DIRT Development for Thursday, March 26, 2009
Ira Meislik
Meislik & Meislik
Montclair, New Jersey

RECORDING ACTS;  DUTY OF INQUIRY; CORRECTIVE DEEDS:. Knowledge of a corrective deed may impose a duty of inquiry on a property buyer to investigate whether any title defects have arisen between the date of an otherwise valid deed and the date the corrective deed was recorded, and failure to do so may upset a buyer's claim that it was a bona fide purchaser who had taken good title to a property despite an intervening fraudulent transfer. 

Hahn v. Love, 273 S.W.3d 712 (Tex. App. 1st Dist. 2008).

There are five actors in this case - a property owner with a judgment against it (the Judgment Debtor); the company that was owed the money (the Judgment Creditor); a couple of people purportedly having a familial relationship to the owners of the Judgment Debtor (the Intermediate Owners); a broker; and a buyer of the property (the Ultimate Buyer).

In 1988, a judgment in favor of the Judgment Creditor was entered against the Judgment Debtor. On April 16, 1992, the Judgment Creditor filed an abstract of judgment against the property. It expired ten years later on the same day. In 2001 or 2002, the property was conveyed to the Intermediate Owners. That deed was recorded in 2002. Despite already having sold the property to the Intermediate Owner, the Judgment Debtor, more than a year later, contracted to sell the property to an unrelated third party. When the title company saw the expired abstract of judgment, it required that the judgment be satisfied. As a result, that deal fell through.

About a week later, the Judgment Creditor filed a motion to revive the judgment and sent notice to the Judgment Debtor. The same broker who had "represented" the buyer in the first contract now represented "represented" the Judgment Debtor as seller. Less than a month later, the Judgment Debtor and the buyer who had cancelled the earlier contract signed another one. Two weeks after that, on January 21, the 2002 deed from the Judgment Debtor to the Intermediate Owner was recorded. It lacked a metes and bounds description. About a week later, on January 23, 2004, just two days after the 2002 deed to the Intermediate Owner was actually recorded, the Judgment Creditor got its order reviving the Judgment. At the hearing, the Judgment Debtor's attorney unsuccessfully asked for more time to respond and never disclosed that the deed to the Intermediate Owner had been filed in the interim. On March 1, the second (now revived) abstract of judgment was recorded and two days later a correctiv

e deed, now incorporating a metes and bounds description, was recorded.

The same broker who has been involved in the two earlier attempts to sell the property to the same buyer was then contacted by, or himself contacted, another interested purchaser. He told this interested purchaser that the contract buyer was unable to close. A closing between the Intermediate Owner and the interested purchaser then took place, however, and this purchaser became the Ultimate Buyer. A deed from the Intermediate Owner to the Ultimate Buyer was promptly recorded on April 16, 2004.

What followed was an attempted execution sale, a request for a temporary and then a permanent restraining order, and the Ultimate Buyer's intervention in the suit. Allegations of a fraudulent conveyance were raised. The validity of the originally recorded deed lacking a metes and bound description was challenged. And , most significantly for this case, the Judgment Creditor charged that property was subject to a constructive trust because the Ultimate Buyer was not a bona fide purchaser for value, in good faith. The Ultimate Buyer contended that the 2002 deed from the Judgment Debtor to the Intermediate Owner was recorded at a time when no active abstract of judgment was in force, and that the property was therefore not encumbered by the judgment lien. It successfully obtained summary judgment in its favor.

In the appeal that followed, the Texas Court of Appeals reversed and sent the matter back for further findings. In doing so, it looked at the Fraudulent Transfer Act. That Act accepts, as evidence of an actual intent to defraud, that a transfer has been made to a related party while there was a threat of suit or a creditor's claim if, at the time, the transfer had been made for less than reasonably equivalent value. Those questions were never seriously treated by the lower court. There is a limitation in the Act to protect bona fide purchasers. It protect those who take in good faith and for reasonably equivalent value. A putative bona fide purchaser has the burden of proof on those issues. Critical here is that, "[a] transferee who takes property with knowledge of such facts as would excite the suspicions of a person of ordinary prudence and put him on inquiry of the fraudulent nature of an alleged transfer does not take the property in good faith and is not a bona fide purchaser

." That is a question of fact, and generally cannot be resolved on summary judgment.

