PRESENT: Hassell, C.J., Keenan, Kinser, Lemons, and Agee, JJ.,
Carrico, S.J., and Whiting, R.J.
JOHN W. RICHARDSON,
SUBSTITUTE GUARDIAN FOR THE ESTATE OF
CHRISTINA ELIZABETH BROWN, A MINOR
v. Record No. 030390 OPINION BY JUSTICE BARBARA MILANO KEENAN
January 16, 2004
AMRESCO RESIDENTIAL
MORTGAGE CORPORATION, ET AL.
FROM THE CIRCUIT COURT OF THE CITY OF VIRGINIA BEACH
Frederick B. Lowe, Judge
In this appeal, we consider whether the chancellor erred in
ruling that certain mortgagees were entitled to protections
afforded third parties under the Uniform Transfers to Minors
Act, as codified in Kentucky and Virginia (the Act). Kentucky
Rev. Stat. Ann. §§ 385.012 through 385.252 and Virginia Code
§§ 31-37 through –59. This issue arose from the mortgagees'
asserted right to enforce liens secured by real property that a
custodian had transferred from a custodial estate to herself by
a quitclaim deed. We also consider whether the chancellor erred
in holding that the quitclaim deed was valid, notwithstanding an
attack on the deed by the beneficiary of the custodial estate.
The relevant facts are not in dispute. In 1990, Christina
E. Brown, a one-year-old resident of the Commonwealth of
Kentucky, received about $700,000 from the settlement of a
wrongful death action brought in Kentucky by the administrator
of her father's estate. Christina's natural mother, Dana R.
Brown (Brown), was appointed guardian of Christina's estate by
the District Court of Shelby County, Kentucky (the Kentucky
court). The Kentucky court prohibited Brown from "invading or
otherwise using the principal or personal estate of [Christina]
unless approved" by order of that court.
In August 1996, Brown moved her residence from Kentucky to
the City of Virginia Beach, and brought Christina with her.
Brown used a portion of the estate's assets to purchase certain
real property in Virginia Beach, which was conveyed by deed to
Brown in her capacity as the "Custodian for Christina Elizabeth
Brown under the Kentucky Uniform Transfers to Minors Act." The
deed was recorded in the clerk's office of the Circuit Court for
the City of Virginia Beach (the circuit court).
In March 1997, Brown, in her capacity as Christina's
custodian, conveyed the property to herself, individually, by a
"quitclaim" deed that was recorded in the circuit court clerk's
office on April 3, 1997. Brown conveyed the property to herself
without consideration in order to use it as security for a
personal loan. The parties have stipulated that this quitclaim
deed is part of the "chain of title" to the property.
Brown obtained a personal loan in the amount of $139,750
from AMRESCO Residential Mortgage Corporation (AMRESCO). The
loan was secured by a deed of trust on the property dated April
15, 1997.
2
Before executing the loan, AMRESCO retained an attorney,
Charles D. Pittman, Jr., to determine whether Brown held valid
title to the property. A title search revealed both the deed in
which Brown acquired the property in her custodial capacity (the
original deed) and the quitclaim deed in which she conveyed the
estate property to herself individually. However, Pittman
failed to advise AMRESCO regarding either deed.
In June 1997, the Kentucky court removed Brown as the
guardian of Christina's estate based on her failure to make a
required appearance in that court and her failure to file with
the court certain periodic and final settlement reports. In
July 1997, the circuit court appointed Brown as guardian of
Christina's estate. 1
In January 1998, Brown obtained a personal loan in the
amount of $35,000 from CENIT Bank, FSB, formerly known as
Princess Anne Bank (CENIT). 2 The loan was secured by a deed of
trust on the property dated January 5, 1998.
Before executing the loan, CENIT retained an attorney,
Henry C. Frenck, III, to conduct a title examination of the
1
The record does not show that the circuit court was
informed of Brown's removal as guardian by the Kentucky court at
the time the circuit court entered its order.
2
Since the filing of the present case, CENIT has merged
with SouthTrust Bank, which has become the successor in interest
to CENIT in its deed of trust and in the present proceedings.
Upon the parties' agreement in this appeal, we have substituted
3
property. His title search revealed the existence of both the
original deed and the quitclaim deed. Frenck advised CENIT that
Brown owned the property in her individual capacity.
