Court Opinion

ID: 9781403
Source: CourtListenerOpinion
Date Created: 2023-08-30 16:36:36.209498+00
Date Added: 2024-06-11T07:34:26.139787
License: Public Domain

Justice EISMANN,
Dissenting.
Because the majority opinion distorts real property law by holding that the lender on a real estate development can lose its security interest if it knows too much about the pro*89posed development, I respectfully dissent. The majority opinion, if it is ever followed in subsequent cases, will turn real estate financing on its head, to the ultimate detriment of consumers.
The facts relevant to the central issue involved in this case are quite simple. In the 1980’s, Arrow Point Properties (APP) began to develop the property at issue as a townhouse condominium project, but that development did not progress very far. A diagram prepared by APP showed that it intended to have a community club on the property later designated as Lot 5. On December 11, 1991, it recorded a set of covenants, conditions, and restrictions (CC & R’s) for the property, which defined “common area” to mean “all real property (including improvements thereon) owned by the Association for the common use and enjoyment of the Owners.” The CC & R’s did not designate where the proposed common area would be. While APP owned the property, there was no Association, there were no Owners, and therefore there was no common area. APP’s master plan provided that the final determination of the need and desirability for the service area and community club reservation would be made when the property was platted, and APP never platted the property before selling it.
In 1992 and 1993, Arrow Point Development Company (APDC) purchased the property with APP taking a promissory note secured by a deed of trust. The deed of trust and an addendum to it were both recorded on May 11, 1993. The addendum included a provision stating that if the deed of trust is foreclosed, all improvements on property that had not been released from the deed of trust “shall become the property of the Beneficiary.”
After purchasing the property, APDC changed the nature of the development from townhouse condominiums to high-rise condominiums and it divided the property into lots. In 1993 it obtained approval from Kootenai County for a revised planned unit development, and on November 19,1993, it recorded a plat of the property. The plat did not designate any common areas. On March 11, 1994, it recorded a master set of CC & R’s that expressly superseded the prior CC & R’s that had been recorded by APP.
After purchasing the property, APDC constructed a pool on Lot 5 and five condominium buildings, and in November 1994 it began selling condominium units. In 1996 and 1997, APDC began experiencing financial difficulties. In 1997, West Wood Investments, Inc., (West Wood) took an assignment of APP’s interest in the promissory note and deed of trust. Wben it foreclosed its deed of trust, the district court ruled that its lien was subordinate to the exclusive rights of the condominium owners to use Lot 5 and the improvements constructed thereon for recreational purposes.
The district court held that West Wood only took whatever interest APP had, and that APP’s lien was subordinate to the interests of the condominium owners in Lot 5. The district court reached the latter conclusion as follows:
In essence, APP permitted APDC to market Lot 5 and the pool building as a common area to unsuspecting consumers for APP’s own benefit. Frame himself indicated that APP approved the budding of the pool building, and also that the construction and use by the homeowners of the pool building on Lot 5 was consistent with the APP development plan utilizing Lot 5 as a common area to benefit the condominium project. APP approved APDC’s construction of the pool building, presumably to assist APDC in sales of units and in hopes APP would get its note paid in full____APP had to know, or certainly should have known, that APDC was marketing the units using Lot 5 and the pool building as an inducement to buyers, and that APDC was in no way advising unsuspecting consumers that APP would take Lot 5 and the pool building away should APDC fail to pay the APP note. In short, APP allowed Lot 5 and the pool building to be sold to unsuspecting consumers as common area.
In summary, the district court held that APP’s properly recorded prior hen would be subordinate to the interests of the condominium owners because APP knew or should have known that APDC marketed the condo*90minium units using Lot 5 as a common area and the pool building as inducements to the buyers.
Incredibly, the majority upholds this finding of the district court, after first adding two additional findings of fact of its own. First, it states, “APP engaged in representations of its own, prior to divesting itself of ownership of the property, that the development would include common areas.” These “representations” consisted of preparing a diagram that showed a community club and tennis courts on the proposed development and recording CC & R’s that indicated there would be common areas, but did not specify where they would be. What the majority fails to mention is that these representations were not made to any of the condominium owners in this case. There is not a single alleged act by APP that could reasonably be construed as a representation to the condominium oumers either that it would not enforce its lien in Lot 5 or that Lot 5 was not subject to its lien. The diagram prepared by APP did not reflect the development ultimately constructed by APDC and was not used to market the condominiums, and the CC & R’s recorded by APP were superseded by those recorded by APDC in March 1994, eight months before it began selling condominiums. The majority’s second finding of fact is that APP “was engaged in the development after selling the property to APDC.” APP’s conduct supporting this finding was the exercise of its rights under its agreement with APDC to approve the construction of the pool and to monitor the project to make sure it was being constructed as planned in order to protect APP’s security interest. APP did not engage in any of the construction, nor did it participate in marketing any of the condominiums.
