Daily Development for Friday, February 16, 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

RECORDING ACTS; TORRENS REGISTRATION SYSTEM; PRIORITY: Purchaser of Torrens property who had actual knowledge of mortgagees prior unregistered mortgage takes property subject to that mortgage.

In the Mater of the Petition of Collier, 2007 WL 270435 (Minn. 2/1/07)

This case has occasioned a lot of discussion in Minnesota, as did the Court of Appeals decision that it reverses.  The editors contacts tell him that half the title mavens in Minnesota think the case is wrong and inconsistent with the whole notion of registered title.  The other half think its perfectly OK and a just result.

The case deals with the Torrens property system, a system in use in Canada, but in America, the mostly appearing in Minnesota.  Torrens is a form of registration of title, a system in widespread use throughout the world.  Registered title is not acivil law concept - some common law countries (such as Canada) use it, and some civil law countries use an American-style recording system.  Under the typical registration system, a party investing in registered land gets a government certificate assuring that party of the state of the title, and usually the registry is regarded as the final source of information about the title.  Typically, constructive notice outside of the record, unlike in recording act states, will not detract from ones reliance on the title assurance provided by the land registry.

In Minnesota, an owner of property pay elect to submit it to the Torrens system.  In some counties, more than half the total properties are so registered.  But there is also a substantial amount of unregistered property, and the county records office maintains a grantor/grantee recording system.  There is separate registry for Torrens land. 

Here, in brief, a mortgagee obtained a mortgage on land that had been submitted for Torrens registration.  Contrary to what a careful mortgagee should have done, the mortgagee recorded its mortgage in the land records, but did not register its mortgage in the Torrens registry.

Subsequently, the mortgagor defaulted and the mortgagee purchased the property at a foreclosure sale.  Collier, a local investor, learned of these facts and contacted the mortgagee about buying the property, but the parties could not come together on a deal. 

Collier then researched the title to the property and saw that the mortgage had not been registered, although the mortgaged property was registered property.  Collier than contacted the original mortgage and offered to buy any interest he still had in the property for $5000.  Upon receiving a quitclaim deed from that mortgagor, Collier quickly borrowed against the property from another party (that party settled out of this case, and his interests are not discussed in this opinion.)

Seeking a declaratory judgment that his interest in the property superceded that of the mortgagee, Collier relied on a provision of Minnesota law stating that a mortgage on registered title must itself be registered, andtake effect upon the title only from the time of registration.  Thus, he argued, the mortgage had no validity at all, and consequently the foreclosure also was invalid and he was the owner of the property free of the mortgage.

The Bank relied upon another provision of the Torrens law that stated that a party who acquires registered property in good faith and for valuable consideration takes it free of any unregistered claims.  The Bank argued that the termin good faith meant that purchasers of property who had actual knowledge of unregistered interest in that property did not take in good faith and did not prime the unregistered interests. 

The Court of Appeals concluded that summary judgment should have issued for Collier, since the statute clearly invalidated the mortgage.  The Supreme Court reversed.  It acknowledged prior authority that held that constructive knowledge of an unregistered interest will not affect the title in the hands of a purchaser of registered property.  But it held that where, as here, a party taking an interest in registered property has actual knowledge of the mortgage, that party is not a good faith purchaser and takes its interest subject to those unregistered interests of which it has actual notice. 

The bulk of the courts analysis has to do with close readings of the statute and precedent cases in Minnesota, but as to policy analysis, the court opines (guided from the Registrar of the a major land registration county in the state, who filed an amicus brief) that Minnesota lawyers and land investors had assumed that an unregistered interest could not be defeated by a party who took registered land with actual knowledge of such interest.  Further, the court held that the statutory construction of the Torrens statutes should takeprinciples of equity into account.  Of course, there is the underlying reality here that Collier (and others similarly situated) would be reaping a windfall profit from the carelessness of the unregistered mortgagee, and the court didnt seem include to let Collier get away with afast one.

Comment: Minnesota lawyers in fact do not agree that the opinion reflects their preexisting understanding of the statute, nor that this is the best interpretation of the statute.  Although it is limited in application to parties taking with actual notice, they point out that many parties in fact get actual notice of certain unregistered interests, such as tax liens and judgment liens, when they order title reports of registered land.  Because of problems of delay in post closing registration, there is reason for the title companies to disclose such information.   Such interests might be primed by a party taking registered land without knowledge of them (at least if they are not registered before a certificate is issued), but the title report in fact gives them such knowledge.  Consequently, at least with respect to matters reported in a standard title report before acquisition, Minnesotas Torrens system may have been converted to a race notice system. 

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