In October 1998, Victor W. Brizendine, III, Christina's
guardian ad litem, filed a petition in the circuit court seeking
to remove Brown as the guardian of Christina's estate. In
December 1998, the chancellor "enjoined and restrained" Brown
from "selling, destroying, giving away, disposing of, changing,
adjusting or causing to be diminished in value any assets of the
guardianship."
In March 1999, despite the chancellor's order, Brown
entered into a contract to sell the property to Carter H. and
Lynn M. Coupland (the Couplands). In June 1999, the chancellor
entered a decree prohibiting Brown from selling or transferring
the property. In July 1999, the chancellor removed Brown as the
guardian of Christina's estate and appointed John W. Richardson
as the estate's substitute guardian.
Richardson filed an "Amended Bill of Complaint to Quiet
Title to Real Estate" against various parties, including AMRESCO
and CENIT (collectively, the mortgagees). 3 Richardson asked the
SouthTrust Bank in place of CENIT Bank, FSB, as the proper party
of record in this appeal.
3
AMRESCO filed a third-party bill of complaint against its
attorney, Charles D. Pittman, Jr., and Charles D. Pittman, P.C.,
requesting judgment against them for any damages suffered by
AMRESCO in the suit filed against it by Richardson. This suit
4
chancellor, among other things, to declare that the quitclaim
deed was "null and void" and to declare that Christina's estate
owned the property "free and clear of all liens and
encumbrances." The chancellor, however, ordered that the
property be sold to the Couplands under the terms of their sales
contract with Brown, and further directed that all proceeds from
the sale be placed in trust pending the outcome of the present
litigation.
Richardson filed a motion for summary judgment in which he
argued that the quitclaim deed was void under Kentucky law, and
voidable under Virginia law, and that the mortgagees had actual
and constructive notice of Brown's "fiduciary self-dealing." In
response, the mortgagees argued that they were entitled to rely
on the quitclaim deed under the Act's "safe harbor" provision,
as codified in Kentucky Rev. Stat. Ann. § 385.162 and Virginia
Code § 31-52.
was consolidated with Richardson's suit, and the chancellor
ultimately entered final judgment in favor of all the original
respondents, including Pittman and Charles D. Pittman, P.C., and
Henry C. Frenck, III, upon resolving the allegations in
Richardson's complaint in favor of the mortgagees. On appeal,
Pittman and Charles D. Pittman, P.C., have filed a joint brief
with AMRESCO. Therefore, in stating the mortgagees' arguments
in this opinion, those arguments also represent the position of
Pittman and Charles D. Pittman, P.C., in this appeal. Cenit
also filed a third-party bill of complaint against its attorney,
Henry C. Frenck, III, requesting judgment against him for any
damages suffered by Cenit in the suit filed against it by
Richardson. However, Frenck has not participated in the present
appeal.
5
Kentucky Rev. Stat. Ann. § 385.162, which contains language
substantively identical to that found in Virginia Code § 31-52,
provides, in relevant part:
A third person in good faith and without court order
may act on the instructions of or otherwise deal with
any person purporting to make a transfer or purporting
to act in the capacity of a custodian and, in the
absence of knowledge, is not responsible for
determining:
(1) The validity of the purported custodian's
designation;
(2) The propriety of, or the authority . . . for, any
act of the purported custodian;
(3) The validity or propriety . . . of any instrument
or instructions executed or given either by the
person purporting to make a transfer or by the
purported custodian; or
(4) The propriety of the application of any property
of the minor delivered to the purported
custodian.
The chancellor denied Richardson's summary judgment motion
and held that the mortgagees were entitled to the protections
afforded third parties under the Act. The chancellor stated
that while the existence of the quitclaim deed should have
"raised a red flag," the Act was "sufficient to warrant the
court to deny" Richardson's motion.
After conducting an evidentiary hearing, the chancellor
held that Brown's conveyance of the property to herself in her
individual capacity was a valid transfer. The Chancellor
further held that the mortgagees' deeds of trust were valid and
6
enforceable liens against the proceeds of the sale of the
property. Richardson appeals.
Richardson asserts that the chancellor erred in holding
that the quitclaim deed was valid because under Virginia law, a
deed in which a fiduciary transfers property to herself,
individually, is voidable and must be set aside at the
beneficiary's request. The mortgagees do not dispute this basic
principle of law, but argue that the "safe harbor" provisions of
the Act and the mortgagees' alleged status as bona fide
purchasers protect their interest in the property from
Christina's attack on the quitclaim deed. We disagree with the
mortgagees' arguments.
