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Equal Rights

Saturday, January 7th, 2012

Fraud victims compete for priority.

SOUTH GATE, CA–On Thursday, August 28, 2008, Ms. Kyung Ha Chung gave a deed of trust against her property on Roosevelt Avenue. It all went so smoothly she repeated the process that day, eventually signing six deeds of trust against the same property, in favor of six different lenders and witnessed by six different notaries.

The property in question, or 'modus operandi'

The next day, August 29, Ms. Chung signed a seventh deed of trust. Each lender believed it had a first mortgage. All told, the seven deeds of trust secured loans totalling $1,827,500. The property was worth maybe $300,000.

Of the seven deeds of trust, the first three submitted for recording were received by the Los Angeles County Recorder’s office in batches from different title companies around 6:00 a.m. on September 4, 2008. One was in favor of First Bank, another in favor of East West Bank, and another in favor of Flagstar Bank.

The L.A. County Recorder’s office processes thousands of documents each business day. Once received, each document is referred to an examiner to make sure it’s suitable for recording, and then to a cashier to collect applicable fees. If accepted the document is stamped with a recording date and time, and an instrument number. It is later indexed and becomes part of the official land records.

All three deeds of trust were accepted and stamped as recorded on September 4, 2008. As is done in most California counties, the Recorder gave the documents an 8:00 a.m. time stamp because they were deposited before office hours. The East West deed of trust was indexed before the others, at 11:26 a.m. that day.

Los Angeles County Registrar-Recorder/County Clerk's building at Norwalk, California. This is the Recorder's main office; there are five branch offices

It should come as no surprise that all seven loans defaulted, and the lenders discovered they’d been scammed. Some commenced foreclosure, and a dispute arose as to which lender had priority.

Eventually, First Bank filed suit for a court order that the three deeds of trust should have equal priority because they share the earliest recording date and time. But East West opposed the suit, claiming it alone should have priority because its deed of trust was indexed before the others.

The trial court ruled in favor of First Bank, and East West appealed.

The Court of Appeals affirmed the trial court, based on California’s “law of priorities.”

The Court explained that, under state recording laws, priority of interests in land depends on a combination of factors. One gains priority by (a) acquiring an interest as a bona fide purchaser, for valuable consideration, without actual or constructive notice of (b) a previously created competing interest of another party, and (c) being first to record his interest in the land records. This is commonly known as a “race-notice” system, to be distinguished from “pure race” rule giving priority to the first to record.

In this case the Court deferred to the Recorder’s administrative system of assigning recording dates and times, and said the First Bank and East West deeds of trust were recorded “simultaneously” at 8:00 a.m. on September 4. Indexing, the Court said, is a separate function done not to affect recording times but instead to impart constructive notice. Since “both trust deeds were executed on the same day and are deemed recorded simultaneously,” and neither lender had notice of a competing interest, the Court concluded the deeds of trust have “equal priority.”

Moral: This decision gives a good explanation of California’s race-notice recording laws, and is a case study of how the rules apply. Flagstar Bank did not participate in the appeal, due to some procedural issue, but it should benefit by this decision.

What’s curious is how the scammer was able to pull this off. Most lenders and title companies now have systems to detect redundant loan applications and open title orders involving a single property. This plot should have been foiled before the loans funded.

And what do we know of Kyung Ha Chung? It’s possible she was an impostor, using an alias or stolen identity–although the Court seems to believe otherwise.

The case is First Bank v. East West Bank, 199 Cal.App.4th 1309 (Cal. App. 2011).

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Foreclosures / Haunted Houses

Friday, October 28th, 2011

First there were bad mortgages, now it’s dud foreclosures.

HAVERHILL, MA–Francis Bevilacqua was a cash-for-trash real estate investor.

When he bought this duplex in 2006 the chain of title was, let’s say, not perfect.

