Home Purchaser Loses Life Savings After Seller Pledges Property As Loan Collateral After Pocketing Buyer's Cash & Failing To Give Recorded Title

In Sullivan City, Texas, KRGV-TV Channel 5 reports:

• A father used his life savings to buy a home for his daughter. He was hoping she would never have to worry about a mortgage. Now, they've learned they don't own the home.

• Frank Gonzalez made a deal directly with the owner of the house on Alamo Street four years ago. [...] He paid $68,000 cash. It was money he saved over 30 years of working construction jobs. Gonzalez says he signed some papers, got a deed, and a receipt. He thought he was finally a homeowner.

• A few months ago, Gonzalez became concerned when he never got a property tax bill. He learned through the Hidalgo County Tax Assessor's Office, the house was not in his name. It was still under Hernandez Homes, owned by a man named Frank Hernandez. Hernandez is the same man who Gonzalez made the deal with. The house was thousands of dollars behind in taxes.

• Soon after, Gonzalez and his daughter got a foreclosure notice. Turns out, Compass Bank now owns the house. The lawyer representing the bank told them Frank Hernandez took out a loan for $78,000 after he made the deal with Gonzalez.(1) He never paid it back and the bank foreclosed on the home.

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• The bank says they must be out of the home by September 15. Gonzalez is back where he started, looking for a place to live. This time, it's a struggle because his entire life savings is gone.

For the story, see Man Loses Home He Spent Life Savings On.

For a similar Texas story, see More Contract For Deed Horror Stories - Texas Homebuyers Lose Home To Foreclosure Despite Making All Payments As Seller Pockets Cash & Stiffs Bank.

(1) A prospective purchaser of, or lender proposing to take a mortgage on, real estate generally has a duty not only to examine defects in the record chain of title but, also, to discover anyone who is in open possession of land.

If, as reported in this story, the seller pledged the home as collateral after the sale to Gonzalez and after the latter took possession of the premises, said possession, if "visible, open, exclusive, and unequivocal possession -- affords notice of title equivalent to the constructive notice deed registration affords" under Texas case law to subsequent purchasers and lenders proposing to take a mortgage as collateral for a loan, even though the occupant's deed is otherwise unrecorded. Madison v. Gordon, 39 S.W.3d 604 (Tex. 2001) (citing Strong v. Strong, 128 Tex. 470, 98 S.W.2d 346, 348 (Tex. 1936).

The Texas Supreme Court, in Madison, made these statements regarding the application of the bona fide purchaser doctrine to subsequent purchasers and lenders in situations like those described in this story (some citations omitted, bold text is my emphasis, not in the original text):

• Status as a bona fide purchaser is an affirmative defense to a title dispute. A bona fide purchaser is not subject to certain claims or defenses. To receive this special protection, one must acquire property in good faith, for value, and without notice of any third-party claim or interest. Notice may be constructive or actual. Actual notice rests on personal information or knowledge. Constructive notice is notice the law imputes to a person not having personal information or knowledge.

• 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. See Collum v. Sanger Bros., 98 Tex. 162, 82 S.W. 459, 460 (Tex. 1904); American Surety Co., 82 S.W.2d at 183. 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. Dixon v. Cargill, 104 S.W.2d 101, 102 (Tex. Civ. App.--Eastland 1937, writ ref'd); see also Flack, 226 S.W.2d at 632. The duty arises, however, only if the possession is visible, open, exclusive, and unequivocal. See Strong v. Strong, 128 Tex. 470, 98 S.W.2d 346, 350 (Tex. 1936).

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• In Strong, we described the kind of possession sufficient to give constructive notice as "consisting 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." Strong, 98 S.W.2d at 350. Possession that meets these requirements--visible, open, exclusive, and unequivocal possession -- affords notice of title equivalent to the constructive notice deed registration affords. Strong, 98 S.W.2d at 348.

See Bank of Am., N.A. v. Schwartz (In re Hayes), 194 Fed. Appx. 217; 2006 U.S. App. LEXIS 21139 (5th Cir. 2006) (affirming In re Hayes, Case # SA-03-CA-1228, 2004 WL 2926006 (W.D. Tex. San Antonio Div. 2004)) for a relatively recent Federal appeals court case that is substantially on point - where a homebuyer's equitable title to a purchased home in an arrangement where no deed was recorded was found to have priority under Texas law over a mortgage loan subsequently placed on the property by the seller after the sale to the homebuyer (the lower court's 23-page ruling in In re Hayes gives an extensive analysis on the Texas law involving the effect of the bona fide purchaser doctrine to subsequent purchasers and mortgage lenders where one is in possession of land under an unrecorded instrument and how it was applied to the facts in this case).

Based on the reported facts in the KRGV-TV Channel 5 story, above, assuming the foreclosing lender failed in its duty to ascertain the rights of the occupants, and possession was visible, open, exclusive, and unequivocal, the homeowner's rights in the home are superior to those of the lender and, accordingly, has no business being booted out of his home.

Unfortunately, the combination of unaffordable legal representation to some homeowners, and the fact that this area of law (ie. bona fide purchaser doctrine) is regrettably beyond the scope of many attorneys' expertise, this homeowner stands to wrongfully lose his home.

See this post, footnote 2 more on the duty to inquire into the rights of occupants in possession of land when applying the bona fide purchaser doctrine under Texas law.

For other states, see Bona Fide Purchaser Doctrine, Possession Of Property By Occupants Other Than The Vendor & The Duty To Inquire.