The conduct of APP in this case was no different from that of any other responsible real estate lender. It knew the details of the proposed development, including proposed common areas, and it monitored the development to ensure that it was being constructed according to the borrower’s plans. It would also benefit if the development succeeded because it would be paid the sums owing to it. As counsel for the condominium owners admitted during oral argument, in the real world any lender would want to know the details of the proposed development before agreeing to lend money and would monitor the construction to ensure that the development was proceeding according to plan. With the majority’s decision in this case, however, any lender that does so in the future risks losing its security interest.
This case in indistinguishable from Sun Valley Hot Springs Ranch, Inc. v. Kelsey, 131 Idaho 657, 962 P.2d 1041 (1998) (Sun Valley I). In that ease, First Federal Savings and Loan (First Federal) had loaned $400,000 to a real estate developer and had received a mortgage as security. After the developer defaulted on the loan, First Federal obtained title to the development, excluding the lots already sold, through foreclosure proceedings and then assigned its interest to others. The owner of a subdivision lot then brought an action against the assignees contending that it was entitled to an interest in the common areas. In rejecting that argument, this Court stated:
The fact that First Federal had notice of the plat and the CC & Rs at the time it executed the release does not eliminate its status as a good faith purchaser or disturb the priority of its security interest____ First Federal’s knowledge that Clarendon [the developer] intended to create common area and access rights which would attach to the subdivision lots was not a legally recognizable interest that would constitute an adverse claim on the property.
131 Idaho at 661, 962 P.2d at 1045.
The majority attempts to distinguish the Sun Valley I case by stating, “In Sun Valley, the lender was a stranger to the property prior to lending money to fund the development and taking back a mortgage. APP is not similarly situated.” Such distinction is no different than saying, “In Sun Valley, the secured party’s name was ‘First Federal’ and in this case it is ‘Arrow Properties Partnership.’ ” A fact that distinguishes a prior opinion must be one that logically would make a difference in the law to be applied. The majority cites no statutory or common law authority holding that a real estate vendor’s properly recorded security interest is *91inferior to that of a real estate lender, nor does it explain how in this case the applicable law should vary depending upon whether the owner of the security interest is a vendor or a lender. The asserted distinction cannot be based upon an assumption that a vendor knows more about the proposed development on the land sold than would a lender. You would have to be extremely naive to believe that in Sun Valley I First Federal had blindly loaned $400,000 to Clarendon with no knowledge of the details of the proposed development.
The district court in this case held that West Wood stood in the same position as APP. The majority holds that the district court erred in this regard because “the relevant inquiry is not into what right or interest APP had to give.” Rather, the relevant inquiry is what notice West Wood had when it acquired APP’s interest in the promissory note and deed of trust. The majority finds that West Wood did not take its interest in good faith because the majority concludes that “West Wood took the assignment of APP’s interest with notice of inconsistent claims, failed to investigate the open and obvious inconsistent claims, and cannot take the property in good faith.” The majority cites three facts supporting its conclusion.
First, the majority refers to the record of survey recorded prior to APP’s assignment to West Wood. According to the majority, “This document was recorded with Kootenai County on May 10, 1997, and marks the substantial portion of Lot 5 as ‘common area.’ ... West Wood is charged with notice of this recorded document and that this area was designated as common area.” This statement by the majority reflects a misunderstanding of real estate law.
“Constructive notice imparted from the record ... is a matter of statute.” Kalange v. Rencher, 136 Idaho 192, 195, 30 P.3d 970, 973 (2001). The crux of Idaho’s constructive notice recording laws are Idaho Code §§ 55-809 and 55-811. Miller v. Simonson, 140 Idaho 287, 92 P.3d 537 (2004). Section 55-809 defines when an instrument is deemed recorded. That is not an issue in the present case. Section 55-811 provides: “Every conveyance of real property acknowledged or proved, and certified, and recorded as prescribed by law, from the time it is filed with the recorder for record, is constructive notice of the contents thereof to subsequent purchasers and mortgagees.” In order to give constructive notice, the document recorded must be a “conveyance of real property.” Idaho Code § 55-813 defines a “conveyance” as “every instrument in writing by which any estate or interest in real property is created, alienated, mortgaged or encumbered, or by which the title to any real property may be affected, except wills.” A record of a survey is not a conveyance as defined by § 55-813, and therefore it cannot provide constructive notice.
