BONA FIDE PURCHASERS AND INQUIRY NOTICE

By Mark A. Gomez, Esq. and April Bayonne, Esq.

Mark A. Gomez, Esq. and April Bayonne, Esq.

The purpose of this article is to introduce the concept of the Bona Fide Purchaser (“BFP”), types of notice, and common arguments to overcome a BFP defense. It will focus on the requirements to obtain BFP status, specifically regarding notice. Additionally, it will address inquiry and implied notice, rarely used arguments, that can result in a denial of BFP status and loss of priority interest in a property. The article will also provide tips on what to look for in a property dispute to help overcome the BFP defense.

Bona Fide Purchaser

A BFP is a person who acquires a lien on, or a title interest in a property in good faith and for value without knowledge or notice of any prior interest. The BFP will take priority over prior unrecorded interest of which he or she has no actual or constructive notice. A person deemed a BFP will take their interest in the property free and clear from any adverse interests. § 10:50. Bona fide purchaser defined; rules of priority, 4 Cal. Real Est. §10:50 (4th ed.) 

Simply put, a BFP is someone who purchased property, by parting with something of value, with no reason to believe that someone else had an interest in the property. If the BFP meets these elements, they will take their interest in the property free from any other interest.

The main components for obtaining BFP status is having no knowledge or notice of any prior interest and parting with something of value in good faith. These components are some of the most common points of contention in BFP disputes. BFP status is not bulletproof. Courts will make rulings based on the specific facts of the case and what they deem to be equitable. This will vary from judge to judge.

Value

A BFP acquiring a lien or title interest in property for value does not mean the BFP paid the full market value for the property. This is not a requirement to be a BFP. The value requirement does not require the buyer’s consideration be the fair market value or anything approaching it. Melendrez v. D & I Inv., Inc., 127 Cal. App. 4th 1238, 26 Cal. Rptr. 3d 413 (2005). When there is no irregularity in nonjudicial foreclosure sale and purchaser is bona fide purchaser for value, great disparity between sales price and value of property is not sufficient ground for setting aside sale. Moeller v. Lien, 25 Cal. App. 4th 822, 30 Cal. Rptr. 2d 777 (1994). The BFP is only required to give some sort of valuable consideration in good faith. Valuable consideration takes on many forms.

For example, forbearance in collecting a debt is a valuable consideration. Frey v. Clifford, 44 Cal. 335, 337 (1872). It makes no difference if the consideration is paid in money, horses, cattle, old debts or new debts only if valuable consideration was paid. Id. Valuable consideration is such as money or the like, and inadequacy of amount or its disproportion to actual value of property are immaterial. Cain v. Richmond, 126 Cal. App. 254, 14 P.2d 546 (Cal. Ct. App. 1932). The adequacy of the consideration is an element of the good faith of the transaction and has no bearing upon whether the consideration is a valuable or good one. Lindley v. Blumberg, 7 Cal. App. 140, 93 P. 894 (Cal. Ct. App. 1907). What constitutes valuable consideration is a question of much discussion and one in which courts have decided differently. Frey, 44 Cal. at 335.

Notice

There are specific types of notices, when given or obtained, that will overcome a BFP defense.

Actual notice of a lien or interest in a property arises when the purchaser of property is notified directly of another interest in that property that could affect their interest.

Imputed notice of a lien or other interest in a property occurs when the agent of a purchaser has or obtains knowledge of an encumbrance on the property. Notice is imputed because, as a general rule, an agent has a duty to disclose material matters to his or her principal, and the actual knowledge of the agent is imputed to the principal. (Civ. Code, § 2332.)

Constructive notice of a lien or other interest in a property arises from the proper recording of that interest. This means the purchaser is on notice of any recording that has been properly recorded within the chain of title. However, “a bona fide purchaser of real property has constructive notice of only those matters that could be located by a diligent title search.” (Dyer v. Martinez (2007) 147 Cal.App.4th 1240, 1242, 54 Cal.Rptr.3d 907.

Inquiry notice of a lien or other interest in a property occurs whether the purchaser looks at the property or not. The purchaser is on notice of whatever a routine inspection would reveal.

Implied notice is another from of inquiry notice. Notice implied from possession or use occurs when apparent possession is inconsistent with the title of record. An encumbrancer (BFP) may have a duty to inquire about unrecorded agreements between joint owners or those in possession of the property. Caito v. United California Bank (1978) 20 Cal.3d 694. A diligent purchaser would inspect the property. If the purchaser neglects to prosecute such inquiry diligently he may not be rewarded the standing of a bona fide purchaser.” Asisten v. Underwood (1960) 183 Cal.App.2d 304, 310.

