This week, we look at another case where an investor bought a property from a seller who did not hold title.  Once again, believing he owned it, the buyer fixed up the property.  And once again, the real owner later showed up and sought to assert its claim to title to the now improved property.  Only this time, because of one critical difference-- the lack of a title search, of course!-- the outcome was different, and even worse, for the investor.

In 1986, the Philadelphia Housing Development Corporation (PHDC) sold a run-down house to a buyer named Ruffin for a low price, on the condition-- written into the deed-- that the buyer would live in the property for ten years.  If the buyer did not satisfy this condition, title would revert to the PHDC.

Ruffin did not live in the property for the required ten years, and the PHDC filed a quiet title action to get a court order to confirm that title had reverted to it.  Ruffin did not show up in court to challenge the quiet title action, and the PHDC obtained a court order confirming its title to the property.  The court order was recorded in the city's deed books in 1998.

Over the next several years, the PHDC did nothing with the property and the already dilapidated house fell into further disrepair, becoming little more than a shell with holes in the roof and inhabited by animals.

The property nevertheless caught the attention of an investor, Kevin Willoughby, in 2006.  To find the owner of the property, Willoughby conducted an "online search" of the City's Department of Revenue database, which listed Ruffin as the owner of the Property and owing property taxes and Water Department bills. 

Willoughby did no title search on the property.  Instead, Willoughby got in contact with Ruffin, and arranged to purchase the property for $9,000.  Ruffin gave Willoughby a deed.

Willoughby then spent around $90,000 fixing up the property.  But when he tried to sell the property, the buyers' title search discovered that PHDC held title to the property, and the sale fell through.

Willoughby's attorney then contacted the PHDC in an attempt to obtain title to the property.  The city offered to sell the property to Willoughby for $52,000, but Willoughby did not follow through.  Instead, he rented the property out to some tenants.

PHDC filed a new quiet title action to eject Willoughby's tenants from the property and assert its title to the property.  After a bench trial, the trial court entered an order confirming PHDC's title, but awarding Willoughby $50,000 for the improvements that he made, on the reasoning that PHDC would be unjustly enriched if they were able to retain the value of Willoughby's improvements without paying for them.

PHDC appealed. Among other things, they argued that Willoughby was not entitled to recovery on his unjust enrichment claim because he was not a bona fide purchaser-- in other words, he was not a "good faith" purchaser who had taken reasonable steps to assure himself that he was getting good title to the property.  Instead, he had bought the property with no title search whatsoever.  Recovery for unjust enrichment, they argued, was reserved for bona fide purchasers-- those who had done what was reasonably necessary to assure themselves of title to the property, namely, those who conduct title searches.  Absent that, PHDC was enriched, but it was not unjustly enriched... looked at this way, Willoughby was so careless with his money that he in a sense deserved to lose his money.

The appeals court agreed with this view, and wiped out the unjust enrichment award to Willoughby.  So because he failed to do a title search, Willoughby is out not only the purchase price he paid for the property, but also has lost all the money he invested in improving the property, not to mention all of the litigation expenses he has incurred.

If you read last week's article, "How to become roommates with a banker," you might have noticed many similarities with that case in this one.  In both cases, an investor bought a property from a seller who did not hold title to the property, then the investor made significant investments in fixing up the property, and finally, the real owner showed up.  But in last week's case, the investor won on its unjust enrichment claim, and therefore did at least get some money back for its improvements.  And the reason they did is because they did make a good faith attempt to assure themselves good title.  They obtained title insurance, and the title insurer did a title search.  Fraud perpetrated by the seller, rather than carelessness by the investor, caused the investor to receive a defective title.