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Mortgages and Deeds / Larceny, Inc.

Saturday, March 19th, 2011

Can a phony deed pass good title?

BALTIMORE, MD–When she bought this row house in December 2005, Cateania Matthews stepped into legal Adventureland.

The Matthews house, right

The seller was Scotch Bonnett Realty Corporation. Scotch Bonnett was formed in 2003 by Emora Horton and Sandra Denton, then husband and wife, to buy and sell real estate. The business was to be financed with Denton’s earnings as a recording artist. Articles of incorporation were filed, naming Denton as initial sole director.

By the end of 2003 Horton and Denton were divorced, and the incorporation of Scotch Bonnett stalled. There were no by-laws, no minute book, and no officers. The only contact person of record was Richard Hackerman, an attorney who signed the articles of incorporation and was named as “resident agent.”

Following the divorce, Horton and Denton continued to do business as “Scotch Bonnett.”

Through Horton, Denton was introduced to Corey Johnson. Later, in September 2005, there was filed with the state an amendment of Scotch Bonnett’s articles of incorporation. The amendment stated “Corey Johnson is to be added as an officer of the Company.” The amendment was purportedly signed by “Richard Hackerman, President,” but Hackerman would later say this was a forgery and he had never been president of Scotch Bonnett.

Now back to Ms. Matthews. When she bought the house (December 2005) she got a deed from Scotch Bonnett signed by “Corey Johnson (Officer).” But none of the sale proceeds found their way into a Scotch Bonnett bank account, and Denton later denied Johnson’s authority to sell the property.

Scotch Bonnett filed suit against Matthews and her purchase money mortgage lender, to quiet title. When Matthews filed a Chapter 13 bankruptcy, the quiet title suit was re-filed in the bankruptcy court.

The settlement officer who handled the Matthews purchase testified in bankruptcy court. She said she relied on state filings to confirm Johnson’s authority to act on behalf of the corporation, and had no reason to suspect the amendment to articles of incorporation was a forgery. There was no suggestion that Matthews or her lender were anything other than innocent victims.

The bankruptcy court framed the question as follows: “Does the use of a deed that is neither a forged document, nor signed with a forged signature, but which derives its transactional validity from forged corporate articles of amendment, render a conveyance of land void ab initio, or, is good title transferred to bona fide purchasers for value without notice (of the fraud)?”

The bankruptcy court certified the question to the Maryland Court of Appeals (the state’s highest court), for an advisory opinion.

The Robert C. Murphy Courts of Appeal Building, home to Maryland's high court, at Annapolis

The Court of Appeals answered that the fraudulent deed could convey good title to a bona fide purchaser, because the deed itself was not a forgery.

The Court explained that a deed bearing a false signature is a forgery, and under the common law “forgery rule” a forged deed is null and void, at inception. On the other hand, a deed with a genuine signature but based on false authority is merely voidable, by court action. Just as any deed tainted by fraud, duress or undue influence may be voidable, but not void.

In declining to follow the forgery rule here, the Court cited “strong public policy favoring bona fide purchasers.” An expansion of the rule, the Court said, “would turn into a jury question whether fraud in the inducement voided a deed ab initio and destabilize predictability of result for bona fide purchasers for value.”

Moral: The distinction between a deed that is void, as opposed to one that’s voidable, is crucial to maintaining the legal protection for a bona fide purchaser. This protection promotes predictable outcomes for real estate transactions, and certainty in land records.

Still, the result here is stunning. A stranger to title (signing as Corey Johnson), without authority to act on behalf of Scotch Bonnett, has deeded away its property.

Title insurance typically covers many types of fraud risk, other than fraud by the insured.

The case is reported as Scotch Bonnett Realty Corporation v. Matthews, 417 Md. 570, 11 A.3d 801 (2011).

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Premises Liability / Earthquake

Saturday, January 29th, 2011

The Acorn Building, reduced to rubble

Who’s to blame for a natural disaster?

PASO ROBLES, CA–On December 22, 2003, around 11:00 a.m., a 6.5 magnitude earthquake struck near San Simeon off the California coast.

