Conveyancing Traps for the Unwary
by Gary Casaly, Esquire
I had originally contemplated naming this article "Anomalies of Conveyancing" or "Curiosities of Conveyancing," but I decided against those titles because they would not have driven the point home. The point is this: There are many instances when there is lurking within a title the potential for disaster. The situation is disguised and is created because of some "quirk" in conveyancing law which may have unwittingly been overlooked. This article will attempt to point out and expose some of these situations and, hopefully, keep you from falling into the deadly traps that they have set. Get ready. And you thought Halloween was scary!
Suppose you're searching the title to a lot in a large subdivision. Your examiner carefully examines the schedule for the builder and determines that your lot is one of those that the builder held until the end of the development. Pages and pages of schedule sheets bear this out. Your examiner, who wants to complete the abstract during his or her lifetime, wants to know whether the documents (deeds, mortgages, easements, etc.) regarding each and every non-locus lot must be scrutinized. The safe answer, of course, is yes. It is possible, of course, that any particular index entry (which merely refers in an abbreviated way to non-locus lots) could be inaccurate or incomplete. But what's an examiner to do? Clearly, the index is not part of the record title and any error which occurs in it does not invalidate or control the effect of the instrument itself. The index, although required to be kept pursuant to the provisions of G.L.c. 36, is merely a convenience. See Gillespie v. Roger, 146 Mass. 610, 16 N.E. 711 (1888). (In fact, an entry in the index could have been omitted altogether, and the result would be the same.) But the examiner cannot be held to be the guardian of the register of deeds, so it's not for this reason that the examiner needs to look at each previously recorded non-locus instrument. The reason that the practice is necessary is because of the law which was examined in Houghton v. Rizzo, 361 Mass. 635, 281 N.E.2d 577 (1972). Although the result in Houghton was good news for the examiner and the conveyancer, the court was clear to point out that if a recorded instrument (including a deed to a non-locus lot) provided that the grantor would, and thereby did, subject retained land (in this case, the lot you're examining) to certain restrictions then that retained land when conveyed out would be subject to the restriction even though not mentioned in the deed of that lot.
Even though Houghton alerts us to the requirement of reviewing documents which may not appear from the index to have an effect of our locus, the practice of actually reviewing those documents, unfortunately, sometimes is not followed by conveyancers because of the additional—and sometime laborious—work involved. But the failure to review these documents can result in serious problems. In this regard, see Guillette v. Daly Dry Wall, Inc., 367 Mass. 355, 325 N.E.2d 572 (1975).
The doctrine announced in Salter v. Quinn, 334 Mass. 220, 134 N.E.2d 749 (1956) presents a conveyancing nightmare, which is easily spotted—provided you know what you're looking for! Consider this: A and B give a mortgage to C. The mortgage goes into default and C forecloses the entry. A takes title from the foreclosing mortgagee and conveys the title out and the title continues thereafter in the usual fashion. Would you pass this title? The decision is Salter advises that you don't. In Salter the question was whether the owner of property could tender a good marketable record title where the scenario just stated occurred in the chain some thirty years before. The court said that the title was defective. Do you see why? The court held that the purchase of an encumbrance by one cotenant (in this case A) while both cotenants are actually in possession or are entitled to immediate possession is deemed to have been made for the benefit of all and that the cotenant who makes that purchase is deemed to be holding the encumbrance for the others (in this case B) in a fiduciary capacity. "The facts concerning the title of the [seller] and the probable interest of [B] in such title plainly appear in the records of the registry of deeds …. This we think is enough to put the careful conveyancer on his guard and cast doubt upon the record title."
The foreclosure in Salter was by entry only (the sale having been deemed to be defective for a technical reason), so when A took a deed from the mortgagee who had made the entry, that deed amounted to an assignment of the mortgage (the three year period of redemption not having expired) and so the "cotenants [were] actually in possession or [were] entitled to immediate possession." It is wondered, therefore, whether the oddity which Salter poses would apply in the case of foreclosures of sale.
Another trap ready to snare the unwary is the situation that arises when estoppel by deed occurs. The theory of estoppel by deed would require that when searching a title the examiner run each and every grantor not only in the usual way but also before they even acquired title. If any grantor gave a warranty deed[1] before he or she acquired title, the title, once acquired, would inure to the grantee under that deed and not to the person to whom the grantor might thereafter convey. Of course, nobody does such an exhaustive search, but the failure to examine the title as required by the rule could prove disastrous.
The concept applies most frequently in the case of the foreclosure of a mortgage. If X gives a mortgage to Bank A and then gives a mortgage to Bank B and then Bank A forecloses, the Bank B mortgage, which was wiped out by the foreclosure, will be "revived" if X comes back into title. See Ayer v. Philadelphia & Boston Face Brick Company, 159 Mass. 84, 34 N.E. 177 (1893). The revival will not occur in some instances where the mortgage to Bank B refers to the mortgage to Bank A as a superior lien. See Huzzey v. Heffernan, 143 Mass. 232, 9 NE 570 (1887).
There appears to be no decision in Massachusetts on this issue, but the question of the relative priorities of a seller's purchase money mortgage and an institutional loan is a serious one, and has been the subject of judicial decisions in other states. Sometimes referred to as the doctrine of the "silent second mortgage," the legal principle applied in situations like these results in the purchase money mortgage having priority over the institutional loan—even though the purchase money mortgage is recorded after the institutional loan. It is said in R. Powell & P. Rohan, 3 The Law of Property ¶455.1[1] (1992), that:
Every mortgage loan obtained for the purpose of purchasing real estate is a purchase money mortgage. If the purchase money is obtained from an institutional lender it gives rise to a third party purchase money mortgage. * * * If the seller accepts a down payment and takes back a mortgage to secure payment of any portion of the remaining purchase price, then a vendor purchase money mortgage arises.
