Posting for

Wednesday, October 14, 1998

by: Lillian Eyrich

leyrich@firstam.com

and: Bert Rush

brush@firstam.com

LAND SALE CONTRACTS/JUDGMENT LIENS/RECORDING ACTS

(This just in from Lillian Eyrich [New Orleans]. What Lillie calls a "land contract" is probably more commonly known as a "land sale contract"--see Black's Law Dictionary, 6th Ed.)

I posted this message to DIRT, and would like to post it to LandSakes for additional readers' input:

I was hoping some of the LandSakes readers could lead me to case law on an issue involving land contracts. We have not been able to locate any Louisiana case law dispositive of this question. In Louisiana, the land contract is recorded, but at the end of the term of the land contract, it is necessary to record another document to transfer the property from the grantor under the land contract to the grantee. Under our law, there is no transfer of the property until that second act is recorded.

The question has to do with priority of liens or encumbrances recorded against the grantor during the term of the land contract. If the land contract is of record, and then there is a lien against the grantor, what is the priority of that lien relative to the interest of the grantee? Does the grantee take title subject to the lien, as the lien was of record before the grantee took title? Does the grantee take free of the lien, as the land contract was of record prior to the grantee taking title? Does the lienholder have the right to foreclose its lien and title to the property, but subject to the obligations under the land contract, i.e., the obligation to transfer title to the grantee upon completion of the payments and other terms of the land contract?

Any leads would be appreciated.

Reply to Lillie: The conventional view is that upon entering into a land sale contract the contract vendee acquires an equitable interest in the land and the vendor has the "bare" legal title pending performance of the contract. When the contract is fully performed the vendee is entitled to recording of a deed and full legal title.

Plus, I'm mindful that Louisiana is a pure race recording act jurisdiction--so there's public policy favoring the rights of he/she who records first, perhaps more than elsewhere.

So I'd say that the vendee under a recorded land sale contract has an equitable interest which will enjoy priority over a later-recorded judgment lien, and may ripen into legal title upon performance of the contract without losing priority visa-vis the judgment lien. The judgment creditor's remedy is to execute his/her judgment against the vendor's interest under the land sale contract (ie., the right to receive payments and foreclose in the event of default). But when the contract is fully performed there remains nothing for the judgment creditor to execute against.

I don't recall a case directly on point, but several discussed in our posting for 8/19/98 (on "Judgment Liens") come close. You may recall the Prochaska case from Washington--Prochaska v. Midwest Title Guarantee Co. of Florida, 85 Wash.App. 256, 932 P.2d 172 (1997).

The Prochaskas purchased a lot on which they planned to build their retirement home. Unfortunately, a judgment lien against their seller recorded nine minutes before their deed. The Court of Appeal held against the Prochaskas, saying that the deposit of the deed into escrow and funding of their purchase did not complete the conveyance since there were other "conditions precedent" to be satisfied (such as issuance of a title policy, proration of taxes, etc.)--so the lien primed them by nine minutes.

I was critical of this reasoning, and cited two California cases holding that the holder of an unrecorded deed would take title free of a (first) recorded judgment lien against the grantor, because at the time the judgment lien recorded the grantor retained no interest in the deeded land to which the lien could attach. It seems to me the facts in these cases are very analagous to your hypothetical. The California cases are Barisich v. Lewis (1990) 226 Cal.App.3d 12, 275 Cal.Rptr. 331; and Casey v. Gray (1993) 13 Cal.App.4th 611, 16 Cal.Rptr.2d 538.

On the other hand, I can understand your concern that from a pure race standpoint it seems the first-recorded judgment lien will prime the later-recorded deed into the vendee. And maybe Louisiana law is perceived as less hospitable to equitable interests than I realize....

Savants! What say you? Just press the "reply" button and scoop DIRT.

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Following Wednesday's posting Frank Melchior (Iselin, NJ) writes:

I wholly concur with Bert's comments but note that, I believe (and I have no research to back this statement) that in some jurisdictions, the judgment lien would attach to the vendor's equitable lien on the equitable title, i.e. attach to the proceeds due the seller. Certainly in those jurisdictions (and there are way too many of them) where courts disregard the existing law to fashion remedies in order that the lien claimant gets paid by someone, it is highly likely that a court would so hold.

For the reasons noted above, I believe it to be the better part of valor to insist the lien claimant be paid out of the seller's proceeds.