The property in question, at Haverhill, Massachusetts

A prior owner was Pablo Rodriquez. In March 2005 Rodriquez gave a mortgage against the property to Mortgage Electronic Registration Systems (“MERS”), as nominee for the originating lender, Finance America. MERS, remember, is the privately owned database created by the mortgage banking industry to track mortgage loan ownership and servicing rights throughout the U.S. The mortgage bankers save lots of money on recording fees by registering with MERS instead of local county recording offices.

Rodriguez defaulted on his loan and in June 2006 the property was sold at a foreclosure sale. The foreclosing lender was U.S. Bank, as Trustee under a mortgage pooling and servicing agreement, and the successful bidder was also U.S. Bank. Weeks later, in July 2006, an assignment of the now-foreclosed mortgage from MERS, as nominee for Finance America, to U.S. Bank, was created (signed and dated). The assignment of mortgage was then recorded in the land records (Southern Essex Registry of Deeds).

Such were the circumstances when, in October 2006, Francis acquired the property by quitclaim deed from U.S. Bank.

MERS has headquarters in this building, at Reston, Virginia

By April 2010 Francis had converted the property into four condominiums and sold three units. At this point he had concerns about the title(s), so he filed suit to try title (akin to a quiet title action). He sought an order from the Massachusetts Land Court confirming his quitclaim deed, to rule out “the possibility of an adverse claim by Rodriquez.”

The Land Court ruled against Francis, even though Rodriguez could not be found and there was no opposition to the lawsuit. The court held Francis did not have standing to sue because the U.S. Bank foreclosure was void and his quitclaim deed was worthless. Francis appealed, and the Massachusetts Supreme Judicial Court agreed to decide the case.

The Supreme Court upheld the Land Court decision. The Court explained that at the time the foreclosure deed was created (June 29, 2006) its grantor (U.S. Bank, as Trustee) did not have an interest in the property according to “official” land records (the Southern Essex Registry of Deeds). Instead, U.S. Bank first appears in the chain of title by virtue of the assignment of mortgage (dated July 21, 2006). Since foreclosure can only be done by a mortgage holder, the foreclosure here was unauthorized, and void.

The Southern Essex Registry of Deeds, at Salem, Massachusetts

It follows the quitlclaim deed from U.S. Bank to Francis was ineffective to pass title.

Responding to Francis’ argument that he should be entitled to protected status of a bona fide purchaser, because he had no way of knowing all this, the Court disagreed saying the problem was apparent in the land records before Francis bought the property.

The Court concluded saying Francis may yet perfect his title if he can arrange a proper foreclosure to eliminate Rodriguez’s interest.

Moral: In recent years lenders and investors have relied heavily on MERS to evidence their mortgage rights. It’s been assumed an investor with superior rights can foreclose first and straighten out land records later. This decision upends such assumptions, at least in Massachusetts.

But what should such technicalities matter, when a borrower can’t afford property and abandons it?

According to the Supreme Court, it matters because the defaulting borrower continues to have a right to redeem the loan and reclaim the property, until the right of redemption is ended by foreclosure. It follows the borrower can still refinance or sell and, if he files bankruptcy, the property may be part of the debtor’s estate–tied up in bankruptcy proceedings.

Consequences of all this may seem illusory, but fear of clouded titles will cause some to avoid foreclosures entirely. And as for properties already foreclosed, and perhaps resold, no one knows how many could be in legal limbo.

State laws differ, so it’s unclear whether this view of faulty foreclosures will spread outside the Bay State.

The case is Bevilacqua v. Rodriguez, 995 N.E.2d 884 (Mass. 2011).

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Hiding in Plain Sight

Friday, October 7th, 2011

Enduring rights of parties in possession.

SPOKANE, WA–Clare House is a senior living community on the south side of Spokane. It has a 124-unit apartment complex, flanked by 28 “bungalow” units built in clusters much like attached homes.