There is a second reason why the record of survey does not give constructive notice under the existing recording statutes. The record of survey was recorded pursuant to Idaho Code §§ 55-1901 et seq., which requires surveyors to record certain surveys. Such recorded surveys do not provide constructive notice to subsequent purchasers because they are outside the chain of title. As this Court explained almost 100 years ago, where Idaho recording statutes provide for grantor-grantee indexes rather than tract indexes, documents that are outside the chain of title — that are executed by someone who does not have a interest of record in the real property — do not provide constructive notice.
Where, therefore, a stranger to the record title executes an instrument purporting to convey or incumber real estate and causes the same to be recorded, there is no method provided by the statute of this state whereby a person about to deal with such property would be able to find the record of such conveyance or incumbrance executed by such stranger; nor do the recording laws require the recorder to make any such index, notation, or record as would enable either him or any one else to find such record if he were making an abstract of the title to such property. In view of this condition of this statute, it would seem that the conveyance mentioned in section 3159 [currently I.C. § 55-811], which constitutes constructive notice to subsequent purchasers and mortgagees, must be intended as a conveyance emanating direct*92ly, or through mesne conveyances, from the holder of the record title. The Legislature certainly did not mean to enact an absurdity or provide for a constructive notice that would never be likely to give any actual notice to one who might in fact search the records.-
Harris v. Reed, 21 Idaho 364, 371-72, 121 P. 780, 782 (1912). Because the recorded survey was outside the chain of title, it did not provide constructive' notice, at least under the law in existence prior to the majority opinion herein.
The two other facts cited by the majority in support of its finding are that prior to its assignment from APP, a West Wood representative stayed in a condominium and used the pool and he also attended a meeting at which a participant stated that “the swimming pool facility is a part of the condominium phase of the project and could not be owned by the lodge [that may be built on another lot].” The majority’s conclusion that this represents “notice of inconsistent claims” reflects a confusion regarding the distinction between an owner of real property and the holder of a security interest in it. APDC was the owner of the common area. APP only had a security interest in the common area. APP had no right to the possession of the common area, nor did it have any right to exclude people from the common area. The condominium owners were using the common area with the permission of the owner, APDC. Their use was not inconsistent with APP’s rights as beneficiary of the deed of trust, nor would their use give notice of any claim that APP’s security interest was unenforceable.
The majority’s reference to Middlekauff v. Lake Cascade, Inc., 110 Idaho 909, 719 P.2d 1169 (1986), and Middlekauff v. Lake Cascade, Inc., 103 Idaho 832, 654 P.2d 1385 (1982), reflects its failure to distinguish between the owner of real property and the holder of a security interest in that real property. In Middlekauff, the owner-developer of a subdivision represented to purchasers of lots in that subdivision that adjoining real property owned by the developer would remain common area for use by the purchasers. Middlekauff had nothing to do with the rights of the holder of a security interest in the real property. As this Court explained in Sun Valley Land and Minerals, Inc. v. Hawkes, 138 Idaho 543, 549, 66 P.3d 798, 804 (2003) (Sun Valley II) (citation omitted):
This Court has held that, under certain circumstances, misrepresentations of a developer alone may be sufficient evidence to establish a legally enforceable interest. Nevertheless, while Middlekauff stands for the idea that misrepresentation alone may be sufficient evidence, the right to relief must be based on an independent cause of action, such as misrepresentation or fraud. Further, in order to prove a representation in fact occurred, the court must make a factual inquiry into the circumstances surrounding the interaction between buyer and seller.
The Lot Owners’ argument fails, because they do not provide a legal basis for their claim. Moreover, this Court already determined the Lot Owners were in fact informed of the risks involved in this development prior to purchasing the lots.
In Sun Valley II, we held that representations by the developer that portions of the development would be common area did not give the lot owners, who purchased in reliance on those representations, a legal claim in the common area superior to that of the lender who had a security interest in that common- area. Now, less than two years later, the majority effectively overrules Sun Valley II.
The majority quotés from Kalange v. Rencher, 136 Idaho 192, 195-96, 30 P.3d 970, 973-74 (2001), as follows: “A purchaser is charged with every fact shown by the records and is presumed to know every other fact which an examination suggested by the records would have disclosed.” It is undisputed that the duly recorded deed of trust in which APP was beneficiary, and the accompanying duly recorded addendum, expressly stated that if APP was not paid, all improvements on property that had not been released from the deed of trust, which would include the common area (Lot 5), “shall become the property of the Beneficiary.” When the deed of trust was foreclosed, West Wood was the beneficiary and was legally *93entitled to the property subject to the deed of trust free of any subsequently acquired interests. Although the majority gives lip service to the law quoted from Kalange v. Rencher, it fails to explain why that law does not apply to the condominium owners in this case. Apparently, courts can selectively apply the constructive notice provided by our recording statutes.