by Morgan L. Weinstein and J. Anthony Van Ness
Prudent purchasers of real property conduct title searches to ensure that the property is unencumbered by, among other potential defects—, mortgages, liens, or restrictions. A purchaser frequently employs the services of attorneys or title search companies to review the chain of title of a particular piece of real property. Likewise, a lienholder on real property may require a title search on the property for which the lien is held. In order to fully foreclose a lien, the lienholder must establish that its lien is superior in right or title to the property owners’ rights, as well as the rights of other lienholders.1
Problems arise when it is difficult to determine which documents must be searched. Those persons or companies charged with review of title documents first have to procure the documents to review. The pertinent documents may be gleaned from the use of private databases, review of plat books, and review of clerks’ offices’ indexes relating to real property. However, it is possible for a clerk’s office to fail to properly index conveyances, resulting in a situation in which a purchaser or lienholder cannot adequately search liens or defects in title. Further, when property is ineffectively described within a mortgage, questions may arise as to whether the mortgage encumbers the ill-described property.
Currently, the answer to whether a described or referenced document or property description will be within the ambit of a conveyance or mortgage turns on a distinction: Is the document or property description referenced in the mortgage, or is it instead a part of the mortgage? If it is a part of the mortgage, a separate, more automatic application of Florida’s recording statute will occur than if it is merely referenced in the mortgage. In Regions Bank v. Deluca, 2012 Fla. App. LEXIS 13986 *9 (Fla. 2d DCA Aug. 22, 2012), the Second District Court of Appeal affirmed the different tracks that recording and notice questions can follow, while at the same time highlighting the problems caused by Florida’s approach to constructive notice.
Conveyancing and the Types of Recording Statutes
Title review is important because Florida law relating to real property is premised in part upon the legitimacy of conveyances, meaning that there are documents or writings which, in and of themselves, establish the transfer of interests in real property from one person to another.2 There also may be recorded documents establishing mortgages or liens on the real property to be purchased. Such documents, though merely liens, fall within Florida’s laws on recordation of conveyances.3 In order for conveyances to be effectual against creditors or subsequent purchasers for value, they must be recorded.4
Every state has a recording statute or act, and recording statutes typically fall within one of three categories: 1) race; 2) notice; or 3) race-notice.5 The type of recording statute in a particular state may determine who will prevail in actions relating to mortgages. Under a “race” recording statute, a subsequent mortgagee will prevail against a prior mortgagee if the subsequent mortgage is recorded before the prior mortgage.6 Under a “notice” recording statute, a subsequent mortgagee who purchased for value and without notice of a prior mortgage will prevail against the prior mortgagee.7 Finally, under a “race-notice” recording statute, a subsequent mortgagee who purchased for value and without notice will prevail against the prior mortgagee, if and only if the subsequent mortgage is recorded before the prior mortgage.8
The Fact of Notice
Florida is a “notice” state. F.S. §695.01 provides that “[n]o conveyance, transfer, or mortgage of real property, or any interest therein . . . shall be good and effectual in law or equity against creditors or subsequent purchasers for a valuable consideration and without notice, unless the same be recorded according to law.”9 Therefore, under Florida law, a subsequent purchaser who purchases for value and without notice of a prior mortgage will prevail against the prior purchaser. The specific subjunctive exception in the Florida Statutes, “unless same be recorded according to law,” is not so much a literal exception as it is a provision that the act of recording a conveyance places creditors and subsequent purchasers on notice.10
The recordation of conveyances, mortgages, or other liens on property, is emphasized because a recorded conveyance or lien of real property, or an interest therein, places creditors and subsequent purchasers on “constructive notice” of the prior conveyance.11 In applying the notice provision of Florida’s recording statute, Florida courts have held that notice may take three distinct forms: 1) actual notice; 2) implied notice; or 3) constructive notice.12 A party has “actual notice” when the party has actual knowledge of the fact in question.13 A party has “implied notice” of a fact when the party had a duty to make inquiry regarding such fact and the means of acquiring knowledge of such fact were present.14 “Constructive notice” also arises from an inference of knowledge. However, unlike implied notice, a party has constructive notice when the inference of knowledge arises “by operation of law, as under a recording statute.”15
The Contents and Character of Notice: Differing Tests for Implied and Constructive Notice
A party’s possession of actual, implied, or constructive notice is only half of the equation. The other half of the equation is determining what, exactly, is the nature and subject matter of the party’s notice. For instance, as explained in Regions Bank,16 “[t]he lien of a mortgage only covers the property that is described in the mortgage.” If a mortgage is recorded “with no description of the property or a description that would have to be reformed to be effective,” then such a mortgage “does not constitute constructive notice” of the subject property and “defeats the effect and purpose of recordation.”17 Therefore, a subsequent purchaser for value is without constructive notice of a mortgage that insufficiently describes the property being mortgaged.
