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Source of Title Blog

Hypothetical: Same property sold twice!
by Robert Franco | 2011/08/15 |

Last week, I posted an Interesting Hypothetical Question in the forums.  Basically, the seller sold the same property to two different buyers on the same day, before either of them had the opportunity to record his deed.  The obvious question was "how owns the property?"  Is it the one who first took delivery of the deed, or the one who recorded first, by just minutes? 

Source of Title Blog ::

Here is a recap of the hypothetical situation: 

Sam owns a run-down property that he wants to get rid of.

In the morning, Andy stops by to visit Sam and offers him $3,000 to buy it.  Sam accepts the offer and on the spot executes a warranty deed and delivers it to Andy.  Andy pays him $3,000 in cash.

In the afternoon, on the same day, Bruce visits Sam and offers him $3,000 to buy the property.  Sam accepts the offer and on the spot executes a warranty deed and delivers it to Bruce.  Bruce pays Sam $3,000 in cash.

Unbeknownst to Andy or Bruce, they both arrive at the courthouse at the same time to record their deeds.  Andy is first in line at the Auditor's office to pay the conveyance fee and get his deed stamped.  The clerk tells Andy that he needs to get the legal description approved first, and directs him to the Tax Map Office. 

Bruce gets a different clerk who doesn't realize that Andy has a deed for the same property. Bruce's deed gets the required stamp and proceeds to the recorder's office where his deed is properly recorded.

Andy gets his legal approved and goes back to the Auditor's office, where Bruce's transfer is not yet showing up in the Auditor's computer system.  Unaware that the property has already been transferred to Bruce, Andy gets the deed stamped and proceeds to the recorder's office where his deed is recorded... just minutes after Bruce's deed went on record.

Not surprisingly, the responses were split between Andy and Bruce. Under one line of thought, title passes upon delivery of the deed, not recording.  Thus, Sam could not have sold to Bruce what he didn't own and that deed was not valid.  Thus, Andy is the owner.  This would be the "common law" result.

The other line of thought is that the recording statute protects Bruce.  Since he acquired title as a bona fide purchaser for value, without notice of the prior conveyance to Andy, and he recorded first, Bruce is the owner.

Were this property worth enough to fight over, the litigation would have been very interesting.  First let's take a look at the relevant recording statute in Ohio.  It provides that "all deeds... shall be recorded... Until so recorded or filed for record, they are fraudulent insofar as they relate to a subsequent bona fide purchaser having, at the time of the purchase, no knowledge of the existence of that former deed, land contract, or instrument."  O.R.C. § 5301.25(A). This is a form of race-notice statute.

Strictly applying this to the set of facts in the hypothetical, Bruce was the "subsequent bona fide purchaser" and he had no knowledge of the existence of the former deed.  Thus, as far as he is concerned the deed to Andy was "fraudulent."  It would appear that Bruce would "win," even if Andy had recorded his deed first.  Regardless of whether Andy recorded his deed first or not, at the time of Bruce's purchase, he had no knowledge (constructive or actual) of Andy's deed.

But what about that common law rule - "you cannot convey what you do not own?"  It seems the courts reconcile that with the recording statute by finding that between the grantor and grantee, title is passed upon delivery.  However, with regard to the rest of the world (or at least bona fide purchasers), title passes upon recording.

Thus, under this seemingly-harsh rule, Bruce could only have lost his title to yet another bona fide purchaser prior to his deed getting recorded.  Andy had no way to ever acquire legal title (short of filing his deed prior to the sale to Bruce). 

So, what effect, if any, does the common law rule have?  Well, Andy would "win" if Bruce did not qualify as a "bona fide purchaser."  Ohio generally defines bona fide purchaser as  "one who takes in good faith, for value, and without actual or constructive notice."  At least some legal dictionaries imply that "for value" means a "fair value."  Was $3,000 sufficient "value" to qualify Bruce as a bona fide purchaser? 

This could certainly be litigated... and the sales price does seem awfully low in this example. And, did Bruce (or Andy) really take title in good faith?  It seems like they were both looking to pick this property up cheap to make a quick buck.  Maybe they were both trying to take advantage of Sam, who turned out to be just a little bit smarter than both of them.   

I promised that I would share the outcome of the "true story" on which this hypothetical was based.  I believe that Andy and Bruce both realized they had been taken for a ride by a greedy seller.  Since they both snapped up this "run down" property to make a quick profit, they decided to sell it and split the profits.  Certainly, this is a good result that avoided expensive litigation.

If this case had been litigated, I'd be hesitant to place a bet on either party.  I understand the recording statute - and technically, Bruce would have good title if he is deemed a bona fide purchaser.  But given the very low sales price, a good argument could be made that he is not. 

The recording statute aside, I'm not so convinced that it should apply where both sales take place before either has a chance to record.  Where the buyer is negligent, and delays the recording of his deed, I don't find the result so offensive.  However, where the first buyer goes to the courthouse the same day he receives his deed and still doesn't have good title, I'm a little put off by the effect of the recording statute.  But, maybe that is just a good argument for title insurance (though I'm still not going to recommend an owner's policy for a property acquired for $3,000). 

If Bruce was a bona fide purchaser, who did acquire good title over Andy, Andy would certainly have a civil suit against Sam.  Ohio courts have held that "the mere failure of a grantee to record a deed is not a defense to the grantee's action against his grantor for the grantor's act of conveying the identical property a second time."  Essentially, the recording statutes "provide protection for a subsequent bona fide purchaser, but affords no protection to the original but forgetful or fraudulent grantor in a suit by the original grantee."  In that case, the conveyances were 5 years apart - and it looks like the seller sold a small piece of their property in 1965, and when they sold the remainder in 1970, they forgot to except the smaller piece from the legal description.... that could have been "forgetful."  A title company probably prepared the deed and the prior sale did not show up on the title search.

  




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Categories: Fraudulent Transfers, General Interest, Title Problems

1629 words | 10748 views | 2 comments | log in or register to post a comment


Opinion
The minute the seller took the cash from the first purchaser that made him the rightful owner. Because when he signed over the deed to the first purchaser that was like entering into a contract. Exspecially if it is a Warranty Deed vs a Quit Claim Deed. The purchaser can prove his case by providing the courts proof that he was at the recorder's window first and that he more than likely has a paper trail that indicates that he withdrew $3,000 from his bank account which would also have a date and time stamp to help prove his case. 
by Penny Bettorf | 2011/08/16 | log in or register to post a reply

recording statutes
I disagree w/ Penny.   Recording statutes function to establish priority of claims to real property.  Assuming BFP status in both grantees, Bruce wins.  End of story.  Taking cash doesn't in and of itself make anyone a rightful owner as far as real estate is concerned in race notice states  Andy does have recourse in civil court against his seller, but that's it.    
by Vincent Racaniello | 2011/08/16 | log in or register to post a reply
Source of Title Blog

Robert A. FrancoThe focus of this blog will be on sharing my thoughts and concerns related to the small title agents and abstractors. The industry has changed dramatically over the past ten years and I believe that we are just seeing the beginning. As the evolution continues, what will become of the many small independent title professionals who have long been the cornerstone of the industry?

Robert A. Franco
SOURCE OF TITLE

 

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