Entrance to the Clare House community

The bungalows have been offered under a “Resident Agreement,” by which the buyer pays a lump sum at move-in for the right to occupy their bungalow and use common areas until they die or become unable to care for themselves. When occupancy ends, the resident or their heirs are entitled to repayment of 80 or 85% of the initial lump sum or, in some cases, 80 or 85% of the price received from resale of the bungalow. Each resident is also a member of the Clare House Bungalow Homes Residents Association, an association formed to represent their common interests.

The bungalows occupy a 2.68 acre parcel of land, which continues to be owned by the developer. Beginning in 2004, the developer took a series of loans from “hard money” lenders, secured by deeds of trust against the 2.68 acre parcel. The first of these loans was arranged by the Caudill Group, in the amount of $400,000, secured by a deed of trust in favor of the Caudill Living Trust. There were four subsequent loans, secured by deeds of trust totalling $565,000.

One of the Clare House bungalows

All of these deeds of trust were recorded in Spokane County land records. Prior to the first deed of trust, two of the Resident Agreements had been recorded, even though the bungalow residents did not have proper deeds conveying ownership of the real property.

All was well at Clare House until the developer filed bankruptcy. Then things got dicey. The lenders, headed by the Caudill Group, made known their wishes to foreclose against the 2.68 acre parcel, and oust the residents.

The Residents Association stepped in, and filed an adversary proceeding in the developer’s bankruptcy. The Association asked for a court order that the residents’ rights are superior to rights of the lenders.

The bankruptcy court ruled for the residents, in part. The court ordered that all members of the Residents Association (i.e., all those having a Resident Agreement with the developer) may continue to occupy their bungalows undisturbed by the lenders, even if the lenders foreclose and acquire the land. However, the court also held the residents’ rights to repayment upon termination of occupancy are contractual rights against the developer only, and are not enforceable against any lender.

Aerial view of the Clare House community, with apartment complex, lower left, and 2.68 acre parcel, highlighted

Citing “longstanding common law,” the court explained that one who acquires an interest in real property with actual or constructive notice of the rights of another takes subject to the other’s rights. In modern times, this rule has been refined by statute and case decisions so as to impose a duty on a subsequent purchaser (or encumbrancer) to inquire as to rights of parties in possession of land, “and a failure to inquire results in the new title holder taking title subject to whatever rights of occupancy existed.”

In this case, the court said a “casual observer” could see the bungalows were occupied as “single family residential units,” and inquiry would have disclosed the Resident Agreements. Likewise, these lenders who received financial information from the developer should have been aware of his “basic business model.” The court noted that two Residents Agreements were recorded in the land records, but this does not appear to have been decisive in the court’s reasoning.

So the residents win what amounts to a life estate in their bungalows, but must stand in line as unsecured creditors in the bankruptcy to recover what they can of promised repayments. For their part, the lenders can foreclose, but their security interests are subject to all Resident Agreements made with the developer–even those signed after deeds of trust were recorded.

Moral: Lessons here for everyone, since both residents and lenders now have much, much less than they bargained for.

The case is In re Clare House Bungalow Homes, L.L.C. (Clare House Bungalow Homes Residents Association v. Clare House Bungalow Homes, L.L.C.), 447 B.R. 617 (Bankr.E.D.Wash. 2011).

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False Security

Monday, September 12th, 2011

An unattested mortgage, even when recorded, fails its purpose.

ALPHARETTA, GA–On October 12, 2005, Bertha Hagler refinanced her home.

The property in question, center

She signed two security deeds (akin to a mortgage): A “first” securing repayment of $240,000, and a “second” for a lesser amount. But at closing somehow things got confused, and only the “second” got signed by the notary and witness who were there.

Weeks later when the security deeds were recorded no one noticed that the “first” was not properly attested to.

In April 2007 Bertha filed Chapter 7 bankruptcy, and a trustee in bankruptcy was appointed. The trustee noticed the defective security deed, and filed an adversary proceeding to avoid it as against Bertha’s home.

The trustee relied on Bankruptcy Code section 544(a)(3), the so-called “trustee avoiding power” or “strong arm” power. This code provision allows a trustee (or a debtor-in-possession) to avoid an interest in debtor real property that is not perfected as of the commencement of bankruptcy. (See our posting for 5/22/10, “Bankruptcy 101.”)

