C F Invs., Inc. v. Option One Mortg. Corp.

• Decision Date: 09 March 2012
• Docket Number: No. 2011–042.,2011–042.
• Citation: 163 N.H. 313,42 A.3d 847
• Parties: C F INVESTMENTS, INC. v. OPTION ONE MORTGAGE CORPORATION and another.
• Court: New Hampshire Supreme Court

163 N.H. 313

42 A.3d 847

C F INVESTMENTS, INC.

v.OPTION ONE MORTGAGE CORPORATION and another.

No. 2011–042.

Supreme Court of New Hampshire.

Argued: Feb. 15, 2012.

Opinion Issued: March 9, 2012.

Bryan J. Kerman, of Methuen, Massachusetts, on the brief and orally, for the plaintiff.

Johnson & Borenstein, LLC, of Andover, Massachusetts (Mark B. Johnson and Donald F. Borenstein on the brief, and Mr. Johnson orally), for the defendants.

LYNN, J.

After a bench trial, the Superior Court ( McHugh, J.) ruled in favor of defendants Option One Mortgage Corporation (Option One) and Wells Fargo Bank, N.A., concluding that the claim of its predecessor-in-interest, First Eastern Mortgage Corporation (First Eastern), to real property located in North Hampton (the Property) had priority over the claim of the plaintiff, C F Investments. We affirm.

I

The following undisputed facts are drawn from the record. On January 21, 1989, Richard Cormier conveyed the Property to CF Realty Trust by warranty deed, and CF Realty Trust recorded the conveyancein the registry of deeds shortly thereafter. In 1993, CF Realty Trust and C F Investments, a New Hampshire corporation whose principal place of business is in Andover, Massachusetts, both filed for Chapter 11 bankruptcy. Pursuant to a proposed plan of reorganization, C F Investments succeeded to all of CF Realty Trust's assets, including the Property, and the bankruptcy court entered a final decree approving the proposed plan in 1995. However, C F Investments never recorded its interest in the Property in the registry of deeds.

Notwithstanding the bankruptcy plan, CF Realty Trust continued to conduct real estate business after 1995. On June 7, 2002, Robert Fuller, acting as trustee of CF Realty Trust, conveyed the Property to himself as an individual and duly recorded the transaction in the registry of deeds. He then borrowed $219,000, secured by a mortgage on the Property, from First Eastern, and First Eastern recorded its interest. Thereafter, First Eastern assigned its interest to the defendants, and the defendants duly recorded.

In January 2008, counsel for C F Investments notified defendant Option One of its competing claim to the Property, alleging that Robert Fuller had acquired title to it unlawfully and had no authority to borrow money against it. In June 2008, defendant Wells Fargo notified C F Investments of its intent to conduct a foreclosure sale of the property on July 7, 2008, because Fuller had defaulted on his promissory note. C F Investments brought this action in superior court to enjoin the foreclosure sale, arguing that CF Realty Trust did not own the property at the time of its purported conveyance, that such conveyance was therefore invalid, and that consequently Fuller could not lawfully have granted a mortgage to First Eastern. The trial court disagreed, concluding that First Eastern was protected as a bona fide purchaser without notice of C F Investments' claims. This appeal followed.

II

C F Investments first argues that CF Realty Trust “had no lawful title or authority” to convey the property to Robert Fuller individually. As the trial court recognized, however, the issue in this case is not whether CF Realty Trust had “lawful title” to the property, but whether First Eastern was a bona fide purchaser without notice of C F Investments' prior competing claim to the property; if so, then its mortgage is senior to C F Investments' interest.

New Hampshire is a “race-notice” jurisdiction. Amoskeag Bank v. Chagnon, 133 N.H. 11, 14, 572 A.2d 1153 (1990). Therefore, a person or entity with a claim to real estate, such as the plaintiff, must record its interest in order to prevail over a bona fide purchaser for value. See id. As the recording statute states:

Every deed or other conveyance of real estate and every court order or other instrument which affects title to any interest in real estate, except probate records and tax liens which are by law exempt from recording, shall be recorded at length in the registry of deeds for the county or counties in which the real estate lies and such deed, conveyance, court order or instrument shall not be effective as against bona fide purchasers for value until so recorded.

RSA 477:3–a (2001). The recording requirement “provide[s] notice to the public of a conveyance of or encumbrance on real estate” and “serve[s] to protect both those who already have interests in land and those who would like to acquire such interests.” Amoskeag Bank, 133 N.H. at 14, 572 A.2d 1153. Accordingly, in order for the defendants to claim the protection of the recording statute as bona fide purchasers, they must have lacked notice—actual, record, or inquiry—of the plaintiff's prior interest. Cf. Mansur v. Muskopf, 159 N.H. 216, 224, 977 A.2d 1041 (2009).

The goal of a prospective bona fide purchaser is “to make sure he or she will obtain an interest in a property free and clear of encumbrances.” Amoskeag Bank, 133 N.H. at 16, 572 A.2d 1153. Because properly recorded instruments are deemed to give notice to prospective purchasers of any outstanding claims against property, a proper search of public records should reveal whether the grantor has clear and marketable title to the property with the right to convey it. See generally 14 R. Powell, Powell on Real Property § 82.01[4], at 82–14 (Michael Allan Wolf, ed., 2009). A proper search of a property's chain of title includes tracing the property back to a firm root in title and researching the grantor index from that date forward for out-conveyances to be sure that other deeds executed by a grantor did not convey or encumber the land desired by the prospective purchaser. See generally id. § 82.03[2][a], at 82–72 (describing mechanics of title search).

In addition, bona fide purchasers may not ignore information pertinent to title, even from sources outside the chain of title, “to the extent such information puts the person on reasonable inquiry notice of information that may bring into question the state of title.” 77 Am.Jur.2d Vendor and Purchaser § 385, at 434 (2006); see, e.g., Bynum v. Barker, 39 So.3d 1013, 1017 (Ala.2009) (inquiry notice is “knowledge of facts which would cause a reasonable person to make an inquiry which would reveal the interest of a third party”); Will Investments, Inc. v. Young, 317 S.W.3d 157, 166 (Mo.App.2010) (inquiry notice refers to “notice of facts that would place a reasonably prudent person upon inquiry as to the title he or she is about to purchase”); Fuqua v. Oncor Elec. Delivery Co., 315 S.W.3d 552, 559 (Tex.App.2010) (“Notice is sufficient if it would lead an ordinarily prudent man to inquire into the matter.”). Thus, subsequent purchasers and mortgagees are obligated to fully investigate any apparent discrepancies to determine whether title to the desired parcel is encumbered in any way. Cf. Amoskeag Bank, 133 N.H. at 15–16, 572 A.2d 1153.

It is undisputed that First Eastern lacked record notice of C F Investments' interest in the Property, as C F Investments did not record its interest within the Property's chain of title— i.e., those documents and records recorded in the registry of deeds whose subject matter is the Property and which create direct encumbrances on it. Nevertheless, C F Investments contends that First Eastern was on inquiry notice of its interest because a proper title search in the grantor index under the name “CF Realty Trust” would have revealed an entry dated January 9, 1995, that contained a reference to the bankruptcy judgment. That entry contained the words “mortgage & cert” in the column designated for the character of the document recorded, but provided no indication as to the location of the encumbered property. Both the mortgage and certificate to which that entry refers contain references to the fact that CF Realty Trust and C F Investments filed for Chapter 11 bankruptcy protection. The certificate states that CF Realty Trust “is and continues to be in existence subject only to its substantive...