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CONSTRUCTIVE
NOTICE
1
The first common law rule was “first in time is first in right”, illustrated as:
(time of conveyance) 1
O -------------------------------- A
(time of recording) UR
2
O -------------------------------- B
UR2
Some principles originally contained in the earliest
recording statutes that are still important:
1. An instrument is fully operative between its parties
without recordation;
2. The essential features of a transaction are made a
matter of public record;
3. Acknowledgment of an instrument is required for
recordation; and
4. If a first purchaser is negligent and does not record,
the grantor can divest him of title by making a
second conveyance.3
Benefits of the Recording
Statutes:1. They benefit the first purchaser because the
first purchaser can verify that he is first fromprior recording.
2. They benefit the seller because they assurethe seller he can receive fair market value forhis conveyance because he can confirm hisownership.
CONFIDENCE4
A “purchaser” is a person who pays present
consideration to acquire an interest in land from the
present owner, such as:
1. The buyer of the legal title
2. A mortgagee or other creditor
3. An assignee of a mortgagee or a person with a
legal interest
4. The buyer at an execution or other forced sale, if
he pays consideration in addition to crediting his
lien against the property.5
Some States provide that the following
persons are not recognized as “purchasers”:
1. Donees
2. Heirs and devisees
3. Creditors - sometimes
4. Assignees for the benefit of creditors
5. Persons who have a filed a lis pendens
6. Mortgagees, where the consideration was a
preexisting debt.
6
Additional parties most Courts do not
classify as “purchasers” are:
1. Grantee of a stranger to record title.
2. A person claiming through an unrecordedconveyance.
3. Owners of equitable interests, such as:
a. Heirs of a spouse
b. Resulting and constructive trusts
c. Mortgage in form of a deed absolute
d. Adverse possession7
All states require that to establish the affirmativedefense of being a bona fide subsequent purchaser(BFP) the party must prove:
1. Payment of a valuable consideration
2. Good faith (no intent to take an unfair advantageof a third person)
3. The absence of notice, either actual or constructive, of the rights of third parties
4. Timely recording.
The states differ as to placing the burden of proof oneither the first purchaser or the second purchaser.
8
The Types of Recording Statutes are:
1. Race statute – gives priority to the first granteeto record. The concept of “notice” is not anissue.
2. Notice statute – gives priority to the granteewho acquires without notice of a prior transfer.
3. Race Notice statute – gives priority to thegrantee who acquires without notice, but only ifthat grantee records first.
9
The Race Statutes
Representative States – Arkansas and Louisiana
In these states, recording is the final act in transferring titleand recording is the determining factor in resolving adispute between conflicting parties.
The exceptions are:
1. Subsequent purchasers cannot use fraud or delaythe recording of the earlier instrument.
2. The title of a purchaser or mortgagee is subject toany prior interest identified in the conveyance to him.
10
The Notice Statutes
Representative States – Kansas, New Mexico, Texas
and West Virginia
The “notice” type statute grants priority to a
subsequent purchaser only if he, at the time of
delivery, has no notice of the prior conveyance.
The statute protects a subsequent purchaser who
takes without notice whether or not the
first/prior purchaser ever records.11
The Race-Notice Statutes
Representative States – Arkansas, California, Colorado,Michigan, Montana, North Dakota, New York, Ohio,Oklahoma, Pennsylvania, Utah, West Virginia and Wyoming
In a race-notice state the priority is given to the firstpurchaser who records without notice of the priorconveyance.
The Courts have not consistently interpreted the differentstatutes so that the effective rule in a state may not beconsistent with the statute. Also, commentators andpractitioners differ on how they categorize the states. Seethe Smart Chart – Exhibit B.
12
Some property interests are not in writing and thus not subject to the penalty ofthe recording statutes. These property interests usually arise as an operation oflaw, not by agreement of the parties:
1. Adverse possession
2. Community property interest of a spouse who is not a prior
grantee.
3. Resulting and constructive trusts
4. Title by descent
5. Easement by prescription or easement by necessity
6. Vendor’s lien
7. Other equitable liens
8. Right of reformation or rescission.
Most of the interests above are considered equitable interests, but 1,4, and 5 are legal.
