Title: Gannaway v. Torres

State: north-dakota

Issuer: North Dakota Supreme Court

Document:

IN THE SUPREME COURT STATE OF NORTH
DAKOTA 2017 ND 287Robert and Teryl
Gannaway, Plaintiffs and Appelleesv.Nadir Torres and Terra Nova Developments,
LLC, an involuntarily dissolved North Dakota Limited Liability company, LND 10, LLC, a
Minnesota Limited Liability Company, and all other persons unknown claiming any interest in,
or lien or encumbrance upon, the property described in the complaint, Defendants and William
and Karen Schneider, Defendants and AppellantsNo.
20170092Appeal from the District Court of Williams County, Northwest Judicial District,
the Honorable Joshua B. Rustad,
Judge.AFFIRMED.Opinion of the Court by Jensen, Justice.Michael L. Forman, Southlake, TX, for plaintiffs and
appellees.Randall J. Bakke (argued), Shawn A. Grinolds (on brief), and Wade A. Davison (on brief), Bismarck, ND, for
defendants and appellants William and Karen Schneider.Gannaway v. TorresNo.
20170092Jensen, Justice.[¶1] William and
Karen Schneider appeal from a judgment entered by the district court, determining Robert and
Teryl Gannaway were entitled to quiet title, free and clear of the Schneiders' mortgage. We
affirm the district court's judgment quieting title in the Gannaways and determining the
Schneiders were not good-faith purchasers for value without notice.I[¶2] Robert and Teryl Gannaway filed a
complaint on June 3, 2015 against Nadir Torres, Terra Nova Developments, LLC ("Terra Nova"),
William and Karen Schneider, and any other encumbrancers of their property. The Gannaways
sought to quiet title to the property after it was fraudulently conveyed, and the Schneiders secured
a mortgage on the property.[¶3] In May 2014, the Gannaways
signed a real estate purchase and sale contract, which provided for a conveyance of their property
to Terra Nova for a purchase price of $15,360,000. The Gannaways also signed a document
Torres represented to be a "notary page to the purchase agreement" at the Farm Credit Services
office. Nadir Torres told the Gannaways "he needed it notarized for whoever the people were that
he was working with, to show them that--you know, that [Robert Gannaway] had actually signed
it." After the Gannaways had the additional page notarized, Torres and the Gannaways went to
the courthouse to record the sale contract. Torres went into the recorder's office alone, told
Robert Gannaway the filing was completed, and they left the courthouse.[¶4] Robert Gannaway noted that after they had the separate document notarized,
Torres was looking at the documents and said he believed he could make them work. Robert
Gannaway thought it was an odd statement to make about the sale contract, but did not inquire
further. When Robert Gannaway requested a copy of the signed documents, Torres sent the
signed page to the sale contract in a text message to Robert Gannaway and the notarized page to
a third party. At trial, an additional signed two-page land agreement providing for the conveyance
of a portion of the Gannaways' property to Nadir Torres was admitted as evidence. However,
Robert Gannaway testified he never signed that document and believed the signatures were cut
and pasted onto the two-page land agreement.[¶5] On August 18,
2014, Torres recorded the quitclaim deed conveying the property to himself from the Gannaways.
On October 23, 2014, Torres recorded a separate quitclaim deed conveying the property from
himself individually to Terra Nova. In connection with the quitclaim deed to Terra Nova, Torres
also signed and recorded an affidavit of the Gannaways' marital status.[¶6] Robert Gannaway testified he believed Torres removed a portion of a
signature page from a different document and pasted it onto the quitclaim deed. When the
Gannaways signed the sale contract on May 22, 2014, Torres did not mention anything about a
quitclaim deed to the Gannaways. Robert Gannaway said the front page to the quitclaim deed
was not attached to the notarized page when he signed it. He also testified that he never signed a
deed in connection with the transaction. Teryl Gannaway, Robert Gannaway's wife, testified that
when she signed the notarized signature page, it was not attached to a quitclaim deed.
