Daily Development for Tuesday, October 4, 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 dirt@umkc.edu FEDERAL FORFEITURE; "INNOCENT OWNER" DEFENSE; TORRENS SYSTEM: Although, as to property held in ordinary, or "abstract" title, a mortgagee, upon the making of a mortgage loan, may become an "innocent owner" and may avoid federal forfeiture of the mortgagor's property due to mortgagor's criminal acts on the property, the same is not true of mortgagees of Torrens land. Such mortgagees must register their mortgages in the Torrens system before they have knowledge of the alleged criminal acts, or else they are subject to forfeiture under federal civil forfeiture laws. U.S. v. 392 Lexington Parkway South, St. Paul, Minnesota, Ramsey County, 2005 Westlaw 2179155 (9/7/05) Gore acquired certain property in 2002 and borrowed money about the same time from Long Beach, giving Long Beach a mortgage on the property. The property consisted of some land that was subject to the Minnesota registered title system, known as Torrens, and some land that had not been subjected to that system, which the court described as "abstract" land. Long Beach failed to record or register its mortgage at the time it took the mortgage. A year later, Gore, already indicted for cocaine trafficking, took out a second loan secured by the property and gave a mortgage to MG III. MG III had no actual knowledge of the indictment or the drug activity. Astonishingly, MGIII also failed to record or register its mortgage promptly . Six weeks after the MG III loan, the U.S. Government filed a lis pendens on the property stating that the Government had undertaken an action to forfeit Gore's interest in it. A month after that, MG III filed its mortgage for recordation and for registration on the Torrens portion. Long Beach didn't get around to recording until Gore defaulted in and it sought foreclosure several months after the MG III filing. The mortgagees noted that the federal statute defines "innocent owners" as including mortgagees and says that "an innocent owner's *interest in property* shall not be forfeited." They argued that when they took their mortgages they obtained an interest in the property within the meaning of the federal law, and that the only relevant question was whether they had knowledge of the mortgagee's criminal problems at that time. In fact, the court concluded that both mortgagees had not actual or constructive notice of the criminal issues at the time that they took their mortgages. But it concluded that the question of whether those mortgages represented an "interest in the property" depended upon state law. It conceded that as to the property that was "abstract" land, a mortgage interest in the land becomes valid upon conveyance of a mortgage in Minnesota. But, under Minnesota's Torrens system, the court concluded, there is no interest in property unless and until a mortgagee actually registers the mortgage with government authorities. At the time that the mortgagees registered their mortgages, a lis pendens had been filed, the Government had filed its lis pendens and the mortgagees could not be "innocent purchasers" under the federal law because they had constructive notice of the forfeiture claim. Comment 1: It does seem bizarre that the same mortgagee is protected as to some land and not as to others as a consequence of the dual recording system in Minnesota. Clearly this was not the intent of the drafters of the system, but it must be conceded that the focus on the registration requirement as a condition of validity of one's interest is a vital element of registration systems. Comment 2: We're all comfortable in the U.S. with our own system, but required registration has a lot to recommend it, especially in a more sophisticated and organized society, when it really isn't unreasonable to expect people to carry out transactional formalities. There are other problems with Torrens, however. First, it's expensive for the government. (But perhaps less so as computer technology develops.) Second, all the existing properties would have to go through a registration process, and this requirement has killed the proposal for registration in most places it has been raised. 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