Experience

Property and Construction Law Update
Summer 2006

The Torrens System: Alive and Well

B y Andy Jacobson

The Minnesota Court of Appeals’ recent decision in In re Collier confirms that that the Torrens land registration system remains alive and well in Minnesota. It also illustrates that a failure to recognize the distinction between abstract and registered property can have dramatic consequences. 

The Torrens land registration system was developed by Sir Robert Torrens, a 19th century Australian land registrar. Torrens’ system was based on the English system used for ship registration. Under that system a local registrar kept a registry book of all ships based from the local port. Each ship had its own page in the registry on which all liens against that ship were registered. In turn, the owner of the ship kept a duplicate original of the registry page which served as proof of ownership. To check the ownership status of and liens on a specific ship, a lender or buyer merely needed to check the appropriate registry. 

Minnesota was one of 21 states that enacted the voluntary Torrens land registration systems in the late 1800s and early 1900s. While adopted by a number of states, the voluntary Torrens systems have only been used extensively in limited areas of the country, including Cook County, Illinois; Massachusetts, and Minnesota. Because of the availability of Torrens land registration in Minnesota, each county is required to maintain two distinct systems of real property records. Land records for abstract properties are maintained in the county recorder’s office while records for registered property are kept by the county registrar. 

In re Collier, No. A05-1178 (Minn. Ct. App. 4/04/06), the owner of a Torrens registered property took out a loan secured by a mortgage from a major institutional bank. The bank recorded its mortgage on the registered property with the county recorder (abstract records) but failed to register the mortgage with the county registrar (Torrens records). As a result of this error, the bank’s mortgage did not appear as an encumbrance on the “Certificate of Title” for the property. The landowner subsequently defaulted on the bank’s loan, resulting in the bank foreclosing on its mortgage and the bank purchasing the property at the foreclosure auction. 

Following the foreclosure sale the bank compounded its initial error by recording (but failing to register) its certificate of sale. During the statutory redemption period following the foreclosure sale, Collier approached the bank with an offer to purchase the bank’s interest in the property. After being turned down by the bank, Collier did some research and discovered that the bank had recorded, but not registered, its interest in the property. Collier then contacted the foreclosed landowner and purchased the property for $5,000. At the time of purchase, Collier executed a new mortgage on the property to a third-party lender and then promptly registered both his deed and the new mortgage with the county registrar (Torrens records). 

Several months after Collier’s purchase, Collier brought an action against the bank to determine their respective rights and priority. The priority issue would dictate whether Collier owned the property free and clear of the bank’s interest. The trial court determined that Collier was subject to the bank’s interest, because he had actual notice and knowledge of the bank’s interest at the time he purchased the property. This prevented him from qualifying as a “good faith” purchaser under Minnesota Statute Section 508.25. 

The Court of Appeals reversed the lower court, holding that the bank’s mortgage could not constitute an “encumbrance” against the property or an interest adverse to Collier’s interest in the property, because the mortgage and certificate of sale were never registered on the Certificate of Title. Until such registration, the bank’s interest was merely a private contract between Collier’s predecessor and the bank and thus did not burden the property or bind third-party purchasers, such as Collier. 

Consequently, under the Torrens system, Collier’s actual knowledge of the bank’s mortgage was insufficient to prevent Collier from being a “good faith” purchaser of the property. The appeals court justified its decision, in part, on one of the underlying principles of Torrens law: a purchaser need look no further than the “Certificate of Title” to determine the existence of any adverse interests for a property. On June 20, 2006, the Minnesota Supreme Court granted the petition to hear a further appeal of this case. 

It remains to be seen whether the Supreme Court will follow the Court of Appeals’ semantic distinction regarding encumbrances on Torrens properties and whether there is anything left of the doctrine of actual notice with respect to registered properties. In any case, Collier is a great reminder of the importance of knowing whether one is dealing with abstract or registered property, and acting accordingly. 

If you have questions, contact Andy Jacobson at 612.672.8333 or andy.jacobson@maslon.com.