Opinion
Civil Action No.: SA-03-CA-1228-XR, Bankruptcy Case No. 02-54393, Adversary No. 03-5069-C.
November 29, 2004
ORDER
On this date, the Court considered Appellant Bank of America's appeal from the Bankruptcy Court's Order granting Summary Judgment to Appellee John Henderson ("Henderson"). After considering the applicable law, the summary-judgment evidence, and the arguments of counsel, the Court AFFIRMS the Bankruptcy Court's judgment in favor of Henderson.
Background
Debtor Elizabeth Hayes filed a Chapter 7 bankruptcy petition on September 11, 2002, and on October 10, 2002, Helen Schwartz became the Chapter 7 Trustee. On September 23, 2002, Bank of America filed a Motion for Relief from Stay against Hayes's property located at 8523 Ridge Garden, San Antonio, Texas, alleging a lien against that property in the original amount of $63,000 with an unpaid principal amount of $52,471.14. On October 11, 2002, John Henderson filed an objection, alleging that he has an equitable lien in the property because he paid debtor approximately $105,000 to purchase the property. The Bankruptcy Court ordered the Trustee to attempt to sell the property and proceed with an adversary proceeding to determine the validity, extent, and priority of the asserted liens.
In accordance with the Bankruptcy Judge's Order, the Trustee initiated this proceeding and filed a Complaint to Determine Validity, Priority and Extent of Liens. Henderson answered, alleging that, in February 1997, he was approached by Hayes and her husband with an offer to purchase the property, that he purchased the property and has resided there since April 1997, and that his exclusive, visible, open, and unequivocal possession of the property gave rise to constructive notice to the Bank of his claim to the property such that the Bank was not an innocent purchaser for value. Bank of America also answered, admitting the allegation in the Complaint that it asserted a lien based on a deed of trust executed by Hayes against the property in favor of NationsBank, predecessor to Bank of America, securing a promissory note in the amount of $62,990.00 on or about May 26, 1998. Hayes represented herself to the Bank to be single, though she was in fact married, and also indicated that the property was her homestead, although Henderson was occupying the property at the time. The Bank also asserted laches, estoppel, and unclean hands as affirmative defenses.
On August 8, 2003, Henderson filed a motion for summary judgment seeking to establish the priority of his equitable lien. Specifically, Henderson sought summary judgment that he paid $105,144.14 for the property, that he occupied the property in April 1997, that the Bank's deed of trust was filed over one year later, in May 1998, that the Bank was on inquiry and constructive notice of Henderson's open, visible, exclusive, and unequivocal occupation of the property, and that the Bank was not a bona fide purchaser for value without notice of a prior claim. To support his motion, he filed a copy of a $40,000 check payable to Hayes drawn on Henderson's bank account, a wire transfer confirmation in the amount of $65,144.14 from Henderson to Hayes, the Bank's deed of trust, his affidavit, and the affidavit of his neighbor, James Holbrook.
In his affidavit, Henderson stated that he was approached by Elizabeth Hayes in February 1997 with an offer to purchase the property, and that he intended to purchase the property as his homestead. The total purchase price was to be $105,000, paid in two cash installments. The first cash installment of $40,000 was made by check, and the second by wire transfer in the amount of $65,144.14 on March 18, 1997. After payments were made, the Hayeses continued to make repairs to the property, but they did not finish the construction. Henderson continued to make improvements and resided in the home since April 1, 1997. Henderson testified that, on numerous occasions subsequent to his payment of the purchase price, he requested that the Hayeses complete the transaction by transferring the property to him by general warranty deed, but Hayes never transferred the deed. Henderson stated that he possessed and resided in the property at all times prior to the Bank's filing a deed of trust in May 1998. He further stated that before and after moving into the property, he had construction projects ongoing, including installing siding and burglar bars and the purchase of a new air conditioning unit. Henderson also testified that he often invited neighborhood children to the property to play baseball and basketball in the yard with his sons, and their parents were aware that he lived on the property. Henderson stated that, when he was home, he parked his truck in the driveway, that he received his mail at the property, and his phone number was registered to the property. Last, he testified that, at no time after April 1997 did Hayes occupy any part of the property.
Henderson's motion is also supported by the affidavit of his neighbor, James Holbrook, who testified that Henderson continually possessed the property and came and went from the house as is usual and customary for any person who lives in a house to do, that he parked his truck in the driveway, and that he had a large dog that was in the house and yard and could be seen and heard from the street. Holbrook confirmed that Henderson moved into the property in April 1997 and resided there at all times before the Bank filed its deed of trust.
Bank of America responded to Henderson's motion for summary judgment, alleging that its lien had priority because it was a bona fide purchaser for value without notice. The Bank asserted that neither it nor its predecessor, NationsBank, had actual notice of Henderson's unrecorded claim, and that neither had constructive notice of his claim. Without citing a single case or other authority in support of its position, the Bank asserted that it had no constructive notice that Henderson held an unrecorded interest in the property because the valuation model used by NationsBank did not require physical inspection of the property, that the constructive notice standard for lenders should be different from, and lower than, the standard applicable to purchasers of real property, and that even assuming that NationsBank had driven by the property and seen Henderson, that still would have been insufficient to give constructive notice that Henderson was claiming an unrecorded interest in the property. Last, the Bank argued that Henderson should not be able to assert an equitable lien when his actions were "a major cause of the problem," noting that although Hayes appears to have defrauded Henderson, the resulting litigation was "due to the fact that Mr. Henderson did not obtain and record a warranty deed when he allegedly gave all of the money to Hayes" and "[a]ll of these problems could have been avoided by his merely doing what is the proper course of action — obtaining and recording a warranty deed to the property."
