Transactional certainty

Transactional certainty In Germany, how do you know who owns land? • Publicity in real property transactions • Land register (German Grundbuch) • Protection of bona fide purchaser • Techniques to create clear title • Publicity in commercial transactions • Commercial register • Protection against renegade agents • Protection of third-party expectations

German Civil Code § 891. If in the Land Register aright has been registered in the name of a person, it is presumed the right exists and belongs to such person. If a registered right has been canceled in the Land Register, it is presumed that the right does not exist. § 873. The conveyance of ownership in land, the encumbrance of land with a right, and the transfer or encumbrance of such a right requires … the agreement of the affected persons with regard to the change and the registration of such change in the Land Register.

German Civil Code § 892. For the benefit of a person who by jural act acquires a right in land, or an encumbrance of such right, or a right with respect to such encumbrance, the entries in the Land Register are deemed correct … unless the incorrectness is known to the acquirer. … If the registered holder of a right registered in the Land Register is subject to a restriction of his power to dispose of such right, and if such restriction exists for the benefit of a particular person, the restriction is not effective as against the acquirer, unless it appears in the Land Register or is known to the acquirer ….

Transactional certainty Blackacre

Hypothetical 1 Bud is in bankruptcy and legally cannot sell his property, including Blackacre. But his bankrupt status is not registered, so he sells Blackacre to Percy. A Percy is a bona fide purchaser and acquires good title. B Incapacity prevents Bud from transacting. Transactional certainty

Hypothetical 1 Bud is in bankruptcy and legally cannot sell his property, including Blackacre. But his bankrupt status is not registered, so he sells Blackacre to Percy. A Percy is a bona fide purchaser and acquires good title. B Incapacity prevents Bud from transacting. See § 892 Transactional certainty

Transactional certainty German Civil Code § 892. … If the registered holder of a right registered in the Land Register is subject to a restriction of his power to dispose of such right, and if such restriction exists for the benefit of a particular person, the restriction is not effective as against the acquirer, unless it appears in the Land Register or is known to the acquirer …. Moral: rights in Land Register

Hypothetical 2 Bud owns Blackacre, which is registered in his name. Bud sells Blackacre to Penny, who does not register the transfer in the Land Register. A Penny is a bona fide purchaser and acquires good title. B Penny does not have rights to Blackacre unless registered in the Land Register. Transactional certainty

Hypothetical 2 Bud owns Blackacre, which is registered in his name. Bud sells Blackacre to Penny, who does not register the transfer in the Land Register. A Penny is a bona fide purchaser and acquires good title. B Penny does not have rights to Blackacre unless registered in the Land Register. See § 873 Transactional certainty

Transactional certainty German Civil Code § 873. The conveyance of ownership in land, the encumbrance of land with a right, and the transfer or encumbrance of such a right requires … the agreement of the affected persons with regard to the change and the registration of such change in the Land Register.

Hypothetical 3 Bud inherited Blackacre, but the Land Register clerk enters that Bryan is the owner. Bryan conveys Blackacre to Paul, who has not inspected Land Register. A Paul is a bona fide purchaser and acquires good title. B Paul does not have rights since Bud became owner of Blackacre by inheritance. Transactional certainty

Hypothetical 3 Bud inherited Blackacre, but the Land Register clerk enters that Bryan is the owner. Bryan conveys Blackacre to Paul, who has not inspected Land Register. A Paul is a bona fide purchaser and acquires good title. B Paul does not have rights since Bud became owner of Blackacre by inheritance. “Public faith” Transactional certainty

Transactional certainty Greenacre

Hypothetical 4 A owns Greenacre and, by notarial agreement, sells to B. But before B is registered as new owner, A sells to C before a different notary. C’s ownership is registered in the Land Register. A If C knows about sale to B, C is not a bona fide purchaser and acquires no title. B Even though C knows of sale to B, the Land Register is conclusive (unless and until B asserts his rights). Transactional certainty

