Minnesota’s Torrens System: Clarity or Confusion?

Minnesota’s Torrens system of land registration can be a confusing one for those not familiar with it.  This system, enacted in 1901 and based upon a 19th century Australian system of registering ships established by Sir Robert Torrens, requires interests in real property to be memorialized on a certificate of title, and interests not so memorialized are not valid.

The purpose of the Torrens system is to create conclusive evidence of interests in real property.  Documents that are submitted for recording are reviewed by the county’s Examiner of Titles, and the Examiner’s office’s approval is required before the document is recorded with the county’s Registrar of Titles.  The idea behind this system is to keep stray interest, fraudulent documents, etc. from entering the recording system and creating later title disputes.

Despite its laudable goals, the Torrens system at times resembles a “make work” program for Minnesota real estate attorneys.  For example, in order to have a new certificate of title issued after a foreclosure sale regarding Torrens property, the new owner must complete a procedure known as a “proceeding subsequent to registration.”  Additionally, each year there seems to be at least one significant case from the Minnesota Court of Appeals or Minnesota Supreme Court involving a title dispute over Torrens property.

The latest case is Imperial Developers, Inc. v. Calhoun Development, LLC, et al, Case No. A08-1883, decided by the Minnesota Court of Appeals on December 8, 2009.  In this case, the Minnesota Court of Appeals was asked to decide what it meant for a mortgage to be “of record” in the Torrens system when the Registrar of Titles records the mortgage but fails to memorialize it on the certificate of title for the subject property. 

The facts of the Imperial Developers, Inc. case are as follows:  one developer sold three lots to another developer, who financed the purchase and granted mortgages on the three lots to two separate lenders.  The Hennepin County Registrar of Titles recorded the warranty deed and the mortgages, but failed to memorialize the mortgages on the certificate of title for two of the three lots.  By the time the error was corrected, two mechanics lien claimants completed work on one of the lots and recorded mechanics liens against that lot.  Predictably, the developer defaulted on the mortgages and failed to pay the mechanics lien claimants, which landed everyone in court fighting over priority to foreclose upon the property. 

The District Court found that the mortgages were of record and the mechanics lien claimants had actual knowledge of them, even though they were not memorialized on the certificates.  The Court of Appeals, in reversing the District Court’s finding as to the mortgages being “of records”, concluded that to be “of record” for purposes of the Torrens system, Minnesota Statutes Section 508.55 requires that a mortgage must be filed for recording and memorialized on the certificate of title; one without the other is not sufficient.  The Court of Appeals, in remanding the case back to the District Court for further determination of whether the mechanics lien claimants had “actual knowledge” of the mortgages given the reversal on whether the mortgages were “of record”, alluded to the mistake by the Hennepin County Registrar in not memorializing the mortgages on the appropriate certificates, and suggested that the lenders should seek redress through the general assurance fund established by Minnesota Statutes Section 508.76, subd. 1. 

The dissenting opinion by Judge Heidi Schellhas (who, it should be noted, happens to be one of only a few judges on the Court of Appeals who was a real estate attorney in private practice prior to appointment) appears to be the better reasoned opinion.  Judge Schellhas, rather than use an abstract statutory construction, applies a more common sense approach:  regardless of whether the mortgages were memorialized on the certificates, the mortgages were actually recorded and document numbers were assigned.  Judge Schellhas further noted, correctly, the lag time between recording documents in the Torrens system and the Registrar issuing a new certificate.  Under the majority’s opinion, parties are left at the mercy of the county registrar to make their interests be “of record”, with their only recourse for errors being a claim against the general assurance fund. 

It is my prediction that this case will be appealed to the Minnesota Supreme Court and Judge Schellhas’ dissenting opinion will be adopted by a majority of the Justices.  Regardless, the Imperial Developers, Inc. case adds yet another Torrens-inspired dispute to the annals of Minnesota real estate law and again begs the question of whether the Torrens system is achieving its goal of clarity, or simply adding a different level of confusion.