Additionally, the sale contract provided for a conveyance from the Gannaways to Terra Nova, not
to Torres. The Gannaways became aware of this quitclaim deed only after their son discovered
the deed by chance while doing other title work at the end of 2014 or early 2015.[¶7] After signing the sale contract, Robert Gannaway met with Torres and gave
him the abstracts for the property so they would be updated for closing, but the closing date was
never set and the Gannaways were never contacted by a title company. Additionally, the
Gannaways never received the $250,000 earnest money from Terra Nova or Torres specified in
the sale contract. The Gannaways believed the deal with Terra Nova and Torres was no longer
moving forward.[¶8] Paul Heinle, of Bismarck Title Company,
testified Torres wanted him to handle the title work and closing on the disputed property in the
summer of 2014. Heinle noted the following details of the transaction with Torres seemed
peculiar: (1) Terra Nova was the named purchaser in the sale contract, but the quitclaim deed
showed the grant was to Torres personally; (2) the quitclaim deed included a notation that it was
prepared by Bismarck Title Company, but no one in that office prepared the deed; (3) the lender
was to be determined; (4) the affidavit of marital status was self-serving on Torres' part; (5) the
transaction was abnormal because this was a fifteen million dollar deal with a pre-signed
quitclaim deed; and (6) Torres represented the transaction was exempt from filing a consideration
statement under N.D.C.C. § 11-18-02.2(6)(c), now codified at N.D.C.C.§
11-18-02.2(7)(c), which is for transferring property between family or corporate affiliates. Heinle
noted that a deal of this size would normally be handled through a warranty deed executed at the
time of closing.[¶9] When Heinle asked Torres about the
quitclaim deed, Torres said he wanted Heinle to change the title work:to
reflect him as being an owner and showing that more or less it would have been free and clear
title. . . . [T]here were some mortgages on the property with Farm Credit Services. He wanted
them removed and he wanted the ownership changed to reflect him as an owner after he emailed
me this deed. After Heinle told Torres he could not give him a letter saying
he was the owner with free and clear title, Torres cancelled the transaction with Bismarck Title
Company and went to work with Quality Title. Heinle testified he discovered two mortgages
with Farm Credit Services that included the disputed property when he completed a title search
on the property. Robert Gannaway testified he paid off one mortgage from Farm Credit Services
on July 22, 2014, and the release was recorded on October 17, 2014.[¶10] The Schneiders executed a loan agreement and promissory note secured by
the disputed property to Torres on August 28, 2014. The Schneiders loaned Torres $400,000 and
transferred the money via wire transfer. Before executing the loan agreement, Torres confirmed
to the Schneiders that he owned the land personally, free and clear of any encumbrances. The
Schneiders were told they had the first lien on the property with no other encumbrances by
Quality Title on August 20, 2014, North Dakota Guaranty and Title Company on August 29,
2014, and through a title opinion from a Bismarck lawyer on September 23, 2014. The first time
the Schneiders learned about the problems with the property was when they were served in this
action. The Schneiders did not recall an explanation as to why the loan was to Torres individually
when the project was in Terra Nova's name. Additionally, the Schneiders wired the loan money
to an account registered to Terra Nova, not Torres, which the Schneiders did not inquire further
about. The Schneiders relied on Quality Title and their attorney to advise them of any
encumbrances on the property. At the time of trial, the Schneiders had not received any payment
from Torres on the loan agreement or promissory note. The Schneiders also stipulated to a
judgment against Torres, which left for trial only the issue of whether the Schneiders' mortgage
was still valid on the Gannaway property.[¶11] The district court
concluded the Gannaways were entitled to quiet title. The district court also determined the
Schneiders had constructive notice of the fraud by failing to inquire about the ownership of the
property or exercising reasonable diligence before executing the mortgage. Therefore, the district
court concluded the Schneiders had no valid encumbrance upon the Gannaway property. The
Schneiders appealed the district court's judgment.II[¶12] The district court concluded the quitclaim deed conveying the property to
Torres was void and inoperative to pass an interest to the Schneiders. The Schneiders argue the
district court's findings of fact are unsupported by the evidence and are clearly erroneous. Also,
the Schneiders argue the evidence does not support a finding of fraud in the execution of the
quitclaim deed. "Fraud and deceit are questions of fact which will not be set aside on appeal
unless clearly erroneous." WFND, LLC v. Fargo
Marc, LLC, 2007 ND 67,  25, 730 N.W.2d 841. This Court has determined:A finding of fact is clearly
erroneous under N.D.R.Civ.P. 52(a) if it is not
supported by any evidence, if, although there is some evidence to support the finding, a
reviewing court is left with a definite and firm conviction a mistake has been made, or if the
finding is induced by an erroneous conception of the law. Id. at  13 (citing Pfeifle v. Tanabe, 2000 ND 219,  7, 620 N.W.2d 167). However, the legal
conclusion of whether the deed is void or voidable is a question of law, fully reviewable on
appeal. See Moran v. Williston Coop. Credit
Union, 420 N.W.2d 353, 356 (N.D.