The small town of Paso Robles, 25 miles inland, was hardest hit. Its historic downtown saw many injuries and extensive damage.

There were two fatalities. Marilyn Zafuto, 55, and Jennifer Myrick, 19, died as they fled the shaking in Ann’s Dress Shop. When they reached the sidewalk, the building collapsed on them.

The collapsed building had been a local landmark. Built in 1892, it was known as the “Acorn Building” for its distinctive clock tower and acorn-shaped roof line.

Aerial view of the collapsed building

The Acorn Building was owned by the Mastagni family. The elder Mastagnis, Armand and Mary, married in 1946 and raised three childrena as he worked as a dairyman and nurseryman and she ran a dress shop. They acquired the Acorn Building in 1973.

Armand and Mary managed the building together until 1995, when Armand suffered a series of strokes. As Mary took on more responsibilities, the couple established a family trust and transfered the building into the trust. Later, they transfered a 3% interest in the building into a separate trust set up for their three adult children. After Armand died in 1997, Mary became sole manager of the building and signed leases both on behalf of her family trust and on behalf of the children’s trust.

These details of the building’s ownership are of consequence because, when their survivors sued for wrongful death of Zafuto and Myrick, plaintiffs sued Mary, individually, and all the trustees (Mary and the three children).

At trial, plaintiffs argued that defendants were negligent in failing to perform seismic retrofitting of the 1892 brick and mortar building. Beginning in 1989, the city had inventoried unreinforced masonry buildings under its jurisdiction. The city identified the Acorn Building as potentially hazardous and sent a notice to the owners in December 1989.

Later, in 1992, the city passed an ordinance requiring owners of unreinforced masonry buildings to retrofit them to comply with earthquake safety standards. Under the ordinance an owner would have 15 years from the date of official notice to complete the retrofitting. The Mastagnis got their notice in November 1993. The city amended the ordinance in 1998 to extend the deadline for compliance to 2018. The Mastagnis did not perform retrofitting prior to the earthquake.

The jury found for plaintiffs, and awarded $700,000 in the death of Marilyn Zafuto and $1.2 million in the death of Jennifer Myrick. The judgment made each defendant jointly and severally liable as to all damages. The Mastagnis appealed.

On appeal the Mastagnis argued they had not been negligent because retrofitting was not required until 2018. They said the city ordinance represented a balancing of safety, public interest and costs and, as such, it reflected the city’s determination of what was reasonable.

The Court of Appeals disagreed, saying compliance with laws is not a complete defense to a tort action. Instead, the court said, “a statute, ordinance or regulation ordinarily defines a minimum standard of conduct” and does “not preclude a finding that a reasonable person would have taken additional precautions under the circumstances.”

The Acorn Building today, rebuilt and restored as original

The court also disagreed with the Mastagnis’ argument that each defendant should be liable for only a portion of the judgment, based on the jury’s calculation of their degrees of responsibility. For example, the jury found Mary Mastagni individually 30 percent responsible for the deaths, and the trusts 45 percent responsible. But, as the Court noted, the jury also found defendants operated the building as a joint venture and, consistent with partnership law, each partner is jointly and severably liable for partnership obligations, without regard to their partnership interests or, in this case, responsibility.

Moral: Because the Mastagni children were sued as trustees, presumably the judgment is enforceable only against their trust assets (mainly, the Acorn Building). Mary, on the other hand, may not fare as well since she was also sued in her individual capacity.

The Mastagnis may have liability insurance to cover this mess. Either way, owners should be mindful of this risk when shopping for commercial general liability insurance.

The case is reported as Myrick v. Mastagni, 185 Cal.App.4th 1082 (Cal. App. 2010).

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Land Records / Sham Recordings

Monday, December 13th, 2010

Who’s responsible for public records?

Amador County lies west of the Sierra Nevada mountains, in California’s historic Gold Rush territory.

Here in the small town of Ione, Jewel Jackson owned two rental homes.

One of Ms. Jackson's rentals

In March 2007, while she was living in Texas, Ms. Jackson’s brother Willie B. Norton determined to take control of her properties without her knowledge. To this end, Norton crafted a power of attorney purporting to appoint himself as Ms. Jackson’s attorney in fact to conduct real estate transactions on her behalf.

