As Predicted, Cleveland Suit Over Foreclosures Dismissed
BFP Defense Denied, And IRS Lien Prioritized

Don’t Forget To Record The Deed

The Indiana Court of Appeals in Kumar v. Bay Bridge, 2009 Ind. App. LEXIS 507 (Ind. Ct. App. 2009) (.pdf) explained what might happen if one purchases real estate but fails to record the deed.  In Kumar, prior owner, INB National Bank Trust, had not paid property taxes for years.  Mr. Kumar acquired the subject real estate at a tax sale but didn’t immediately record the tax deed.  After the tax sale, the successor-in-interest to the Trust conveyed the property to Bay Bridge, which recorded the trustee’s deed shortly thereafter.  Bay Bridge later discovered that Kumar claimed an interest in the property.  Bay Bridge filed a complaint to quiet title to the real estate and named Kumar as a defendant.  In response, Kumar quickly recorded his tax deed, but the Court held it was too late.

The recording statute.  Ind. Code § 32-21-4-1 provides that deeds must be recorded in the Recorder’s Office of the county where the land is situated and, furthermore, that a conveyance “takes priority according to the time of its filing.”  The purpose of this so-called recording statute “is to provide protection to subsequent purchasers, lessees and mortgagees.”

Bona fide purchaser doctrine.  Because Kumar failed to record his tax deed as required by I.C. § 32-21-4-1, Bay Bridge did not have notice of Kumar’s interest when it purchased the property.  In the lawsuit, Bay Bridge argued for the application of Indiana’s bona fide purchaser doctrine with respect to Kumar’s claim to ownership of the real estate.   The Court of Appeals stated the general rule that “to qualify as a bona fide purchaser, one has to [1] purchase in good faith, [2] for valuable consideration, and [3] without notice of the outstanding rights of others.”  This acts as a defense to title, and the theory “is that every reasonable effort should be made to protect a purchaser of legal title for a valuable consideration without notice of a legal defect.” 

Notice.  There was no question Bay Bridge was a purchaser in good faith for valuable consideration.  The only issue was whether it was without notice of Kumar’s interest.  In Indiana:

 A purchaser of real estate is presumed to have examined the records of such deeds as constitute the chain of title thereto under which he claims, and is charged with notice, actual or constructive, of all facts recited in such records showing encumbrances, or the non-payment of purchase-money.  A record outside the chain of title does not provide notice to bona fide purchasers for value.

Kumar failed to record, so Bay Bridge wasn’t deemed to have notice.  Also, there was evidence in Kumar that, before purchasing the property, Bay Bridge had requested a title search and found nothing with regard to the tax sale or Kumar’s tax deed.

Unfortunate, but understandable, result.  The Court of Appeals affirmed the trial court’s summary judgment in favor of Bay Bridge on its complaint to quiet title.  The Court wiped away Kumar’s interest in the property.  Had Kumar simply recorded the tax deed, there never would have been a issue.  The Kumar case is a reminder for foreclosing lenders and their counsel to record the sheriff’s deed following a sheriff’s sale, or any deed executed in connection with a deed-in-lieu of foreclosure.  Bizarre problems like the one illustrated in Kumar are rare but can arise in connection with a commercial mortgage foreclosure.  Moreover, secured lenders need to be aware of the bona fide purchaser doctrine should unexpected claims to title arise during or after the foreclosure process.