Although the Bank includes citation to authorities in the sections of its brief regarding the Court's jurisdiction, the standard of review, and the standard for granting motions for summary judgment, the Bank does not include a single citation to any authority in the argument portion of its brief. The Court notes that this omission is in violation of Bankruptcy Rule 8010, which provides that "[t]he argument shall contain the contentions of the appellant with respect to the issues presented, and the reasons therefor, with citations to the authorities, statutes and parts of the record relied on." (Emphasis added.) See also FED. R. APP. P. 28 (argument must contain "appellant's contentions and the reasons for them, with citations to the authorities and parts of the record on which the appellant relies").
The only summary-judgment evidence submitted by the Bank was the declaration of Cynthia Mech, a Bank manager. She stated that, "[p]ursuant to the Valuation Model and Desktop Appraisal used in this loan transaction, there was no physical inspection to be made of the subject real property. Consequently, no one was required to go to the real property to visually inspect the condition of the real property or talk with the occupants. This type of appraisal is an industry standard in cases of this type of equity loan." Mech further testified that "[t]here is no indication from the records . . . that anyone at NationsBank or Bank of America knew or should have known that John Henderson claimed to possess or own the subject real property" and "[t]here is no indication from the records . . . that Mr. Henderson ever told anyone at NationsBank about his claim of possession and ownership of the subject real property until Elizabeth Hayes filed her bankruptcy case and he made his assertions in the bankruptcy case."
On October 14, 2003, the Bankruptcy Court granted Henderson's motion for summary judgment. The Bankruptcy Judge held that, though the contract for the sale of the property was oral, Henderson had paid consideration, taken possession of the property, and made permanent and valuable improvements on the property sufficient to remove the sale from the statute of frauds. The Bankruptcy Judge further concluded that the Bank had constructive notice of Henderson's claim because Henderson's open, exclusive, and visible possession of the property constituted notice that would trigger a duty of inquiry. Last, the Bankruptcy Judge concluded that the recording statute did not apply, and that Henderson had a superior equitable title.
The Bankruptcy Judge's Order granting Summary Judgment was entered on October 16, 2003, and the Bank timely filed its notice of appeal on October 27, 2003. Appellant filed its opening brief on January 21, 2004, and Henderson responded on March 12, 2004. This Court heard oral argument on October 27, 2004.
Standard of Review
Districts courts have authority to hear appeals from final judgments and orders of bankruptcy courts within the same judicial district. 28 U.S.C. § 158(a)(1). The Bankruptcy Judge's decision is reviewed de novo. In re Biloxi Casino Bell Inc., 368 F.3d 491, 496 (5th Cir. 2004) (citing Williams v. Int'l Bhd. of Elec. Workers, Local 520 (In re Williams), 298 F.3d 458, 461 (5th Cir. 2002)). Summary judgment is appropriate when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. FED.R.CIV.P. 56(c); BANKR.R. 7056 (applying Rule 56 to adversary bankruptcy proceedings).
Issues Presented on Appeal
As noted, the Bankruptcy Judge held: (1) Henderson's payment of consideration, possession of the property, and making of permanent and valuable improvements removed the oral contract for the sale of the property from the operation of the statute of frauds; (2) though the Bank did not have actual notice of Henderson's prior claim, Henderson's open, visible, and unequivocal occupation and possession of the property was constructive notice that placed on the Bank a duty to make inquiry; (3) because this was an oral contract and Henderson never received a deed, the recording statute governing unrecorded instruments does not apply; (4) Henderson had an equitable title superior to all subsequent purchasers or creditors; and (5) even if the recording statute does apply, the Bank's lien could be superior only if it had no notice, and Henderson's open, visible, and exclusive possession constituted notice giving rise to a duty of inquiry.
In its brief, the Bank lists twelve "issues presented upon appeal." Two of these issues (issues 4 5) relate to the Bankruptcy Judge's conclusions regarding the statute of frauds, specifically, whether Henderson's actions constituted partial performance of an oral contract for the sale of real property so as to remove it from the statute of frauds. Another two issues (issues 2 and 3) relate to whether Henderson established that he held a valid existing equitable claim against the property. In its brief, however, the Bank addresses only whether Henderson's possession was of an open, visible, and unequivocal nature to impose a duty of inquiry and whether the Bank's lien has priority. Specifically, the Bank contends that the Bankruptcy Judge erred by imposing a heightened duty of inquiry upon a home equity loan mortgage lender under these circumstances, that there is not and should not be a legal requirement for the mortgage lender to conduct a physical inspection of real property in valuing real property for home equity loans, that Henderson's possession was not open, visible, and unequivocal, and that Henderson is seeking to impress an equitable lien, yet he did not "do equity" because he failed to obtain and record a deed or notify the Bank of his claim. Because the Bank has failed to offer any argument or factual or legal support in its brief in support of issues 2, 3, 4, and 5, these issues are waived. General Universal Sys., Inc. v. Lee, 379 F.3d 131, 155 (5th Cir. 2004) (concluding that, although the appellant referenced an issue in its statement of issues, "[b]y failing to advance arguments in the body of its brief supporting its claim on appeal, [appellant] has abandoned this issue"). Thus, the only issues presented on appeal are whether the nature of Henderson's possession was sufficient to impose a duty of inquiry on the Bank, if so, whether the Bank satisfied the duty, and whether Henderson's lien has priority over the Bank's.
