Modern American Mortgage Corp. v. Nelson

Citations: 250 Ark. 928; 469 S.W.2d 124; 1971 Ark. LEXIS 1355Docket: 5-5592

Court: Supreme Court of Arkansas; June 14, 1971; Arkansas; State Supreme Court

Lead Opinion SummaryLead Opinion OriginalDissent AnalysisDissent Original

EnglishEspañolSimplified EnglishEspañol Fácil

The trial court voided a deed from William R. and Doris Nelson to Jimmy Ray Jones and a mortgage from Jones to Modern American Mortgage Corporation (appellant). The appellant argues for reversal on three grounds: 1) insufficient evidence of fraud or misrepresentation in obtaining the warranty deed; 2) the Nelsons' failure to read the warranty deed should prevent them from contesting the conveyance; and 3) Modern American Mortgage is a bona fide purchaser without notice of defects, thus not liable for the fraud claim. 

The Nelsons lived on a plot of land in Smackover, Arkansas, and entered into a construction contract with Jones, who operated as Imperial Builders, on June 20, 1969. The contract stipulated a payment of $10,300 for the new house, contingent upon loan approval from Modern American Mortgage. In July, the Nelsons executed another contract due to unclear terms. An FHA loan commitment was secured on August 26, 1969, and a construction mortgage was executed by Jones on September 15, 1969, relying on a title insurance binder showing Jones as the property owner.

After advancing $6,310 for the loan, Jones went bankrupt before the house's completion. Mrs. Nelson later discovered they had unknowingly signed a deed transferring their land to Jones on September 4, 1969. She testified they were not aware they were signing a deed, as they signed several papers without reading them, believing it was necessary to continue the construction process.

Mr. Nelson’s testimony aligns with Mrs. Nelson's, with the addition that he recalled signing an FHA commitment application and a credit check authorization. John Kooistra, senior vice president of the appellant, confirmed that the June 20th contract was in the appellant’s files and that the FHA commitment was obtained for the Nelsons' loan at the request of Imperial Builders. He stated that the appellant relied solely on the title insurance binder without verifying possession of the premises, and disbursements totaling $6,510.00 were made based on FHA inspections. Kooistra noted that before granting a construction mortgage, the appellant required a take-out letter from a lender and the builder’s contract. 

Jimmy Ray Jones denied being present during the signing of documents by the Nelsons but acknowledged that Miller, his salesman, had been involved and that he was unable to contact Miller. 

The appellant contended that the transaction was standard and that the Nelsons' claims of misrepresentation regarding the warranty deed execution were unfounded. However, evidence suggested that the Nelsons lacked knowledge about the FHA commitment requirements, and the builder misrepresented the necessity of signing the conveyance for construction to proceed, as the contract did not stipulate this requirement.

The appellant argued that the Nelsons should be estopped from denying the conveyance based on precedents from Upton v. Tribilcock and Stewart v. Fleming, which emphasize a contractor's responsibility to understand their contract. However, the court highlighted that in cases of misrepresentation, especially when the information is uniquely known to one party, the other party has the right to rely on its truthfulness. Given the context, Jones's experience as a builder contrasted with the Nelsons' inexperience, leading the court to conclude that the Nelsons were justified in their reliance on Jones’s representations, countering the appellant's estoppel argument.

Appellant, as the assignee of Jones, does not hold a stronger position than Jones unless classified as a bona fide purchaser for value without notice. The legal question of whether a subsequent purchaser or mortgagee can claim this status while the grantor maintains possession after a conveyance has been previously addressed in several cases. The principle established in *American Bldg. Loan Assn. v. Warren* specifies that actual possession, even if unrecorded, signifies equitable rights, thereby alerting subsequent purchasers or mortgagees to the occupant's claims. It is generally accepted that actual, visible, and exclusive possession serves as public notice of the possessor's rights, necessitating diligent inquiry from any prospective purchaser or mortgagee. However, it is argued that this principle does not apply when the grantor retains possession post-conveyance, as the law presumes the grantor’s possession is subordinate to the title conveyed. 

In this case, appellant secured an FHA commitment for a construction loan to the Nelsons, contingent upon receiving a builder’s contract indicating that the Nelsons owned the lot for the new house. Appellant also depended on FHA inspections related to this commitment to disburse funds to Jones. Therefore, it is unreasonable to assume that the Nelsons' possession was merely at Jones's sufferance. Consequently, appellant does not qualify as a purchaser for value without notice against the Nelsons, leading to the affirmation of the decree, with dissenting opinions from Justices George Rose Smith and Fogleman.