The Perils of Quitclaims

The Perils of Quitclaims H. Martin Gibson mgibson@lockelord.com November 10, 2016 North Houston Association of Professional Landmen Houston, Texas

The Texas Recording System • English System: • Possession of land was the only evidence of title. • Transfer of title was only in the memory of witnesses. • Symbolic delivery of possession – livery of seisin. • Feoffor gives the feoffee a handful of earth or other symbolic object. • If done on the land it was a livery in deed. • If off the land (but usually in view of the land) called livery in law. • No writing required. • Under Roman rule, written conveyance became common but was only evidence of title not the conveyance itself.

The Texas Recording System • Before the Statutes of Fraud, if Owner conveyed to A and then later conveyed to B. • A wins based on maxim “first in time is first in right;” and • A wins because O has nothing left to convey. • Writing not required to convey title until Statutes of Fraud adopted.

The Texas Recording System • Originally, no distinction between legal and equitable titles, then • Legal Title was title owned by freehold owner. • Equitable title was a right owned by someone other than the freehold owner who held an equitable right to get a judgment to the land. • A grantee taking without notice of the equitable claim took free of that equity. • A grantee taking with notice took subject to the equity even after paying fair value.

The Texas Recording System • Types of Recording Statutes. • Race. • Purchaser who records first prevails, regardless of notice. Delaware, North Carolina, Louisiana. Arkansas and Ohio seem to be Race jurisdictions for mortgages but Notice for other instruments.

The Texas Recording System • Types of Recording Statutes: • Race – Notice. • Subsequent purchaser without notice must file for record before recordation of the prior unrecorded interest. Alaska, California, Colorado, Hawaii, Idaho, Indiana, Montana, Nebraska, Nevada, New Jersey, Oregon, South Carolina, South Dakota, Utah, Wisconsin, Wyoming. • Notice. • Subsequent purchaser or lienholder who acquires an interest without notice of a prior unrecorded conveyance or lien prevails regardless of when the subsequent purchaser’s deed is recorded, if ever.

The Texas Recording System O A C C pays value has no notice and records. B wins because B was a BFP BUT -- in most notice states C wins. conveys to does not record owns Blackacre minerals conveys to records B If B has no notice of A and pays value, B wins even if A later records. conveys to does not record D D is BFP -- pays value and no notice, i.e. B does not record D wins. conveys to BFP, records Time

The Texas Recording System O A C What if B records before conveyance to D? If B was BFP, B wins. B wins over A because Texas is a notice state. B B wins over D because recording is constructive notice to D. What if D recorded, but had notice of B or took by Quitclaim from O -- B wins whether or not B records. D Time

The Texas Recording System • Texas is a Notice jurisdiction.

The Perils of Quitclaims A quitclaim deed Does not establish title in those holding under it. Passes the interest of the grantor in the property. For the quitclaim to be a conveyance, title in the grantor must be shown. In Texas, the grantee of a quitclaim Takes with notice of all defects in his grantor’s title Including all equitable claims and unrecorded deeds in existence before the delivery of the quitclaim deed to the grantee.

The Perils of Quitclaims Texas occupies a minority position on the issue and, in some respects, stands alone. Quitclaim issue Relevant to all conveyances and security transactions affecting real estate, including mineral interests, oil and gas leases, RE leaseholds, and mortgages. Many assignments of oil and gas leases contain quitclaim-type granting language “All of assignor’s/mortgagor’s right, title and interest” Disclaim warranties

The Texas Recording System Chain of title C is not in B's or D's chain O A C X not in B's or D's chain B If B has no notice of A and pays value, B wins even if A later records. D is BFP -- pays value and no notice, i.e. B does not record, D wins. D Time

The Texas Recording System • Constructive Notice. • Instruments filed for record within the chain of title impart constructive notice. • Instrument of record that does not meet the statutory requirements for recordation does NOT give constructive notice. • But may impart actual or inquiry notice to one who learns of its existence. • Statute allows clerk to refuse an instrument for failure to pay filing fee. • If deed is accepted by clerk but not recorded pending payment of fee, still notice to subsequent purchasers. • Instrument properly filed for record but not yet indexed or not properly indexed gives constructive notice upon filing. • Instruments meeting statutory requirements for recordation, once filed, impart constructive notice even though never actually or accurately recorded or indexed. • Except abstracts of judgment and lis pendens.

