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May, 2011

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The Inheritance

Tuesday, May 31st, 2011

Where there’s a will, there’s a way.

The former home of Amanda Jones

ATLANTA, GA–For many years until her death in 2005, this was the home of Amanda Jones.

Among her close relations, Ms. Jones had a niece named Lillie Mae Walker. In 1976, Ms. Walker came to live with Ms. Jones. Later, in 1994, Ms. Walker’s daughter, Laurlene Riggins, also moved in. Ms. Riggins provided care for Ms. Jones, who was then 90, and Ms. Walker, then 72.

In 1995, Ms. Jones signed a Last Will and Testament giving a life estate in the property to Ms. Walker, with the remainder interest going to Ms. Riggins.

Ms. Jones had a stepson, named Eugene. In June 2003, she signed a different Last Will and Testament in which she bequeathed the property to Eugene. But then, in October 2003, Ms. Jones signed yet another Last Will and Testament, revoking all previous wills and again bequeathing the property to Ms. Walker as to a life estate, with the remainder going to Ms. Riggins.

Ms. Jones died in April 2005. After her death, Ms. Walker and Ms. Riggins continued to live in the home–but they neglected to file the October 2003 will for probate.

Enter Ellene Jones, Eugene’s wife. In May 2005, Ellene filed the June 2003 will for probate. Without notice to Ms. Walker or Ms. Riggins, the Probate Court named Ellene executrix of Ms. Jones’ estate and, in July 2005, Ellene executed a deed transferring the ‘free and clear’ property to Eugene.

Eugene promptly mortgaged the property, giving a security deed (akin to a deed of trust) to Ameriquest, for $95,500, in August 2005. Ameriquest got a drive-by inspection, never speaking to residents Walker and Riggins.

Ms. Riggins learned of the mortgage in mid-2006, after getting a mortgage-related notice in the mail followed by telephone calls, but Eugene denied any knowledge of it.

So Ms. Riggins got a lawyer, and filed the October 2003 will for probate. The Probate Court revoked Ellene’s appointment, and approved the October 2003 will as Ms. Jones’ true Last Will and Testament. Ms. Riggins was made the new personal representative of the estate, whereupon she deeded property to herself and Ms. Walker.

The Supreme Court of Georgia building

The stage was set for a legal battle between the heirs and the lender (now Deutsche Bank). The lender sued to quiet title, and the trial court ruled for the lender. The heirs appealed.

The Supreme Court of Georgia affirmed the trial court decision. The high court explained that, under Georgia statutes, an innocent purchaser of property from an ‘apparent’ heir of a deceased person is protected “as against unrecorded liens or conveyances.”

The Court reasoned that the lender did not have “actual notice” of the true heirs’ interests because Walker and Riggins had not opened a probate at the time the loan was made. And, the Court said, the lender would not be charged with knowledge it could have gained from parties in possession, but instead acted reasonably in relying on what Eugene told them–which was, “momma…made the will to me” but Ms. Walker “is supposed to live there until she dies.”

The Court concluded, “Ameriquest’s failure to inquire further regarding Walker’s status in the house does not show a lack of good faith.”

Moral: In light of this harsh result, seems the Georgia legislature should do some work on its statutes.

But the real moral here is that anyone with an interest in property under a will should see that the will is promptly probated. Failing to act is risky business.

The case is Riggins v. Deutsche Bank, 708 S.E.2d 266, 288 Ga. 850 (Ga. 2011).

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Electronic Recording / To Err is Human

Monday, May 16th, 2011

eRecording is here to stay; so is human error.

SEYMOUR, TN–Here’s a failure of title, 21st century style.

The Greene home

Richard and Deana Greene were owners of this newer home in the Smoky Mountains of Tennessee.

In February 2009 the couple borrowed $204,517 from Homeowners Mortgage, giving a deed of trust against the property.

The title agent was Network Closing Services, a company offering regional services through affiliates in 21 states. Network Closing got the deed of trust signed and notarized, and delivered it to Simplifile, an electronic recording agent. Simplifile provides electronic recording services, converting paper documents into digitized images for transmittal via the Internet to local recording offices.

Sevier County Courthouse, home to the Register of Deeds. The statue on the courthouse lawn honors Dolly Parton

The Greene property is located in Sevier County, TN. The Sevier County Register of Deeds has a vendor relationship with Business Information Systems (B.I.S.), so the Register’s office only accepts imaged documents that are formatted and transmitted through B.I.S.

So it happened that this deed of trust went from Network Closing to Simplifile, then from Simplifile to B.I.S., and then from B.I.S. to the Register of Deeds.

The imaged deed of trust was received by the Register’s office on March 11, 2009. It was reviewed by Deputy Register Lois McMurry, who with a keystroke accepted the document and assigned it Instrument Number 09015404, recorded March 11, 2009, at Book 3300, Page 584.

But perhaps she had been too hasty. Before moving on, Ms. McMurry noticed the document had been mislabeled in a data field affixed by B.I.S. for the Register’s use, as “Miscellaneous” instead of “Deed of Trust,” and the Tennessee mortgage tax had not been paid. So she deleted the recording and returned the deed of trust to B.I.S. with advice it was rejected, but it still showed the recording information (Instrument Number, recorded date, and Book and Page numbers).

Moving on, Ms. McMurry re-assigned this identical recording information to the next document in her queue.

