Court of Appeals Clarifies Good Faith Purchaser Priority Protections for Lenders

06/16/2016 / Jason Tarasek

A lender does not lose its status as a “good faith purchaser” under Torrens law even though it is aware of facts that later give rise to an allegation that a quitclaim deed is actually an equitable mortgage.

So says the Minnesota Court of Appeals in a recent decision involving a woman trying to save her home. After she fell behind on her mortgage payments in the wake of her husband’s death, the woman could not qualify for a new loan to stave off foreclosure. The new lender suggested, however, that it issue a loan to her family members. At the closing of the new loan, the new lender drafted a quitclaim deed in which the woman ostensibly transferred title to the family members as a further condition of giving the new loan.

After the woman fell behind on her monthly payments to the family members, they sought to evict her. The woman sued and sought a declaratory judgment that the quitclaim deed was actually an equitable mortgage that did not transfer title to her family members. The woman also asked the court to declare the new lender’s mortgage invalid because it knew about the peculiar lending arrangement.

Although a jury agreed that – under the unique circumstances of the case – the deed was actually an equitable mortgage, the trial court refused to disturb the new lender’s mortgage.
The Torrens law provides as follows:
Every person receiving a certificate of title pursuant to a decree of registration and every subsequent purchaser of registered land who receives a certificate of title in good faith and for a valuable consideration shall hold it free from all encumbrances and adverse claims, excepting only the estates, mortgages, liens, charges, and interests as may be noted in the last certificate of title in the office of the registrar . . . Minn.Stat. § 508.25.

On appeal, the court first noted that, although the above-quoted statute only expressly protects “purchasers,” it also protects lenders. The court noted, moreover, that the statute protects lenders even if – unlike the statute that applies to abstract property – the lender has implied or constructive notice of a prior encumbrance. “[T]he effectiveness of a Torrens system rests on a purchaser’s ability to trust the certificate of title to reveal all competing interests [and] the Torrens Act abrogates the doctrine of constructive notice.”

Holding that it was impossible for the new lender to have possessed “actual notice” of an equitable mortgage that did not yet exist since it was only determined to exist by the jury, the appellate court affirmed. As a consequence, the lender’s mortgage retained its status as a first mortgage against the property, the family members in essence hold a “second mortgage” in the form of the quitclaim deed given by the woman and the woman is considered the “owner” of the property, subject to the two mortgages.
The decision is Burkhalter v. Mays, Minn. App. A15-1078 (April 11, 2016).