The Texas Recording System • Bona Fide Purchaser: • Examiner cannot determine whether any party in chain is a BFP. • BUT, if title passed by quitclaim, grantee and grantee’s successor are not BFPs as to claims existing at the time of the quitclaim deed. • Definition of BFP: • One who, in good faith, pays valuable consideration without actual, constructive, or inquiry notice of an adverse claim. • Good Faith Purchaser, Bona Fide Purchaser, and BFP all have the same meaning. • A lender meeting the same requirements can be a BFP. • Recital in deed that consideration was paid is not sufficient; consideration must be independently proven. • Can be a BFP even if you pay less that the true value of the land, unless the price paid is “grossly inadequate.” • $5 for land then worth $8,000 will not cut it. • Mortgage for antecedent debt is not payment of sufficient value.

The Texas Recording System • BFP • Good Faith. • Whether a person takes in good faith depends on whether the purchaser is aware of circumstances within or outside the chain of title that would place the purchaser on notice of an unrecorded claim or that would excite the suspicion of a person of ordinary prudence. • Grantee of a quitclaim deed cannot qualify as a BFP against unrecorded instruments and equities that existed at the time of the quitclaim. • Use of quitclaim attests to the dubiousness of title. • Q/C conveys whatever interest the grantor owns, the grantee takes subject to outstanding interests or defects, whether or not recorded and whether or not the grantee is aware of it. • In Texas, all subsequent purchasers in the chain are subject to unknown and unrecorded interests that were outstanding at the time of the quitclaim.

The Texas Recording System • BFP • Quitclaim. • A stipulation by parties that purchaser is a BFP is not effective; stand on own facts. • Principle that a deed is a quitclaim if it conveys only a grantor’s “right, title, and interest,” as opposed to a specific interest in described land, has never been overruled. • Blanket conveyances of a grantor’s interest in land in a county or in the entire state, have generally been held to be quitclaims. • Two exceptions: • Statute provided that officer’s sale of a judgment creditor’s property at an execution sale, even though in form of all right, title and interest, will still treat the purchaser as an innocent purchaser without notice. • Q/C to an owner redeeming property under the Tax Code is not a notice of an unrecorded instrument.

The Perils of Quitclaims Rule in Texas Grantee under quitclaim conveyance cannot: Avail himself of the defense of an innocent purchaser without notice. Deemed to take whatever title the grantor had at the time of the conveyance subject to all defects thereto and adverse legal and equitable claims. Deemed to be on notice of all outstanding legal or equitable unrecorded title in favor of third parties at the time the quitclaim instrument was delivered to him. Subsequent grantee in a chain of title that includes a quitclaim, no matter how remote, takes subject to any unknown and unrecorded interests outstanding at the time the quitclaim was executed. A warranty deed to land conveys property: a quitclaim deed conveys the grantor’s rights in that property, if any.

The Perils of Quitclaims Rule in Texas The notice to which the grantee is subject is not just inquiry notice but is notice as to all claims. “The question is not one of being merely put upon inquiry; the notice is absolute and conclusive as to all claims.” Why? Taker under a quitclaim takes only such title as the grantor had at the time of the conveyance. Takes only the grantor’s “chance of title.” Quitclaim places the grantee on notice of such adverse claims as actually exist, thus rendering him a purchaser with notice who is not protected under the recording statute. “Such notice, or any notice of the fact that there is a better title, excludes good faith from the transaction.”

The Perils of Quitclaims The Effects of a Quitclaim A quitclaim conveys the current title of the grantor. One claiming under or through a quitclaim deed may be a bona fide purchaser of the title of the grantor free of the secret equities of the grantor, but not of secret equities of others. See Meacham case on page 8 of the paper.

