Recently, the Utah Court of Appeals issued its opinion in Q-2, LLC v. Hughes., 2014 UT App 19.  That opinion significantly impacts landowner’s expectations with regard to the establishment and maintenance of boundaries.  The opinion highlights the need to acertain boundaries before purchasing land and maintaning them aftewards.

A complicated set of facts in this case created the rare circumstances for competing claims under boundary by acquiescence and adverse possession theories.  In 1998, the Hugheses purchased a lot with a deteriorated fence that had separated their lot from neighboring lots from approximately 1927 to 1971.  The fence, however, had been built on the Hugheses’ side of the recorded boundary line.  Therefore, after purchasing the lot, the Hugheses occupied the land up to the recorded boundary line.  

In 2001, a neighbor brought a quiet title claim against the Hugheses, claiming title up to the boundary established by the deteriorated fence under boundary by acquiescence doctrines.  The court in that case quieted title to the property in the neighbor up to the location of the deteriorated fence. 

In 2008, Q-2, LLC, another neighbor, also brought a quiet title claim against the Hugheses relying on the same facts and law as the prior case.  One would have expected the outcome to be a simple rubber stamp of the prior case.  The Hugheses, however, brought a counterclaim to have the title quieted in them under adverse possession doctrines.

The elements of a claim for adverse possession are:
    1) continuous adverse occupation of the land;
    2) with payment of all taxes thereon;
    3) for seven years.
Utah Code Ann. §§ 78B-12-214 through 216. 

The elements of a claim for boundary by acquiescence are:
    1) occupation up to a visible line marked definitely by some monument;
    2) acquiescence in that line as a boundary;
        (a) by adjoining land owners;
        (b) for a period of at least 20 years.
See Jacobs v. Hafen, 917 P.2d 1078, 1080 (Utah 1996).

The Hugheses’ contention was that although 7 years had not passed since the prior case was fully adjudicated, the title had passed to Q-2, LLC’s predecessors in interest years earlier when all the elements for boundary by acquiescence were satisfied.  Accordingly, the Hugheses reasoned that their possession was adverse since 1998 when they purchased their lot.

In turn, Q-2, LLC argued that title to the property does not pass under boundary by
acquiescence theories until a court has adjudicated a claim to quiet title to the land.  Accordingly, Q-2, LLC reasoned that the Hugheses’ possession could not have been adverse when the record title to the land as between the Hugheses and Q-2, LLC was in the Hugheses. 

The trial court agreed with Q-2, LLC, but the Court of Appeals, reversed the trial court and ruled that title to the property passed at the moment all the elements of boundary by acquiescence were satisfied regardless of whether a claim to quiet title has been adjudicated.

By in large, the assumption has been that title to land is held by the one the recorded documents indicate has title until a court with competent jurisdiction rules otherwise.  The opinion in Q-2, LLC v. Hughes, undermines that assumption.  Ascertaining and maintaining boundaries has always been a significant concern.  This opinion, however, should serve as a wakeup call for anyone dealing in land, including owners, sellers,
buyers and title insurers.  As noted by Judge Orme’s concurring opinion, the
consequences are that “some real estate titles will be other than as shown by
recorded documents, other than as memorialized in judicial decrees, and other
than as an inspection of the property would suggest.”  Q-2, LLC v. Hughes, 2014 UT App 19, ¶ 19.  Therefore, exercising an increased level of care is now necessary to insure the concistency of boundaries in accordance with recorded documents before purchasing and maintaining those boundaries after purchase.

Copyright © Daniel L. Day 2014

In Insight Assets v. Farias, 2013 UT 47, the Supreme Court of Utah allowed laches to trump the Purchase Money Rule.  According to the Purchase Money Rule, a Trust Deed securing seller financing will generally take first-position priority over a prior recorded Trust Deed securing third-party financing.  However, when the seller sits by doing nothing while the third-party financer forecloses the prior recorded Trust Deed, the seller might forfeit his equitable right to first position.    

In Insight, the buyer in a real estate transaction, purchased property with both third-party financing through a bank and seller financing.  The Trust Deed securing the bank's financing was recorded moments before the Trust Deed securing the seller's financing.  Subsequently, the buyer defaulted on both loans.   Exercising its rights under its Trust Deed, the bank sold the property at a foreclosure sale.  The property then changed hands with other parties, the last of which was Farias.  Later, Insight purchased the seller's rights under the seller's Trust Deed and attempted to foreclose to collect the seller's financing.  Farias sued to stop the foreclosure.  The District Court ruled in favor of Farias and stopped the foreclosure.

Insight appealed based on the argument that the Purchase Money Rule placed the Trust Deed securing the seller's financing in first position.  The Purchase Money Rule is that instruments securing seller financing ordinarily take priority over any other instrument securing third-party financing when both parties have had notice of each other's security instruments. 

Under the seller's Trust Deed, Insight still had plenty of time to foreclose because the six-year statute of limitations had not run.  Accordingly, Insight was confident it was in first position and could still foreclose regardless of the bank's prior foreclosure.

The Supreme Court disagreed.  While reminding us of the continued viability of the Purchase Money Rule in Utah, the Supreme Court held in Farias's favor because the seller sat idly by while the bank foreclosed.  The Supreme Court determined that the equitable doctrine of laches applied even though the statute of limitations had not run.  

Laches will apply when a party has failed to exercise diligence and an injury results from the lack of diligence.  Because the seller failed to promptly exercise its rights before the bank conducted the foreclosure sale, Farias purchased the property reasonably assuming from the seller's inaction that the seller's Trust Deed was extinguished by the bank's foreclosure.

This should serve as a warning to parties involved in seller financed real estate transactions.  Third-party lenders would be wise in all situations where sellers are furnishing part of the financing for the purchase, to insist that the seller furnish a duly acknowledged subordination agreement subordinating the seller's Trust Deed to the third-party's Trust Deed regardless of the sequence of recording.  On the other hand, sellers that have not subordinated to third-party financing and enjoy the benefit of the Purchase Money Rule should never sit idly by while the third-party forecloses.

Copyright © Daniel L. Day 2013

In Utah, debtors can protect as much as $30,000 of value in a primary personal residence under Utah Code Section 78B-5-503.  This is known as the homestead exemption.  On October 24, 2013, the Utah Court of Appeals issued its opinion in Jackson v. Halls, 2013 UT App 254, which addresses this exemption. 

In Jackson v. Halls, Jackson executed on and purchased the personal residence of Halls with a credit bid at the Sheriff's sale.  After the sale, Jackson gave Halls a credit for the value of the homestead exemption toward the judgment against Halls rather than pay Halls in cash.  Of course, Halls objected and moved to have the trial court compel payment in cash. 

Jackson argued that Halls was not entitled to a cash payment from the sale, because Jackson purchased the residence with a credit bid rather than with cash.  Jackson reasoned that because no cash passed hands through the Sheriff's sale the homestead exemption was satisfied by Jackson granting a credit against the judgment.  The trial court agreed and denied the motion.

Recognizing that Jackson's position undermined the purpose of the exemption, the Court of Appeals reversed the trial court.  The Court of Appeals noted that Utah Code Section 78B‐5‐503(5)(b) protects the value of the homestead exemption from further execution for a one-year period.  If a creditor were able to avoid cashing out the debtor's homestead exemptions simply by purchasing the debtor's residence with a credit bid, the one-year protection would be meaningless.  Accordingly, in the future, creditors must come prepared to cash out the debtor's homestead exemption when they make credit bids for the purchase of primary personal residences at Sheriff's sales.

Copyright © Daniel L. Day 2013