Is it Bad or is it Good?
Articles from The Massachusetts Focus
Newsletter of Stewart Title Guaranty Company, Massachusetts Offices
Spring 2002, Volume 1, Number 1
Is it Bad or is it Good?
by Gary F. Casaly, Special Counsel
One of the most important things to know in real estate law is what facts make for a bad title. Being able to spot the salient details that cause a title to be unacceptable is very important. But just as important is being able to distinguish a bad title from a good one. That is, sometimes a title may look bad when in fact some law makes it good. Rejecting a title of this sort can be more than embarrassing; it can subject the conveyancer to liability.
So, what do these masquerading titles look like and what magical statutes or laws make them good?
Out-of-order recordings sometimes make an examiner or conveyancer shudder. Deeds and mortgages are recorded out of order on occasion and it's important to know whether this fact justifies a rejection of the title or whether the reverse recordings can be ignored. It happens every once in a while that a mortgage from a borrower is recorded before the title deed is recorded. While one might be tempted to reject the mortgage title as bad, because the mortgage from the borrower was recorded before the title deed from the seller, this is not the case. A mortgage contains "mortgage covenants," and these covenants are essentially the same as warranty covenants coupled with a defeasance clause. Compare, G.L.c. 183 §16 (warranty covenants) with G.L.c. §19 (mortgage covenants). Warranty covenants have been afforded a special place when it comes to conveyancing. They have the remarkable ability to create a condition known as "estoppel by deed," which was discussed in depth in the case of Ayer v. Philadelphia & Boston Face Brick Company, 159 Mass. 84, 34 N.E. 177 (1893), the case most frequently cited for the proposition. It is a theory, however, that was not new even to the Ayer court. In quoting Knight v. Thayer, 125 Mass. 25 (1878), Justice Holmes said in Ayer:
It has been the settled law of this commonwealth for nearly forty years, that, under a deed of covenants of warranty from one capable of executing it, a title afterwards acquired by the grantor inures by way of estoppel to the grantee, not only as against the grantor, but also as against one holding by descent or grant from him after acquiring the new title.
The theory, very simply put, means that, if a person gives a mortgage, and thereafter acquires the title to the property described in the mortgage, the title, once acquired, will spontaneously be "sucked up" under the mortgage and instantaneously vested in the mortgagee. The rule would apply where the title deed to the borrower is recorded after the mortgage granted by him (and also would apply even if there was a long delay between the recording of the two instruments).
The theory has been applied to quitclaim covenants in at least one decision, but the facts in that case were rather specific and might not be applicable generally. See Zayka v. Giambro, 32 Mass.App.Ct. 748, 594 N.E.2d 894 (1992). On the other hand, while perhaps not as well favored at common law or in historical conveyancing practice as warranty deeds, deeds with only quitclaim covenants have become the norm, at least in eastern Massachusetts, over the past 50 years or so, whereas "the warranty deed has become a rara avis." Thus, as the appeals court went on to observe in Zayka:
If estoppel by deed is a sound principle, no compelling logic or binding precedent proscribes its application to a quitclaim deed.
Though it seems that estoppel by deed is a "saving grace," the theory can backfire on occasion. Though it would be rare to find a title these days where a party gave a warranty deed (or mortgage) before acquiring title to the property described in the instrument, if such was the case and it was not discovered, a title acquired by the borrower later under a title deed would be "stripped" from him or her, leaving only the illusion that he or she had good title when in fact title would be vested in the grantee or mortgagee under the prior deed or mortgage.
Estoppel by deed can backfire in another way too. This can occur when a borrower gives successive mortgages on his or her property and one of the prior mortgages is foreclosed and the borrower thereafter reacquires the property. This is when "revival" occurs, and the previously junior mortgage or mortgages, which had been "wiped out" by the foreclosure, come back to life. A later conveyance from the re-acquiring borrower will carry with it the revived mortgage lien. Fortunately, the case of Huzzey v. Heffernan, 143 Mass. 232 (1887) ameliorated the result, holding the subsequent mortgages would not be revived if there was a statement in them that they were subject to the paramount mortgage.
Out-of-order recordings can occur in other instances as well, and the reverse order of recording can be ignored if it falls into the type of fact pattern discussed in King v. Stephens, 9 Mass.App.Ct.919, 404 N.E.2d 115 (1980). In King the record title, based on the order of recording, looked like this:
- Title began with William and Andrew holding as tenants in common.
