Raub v. General Income Sponsors of Iowa, Inc.
176 N.W.2d 216 (1970)
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Rule of Law:
A mortgagee who takes a security interest in real property for valuable consideration and without notice of fraud in the mortgagor's title qualifies as a bona fide purchaser. A grantor's continued possession of the property after conveying it by recorded deed, especially as a rent-paying tenant, does not constitute constructive notice of the grantor's equitable claim.
Facts:
- Jessie O. Raub, a woman with a ninth-grade education, developed a relationship of trust and confidence with Clark Barczewski, who acted as her financial advisor.
- Over a period of several months in 1965, Barczewski convinced Raub to invest her savings of $10,000 in General Income Sponsors of Iowa, Inc., a company he co-founded.
- On December 2, 1965, Raub executed a warranty deed conveying her homestead, then free of any mortgage, to General Income Sponsors in exchange for what she believed was an additional $14,000 worth of company stock, which she never received.
- Following the conveyance, Raub remained in possession of the home, paying $70 per month in rent to General Income Sponsors from December 1965 through August 1966.
- On September 17, 1966, General Income Sponsors secured a $6,000 mortgage on the property from First National Bank of Fort Dodge.
- On October 25, 1966, General Income Sponsors secured a second mortgage on the property for $10,350 from Manson State Bank.
- At the time the mortgages were issued, the banks were unaware of the fraud, and Raub herself did not suspect she had been defrauded until early 1967.
Procedural Posture:
- Jessie O. Raub filed suit in an Iowa trial court to set aside the deed she gave to General Income Sponsors of Iowa, Inc., and to declare invalid the mortgages held by First National Bank and Manson State Bank.
- The trial court found the deed was obtained by fraud and entered a decree declaring it void.
- The trial court's decree also held that both mortgages were invalid and were not liens on Raub's property.
- First National Bank and Manson State Bank, the mortgage holders, appealed the trial court's decision to the Supreme Court of Iowa.
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Issue:
Do mortgagees qualify as bona fide purchasers whose liens are valid against a prior grantor's claim of fraud, when the grantor remained in possession of the property as a tenant after the fraudulent conveyance?
Opinions:
Majority - LeGrand, Justice
Yes. The mortgagees qualify as bona fide purchasers and their liens are valid because they took their interests from the legal title holder for valuable consideration and without notice of the fraud. A mortgagee is treated as a purchaser for purposes of the bona fide purchaser doctrine. The banks had no actual notice of the fraud, and there were no suspicious circumstances that would have required them to investigate the mortgagor's title. Furthermore, Raub's continued possession of the property did not provide constructive notice of her claim. While possession by a non-grantor typically puts purchasers on notice, there is an exception for possession by a grantor of a recorded deed. Such possession, especially as a rent-paying tenant, is not considered hostile to or inconsistent with the grantee's title. Even if the banks had inquired, Raub herself was unaware of the fraud and would have confirmed her status as a tenant, revealing no adverse claim to the property.
Analysis:
This decision solidifies the protection for bona fide purchasers and mortgagees against unrecorded equitable claims, such as those arising from fraud. It clarifies that the exception to the rule of inquiry notice—where a grantor remains in possession—is particularly strong when the grantor's possession is consistent with the new title, such as by paying rent. By placing the risk of loss on the defrauded original owner rather than a subsequent good-faith lender who relies on public records, the ruling reinforces the stability and reliability of recorded land titles. This precedent makes it more difficult for a victim of deed fraud to invalidate subsequent mortgages taken by lenders who had no reason to suspect the underlying crime.
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