This was amateur hour. Norton alone signed the power of attorney form, before getting it notarized and recorded. Then he signed two quitclaim deeds transfering the properties to himself, and likewise had them notarized and recorded. When the paperwork was done, he evicted Ms. Jackson’s tenants.

Crime as inartful as this did not fool the authorities. Norton was prosecuted, and he pleaded guilty.

In the meantime, Ms. Jackson’s loss of rental income caused her to miss mortgage payments and the properties were lost to foreclosure.

Amador County Courthouse, at Jackson, California

So it happened that Ms. Jackson sued the County for negligently recording the sham documents. She argued the power of attorney was obviously bogus, since it wasn’t signed by the person supposedly granting the power. As such, it should not have been accepted by the recorder’s office and should not have appeared in the land records.

In its defense, the County said the documents were “recordable,” since they were on required sized paper (81/2 x 11), were legible, and were notarized.

The trial court agreed with the County, and Ms. Jackson appealed.

The Court of Appeals also sided with the County, saying the recorder was, in fact, legally required to record these documents because they were in proper format. Likewise, the Court said, the recorder is not responsible for legal sufficiency of recorded documents, and to hold otherwise “would place a county recorder’s office in the untenable position of requiring its employees to in effect practice law.”

Moral: Aside from the limited protection of notary laws, no one really vouches for validity of what gets into public land records.

Title insurance covers a multitude of risks for owners and lenders, and policies offered in some markets may in fact cover post-policy forgery. It’s a good idea to know your insurance coverage, before and after investing in real property.

The case is Jackson v. County of Amador, 186 Cal.App.4th 514 (Cal. App. 2010).

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Mortgage Fraud / Gaming the System

Saturday, November 20th, 2010

Little lies with big consequences.

MIAMI, FL–Yvette Valdes was a mortgage broker, doing business as “Best Mortgage Choice” in Homestead, Florida.

Like other mortgage brokers Valdes relied on large financial institutions, so-called “warehouse lenders,” to finance her loans. Typically, a warehouse lender wires funds direct to an escrow or loan closer, acquires the loan through closing, and re-sells the loan in the secondary mortgage market where it is packaged, or “securitized,” for investment offerings (mainly bonds).

10802 SW 244th Terrace

This business model relies on guidelines and ratings to assure investment quality. Among the critical guidelines, for a prime quality loan, is a requirement that the borrower have equity in the real property security. Thus, a loan equal to 90% of property value is rated more secure than a 100% loan. Likewise, a buyer making a 10% down payment is deemed a better risk than one with no “earnest money.”

Which explains why faking this stuff is a big deal.

Two weeks ago, Yvette Valdes pleaded guilty to federal criminal charges related to mortgages she originated against two residential properties in Miami. Also pleading guilty were her daughter Jeannine Valdes-Perez, her brother Joseph Gonzalez, son-in-law Victor Perez, and a hapless escrow officer named Catherine Maiz. All five pled to one count of conspiracy to commit wire fraud, while Valdez-Perez also pled to an additional count of wire fraud.

According to court filings, Valdes conspired with the other defendants to acquire properties at 10802 SW 244th Terrace (the “10802 Property”) and 21012 SW 122nd Court (the “21012 Property”), under false pretenses.

Prosecutors dubbed this the "21012 Property"

For the 10802 Property, Valdes arranged for her son-in-law, Perez, to submit a loan application falsifying his employment, income, and cash on hand for a down payment. Valdes then enlisted the escrow officer, Maiz, to send a letter to the warehouse lender, Argent Mortgage, saying the title company was holding $17,000 received from Perez. The statement was false. Relying on false information Argent approved the loan and wired $337,808 to fund the closing. The loan defaulted, causing “substantial loss” to Argent.