- The deed recorded next was one from Andrew to William of a half interest.
- The deed recorded next was one from William to Andrew of all of William's title. (Note: This deed was dated prior to the #2 deed and was recorded immediately after it.)
- The next recorded deed was one from Andrew to William of Andrew's remaining half interest.
The net result of the deeds, as recorded, was that Andrew and William ended up owning half interests again. But the title disclosed that after the above deeds were recorded William alone conveyed the title out into the present chain. In an action brought by a present-day buyer for the return of the deposit, the trial judge had determined that the deeds had been recorded out of order (the execution of the deeds, according to their respective dates, was 1, 3, 2, and 4) and that the recording order, and not the order of the execution of the instruments, controlled. If the deeds, according to their respective dates, were laid upon a table in the order they were executed (1, 3, 2, and 4) the result would have been that William would have had the entire title to the property. The trial judge, however, ruled that the title emanating from William alone was defective and could be rejected as not good of record because Andrew had not joined in the conveyance and, according to the order of recording, he was a half owner. The Appeals Court disagreed:
The problem presented is not one of priority as between two conflicting, successive conveyances to bona fide purchasers, or persons claiming under them, of the same legal interest in land, and thus is not a problem to be resolved by application of the recording statute, G.L.c. 183, §4. The deeds . . . were valid between William and Andrew when delivered, and were valid as against all other persons when the deeds were recorded.
Other instances of out-of-order recordings, particularly in connection with discharges and assignments of mortgages, may in many instances be ignored, although they might at first seem to justify the rejection of a title. These instances are set out in Massachusetts Conveyancers Association Title Standard No. 58.
The Statute of Uses
They say that the only things certain in this world are death and taxes. So much so, at least in the case of taxes, that they can wiggle their way right into the conveyancing arena. That's what happened way back in 1535 in England.
The event that occurred so long ago still on occasion affects real estate titles and when it is encountered a conveyancer may at first think that there's something wrong with a title.
In the seventeenth century the English King became frustrated because it seemed that the solicitors of the day were being successful in cheating him out of some of his revenues. Under the taxing laws at that time, revenues were collected and taxes were imposed based upon the wealth of the "lord" whose landholdings were being assessed. So, the lawyers would tell their land-rich clients to convey their properties to their poor serfs "to the use" of themselves. This would vest title in the impoverished workers (whose landholding were negligible), thus requiring the king to tax them (at the lower rate, of course) and yet would allow the lord to retain control over the property (and be able to insist on an immediate reconveyance, if demanded).
The monarch got fed up with this situation and made an appointment with Parliament. The Statute of Uses was enacted in 1535 to prevent (or, more accurately, neutralize) the practice that had caused the monarch's treasury to become depleted. The Statute provides, in effect, that if a conveyance was made "to the use of" another, the use would be "executed" and the "usee" would end up with the full title. So, all the titles that had been held by the poor serfs for the benefit of their land-rich lords would now spontaneously revert to or become vested in the land-rich clients for whom the serfs had theretofore held the title. (Some ingenious barristers wondered what would happen if a use was layered upon a use. They tried it and the courts ruled that the second use was not executed by the Statute. These solicitors accomplished what the Statute was enacted to prevent . . . and they probably earned good fees to prove it!)
The Statute of Uses was adopted as the common law of Massachusetts. In the years preceding the 1960s, one could find examples of it being applied to effectuate real estate transfers between parties, particularly spouses. With there being at the time a prohibition against transfers directly between spouses to create a tenancy by the entirety (the prohibition has since been removed by G.L.c. 184, §8), a deed would be fashioned using the Statute to circumvent the prohibition and save recording costs to boot. For example, if John owned Blackacre and wanted to create a tenancy by the entirety between himself and his new bride Mary regarding the property, John could convey the title to a third party (we'll arbitrarily pick William) "to the use of" John and Mary as tenants by the entirety. So, the grantor would be John and there would be three people mentioned in the grantee clause: William, John, and Mary. The grantee clause would be to "William to the use of John and Mary as tenants by the entirety." The result of this conveyance would be that John and Mary would then hold title as tenants by the entirety. The next deed in the chain of title you'd find would be from John and Mary only. But what happened to William? Don't we need him to sign off? The answer is no. The Statute of Uses executed the use that William took under the deed and immediately caused him to be divested of the title which thereupon became vested in John and Mary. So, what might otherwise look like a bad title is in fact good.