Overcoming Bona Fide Purchaser Defense

If an adverse interest does in fact exist in the property, the BFP without notice, may seek a legal determination through a quiet title action that the title it obtained remains free and clear of any adverse interest. (Reiner v. Danial (1989) 211 Cal.App.3d 682, 690, 259 Cal.Rptr. 570.)

The key to maintaining BFP status when there is an adverse interest is to prove that there was no notice of any kind that an adverse interest existed. “The general rule places the burden of proof upon a person claiming bona fide purchaser status to present evidence that he or she acquired interest in the property without notice of the prior interest.” (*108 Gates Rubber Co. v. Ulman (1989) 214 Cal.App.3d 356, 367, fn. 6, 262 Cal.Rptr. 630; accord, First Fidelity Thrift & Loan Assn. v. Alliance Bank (1998) 60 Cal.App.4th 1433, 1442, 71 Cal.Rptr.2d 295.) “The subsequent purchaser or encumberer has the burden of showing lack of notice.” (Claremont, supra 146 Cal.App.3d at p. 409.)

In contrast, the key to litigating against a BFP defense is to determine the validity of the title instrument and show that the alleged BFP had some type of notice that there was an adverse interest in the property. When presented with a property dispute involving a BFP defense you should first determine if the title instrument in question is either void or voidable. Then look at each type of notice to determine if the purchaser of the property had or should have had notice of any type.

Void Verses Voidable

A title instrument may be cancelled if it is void or voidable. However, the distinction between the two is important with respect to a BFP. If a title instrument is void, it cannot be enforced even if acquired by a BFP. Contrary to a void title instrument, a BFP can enforce title that is voidable. Thus, if you determine that the title instrument is void, then the BFP status is defeated no matter if there was notice or not. If, however, the title instrument is simply voidable you will need to determine if the BFP had notice to overcome the BFP defense.

Determining Notice

In a BFP defense, proving actual and imputed notice is typically straight forward. There are some pitfalls with constructive notice, but the biggest challenge is showing that the purchaser of the property had or should have had inquiry/implied notice of the adverse interest.

As discussed above, constructive notice of a lien or other interest in property arises from the proper recording of that interest. (Cloney, supra, 91 Cal.App.4th at p. 437, 110 Cal.Rptr.2d 615. In your analysis to determine if a purchaser had constructive notice you will need to be aware of wild deeds. A wild deed is a recorded deed that does not appear in the chain of title because the previous conveyance was either not recorded or improperly indexed. Wild Deed, Black’s Law Dictionary (11th ed. 2019.) A wild deed does not give subsequent purchasers constructive notice because the deed is outside the chain of title. For this reason, a subsequent BFP cannot reasonably be expected to locate the wild deed while investigating the chain of title. Therefore, if the adverse interest is a wild deed the BFP defense will not be overcome.

Inquiry/implied notice is the most complex type of notice. In your analysis to determine if a purchaser has inquiry/implied notice you will need to look to the specifics of the recordings and the property itself. The Courts have held, in many cases that there is a duty for the purchaser to make a reasonable, diligent inquiry into potential adverse interests. This is the case when a recorded document refers to an unrecorded document; when someone is in possession of the property inconsistent with ownership; or a lessee’s action, or possession is inconsistent with the terms of a recorded lease; and the possession is open, notorious, visible, and exclusive. In these circumstances, if the purchaser fails to make an inquiry into the potential adverse interest, it can be argued that notice is implied and the BPF status should not stand. The Court in the following cases held that the purchaser had notice and thus did not maintain BFP status:

In Marina Pacifica Homeowners Association v. Southern California Financial Corporation, the court held that when a recorded document refers to an unrecorded document, the recorded document provides constructive notice of the contents of the unrecorded document if a prudent inquiry would lead to the unrecorded document. Civ. Code, § 19. Marina Pacifica Homeowners Association v. Southern California Financial Corporation, 232 Cal. App. 4th 494, 181 Cal. Rptr. 3d 271 (2d Dist. 2014), review denied, (Mar. 11, 2015).