Hypothetical 4 A owns Greenacre and, by notarial agreement, sells to B. But before B is registered as new owner, A sells to C before a different notary. C’s ownership is registered in the Land Register. A If C knows about sale to B, C is not a bona fide purchaser and acquires no title. B Even though C knows of sale to B, the Land Register is conclusive (unless and until B asserts his rights). See § 891 Transactional certainty

Transactional certainty German Civil Code § 891. If in the Land Register a right has been registered in the name of a person, it is presumed the right exists and belongs to such person. Can this be right? See § 826

Transactional certainty German Civil Code § 826. A person who intentionally causes damage to another in a manner contrary to bona mores is bound to compensate the other for the damage. But B wants the land, not money from A and C. See § 249

Transactional certainty German Civil Code § 249. He who is liable in damages, has to being about the condition which would exist if the circumstances making him liable had not occurred. If the liability exists for injury to a person … then the obligee [at his election] may demand, instead of restitution in kind, the sum of money necessary to effect such restitution. All clear?

Hypothetical 5 A owns Greenacre and, by notarial agreement, sells to B. But before B is registered as new owner, A sells to C before a different notary. C’s ownership is registered in the Land Register. A If C does not know about sale to B, C is a bona fide purchaser and acquires good title. B Even though C does not know of sale to B, the first transferee acquires title. Transactional certainty

Hypothetical 5 A owns Greenacre and, by notarial agreement, sells to B. But before B is registered as new owner, A sells to C before a different notary. C’s ownership is registered in the Land Register. A If C does not know about sale to B, C is a bona fide purchaser and acquires good title. B Even though C does not know of sale to B, the first transferee acquires title. Compare to common law Transactional certainty

Transactional certainty Common law Priority to the first transferee, regardless of good faith or bad faith of later transferee Notice-race statutes Priority to the transferee who first records purchase [register of deeds, not title], if transferee acquired interest in good faith and for valuable consideration. Is US same as German system (convergence)?

Hypothetical 6 X owns Redacre sells to Y for 25,000 euros. But before Y is registered as new owner, X gives Redacre to Z as a gift by notorial act. Z’s ownership is registered in the Land Register. A If Z does not know about sale to Y, then Z is a bona fide acquirer and receives good title. B Even though Z does not know of sale to Y, Z is not a purchaser for value and acquires no title. Transactional certainty

Hypothetical 6 X owns Redacre sells to Y for 25,000 euros. But before Y is registered as new owner, X gives Redacre to Z as a gift by notorial act. Z’s ownership is registered in the Land Register. Norbert Luehring (notary) Transactional certainty

Hypothetical 6 X owns Redacre sells to Y for 25,000 euros. But before Y is registered as new owner, X gives Redacre to Z as a gift by notorial act. Z’s ownership is registered in the Land Register. A If Z does not know about sale to Y, then Z is a bona fide acquirer and receives good title. B Even though Z does not know of sale to Y, Z is not a purchaser for value and acquires no title. Is Land Register certain? Transactional certainty

Hypothetical 6 J, who owns Whiteacre, is insane. J transfers Whiteacre to K, who registers. But K knows she is not an owner, since J lacked capacity to sell. Quite wily, K sells Whiteacre to innocent L, who immediately is registered as owner. A L must search the title to be sure there was no defect, such as J’s insanity. B L is a bona fide purchaser and becomes owner, even though K was not an owner. Transactional certainty

Hypothetical 6 J, who owns Whiteacre, is insane. J transfers Whiteacre to K, who registers. But K knows she is not an owner, since J lacked capacity to sell. Quite wily, K sells Whiteacre to innocent L, who immediately is registered as owner. A L must search the title to be sure there was no defect, such as J’s insanity. B L is a bona fide purchaser and becomes owner, even though K was not an owner. What about J? Transactional certainty

Transactional certainty German Civil Code § 892. … If the registered holder of a right registered in the Land Register is subject to a restriction of his power to dispose of such right, and if such restriction exists for the benefit of a particular person, the restriction is not effective as against the acquirer, unless it appears in the Land Register or is known to the acquirer ….