The Indefinite Reference Statute
Some titles look bad, and they would be bad, and in fact have been declared bad under court decisions, but like magic have been made good by the legislature. The various subsections of G.L.c. 184, §25 address in each instance situations that have in the past caused titles to real estate to be unmarketable, and without the statute what looks bad would in fact be bad.
There are a number of basic subsections to G.L.c. 184, §25, but the two most important ones address the following problems:
Bare recitals or indications in instruments excluding generally real estate previously conveyed or by being in general terms of a person's right, title or interest where there is no recorded deed out or other instrument affecting the grantor's title.
A description in a deed of a person as trustee or an indication that a person is acting as trustee unless the instrument itself contains the trust or points to another recorded instrument that contains the trust.
One appreciates the magic of the statute when it is realized how deadly to a title the above situations could be under court decisions which existed before the statute was passed. For example, it had been held that where a description was followed by language that any portion thereof previously conveyed was excluded from the grant, the result was that the grant would be diminished by any out conveyances whether or not they were recorded. Adams v. Cuddy, 13 Pick. 460. Likewise, a reference in a deed to the grantor's "right title and interest" would necessarily exclude from the conveyance any interest that the grantor had previously parted with, or subject the grant to any encumbrances against that interest, whether or not the instruments were recorded.
Also, prior decisions had held that the reference in a deed to the grantee as a "trustee," with no indication where the trust instrument could be found, rendered the title hopelessly unmarketable. Cleval v. Sullivan, 258 Mass. 348.
The statute cures both of these situations and render the title marketable.
Another type of title issue that looks bad but in fact may be good is one that revolves around a homestead, especially in a refinance situation. Many times an owner of property may decide to refinance it after having declared a homestead. The question in such a case is what, if anything, must be done regarding the homestead in order to ensure that the mortgage will be in first position. Where there is a homestead the execution of a mortgage containing a release of the homestead will effectively subordinate the homestead to the mortgage. The release, though in broad terms, if contained in the mortgage, will nevertheless keep the homestead in place with regard to the world generally. See G.L.c. 188, §6. For the release to be effective the spouse, if any, of the grantor must join in (or at least sign) the mortgage. (If the spouses are joint owners they will, of course, appear as mortgagors in the mortgage, but if only one spouse owns the property the second spouse must join in the mortgage, though not necessarily as a mortgagor.) For some reason, many conveyancers are not satisfied that the aforementioned statute does what it purports to do, and require that there be an outright release of the homestead under G.L.c. 188, §7 before the mortgage is granted, with a new homestead thereafter being declared by the owners. This is dangerous because the real estate will become vulnerable to the claims of creditors that arose between the time of the original declaration and the new declaration since either the separate release (i.e., one not contained in the mortgage) or the acquisition of a new homestead will terminate the original homestead. See G.L.c. 188, §2. So, the lack of an outright release of a homestead in a refinancing situation may look bad, but really it's okay.
The real "looks-bad-but-it's-okay" situation is where there's not even a release of the homestead in the mortgage. This is due to the above two statutes - G.L.c. 188, §6 and G.L.c. 188, §7 - working together. Those sections provide as follows:
§6. Property which is subject to a mortgage executed before an estate of homestead was acquired therein, or executed afterward and containing a release thereof, shall be subject to an estate of homestead, except as against the mortgagee and those claiming under him, in the same manner as if there were no such mortgage. (Emphasis added.)
§7. An estate of homestead . . . may be terminated during the lifetime of the owner by . . . a deed conveying the property in which an estate of homestead exists, signed by the owner and the owner's spouse, if any, which does not specifically reserve said estate of homestead.