For the 21012 Property, Valdes again arranged for Perez to submit a loan application with false information, including a statement he would occupy the property as his residence. This time, Valdes instructed Maiz to create a false settlement statement (HUD-1 form) misrepresenting the source and amount of funds handled through escrow. Mainly, the HUD-1 showed $26,321 as deposited by Perez toward closing. In fact, Maiz held only a “fake” check which, following instructions from Valdes, she did not attempt to deposit. Relying on phony documentation, JPMorgan Chase wired $246,646 to fund the closing. Unbeknownst to JPMorgan Chase, some $15,000 was diverted from loan proceeds to pay Perez for his cooperation as the “straw borrower.” This loan also defaulted, and JPMorgan Chase took a loss.

The Wilkie D. Ferguson, Jr., Federal Courthouse, Miami, Florida

Sentencing for all defendants is set for January 21, 2011. Each faces a maximum 30 years in federal prison.

Moral: As mortgage fraud goes, these are small cases. It appears the main motive was to create bad loans so Valdes, and others, could “earn” routine commissions and fees.

And this isn’t Valdes’s first brush with notoriety. In 2008, in a series titled “Borrowers Betrayed,” the Miami Herald named Yvette Valdes as a local mortgage broker who originated $22 million in loans approved by Orson Benn, a former executive with Argent Mortgage. According to the Herald, “nearly all of the (Valdes) mortgages contained false or misleading information.” Benn was charged with racketeering by Florida state prosecutors in 2008, and is serving an 18-year prison sentence.

Like counterfeit money, bad loans subvert the economy. Creating them is serious crime.

Postscript: In February 2011 each defendant was found guilty of one count of conspiracy to commit wire fraud. Valdes was sentenced to 33 months in prison, followed by three years’ supervised release, and ordered to pay restitution of $386,500; her daughter Valdes-Perez got 27 months, three years’ supervised release, and must pay restitution of $249,500; brother Gonzalez got 33 months, three years’ supervised release, and must pay restitution of $302,000; son-in-law Perez got 21 months, three years’ supervised release, and must pay restitution of $386,500; and, finally, escrow officer Maiz was credited for time served (nine months), plus five years’ supervised release, and must pay restitution of $337,000.

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Foreclosure Rescue / Indictable Offenses

Saturday, November 6th, 2010

Suspicious dealings of a foreclosure rescue “expert.”

The first thing was to save her home.

It was 2008, and Karen Tappert was broke. Sometimes self-employed, but mainly unemployed, she couldn’t make the mortgage payment on her home in Bend, Oregon.

The Las Vegas property

Twice that year Tappert filed bankruptcy, but each case was dismissed when she failed to make court appearances and required payments.

In the meantime, Tappert studied debt elimination schemes being touted on the internet. She became convinced that debt, in particular mortgage debt, could legally be avoided using simple procedures and forms offered by the debt elimination “consultants.” The typical rationale behind these schemes was that the U.S. Federal Reserve system is unconstitutional, and loans funded with anything other than gold or silver can be avoided.

Soon Tappert began to offer her own services, and dubious legal forms, on the internet and by word of mouth. One blog boasted, “Karen has over 100 SUCCESSES around the country and WITHOUT having to use the courts!”

But last June the “Karen Tappert Method” came into question, when Tappert was indicted by a federal grand jury in Las Vegas and charged with multiple counts of mail and wire fraud. Here are some highlights from the criminal indictment.

The "rental" in Farmington, New Mexico

Count 3: The owner of property at 1601 Imperial Cup Dr., Las Vegas, NV, was behind in payments and faced foreclosure. Tappert offered to rescue the property for $1,800. The owner declined, but signed a quitclaim deed to an entity controlled by Tappert, known as “Amari Group.” Later, the property was foreclosed and acquired by Federal National Mortgage Association (a/k/a “Fannie Mae”). Tappert caused a fraudulent deed to be recorded, purportedly conveying the property from Fannie Mae to Amari Group. Tappert signed this deed on behalf of Fannie Mae.

Count 5: Property at 612 Diamond St., Farmington, NM, was foreclosed and acquired by Deutsche Bank National Trust Company, as trustee for investors in a mortgage-backed security that included the foreclosed mortgage. Tappert caused a fraudulent deed to be recorded, purportedly conveying the property from Deutsche Bank to an entity controlled by Tappert, known as “Saraland Investments.” Tappert notarized the bogus deed. Then Tappert rented out the property pocketing $4,050.