The Perils of Quitclaims After-Acquired Title General rule with respect to conveyances of land or of a specified right or interest: A subsequently acquired interest in that land or in that specified right or interest would pass instantly to the grantee under the doctrine of after-acquired title. The doctrine of after-acquired title does not apply to conveyances that are quitclaims.

The Perils of Quitclaims Statutorily Implied Covenants Section 5.023 of the Texas Property Code says: Use of “grant” or “convey” implies only that the grantor covenants to the grantee: Grantor has not previously conveyed the estate or any interest in the estate to a person other than the grantee; and At the time of the execution of the conveyance the estate is free from encumbrances.

The Perils of Quitclaims Statutorily Implied Covenants In Baldwin v. Drew, Moore conveyed to Drew but subject to undisclosed trust for payment of purchase price. Drew conveyed to Baldwin by quitclaim containing “grant” and “convey.” Baldwin says, “I win.” Court: Therefore, as a conveyance, it … is of a dignity less than a conveyance of an estate of inheritance or an estate in fee, and for this reason the statute does not apply to a strictly quitclaim deed. (emphasis added).

The Perils of Quitclaims Cured by a Subsequent Deed? Is this the law? Once the grantee, placed on notice of prior defects by receiving a quitclaim, has conveyed the property by a deed to a subsequent purchaser for value and without notice, that subsequent purchaser is protected in full. No. “It is earnestly insisted, that such protection does extend to one where the quitclaim deed appears to have been to a remote grantor [and] that, even if such quitclaim to a remote grantor would be sufficient to put all grantees thereunder upon notice … such remote grantee is only required to use reasonable diligence to ascertain the existence of such outstanding title … A careful review of the Texas Supreme Court cases …conclusively demonstrate[s] that all the contentions of the defendants have been foreclosed adversely to those contentions by a long line of decisions.”

The Perils of Quitclaims Sales by Administrators Texas Supreme Court, p.13 White v. Dupree: But what is clearly decided in the case cited [Taylor v. Harrison, 47 Tex. 454 (Tex. 1877)] is that whether a purchaser at an administrator’s sale, without actual or implied notice of a prior unrecorded deed, can claim protection against the previous conveyance, does not depend upon the form of the deed; but that if it appears from the whole transaction that it was the purpose to sell, and the intention of the purchaser to buy, the land itself, and not a mere claim upon it or a chance of title, he may be an innocent purchaser.

The Perils of Quitclaims • Sheriff's deed. Case on p. 13: Parties had stipulated that each party was a bona fide purchaser for value. Held: Contrary to the parties' stipulation that appellant was "a bona fide purchaser for value," the proper legal conclusion to be drawn from the facts of the case is that appellant was not a bona fide purchaser for value without notice and was not entitled to the protection afforded a bona fide purchaser for value without notice. Appellant claimed title through a sheriff's deed, which only conveyed to appellant "all the rights, title, interest and claim of the said John Montalvo" in and to the subject property. We hold that, in our fact situation, the sheriff's deed was in the nature of a quitclaim deed. Before statutory change.

The Perils of Quitclaims Grants by a group of heirs can, at times, be given special consideration when identifying the type of conveyance. Moore v. Swift, p. 14: ... then it is fairly made to appear that Swift bought the land, and not the mere chance of title. It is undisputed that he paid full value for the land … Against this is the fact that in the conveying clause the grantors undertook to convey only their right, title, and interest. But this does not necessarily militate against the construction adopted by the trial court. To the instrument in question there were six grantors. They conveyed as heirs of the decedent, Jane Mast. Their interests were doubtless undivided, and it was not especially significant of a purpose to convey only a chance of title that they used the words, "all our and each of our right, title, claim, and interest," etc.