Fulton County Courthouse, where the questioned security deed was recorded and indexed in the land records

In this case, the trustee claimed the “first” was not entitled to be recorded in the land records, and thus “perfected,” because it did not comply with Georgia statutes requiring that a mortgage affecting real property be signed and acknowledged before a notary, attested to by the notary, and attested to by one additional witness, in order to be accepted for recording.

The bankruptcy court ruled in favor of the trustee, avoiding the mortgage and relegating the lender to status of an unsecured creditor for the $240,000 debt. The lender would stand in line for cents on the dollar.

The lender appealed, arguing that despite its flaws the mortgage was in fact recorded and correctly indexed in the land records. Anyone who searched the records should find the mortgage and readily understand it was intended to encumber the property. The lender relied on case law holding that a defective instrument once recorded may impart constructive notice of its contents.

The federal district court entertaining the appeal said the issue involved “an unclear question of Georgia law,” and asked the Georgia Supreme Court to decide whether, in Georgia, a recorded security deed with a “facially defective attestation” can provide constructive notice.

The Georgia Supreme Court building

The Supreme Court sided with the bankruptcy court. The Court allowed that a “duly recorded” albeit defective instrument can provide constructive notice, but said this security deed was not duly recorded because a lack of required attestations was apparent “on the face” of the instrument. Instead, the Court cited “longstanding law” that a mortgage recorded with “facial defects as to attestation” may not impart constructive notice.

The Court concluded saying the lender’s position would relieve it and other lenders “of any obligation to present properly attested security deeds.” It would “risk an increase in fraud,” and “shift to the subsequent bona fide purchaser and everyone else the burden of determining (possibly decades after the fact) the genuineness of the grantor’s signature.”

Moral: Another example of section 544(a)(3) at work, and a reminder (if we need one) that legal formalities matter.

The case is U.S. Bank National Association v. Gordon, ___ S.E.2d ___, 2011 WL 1102995 (Ga. 2011).

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Landlocked

Wednesday, August 3rd, 2011

When you own land, you need a right of access.

VALPARAISO, IN–In August 1985 John and Susan Hall acquired two parcels here in rural Indiana, one fronting County Road 50 North and the other 800 feet to the rear. Neighbors to the east were John’s brother and his wife.

The rear parcel, shown highlighted, with the front (Wilusz) parcel above it and the eastern (Luna) parcel to its right. The public road is at the top of this image.

John and Susan soon mortgaged the front parcel and built a home.

Our story continues in 1998, when John and Susan were delinquent and their mortgage lender, First Federal Savings, filed a judicial foreclosure action. In March 1999, the front parcel was sold at sheriff’s sale and promptly resold to William and Judith Wilusz.

John and Susan remained owners of the rear parcel, about two acres, which was undeveloped. By 2007, they determined to sell the property but, problem was, there was no legal right of access to connect it with the public road. The Wiluszes would not grant an easement over the front parcel, and the eastern parcel was now owned by Benjamin Luna who likewise denied the Halls’ plea for an easement. So the Halls filed suit against the Wiluszes and Mr. Luna, seeking an “easement of necessity.”

The trial court ruled in favor of defendants Wilusz and Luna, reasoning that the Halls had failed to arrange for access when they easily could have, and waited too long to raise the issue with innocent newcomers Wilusz and Luna. The Halls appealed.

The Court of Appeals reversed in part (against Wilusz), and affirmed in part (for Luna).

Porter County Courthouse, at Valparaiso, Indiana

The Court explained that an easement of necessity may arise, by implication, when land under a “unity of title” (having one owner) is divided “in such a way as to leave one part without access to a public road.” In such a case, the law presumes an intention of the owner that none of the land be made inaccessible by the division.