Corona, California: A million-dollar property "sold" for $490,000

Count 6: Property at 675 Gregory Circle, Corona, CA, was in the midst of non-judicial foreclosure. The foreclosure sale had been postponed, several times, when a fraudulent “Trustee’s Deed Upon Sale” was recorded. This trustee’s deed purportedly evidenced a foreclosure sale to an entity controlled by Tappert, known as “Northwest Properties Associates, Asset-Backed Certificates, Series 2006-FF1.” Days later, the property was sold by Northwest Property Associates for $490,000. The sale deed was signed by Tappert, on behalf of Northwest Property Associates.

Tappert has entered pleas of not guilty, and she awaits trial.

Moral: Karen Tappert is presumed innocent until proved otherwise. But if a defense to these charges will be that the Fed’s unconstitutional, and the money’s no good, she should know that others betting on this defense have gone to prison.

Postscript: In July 2011 Karen Tappert pleaded guilty to two counts of mail fraud and four counts of wire fraud. In January 2012 Tappert was sentenced to 97 months in prison, followed by three years supervised release, and ordered to pay restitution of $3,643,259.

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Nine Points of the Law

Monday, October 25th, 2010

The mysterious rights of a party in possession.


KOKOMO, IN–When Park P, LLC, bought this 254-unit apartment complex they expected to inherit about 250 tenants. But there was an unexpected problem.

The Park Place apartments at Kokomo

Within the complex are two laundry rooms, housing 45 commercial, coin-operated laundry machines. In each laundry room there was a sign saying the machines were owned and operated by Commercial Coin Laundry Systems “pursuant to a written lease.” Each machine also bore a 3×5-inch label with the same information. The signs and labels included Commercial Coin’s logo, office telephone number, and a 24-hour toll-free service number.

Park P had purchased the complex in April 2005. Several weeks later, the owner of Park P wrote a letter to Commercial Coin complaining about maintenance of the machines and hazardous conditions in one of the laundry rooms. The owner said he was willing to honor “the agreement” that Commercial Coin had with a prior owner, but wanted Commercial Coin to agree in writing to “accept full liability for any eventual accident.”

Inside, some of the 254 units

Commercial Coin did not respond to the letter, but continued to operate the machines and pay rent to Park P. So it happened that, in February 2008, Park P filed suit for trespass, based on Commercial Coin’s refusal to remove its machines and vacate the premises.

Commercial Coin answered, saying it has a written lease giving it rights to operate without interference by Park P.

Problem is, the lease was not recorded, and Park P claims it is not legally bound by the past agreement.

On a motion for summary judgment, the trial court ruled in favor of Park P, saying the new owner was not subject to terms of the off-record lease. The court cited an Indiana statute, providing that a lease of real estate for a period longer than three years must be recorded in order to bind a subsequent good faith purchaser.  Commercial Coin appealed.

The Court of Appeals reversed, and remanded the case for further proceedings.

The Court reasoned that a good faith purchaser, of the type protected by the statute, must be one without notice of rights asserted by a party in possession. The court explained that notice sufficient to bind a purchaser could be actual, constructive (imparted by county land records), or implied (imparted by occupancy or possession of the land). In this case, the question for trial would be whether Commercial Coin’s occupancy was so apparent that Park P should have inquired to discover its alleged rights under the off-record lease.

Moral:  Possession, they say, is nine points of the law.

The old saying, rooted in English common law, has little meaning today except as shown by this case.

American courts uniformly hold that a purchaser of land, or a mortgage lender, may be subject to rights of parties in possession. It may be a lease, an option to purchase, right of first refusal, easement–whatever.

To know the condition of title to land, one should look not only to land records but to the land itself.

The case is Crown Coin Meter v. Park P, LLC, 934 N.E.2d 142 (Ind. App. 2010).

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The Spider and the Fly

Saturday, October 2nd, 2010

How not to pay for that new home.

LEE’S SUMMIT, MO–Sanctum, LLC was developer of the “Siena at Longview” subdivision in this suburb of Kansas City.

