The real drama of a Florida couple leads to a pretty bizarre court decision that should have most of us in the title business scratching our heads. The MacLeods purchased a 70 acre farm and later found themselves in foreclosure over a lien against the prior owner. Orix Financial had recorded its lien in 1996, but the county clerk never indexed it. Thus, it was not discovered by the MacLeods, or their title agent... until the foreclosure action was instituted in 2006.
The Third Circuit ruled that the MacLeods' ownership rights trumped Orix's lien, but the First District Court of Appeals overturned the decision. The Court of Appeals stated that the MacLeods' "remedy, if any, will lie against the title insurer or abstractor or against the clerk of the circuit court."
First, it is necessary to look at the reason for the clerk's failure to index the lien. It wasn't just a "mistake," the clerk apparently made a conscious decision NOT to index the lien because the payment was insufficient.
[MacLeods' attorney] said the issue was a quote from Dixie Clerk of Court Dana Johnson saying the lien was not indexed because "the New York authority sent payment for one document instead of two, so the lien was recorded but not indexed." (see article on Gainesville.com.)
For reasons which I cannot begin to imagine, the clerk accepted the lien and stamped it with an instrument number, but did not enter the lien into the index. Wouldn't the proper course of action be to return the lien unrecorded, if the filing fees were not sufficient? I can't see what was to be gained by accepting the document and not entering it in the index.
Second, I can see no rational basis for the court's finding that the appropriate remedy would be against the abstractor. If the lien was not indexed there would be no way for an abstractor to find it in the course of a diligent title search.
The issue here is that there are two innocent parties, Orix and the MacLeods, so which should bear the burden of the clerk's failure to index the lien? On one hand, Orix did record the lien and on the other, the MacLeods were bona fide purchasers without notice of the lien.
The Court of Appeals took a rather narrow view of the state's recording statute. The statute provides that official recordation occurs at such time as the office of the clerk of the circuit court affixes to an instrument the official register numbers required by law "and at such time shall be notice to all persons." But this view fails to incorporate the requirement that the court index the recorded documents.
It seems rather elementary that without indexing, the recording is meaningless and notice cannot possibly accomplished. The concept of constructive notice is that all parties are charged with notice of documents filed for public record, but there is clearly a problem when a search of the public records could not possibly uncover a document, such as one not indexed.
In a well-written jurisdictional brief, MacLeods' counsel cited a Maryland case, Greenpoint Mortgage Funding v. Schlossberg, 390 Md. 211 (Md. Ct. App. 2005), for a good, solid common sense argument. Maryland apparently has "virtually identical provisions" of state law and it requires indexing as a prerequisite to constructive notice.
The Greenpoint Court recognized that the nature of recording systems are such that "without indexing nothing works." The Court therefore held that "indexing mistakes should be at the risk of the person who had the ability to insure that the document was indexed correction -- the filer." The Court reasoned that, if the risk of indexing errors is placed on the innocent purchaser, "the marketability of titles would be seriously compromised and the entire system of property in this country might collapse."
That may seem like an exaggerated prediction, but I don't think it is too far off. If a document that is not indexed, or even mis-indexed, is sufficient to impart constructive notice on third-parties, an abstractors would have to look at every document to find any strays that may have been correctly recorded but not correctly indexed. Such a burden would be so impractical that nobody would be willing to accept the risks associated with searching or insuring titles.
The brief also pointed out that the First District's holding was inconsistent with prior Fourth District decisions. The Fourth District interpreted the same recording provision in conjunction with a statute that requires the county clerk to maintain "a general alphabetical index, direct and inverse, of all instruments filed for record." The holding was that "the purchaser had a right to rely on the record as disclosed by a full and complete search at the time of purchase."
Despite the inconsistencies between the district courts and the logical reasoning of the brief and the Fourth District, the Florida Supreme Court declined to accept jurisdiction with no explanation. The court system in Florida has failed in this instance. At this point, the Florida legislature would be well-advised to amend the statute that declares constructive notice to third parties is accomplished upon the clerk's affixing "to an instrument the official register numbers." Clearly, indexing must be a prerequisite to constructive notice.
Luckily for the MacLeods, a settlement was reached.
Although [the clerk of court's] quote blamed Orix for not paying to index the lien, the clerk's office agreed to pay Orix $200,000, the state's cap on suits against a government entity.
The clerk's attorney, Cindy Townsend, said the settlement was not an admission of liability, but was in the best interests of all parties. She said there is always a risk with a jury trial of an award in excess of $200,000, which could be paid above the state cap through a legislative claims bill.
Sadly, though, the MacLeods incurred more than $100,000 in legal fees throughout this ordeal. Though their title insurance policy paid out $110,000, that only covered the original purchase price, not the value at the time or potential sales value, and was already spent in legal fees. At least they will be able to keep their farm.
Robert A. Franco
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