1988) (determining the district court correctly ruled as a matter of law that a contract was void
rather than voidable).[¶13] In its findings of fact, the district
court determined Torres committed actual and constructive fraud by attaching the notarized page
to the quitclaim deed. Further, the district court stated, "Torres' actions constituted fraud in the
execution of the quitclaim deed purporting to convey the Property from Plaintiffs to Torres.
Therefore, the quitclaim deed is void and inoperative to pass an interest in the Section 2 Property
to the Schneiders."[¶14] This Court has
concluded:A deed that is absolutely void passes no title. It gives no
constructive notice and a claim of bona fides may not be based upon a void instrument, even
when placed of record in the manner prescribed by statute.A deed obtained by fraud is
sometimes void, but more often is merely voidable, depending on the facts on which the claim of
fraud is based.Uniformity does not prevail among the courts as to the circumstances of fraud
which will render a deed void and inoperative as against the claims of an innocent purchaser. It
would seem, however, that in such cases the innocent purchaser should be protected unless the
fraud is clear, unequivocal, and its force undiminished by lack of care on the part of a
mentally competent, defrauded grantor. Hoffer v. Crawford, 65 N.W.2d 625, 631 (N.D. 1954) (citations and quotation marks
omitted).[¶15] In Hoffer, the plaintiffs did not recall signing a
specific mineral deed and sought to invalidate a subsequent mineral deed purchase by grantees
who had no notice of the previous fraud. 65 N.W.2d   at 628. The plaintiffs believed they only signed a
mineral lease and one mineral deed. Id. At
trial, the plaintiffs testified one of the defendants only moved the top document enough to see
where to sign the documents. Id. The
plaintiffs claimed they believed the bottom document was only a copy, not a separate deed.
Id. at 629. This Court concluded the plaintiffs did not
attempt to move the top document to inspect the one below or give any explanation why they did
not realize they were separate documents, and the defendant testified he explained each separate
document to the plaintiffs. Id. This Court
concluded the fraud was in the inducement and did not void the subsequent conveyance of
mineral rights to a third party. Id. at 630. This Court concluded the plaintiffs were
intelligent people with considerable business experience and were negligent because they did not
"exercise that care and caution which would be normal under all of the circumstances." Id. at 630-31. Because the plaintiffs failed to read the
bottom document and the subsequent grantee had no notice of any irregularity in the deed, this
Court held the fraudulent deed was voidable and could pass title to subsequent purchasers.
Id. at 633.[¶16] When
there is a question of whether a title is void or voidable in relation to a good-faith purchase, this
Court has held:The general rule in this State, and in others, is that a
good-faith purchaser for value will prevail if his grantor was possessed of voidable title. While a
deed that is absolutely void passes no title, before a court of equity will declare a deed void as
against the rights of an innocent purchaser, a fraud which goes to the execution of the instrument,
rather than its inducement, must be proved. Nodland v. Plainsmen Petroleum, Inc., 265 N.W.2d 252, 255 (N.D. 1978). This Court also
noted:Where the rights of an innocent purchaser may be affected by
holding the deed inoperative to pass title, only unusual circumstances, such as
misreading the instrument to a blind or illiterate person, fraud on a mentally defective person,
the surreptitious substitution of one instrument for another, or representation of its contents by a
person in whom the grantor is entitled to place confidence, will support a plea of fraud as to
the character of the instrument. Hoffer, 65 N.W.2d   at 632 (citation and quotation marks
omitted).[¶17] Here, like in Hoffer, the Gannaways are intelligent people
who signed a stand-alone notarized page they said they knew nothing about. The Gannaways
were misled by Torres to believe the notarized page was only for seeking financing. The
Gannaways read the document, but the evidence supports the conclusion that Torres attached the
Gannaways' signatures onto the quitclaim deed without their knowledge. Further, the Gannaways
testified they had no knowledge of any quitclaim deed when they executed the sale contract. The
district court's conclusion that Torres committed fraud was supported by the evidence because
the Gannaways were unaware of the quitclaim deed, did not intend to convey their property to
Torres personally, and Torres misled them by stating the notarized page was only going to be
used to seek financing. The district court did not clearly err in finding Torres committed fraud
when he acquired the property from the Gannaways.[¶18] As
noted in Hoffer, the fraud must be related
to the execution of the instrument to render a deed void. Although the district court did not
clearly err in concluding Torres committed fraud, in determining the deed was void rather than
voidable, the district court failed to note whether the fraud was related to the execution or
inducement of the deed. In this case, this Court need not determine whether the deed was void as
the result of fraud in the execution or voidable due to fraud in the inducement. This Court will
only determine a deed is void in unusual circumstances, and even if there has been fraud in the
execution before determining a deed to be void, the fraud must be undiminished by the grantor's
negligence. See Glascoe v.
