Earth Builders, Inc. v. State, for and on Behalf of State Highway Dept.

• Decision Date: 20 October 1982
• Docket Number: No. 10226,10226
• Citation: 325 N.W.2d 258
• Parties: EARTH BUILDERS, INC., Plaintiff and Appellant, v. STATE of North Dakota, For and on Behalf of the STATE HIGHWAY DEPARTMENT, Defendant and Appellee. Civ.
• Court: North Dakota Supreme Court

Page 258

325 N.W.2d 258

EARTH BUILDERS, INC., Plaintiff and Appellant, v. STATE of North Dakota, For and on Behalf of the STATE HIGHWAY DEPARTMENT, Defendant and Appellee.

Civ. No. 10226.

Supreme Court of North Dakota.

Oct. 20, 1982.

Zuger & Bucklin, Bismarck, for plaintiff and appellant; argued by John A. Zuger, Sr., Bismarck.

Robert E. Lane, Asst. Atty. Gen., State Highway Dept., Bismarck, for defendant and appellee.

PEDERSON, Justice.

This is an appeal by the plaintiff, Earth Builders, Inc., from a judgment of the district court of Burleigh County quieting the State's title to sand and gravel on land owned by Kermit Maloney. We reverse.

On March 31, 1976, Maloney executed and delivered to Earth Builders a four-year gravel, rock, sand, and clay lease, with a renewal clause, on land situated in McLean County, North Dakota. Earth Builders did not record the lease until February 20, 1981. Maloney, on May 1, 1980, executed and delivered a "material option" to the North Dakota State Highway Department for sand and gravel located on the same property in McLean County. The Highway Department recorded the lease on June 24, 1980.

The record discloses that two or three acres had been excavated, that the materials had been removed and the surface restored for agricultural uses. It is undisputed that this was evident to Highway Department representatives. Maloney testified that he told the Highway Department's representative, Harold Kottenbrock, that the property was already leased but the lease, he "thought," had expired. Kottenbrock testified that he "took his statement that he thought the lease had expired," and made no further inquiry. He specifically acknowledged that he did not ask to see a copy of the lease nor did he ask for identification of the party who had the prior lease. Kottenbrock denied offering to "check out" any conflicting claim on the property.

In its conclusions of law, the court found that the Highway Department acted in good faith without actual or constructive notice of Earth Builder's lease and that, consequently, the Highway Department acquired its interest free of Earth Builder's prior lease.

Earth Builders appeals from the judgment and urges this court to review the lower court's finding as a finding of fact rather than a conclusion of law which is fully reviewable. Rule 52(a), NDRCivP. We disagree with Earth Builder's characterization. As this court said in E.E.E., Inc. v. Hanson, 318 N.W.2d 101, 104 (N.D.1982), "[f]indings of fact are the realities as disclosed by the evidence as distinguished from their legal effect or consequences." When the ultimate conclusion "can be arrived at only by applying rules of law the result is a 'conclusion of law.' " Id. See also Slope Cty., Etc. v. Consolidation Coal Co., 277 N.W.2d 124, 127 (N.D.1979). The determination that the Highway Department leased the sand and gravel rights in good faith without notice of a competing interest is a mixed question of fact and law, fully reviewable by this court without the strictures imposed by Rule 52(a), NDRCivP.

The Highway Department asserts that it acquired its interest in good faith and for valuable consideration and that its interest is, therefore, superior to that of Earth Builders. Section 47-19-41, NDCC, provides that every conveyance not recorded in accordance with the provisions of the recording act is void as against a subsequent purchaser in good faith and for valuable consideration whose conveyance is first recorded. There is no dispute that the Highway Department is a subsequent purchaser for valuable consideration. The controlling issue is whether or not it is a purchaser in good faith without notice of a prior interest. Good faith is defined as "an honest intention to abstain from taking any unconscientious advantage of another even through the forms or technicalities of law, together with an absence of all information or belief of facts which would render the transaction unconscientious." Section 1-01-21, NDCC.

One who has actual notice of circumstances sufficient to put a prudent person upon inquiry as to a particular fact, and who omits to make such an inquiry with reasonable diligence, is deemed to have constructive notice of the fact itself and is not protected as a purchaser in good faith. Burlington Northern, Inc. v. Hall, 322 N.W.2d 233, 242 (N.D.1982); City of Bismarck v. Casey, 77 N.D. 295, 43 N.W.2d 372 (1950); Agricultural Credit Corp. v. State, 74 N.D. 71, 20 N.W.2d 78, 81 (1945).

The trial court relied upon the following excerpt from 77 Am.Jur.2d Vendor and Purchaser Sec. 647, as the authority for its judgment:

"[A] purchaser is not deemed to have notice of an outstanding equity although he was informed that it once existed, if at the same time he is told by the informant that the equity has been discharged." (Citing Rogers v. Wiley, 14 Ill. 65 (1852)).

We cannot adopt this view as the general rule. To do so would require this court to ignore an "array of circumstances that militate against the good faith" of the Highway Department. Pierce Township of Barnes County v. Ernie, 74 N.D. 16, 19 N.W.2d 755, 759 (1945).

The Highway Department had notice of facts which would provoke a prudent person to make further inquiry beyond checking for recorded documents. Maloney was not in possession of the land, yet no contact was made with the known tenant. Maloney displayed a poor memory, yet Kottenbrock readily relied on a statement relating to expiration of a lease. It was evident that materials had been removed by someone, and the fact that a considerable quantity remained does not indicate abandonment to a prudent person.

Based on all of these circumstances, the Highway Department had a duty to make more than a superficial inquiry as to the prior lease and was chargeable with the information that a diligent inquiry would have disclosed. Accordingly, we conclude that the Highway Department was not a good-faith purchaser without notice of the prior interest of Earth Builders in the sand and gravel rights.

The judgment is reversed and the case is remanded for entry of judgment in favor of Earth Builders.

ERICKSTAD, C.J., and VANDE WALLE and SAND, JJ., concur.

GARAAS, District Judge, sitting in place of PAULSON, J., disqualified.

JOHN O. GARAAS, District Judge, dissenting.

I would uphold the trial court decision. The majority opinion has recited only such facts as to support its ruling and has failed to recite the totality of facts which clearly support the trial court's ruling. When such additional facts are considered, the...