Posting for

Monday, August 24, 1998

by: Bert Rush

brush@firstam.com

COMPETENCY AND CAPACITY/REVERSIONARY RIGHTS/MISREPRESENTATION

Time again to play "You Be the Judge."

This is based on an actual claim: During the late 1940's Frances Adamson was sole owner of substantial acreage on the then outskirts of Roseville, California, a rural community just north of Sacramento. The Adamson land, including a home which Frances occupied with her husband, Stanley, and their family, was without utility service and accessed by a dirt road.

Roseville city leaders felt the need for a community hospital. Mayor Harold "Bizz" Johnson thought some of the Adamson land would make a good site. Mayor Johnson enlisted John Piches, who had worked on various projects for the City and who was friendly with the Adamsons, to accompany him in asking the Adamsons to donate 8 1/2 acres for a new hospital.

The Adamsons were agreeable--the plan would connect their property to paved roads and bring utilities to the area--but when they conveyed the land in February 1949 they inserted this language in the deed:

Construction of the new hospital was financed by a bond issue. The bond underwriter required that the Adamson reversionary rights be subordinated to the interests of the bondholders, which the Adamsons agreed to--and the hospital got built.

In 1955 the hospital underwent an expansion and, once again, the Adamsons were approached by John Piches--on behalf of the City--and they agreed to subordinate their reversionary rights to lenders financing the expansion.

By 1960 another hospital expansion was planned. The City Manager wrote a letter to John Piches, transmitting a quitclaim deed form, which Piches was asked to have the Adamsons sign. This one-page quitclaim form contained the recital:

Piches later recalled that he first approached Mrs. Adamson, whom he visited in the hospital (yes, Roseville Community Hospital) where she was recovering from a stroke. He found her weak, but "as sharp as she had ever been mentally." Piches recalled that Mrs. Adamson asked him about the quitclaim form, and he assured her it was to accomplish the same type of subordination as had been done in the past. He also recalled Mrs. Adamson had been promised in writing that termination of the reversionary rights would be temporary, and they'd be restored as soon as needed revenue bonds were recorded.

After Mrs. Adamson signed, Piches took the form to Mr. Adamson--whom he recalled was indifferent to the details and signed solely on his wife's OK (it was, after all, her land to begin with).

After the 1960 hospital expansion, nothing was done to restore the reversionary rights. Mr. Adamson died and, in 1969, Mrs. Adamson died at page 69.

By 1993 it was decided the site was no longer adequate for hospital purposes. The hospital was moved across town to a 177-bed regional health care facility on 57 acres. The City sold the old hospital buildings and land to a private, non-profit corporation for about $14.1 million. Through an agent, First American insured the new owner.

This sale made the local papers--and got the attention of the Adamson heirs. Five heirs filed a lawsuit seeking to have the 1960 quitclaim deed declared void, to restore for their benefit the reversionary rights established by the 1949 deed, and to recover the sale proceeds of $14.1 million. Their complaint, as amended, claimed that at the time Mrs. Adamson signed the 1960 quitclaim deed she was incapacitated by a stroke and "did not have a full understanding of her rights," that both Mr. and Mrs. Adamson were victims of misrepresentations made on behalf of the City, and that the private corporation which purchased the hospital was chargeable with knowledge of these facts because some of its directors were previously directors of the original hospital. The heirs also claimed that they were unaware the reversionary rights had been terminated of record, until after the property was sold in June 1993.

The insured owner claimed to be a bona fide purchaser--no officer or director of the insured corporation seemed aware of the heirs' claims prior to filing or the lawsuit.

The deposition of John Piches supported the heirs' claims. Besides his recollections described above, Piches testified, "If I thought that she gave this away permanently,...I wouldn't have let her sign the damn thing." Although he recalled Mrs. Adamson was promised "in writing" that the reversionary rights would later be restored, no such writing could be located.

