Recent Florida District Court Case Underscores Value of Title Insurance (and Recording Savvy) in Real Estate Transactions

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The recent Florida case of Mayfield v. First City Bank of Florida[1] contains an instructive look at what can happen when the usual mechanics of recording deeds and mortgages in a real estate transaction break down.  Several important lessons emerge from the case. 

The facts concerned what began as a very typical residential real estate transaction.  In 2006, Wright & Associates of Northeast Florida (“W&A”) purchased a lot in a subdivision in Walton County from Bluewater Real Estate Investments (“Bluewater”).  W&A mortgaged the lot to First City Bank of Florida (“First City”).  Both the deed and mortgage were recorded in the office of the Clerk of the Circuit Court in Walton County, Florida, which was the proper place for recording under Florida law.[2]

The Clerk, as usual, stamped an instrument number, as well as book and page numbers, on the original documents and created a digital image of them in the “Official Records,” an electronic registry of indexed documents required by Florida law to establish the chain of title to real property, as well as the priority of claims and encumbrances against it.

From here on, however, the facts become a lot less typical.  Exactly 73 minutes after recording, the clerk realized she had made an error in the recording process and voided the W & A deed and First City mortgage from the Official Records.  In effect, she cancelled the recording, without informing W&A or First City.  Apparently, the clerk intended to re-record the documents after she corrected the error, but, unfortunately, she later recorded two similar documents that concerned an entirely different parcel of property.  

This was bad in itself, of course, since a voided instrument doesn’t appear in the Official Records (as though it had never been recorded) and wouldn’t be findable in any later search under the names of the parties.  However, to make matters worse, the clerk’s office then returned the original deed and mortgage, stamped with the Official Records book and page numbers, to the purchaser and mortgage holder, giving them every reason to assume that the documents were of record and gave notice of their existence to the world. 

Remember: Florida has a so-called “notice” recording statute.[3]  This means that your claim of title to or a lien upon real property is only good against another purchaser or mortgagee of the same property if you receive a deed or mortgage first AND the competing party has “notice” of your instrument when he records his.  If the competing party doesn’t have actual notice of your instrument (e.g., he actually saw your deed delivered to you) or has “constructive notice” of your instrument (i.e., your deed is properly recorded in the county Official Records), then the other instrument gives the competing party a better title or lien than yours, even though you received your instrument first.

Thus, when Blue Water sold the same lot again in 2009[4] to Mr. and Mrs. Mayfield (who mortgaged the lot to a different bank[5]), the Mayfields didn’t know, and had no way of knowing, that the lot had already been sold to W&A and mortgaged to First City.  Imagine the Mayfields’ surprise, then, when they received a summons notifying them of the filing of a foreclosure action against their property by First City against W&A, which by this time had stopped paying its mortgage.

The unique facts of this case presented a case of first impression on appeal that led to a surprising (but not unexpected) outcome: First City Bank wins against the Mayfields and BB&T.  Reviewing the language of the Recording Act and previous appellate decisions under different facts, the First District Court of Appeal reasoned that Florida’s Recording Act doesn’t say how long an instrument must be of record in order to be “recorded” for purposes of giving constructive notice to the world that it exists.   The Recording Act only says that the instrument has to be “recorded,” even if the instrument is recorded for only 73 minutes.[6]

This is a hard result for the Mayfields and their lender.   One might question the wisdom of such a holding from a public policy perspective if, for example, we consider which policy is most likely to limit the loss suffered from a mistake by the Clerk’s office in recording documents.[7]  If the court had held that an instrument is “recorded” only if it is recorded on the date a competing claimant records its instrument, then the loss would have been placed on (and limited to) W&A and its lender alone.  However, the holding in the Mayfield case means that, theoretically, every subsequent purchaser or mortgagee in the chain of title that began with the Mayfields would have lost its claim, since, paradoxically, each of them had constructive notice of instruments that could not be found by a search of the public records.   Thus, the scope of the potential loss is greatly expanded.  Could this case be a signal that we need legislative change to the Recording Act?  One might well conclude so.

In the meantime, however, here are a few lessons to be gleaned from the pages of the Mayfield case:

  1. The Mayfields’ loss is exactly the kind of result that title insurance is designed to cover.   Along with the risks of forgery, fraud, and other problems not disclosed by the public records, the title insurance company assumes the risk that a recording clerk will make a mistake in recording your documents, leaving the priority of your transaction unprotected.  Don’t forego title insurance because you think you have a simple or routine transaction — such was the Mayfields’ transaction. 
  2. Make sure that your title insurance commitment is marked or endorsed at closing to insure that your ownership is insured through the date and time of the closing.  Thankfully, Florida has a statute that effectively requires the title insurance company to provide coverage as of this date if it is disbursing funds in connection with closing a transaction, but most real estate lawyers require the update notation or endorsement anyway.  
  3.  As a double check on the title insurance company, learn to use the online Official Records of the local clerk of circuit court, which, within a few days of closing in most counties, will enable you to see your recorded documents online in the county Official Records over the internet.  In view of the Mayfield case, it may be a good idea to check the records again a few days or weeks later, to be sure that the recording hasn’t been cancelled.  No kidding.

[1] — So.3d —-, 2012 WL 3115140, 37 Fla. L. Weekly D1848a (Fla. 1st DCA, August 2, 2012

[2] Instruments affecting title to real property must be recorded in the Florida county in which the real property is located. 

[3] The court cites the Recording Act several times in its discussion, see F.S. 695.11

[4] The case doesn’t discuss how this happened, whether accidentally or purposefully – regardless, the result is the same as far as the holding in the case is concerned. 

[5] Their original lender was Old National Bank, but the BB&T later acquired the note and mortgage.

[6] Based on the case, the actual time recorded is likely irrelevant: recording for any time is probably sufficient.

[7] The court noted that the Mayfields might consider a lawsuit against the county clerk’s office, which the court noted, in dicta, does not have sovereign immunity under the facts of the case.

 

Published In: Finance & Banking Updates, Insurance Updates, Residential Real Estate Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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