Adverse Claim, Swindler's Game,
Insurer's Shame, Title Agent's Blame,
OR
(Not) An Excruciatingly Boring Synopsis of Torrens Law
Raise your hand if a) you believe the Torrens
Act was passed when the 13 colonies were formed; b) is obviously
related to enactment of the Ninth and Tenth Amendments to the
Constitution (What?); or c) a law similar in its intricacies to the
Internal Revenue Code and Treasury Regulations.
The poet Ogden Nash once wrote a poem entitled
“Parsley” which I can recite in its entirety from memory. (My Dad
had the collected works). It goes: “Parsley is garsely”. With
apologies to the late Mr. Nash (I presume he’s dead), I suggest the
following poem entitled “Torrens” which goes “Torrens is borrens”.
I extend sincere apologies to the Examiners of Title throughout our
great state. These men and women work tirelessly sorting out the
mayhem left behind by stray cats and Deeds; yet I suggest a Plain
Language Version be legislated. Until that happens shortly after a
famous hot spot goes glacial, readers will have to accept this
primer.
Whenever you get that call from the prospective
client claiming an interest in real estate which is fading into
oblivion, you typically think you can file suit along with Notice of
Lis Pendens. Well, that may be true enough, but not always and I
wouldn’t have this really clever article if it were always true.
There is not always a current breach entitling one to bring suit; at
times, the holder just wants to get his interest of record. With
Torrens property, the Examiner’s office serves as more of a
gatekeeper than does the County Recorder. The general purpose of
the Torrens system is that buyers and lenders are supposed to have
to look in only one place to learn all there is to know about the
title’s status. A court proceeding registers title once and for all
and concludes any hostile claims establishing Phoebe Owner as the
one entitled to hold the parchment.
But when can you file a Notice of Adverse
Claim? May anyone sully another’s title by merely wandering into
the Registrar’s office with a claim he just made up on his
Smith-Corona? Well, that was one of several questions raised in the
Matter of Lysne, a case tried by stipulation in the Hennepin County
Examiner’s office and sustained on review in the District Court.
The Registrar overseen by the Examiner serves
as a gatekeeper in that they will typically prevent a stranger to
title from placing his interest of record. While this may seem
really dry, buckets of money can ride on a decision. The Recorder
on the other hand will take almost anything from doofuses who have
no clue what they’re up to. I verified this with an attorney I see
almost daily (in the mirror).
While the Recorder’s system may seem silly,
imagine presenting a suit for filing to the District Court and being
told by a clerk that it’s so obviously insipid you cannot even file
it. (Wait, you’re thinking, maybe he’s on to something).
At times, one can have a genuine claim on
registered land, but be unable to place it of record directly. This
can happen, trust me. We represented a bank who was fleeced (though
only temporarily) by the borrower my kids like to call the Horse
Lady. The Horse Lady claimed to have $15 million in trust but
needed our little quarter million swing loan to buy a Hennepin
County hobby farm. She actually did own a small herd of Arabian
horses. By the time we did our due diligence, our money was gone
and so was hers. In other words, the banksters closed the loan and
disbursed the funds; only subsequently discovering the trust was
fictitious. To this day, the Horse Lady claims she believed it all
was real.
We were traumatized to learn the bankster’s
Mortgage was unrecordable in the Torrens’ office. Why you ask? She
did own the land. However, she was buying it on a Contract for Deed
which had not been registered. Her interest in the real estate was
not of record. We were no longer friendly, and she would not hand
over the original for registration. Time was running out. The
banksters could not cloud the fee owner/contract seller’s
Certificate of Title by simply registering the Mortgage. The Horse
Lady was a stranger to title, and a stranger one I have not met.
But the banksters’ lawyers were creative, and
undaunted. What we could not do directly, we were permitted to do
through the back door. After obtaining approval by the Examiner,
the bank filed a Notice of Adverse Claim attaching copies of the
Horse Lady’s contract for deed and the bank’s Mortgage.
Minnesota Statutes 508.70 governs registration
of an adverse claim in the Torrens office. It does say your claim
must be adverse to the registered owner, and that you may not have
another means of registering your interest. However, speedy
hearings are available (and required) by the same statute.
508.70. How to make adverse claim after
registration
Subdivision 1.
