Daily Development for Friday, April 7, 2007
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
dirt@umkc.edu

RECORDING ACTS; REGISTRATION; BONA FIDE PURCHASER: Under Minnesota’s Torrens registration system, a mortgagee that recorded, but did not register, its mortgage and foreclosure title against Torrens property will have no claim against the title of a transferee of the mortgagor who registers title, even where the transferee had actual knowledge of the mortgagee’s interest.

Conley acquired Torrens property subject to Bank’s mortgage. Bank’s mortgage was recorded with the County recorded, but not registered. Minnesota law requires that mortgages on Torrens property be registered. Two years after Conley acquired the property, Conley defaulted on the mortgage and Bank carried out a foreclosure proceeding and purchased the property at the foreclosure sale.

Collier, a person apparently unrelated to Conley, wished to buy the property and contacted Bank about buying the property from Bank. Bank declined Colliear’s offer, but Collier, undaunted, researched the ownership of the property and discovered that Bank had never registered its mortgage or foreclosure title, although the property had been registered with the Torrens system earlier.

Collier then went to Conley who remained the registered owner, and paid him $5000 for his interest in the property. On the same day that Collier obtained a registration certificate evidencing the transfer of ownership from Conley to him, Collier borrowed $145,000 against the property from a party who apparently was a business associate of Collier. That party’s mortgage was not at issue in this litigation, as he reached some kind of settlement with Bank.

Collier then brought a declaratory judgment lawsuit to establish his ownership in the property free of the claims of Bank. The trial court granted summary judgment to Bank.

On appeal: Held: Reversed: Based upon Minnesota’s Torrens statute and its purposes to provide guaranteed title, Collier’s actual knowledge of Bank’s interest in the property was of no relevance - when Collier obtained a clear registered title to the property, his interest prevailed over the Bank’s unregistered claim, despite the fact that he appears to lack bona fides in his dealings with the property.

The court was called upon to balance somewhat contradictory language in the Minnesota statutes. One provision states that a party who obtained a registered title "in good faith" shall hold it free from all encumbrances. But another provision states that an unregistered mortgage against Torrens property shall be regarded only as a contract between the parties, and shall take effect as an encumbrance only upon registration.

Of course it would have been possible to read the "good faith" requirement in one statute as a modification of the provision stating that unregistered mortgages do not bind registered property, but the court viewed such construction as inconsistent with the fundamental purposes of the Torrens statute.

Although the interpretation of the statutes at issue here was a question of first impression in Minnesota, a prior decision had stated that unregistered claims get no respect:

Despite the implications of this language, the court acknowledged that there was some uncertainty in the Minnesota cases as to the significance of actual knowledge of unregistered claims. But ultimately the court concluded that the significance of guaranteed title prevailed over concerns about the lack of good faith on in the party claiming such a guaranteed title

Comment : The bottom line is that Collier basically stole the property from the bank, and did so quite legally. The editor understands the special function of the Torrens system, and certainly agrees that one should not carry notice issues to far. But the facts of this case appear to cry out for a different approach, and the statute appeared to supply an interpretative escape for the court that would have avoided rewarding thievery.

As the editor has never practiced in a Torrens regime, he is loathe to suggest a value judgment on the outcome itself, but notes only the result, which would be viewed as outlandish in a recording act jurisdiction (except, possibly in North Carolina’s "pure race" regime.)

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