Reply to Frank: So you're thinking about the situation where we're handling the sale of property which is subject to a recorded but not-yet-fully-performed land sale contract --and your concern is that the judgment creditor will come along after closing and assert that he or she should have been paid sale proceeds which we instead paid to the contract vendor. Could happen. If I represented such a judgment creditor and had blown it by not executing against sale proceeds in escrow (by timely application to the court for a writ of attachment or execution--whatever you want to call it) I might be inclined to show up in your office all red-faced and blusterly making just the argument you describe. Still, I think I'd be wrong. But please don't remind me to think.

Neil Hulbert (outside counsel in Honolulu) writes:

Try JENKINS V. WISE, 58 Haw. 592, 574 P.2d 1337 (S. Ct. 1978) and its progeny.

Reply: In Jenkins the Hawaii Supreme Court held that a land sale contract created a strong equitable interest in the vendee--such that the vendee was able to enforce the contract by specific performance even after failing to make payments when due. The Court viewed the land sale contract as a security device--even seeming to say its use should be encouraged as a matter of public policy to promote land ownership by those of modest means--and held that the vendee's late payments were no big deal in light of the fact the vendee was under contract to re-sell the subject property (at a profit) so the vendor was adequately secured and would soon be paid in full.

Paul Hammann (Santa Ana) writes:

There is a fair body of case law out of the State of Washington on this subject and the direction of the cases is consistent with the advice you gave Lillie in your reply. The evolution of the law in Washington relating to land sale contracts, which includes primarily case law but also, in recent years (going back to the 1980s), statutory law, was to treat the land sale contract as another form of security device, with the vendor holding "bare legal title" as security for the performance of the contract, similar to the position of a mortgagee or a "deed to secure debt" in some eastern jurisdictions. The vendor's interest is a personal property interest - the right to receive payments and the obligation to deliver a deed upon fulfillment of the contract by the vendee - and the vendee's interest is a real property interest. Where the court looks upon the interests in this manner, it is going to be inclined to conclude that judgments that record against the vendor after recording of the land sale contract do not attach to the vendor's interest (although, as you point out, the judgment creditor could execute on its judgment against the vendor's interest in the contract and hold a sheriff's sale of that interest, with the successful bidder stepping into the shoes of the vendor - obtaining the right to receive payments and the obligation to give a deed upon fulfillment of the contract.

Washington adopted a statute in the 1980s that clearly confirmed that judgments entered against a contract vendor after the effective date of the statute (sometime in 1983 or 1984 as I recall) did not attach to the vendor's interest which was personalty. If Lillie would want citations to Washington cases in this area, I believe they are collected in the Real Estate Contract (Washington's name for land sale contracts) section of the Washington Real Property Deskbook. I'm sure that John Dahl would be happy to assist Lillie in this regard.

Meanwhile Oscar Beasley (Santa Ana) writes:

I SUGGEST YOU TRY NEW MEXICO. THERE ARE ACTUALLY THOUSANDS UPON THOUSANDS OF LAND CONTRACTS IN NEW MEXICO AND I SUGGEST THAT THERE IS LOTS OF LAW. I KNOW THAT ABOUT 20 YEARS AGO THERE WERE MANY CONTRACTS USED IN CALIF FOR THE PURPOSE OF GETTING AROUND THE DUE ON SALE CLAUSE. GENERALLY THE LAW HAS TO DO WITH WHETHER THERE WAS A PHYSICAL TRANSFER OF POSSESSION AND WITH RECORDING.

And, Lillie Eyrich (New Orleans) had a follow-up reply:

I do remember the Prochaska case posting, and I believe I said that the result would have been the same in Louisiana, because if you deem the sale complete between the parties, it could not affect third parties until recorded; thus, the intervening judgment creditor who recorded the judgment against the seller only nine minutes before the deed would prime the purchaser's interest, and could seize the property from the purchaser.

We do not really have the equitable title concept in Louisiana's civil law system. So the seller in a bond for deed (the Louisiana term for a land sale contract) retains title. The purchaser has some interest in the property, probably most analagous to the rights held by a buyer who has recorded his purchase & sale agreement. Unfortunately, LA has very little case law in this area; that's why I was hoping other jurisdictions might have some case law that would be helpful.

I was discussing with Ken Jannen the most appropriate method of insuring the interest of a buyer under a bond for deed, and the priority issues are important to that determination. How do we insure purchasers under land sales contracts in other jurisdictions?

Reply to Lillie: From the foregoing replies I think there's consensus that the vendee's interest under a land sale contract is an insurable interest in land--so I'd be willing to issue an owner's policy to the vendee at the inception of the contract, showing the estate or interest being insured in Schedule A as "the vendee's interest" in the referenced land sale contract. I'd probably want to record the land sale contract (or a memorandum thereof) even if not required otherwise--and I would want to hold (as escrowholder) a deed from the vendor to the vendee to be recorded upon full performance of the contract.