Even if these issues were preserved, the Court would agree with the Bankruptcy Judge's conclusion. The statute of frauds requires that contracts for real estate transactions be in writing and signed by the person to be charged with the promise. Elizondo v. Gomez, 957 S.W.2d 862, 863 (Tex.App.-San Antonio 1997, pet. denied). There is a partial performance exception to the statute of frauds if three conditions are satisfied: "(1) payment of the consideration, whether it be in money or services; (2) possession by the vendee; and (3) the making by the vendee of valuable and permanent improvements upon the land with the consent of the vendor." Hooks v. Bridgewater, 229 S.W. 1114, 1116 (Tex. 1921). All three elements are essential. Elizondo, 957 S.W.2d at 864.
Although Henderson's contract was oral, under the partial performance exception to the statute of frauds, the contract was valid. Henderson paid full value for the property and then took possession of it. Henderson also made several improvements to the land, including installation of siding, burglar bars, and an air conditioning unit. Since all three requirements were met, the Bankruptcy Judge correctly held that Henderson's oral contract for the sale of the property fell within the exception to the statute of frauds.
Analysis
The Texas Property Code provides for the recording of real property transfers and provides consequences for the failure to record:
(a) A conveyance of real property or an interest in real property or a mortgage or deed of trust is void as to a creditor or to a subsequent purchaser for a valuable consideration without notice unless the instrument has been acknowledged, sworn to, or proved and filed for record as required by law.
(b) The unrecorded instrument is binding on a party to the instrument, on the parties' heirs, and on a subsequent purchaser who does not pay a valuable consideration or who has notice of the instrument.
TEX. PROP. CODE § 13.001. Thus, the recording of a deed is not essential to an effective conveyance of title, and an unrecorded instrument is binding on the parties to the instrument, the parties' heirs, and all who have notice of the instrument. However, the law requires the recording of title to land for the protection of innocent purchasers and creditors who act without notice of the prior conveyance. Although the statute states that a conveyance is void as to "a creditor," it has long been construed to provide protection only to creditors who have acquired liens without notice of the prior conveyance. Paris Grocer Co. v. Burks, 105 S.W. 174, 175 (Tex. 1907); Omohundro v. Jackson, 36 S.W.3d 677, 682 (Tex.App.-El Paso 2001, no pet.).
Although Henderson failed to record the conveyance, that failure did not affect the validity of the transaction. Once Henderson paid the consideration for the property and took possession, he became the owner of the superior equitable title to the land, and Hayes was the holder of the naked legal title. See Fed. Life Ins. Co. v. Martin, 157 S.W.2d 149, 152 (Tex.Civ.App.-Texarkana 1941, writ ref'd); Tex. Am. Bank/Levelland v. Resendez, 706 S.W.2d 343, 346 (Tex.App.-Amarillo 1986, no writ). Thus, the Bankruptcy Judge correctly found that Henderson had an equitable claim to the property. The question that remains is what the consequence of Henderson's failure to record must be.
Under the recording statute, an unrecorded conveyance is void as against a subsequent bona fide purchaser or creditor without notice. However, Texas courts have construed the statute strictly as applicable only to "writings that convey an interest in land." Gaona v. Gonzales, 997 S.W.2d 784, 786 (Tex.App.-Austin 1999, no pet.); see also Johnson v. Darr, 272 S.W. 1098, 1101 (Tex. 1925) ("The decisions of this state uniformly hold that the registration statutes do not apply to equitable titles."). Thus, where, as here, the parties enter into an oral contract to sell land, and the buyer pays full value, but the seller does not convey a deed, the contract does not fall within the recording statute. Resendez, 706 S.W.2d at 346 (holding that equitable title that results after complete payment under contract for sale of land is not subject to recordation and is outside the scope of the recording statute).
Nevertheless, the rule under the recording statute is essentially the same as the common-law rule, which protects bona fide purchasers against the assertion of prior unrecorded interests under equitable principles and the doctrine of estoppel. Under the common law, when one with an equitable claim to property allows the naked legal title to remain in the vendor, his equitable rights become inferior to those of an innocent purchaser or mortgagee for value without notice. Martin, 157 S.W.2d at 152; see also Johnson, 272 S.W. at 1101 ("That bona fide purchasers for value are protected against the assertion of [an unrecorded equitable title] is because of the doctrine of estoppel, and not the registration statutes."). Thus, the question under either the statute or the common law is whether the Bank had constructive notice of Henderson's prior equitable title. To answer this question, and to determine the scope of the duty of inquiry triggered by such constructive notice, the Court will review the relevant Texas authorities.
