvers, Inc., supra.

• The Trustee had constructive notice. He had a duty to view the property, and by finding an individual other than the Debtor on said property, he had a duty to inquire. Such inquiry would have led to the knowledge that the party in possession claimed equitable ownership in same. Therefore, the Trustee cannot be a bona fide purchaser and is not able to avail himself of the § 544 avoiding powers.

In re R.A. Beck Builders, Inc., 66 B.R. 666 (Bankr. W.D. Pa. 1986):

• Our determination, that constructive notice did exist, does not rest exclusively upon the recording statute. The property in question bore a "For Sale" sign, which included two telephone numbers, traceable to Auld and Lisk. We must further determine if this sign (and the additional sign erected on the property several months later) constitute constructive notice.

• The law in Pennsylvania states:
  
  clear and open possession of real property generally constitutes constructive notice to subsequent purchasers of the rights of the party in possession. Such possession . . . . obliges any prospective subsequent purchaser to inquire into the possessor's claimed interests, equitable or legal, in that property.
  
  McCannon v. Marston, supra at 16; see also, Kinch v. Fluke, 311 Pa. 405, 166 A. 905 (1933); Long John Silver's, Inc. v. Fiore, supra.

• If the sign merely said "For Sale", we believe there would be no duty to further inquire into the claimed interest. Similarly, if the sign said "For Sale -- call Auld or Lisk", we believe there would be an inherent duty to inquire. In turning to the facts of the case at bar, we hold that the existence of the two telephone numbers on the sign, traceable to Auld and Lisk, is a sufficient claimed interest to put a prospective subsequent purchaser on constructive notice.

• The position of a bona fide purchaser is a lofty one; it is available only to the reasonably prudent person. A truly reasonable purchaser would inquire about a "For Sale" sign bearing unfamiliar telephone numbers. A simple telephone call to either of the posted numbers would have adduced the ownership claims of Auld, Lisk and White, purchasers who paid good and fair consideration for their ownership rights.