Procedure; costs. Any person claiming any right, title, or
interest in registered land adverse to the registered owner
arising subsequent to the date of the original registration, may,
if no other provision is made in this chapter for registering the
same, file with the registrar a verified statement in writing
setting forth fully the alleged right or interest, and how or from
whom it was acquired, and a reference to the volume and page of
the certificate of title of the registered owner, together with a
description of the land, the adverse claimant's residence, and
designating a place at which all notices may be served upon the
adverse claimant. Such statement shall be entitled to registration
as an adverse claim, and the court, upon the petition of any party
in interest, shall grant a speedy hearing upon the validity of
such adverse claim and enter such decision and decree therein as
justice and equity may require. If the adverse claim is adjudged to
be invalid, the registration thereof shall be canceled. The court
may, in any case, award such costs and damages, including a
reasonable attorney's fee, as it may deem just.
The litigation that ensued is instructive.
Horse Lady then fleeced bank # 2 of almost half a million dollars!
I came to admire her entrepreneurial spirit. Bank # 2 also took back
a Mortgage and bought title insurance. BUT, the title
insurance agent got caught in the primordial ooze when, having a
copy of our Notice of Adverse Claim in his file, issued his title
commitment to bank # 2 ignoring the Adverse Claim. He believed the
Adverse Claim was not entitled to registration so he took it upon
himself to ignore it. Bank # 2 got a clean title policy. Then the
lawsuits flew.
Counsel for Bank # 2 argued the Notice of
Adverse Claim was not properly registered and so correctly ignored
because: a) the bankster’s Mortgage was not “adverse to the
registered owner” as required by Minn. Stat. 508.70; b) could have
been registered through other means so didn’t meet the requirement
that there be no other means of registration; c) if not properly
registered then there was no constructive notice by virtue of the
Notice of Adverse Claim; d) there was no actual notice based on the
claim the title insurance agent was not Bank 2's agent and e)
besides, the banksters had defrauded the poor horse lady getting her
to sign a Mortgage.
Bank 2 claimed we did not meet the requirement
of being adverse to the registered owner. They asserted our
mortgage had to be directly adverse to Phoebe Owner, the registered
owner, while we were only claiming a Mortgage upon a subordinate
Contract interest. Next, they pointed out (correctly) that we could
have required Horse Lady to register her Contract for Deed properly
and we then had a routine way to register our interest. (If we’d thunk of it, we sure wouda). Third, Phoebe claimed she was not a
crook! Hah! Her bankruptcy Petition dropped her assertion of a $15
million trust and she asserted a mystery lady had duped her into
believing it was all true.
The banksters successfully countered 1) we are
too adverse; uh, we are so adverse; we are perverse and adverse to
Phoebe Owner because even a subordinate interest such as a mortgage
upon a vendee’s interest clouds Phoebe Owner’s title; 2) sure we
coulda had Horse lady register her Contract for Deed but that would
take the prescience of even realizing the land was Torrens in the
first place. You play the cards you’re dealt, even where you dealt
them yourself.
Next, we said, who cares what the Torrens
statute says if most Registrars routinely accept this type of Notice
of Adverse Claim for registration. We put in evidence of the policy
of several other counties to accept Notices of Adverse Claim for
registration and to let the combatants slug it out in Proceedings
Subsequent. The statute provides for speedy resolution and
permission to register the claim merely preserves the claimant’s
interest until he/she/it/they can have a hearing.
Then, too, if it’s there in the record, you
can’t ignore it. Even if it wasn’t constructive notice, the title
agent and therefore Bank2 couldn’t ignore it when the Agent had
actual knowledge. This led to an interesting discussion of the law
of agency, but first the rule on actual knowledge:
In re Juran, 226 N. W. 201, 202, 178
Minn. 55 (1929) stands for the proposition that Torrens registration
does not alter the significance of actual knowledge of a competing
property interest on the part of a purchaser.
That act (the Torrens
Act) abrogates the doctrine of constructive notice except as to
matters noted on the certificate of title. We think, however, that
it does not do away with the effect of actual notice, although it
undoubtedly imposes the burden of proving such notice upon the one
asserting it.
Bank 2 claimed that the title agent who knew of
the bankster’s Notice of Adverse Claim, was not their agent, and,
thus, his knowledge should not be imputed to Bank 2. Recall the law
of agency, generally, first. Our Supremes discussed the general
rule in A. Gay Jenson Farms Co. vs. Cargill, Inc., 309 N.W.
2d 285 (Minn. 1981), as follows:
Agency is the
fiduciary relationship that results from the manifestation of
consent by one person to another that the other shall act on his
behalf and subject to his control, and consent by the other so to
act. (citations omitted). In order to create an agency there must
be an agreement, but not necessarily a contract between the
parties. (citation omitted) An agreement may result in the
creation of an agency relationship although the parties did not call
it an agency and did not intend the legal consequences of the
relation to follow. 309 N.W. 2d at 290.
We pointed out that the Minnesota Court of
Appeals has squarely held that a title agent is the agent for a
mortgagee when it closes a loan.
