Raub v. General Income Sponsors of Iowa, Inc.

• Decision Date: 07 April 1970
• Docket Number: No. 53841,53841
• Citation: 176 N.W.2d 216
• Court: Iowa Supreme Court
• Parties: Jessie O. RAUB, Appellee, v. GENERAL INCOME SPONSORS OF IOWA, INC., Defendant, and First National Bank, Fort Dodge, Iowa, Defendant-Appellant. MANSON STATE BANK, Appellant, v. GENERAL INCOME SPONSORS OF IOWA, INC., and First National Bank, Fort Dodge, Iowa, Defendants, and Jessie O. Raub, Defendant-Appellee.

Page 216

176 N.W.2d 216

Jessie O. RAUB, Appellee, v. GENERAL INCOME SPONSORS OF IOWA, INC., Defendant and First National Bank, Fort Dodge, Iowa, Defendant-Appellant MANSON STATE BANK, Appellant, v. GENERAL INCOME SPONSORS OF IOWA, INC., and First National Bank, Fort Dodge, Iowa, Defendants and Jessie O. Raub, Defendant-Appellee.

No. 53841.

Supreme Court of Iowa.

April 7, 1970.

Mitchell, Mitchell, Murray & Goode, Fort Dodge, for appellant First Antional Bank.

Charles F. O'Connor, Manson, for appellant Manson State Bank.

Arthur H. Johnson, Fort Dodge, for appellee.

LeGRAND, Justice.

This de novo appeal of two consolidated cases involves an attempt by Jessie O. Raub to set aside a deed to her homestead allegedly obtained from her by fraud and to declare invalid two mortgages which the grantee of that deed later placed on the property. The trial court entered a decree declaring the deed void and providing that neither mortgage was a lien on her property.

This appeal is by First National Bank of Fort Dodge, Iowa, holder of the first mortgage, and by Manson State Bank of Manson, Iowa, holder of the second mortgage. General Income Sponsors of Iowa, Inc., the grantee in the controversial deed, does not appeal.

Although Manson State Bank is named as plaintiff in one of the consolidated cases, we refer herein to Jessie O. Raub as sole plaintiff and to both banks as defendants.

As already mentioned, General Income Sponsors of Iowa, Inc. does not appeal. The decree holding that its warranty deed was obtained from plaintiff by fraud is therefore a finality. Indeed the evidence is overwhelming that plaintiff was the unfortunate victim of gross fraud practiced upon her by Clark Barczewski and Joseph Huffman, officers and agents of General Income Sponsors of Iowa, Inc., over a period of more than three years during which they bilked her of some $33,000.00 for which she now has nothing. These unscrupulous men, having once ingratiated themselves with plaintiff, did not rest until they had taken virtually all she had saved. She testified she is now 'financially drained.'

Plaintiff was employed at Geo. A. Hormel & Co. for a number of years. She had only a ninth grade education but was not without some experience in business affairs. She had bought and sold several pieces of real estate. She knew what a warranty deed was and understood the legal effect of such an instrument. She was hard-working and frugal and had accumulated substantial savings and investments when she first met Barczewski and Huffman in 1963. She also owned her own home, upon which there was then a small mortgage.

She sought these men out to help her sell stock she owned in Allied Fund of New York. Her dealings thereafter were principally with Mr. Barczewski although she also had some contact with Mr. Huffman. Upon Barczewski's advice she sold her Allied Fund holdings and invested the proceeds in two other corporations suggested by him. For some time she received small dividends from at least one of these corporations.

Plaintiff was interested in providing for her eventual retirement. She was then 58 years old and expected to work only a few more years. She talked with Barczewski about her plans, and he advised her concerning what course her investments should take. Within a short time he had her complete trust and confidence. She formed a close personal association with him and his wife. They visited back and forth. She made a will naming him as her executor. Little by little he prevailed upon her to place all her money in stock of General Income Sponsors of Iowa, Inc., about which she knew nothing. He told her this was a company he and Mr. Huffman were starting and she should 'get it all in General Income Sponsors.' By a series of transactions from February to October (1965) she gave Barczewski $10,000.00 for stock in that corporation. On December 2, 1965, plaintiff executed and delivered to General Income Sponsors of Iowa, Inc. a warranty deed to her homestead, which by then had been cleared of its existing mortgage, in return for which she was to receive an additional $14,000.00 in company stock. Although she asked for the stock certificate several times, apparently she never received it. The warranty deed was recorded December 20, 1965. Thereafter plaintiff remained in possession of the real estate as a tenant, paying $70.00 a month rent from December, 1965, through August, 1966. The rent was paid to Mr. Barczewski on behalf of General Income Sponsors of Iowa, Inc.

On September 17, 1966, the defendant, First National Bank of Fort Dodge, took a mortgage on this property from General Income Sponsors in the amount of $6000.00. The mortgage was promptly recorded. On October 25, 1966, the Manson State Bank placed a second mortgage on the real estate to secure payment of $10,350.00. This mortgage was recorded on November 7, 1966.