The Perils of Quitclaims • Bryan v. Thomas Subject to ownership 1/3 each by B. Bryan, C. Bryan and Johnson B. Bryan buys ½ in 1924 Unrecorded 1936 B. Bryan conveys 1/12 minerals to C. Bryan and Johnson Recorded Heirs of B. Bryan convey to Thomas in 1960 Thomas: I received 1/3: ½ - 1/12 – 1/12 C. Bryan and Johnson: Thomas got 1/6: 1/3 of 1/2

The Perils of Quitclaims Bryan v. Thomas Deed from B. Bryan’s Heirs: . . . grantors “have granted, sold, conveyed, assigned and delivered and by these presents do grant, sell, convey, assign and deliver unto the said grantee all of our undivided interest in and to all of the oil, gas and other minerals in and under and that may be produced from the following described land situated in Hunt County, Texas. Grant of access for mining. Grantee shall own all gas and other minerals in and under said lands, together with all royalties and rentals that might be provided in future oil and gas leases. Court: To remove the question from speculation and doubt we now hold that the grantee in a deed which purports to convey all of the grantor’s undivided interest in a particular tract of land, if otherwise entitled, will be accorded the protection of a bona fide purchaser (emphasis added).

The Perils of Quitclaims Bryan v. Thomas Likely would not have been a quitclaim under Cook v. Smith. Addition of “if otherwise entitled” muddies the water. Explanation of Walter Conrad TLR 1963: The court addressed itself to all deeds combining quitclaim language, such as “all my right, title and interest,” with a general warranty clause or words of conveyance normally found in warranty deeds. The court said if an instrument contains such dual elements it will not be regarded as a quitclaim. This redefinition means that grantees claiming under the deed, immediate or remote, may rely on the recording acts.

The Perils of Quitclaims Geodyne v. Newton, 2005, p. 16 Deed: “all of [Assignor’s] right, title and interest” in the described lease “AS IS AND WHERE IS, WITHOUT WARRANTY OF MERCHANTABILITY,” (2) provided that “this Assignment hereby conveys to Assignee . . . all of Assignor’s right, title and interest on the effective date hereof in and to the Property,” and (3) concluded in the habendum clause that the assignment was “WITHOUT WARRANTY OF TITLE, EITHER EXPRESS OR IMPLIED.” Texas Supreme Court Quitclaim as a matter of law. Assignment did not state “the nature or percentage interest that was being conveyed.” “a quitclaim deed without warranty of title cannot be a warranty (or ‘misrepresentation’) of title.”

The Perils of Quitclaims Enerlex v. Amerada Hess, Eastland Court of Appeals 2009 Deed conveyed “all right, title, and interest,” not my right, title and interest. Contained general warranty and had no “as is” or “without warranty” language. Held that it was a quitclaim because it did not purport to convey any specific percentage interest in the tracts. Conclusion: Appears that any conveyance of the grantor’s “right, title, and interest” in specified lands that does not quantify the interest being conveyed would be construed as a quitclaim, regardless of what the other provisions of the instrument say.

The Perils of Quitclaims Jackson v. Wildflower, Amarillo Court of Appeals, October 2016. Fuller deeded minerals to his 3 children. Their heirs signed a deed of trust. It was foreclosed. The bank's agent purchased the property for the bank. On Nov. 23 the Agent delivered a quitclaim to Jackson it was recorded on Dec. 3, 1993; on November 30, another side of the bank delivered a quitclaim to Wildflower; it was recorded on December 14. The quitclaims conveyed "a portion of the Grantor's right, title, interest, estate, and every claim and demand, both at law and in equity, in and to that part of the oil, gas and other minerals in and under and that may be produced from the following described lands situated in Wheeler County, State of Texas," Wildflower said Jackson's deed is void because Wildflower got its deed before Jackson recorded. Jackson said the Wildflower deed is a quitclaim so Wildflower was on notice of Jackson's deed. The court found that the Wildflower deed was a quitclaim and was poorly drafted. It conveyed a "portion" of a "part" but defined neither, conveys right, title, and interest, and contained no covenant of seisin. Jackson won because the Wildflower deed was a quitclaim and put Wildflower on constructive notice of Jackson's deed; it did not matter that Jackson's deed was also a quitclaim.