In the event of an intervening judgment lien--as in your intial hypo--I think any resulting claim under the owner's policy could reasonably be considered not covered--as a post-policy matter. On the other hand, I'd prefer to see us consider this risk as a covered one in order that the insured not be surprised by an unexpected event which they might think should be covered by title insurance. Depending on how seriously you weigh this risk in a given jurisdiction, you might offer coverage against post-policy liens recorded against the name of the vendor by way of an endorsement --perhaps for additional premium. And you might condition availability of the endorsement on the vendor giving express warranties against liens. If you have such warranties--where's your risk?

Anyone disagree or have additional thoughts???

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Following up on last Wednesday's posting Jay Dobson (Portland) writes:

Add Oregon to the list of states which would protect the vendee as against a subsequent judgment creditor of the vendor. Although the judgment lien attaches to the property, the lien is removed (as if by magic) be the recording of the fulfillment deed by Statute (ORS 93.645). I believe this is just a codification of the common law where equity wants to protect the interests of an innocent purchaser whose interest appears of record prior to that of the judgment creditor - time crunches on other matters have not allowed me to check for particular case citations however.

Chuck Woods (Albuquerque) writes:

Oscar is correct in that the use of "land contracts" are widely used in New Mexico. The general rule is that a vendee under an executory contract for the sale of realty, acquires an equitable interest in the property. By application of the doctrine of equitable conversion, the vendee is treated as the owner of the land and holds an interest in real estate. On the other hand, the vendor holds the bare legal title as a trustee for the vendee. The vendor's interest is considered personalty. This position was affirmed in Marks v. City of Tucumcari, 93 N.M. 4, 595 P.2d 1199 (1979), a case in which Marks purchased property from Goldenstein by Real Estate Contract, which was recorded. A Transcript of Judgement was subsequently filed against Goldenstein (record owner). The Real Estate Contract was later paid in full and the Warranty Deed, (which in NM is executed at the time of the Real Estate Contract and held by an escrow agent until fulfillment of the Real Estate Contract) was released from escrow and recorded. The Court ruled in favor of Marks (record purchaser) that the Transcript of Judgment did not attach to the real estate.

And Jim Dondero (Grand Rapids, MI) writes:

Boy, this one sure has evoked a plethora of responses from the group!

Just though I would add my two cents to the fray on how land contracts are treated under Michigan law. As Paul suggests, the modern trend has been to view them as security arrangements, i.e. the vendee holding a very strong equitable interest in real property and the vendor holding the "base" fee title as security for the vendee's full performance under the terms of the contract. In fact, the Uniform Probate Code adopted in Michigan (and presumably other states as well) goes so far as to deem the vendor's interest as PERSONAL property in the estate of a decedent. Case law holds both the vendor's and the vendee's interests to be independently capable of being assigned for security, mortgaged, liened and executed against. A Michigan statute and court rule provides for summary proceedings to recover possession of land after forfeiture of the vendee's interest (the resulting Writ of Restitution, issued by the court after expiration of the 90 day period allowed under a Judgment of Forfeiture for the vendee to "cure the default", is often required to be recorded as evidence of the completed forfeiture in order to insure a re-sale by the vendor without exception to the former vendee's interest).

We have insured vendees' interests and mortgages on the vendee's interest in Michigan for decades always subject to, of course, the rights of the vendor and the terms, covenants and conditions of the land contract. If the land contract is not evidenced of record, we also take exception to loss or damage resulting from that fact (it is common to record a Memorandum of Land Contract). That way, our policy does not indemnify the vendee against default on the terms of the contract, or failure of the vendor to give a proper deed in fulfillment thereof (vendors will often die before the contract is fully performed by the vendee, necessitating the vendor's estate be probated with respect to the "base" fee title).

Personally, I think land contracts have outlived their utility in a modern society where a "seller-back" mortgage or deed of trust would serve the same purpose and, under most state statutes, can be foreclosed without resort to judicial proceedings. But, if they were abolished, we Savants would have one less stimulating topic of discussion, wouldn't we!!

Reply: I'm sure something else would come along. You mention insuring mortgages against the vendee's interest under a land sale contract. Last Friday (10/16) Prof. Pat Randolph's DIRT listserv carried a discussion of new provisions in the UCC Article 9 for perfecting security interests in the vendor's interest--are we exhausting this topic or what? Reprinted below is an excerpted version of Prof. Randolph's posting on this subject--note in particular the last paragraph.