Bracksieck, 85 N.W.2d 423, 426
(N.D. 1957) (stating even when there is fraud in the execution of an instrument an innocent
purchaser will be protected when there is a lack of ordinary care by a competent defrauded
grantor). The Gannaways were misled by Torres' statements about the documents, but did not
inquire further about the stand-alone notarized page or what Torres was recording at the
courthouse. The district court should have considered the Gannaways' conduct in relation to the
fraud as required under Hoffer. However,
despite concluding the deed was void, the district court correctly analyzed whether the
Schneiders were good-faith purchasers for value. The district court's conclusion that the
Schneiders were not good-faith purchasers makes the determination of whether the deed was
void or voidable unnecessary to the resolution of this dispute.III[¶19] The Schneiders argue their mortgage
should be upheld because they are good-faith encumbrancers for value without notice of the
fraud and because the Gannaways' negligence contributed to the fraud. Although the district court
determined the deed was void and could not pass title to a subsequent purchaser, the district court
further concluded the Schneiders had constructive notice of Torres' fraud and were not good-faith
purchasers for value without notice. Accordingly, the district court determined the Gannaways
were entitled to the property free and clear of the Schneiders' mortgage. The determination of
whether a party is a good-faith encumbrancer for value without notice is a mixed question of fact
and law. Poyzer v. Amenia Seed & Grain
Co., 381 N.W.2d 192, 196 (N.D.
1986).The factual circumstances relating to events surrounding the
transaction--the realities disclosed by the evidence as distinguished from their legal
effect--constitute the findings of fact necessary to determine whether a party has attained the
status of a good faith purchaser without notice. A court's ultimate determination that a party is
not a good faith purchaser for value is a conclusion of law, because that determination describes
the legal effect of the underlying factual circumstances. Diocese of Bismarck Trust v. Ramada, Inc., 553 N.W.2d 760, 768 (N.D. 1996) (citations
omitted). This Court reviews findings of fact under a clearly erroneous standard, while
conclusions of law are fully reviewable on appeal. Pfeifle, 2000 ND 219,  7, 620 N.W.2d 167.[¶20] The district court did not clearly err in determining the Schneiders had
constructive notice of the fraud. Section 1-01-25, N.D.C.C., defines constructive notice and
provides, "[e]very person who has actual notice of circumstances sufficient to put a prudent
person upon inquiry as to a particular fact and who omits to make such inquiry with reasonable
diligence is deemed to have constructive notice of the fact itself." In Hoffer, this Court determined subsequent
purchasers with no information about any irregularities in the previous conveyance were
good-faith purchasers for value without notice. 65 N.W.2d   at 633.[¶21] Here,
unlike Hoffer, the district court determined
there were facts which put the Schneiders on notice of the fraudulent transaction. Through
Heinle's testimony about Torres' behavior and requests, the district court heard evidence about
other mortgages on the property. The Schneiders failed to investigate the project or inquire about
certain documents conveying property to Torres, individually, while others were to convey
property to Terra Nova. The Schneiders also failed to investigate why the project and land was in
the name of Terra Nova, but its loan was to Torres, individually. Further, the quitclaim deed from
the Gannaways to Torres noted it was exempt from filing requirements under N.D.C.C. §
11-18-02.2(7)(c), which exempts "[a] sale when the grantor and the grantee are of the same
family or corporate affiliate, if known." This statement on the quitclaim deed from the
Gannaways to Torres, in combination with the other inconsistencies, raised a duty to inquire
because the Schneiders would have had no reason to believe Torres was related to or had a
corporate affiliation with the Gannaways. There are several inconsistencies with Torres' interest
in the property, which would put a reasonably prudent person on notice to inquire
further.[¶22] The evidence supports the district court's
conclusion, and the district court did not clearly err in its findings of fact. The evidence supports
a finding that the Schneiders were not good-faith encumbrancers for value without notice. We
conclude the district court properly quieted title in the Gannaways and determined they own the
property free and clear of the Schneiders' mortgage. We affirm the district court's judgment
determining the Schneiders were not good-faith purchasers for value because facts existed which
would have put a reasonable person on notice of Torres' fraud and unclear title.IV[¶23] We affirm the district court's judgment
quieting title in the Gannaways and determining the Schneiders were not good-faith purchasers
for value without notice.[¶24] Jon J. JensenLisa Fair McEversDaniel J.
CrothersJerod E. TufteGerald W. VandeWalle, C.J.