In Collum v. Sanger Brothers, 82 S.W. 459 (Tex. 1904), the Texas Supreme Court considered whether possession of real property by the owner's tenants was notice to a subsequent judgment lien holder. The Court held that it was, stating: "We think it a safe and salutary rule to require of a prospective purchaser of land to ascertain whether any other be in occupancy of it; and, if there be such possession, to go to the possessor and ascertain the nature and extent of his claim. Possession is evidence of title, and, it seems to us, that common prudence and common honesty demand this course. If so, the possession should be notice to him; and, if notice to a purchaser, it is notice to a creditor." Id. at 460.
However, in 1916, the Court distinguished between the rights of a judgment lien holder and an innocent purchaser for value without notice and emphasized that an innocent purchaser for value without notice is entitled to priority over an unrecorded interest: "A judgment lien holder is not in the same attitude as an innocent purchaser for value without notice. The latter has expended his money in good faith to the amount of the purchase price of the land, and is justly entitled to be held harmless. It is right that the loss under such circumstances should be visited upon the landowner whose negligence, in failing to give notice through the deed records of his ownership, occasioned the loss, rather than that it should fall upon the innocent purchaser who was without fault." First State Bank of Amarillo v. Jones, 183 S.W. 874, 876 (Tex. 1916). Thus, in Jones, the Court expressed the long-standing equitable estoppel principle that, as against an innocent party without notice, the loss should fall upon the one whose negligence contributed to the loss. However, one who has actual or constructive notice of a prior sale or contract for the sale of land cannot be an innocent purchaser thereof and cannot claim ignorance of such prior sale as a basis of estoppel against a prior purchaser who has not actually misled the subsequent purchaser. Tex. Consol. Oils v. Bartels, 270 S.W.2d 708, 712 (Tex.Civ.App.-Eastland 1954, writ ref'd). Thus, to enjoy the equitable protections of innocent purchaser status, the Bank must demonstrate the absence of notice. See id.; Strong v. Strong, 98 S.W.2d 346, 347 (Tex. 1936); see also Neeley v. Intercity Mgmt. Corp., 623 S.W.2d 942, 953 (Tex.App.-Houston [1st Dist.] 1981, no writ) ("In order for the appellants to establish title superior to the equitable title claimed by the appellees under the unrecorded instruments it was necessary for them to be bona fide purchasers for value without notice of the appellees' claims.").
In concluding that Henderson had a superior equitable title, the Bankruptcy Judge relied on language in Texas American Bank/Levelland v. Resendez, 706 S.W.2d 343, 345 (Tex.App.-Amarillo 1986, no writ), which held that "[t]he superiority of equitable title can be enforced against a subsequent judgment lien creditor even though this creditor had no notice of the equitable title at the time of fixing his lien." However, the Resendez court recognized that a judgment lienholder is not an innocent purchaser, and Resendez dealt with a judgment lien holder rather than a bona fide purchaser for value. Because the Bank did expend its money rather than simply acquire a judgment lien, its title would be superior even to a prior equitable title unless it had actual or constructive notice of the prior equitable title.
Before both the Bankruptcy Judge and this Court, the Bank seeks to assert this equitable estoppel principle, arguing that Henderson could have prevented the harm by obtaining and recording a deed. At oral argument, the parties disagreed over whether the Bank sufficiently raised its equitable estoppel argument in the Bankruptcy Court. Though it did not use the express term "estoppel" in its brief, the Bank's argument plainly raises an estoppel argument. See, e.g., C.J.S. Estoppel § 115 (noting the principle that if one person causes injury to two others, both innocent, the loss should fall upon the one who made the injury possible). Moreover, the Bank pleaded the affirmative defense of equitable estoppel in its answer. Thus, the Court concludes that the Bank raised the equitable estoppel argument both in the Bankruptcy Court and before this Court. The Bankruptcy Judge, however, failed to expressly consider the argument. This failure is not harmful, however, given the equally well-settled principle governing equitable estoppel that no estoppel will arise where all the parties have equal knowledge of the facts or where the party setting up the estoppel is chargeable with notice of the facts. See id.; see also Tex. Consol. Oils v. Bartels, 270 S.W.2d 708, 712 (Tex.Civ.App.-Eastland 1954, writ ref'd) (one with constructive notice cannot be an innocent purchaser and cannot set up an estoppel). Thus, whether the Bank could assert the estoppel defense is again determined by whether it had constructive notice of Henderson's equitable title, an issue that the Bankruptcy Judge did consider.
In addition, the Bank appears to be asserting an estoppel against Henderson based on the fact that Henderson discovered in 1999 that the Bank had loaned Hayes the money and taken a lien on the property but did not assert his interest until much later. The Texas Supreme Court has held, however, that silence or failure to assert title is not of itself sufficient to create an estoppel. Simonds v. Stanolid Oil Gas, 114 S.W.2d 226 (Tex. 1938); see also Hidalgo County v. Pate, 443 S.W.2d 80, 84 (Tex.Civ.App.-Corpus Christi 1969, writ ref'd n.r.e). Moreover, the Bank may assert an estoppel based on Henderson's silence after he learned of the Bank's interest only if it altered its position to its detriment based on Henderson's behavior, but the Bank has not set forth any evidence that it was harmed by Henderson's silence after the time he learned of the Bank's loan, since the Bank had already loaned the money at that time. Thus, the Court concludes that the Bank's argument that the loss should fall on Henderson because he did not "do equity" must fail.