Alternatively, a description is not ineffective merely because it contains mistakes or defects. The caveat provided in Regions Bank is that “in considering the sufficiency of a legal description in a mortgage, one must examine the entire instrument.”18 The court reasoned that “the Florida courts have repeatedly held descriptions of property in mortgages sufficient despite minor mistakes or irregularities where the description of the property intended to be encumbered could be determined from a review of the entire instrument.”19
Additionally, a mortgage referencing extrinsic documents may provide constructive notice of the contents of such extrinsic documents. For example, a mortgage may describe the real property that it intends to cover by reference to a previous conveyance which contains a full description of the property.20 The reason that mortgages provide notice of other documents referenced therein is that the record of a mortgage is constructive notice “not only of its own contents, but of such other facts as would have been learned if the record had been examined and inquiries suggested thereby duly prosecuted.”21 In fact, reference to an extrinsic document may be made for the express purpose of aiding defects or uncertainties contained within the primary instrument.22
However, a mortgagee is not able to use the reference to extrinsic documents as a means to hide collateral. Instead, a creditor or subsequent purchaser is only placed on notice by reference to extrinsic documents “to the extent that there is a duty to make further inquiry of that deed or unrecorded instrument.”23 The Florida courts have established a reasonable person standard in relation to the duty to make further inquiry as raised by reference to extrinsic documents:
If a reasonable and prudent person would be apprised of the existence of a right by reference to another document or if reference to another document can supply what clearly and reasonably appears to be an omission or defect in an essential part of the recorded instrument then notice is presumed as a matter of ‘implied’ actual notice.24
Ultimately, the reference to extrinsic documents creates tiered notice. The law in Florida seems to be that a mortgage provides constructive notice of its contents if the mortgage is recorded pursuant to the recording statute.25 Any reference to an extrinsic document in a recorded mortgage, however, may only trigger implied notice, and only if such reference creates a duty in a creditor or subsequent purchaser to conduct further research into the referenced extrinsic document.26
Moreover, a mortgagee is further restricted from relying upon the reference to extrinsic documents by the requirements of the reference. A reference to the existence to another document must be specific.27 The reference must be specific both to the identification of the extrinsic document (what type of document it is, who it is between, etc.) and to the fact that the person viewing the mortgage would be required to make reference to the extrinsic document.28 The parameters of what a party is on notice of in any particular instrument are, therefore, governed by a set of rules that are ultimately governed by questions of degree: Is the reference to an extrinsic document clear and specific enough, and does it provide the reviewer with enough knowledge that he or she should make further inquiry into other documents?
Regions Bank v. Deluca: Where the Bread Fell Butter Side Down
Regions Bank provides a prime, recent example of the problems that constructive notice can create in the title search process. Regions Bank, as successor by merger with AmSouth Bank, appealed a final summary judgment entered against it, citing “irregularities in the formatting of the legal description” of the property in question.29 Appellees, the Fulchinos, had owned real property referred to as “the Olde Cypress property,” on which they had taken out both a first and a second mortgage with AmSouth.30 Subsequent to taking out the second mortgage on the Olde Cypress property, the Fulchinos applied for and were approved for a mortgage loan from AmSouth to purchase real property referred to as “the Bayfront Gardens property.”31
In addition to the Bayfront Gardens property itself, the mortgage for the Bayfront Gardens property provided further collateral. The twelfth page of the Bayfront Gardens property mortgage is labeled “Exhibit ‘A,’” and contains the legal descriptions of both the Bayfront Gardens property and the Olde Cypress property.32 Essentially, the Fulchinos’ first mortgage on the Bayfront Gardens property included their third mortgage on the Olde Cypress property.