13
There are some types of instruments that do notreceive the benefit of either the recording statutes orthe equitable doctrine of BFP. The followinginstruments are either void or voidable:
1. Forgery
2. Mistaken identity
3. Agent without authority (ancient document rule)
4. Minority
5. Incapacity14
Constructive Notice
Constructive Notice is imposed as a matter of law from:
1. Proper recording
2. Actual possession
In every state except for Colorado, an instrument must be properlyacknowledged to be recordable. In most states, the filing fee is acondition to proper filing. In some states the mailing address of thegrantee is a requirement, but not a condition, to proper filing.
In most states an instrument provides constructive notice from themoment it is properly filed. In other words, actual recording of theinstrument in the record books is not required.
15
Indices – Tract or Grantor-Grantee
Most states require the following information in
their index:
1. Type of instrument
2. Date of instrument and date filed/recorded
3. Volume and page or other reference
4. Parties
5. Land covered
Problems – Grantor-Grantee Indices.16
Chain of Title
Definition – Successive conveyances commencing with the patent fromthe government down to and including the conveyance to the presentowner referencing the land in question. A purchaser or creditor is usuallynot charged with notice of the following:
1. Instruments executed by a stranger to title.
2. Instruments affecting other property.
3. Instruments executed by grantor but recorded before Grantor acquired title.
4. Instruments executed by grantee of a prior unrecorded instrument
5. Subsequent conveyances or encumbrances by immediate grantor or mortgagor.
The “Chain of Title Rule” is that purchasers and creditors are on noticeonly of those instruments within the chain of title, as defined in eachstate, affecting the lands in question. 17
Scope of Search – Two Theories
1. Narrow scope of search – from the day of the deed to each grantor (some states would say the day this deed is recorded) to the day the deed from that grantor to a grantee is recorded.
2. Broad scope of search – a purchaser or creditor must examine all deeds given by all prior record owners.
In states utilizing a tract index, a broad scope of search is possible/practical. A broad scope of search is impractical in states utilizing a grantor-grantee index system.
As a practical matter, abstract-title companies only maintain tract indices so most examinations are performed utilizing a narrow search method, regardless of the state’s requirement.
18
Constructive Notice From Properly Recorded Instruments Imposes Uponthe Purchaser or Creditor knowledge of:
1. The terms, recitals, stipulations and conditions of the instrument
2. All facts disclosed by the acknowledgment of the instrument; and
3. The legal effect of the instrument.
As a general rule, a purchaser or creditor is not charged with constructivenotice of facts which can be obtained only by inquiring beyond the record.There are two important exceptions to this lack of duty to inquire:
1. When the legal description of the instrument is ambiguous or
inconsistent.
2. When the recorded instrument refers to or is subject to other
instruments, whether the other instruments are recorded or unrecorded.
Whether or not a fact contained in a recorded instrument is constructivenotice is a question of law. 19
Constructive Notice from
Defective or Insufficient Recording
Since a properly filed instrument provides constructivenotice, the grantor is not responsible, and constructivenotice is applicable, even in the following instances:
1. The clerk fails to record the instrument
2. The clerk fails to enter the filing of the instrument inthe proper index
3. The clerk records the instrument in the wrong book
4. The clerk fails to maintain the proper indices
5. The clerk fails to properly transcribe the instrument.
20
Constructive Notice From Actual
Possession
Many Courts describe this as a type of “actualnotice”, but I believe that any type of knowledgethat is imposed upon a purchaser as a matter oflaw should be classified as constructive notice.
A purchaser/creditor/lessee is always chargedwith knowledge of the facts of actual possession.The purchaser is also burdened with the duty toinquire, from the persons in possession, as to anyadditional facts affecting title.
21
Actual Notice
Most Courts categorize “actual notice” as:
1. Actual notice – knowledge directly communicated to a person.
2. Implied notice – notice implied/imposed by law to a person who had means of
knowledge sufficient to create a duty to inquire.
