Diversified Equities, Inc. v. American Sav. & Loan Ass'n, 860287-CA

• Decision Date: 22 July 1987
• Docket Number: No. 860287-CA,860287-CA
• Citation: 739 P.2d 1133
• Parties: DIVERSIFIED EQUITIES, INC., a Utah corporation, and Dakal, Inc., a Utah corporation, Plaintiffs and Appellants, v. AMERICAN SAVINGS AND LOAN ASSOCIATION, et al., Defendant and Respondent.
• Court: Utah Court of Appeals

Page 1133

739 P.2d 1133

DIVERSIFIED EQUITIES, INC., a Utah corporation, and Dakal, Inc., a Utah corporation, Plaintiffs and Appellants, v. AMERICAN SAVINGS AND LOAN ASSOCIATION, et al., Defendant and Respondent.

No. 860287-CA.

Court of Appeals of Utah.

July 22, 1987.

Jerome H. Mooney, Arthur M. Strong, Mooney & Smith, Salt Lake City, for plaintiffs and appellants.

Ted Boyer, H. Mifflin Williams III, Clyde, Pratt, Gibbs & Cahoon, Salt Lake City, for defendant and respondent.

Before ORME, JACKSON and BENCH, JJ.

OPINION

ORME, Judge:

Appellants Diversified Equities, Inc. (Diversified) and Dakal, Inc. (Dakal) brought an action to quiet title to a duplex and lot in Salt Lake County. Respondent American Savings and Loan (American) had a recorded security interest in the property which was released prior to the conveyances to Diversified and Dakal. The lower court quieted title in Dakal, subject to an equitable lien in favor of American equal to the principal amount owing on the note secured by American's previous trust deed. Dakal seeks reversal of the lower court's judgment and an order that Dakal owns the property in fee simple, free of any interest in American. Diversified, which bought the property from Dakal, seeks reversal of the judgment below and an order upholding its rights against Dakal in the property. We reverse.

FACTUAL BACKGROUND

So far as is relevant for this appeal, which concerns only the rights of Dakal/Diversified and American inter se, the dispute was submitted to the lower court on a detailed stipulation of facts read into the record by counsel. Although there are several transactions, the key facts are relatively simple.

On January 2, 1978, American loaned the Baileys $59,200, which was secured by a trust deed to the property in question. The trust deed was recorded in February 1978. The property was then sold in 1980 to Liston, then on May 14, 1982 by Liston to M & W Enterprises. Although M & W did not pay cash, Liston parted with title to the property. M & W's future obligations were not secured by the subject property but instead Liston was given a trust deed in other property, which proved to be worthless as security. M & W sold the subject property to Rydalch on May 28, 1982, as the first part of a contemplated exchange transaction. The property was still subject to American's original trust deed, and the deed to Rydalch so recited, as did various closing papers.

In order to purchase the property from M & W, Rydalch borrowed $18,000 from Holzer, who took in return a note for $19,200. M & W's principal, Miller, promised to repay Holzer within 30 days. Instead, Miller skipped town. Rydalch then attempted to sell the property to raise the money to repay the note to Holzer and had his attorney, Burnett, investigate the liens on the property. Burnett learned from another financial institution that its trust deed of record had actually been discharged and he secured a reconveyance. Rydalch and Burnett then called American a total of three times and, while the first call was inconclusive, were told each of the other times that the loan to the Baileys had been repaid. Rydalch apparently chose not to be too curious about who his benefactor might be.

Prompted by the telephone calls, American executed and recorded a reconveyance in early December 1982. American subsequently discovered that the loan had not been paid and that there was a balance due in excess of $55,000. Apparently American erred because the Baileys had some thirty-four loans with American, and American's records were somewhat confused. The trial court concluded that American was negligent in reconveying the property. ¹

Meanwhile, Holzer began threatening Rydalch that he and his family would sustain bodily harm if the amount due him was not paid. Although Holzer had received a trust deed to the duplex property, he wanted cash. Rydalch then responded to an ad placed by Pentelute, a self-described mortgage broker specializing in distressed sales. Pentelute spoke to Rydalch, Rydalch's attorney Burnett, and American, and received confirmation all around that American's trust deed had been satisfied. Pentelute was furnished a copy of the reconveyance. Pentelute then contacted Wayne Peck, a principal in both Dakal and Diversified, who agreed to purchase the property. Pentelute ordered a title search, which disclosed nothing unexpected except a lis pendens recorded in September 1982 on behalf of Liston. To facilitate the sale which would raise his repayment, on January 21, 1983, Holzer obtained a release of the lis pendens, albeit with a bad check, and the sale from Rydalch to Dakal was closed later that day.

Dakal paid $38,260 for the property and paid Pentelute a $14,000 finder's fee. Dakal immediately recorded its warranty deed and sold the property to Diversified for $60,000. A month later American, having discovered its mistake, recorded an affidavit stating that it had released the trust deed in error and that the trust deed was still in effect.

On these facts, ² the trial court held that Diversified and Dakal were not bona fide purchasers of the property. It concluded that Pentelute and/or Wayne Peck had more than sufficient information to necessitate yet further inquiry into whether Rydalch or any one else had actually satisfied the obligation to American and whether American had made a mistake in releasing its trust deed on the property. The trial court cited the following facts as imposing upon Pentelute and Peck a duty of further inquiry: the reference to American's lien in Rydalch's deed; the sale of the property by Rydalch to Dakal for approximately one-half or less of its market value; the $14,000 finder's fee paid to Pentelute compared to the purchase price of some $38,000; and the same-day transfer of the property from Dakal to Diversified. The trial court quieted title in Dakal, subject to an equitable lien in favor of American.

The issue on appeal is whether there was sufficient notice of a "lien" on the property to require a duty of further inquiry by Dakal. If there was, Dakal was not a bona fide purchaser and took the property subject to American's "lien." ³

NOTICE REQUIREMENT

Under our recording statute, an unrecorded conveyance is "void as against any subsequent purchaser in good faith and for valuable consideration of the same real estate ... where his own conveyance shall be first duly recorded." Utah Code Ann. § 57-3-3 (1986). However, under Utah Code Ann. § 57-1-6 (1986), unrecorded documents affecting real property are enforceable as against persons with "actual notice." Thus, "[a] subsequent purchaser must ... show that he had no actual notice, i.e., no personal knowledge, of a prior conveyance or that the prior conveyance did not impart constructive notice, i.e., was not recorded before his conveyance in the same land was recorded." Utah Farm Prod. Credit Ass'n. v. Wasatch Bank, 734 P.2d 904, 906 n. 2 (Utah 1987). Wayne Peck and Pentelute obviously did not have constructive or record notice because American had mistakenly released its trust deed and recorded its reconveyance before they dealt with the property.

As for the "actual notice" exception of Utah Code Ann. § 57-1-6 (1986), the stipulated facts make clear Peck and Pentelute did not have actual knowledge of American's interest. However, the exception is also triggered if a party dealing with the land has information or facts which would put a prudent person upon an inquiry which, if pursued, would lead...