Jesco, Inc. vs. Home Life Insurance Co.
357 N.W.2d 123, Minn. Ct. App. 1984. Like Lysne, Jesco
was a priority dispute with a title insurance company acting on
behalf of a mortgage lender. The dispute was between the mortgage
lender and holders of mechanic's liens, the resolution of which
turned on a property inspection performed by the mortgage company's
title insurer. The question of the effect of the agency
relationship between the mortgagee and the title company is answered
there. The title insurer's officer failed to note survey stakes
present on the property because he did not know the significance of
the presence of survey stakes under Minnesota mechanic's lien law.
The Court of Appeals specifically said that the title insurer was
the mortgage company's agent (357 N.W. 2d at 124) and held that the
mortgage company's mortgage became subordinate to the mechanic's
liens because of the knowledge which could have been obtained by the
title insurer.
Conclusion: despite the general rule that you
need only review the Certificate of Title to satisfy yourself on the
status of title, there are exceptions. If a buyer or lender has
actual knowledge of certain claims, they are still subject to them
even though not of record.
DIDN’T KNOW IT AND THE CERTIFICATE DIDN’T SHOW
IT!
But wait, you thought you could rely on a
Certificate of Title to disclose all and every interest and that you
are only additionally subject to claims you already knew about.
Again, not always. What you may learn by investigation remains an
issue. Your (justifiably) modest author persuaded the Eighth
Circuit Court of Appeals of the United States of America to this
effect. See Capitol Indemnity Corporation vs. West Fargo
Plumbing & Heating, et al., 145 F.3d 998 (8th Cir.
1999) below.
When do the rights of another submerge a
Certificate holder? Once in a great while, but you better know when
and where.
In the Capitol
Indemnity case, our clients bought a cabin from a relative. The
relative, unfortunately owed a million dollars to a construction
surety pursuant to an unrecorded indemnity agreement granting a
Mortgage on all real property owned by the guarantor. After our
clients closed their purchase, the title agent quietly filed the
closing documents (in a drawer!), not with the Registrar. Then the
surety got wind of this property, raced to the courthouse and filed
its Indemnity Agreement/mortgage and assumed priority over our
unrecorded Deed. The title agent only filed the Deed a year after
closing. The surety sued to foreclose its Mortgage in U. S.
District Court asserting priority over our previously unregistered
Deed.
We
thrashed around moaning for awhile until we thought, hey, didn’t we
go into possession of the property when we bought it? Sure. Even
though our deed was not registered, and the surety likely had no
actual knowledge of the transaction, MS 508.25 subjects a
certificate holder to the rights of several others, specifically
including rights of one in possession by reason of a deed from the
registered owner. The surety returned to Juran, supra,
arguing there is no constructive notice for torrens property, except
as to matters noted on the Certificate. The Supreme Court had said
in Juran that “possession of registered land is not notice of
any rights under an unregistered deed”. We pointed out that
subdivision 6 of MS 508.25 was added in 1931, two years following
the decision in Juran. We could not find any clear
legislative history despite a trip to the Minnesota Historical
Society. Nevertheless, the District Court agreed with us granting
summary judgment and the 8th Circuit Court of Appeals
affirmed. The 8th Circuit said the addition of
subdivision 6 was “no doubt in direct response to” Juran.
The 8th Circuit even cited Patton on Titles noting that
a certificate is sposed to be the last word on a Torrens title, but
found that a purchaser clearly takes subject to another in
possession if his possession derives from a deed from the registered
owner. The statute provides in part:
508.25. Rights of person holding certificate of title
Every person receiving a certificate of title pursuant to a decree
of registration and every subsequent purchaser of registered land
who receives a certificate of title in good faith and for a valuable
consideration shall hold it free from all encumbrances and adverse
claims, excepting only the estates, mortgages, liens, charges, and
interests as may be noted in the last certificate of title in the
office of the registrar, and also excepting any of the following
rights or encumbrances subsisting against it, if any:
(1) liens, claims, or rights arising or existing under the laws or
the constitution of the United States, which this state cannot
require to appear of record;
(2) the lien of any real property tax or special assessment for
which the land has not been sold at the date of the certificate of
title;
(3) any lease for a period not exceeding three years when there is
actual occupation of the premises thereunder;
(4) all rights in public highways upon the land;
(5) the right of appeal, or right to appear and contest the
application, as is allowed by this chapter;
(6) the rights of any person in possession under deed or contract for
deed from the owner of the certificate of title; and
(7) any outstanding mechanics lien rights which may exist under
sections 514.01 to 514.17.
If
you read to here, you’re waiting for the punch line. It is that there
is nothing simple about this fee title. Sorry, that’s the best I
could do.