New Developments in UCC Article 9. Treatment of Security Interests in Vendor's Interests in Installment Land Contracts (Thanks to Dale Whitman for cluing me on to this issue - but I take the blame for the text that follows.)

A largely unnoticed change in the wording of the latest version of UCC Article 9, which has passed both NCCUSL and ALI and will be in your legislature next term, is both good news and bad news for lawyers working with clients who borrow against their vendor's interests in installment land contracts (known as "contracts for deed" in some places).

The good news is that the UCC provision, once adopted, will resolve considerable uncertainty about whether filing an assignment of the vendor's interest as an Article 9 security interest in the UCC records will adequately perfect the interest. The old answer was "maybe." After all, isn't the vendor's interest essentially the retained title in the property that is the subject of the contract? Isn't that real estate? Doesn't one perfect a security interest in real estate by recording in the land records?

Different common law decisions in various courts held variously that UCC recording was sufficient, that recording of the assignment for security in the land records was sufficient, or that one or another or both were required depending upon the question asked. A wise lawyer would have done both in every case. But such uncertainty always gives a wise lawyer headaches all the same.

The UCC provision makes clear that the method of perfection is filing the assignment as an Article 9 security interest. Note that, unlike with mortgages, there is no negotiable instrument representing the creditor's interest that the lender can take into possession. A record filing is required, and as the debt is an "account" under new Section 9-103(a)(1), the method of record filing is determined by 9-308A(2) of the new statute.

Although 9-308A makes clear that a UCC filing is the appropriate method of perfection when some filing is required, it does not actually require filing as to all security interests in accounts. In fact, it doesn't even require perfection as to most accounts. The statute provides that a security interest in an account is automatically deemed perfected when it attaches by the assignment of the account for security.

So far, so good. No filing of any kind is required. But now comes the bad news. The statute contains an exception stating that the "automatic perfection" feature does not operation if the debtor (the installment contract vendor) has assigned to the creditor for security "a significant part of the assignor's outstanding accounts or payment intangibles." If this has occurred, then UCC filing is required.

What exactly is "a significant part of the assignor's outstanding accounts" in the context of an installment land contract vendor? Who knows.

Obviously the UCC drafters were looking in another direction - attempting to deal with assignments of receivables in an ongoing business. But it is quite likely that the typical land contract vendor in most states does not deal in a great deal of "inventory" and likely only has one or two vendor's interests at any given time. Even assignment of one of them would in most cases constitute the assignment of "a significant part" of the vendor's receivables, at least unless we take into account other, unrelated receivables (and in what way or to what degree we would take these into account is anyone's guess). Thus, we continue to have ambiguity about the impact of the UCC here.

Once again, however, the good news is that as a planning matter the lesson is clear. You don't have to worry about whether the exception to 9-308A applies if you just file the security interest as a UCC security interest.

The people that will have the real problems are those transactions that "go down" without competent legal advice - often in small rural towns. Many folk in those towns will hold vendor's interests in installment land contracts as assets, and occasionally they will borrow against them. If the borrow from a bank, one would assume that the bank will be savvy enough to file in the UCC records and perhaps file in the real estate records as well. Bank counsel usually advice the "belt and suspenders" method.

...

We should note that installment land contracts, though still quite prevalent in rural areas in many parts of the country, and also quite popular for other applications in states like Michigan and Iowa, are disfavored in many states. In fact, the new Restatement of Land Security proposes that the common law begin treating them as equitable mortgages. Indiana, Kentucky, Oklahoma, and several other states have legal rules to this effect already. since installment land contract instruments aren't really designed to serve as mortgages, this creates lots of difficulty for those relying upon them. If you are in a state permitting nonjudicial foreclosure, you're probably far better off just using a deed of trust or other nonjudicial forecloseable instrument to begin with. Even in judicial foreclosure states, these devices present significant enforceability problems, and you may be better off with a mortgage to begin with, whether or not the Restatement approach takes hold.

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Following up on last Wednesday's (10/14) posting, Ken Jannen (Fort Lauderdale/Sr. Underwriting) writes:

OK, I'm a little behind on LandSakes. On the Contract For Deed issue, Lillie has some unique issues, since hers is a civil law jurisdiction - no legacy of equitable remedies, and a strong public records doctrine. This takes concepts like equitable conversion and notice of a possessor's rights out of the equation.

The Article 9 discussion from "Dirt" is certainly thought provoking!

Reply: On UCC Article 9 there have been subsequent postings on DIRT to the effect that security interests against the vendor's interest must still be recorded in the land records to impart constructive notice in Michigan. If anyone gets involved in this--be cautioned to check state statutes (in particular the state enactment of the UCC) to know the latest requirements for recording a security interest.