Transactional certainty Does this mean that chain of title is irrelevant? What about real estate lawyers and the happy business of “title searches”?

Transactional certainty Wanessa Villa (Berlin)

Transactional certainty P owned a stately villa in Berlin. In April 1945, Colonel S of the Russian Army “donated” the villa to Mrs K – who had endeared herself to Colonel S. Colonel S persuaded the German major of Berlin to certify the gift and threatened the Land Register officials with Siberia when they balked in registering Mrs K’s ownership. Mrs K then sold the villa to Mr D, who was unaware of the villa’s transactional history. Who owns the villa, Mr P or Mr D?

Transactional certainty German Civil Code § 892. For the benefit of a person who by jural act acquires a right in land, or an encumbrance of such right, or a right with respect to such encumbrance, the entries in the Land Register are deemed correct … unless the incorrectness is known to the acquirer. What is the assumption of “public faith”?

German Supreme Court (1952): Certainty based on “public faith” in official entry in Land Register. But coerced entry cannot be recognized as official act. Transactional certainty

Hypothetical 7 S, a scoundrel, transfers Whiteacre to himself by forging the signature of T, the true owner. N, a notary, authenticates the signature and registers the transfer. S sells Whiteacre to innocent U, and T asserts ownership. A U, as a bona fide purchaser, acquires good title. (T can sue N, who is insured.) B Since the transfer to S was fraudulent, S is not the owner and has no rights to transfer. Transactional certainty

Should we import a land registration system to the United States? Wouldn’t we would avoid expensive title searches, Torrens system (quiet title) proceedings, title insurance. John “Bev” Spickard Wilson County Register of Deeds (TN) Transactional certainty

Transactional certainty Publicity in Non-land Transactions Register of Commerce – Germany / France

Transactional certainty

Hypothetical 8 M, a registered merchant, appoints X as general manager of his jewelry store. M fires X, but before having this registered, X buys $100,000 in jewelry from S, purportedly on behalf of M. Is M bound? A M is bound, since X was registered as M’s agent at the time of the sale. B M is not bound, since S must inquire into X’s authority for such a large transaction. Transactional certainty

German Commercial Code Sec 15. If a fact which ought to be registered in the Register of Commerce is not registered and published, the person concerning whose affairs the fact should have been registered cannot avail himself of such fact as against a third party, unless such party was aware of the fact. French Decree (1984) Art 66. In pursuing his activity, the person required to be registered cannot, as against third parties …, avail himself of registrable facts and acts which have not been published. … These provisions cannot be invoked by third persons … who had personal knowledge of the relevant facts and acts. Transactional certainty

Hypothetical 9 A, B, C formed and registered a partnership. C left, but the registration remained unchanged. When A and B buy merchandise on credit from W, but then the partnership becomes insolvent, is C liable to W? A C is liable since his status as registered partner remains valid, unless changed. B W can hold C liable only if he performed due diligence of the Register of Commerce. Transactional certainty

German Commercial Code Sec 15…. If the fact has been registered and published, such fact can be relied upon as against a third party. French Decree (1984) Art 66. … third parties … may avail themselves of registrable facts and acts which have not been published in the Register [against the person who failed to have them registered] …. Compare UPA Transactional certainty

Transactional certainty UPA § 16 [Partner by estoppel] When a person … represents himself … as a partner in an existing partnership …, he is liable to any such person to whom such representation has been made, who has on the faith of such representation given credit to the … partnership. UPA § 35 [Power of partner … after dissolution] Nothing in this section shall affect the liability under Section 16 of any person who after dissolution represents himself … as a partner …

Hypothetical 10 Bank plans to loan X Corp (NY corporation) and Y AG (German corporation). What documentation will Bank want to be sure the individuals who sign the notes on behalf of X and Y are indeed authorized. A The Register of Deeds in New York and the Register of Commerce in Germany will make this clear. B In New York, Bank will insist on a legal opinion. In Germany, Bank will want a notarized registration from the Register of Commerce. Transactional certainty

Transactional certainty