As early as 1883, the Texas Supreme Court recognized that "[m]any cases can be found in our reports in which it is said that possession is notice of whatever title the possessor has." Eylar v. Eylar, 60 Tex. 315 (Tex. 1883). In Eylar, the person in possession had conveyed the property to another but intended the conveyance to operate only as a mortgage. However, the deed was recorded, and the Court had to consider whether the rule of possession as notice would apply to one purchasing the property from the grantee when the person in possession had conveyed the property to the grantee and the conveyance had been recorded. The Court noted that application of the rule should be limited to cases in which the possessor is not knowingly at fault in permitting a deed divesting the possessor of his interest to be recorded or to cases in which the possessor has not voluntarily aided in misleading a purchaser. Id.; see also Ramirez v. Smith, 59 S.W. 258, 260 (Tex. 1900) ("There are cases which, while recognizing the proposition that possession is sufficient to incite inquiry, hold that where the possessor has done something, such as making a deed to another, which is of record, which furnishes a sufficient answer to the inquiry arising, the possession does not impose the duty of further investigation."). The Court emphasized that "[t]he policy of the law, as evidenced by our statutes, requires all conveyances of land or interests therein for a term longer than one year to be evidenced by writing" and that the law requires all persons, for the protection of innocent purchasers and creditors, to register their titles to land. Thus, in that case, the purchaser who searched the records of the county and found on record a deed from the person in possession to the person who offers to sell had satisfied the duty of inquiry imposed by the possession. The Court held that the purchaser from the record title holder "was not bound to inquire of the [possessor] what right they had in the land; that the inquiry was sufficiently prosecuted; prosecuted as far as a prudent man, having due regard to the rights of others, and to his own protection, would be bound to prosecute it, when he looked to the record and there found that [the vendor] was declared by the very persons in possession to be the true and absolute owner of the land."
Some of the Court's broader language could be read to suggest that an inquiry into the records would be sufficient in any case:
If the inquiry is prosecuted to the highest source which the law of the land declares shall exist for the determination of title, and to the source which the parties have created as the highest evidence of their respective rights, can it be true that it is further necessary to examine sources inferior and make inquiry as to whether or not there are claims, or even rights, in others not evidenced as the law requires, or otherwise the purchaser be charged with constructive notice of secret vices in the title which he buys.
However, this language must be read in the context of the facts of that case. There, the possessors had conveyed the property to the vendor and had allowed the deed to be recorded. Thus, they had made an affirmative representation in the records, the "highest authority" regarding title, that the vendor was the true owner. In this case, however, Henderson did not make any similar affirmative misrepresentation.
In 1917, in another case involving a purported conveyance of property by the possessor, the Supreme Court held that the fact of possession by tenants placed a purchaser on inquiry, as a matter of law, as to whether the deeds were absolute or intended only as mortgages. Moore v. Chamberlain, 195 S.W. 1135, 1137 (Tex. 1917). In 1990, the Fifth Circuit noted that the reconciling principle between Eylar and Moore was that a purchaser's or lender's duty of inquiry must be "prosecuted as far as a prudent man, having a due regard to the rights of others and to his own protection, would be bound to prosecute it." In the Matter of Rubarts, 896 F.2d 107, 112 (5th Cir. 1990). Thus, the Fifth Circuit held that a prudent lender, in the context of a potential "sham" conveyance like that involved in Eylar and Moore "will not rely upon the representations of husband and wife to the contrary; instead, the lender or purchaser must investigate the circumstances under which the purported sale was made, the status of the purchaser, the arrangements made by the original owners for other housing, or any affirmative actions indicating abandonment." Id.
Although this case does not involve the same "sham conveyance" scenario as Eylar, Moore, and Rubarts, those cases establish that possession acts as constructive notice of the possessor's claims, which puts upon a potential purchaser or lender a duty of inquiry. The duty of inquiry must be prosecuted as far as a prudent man would be bound to prosecute it. Thus, in the face of a possible sham conveyance where one conveys the land to another but remains in possession, the Fifth Circuit has construed the duty of inquiry to reach so far as to require the lender or purchaser to investigate the circumstances of the sale, the purchaser's status, the arrangements made by the original owners for other housing, or any affirmative actions indicating abandonment. In addition, as discussed below, numerous Texas cases with facts analogous to this one impose a duty of inquiry on a potential purchaser to inquire of one in possession of the property what his rights are.