In this case, the effect of the mortgage against the front parcel, and subsequent foreclosure and sale to Wilusz, was to render the rear parcel inaccessible. It follows that an easement of necessity was created, by operation of law, over the Wilusz parcel at the time the Halls’ ownership of the two parcels was “divided,” and this easement benefits the rear parcel indefinitely even as one or both parcels are acquired by new owners.

The Luna parcel, on the other hand, was never owned by John and Susan Hall and, the Court said, “an easement of necessity cannot arise against the lands of a stranger.”

Moral: Key words here are “easement by implication,” and “unity of title.” The common law favors productive use and enjoyment of land, hence this rule to preserve rights of access when lands are divided and dealt off.

A legal right of access to land is typically covered by title insurance, at least in subdivisions and established neighborhoods. But real estate buyers and investors should always assure themselves that covered or “legal” access meets expectations.

The case is William C. Haak Trust v. Wilusz, ___ N.E.2d ___, 2011 WL 1842735 (Ind. App. 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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Yours, Mine and Ours

Sunday, April 17th, 2011

Concerning duties of the homeowner in a common interest subdivision.

NEWPORT BEACH, CA–Dover Village is a 38-unit condominium complex, governed by the aptly named Dover Village homeowner association (“HOA”).

The Dover Village condominiums

One unit here was owned by Patrick Jennison when, in July 2007, Patrick noticed seepage coming up through the floor. It seemed to be from a sewer line.

Patrick contacted the HOA, and its property management company sent a contractor to investigate.

The contractor figured the seepage came from sewer pipe installed by the builder in 1965, so he ripped up the flooring and jackhammered the concrete slab foundation.

Finding a burst pipe two feet beneath the slab, the contractor determined it had to be replaced. So the contractor jackhammered and dug some more, finally clearing a trench about 50 feet in length through Patrick’s living room and into the front yard.

Patrick's unit, center

After the pipe was replaced and the slab repaired, Patrick replaced carpeting and floor tiles and sent a bill to the HOA for $2,235.

The HOA refused to pay and, on advice of its attorney, the Board of Directors sent Patrick a letter demanding reimbursement for repair work to the tune of $15,453. The Board said the sewer pipe “exclusively serviced” Patrick’s condo, so was his to maintain and repair.

The HOA and Patrick headed to court, where the judge ruled that the sewer pipe is common area to be maintained by the HOA. The judge also awarded Patrick $16,490 for attorneys’ fees and costs. The HOA appealed.

On appeal, the HOA referred to its governing CC&Rs (conditions, covenants and restrictions) which distinguish “common areas” within the condo complex from “exclusive use common areas” servicing a single unit. Patios and garage areas are, for example, exclusive use common areas. It’s the duty of the condo owner to maintain his (or her) exclusive use common areas and, the HOA said, a unit’s sewer pipe should be treated no differently than its patio or garage.

Patrick answered saying the CC&Rs also state that “pipes” and “other utility installations” are not part of the condo unit, unless “located within the physical boundaries of the unit.” Since the pipe was beneath the slab, Patrick argued it’s in common area and a responsibility of the HOA.

The California Court of Appeal, Fourth District, Division 3, at Santa Ana

The Court of Appeal affirmed the trial court, agreeing with Patrick and holding the sewer pipe is “common area.”

Referring to the CC&Rs, and to California’s common interest subdivision statutes, the Court said sewer pipes are interconnected  with main and lateral lines throughout a condo complex and, therefore, cannot reasonably be called “‘fixtures’ of any particular unit.”

Likewise, the Court said sewer pipes are not comparable to patio and garage areas, because it’s not reasonable to believe “individual unit owners somehow control sewer pipes beyond the boundaries of their unit.”

Moral: A key to understanding this decision is knowing how condo units are legally created and described.

Unlike a plot of land, legally described by metes and bounds or by reference to a lot on a recorded survey map, condo units are described as airspace with a fixed location in relation to land as shown by the condominium plan. The boundaries of the condo unit are its floor, walls and ceiling. Everything outside the airspace is common area, or other condo units.