The Judgment Creditor challenged the legal sufficiency of the 2002 deed to the Intermediate Owner which, if fully valid, would have placed the subsequent recorded (revived) abstract of judgment out of the chain of title. The Ultimate Buyer claimed that the original deed, though lacking a metes and bounds description, was still valid and that it had paid reasonably equivalent value (and that seems to be the case). The Ultimate Buyer, by affidavit, claimed no knowledge of the judgment's history, claiming he had first heard of the property in a telephone call from the broker, with whom he had done many prior deals.

The Judgment Creditor countered as follows: The corrective deed to the Intermediate Owner was filed two days AFTER the revived judgment was recorded. The first (failed) contract with the earlier buyer failed because the title company for that transaction raised the judgment as an objection and the broker knew about the judgment (even though the judgment had become dormant). A motion to revive the judgment had been filed. The same broker negotiated the second contract with the earlier (failed) buyer. And, the same broker, who enjoyed a long time relationship with the Ultimate Buyer, served as the broker for the Ultimate Buyer.

After sorting through this set of circumstances, the Appellate Court drilled down to the broker's relationship to the transaction. To the Court, the relationship of the broker to the Ultimate Buyer raised fact questions as to whether the Ultimate Buyer had either actual or constructive knowledge that the Intermediate Owner (as seller) had clear title to the property free of the judgment lien. "A broker is a fiduciary required to exercise fidelity in good faith toward his principal in all matters within the scope of his employment... ." In Texas, and in many other jurisdictions, this "imposes upon [the broker] the positive duty of communicating all information he may possess or acquire which is, or may be, material to his employer's advantage." That was enough to topple the lower court's summary judgment granted in favor of the Ultimate Buyer.

Another problem for the Ultimate Buyer was that the original deed to the Intermediate Owner lacked a proper metes and bounds description. The Court never revealed if it had any property description at all, but clearly found that the first deed was a "conveyance that several title searches indicated was of questionable validity." It would appear that even if the first deed had a sufficient property description, the existence of the corrected deed, filed two days AFTER the revived judgment was recorded, should have triggered an inquiry by the Ultimate Buyer as to what happened between the filing of the first deed and the filing of the corrected deed. According to the Court, "reference to another document puts the purchaser upon inquiry, and he is bound to follow up on this inquiry, step by step, from one discovery to another and from one instrument to another, until the whole series of title deeds is exhausted and a complete knowledge of all the matters referred to and affecting the

 estate is obtained."

The result: back to square one - the lower court now has to figure out whether the Ultimate Buyer was, in fact, a bona fide purchaser.

Comment 1: Excuse us if we overlooked Texas procedural law regarding such things about the expiration dates for recorded judgments. And, by way of curious note, this case has 29 headnotes and 13 footnotes. After chucking those out, the opinion isn't as long as it looks.

Comment 2: Oh, how much easier life would have been for this judgment creditor and its pocketbook had it revived the judgment before it expired. How many attorneys keep track of the expiration date of expiring judgments (or financing statements)? How many expressly disclaim responsibility to do so? And, what would be the remaining issues if the original deed had included a metes and bounds description and re-recording it as a corrective deed had not been called for?

Comment 3: What are the limits of the duty of inquiry? Presumably, the Ultimate Buyer's title search showed the corrective deed. Assuming that the originally recorded deed was valid notice of the change in ownership, why should the Ultimate Buyer have been required to see if the grantor under that deed had any subsequent judgments? What if an internet search had turned up an article about the Judgment Debtor having lost a law suit ten years earlier? Should the Ultimate Buyer have done more investigation to find out whether a judgment lien was ever filed against the debtor or the property? Wasn't the notice-filing scheme supposed to protect parties who look at the record if they are without actual knowledge of the status of a property's title? Assuming it just never occurred to the Ultimate Buyer that there was something going on here, shouldn't it have been able to rely on the record?

Comment 4: If a buyer knows that its seller obtained title from a party related to its seller, does the buyer need to inquire as to whether that transaction was a fraudulent transfer? After all, the Court is saying that investigation ends when the buyer has "complete knowledge of all the matters referred to and affecting the estate is obtained." The Reporter hopes not. The facts here sure put out a giant smell, and summary judgment certainly seems inappropriate. But, to this editor, the Appellate Court is setting a trap much larger than what would seem to be required to catch this varmint.

Comment 5: A request for a rehearing has been overruled (Dec 12, 2008), and a petition for review has been filed (Jan 26, 2009).

The Reporter for this item was Ira Meislik of the New Jersey Bar. 

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