In Paris Grocer Co. v. Burks, 105 S.W. 174 (Tex. 1907), the Court recognized the well-settled rule that a creditor's lien would prevail over an unrecorded deed unless the creditor "is affected with notice." Id. at 175. It was equally settled, held the Court,
that an open, exclusive, and visible possession, maintained by the holder of the unrecorded deed when the right of the creditor attaches, is notice of the right under which it is held. This is so, for the reason that one who seeks to acquire an interest in or with respect to land is expected, in the exercise of common prudence, to learn of a possession held by others than him whose rights he purposes to acquire, and to make inquiry of the possessor as to the nature of the claim under which he holds. Having such opportunities of which prudence dictates that he shall avail himself, one who has omitted to do so will not be heard to deny that he had notice of a fact of the existence of which he was thus put upon inquiry.Id. However, the Court also limited the facts that would trigger the duty of inquiry to those in which the possession sufficiently appears to be that of a third person:
[T]he fundamental fact essential to the application of this doctrine is that of a possession visibly that of some one who is not the person with whom the purchaser or creditor purposes to deal. He is not required to institute inquiries as to the existence of rights of which there is no evidence upon the records, unless there be some fact which he knows or should know sufficient to excite inquiry in the minds of prudent persons. A possession openly that of one other than his debtor or vendor is such a fact; but is a possession sufficient which does not appear to be that of a third person? The reason upon which the doctrine is founded does not warrant an affirmative answer. The authorities lay it down that the possession must be open and visible and unequivocal, meaning that it must be openly, visibly, and unequivocally that of the claimant under the unrecorded instrument.Id.
Similarly, in 1927, in a writ refused case, the Court stated:
Generally speaking, possession of real estate "is equivalent to registration" (Mainwarring v. Templeman, 51 Tex. 205), and is constructive notice of the possessor's right or claim, in that, as a matter of law, it puts a purchaser upon inquiry as to the nature of the claim of right of the possessor, and in the absence of proper inquiry the law charges the purchaser with notice of that claim upon the presumption that proper inquiry would disclose it. This rule is elementary.Ramirez v. Bell, 298 S.W. 924, 927 (Tex.Civ.App.-Austin 1927, writ ref'd).
In 1936, the Supreme Court further discussed possession and its relation to a purchaser's inquiry requirement:
A purchaser of land must search the records, for they are the primary source of information as to title and he is charged with knowledge of the existence and contents of the recorded instruments affecting the title. He must also make inquiry as to the rights or title of the possessor, for possession is equivalent to registration, in that it gives constructive notice of the possessor's rights. "The rationale seems to be, that as the occupant's title is a good one, and as his possession is notorious and exclusive, a purchaser would certainly arrive at the truth upon making any due inquiry. The purchaser cannot say, and cannot be allowed to say, that he made a proper inquiry, and failed to ascertain the truth. The notice, therefore, upon the same motives of expediency, is made as absolute as in the case of a registration." Pomeroy's Equity Jurisprudence (4th Ed.) § 615, Vol. 2, pp. 1166, 1167.
The value and effectiveness of the registration statutes are to an extent impaired by the rule that possession gives constructive notice of title, but the rule is justified, or at least supported, as suggested by Mr. Pomeroy, by the fact that ordinarily the truth as to title may be readily obtained from the person in possession.
. . .
So it may safely be said that the `character of possession' referred to as constituting constructive notice, with respect to the character of case we have under consideration, must consist of open, visible, and unequivocal acts of occupancy in their nature referable to exclusive dominion over the property, sufficient upon observation to put an intending purchaser on inquiry as to the rights of such possessor; and that ambiguous or equivocal possession which may appear subservient or attributable to the possession of the holder of the legal title is not sufficiently indicative of ownership to impute notice as a matter of law of the unrecorded rights of such possessor.
. . .
. . . A fact or circumstance, other than facts of record or possession visible and exclusive, will not put a purchaser on inquiry unless it is a fact or circumstance that he knows or should know. In other words, one is not put on inquiry by a fact or circumstance of which he knows nothing, unless it can be said that notice of it is imputed to him as a matter of law. Strong v. Strong, 98 S.W.2d 346, 348 (Tex. 1936). Thus, in Strong, the Court noted that open, visible, exclusive, and unequivocal possession would suffice as constructive notice, just as if title had been recorded, and that a purchaser had a duty to inquire as to the possessor's rights, despite the fact that such constructive notice would impair the effectiveness of the registration statutes.
In 1968, the Supreme Court refused the writ in Aldridge v. N.E. Indep. Sch. Dist., 428 S.W.2d 447 (Tex.Civ.App.-San Antonio 1968, writ ref'd), in which the Court stated, "As a general rule, possession of real estate is equivalent to registration and is constructive notice of the possessor's right or claim, in that, as a matter of law, it puts a purchaser upon inquiry as to the nature of the claim of right of the possessor, and in the absence of proper inquiry the law charges the purchaser with notice of that claim upon the presumption that proper inquiry would disclose it." Id. at 449.
The Texas Supreme Court recently set forth the same rules in Madison v. Gordon, 39 S.W.3d 604 (Tex. 2001). The Court stated:
One purchasing land may be charged with constructive notice of an occupant's claims. This implied-notice doctrine applies if a court determines that the purchaser has a duty to ascertain the rights of a third-party possessor. When this duty arises, the purchaser is charged with notice of all the occupant's claims the purchaser might have reasonably discovered on proper inquiry. The duty arises, however, only if the possession is visible, open, exclusive, and unequivocal.Id. at 606. The Court noted that in the case of Strong v. Strong, 98 S.W.2d 346 (Tex. 1936), the Court "described the kind of possession sufficient to give constructive notice as `consist[ing] of open, visible, and unequivocal acts of occupancy in their nature referable to exclusive dominion over the property, sufficient upon observation to put an intending purchaser on inquiry as to the rights of such possessor.' Possession that meets these requirements — visible, open, exclusive, and unequivocal possession — affords notice of title equivalent to the constructive notice deed registration affords." Id. at 607.