B.I.S. got the deed of trust and forwarded it to Simplifile, but failed to report it was unrecorded. Had Simplifile known, they would have advanced the mortgage tax payment and backcharged Network Closing.

The Greenes filed a Chapter 7 bankruptcy in June 2009, and their court-appointed Trustee in bankruptcy filed an adversary proceeding to avoid the unrecorded deed of trust as an interest in the Greene property. Mainly, the Trustee based his action on Bankruptcy Code section 544(a)(3), which allows a trustee to avoid an interest in debtor real property that is not perfected as of commencement of bankruptcy. This is the so-called “trustee avoiding power,” or “strong arm power.” (See our posting for May 22, 2010, “Bankruptcy 101.”)

The Trustee argued the deed of trust was not “perfected,” because there’s no record of it in county land records. The lender (Bank of America, as current holder of the loan) replied the deed of trust was duly recorded, and therefore perfected, because Tennessee law states that a document once accepted for recording cannot later be removed from land records for failure to pay a fee or tax.

The bankruptcy court ruled in favor of the Trustee, allowing that even though Ms. McMurry’s actions were “improper and contrary to statute,” the result was the deed of trust disappeared from Sevier County land records. And, the court concluded, intervening rights of the trustee in bankruptcy prevail over expectations of the lender.

So the lender loses its security, and becomes just another unsecured creditor.

Moral: We’ve said it before, “There’s no crying in bankruptcy.”

The risk that a mortgage or deed of trust is invalid or unenforceable against security property is typically covered by title insurance.

The case is In re Greene (Newton v. Bank of America), 2011 WL 864971 (Bkrtcy,E.D.Tenn. 2011).

The rejected deed of trust, as returned to Simplifile and Network Closing. Note entries in the data field, upper right, as "Miscellaneous" and "zero" mortgage tax (yellow). Note also recording information (red arrow). (Click to enlarge)

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Coming to Terms

Monday, May 2nd, 2011

When details are neglected, fate comes out to play.

SOUTHAVEN, MS–Janet Wright, a widow, lived with her daughter Patricia and son-in-law, James O’Daniel. Janet wanted a home of her own, and the three of them talked about building a house together.

Details, details: The Southaven property

Janet bought a lot in Southaven, a suburb of Memphis, and held title with Patricia as joint tenants with a right of survivorship. Then, Janet, Patricia and James contracted to build a 5,200 square foot home on the lot, for an estimated $440,000.

Janet intended to contribute $200,000 to construction, but the work went over budget and she paid another $200,000. Having advanced $400,000, Janet approached Patricia and James about getting a construction loan to finish the work.

In March 2003, Janet, Patricia and James got a construction loan, secured by a mortgage against the Southaven property. The construction loan had to be paid off when the work was completed.

A few months later the work was completed and Patricia and James arranged a permanent loan to pay off the construction loan. Since this loan would be their contribution to the asset, it was agreed only Patricia and James would be the borrowers on the permanent loan.

The new lender, National City Mortgage, required a mortgage to secure the loan. The lender instructed that the property title be vested in Patricia and James so that the new mortgage would have first priority, and encumber the entire ownership.

So Janet and Patricia signed a deed conveying the property to Patricia and James, and the loan was ready for closing.

The closing was handled by a law firm where James’s mother was employed. With Patricia and James’s agreement, Janet instructed James’s mother to return Janet’s name to the property title after the loan was closed.

The loan closed and another deed was recorded conveying the property from Patricia and James to Janet, Patricia and James, as joint tenants with right of survivorship.

When she got a copy of the latest deed, Janet thought there’d been a mistake. It was, after all, her intention to vest the property in herself and Patricia, as joint tenants, without James being on the title at all.

So Janet contacted her own attorney, who advised her to have a real estate attorney correct the error. But Janet didn’t follow the advice, and neither did she raise the issue with Patricia and James. Then, of course, Patricia filed for divorce.

With Patricia and James divorcing, and James claiming a one-third interest in the property, Janet decided to file a lawsuit to straighten things out.

De Soto County Courthouse, at Hernando, Mississippi

Janet sued James for a judicial declaration that his interest in the property should be subject to a constructive trust or an equitable lien in favor of Janet. James filed a defense.

At trial, Janet testified it was always her intention to own the property 50-50 with Patricia. If she died, she wanted Patricia to own the property outright. Patricia testified the parties never discussed specific ownership interests in the property. James’s mother said she was told only that Janet’s name should be “added” to the title, with nothing said about James.

The trial court ruled in favor of James, mainly holding there was insufficient evidence to impose a constructive trust. Janet appealed.

The Court of Appeals affirmed, agreeing there was insufficient evidence to support Janet’s complaint.

The Court said Janet is not entitled to a constructive trust or an equitable lien because there was no evidence of fraud, duress or unconscionable conduct. In other words, James didn’t do anything wrong. Likewise, the Court would not cancel the deed for mutual mistake, because a mistake (if any there was) was Janet’s alone.

Moral: Mere intentions hold no sway in real estate matters. Any supposed real property interest should be reduced to writing. Otherwise, it probably can’t be enforced if challenged. In fact, our “statute of frauds,” a rule inherited from English common law, generally invalidates unwritten agreements as to real property interests. And, every state has some version of the statute of frauds.

Judges don’t like to re-write contracts, or deeds.

The case is Wright v. O’Daniel, 58 So.3d 694 (Miss. App. 2011).

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