3. Imputed notice – notice implied/imposed by law based upon special relationship.
Circumstances that would create a duty to inquire, implied notice, are:
1. Possession by a party other than the grantor.
2. Litigation involving the land in question
3. Contract calling for a grossly inadequate price
4. Receipt of a quitclaim deed.
Majority – Receipt of a quitclaim deed does not prevent a grantee from being a BFP.
Minority – Texas – A quitclaim deed infects entire subsequent chain of title.
5. Construction or repair work visible on the property
6. Facts revealed through actual examination of instruments in the chain of title – See Westland.
22
Imputed notice is the result of specific relationships,such as:
1. Principal and agent
2. Trustee and beneficiary
3. Attorney and client
4. Partner and partnership
so that notice to one is imputed as a matter of law tothe other.
The issue of there being actual notice is usually a factquestion with the party asserting that no notice wasgiven having the burden of proof.
23
The Duhig Rule – Ignoring Notice
THE DUHIG CASE (Tex. 1940)
O → A (All S)
Reserves ½ M ½ M
A → B (All S)
No “subject to” (ST) ½ M
Reserves ½ M24
The Duhig Case
ISSUE – Over-conveyance
Breach of warranty
PROBLEM – To make it work, B not charged with constructive notice (CN)
THEORY – A created problem – no ST
A should lose.25
BENGE V. SCHARBAUER (Tex. 1953)
O → A (All S)
Reserve ¼ M 3/4 M
A → B (All S)
Reserve 3/8 3/8 M or 5/8 M?
No ST
NO OVER-CONVEYANCE
Result – A 1/8 M
B 5/8 M
6/8 (3/4)
26
Westland Oil – Duty of Inquiry-
How Far?
All states – duty to examine referenced instrument.
Quandary – How far does the duty extend?
CO – No duty to examine any unrecorded
agreement
TX – Duty extends to multiple levels.
27
Arkansas
1. Circuit Clerk – Grantor/Grantee
2. Arkansas Oil and Gas Commission
3. Fayetteville Shale play in N/3 Central (around3,000’)
4. South Arkansas/North Louisiana – LowerSmackover (Brown Dense) – like Baakan orEagleford.
5. First State to adopt regulatory crossunit well– OK has adopted and LA is next.
28
California
1. Recording Clerk - Grantor/Grantee
2. State of California Division of Oil and Gas
3. Recent drilling in Monterey Shale – Fresno to
Bakersfield – horizontal plus fracing.
4. Discovering/utilizing more gas storage by
rehabilitating old fields.
29
Colorado
1. County Clerk – Grantor/Grantee
2. Colorado Oil and Gas Conservation Commission
Department of Natural Resources – State Board ofLand Commissioners – State Lands
Bureau of Land Management – Federal Lands
3. Can record anything without acknowledgment.
4. Statute provides that there is no duty to inquire aboutunrecorded agreements referenced in a conveyance.
5. Niobrara play in several parts of state, particularly theD J Basin.
30
Kansas
1. Register of Deeds – Tract Supplemented byGrantor/Grantee
2. Kansas Corporation Commission
3. Requirement that Affidavit of Production orNon-Production be recorded.
4. SW Central – success of independents utilizing3D finding oil in Mississippian or olderformations.
5. Some large companies have drilled horizontalwells but have not announced results.
31
Louisiana
1. Clerk of Courts- Each type of record has its ownGrantor/Grantee index.
2. Ten year prescription of nonuse on mineralrights (not mineral leases)
3. Office of Conservation
State Land Office – State Lands
4. Active Resources Plays:
North – Haynesville and Brown Dense
Central – Austin Chalk
South Central – Tuscaloosa Marine Shale32
Michigan
1. Register of Deeds – Grantor/Grantee, tractmaybe
2. Department of Natural Resources – LandsDivision
3. Dormant Mineral Act
4. Collingwood Shale play in N/4 – Chesapeake,using shell companies as leasing agents,stopped leasing suddenly. Over 100 separatelawsuits filed claiming completed agreement.