Thus, Texas law for over a century has consistently held that visible, open, exclusive, and unequivocal possession is constructive notice of title equivalent to the constructive notice that deed registration affords. Moreover, in addition to the cases cited previously, Texas courts have consistently held that this constructive notice places upon a potential purchaser a duty to inquire as to the possessor's rights. See Ramirez v. Smith, 59 S.W. 258, 260 (Tex. 1900); Tex. Am. Bank/Levelland v. Resendez, 706 S.W.2d 343, 346 (Tex.App.-Amarillo 1986, no writ); Investors Syndicate v. Mayfield, 96 S.W.2d 247, 250 (Tex.Civ.App.-Fort Worth 1936, writ dism'd) (holding that possession placed upon lender a duty of inquiry and that the "simplest inquiry would have disclosed, immediately, the fraud and deceit practiced by Ryan, Inc., and Snebold, and there would have been no renewal note — no deed of trust, and no money paid by appellant").
The Bank contends that the Bankruptcy Judge erred in concluding as a matter of law that Henderson's possession of the property was open, visible, exclusive, and unequivocal. In Madison v. Gordon, the Texas Supreme Court noted previous cases that seemingly supported the possessor's position that possession alone gives rise to constructive notice, but criticized those cases because they did not mention the requirements that the possession be visible, open, exclusive, and unequivocal. However, the Court acknowledged that, in each of those cases, the occupant lived in a single-unit dwelling. Thus, the Court did not question the ultimate outcome in those cases, noting that an occupant's sole possession of a single-unit dwelling "arguably" implicates visibility, openness, exclusivity, and unequivocality, but stressed that a Court should nevertheless assess the requirements of visibility, openness, exclusivity, and unequivocality. Id. These elements are essential because the doctrine of notice by possession is justified only by possession that would be sufficient upon observation of a subsequent purchaser to put him on inquiry as to the rights of the possessor.
The Court concludes that the summary-judgment evidence conclusively established that Henderson's possession was open, visible, exclusive, and unequivocal, and that the Bank has failed to create an issue of material fact. The evidence establishes that Henderson occupied the property, a single-unit dwelling, continuously after April 1997, and that Henderson "came and went out of the house as is usual and customary for any person who lives in a house to do." Henderson parked his truck in the driveway and allowed his children and dog in the front yard. Thus, Henderson has shown that his possession was visible and open. No one occupied the property other than Henderson and his family, and thus the possession was exclusive. With regard to unequivocality, the Court concludes that there was nothing equivocal about Henderson's possession, which was continuous from the April 1997 through the time the loan was made, and was not compatible with an ownership claim by Hayes, a woman who purported to be single and using the property as her homestead. Compare Collum, 82 S.W. at 459 (holding that continuous possession of property marked by a fence was sufficient for inquiry notice) and Moore, 195 S.W. at 1137 (holding that possession by tenants of alleged vendors was sufficient to place duty of inquiry as to whether conveyance was absolute or intended only as a mortgage) with Burks, 105 S.W. at 176 (holding that portion of land that was fenced off but used only for garden was too uncertain or equivocal to provide notice) and Boyd v. Orr, 170 S.W.2d 829, 834 (Tex.Civ.App.-Texarkana 1943, writ ref'd) (holding that the fact that minor children were living with their mother, who was the vendor and apparent title holder, is not the character of possession as would constitute constructive notice of their equities arising from the undisclosed fact that their father had paid for a portion of the land with his separate funds).
In Madison v. Gordon, the Texas Supreme Court stated that "[w]hen an occupant's possession is compatible with another's ownership assertion, the occupant's possession cannot be said to be unequivocal." Madison, 39 S.W.3d at 607. However, this language should not be read to mean that, if one could envision a state of facts in which the possession is consistent with the vendor's, then the possession is equivocal, for that would eviscerate the doctrine of notice by possession. As explained by the Supreme Court:
The proposition that the possession must be inconsistent with that of the person holding the legal title, applied as here attempted, would entirely destroy the doctrine of notice by possession. A purchaser, without troubling to inform himself as to the claim of the possessor, might assume any possession to be consistent with the legal title of record, as that the possessor was holding as tenant of, or otherwise in subordination to, the holder of such title. But the law permits him to make no such assumption; and the reason is that the possession puts him on inquiry, which he must prosecute with reasonable diligence. Bailey v. Richardson, 15 Eng. Law Eq. 218; Daniels v. Davison, 16 Ves. 249. The facts of the case make it evident that any inquiry would have revealed to the mortgagees the true state of this title.Ramirez v. Smith, 59 S.W. 258 (Tex. 1900). Thus, the mere fact that Henderson's possession could have, under some imagined scenario, been as a tenant of Hayes, the mortgagor, does not render his possession equivocal. In Madison v. Gordon, the occupancy was "ambiguous or equivocal possession which may [have] appear[ed] subservient or attributable to' Williams" because the property was in fact a multi-unit rental property and one would expect the presence of tenants other than the record title holder. In this case, however, Hayes represented to the Bank that she was a single woman and the property was her homestead, not rental property. Thus, Henderson's occupation and possession of the property would not appear compatible with or subservient to Hayes' assurances of ownership.
