“Chain of title” is a collection of documents used to find the true owner of a parcel of real estate. Sometimes, the “chain” has weak links and this case exemplifies the pitfalls of transferring title when multiple parties are involved.
Under the facts of this case, two individuals formed a rental property partnership after they purchased a duplex. The prior owners conveyed the property to the individuals, not to the partnership. Months later, the property was conveyed to the partnership. In 2003, one of the partners borrowed $162,000 from a mortgage company. The note was secured by the rental property, even though it was owned by the partnership. Later that year, the partner who borrowed the money attempted to convey the property, once again. The “corrected warranty deed” specified that the two partners were conveying the rental property individually to one of the partners and his spouse (the other partner was attempting to unload his interest in an effort to keep his child support obligations from being a lien against the property).
Confusion over the title to the rental property came about when the partnership decided to sell the property and conveyed the property by warranty deed to two individuals. The buyers obtained a mortgage secured by the real estate. After this transaction, the partner who had secured a mortgage against the property defaulted. The bank filed a petition to foreclose and the status of the title became a major issue for the partner, the new owners, and their financier.
At trial, the new owners and their bank filed a motion asking the court to hold that the first mortgage on the property was invalid and, thus, could not be foreclosed on because the new owners were bona fide purchasers. Unfortunately for the partnership, the court determined that the partner with the mortgage never properly obtained title to the property. As a result, the mortgage held by the first bank was “null and void.”
On appeal, the Iowa Court of Appeals agreed with the trial court. The first bank lent money to a party that had no interest in the rental property. The property was conveyed to the partnership in 2002 and only the partnership could transfer title, not an individual partner.
The case demonstrates the need for banks and lending departments to investigate the validity of title before lending money to individuals. Deutsche Bank Nat. Trust Co. v. Gaupp, No. 0-272/09-0700 (Iowa Ct. App., Jun. 30, 2010)