But, said Piches, Frances Adamson would be "madder than hell" had she known the reverter clause never got re-recorded.

So...how would you decide the case?

The trial court dismissed the case, after four successful demurrer motions filed on behalf of First American's insured owner (joined with similar motions on behalf of the other defendants), for failure to state a cause of action. This dismissal was affirmed on appeal--by a decision not certified for publication.

The Court of Appeal agreed with the trial court that the heirs' allegations concerning Mrs. Adamson's state of mind in 1960 were insufficient to raise an issue of mental incompetency. Claims that she was ill and did not understand her rights fell short of a claim that she could not understand what she was doing. Since it wasn't claimed she was incompetent, no ruling could be made that the 1960 quitclaim deed was void--a nullity. Instead, the heirs found themselves arguing that the 1960 deed was merely voidable.

Under California law, a deed which is void is of no effect--and good title cannot be derived from it. But where a deed is merely voidable, a defense of title may be based on the present owner's status as a bona fide purchaser (for value and without knowledge of controversy). Here, the heirs' claims that our insured corporation had among its directors certain individuals who were also directors of the public hospital board were held insufficient to challenge defendant's status as a bona fide purchaser. And, the Court pointed out, there was no allegation that any of defendant's directors had guilty knowledge before the sale closed in June 1993. So the insured owner's status as a bona fide purchaser protected its title from adverse claims of the Adamson heirs.

With respect to allegations the City had made oral promises to restore the reversionary rights, the Court held that any such claim would be barred by California's Statute of Frauds (Civil Code section 1624), which requires that promises to convey or release and interest in land must be in writing.

And, the Court held that all other allegations against the City were barred by California's governmental immunity laws, which generally shields governmental entities from claims based on intentional or negligent misrepresentations by public employees or independent contractors.

Comment: Although California statutes were at play, the legal principles involved are so rooted in common law I would expect the same result in other jurisdictions.

My first impression of this claim was that it could be nasty--particularly since it appeared the City had converted a conditional gift into a $14 million windfall. And the only real witness, Piches, had worked for the City over many years, but was strongly sympathetic with the heirs. Nasty!

A classic story of title insurance protecting against a hidden risk.

Questions, comment, argument? Just press the "reply" button....

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Following Monday's posting Rich Angelo (Valley Forge/Philadelphia) writes:

This is another great example of the value of title insurance, and it should be worked into one of our brochures.

Frank Melchior (Iselin, NJ) writes:

Assuming that the statements regarding Mrs. Adamson's questions while in the hospital are provable, I do not see how the court could come up with a different conclusion. Obviously, she was competent as to the transaction as she clearly understood the tenor of what she was doing.

As to the "fraud" of the city in not recording the proposed agreement to reinstate the reverter, I believe the holding was correct vis a vis a bona fide purchaser. Either that, or there is a new level of extension of imputed knowledge. I know that officers are imputed to know all of the acts of their entity; I was (and am) not aware that this imputed knowledge also applies to directors (who, of course, may have actual knowledge).

And Jim Dondero (Grand Rapids, MI) writes:

I applaud, and heartily concur with, the Court's sterling analysis and conclusion on these facts, and would like to think that the same result would obtain in ANY "common law" jurisdiction.

I first look for the "bad guy" in these situations, then the party(ies) in the best position to bear the loss. In this case, the CITY fits BOTH bills and should ultimately bear any liability to the heirs --based not so much on Mrs. Adamson's "state of mind" (aren't the legal acts of adults generally PRESUMED to be valid, lest a person be subject to the "protective order" of a court of competent jurisdiction?), but on what appears to be "fraud in the execution" of this quit-claim deed releasing the reverter clause for condition broken. After all, as you point out, the CITY was the party that realized the $14.1 Million "windfall" profit.

And as for Mr. Piches -- he should simply be left to live with himself, his God, public opinion, and whatever his position with the City might suffer as a result of his shameful role in this deception and its aftermath. 'Nuff said!