We address the validity of the quitclaim deed under
established principles of Virginia law, which govern this issue
because the property conveyed by that deed is located in this
Commonwealth. Ware v. Crowell, 251 Va. 116, 119, 465 S.E.2d
809, 811 (1996); Seaton v. Seaton, 184 Va. 180, 183, 34 S.E.2d
236, 237 (1945); Mort v. Jones, 105 Va. 668, 671-72, 51 S.E.
220, 221 (1905). With regard to transfers of property by a
fiduciary, we have stated:
[I]t is a settled principle of equity that trustees
and all persons acting in a confidential character
with respect to [a] subject of sale are disqualified
from purchasing the property for themselves. The
characters of buyer and seller are incompatible, and
cannot be safely exercised by the same person. The
validity of a sale in such case does not depend upon
7
its fairness, but the sale is voidable, and when
attacked, must be set aside, although the price was
fair, or the best to be had, and the motive pure.
Smith v. Credico Indus. Loan Co., 234 Va. 514, 516, 362 S.E.2d
735, 736 (1987) (quoting Smith v. Miller, 98 Va. 535, 541, 37
S.E. 10, 11-12 (1900)); accord Whitlow v. Mountain Trust Bank,
215 Va. 149, 152, 207 S.E.2d 837, 840 (1974); Owens v. Owens,
196 Va. 966, 973, 86 S.E.2d 181, 185-86 (1955). Such a sale by
a person acting as a fiduciary constitutes a constructive fraud,
and must be set aside when attacked by the fiduciary's
beneficiary in order to uphold the fiduciary relationship that
existed at the time of the sale. Whitlow, 215 Va. at 152, 207
S.E.2d at 840.
Applying these principles, we hold that Christina's attack
on the quitclaim deed requires that the deed be set aside, and
that the chancellor erred in reaching a contrary conclusion.
Therefore, we will now consider whether the mortgagees' asserted
interest in the property is protected under the "safe harbor"
provisions of the Act or by the mortgagees' alleged status as
bona fide purchasers.
Richardson contends that the Act does not protect the
mortgagees' interest in the property because the Act shields
only third parties who "act on the instructions of or otherwise
deal with any person purporting to . . . act in the capacity of
a custodian." Kentucky Rev. Stat. Ann. § 385.162; see also
8
Virginia Code § 31-52. He argues that because the mortgagees
dealt with Brown in her individual capacity seeking personal
loans, rather than in her capacity as custodian for Christina's
estate, the mortgagees did not "deal with" Brown within the
meaning of the Act. Richardson also argues that the mortgagees
do not qualify as bona fide purchasers because both had
constructive knowledge of Brown's fiduciary self-dealing.
In response, the mortgagees argue that they "dealt with"
Brown in her capacity as the custodian of Christina's estate,
within the meaning of the Act, when they relied on the quitclaim
deed in the chain of title that Brown executed in her custodial
capacity. Thus, they assert that their interest in the property
is protected under the Act's "safe harbor" provisions because
they lacked knowledge that Brown's acts were unauthorized or
improper. We disagree with the mortgagees' arguments.
As we have stated, the Kentucky and Virginia statutes
adopting the Act's "safe harbor" provisions are substantively
identical. We also note that there is no jurisprudence in
either jurisdiction interpreting these unique statutory
provisions. Thus, we need not decide whether the disputed
provisions of the Act should be interpreted under the Kentucky
statute or the Virginia statute, and we focus our inquiry on the
Act's language that is contested by the parties.
9
We hold that the language at issue is unambiguous and,
therefore, we examine this language in accordance with its plain
meaning. See Woods v. Mendez, 265 Va. 68, 74-75, 574 S.E.2d
263, 266 (2003); Mozley v. Prestwould Bd. of Dirs., 264 Va. 549,
554, 570 S.E.2d 817, 820 (2002); Industrial Dev. Auth. v. Board
of Supervisors, 263 Va. 349, 353, 559 S.E.2d 621, 623 (2002).
We conclude that because the Act's plain language encompasses
only third parties who "deal with" a "person purporting to make
a transfer or purporting to act in the capacity of a custodian,"
such protections do not extend to those who merely rely on
various acts of a custodian. See Kentucky Rev. Stat. Ann.
§ 385.162; Virginia Code § 31-52.
Because Brown's conveyance to herself by the quitclaim deed
was not a "transfer" as defined by the Act, 4 the mortgagees can
obtain protection under the Act only to the extent that they can
show that they dealt with Brown when she was "purporting to act
in the capacity of a custodian." See Kentucky Rev. Stat. Ann.
