Property title claims, and the process of title abstracting are based on the mechanism of "notice." Ownership, mortgage interest, and claim of lien can only attach to a property when there is notice to a person. This notice can take the form of actual notice and constructive notice. Properly executed documents are the most common form of constructive notice, under the premise that a document recorded in the land records is available for any interested party to make them self aware of.

Generally, a party need not investigate all documents of every party. Most standards place the threshold of constructive notice of claims made for or against those apparently within the chain of title. In other words, a person is not bound to search records for those not in title. However, should a person discover actual knowledge of a potential claim to a third party outside the chain of title parties, they would be required to investigate further.

Constructive notice has its loopholes in the law. In the following three actual cases, consider whether as a professional abstractor you would have listed these mortgages on a title abstract, either directly or as a footnote.

Case 1. In the first case, a homeowner had refinanced a mortgage several times over several years. The last time, the mortgage was inadvertently not recorded by the lender. A short time later, the borrower filed bankruptcy. The schedule of assets and liabilities for the bankruptcy listed the mortgage, although it was still unrecorded in the land records.

The bankruptcy trustee moved to disclaim this mortgage as a liability in order to release more net assets to other creditors. The mortgage lender claimed that the bankruptcy petition itself represented notice of the mortgage. The trial court and appeals courts both agreed with the trustee, that the unrecorded mortgage was invalid against the bankruptcy assets. In a case of tragic irony, the bankruptcy filing was an involuntary action against the borrower, by one of its creditors. Guess which one? The answer and more details on the case are here.

Regardless, if you were an abstractor running a search for the bankruptcy, would you list the mortgage on the search since you had seen it on the BK schedule, or leave it off because it was an unrecorded instrument? This case also demonstrates the duty of a bankruptcy trustee to vigorously defend against claims to the assets, and how this "strong-arm trustee" philosophy is generally supported by the courts.

Case 2. A property owner is in the process of constructing a home on a parcel of land, already financed by a private mortgage from the seller. This mortgage was not recorded, unintentionally. This project eventually needs more financing, so the owners apply for a mortgage from Gerrity Financial. The borrower forged a purchase agreement as part of the application process, but did state an amount of "downpayment," considerably less than the property value.

Of course, the Gerrity loan goes into default, and the original seller who provided financing is precluded from collecting proceeds since the instrument was not recorded in priority. This party appeals, under the premise that "Gerrity's knowledge of the reference in the purchase and sale agreement to a mortgage, standing alone, was sufficient to establish the priority of their mortgage."

Here's another curve ball: the law firm which performed the title search for the new lender, Gerrity, had notarized the original purchase money mortgage. So should the purchase money mortgage have priority over the new mortgage?

The court said no: "Gerrity had no obligation to go beyond the registry record and make inquiry of the Moores about any reference in the purchase and sale agreement. Consequently, Gerrity cannot be charged with "actual notice" of the terms of the unrecorded mortgage referred to in the altered purchase and sale agreement. In notarizing Delaney's signature, the attorney did not read the mortgage above the signature line. That being so, his firm had no knowledge about the unrecorded mortgage that could be imputed to Gerrity."

Case 3: In this case, a mortgage was actually recorded in the land records. However, the signature on the document was not properly notarized.

Of course, the property was foreclosed, and subsequent lenders disputed the validity of the mortgage based on its being improperly executed. Should an abstractor show this mortgage on a search? (It should be noted that this case was in Ohio, which is more of a "pure race notice" state than others may be.)

Surprisingly, the appeals court, held that the recording of a defectively executed mortgage does not establish lien priority over subsequently recorded properly executed mortgages, even though the recorded document represents actual rather than constructive notice. It brings up some interesting considerations.

In a pure race state, an unrecorded mortgage is ineffective against any subsequent rights, whether the party had notice or not. Notice is irrelevant. The mortgage was signed by the borrower, notarized, and presented to the records office. There was no fraud or forgery. In practical terms, the parties intended for the property claim to attach, and there is a public record of it. However, a technicality invalidates it, and even trumps actual notice.

These outcomes cases may be exclusive to the time, location and circumstances of the events, but they are interesting for consideration. If nothing else, they demonstrate the importance of not making assumptions with searching title records, and thinking of possible and unusual results. Each case also has additional details that are worth reading.

Your comments and opinions are requested.