In June 2002, Ivan and Marie Johnson entered into a construction contract with Sanctum for a new home to be built on Lot 7B in the Siena subdivision. The price would be $317,600, with the understanding the Johnsons would upgrade cabinetry, lighting and fixtures at their own expense, and receive credit for upgrades against the sale price at closing. Move-in was scheduled for November 2002. This would be their “retirement home.”

Lot 7B: A trap for the unwary

At the time the contract was made, Sanctum had construction loans from Gold Bank–secured by deeds of trust against the subdivision–for infrastructure and other improvements.

As provided by the contract, at signing the Johnsons paid Sanctum an earnest money deposit of $1,000, plus an additional $62,720 sixty days later.

Planning to move, the Johnsons sold their old home and moved into an apartment. They put most of their possessions in storage.

As work on the home proceeded the Johnsons advanced $57,517 for upgraded materials and labor.

November came, but the home was not ready. Each month thereafter Sanctum gave the Johnsons a new move-in date. Finally, in February 2004, the interior was ready and Sanctum scheduled a closing for March. The Johnsons were told they could move in on the first of April.

But as the closing date approached, Sanctum announced a new problem. It was, perhaps, “the problem” all along. Sanctum, it seemed, could not get its lender, Gold Bank, to release the property from construction deeds of trust without payment of an amount Sanctum didn’t have at hand. Sanctum hoped to have new investors, but wouldn’t be able to close until the investors were lined up and provided funding.

The Johnsons were allowed to move in, but there was no closing and they didn’t have a deed to the property. That, they hoped, would come.

Instead, by July 2004 Gold Bank put the subdivision into foreclosure. The foreclosure sale was held August 17. The Johnsons attended the sale, but couldn’t bid on Lot 7B because the subdivision was offered as a whole for $3 to 4 million.

By now the Johnsons had hired a lawyer, and they began heroic efforts to save their investment.

The Jackson County Courthouse at Kansas City, Missouri

First, they recorded a “Notice of Equitable Lien” against Lot 7B. Later, they filed a lawsuit and recorded a “Notice of Mechanic’s Lien.”

There were other mechanics’ lien claims against the subdivision, and other lawsuits, and the cases were consolidated for trial.

The trial court ruled against the Johnsons, and they appealed.

The Court of Appeals ruled the Johnsons were simply out of luck. Even though they had paid for substantial improvements, the court held they were not “eligible” to enforce a mechanic’s lien claim because the contract with Sanctum, coupled with their payments, made them “equitable owners” of the property. The court explained Missouri law provides mechanics’ lien rights for contractors and material suppliers, but not an “owner.”

As for their equitable lien claim, the court said the claim had merit and “the Johnsons did, in fact, have a legally recognizable vendee’s lien against the property in the total amount of $121,237.86.” But their lien was created after the Gold Bank deeds of trust were recorded and, the court said, it was wiped out by the foreclosure.

In closing, the court said: “This is not a result that sits well with the Court, but it is a result that is required by the law….”

Moral: The Johnsons should not have paid Sanctum or the upgraders before they had clear title to the property. That means a deed, of record, not subject to prior deeds of trust.

The earnest money should have been put in escrow, and not paid out until the buyers could get clear title.

“Unto an evil counsellor, close heart and ear and eye; And take a lesson from this tale, of the Spider and the Fly.” (Mary Howitt, The Spider and the Fly, 1829.)

The case is reported as First Banc Real Estate, Inc. v. Johnson, 321 S.W.3d 322 (Mo. App. W.D. 2010).

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Mechanics’ Liens

Sunday, September 19th, 2010

The hidden risk of unpaid work.

ST. LOUIS, MO–The papers here lately have carried stories of a once-respected local builder, whose ruinous attempts to save his business have landed him in prison.

As reported in the Globe Democrat, Edward Levinson borrowed millions from three banks to build custom homes in upscale subdivisions, but failed to pay his contractors and material suppliers while falsely representing that all bills were paid when the homes were sold.  He also took down payments from home buyers, which he used to keep his business afloat rather than to construct their homes.

Levinson was the owner of Levinson Companies, a firm founded by his father more than 50 years ago.

Facing multiple criminal charges, in June Levinson pleaded guilty to one count of bank fraud. He was sentenced to 51 months in federal prison, and ordered to pay restitution of $13,457,603 to a long list of victims.

