Daily Development for Friday, March 24, 2005
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; INQUIRY NOTICE; INQUIRY FROM POSSESSION OF PRIOR OWNER:  Purchaser of home is on inquiry notice to inquire as to both possessory and tenancy rights when former owner is still in physical possession. 

Martinez v. Affordable Housing Network, Inc., 123 P.3d 1201 (Colo. 2005).

Affordable Housing Network (AHN) sent a targeted mail solicitation to Owner, who had fallen behind on his mortgage payments.  Owner met with AHN representatives, who represented that they would help Owner refinance, and, if the refinancing failed, help Owner acquire another house. AHN also falsely represented that it was a 501( c)(3) nonprofit affiliated with HUD and FNMA.   Based on these promises, Owner entered into an agreement that effectively gave AHN an option to purchase the property for the amount needed to cure Owner’s mortgage deficiency, but AHN was also supposed to try to arrange to refinance the existing loans on the current home and provide alternative housing and financing for such housing if it became necessary to transfer title to the existing home.. 

Owner continued to occupy the property through a lease contained in the option.  AHN in fact did pay the deficient payments of about $9,000, but a balance of over $150,000 was still owing on the mortgages on the property. 

Later, AHN talked owner into providing a  quitclaim deed for “protection” of AHN’s interest.  AHN cured the mortgage deficiency.  AHN represented that this deed would be used

During the next six months, Owner became upset about AHN’s lack of communication, lack of effort to refinance the home, and failure to show Owner other homes for purchase in case Owner’s home sold.  An Investment Company purchased the home ( under circumstances suggesting come collusion between AHN and the Investment Company, but nothing was really proven.).  AHN, in violation of the agreement with Owner, recorded the quitclaim deed from Owner to AHN and conveyed AHN’s interest in the home to the Investment Company by quitclaim deed without notice to Owner. 

Investment Company claimed bona fide purchaser status.  The trial court and court of appeals found that Investment Company had received good title because they paid value, in good faith, and took title without actual or constructive notice of any defect.  Despite AHN’s fraud in procuring the quitclaim deed from Owner, Investment Company received good title.

The Colorado Supreme Court reversed, finding Investment Company should have been on inquiry notice despite the fact Investment Company had no actual or constructive knowledge or any defect of title. 

The lower courts had relied upon the fact that Owner’s continued possession of the property was explained fully by the executed option agreement.  Thus, those courts reasoned, it was not necessary for Investment Company  to make specific inquiry of Owner as to why it was on property being sold to it by AHN.  

The Supreme Court, in reversing,  held that possession of property by a former owner is sufficient to put a purchaser on inquiry notice of any legal or equitable claim that could be obtained from personal inquiry of such possessor.  Reliance on documentation produced by third parties is not enough, at least when the party in possession is available for questioning. 

The court also discussed whether what impact there was on the case that Owner’s deed to AHN and AHN’s deed to Investment Company were both quitclaim deeds.  (Owner’s deed to AHN was not recorded to closing, but the court appears to assume that it had seen the deed before closing.)  It concluded that Colorado did not follow the rule that a quitclaim deed in an of itself puts a party on inquiry notice to exam the validity of the deed.  But it stated that a conveyance of back-to-back quitclaim deeds in one closing combined with physical possession by Owner should have alerted Investment Company to a possible title issue.  This conclusion appears to be an alternative holding on the notice issue.  The court had already stated that the buyer had a duty to make personal inquiry of the Owner in possession.              

Comment: The whole case is a sorry tale indeed of the clever preying on the weak.  At one point, the court describes a day when a broker, attempting to sell the house for AHN, contacted the Owner for a showing.  Owner responded that they were no longer interested in selling the property and told the broker to stay away.  Later, following a phone call to AHN, broker came to the house anyway and, according to Owner, pushed his way past her and into the house over her objections that she didn’t want to sell.  The client, who represented the ultimate buyer, claimed that, although he trailed right behind the broker, was not witness to the statements by Owner. 

Fortunately, it was not necessary for the Colorado court to make any new law.  It had already held, in the context of leases, that it was not sufficient for a party acquiring an interest in leased property to look at documents explaining the tenant’s rights.  It must actually ask the tenant (in that case the tenant had an option to purchase not stated in the lease the third party was shown.)  Thus, simple inquiry, at least where practicable, of parties in possession, seems to be a minimum requirement.  Not unreasonable, to the Editor. 

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