The Perils of Quitclaims Analysis Tools “All my right, title, and interest,” exposes the deed to quitclaim treatment. Statement of conveyance of specific interest helps avoid quitclaim. Description of the property, without specific interest owned, does not avoid quitclaim. Covenant of Seisin (“I have the right to convey Blackacre”) avoids quitclaim treatment -- but few cases. Warranties. Probably most difficult aspect to judge. Many cases hold that warranty is irrelevant as it is a contract between parties, but some point specifically to presence of warranty clause as determinative. Bryan v. Thomas had a warranty, so did Enerlex. Different results. Warranty may “cast light” on the question but not determine it.

The Perils of Quitclaims Analysis Tools Consideration. Several cases find that inadequate consideration (paying less than even a “good deal”) indicates a quitclaim. Cook v. Smith found that a global conveyance saved what would have been a quitclaim: “and it is my intention here now to convey to the said A.A. Neff all the real estate that I own in said town… whether it is set out above or not.” Specific references help: “the twenty acres herein conveyed” and a reservation of undivided mineral interest amounting to 10 acres of the 20 acres avoided quitclaim treatment.

The Perils of Quitclaims Analysis Tools An instrument conveying “my entire interest in and to 200 acres of land … and being the same land bequeathed to us and at my death my entire interest in said land and premises is … conveyed to my sister,” was not a quitclaim. Contrast: “all the interest I now have as an heir in my father’s estate to which I was entitled at the death of my father, as heir … or to which I may be entitled in his estate….” held to be a quitclaim as “manifestly restrictive to the possible inheritance of the grantor in his father’s estate as to render it clearly and obviously a quitclaim.” “any and all lands and interest in land belonging to [company]” was a chance at the title and a quitclaim.

The Perils of Quitclaims A proposal for a legislative cure was circulated at a subcommittee of TLTA in 2014 in anticipation of the 2015 Legislative Session, but was rejected by the full TLTA legislative committee. Here was the proposal: Tex. Prop. Code § 13.001 §13.001. Validity of Unrecorded Instrument. (a) A conveyance of real property or an interest in real property or deed of trust is void as to a creditor or to a subsequent purchaser for a valuable consideration without notice unless the instrument has been acknowledged, sworn to, or proved and filed for record as required by law. (b) The unrecorded instrument is binding on a party to the instrument, on the party’s heirs, and on a subsequent purchaser who does not pay a valuable consideration or who has notice of the instrument. (c) This section does not apply to a financing statement, a security agreement filed as a financing statement, or a continuation statement filed for record under the Business & Commerce Code. (d) A grantee for valuable consideration under a quitclaim deed may be a subsequent purchaser for a valuable consideration without notice.

The Perils of Quitclaims d) A prior recorded conveyance or transfer in a chain of title in the form of or containing the terms of a deed of quitclaim and release shall not affect the question of good faith of a subsequent purchaser, or be itself notice to such subsequent purchaser of any unrecorded conveyance of, transfer of, or encumbrance on the same real estate or any part thereof. Another suggestion follows Texas Tax Code Section 34.21: (d) A quitclaim deed is not notice of an unrecorded instrument or claim. The grantee of a quitclaim deed and a successor or assign of the grantee may be a bona fide purchaser in good faith for value under recording laws.

The Perils of Quitclaims Possible solutions: Use a deed without warranty. Convey a specified interest in a tract of land, and disclaim all warranties. Convey all interest I own of record in a specified tract (would not be sufficient for Enerlex). Convey a specific interest in land and follow with an additional conveyance of “all my right, title, and interest.” Global conveyances, in spite of Enerlex, are probably good: “all interest that I own in the East ½ of Section 6.”

The Perils of Quitclaims Presented toNorth Houston Association of Petroleum Landmenby H. Martin Gibsonmgibson@lockelord.com

The Perils of Quitclaims