Some buyers in this neighborhood got a nasty welcome

Behind the news coverage, there are untold stories of home buyers who, along with their lenders, were stuck with mechanics’ liens against their properties.

Missouri, like most other states, has laws allowing a provider of labor or materials for construction to file a lien against the improved property if their bills and invoices go unpaid. This construction lien is most commonly known as the “mechanics’ lien.” If necessary, the unpaid improver can file suit to force a sheriff’s sale of the property to satisfy his lien.

Buyers hit with sixteen lien claims, totaling $446,401

In one such case, within months of moving in  buyers of an $898,000 home were surprised to be served with a total of sixteeen liens, claiming $446,401 due for everything from drywall to landscaping. Not to be outdone, their neighbors are looking at nineteen liens totaling $345,468 due.

Because they have title insurance, most of Levinson’s buyers and their lenders are protected. The real losers will be the banks that loaned money to Levinson, his contractors and suppliers who failed to timely perfect their liens, and buyers who lost down payments. And, of course, the title insurance company.

Moral: The risk that property may be charged with mechanics’ lien claims can be hard to assess before closing a purchase, because liens filed after closing may “relate back” and have priority as of the date of commencement of work on the project as a whole. So a carpet layer may have the same lien rights and priority as the contractor that laid the foundation

In other words, the risk may be virtually undetectable. And, this risk exists with resale properties, as well as new construction.

Mortgage lenders require title insurance coverage against this “hidden” risk; so too should buyers.

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Who’s on First?

Monday, August 2nd, 2010

When being first means getting paid.

DUNDALK, MD–Mary was twelve years old, and homeless.

Her mother was mentally ill, and she had never known her father, so Mary went to live with her aunt Linda and Linda’s boyfriend, Charles.  Charles owned a house in Dundalk, a working class suburb of Baltimore.

Charles' property: A house is not a home

But Charles was a sexual predator. By the time Mary was thirteen she was having sexual relations with Charles, and by fourteen he had impregnated her twice. The first pregnancy ended in a miscarriage, while the second led to the birth of a son, Jesse.

At sixteen Mary attracted the interest of a boy in the neighborhood, who befriended her, but Charles warned the boy to stay away since Mary was his “girlfriend.”

At the boy’s urging, Mary went to a school counselor and told her story. Then the local department of social services intervened, causing Mary and Jesse to be removed from the home and placed in foster care.

Soon Charles was prosecuted for molesting Mary, and convicted of second-degree rape.  He got 20 years.

Meanwhile, one of the lawyers for Mary in social services recommended that she sue Charles for damages.  The lawyer had checked the land records, and concluded Charles’ property was free and clear.

So Mary sued Charles and, on May 11, 2007, got a judgment against him for $2,000,000.  The judgment was docketed in the Circuit Court of Baltimore County that day, and, because the property was also located in Baltimore County, upon docketing the judgment became a lien against Charles’ house.

Mary’s lawyer proceeded to get a writ of execution, directing the sheriff to sell the property and apply the proceeds to pay a portion of Mary’s judgment.  The sheriff posted the property with notice of a sheriff’s sale set for October 25, 2007.

But fate would deal Mary another blow.  It turned out Charles had previously given a deed of trust against the property which, for reasons unknown, had not been recorded.  This deed of trust secured a refinancing of the property, and it was signed and delivered by Charles on July 15, 2005.  It was recorded on October 9, 2007, just ahead of the sheriff’s sale.

So now Mary found herself back in court, in a lawsuit filed by the lender and the lender’s title insurance company, to decide who was entitled to first priority and payment.

Mary argued that she was first, as a matter of record, having obtained a judgment lien disclosed by county land records as of May 11, 2007.

The lender claimed priority under a Maryland statute providing that a deed (or mortgage) is effective as of the date of delivery and, when recorded, is enforceable against “the grantor, his personal representatives, every purchaser with notice of the deed, and every creditor of the grantor with or without notice.”

Baltimore County Courts Building

The trial court ruled for Mary, but the Court of Special Appeals reversed and held for the lender.