33
Mississippi
1. Chancery Clerk – Grantor/Grantee
2. Mississippi Oil and Gas Board
Department of Environmental Quality
3. Separate Courts of Law and Equity at the triallevel
4. 22,000’ Haynesville Shale test in JeffersonCounty – tight hole
5. New legislation – Carbon sequestration
6. SW – Marine Shale – Oil34
Montana
1. County Clerk and Recorder – Official –
Grantor/Grantee
Unofficial – tract
2. Montana Board of Oil and Gas Conservation
3. Baakan Oil Play – E/4
35
New Mexico
1. County Clerk – Grantor/Grantee
2. Oil Conservation Division
3. BLM Records do not impart constructive
notice.
State Land Office records do impart
constructive notice.
36
New York
1. County Clerk – Grantor/Grantee
2. Department of Environmental Conservation –Bureau of Mineral Resources
3. Marcellus Shale shut down by state moratorium if requiring more than 40,000 gallons of water.
4. Dysfunctional state government – moratorium; ethics probes
5. Grassroots land owners groups are supporting industry – Google “joint landowners coalition of New York”.
37
North Dakota
1. County Recorder – tract, also Grantor/Grantee
2. North Dakota Industrial Commission – Oil and Gas Division
3. 20 year dormant mineral act
4. Almost 200 rigs operating.
Examine title to 1,280 acre drilling units. Requires examining multiple large boxes –sometimes thousands of documents.
One title Opinion can take several months to complete.
38
Ohio
1. County Recorder – Grantor/Grantee
2. Ohio Division of Natural Resources
3. Marcellus Shale – E/4
4. Relatively little oil and gas law.
Still has Dower
Has Dormant Mineral Act
Records more like original 13 colony states than mid-continent, but some tracts are section, township and range.
39
Oklahoma
1. County Clerk – tract, supplemented by:
a. Grantor/Grantee
b. Miscellaneous index – instruments containing no legal description
2. Corporation Commission
3. W/6 – Granite Wash/Atoka
Central - Woodford
SE/3 - Arkhoma40
Pennsylvania
1. County Clerk – Grantor/Grantee
2. Department of Environmental Protection
3. Marcellus Shale – all but SE
4. Lack of legal infrastructure
5. Apportionment state (PA, CA & MS)
6. Dunham Rule – “Minerals” are not oil and gas; Oil is notgas and gas is not oil. Thus, conveying or reservingminerals does not include oil and gas.
7. “Title wash” – where land not occupied thus accessed as“unseated land” and oil and gas severed from surface – atax sale of the surface reunites the oil and gas and surfacetitles without notice to the oil and gas owner.
41
Texas
1. County Clerk – Grantor/Grantee
2. Railroad Commission of Texas
3. NW – Granite Wash
NE – Barnett Shale
S – Eagleford
W – Wolfberry, combination of Spraberry and
Wolfcamp
42
Utah
1. County Recorder – tract
2. Utah Division of Oil, Gas and Mining
3. Legislature considering Surface Damage Act
4. Suspension of royalty by company who utilized a non-Utah licensed attorney can cause imposition of penalty.
5. Just beginning horizontal drilling in:
Uintah Basin – East Central abutting Co.
Central – Carbon County43
West Virginia
1. Clerk of the County Commission –
Grantor/Grantee
2. West Virginia Department of Environmental
Protection
Oil and Gas Commission
3. Marcellus Shale
4. Inadequate legal infrastructure
44
Wyoming
1. County Clerk – tract and Grantor/Grantee
2. Wyoming Oil & Gas Conservation
Commission
3. SE – Niobrara Shale – horizontal
South and Central – Powder River
45
Chapter 4
Execution, Acknowledgment, and Recordation
4.10 Omission and Inconsistencies
4.20 Defective Acknowledgments
4.30 Delivery; Effective Date; Delay in
Recordation
46
Chapter 4
Execution, Acknowledgment, and Recordation
4.40 Notice Recording System
4.50 Constructive Notice
4.60 Recitals in Instruments in Chain of Title
4.70 Duty of Inquiry Based on Actual Notice
4.80 Duty of Inquiry Based on Possession
4.90 Qualification as Bona Fide Purchaser
4.100 Qualification as Lien Creditor
4.110 Electronic Filing and Recordation
4.120 Estoppel by Deed47
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