Actual Knowledge Defeats Indiana’s Bona Fide Purchaser Defense Too

The Indiana Court of Appeals, in Weathersby v. JPMorgan Chase Bank, 2009 Ind. App. LEXIS 836 (Ind. Ct. App. 2009) (.pdf) , reminds us that actual knowledge of a prior interest in real estate is just as important as constructive knowledge in disputes over title.

Chronology of events.  On July 24, 1998, the Blair Family Trust (“BFT”) deeded the subject property to Financial Help and Consulting Services (“FHCS”).  That deed was not recorded until November 17, 1998, however.  In the interim, BFT deeded the same property to the 5285 Adams Trust (“5285”), and the BFT/5285 deed was recorded on October 13, 1998, about a month before the recordation of the BFT/FHCS deed.  The point is that, in late 1998, both FHCS and 5285 held a deed to the same property.  By 2000, the 5285 chain of title led to Lewis, who granted a mortgage on the property to Chase.  By 2005, the FHCS chain of title led to Weathersby, who granted a mortgage on the property to MERS.  The Weathersby opinion is about which alleged owner and mortgagee should prevail.

The chain of title split.  The Weathersby suit involved an analysis of the bona fide purchaser doctrine.  In Indiana, in order to qualify as a “bona fide purchaser” one must [1] purchase in good faith, [2] for valuable consideration and [3] without notice of the outstanding rights of others.”  Indiana law recognizes both “constructive” and “actual” notice.  I previously addressed constructive notice on May 28 and June 4, 2009.  Weathersby focused on actual notice and examined the effect of BFT’s 1998 conveyances of the property to both 5285 and FHCS.  Chase’s contention was that the July 24, 1998 deed to FHCS did not provide notice to 5285 because BFT did not record the deed until November 17, 1998, a month after the BFT/5285 deed was recorded.  The Court of Appeals agreed that, under I.C. § 32-21-4-1, 5285 did not have constructive notice of the deed to FHCS, but the compelling question was whether 5285 had actual notice of the deed. 

Test for actual notice.  Indiana law provides that, “notice is actual when notice has been directly and personally given to the person to be notified.”  Actual notice may be implied or inferred:

[f]rom the fact that the person charged had means of obtaining knowledge which he did not use.  Whatever fairly puts a reasonable, prudent person on inquiry is sufficient notice to cause that person to be charged with actual notice, where the means of knowledge are at hand and he omits to make the inquiry from which he would have ascertained the existence of a deed or mortgage.  Thus, the means of knowledge combined with the duty to utilize that means equates with knowledge itself.  Whether knowledge of an adverse interest will be imputed in any given case is a question of fact to be determined objectively from the totality of the circumstances.

Need for trial. The Court in Weathersby reversed the summary judgment granted to Chase and remanded the case for trial because there were factual issues surrounding the role of attorney Michael Delfine.  Mr. Delfine’s fingerprints are all over the key transactions.  Because the evidence at the summary judgment stage was not entirely clear, the Court of Appeals remanded the case for trial.  Here’s how the Court articulated the unresolved issues:

This evidence demonstrates that Delfine was aware that the Property had been transferred to both FHCS and [5285] in 1998.  In June 1999, Delfine was identified as the trustee of [5285].  However, the designated evidence does not demonstrate whether Delfine was also the trustee of [5285] in October 1998 or whether Delfine’s knowledge would be [legally] imputed to [5285].  As a result, we conclude that genuine issues of material fact exist regarding whether [5285] had actual knowledge in October 1998 of the prior transfer from [BFT] to FHCS and, thus, whether [5285] was a bona fide purchaser of the Property.

If 5285 was not a bona fide purchaser, then the chain of title leading to Lewis and Chase must fail, in which case Weathersby/MERS would prevail.

Weathersby demonstrates that, in the absence of constructive notice of a deed or mortgage, actual notice can be outcome determinative in title disputes.  Admittedly, litigation surrounding chain of title in commercial foreclosure cases is rare.  Cases like Weathersby mainly arise out of residential transactions.  Further, Weathersby appears to be unique in terms of the role of Mr. Delfine, and the Court noted that he resigned from the Indiana bar in 2002.  In the end, like many of these cases, the over-arching message for lenders is that it’s very important to have a closing that is covered by title insurance.