The court of appeals said the statute is clear, and it promotes public policy to protect mortgage lenders, advancing money in good faith, against involuntary liens that may (as happened here) be recorded first.  It made no difference to the court that Mary’s lawyer had checked the land records and believed the property to be free and clear, because Mary was a mere “creditor” rather than a “purchaser” entitled to protection under the statute.

Moral:  Courts in other states, asked to consider this question, have reached the same result as here in Maryland. Although statutes and precedents may differ, across state lines we Americans share many values and principles adopted mainly from English common law.

The lesson here is, not all liens are created equal. Involuntary liens created under state laws may be trumped by consensual mortgages, and sometimes federal liens.

This case is reported as Chicago Title Insurance Company v. Mary B., 988 A.2d 1044 (Md. App. 2010)

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Last Wishes

Sunday, July 18th, 2010

A transfer on death deed:  What a difference a day makes.

UNIONTOWN, OH–Charles Morris was dying.

Diagnosed with colon cancer in 2004, his condition worsened until, in the summer of 2006, the end was near.

Charles' house: A dying wish would be tested in court

So Charles sat with a lawyer to draw up a will.  He wanted his house and two cats to go to his ex-wife, Michelle;

his computer and camera equipment to Thomas Hall; and the remainder of his possessions to his nephew, Joseph Mattia.

Because gifts made by a will must go through probate, which could tie up the real property for months, the lawyer suggested Charles sign a transfer on death deed, so that upon his death the house would immediately pass to Michelle outside of probate, without court supervision.

The transfer on death (“TOD”) deed is new.  It’s an alternative to the trust, or joint tenancy with right of survivorship, as a means to transfer a decedent’s real property without necessity of probate.  Ohio’s statute approving the TOD form became effective in 2002.

On August 25, 2006, Charles executed his Last Will and Testament, along with a TOD deed naming Michelle as the transfer on death beneficiary.  It appears the TOD was left with the lawyer for recording.

Days later, on August 30, Charles died.  The next day, August 31, the TOD was recorded with the Recorder Division of the Summit County Fiscal Office.

Soon Charles’ will was filed in court and admitted to probate.  Thomas Hall was appointed executor of the estate.

As instructed by the lawyer, Michelle recorded an affidavit of transfer on death, stating she was the sole surviving beneficiary under the TOD, along with a certified copy of Charles’ death certificate.

Then things got contentious.

Joseph Mattia, the nephew entitled to the remainder (“residue”) of the estate under Charles’ will, filed suit for a judgment that the TOD was invalid, because the deed was not recorded while Charles was living.  Such a judgment would cause the house to be included in the probate proceedings where, as part of the “residue” of the estate, it could be inherited by Joseph.  This leaves Michelle with just the two cats.

Joseph argued for a literal reading of the Ohio statute (Revised Code section 5302.22).  The statute says that a TOD deed must be executed and recorded for the beneficiary to have rights to the property.  So, the argument goes, a deed recorded after the grantor’s death is ineffective.

Michelle countered that the statute should not be so narrowly construed.  She pointed out a grantee can’t control when a deed, filed for record, will be officially “recorded.”  She also invoked the familiar rule that a deed is effective, as between the grantor and grantee, when it is executed and delivered (i.e., entrusted to a third party for recording).

The trial court ruled in favor of Joseph, and the decision was upheld by the Court of Appeals.

Summit County courthouse at Akron, Ohio

The courts relied on language of the statute, which states that a property owner “may create an interest in the real property transferable on death by executing and recording a deed as provided in this section….”  Citing an earlier Ohio case in which the literal interpretation was followed, the appeals court reasoned that a TOD deed may be later revoked by a grantor, so the recording requirement protects the grantor’s true “last wishes.”

Moral:  As of this writing, the TOD deed has been approved by legislatures in more than a dozen states and is under review in the rest.  It may become commonplace.  As with anything new, there may be pitfalls.  When relying on the TOD deed you should get legal advice, follow your state statute, and be mindful of local recording practices.

Such is the power of wishes.

The (unpublished) case is reported as Mattia v. Hall, 2008 WL 186650 (Ohio App. 9 Dist.)

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