The Bank contends that the valuation model and desktop appraisal methods it used, which were within industry standards, did not require physical inspection of the subject real property, However, it is Texas law that imposes a duty of inquiry based on Henderson's open, visible, exclusive, and unequivocal possession, regardless of whether the valuation model chosen by the Bank includes such a requirement. Thus, whether the valuation model or desktop appraisal method chosen by the Bank and the industry requires a physical inspection is not the relevant inquiry. Rather, given that the duty of inquiry was triggered by Henderson's open, visible, exclusive, and unequivocal possession as a matter of law, the only question that remains is whether the Bank prosecuted the inquiry as far as a prudent man would be bound to prosecute it, as delineated by relevant Texas authorities. As demonstrated by the Texas authorities cited above, Texas law has consistently held that a prudent man must inquire of the possessor regarding his claim and he will be deemed to have knowledge of the facts that such inquiry would disclose.
The Bank argues that it should not be held to the same standard as a purchaser of real property and should not be required to inspect the real property because lenders are interested only in record title and valuation, and imposing such a requirement would make the lending process much more onerous and costly. However, the Texas Supreme Court has not distinguished between purchasers and creditors. Paris Grocer, 105 S.W. at 175 (refusing to hold that possession that was not notice to a purchaser would be notice to a creditor, when both take their rights under the same statute); Collum, 82 S.W. at 460 (holding that, if possession is notice to a purchaser, it is notice to a creditor); Ramirez v. Smith, 59 S.W. 258 (Tex. 1900) (holding that a mortgagee was put on constructive notice that triggered a duty of inquiry concerning the possessor's claim). Texas courts of appeals also have not imposed a lesser burden on mortgagees than on purchasers of real property, instead applying the same standard to both. See, e.g., Boyd v. United Bank, 794 S.W.2d 839, 841 (Tex.App.-El Paso 1990, writ denied) (noting that one who accepts a mortgage may be charged with knowledge as to the possessor's interest and be held to have acquired a lien that is inferior to the possessor's interest); Tex. Life Ins. Co. v. Tex. Bldg. Co., 307 S.W.2d 149, 152-53 (Tex.Civ.App.-Fort Worth 1957, no writ); Brown v. Moss, 265 S.W.2d 613, 616 (Tex.Civ.App.-Fort Worth 1954, writ ref'd n.r.e.); San Antonio Loan Trust Co. v. Rabb, 155 S.W.2d 981, 982 (Tex.Civ.App.-San Antonio 1941, writ ref'd w.o.m.) (possession of the property at the time the deed of trust was executed and the loan made was sufficient to place the loan company on notice of possessor's rights, and the loan was therefore made subject to her prior title). Federal district courts have also applied the same standard to mortgagees. See, e.g., Ontiveros v. Mbank Houston, N.A., 751 F.Supp. 128, 130 (S.D. Tex. 1990) (holding that bank was charged with constructive notice of tenant's rights in property by tenant's possession). Thus, because the Texas Supreme Court and the recording statute fail to differentiate between purchasers and mortgage lenders with regard to constructive notice, the Bank's argument that it should be held to a lesser standard fails.
Even secondary authorities such as CJS and American Jurisprudence have applied the same rule to mortgagees. See C.J.S. Mortgages § 222 "Possession as Notice" ("Where at the time of the execution of a mortgage a person other than the mortgagor is in actual possession of the mortgaged premises, such possession, in the absence of a statute to the contrary, ordinarily is sufficient to put the mortgagee on inquiry as to the rights of such person and he takes subject to such rights."); AM. JUR. 2d Mortgages § 312 "Notice Based Upon Occupancy (open and visible possession by an equitable owner is sufficient to charge a mortgagee with notice of the owner's rights and a mortgagee will take subject to those rights).
The Court is sympathetic to the Bank's position, recognizing that it may be burdensome for Banks to determine whether a third party is in possession of the property and, if so, to inquire as to the nature of their claim. This cost surely will be passed on to mortgagors, rendering the process more costly for all. In addition, whether applicable to purchasers or mortgagees, the Court is concerned that the rule of possession as constructive notice sufficient to defeat one's rights under the recording statute defeats the purpose of the recording statute to encourage recordation and create stability of titles. See Cox v. RKA Corp., 753 A.2d 1112 (N.J. 2000) (because the integrity of the recording scheme is paramount, absent any unusual equity, the stability of titles and conveyancing requires the judiciary to follow that course that will best support and maintain the integrity of the recording system). Nevertheless, that is the result dictated by the case law and by the language of the recording statute, which protects only those without notice. Moreover, this Court cannot make its own policy in this case. Rather, the Court is bound to apply Texas law as established by the Texas Supreme Court. Texas law regarding possession by constructive notice despite the existence of and policy underlying the recording statute has remained unchanged for almost a century, and was affirmed by the Texas Supreme Court as recently as 2001. Accordingly, this Court must apply that well-settled law.
Because Henderson's possession is deemed by law to be notice of what would have been disclosed by inquiry, the Bank is deemed as a matter of law to have had notice of Henderson's prior equitable claim. Accordingly, the Bank does not enjoy the protection of the recording statute or other equitable principles. The Court therefore AFFIRMS the Bankruptcy Court's summary judgment in favor of Henderson.