However, the Bayfront Gardens property mortgage contained severe, notable deficiencies in description. The scrivener of the Bayfront Gardens property mortgage committed an error by failing to insert into the legal description section of the mortgage either the legal description of the Bayfront Gardens property or the Olde Cypress property.33 The scrivener further failed to include in the legal description section of the mortgage any reference to Exhibit “A,” instead leaving the section blank.34
For its part, Exhibit “A” contains the following in centered capital letters: “PROPERTY DESCRIBED BELOW CONSTITUTES ADDITIONAL COLLATERAL TO SECURE THE DEBT EVIDENCED BY THIS MORTGAGE.”35 The “additional collateral” includes the legal description and parcel identification number of the Olde Cypress property.36 Reference to Exhibit “A” in the legal description section of the Bayfront Gardens property mortgage would have made notice a much simpler issue.
Nonetheless, and most likely due to the scrivener’s error in the Bayfront Gardens property mortgage, “the bread fell butter side down.”37 The clerk’s office indexed the Bayfront Gardens property mortgage under the names of the Fulchinos in the grantor/grantee index.38 The proper indexing notwithstanding, the abstract of the legal description of the property subject to the mortgage included only the Bayfront Gardens property, and failed to include the Olde Cypress property.39 Therefore, when performing a title search of the Fulchinos, one would not have viewed a third mortgage on the Olde Cypress property.
The Fulchinos sold the Olde Cypress property to the Delucas, who took out a loan with JP Morgan’s predecessor in interest for the purchase.40 Due to the defects in the mortgage, which led to defects in the recordation and indexing of same, “the title search conducted in connection with the Delucas’ purchase of the Olde Cypress property from the Fulchinos did not disclose the existence of the AmSouth third mortgage.”41 AmSouth’s first and second mortgage were satisfied by the Delucas’ closing of the Olde Cypress property, and the Fulchinos received net proceeds from the transfer.42
The Fulchinos’ third mortgage of the Olde Cypress property remained unsatisfied, but for as long as the Fulchinos continued to pay their obligations under the Bayfront Gardens property mortgage, the issue remained dormant. It was not until Mr. Fulchino passed away and the Bayfront Gardens property mortgage went into default that the legal quagmire presented by the scrivener’s error was revealed.43 Regions Bank filed an action to foreclose its mortgage on both the Bayfront Gardens property and the Olde Cypress property, naming the Delucas and JP Mortgage as defendants.44 As an affirmative defense, the Delucas and JP Morgan alleged that they “were bona fide purchasers without notice of any interest Regions [Bank]… may have had in [the Olde Cypress property].”45
The court, based on the constructive notice doctrine, found that the mortgage provided constructive notice of both the existence of the mortgage and its contents.46 The court, therefore, found that the Delucas and JP Morgan had constructive notice of Exhibit “A,” which contained the legal descriptions of both the Bayfront Gardens property and the additional collateral, the Olde Cypress property.47 The court reasoned that the neglect to “insert an appropriate reference to Exhibit ‘A’ in the blank space provided” was a mistake capable of being corrected via the placement of Exhibit “A,” sans reference, within the four corners of the mortgage.48 Though the court conceded that the Delucas and JP Morgan “relied in good faith on a title search that did not disclose the existence of the” third mortgage on the Olde Cypress property, the court held that they were nonetheless on constructive notice of the mortgage.49
Interestingly, because the court concluded that Exhibit “A” was a part of the mortgage, the Delucas and JP Morgan were on constructive notice of its contents. If, instead, the court had concluded that Exhibit “A” was merely referenced by the mortgage, then the Delucas and JP Morgan may have only had implied notice of its contents, provided that a reasonable person would have believed that inquiry into those contents was required.