§ 385.162; Virginia Code § 31-52. The mortgagees, however, did
not deal with Brown in her capacity as a custodian, but only in
her individual capacity to lend her money for her personal use.
Therefore, the protections afforded by the Act do not apply to
the mortgagees' transactions with Brown.
10
We next consider whether the mortgagees were bona fide
purchasers of the property, thereby entitling them to retain
their security interest in the property notwithstanding
Christina's attack on the quitclaim deed. Although the
chancellor did not reach this issue in his analysis of the case,
we decide the issue here based on our conclusion that it can be
resolved on the present record as a matter of law. 5
A mortgagee may assert the status of a bona fide purchaser
to the extent of the mortgagee's interest in the real property.
See Puckett v. Campbell, 151 Va. 213, 216, 144 S.E. 434, 435
(1928); Gordon v. Rixey, 76 Va. 694, 698 (1882); Cammack v.
Soran, 71 Va. (30 Gratt.) 292, 295 (1878); Garrard Glenn,
Mortgages, Deeds of Trust, and Other Security Devices as to Land
§ 32, at 208, § 378, at 1541-42 (1943). However, to attain the
status of a bona fide purchaser, a mortgagee must establish that
it purchased its interest in the property for value, without
actual or constructive notice of the latent equity of another.
See Tauber v. Commonwealth, 263 Va. 520, 538, 562 S.E.2d 118,
127 (2002); Richmond v. Hall, 251 Va. 151, 157, 466 S.E.2d 103,
4
A "transfer" is defined as a transaction that creates
custodial property under the provisions of the Act. Kentucky
Rev. Stat. Ann. § 385.012; Virginia Code § 31-37.
5
Our resolution of this issue is based on the common law
and, therefore, does not address the meaning of the phrase "in
the absence of knowledge," as found in the Act. See Kentucky
Rev. Stat. Ann. § 385.162 and Virginia Code § 31-52.
11
106 (1996); Guss v. Sydney Realty Corp., 204 Va. 65, 72, 129
S.E.2d 43, 49 (1963).
"The recordation of an instrument gives constructive notice
of all the facts expressly stated in the instrument and other[]
matters therein suggested which might be disclosed upon prudent
inquiry." Shaheen v. County of Mathews, 265 Va. 462, 478, 579
S.E.2d 162, 172 (2003) (quoting Chavis v. Gibbs, 198 Va. 379,
382, 94 S.E.2d 195, 197 (1956)). Thus, a purchaser of real
property has constructive notice not only of the facts appearing
on the face of recorded documents in the chain of title, but
also of such other facts of which the purchaser is placed on
inquiry based on those recorded instruments. Shaheen, 265 Va.
at 477, 579 S.E.2d at 171-72; Allen v. Green, 229 Va. 588, 594,
331 S.E.2d 472, 476 (1985); Kiser v. Clinchfield Coal Corp., 200
Va. 517, 523, 106 S.E.2d 601, 606 (1959); Chavis, 198 Va. at
382-83, 94 S.E.2d at 197-98.
In the present case, the recorded instruments in the chain
of title to the property placed the mortgagees under a duty of
inquiry. On its face, Brown's transfer of the property by
quitclaim deed to herself raised a question of fiduciary self-
dealing, and further inquiry concerning the conveyance would
have yielded additional facts revealing the unauthorized nature
of the transfer. Thus, we conclude that the mortgagees had
notice of the questionable validity of Brown's transfer of the
12
property to herself. This notice refutes their claim that they
were bona fide purchasers and, therefore, their interest in the
property is defeated by Christina's successful attack on the
quitclaim deed. See Tauber, 263 Va. at 538, 562 S.E.2d at 127;
Richmond, 251 Va. at 157, 466 S.E.2d at 106; Guss, 204 Va. at
72, 129 S.E.2d at 49.
Accordingly, we conclude that the mortgagees do not have
valid liens on the proceeds now held in trust from the sale of
the property, and that the Estate of Christina Elizabeth Brown
is entitled to those proceeds free and clear of the mortgagees'
claims. We will remand the case to the chancellor for entry of
an order to be recorded among the land records voiding the
quitclaim deed and the mortgagees' deeds of trust.
For these reasons, we will reverse the chancellor's
judgment and remand the case for entry and recordation of the
above-described order.
Reversed, final judgment,
and remanded.
13