* * * *
As between two purchase money mortgages on the same property—one in favor of a third party lender and the other held by the vendor—courts have given preference to the vendor. The decisions seem to be based on the fact that the vendor had a prior ownership interest in the property, while the third party lender merely later obtained a security interest in the property by lending money to the purchaser. This preference generally applies even if the vendor knew of the mortgage to the third party lender at the time the vendor agreed to extend credit to the purchaser.
This doctrine is rather disturbing and obviously can do havoc to a title, especially when it is realized that the foreclosure of the institutional mortgage might not wipe out the purchase money mortgage to the seller. But the doctrine's application is not as remote as one might think. It has been codified by the Internal Revenue Service[2] and at least one New England state has adopted it in a published judicial decision.[3]
Sometime it happens—actually it happens quite often—that a mortgage is held of record by X, but Y, who does, or at least claims to, service the loan requires that payment be sent to it. Of course, a great risk inherently exists in complying with the request. The risk is obvious and ought to be avoided. But a less obvious risk concerning the same problem is just as lethal, although it probably occurs infrequently. What happens if X holds the mortgage of record and the payoff goes to X? Sounds fine, right? Maybe not! With one exception (discussed below), the record title cannot be relied upon to determine who holds the mortgage. If the payment is made to the holder of record, this does assure that payment has been made to the right party. It is the party who holds the note who's entitled to payment. An assignment of the mortgage, even though unrecorded, will be deemed effectual and will bind the mortgagor. "[If] the mortgagor, after the assignment, makes payments on account of the principal of the note to the assignor of the mortgage without requiring the production of the note, such payments will not be valid as against the assignee." Thayer, et al., Crocker's Notes on Common Forms, Massachusetts Continuing Legal Education, Inc. (Eighth Edition, 1995), §509, citing Biggerstaff v. Marston, 161 Mass. 101, 36 N.E. 785 (1894).
The exception to the rule that one cannot deal with the holder of record of a mortgage with impunity is contained in G.L.c. 183, §54, which states that "[t]he recordation of a duly executed and acknowledged deed of release or written acknowledgment of payment or satisfaction as provided herein shall be conclusive evidence that the mortgage has been discharged notwithstanding the fact that the party signing such instrument may have assigned the note or other evidence of debt to another party, unless such assignment has been duly recorded prior to the instrument discharging the mortgage." Note carefully that this statute, which in derogation of the common law, does not authorize payment to be made to the holder of record—it simply fortifies the title if such holder in fact issues a proper discharge.
Here's a real scary one, too. You're sitting across from the seller at a closing. You've done your title and everything looks fine … except the seller! Strange kind of person who doesn't give you a warm and fuzzy feeling. You wonder, in the back of your mind, exactly what the seller might know about the title. You're curious about that smirk on the seller's face! Not to worry, you surmise. Under G.L.c. 184, §21 it is incumbent upon the seller to disclose to you any encumbrances on the title. The statute provides as follows:
If real property upon which an encumbrance exists is conveyed by deed or mortgage, the grantor, in whatever capacity he may act, shall before the consideration is paid, by exception in the deed or otherwise make known to the grantee the existence and nature of such prior encumbrance so far as he has knowledge thereof.
You feel a little better knowing that the statute puts an affirmative duty on the seller to fess up.
Silence. That's all there is. The seller still continues with that curious smile and says nothing … even after you pose the question.
You close. A few weeks later it is discovered that a deed in the seller's chain was forged … and the seller knew this all the time! What to do?
When you confront the seller he directs you to Security Title & Guaranty Co. v. Mid-Cape Realty, Inc. (1983, CA1 Mass.) 723 F.2d 150. In Security Title & Guaranty Co. the title insurer brought an action against the seller after it was found that the seller closed with the buyer even after the seller found out—but did not disclose to the buyer—that the seller's title was nonexistent. The lack of title was because of a prior deed to another person from the seller's predecessor in title, which person had notified the seller about the deed before the closing with the buyer occurred. The court in Security Title & Guaranty Co. indicated that the claim against the title was as to its entire ownership, and did not consist simply of an encumbrance on the title. The court said:
This leads to the arguable anomalous result that the seller must disclose known encumbrances under the statute but need not disclose a known colorable claim that the seller has no title at all. On the other hand, the anomaly is minimized by Massachusetts' comprehensive title recording system, which we suppose would fully justify placing the risk of failure of record title squarely on the buyer. In any case, our duty as a Federal Court is to apply what we perceive as a Massachusetts law, not to rationalize it.
The Massachusetts courts have never overruled, let alone cited, the federal decision.
1 And perhaps even a quitclaim deed—see Zayka v. Giambro, 32 Mass.App.Ct. 748, 594 N.E.2d 894 (1992). [Back to Text]
2 See Revenue Ruling 68-57: "In view of the legislative history of the Federal Tax Lien Act of 1966, the Internal Revenue Service will consider that a purchase money security interest or mortgage valid under local law is protected even though it may arise after a notice of Federal tax lien has been filed." [Back to Text]
3 Libby v. Brooks, — Me —, 653 A.2d 422 (1995). [Back to Text]