And how, you may ask, did this dink-dollar case make it to the Court of Appeal? Here’s the real poop: Patrick’s legal defense was paid by his homeowners insurance carrier. The risk of a slab leak is commonly covered by homeowners insurance in California, and Patrick’s insurer saw this as a case they had to win.

The case is Dover Village Association v. Jennison, 191 Cal.App.4th 123 (Cal. App. 2010).

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Mortgages and Deeds / A Contested Deed

Saturday, April 2nd, 2011

It comes to this: Is the deed void, or merely voidable?

LOS ANGELES, CA–Back in the day this two unit income property in South Los Angeles was owned by David and Florence Sims. The couple lived next door.

Back in the day: The Simses' income property

David and Florence did some estate planning and, in September 1991, they created the Sims Family Trust to hold title to their residence and income property. With the trust agreement, the Simses directed that upon their deaths the residence would be gifted to Florence’s daughter, Shirley, and the income property would go to David’s daughter, Yvonne.

David died and, as alleged in court filings, shortly after his death Florence began to show signs of dementia. She was then 86. As her condition deteriorated, Florence came to rely on her granddaughter, Sheron, to help her with medical decisions.

By December 2001, Florence was diagnosed with paranoia, hallucinations, and dementia. She signed a Power of Attorney giving Sheron authority over her health care decisions.

Florence died April 7, 2003.

Later, in November 2003, there were recorded two grant deeds purportedly signed by Florence conveying the residence and income property to Sheron. The deeds were dated and notarized as of January 2, 2002.

Sheron proceeded to refinance the properties, taking subsantial cash “out.” The income property was last refinanced in 2006, when Sheron gave Washington Mutual a deed of trust for $440,000.

By early 2008 Sheron was in default on her loans, and in April 2008 foreclosure notices were posted on both properties.

By this time David’s daughter, Yvonne, and her husband James had opened separate probates for the estates of David and Florence. They were in possession of the properties, and were surprised by the foreclosure notices. Apparently, Sheron had made payments without anyone knowing, until she ran out of money.

Yvonne and James filed complaints to invalidate the newly-discovered deeds of trust. As to the income property, they claimed the Washington Mutual deed of trust is invalid because (a) Sheron may have forged Florence’s signature on the deed giving the property to Sheron, (b) if Florence did in fact sign the deed, she lacked mental capacity to understand what she was doing, and/or (c) if Florence did sign, she lacked capacity to understand the nature and effect of the deed.

Washington Mutual (now known as J.P. Morgan) defended the deed of trust arguing the lender relied on the Florence-to-Sheron deed in good faith and, therefore, it is entitled to favored status as a bona fide encumbrancer.

The trial court ruled in favor of the lender, and dismissed the complaint. The court reasoned the deed may be voidable, but it could not be void because, at the time its loan was made, the deed appeared in county land records and the lender had no reason to question it. Plaintiffs Yvonne and James appealed.

The Ronald Reagan State Building at Los Angeles, home to the Court of Appeal

The Court of Appeal reversed, holding the deed would be void if any of the three grounds alleged by plaintiffs can be proven. “Generally,” the Court explained, “a deed is void if the grantor’s signature is forged or if the grantor is unaware of the nature of what he or she is signing. A voidable deed, on the other hand, is one where the grantor is aware of what he or she is executing, but has been induced to do so through fraudulent misrepresentations.”

And, said the Court, a deed which is “wholly void” cannot ordinarily provide a foundation for good title even in the hands of a bona fide purchaser or encumbrancer.

With that, the case was remanded for trial of plaintiffs’ allegations.

Moral: This decision will not be published in the official reports, because it’s based on established law, but it shows how land records are viewed (void vs. voidable) in a deed contest.

The outcome here will likely turn on medical opinion and testimony of those around Florence in her final years.

The risk of forgery or a void instrument in the chain of title is commonly covered by title insurance.

The (unpublished) case is reported as Casonhua v. Washington Mutual Bank, 2010 WL 4193214 (Cal. App. 2 Dist.).

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