In Claremont Terrace 3 Homeowners’ Assn. v. United States the court held, possession of real property is constructive notice to any intending purchaser or encumbrancer of the property of all the rights and claims of the person in possession which would be disclosed by inquiry. The possession required to impart notice to a subsequent purchaser must be open, notorious, exclusive, and visible, and not consistent with the record title. If either a tenant or a stranger is in possession of leased premises, the purchaser is charged with all those facts which might have been ascertained had a reasonably diligent inquiry been made. Possession is notice not only of whatever title the occupant has but also of whether the right he may have in the property and the knowledge chargeable to a person after he is put on inquiry by possession of land is not limited to such knowledge as would be gained by examination of the public records. A subsequent purchaser or an encumberer has the burden of showing lack of notice. Claremont Terrace 3 Homeowners’ Assn. v. United States, 146 Cal. App. 3d 398, 194 Cal. Rptr. 216 (1st Dist. 1983). § 3. Constructive notice, 3 Cal. Real Est. Digest 3d Notice § 3

It was held in Three Sixty Five Club v. Shostak, supra, 104 Cal.App.2d 735, 232 P.2d 546, that where the tenant made improvements to property inconsistent with the terms of a recorded lease, pursuant to another, unrecorded agreement which gave the tenant rights additional to those granted in the lease, the purchaser had a duty of inquiry as to the additional rights, and notice was implied Gates Rubber Co. v. Ulman, 214 Cal. App. 3d 356, 369, 262 Cal. Rptr. 630, 639 (Ct. App. 1989) 

In Dreyfus v. Hirt, supra, 82 Cal. 621, 23 P. 193, a lessee’s possession, which visibly exceeded the terms of a recorded lease, was held to give notice of the provisions of a subsequent unrecorded lease. (Id., at p. 626, 23 P. 193.) Gates Rubber Co. v. Ulman, 214 Cal. App. 3d 356, 370, 262 Cal. Rptr. 630, 639 (Ct. App. 1989)

A common example of implied notice is when those in possession are not the selling parties and the alleged BFP fails to inquire into the grounds for possession including confirming with those in possession. Proving BFP status would then fall on the buyer, however the opposing counsel will need to be prepared to argue notice was given and if all that is left to argue is inquiry notice, both sides should be prepared for a potentially long expensive factual dispute.

Conclusion

Whether a potential BFP had or should have had notice will be determined on a case-by-case basis. If you are faced with overcoming a BFP defense a specific analysis of the facts with relation to the property, recordings and actions of the purchaser and other parties with interest will be required.

Cases

  • Gates Rubber Co. v. Ulman (1989) 214 Cal.App.3d 356, 367, fn. 6, 262 Cal.Rptr. 630; accord, First Fidelity Thrift & Loan Assn. v. Alliance Bank (1998) 60 Cal.App.4th 1433, 1442, 71 Cal.Rptr.2d 295
  • Asisten v. Underwood (1960) 183 Cal.App.2d 304, 310
  • Cain v. Richmond, 126 Cal. App. 254, 14 P.2d 546 (Cal. Ct. App. 1932)
  • Caito v. United California Bank (1978) 20 Cal.3d 694
  • Claremont Terrace 3 Homeowners’ Assn. v. United States, 146 Cal. App. 3d 398, 194 Cal. Rptr. 216 (1st Dist. 1983). § 3. Constructive notice, 3 Cal. Real Est. Digest 3d Notice § 3
  • Claremont, supra 146 Cal.App.3d at p. 409
  • Cloney, supra, 91 Cal.App.4th at p. 437, 110 Cal.Rptr.2d 615
  • Dreyfus v. Hirt, supra, 82 Cal. 621, 23 P. 193
  • Dyer v. Martinez (2007) 147 Cal.App.4th 1240, 1242, 54 Cal.Rptr.3d 907
  • Frey v. Clifford, 44 Cal. 335, 337 (1872)
  • Gates Rubber Co. v. Ulman, 214 Cal. App. 3d 356, 369, 262 Cal. Rptr. 630, 639 (Ct. App. 1989)
  • Lindley v. Blumberg, 7 Cal. App. 140, 93 P. 894 (Cal. Ct. App. 1907)
  • Marina Pacifica Homeowners Association v. Southern California Financial Corporation, 232 Cal. App. 4th 494, 181 Cal. Rptr. 3d 271 (2d Dist. 2014), review denied, (Mar. 11, 2015)
  • Melendrez v. D & I Inv., Inc., 127 Cal. App. 4th 1238, 26 Cal. Rptr. 3d 413 (2005)
  • Moeller v. Lien, 25 Cal. App. 4th 822, 30 Cal. Rptr. 2d 777 (1994)
  • Reiner v. Danial (1989) 211 Cal.App.3d 682, 690, 259 Cal.Rptr. 570
  • Three Sixty Five Club v. Shostak, supra, 104 Cal.App.2d 735, 232 P.2d 546

Statutes

  • Civ. Code, § 19
  • Civ. Code, § 2332

Other Authorities

  • § 10:50. Bona fide purchaser defined; rules of priority, 4 Cal. Real Est. §10:50 (4th ed.)
  • Wild Deed, Black’s Law Dictionary (11th ed. 2019)