During all this time plaintiff still reposed great trust and confidence in Mr. Barczewski. Although she was being systematically swindled, she did not suspect this until early in 1967 when an officer of the First National Bank called to tell her future rent payments should be made there. She then consulted her attorney and investigation quickly disclosed the perfidy which had been practiced upon her.

As we understand defendants' argument, they concede plaintiff's warranty deed of December 2, 1965, was obtained by fraud and was properly set aside by the trial court. However, they assert they are nevertheless entitled to enforce the liens of their mortgages because they qualify as bona fide purchasers.

I. A bona fide purchaser is one who takes a conveyance of real estate in good faith from the holder of legal title, paying a valuable consideration for it without notice of outstanding equities. Bell v. Pierschbacher, 245 Iowa 436, 449, 62 N.W.2d 784, 792 and citations; Kindred v. Crosby, 251 Iowa 198, 201, 100 N.W.2d 20, 22; 92 C.J.S. Vendor and Purchaser section 321, page 214.

In the Pierschbacher case we said such a purchaser takes title divested of such equities and that the rules for determining bona fide purchasers are the same as for establishing what purchasers are entitled to protection under our recording act, section 558.41, Code of Iowa.

We have held a mortgagee is regarded the same as a purchaser for this purpose. Brunsdon v. Brunsdon, 199 Iowa 1099, 1112, 200 N.W. 823, 829; Brenton Bros. v. Bissell, 214 Iowa 175, 183, 239 N.W. 14, 18; 36 Am.Jur., Mortgages, section 205, page 794; 59 C.J.S. Mortgages sections 232, 233, pages 302, 303.

II. In considering the status of defendants, no serious dispute exists except as to good faith and notice of outstanding equities. The evidence clearly establishes both mortgages were taken from the legal title holder, General Income Sponsors of Iowa, Inc., and each defendant paid valuable consideration for its mortgage.

The critical question is: did defendants have notice, either actual or constructive, that their mortgagor's title had been obtained by fraud? The trial court found, and we agree, that the defendant banks, as well as plaintiff, were the victims of Barczewski's fraud. However, this does not answer the question. There may still be notice to defendants if circumstances are shown which would lead a reasonably prudent person to investigate the possible existence of outstanding rights hostile to the grantor's title. If such circumstances do exist, and if such investigation is not made, then one who claims to be a bona fide purchaser is nevertheless charged with all knowledge which that investigation would probably have disclosed. Clark v. Chapman, 213 Iowa 737, 744, 239 N.W. 797, 801; Hayne v. Cook, 252 Iowa 1012, 1029, 109 N.W.2d 188, 197; 55 Am.Jur., Vendor and Purchaser, section 697, page 1075; 92 C.J.S. Vendor and Purchaser section 326, page 231.

A consideration of this problem requires us to determine, first, if plaintiff's possession of the property after she had conveyed it away imparted notice of her present claim; and, second, apart from that, were there any other circumstances which should have put a reasonably prudent person on notice to investigate concerning outstanding equities. We discuss these in reverse order.

III. One who asserts he is a bona fide purchaser must prove his good faith; and good faith is lacking if he knew or, as a reasonably prudent person, should have known others made claims hostile to his grantor's title.

In 55 Am.Jur., Vendor and Purchaser, section 697, page 1075, we find this:

'It is a well settled general rule, in determining whether a purchaser had notice of outstanding equities or unrecorded interests so as to preclude him from being entitled to protection as a bona fide purchaser, that if he has knowledge of circumstances which, in the exercise of common reason and prudence, ought to put a man upon particular inquiry, he will be presumed to have made inquiry, and will be charged with notice of every fact which such suggested investigation would in all probability have disclosed had it been properly pursued. The purchaser may not act in contravention to the dictates of reasonable prudence, or refuse to inquire when the propriety of the inquiry is naturally suggested by circumstances known to him.'

A similar statement is made in 92 C.J.S. Vendor and Purchaser section 326, page 231.

We have many times held litigants to this same standard of conduct. John v. Penegar, 158 Iowa 366, 370, 139 N.W. 915, 917; Johnson v. Chicago, B. & Q. Railway Co., 202 Iowa 1282, 1288, 211 N.W. 842, 846; Norwood v. Parker, 208 Iowa 62, 67, 224 N.W.2d 831, 833; Clark v. Chapman, 213 Iowa 737, 744, 745, 239 N.W. 797, 801; Young v. Hamilton, 213 Iowa 1163, 1173, 240 N.W. 705, 710; Randell v. Fellers, 218 Iowa 1005, 1008, 252 N.W. 787, 790; Rance v. Gaddis, 226 Iowa 531, 544, 284 N.W. 468, 475; Hayne v. Cook, 252 Iowa 1012, 1030, 109 N.W.2d 188, 197.

In Johnson v. Chicago, Burlington and Quincy Railway Company, supra, at page 1288 of...