The Problem of Doctrinal Rigidity Concerning Constructive Notice
Regions Bank demonstrates, in example, the problem of doctrinal rigidity. No matter which way the case was decided, one side was going to incur an inequitable result. Either Regions Bank was going to have provided funds secured by an unenforceable mortgage or the Delucas and JP Morgan were going to be bound by a mortgage that was not revealed by a title search. However, the court in Regions Bank shirks the question of how it is reasonable for the Delucas and JP Morgan to be on constructive notice of an unindexed legal description of a property that is contained within the contents of a mortgage that is indexed for a completely separate property.
Constructive notice can put potential purchasers and lienholders on de facto notice of issues of which they had no reason to make any inquiry. The court’s decision in Regions Bank is ultimately that purchasers, such as the Delucas, prior to purchasing a piece of property, are required to check every instrument in the public record related to the owners of the property, regardless of what the record is or how it is indexed.
Such a prospect is onerous enough when private, individual sellers are concerned. However, the impact is even greater considering recent real estate market conditions. Florida has one of the highest rates of foreclosures in the United States.50 Many foreclosed properties are sold at auction, at which the foreclosing lending institution will frequently purchase the property. Such real estate becomes a bank-owned property, otherwise called a real estate owned (REO) property. An individual attempting to purchase an unforeclosed property from another individual would be required to check the entire chain of title of any foreclosed properties previously owned by the seller, including REO properties and any subsequent transfers or securitizations thereof. Moreover, if a large lending institution holds X number of mortgages, then forecloses on Y number of those mortgages, and purchases Z number of same at foreclosure sales, any of the Z mortgages could contain additional unindexed collateral. It is not difficult to extrapolate a number of circumstances in which the rigidity of the constructive notice doctrine would operate to create inequity through an unreasonably onerous process.
A Prefashioned Solution
The Florida courts have already fashioned a solution to the rigidity of constructive notice. There is an entire body of Florida case law establishing the solution. However, the solution has not been applied to cases involving constructive notice. Currently, the courts ask whether a document or part thereof is a part of the mortgage, as opposed to merely being referenced in the mortgage. If the document is referenced in the mortgage, then the courts will inquire whether a reasonable person would have believed they had a duty to make further investigation as to the contents of that which is referenced. If the document is deemed to be a part of the mortgage, then constructive notice applies and a creditor or purchaser is automatically deemed to have notice of the document.
Were the courts to treat constructive notice cases more like they treat implied notice cases, the results would likely be more equitable. If a creditor or subsequent purchaser is found to have constructive notice only in situations in which they are also found to have had a duty to conduct further research into the subject matter of such notice, there would be fewer instances of the law operating to automatically place a party unreasonably on notice. The application of the reasonability standard for implied notice, articulated in Air Flow Heating & Air Conditioning, Inc. v. Baker, 326 So. 2d 449, 451 (Fla. 4th DCA 1976), could also be employed to govern constructive notice. At the very least, the courts would have more leeway to reason through cases in which a bona fide purchaser for value or a lienholder was without actual notice of a defect in title.
The title search process is an important component of purchasing and foreclosing on real property. It is supposed to reveal defects in title, including encumbrances, such as mortgages or other liens. However, there are instances in which a reasonable title search effort will fail to reveal remote or inscrutable encumbrances. Regions Bank provides an example of dissonance in the current application of constructive notice: A creditor or purchaser may find themselves in the simultaneous position of being reasonably unaware of encumbrances of which they are on constructive notice. The inequity occasioned by the operation of constructive notice may be ameliorated by the application of the reasonability test used in implied notice cases.
