Daily Development for
Wednesday, February 5, 1997

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

INSTALLMENT LAND CONTRACTS; FORFEITURE; THIRD PARTY RIGHTS: Where installment contract buyer has made payments to seller with embezzled funds, and seller subsequently declares a forfeiture of the contract, seller will be subject to an equitable lien in favor of the victim of the embezzlement.

Cedar Lane Inv. v. American Roofing Supply of Colorado Springs, Inc., 919 P.2d 879 (Colo. App. 1996).

A purchaser of commercial property made a $50,000 down payment and $22,500 in interest payments under an installment contract and made $16,000 in improvements on the property, all with funds embezzled from American Roofing. When the purchaser defaulted, the seller instituted a forcible entry and detainer ("FED") action and American Roofing filed a lis pendens and a judgment lien against the property. The purchaser made a claim at the FED hearing for equitable relief from default, but the seller prevailed asserting that the purchaser had no right or title to the money used. The seller then instituted a quiet title action, and American Roofing filed a counterclaim for recovery of the embezzled funds paid to the seller, alleging unjust enrichment.

The trial court ruled that the seller had not been unjustly enriched because it neither knew that the funds were embezzled nor requested or initiated the improvements on the property. On appeal, the Colorado Court of Appeals held that, at least in the unique circumstances of an installment land contract forfeiture, reacquisition properly may be considered in evaluating a claim for equitable relief. While the seller initially gave sufficient consideration for bona fide purchaser status by accepting the obligations of the installment contract and transferring possession to the purchaser, the seller did not qualify as a bona fide purchaser in the forfeited possession. By reacquiring the improved property without paying additional consideration, the seller recaptured the value it gave and again became subject to an unjust enrichment claim.

American Roofing, however, only stood in the shoes of the purchaser, as if the purchaser had used its own funds. Thus, American Roofing was entitled to equitable relief only to the extent the seller was unjustly enriched by the increase in value of the property due to the improvements installed by the purchaser. Remanded for further proceedings.

Comment 1: The last paragraph above, showing that the lien only covers the amount in improvement in value, limits the result to an equitable formula applied in many other cases where innocent owners are enriched at the expense of innocent improvers (or funders of improvements). Although it can be uncomfortable to have a lien against property for improvements that you really didn't want, if those improvements really increase the value of your property and their source is an equally innocent funder, then the editor is comfortable with the result. Of course, he'd just as soon it didn't happen to him!!

Comment 2: The new Restatement on Land Security, and a growing number of states, have jettisoned the installment land contract, treating any attempt to create such an instrument as an equitable mortgage. Where the state has a cheap and efficient means to foreclose on defaulted property (Colorado uses a public trustee) what is the point of preserving the frequently unfair remedy of forfeiture? It is so often the subject of abuse, that courts properly establish doctrines that are very protective of victims of the forfeiture, leading to uncertain title for all. Let's get rid of it!!

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1-6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Stacy Walter at the ABA. (312) 988 5260 or stacywalter@staff.abanet.org

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