The case of Atlantic Savings Bank v. Metropolitan Bank and Trust Company, 9 Mass.App.Ct. 286, 400 N.E.2d 1290 (1980) sheds light on the matter and explains how the two statutes permit the effective subordination of the existing homestead to the refinanced mortgage even where there is no stated release in the latter. (The provisions of §7 were somewhat different when Atlantic Savings Bank was decided, but the minor differences in verbiage do not affect the court's analysis and applicability of the decision to the provisions of the current statute.). In Atlantic Savings Bank Mr. and Mrs. McHardy, after having granted a first mortgage to Atlantic Savings Bank, made a declaration of homestead on their property in 1976. Thereafter, they granted a mortgage to Metropolitan Bank and Trust Company. Although the second mortgage was executed by both parties, it did not contain a release of the homestead. After a foreclosure by Atlantic Savings Bank there was a surplus. The question was whether the excess funds generated by the foreclosure sale should be payable to the McHardys, based on the fact that they still held a homestead which had priority over the mortgage of Metropolitan Bank and Trust Company, or whether that bank was entitled to the surplus based on some theory that the homestead had been effectively released with respect to the second mortgage.
The McHardys had taken the position in Atlantic Savings Bank that the homestead had not been effectively released in the mortgage to Metropolitan Bank and Trust Company because the instrument did not contain a "release" of the homestead.
The court said this:
[S]ection  expressly provided that the spouse's signature on a deed was sufficient to release her rights [in a homestead]. * * * The word "deed" as used in §7 includes a mortgage. (Citations omitted.)
In pointing out that a mortgage is a deed, the court was able to apply the provisions of §7 - which called for merely a signature of the spouse - to the applicability of §6. The court dismissed the notion that the two sections were incompatible by stating:
In our opinion, this expedited method for release [by signature only] changed the preexisting case law (relied upon by the defendants) which held, based on outmoded concepts of coverture, that in order to bar a wife's right of homestead not only was the wife required to join with her husband in the conveyance by executing the instrument, but also the conveyance, so executed, must have contained apt words expressly releasing her homestead right.
The net result of all this is that the absence of an outright release of a homestead (which is dangerous enough by itself) or the failure of the refinanced (or even purchase money) mortgage to contain a specific release is not an issue with respect to the various priorities between the mortgage and the homestead.
Read more about homesteads in the Counsel Q&A section of this newsletter.
Discharge of Mortgages
A mortgage is given to two or more persons and only one of them gives a discharge. What's up with that? At first, the situation looks like a title issue, but in fact everything may be just fine.
The first thing to remember about mortgages is that they are governed by the common law and not by statute, at least on the question of the tenancy under which they are held. At common law, a deed, or other conveyance to two or more persons vested the grantees as joint tenants. In Massachusetts that rule was changed in 1785, with the enactment of the predecessor to G.L.c. 184, §7. That statute essentially states that conveyances to two or more persons vests them as tenants in common. However, the statute carves out from its coverage mortgages and deeds or devises in trust. The latter types of conveyances still to this day remain governed by the common law and title acquired under them is deemed to be held jointly. So, the first instance when there can be a mortgage to two or more persons followed by a discharge from only one of them is where one of the mortgagees has died. In this regard, see the case of Bertolami v. Corsi, 27 Mass.App.Ct. 1132, 537 N.E.2d 1271 (1989). (The Bertolami court cited, but did not apply, Park v. Parker, 216 Mass 405 (1914), which had announced an exception to the joint tenancy rule regarding mortgages.)
But what if all (or some, but more than one) of the original mortgagees are alive? Who can give a discharge then? Although G.L.c. 184, §7 addresses the tenancy by which mortgages are held, another statute, G.L.c. 183, §54, makes provision for a discharge to be signed by less than all the mortgagees. This latter statute speaks not in terms of joint tenants, but rather refers to joint holders of the mortgage, and provides that one of two or more joint holders of a mortgage may discharge it. Some conveyancers might find this statute surprising, but in fact it appears to me that the statute is nothing more than a codification of the common law that a release by one of two or more obligees will effectively extinguish the debt (and, if it is secured by a mortgage, a fortiori, causing the mortgage to fail) and bar an action upon its enforcement by the other obligees. Though it would have no impact on the effectiveness of the discharge, the obligee giving the release will be bound to account to his co-obligees. See Myrick v. Dame, 9 Cush. 248 (1852). See also, Crocker's Notes on Common Forms, Seventh Edition, Little Brown and Company (1955), §553.
As you can see, the question of a discharge from one of multiple mortgagees is just another example of a title issue that may make a title look bad when in fact it is good.