1 See Abdoney v. York, 903 So. 2d 981, 983 (Fla. 2d DCA 2005) (holding that failure to join necessary parties leaves them in the same position that they were in prior to foreclosure); see also Posnansky v. Breckenridge Estates Corp., 621 So. 2d 736, 737 (Fla. 4th DCA 1993).
2 Fla. Stat. §689.01.
3 See Fla. Stat. §695.01(1).
5 Argent Mortgage Co., LLC v. Wachovia Bank, N.A., 52 So. 3d 796, 798-99 (Fla. 2d DCA 2012).
9 See id. at 800 (holding that amendments to Fla. Stat. §695.11 do not modify the notice status of §695.01).
10 Regions Bank v. Deluca, 2012 Fla. App. LEXIS 13986 *9 (Fla. 2d DCA 2012).
11 See id.
12 Id. at *10; see also McCausland v. Davis, 204 So. 2d 334, 335-36 (Fla. 2d DCA 1967).
13 Regions Bank, 2012 Fla. App. LEXIS 13986 at *10.
16 Id. at *11-13.
18 Id. at *11-13; see also Neves v. Flannery, 149 So. 618, 620 (Fla. 1933).
19 Regions Bank, 2012 Fla. App. LEXIS 13986 at *11-13 (citing Fed Land Bank of Columbia v. Dekle, 108 Fla. 555 (1933); Neves, 149 So. at 620-21; Merrell v. Ridgely, 57 So. 352, 353 (Fla. 1912); and Fid. Bank of Fla. v. Nguyen, 44 So. 3d 1238, 1239 (Fla. 5th DCA 2010)).
20 Neves, 149 So. at 620.
21 Id.; see also Hull v. Md. Cas. Co., 79 So. 2d 517, 517-19 (Fla. 1954).
22 Air Flow Heating & Air Conditioning, Inc. v. Baker, 326 So. 2d 449, 451 (Fla. 4th DCA 1976).
23 Id.; see also Crenshaw v. Holzberg, 503 So. 2d 1275, 1277 (Fla. 2d DCA 1987) (quoting 44 Fla. Jur. 2d Records & Recording Acts §55 at 511: “An instrument on record is notice not only of its own existence and contents, but also of other facts that would have been learned from the record if it had been examined and that inquiry suggested by it would have been disclosed.”).
24 Air Flow Heating & Air Conditioning, Inc., 326 So. 2d at 451.
25 Regions Bank, 2012 Fla. App. LEXIS 13986 at *9.
26 Air Flow Heating & Air Conditioning, Inc., 326 So. 2d at 451.
27 Id. at 451-52.
29 Regions Bank, 2012 Fla. App. LEXIS 13986 at *1.
30 Id. at *2.
32 Id. at *2-3.
33 Id. at *3.
35 Id. at *4.
37 Id. at *4-5 (expressing the unfortunate situation through euphemism).
40 Id. at *5.
42 Id. at *5-6.
43 See id.
44 Id. at *6-7.
45 Id. (brackets in original).
46 Id. at *14 (citing Hull v. Md. Cas. Co., 79 So. 2d 517, 519 (Fla. 1954); Crenshaw v. Holzberg, 503 So. 2d 1275, 1277 (Fla. 2d DCA 1987).
48 Id. at *15-16.
49 Id. at *16-17.
50 Megan Anderson, CoreLogic: Orlando Foreclosure Rates Decline in July, Sept. 25, 2012, http://www.bizjournals.com/orlando/news/2012/09/25/corelogic-orlando-foreclosure-rates.html.
Morgan L. Weinstein is an associate attorney at Van Ness Law Firm, P.A., where he practices in the area of real property litigation and performs other legal services related to the mortgage banking industry. He obtained his juris doctorate from the University of Florida Levin College of Law.
J. Anthony Van Ness is the founder of Van Ness Law Firm, P.A., where he provides comprehensive legal services related to mortgage banking, including transactional and adversarial practice. He received his juris doctorate from Albany Law School at Union University.
This column is submitted on behalf of the Real Property, Probate and Trust Section, William F. Belcher, chair, and Kristen Lynch and David Brittain, editors.