We have often discussed in this blog how the Indiana courts will look at contracts and typically enforce the exact terms that were agreed to by the parties.   The courts will also look at those contracts and hold the parties to the terms that were negotiated.   However, in a recent case, the Court of Appeals went even further, most likely to get to what was in the court’s opinion the best result.

The two parties to the dispute had entered into a “property contract” whereby the seller was offering to sell certain real estate “property” to the buyer.   However, the seller did not actually own the property, but in fact had rights under a lease, and another person actually owned the real estate.   Therefore, the contract was not with the actual owner of the property; it was between the buyer and the person who was leasing the property from another person who actually was leasing from the owner.

After the buyer defaulted on the contract due to not paying the monthly payments, the seller filed a lawsuit to evict the buyer and to collect the amounts that had not been paid.   At that point, the buyer, for the first time, conducted a title search and realized that the seller did not own the property, but rather only had been leasing it.

The buyer then filed a counterclaim against the seller because the buyer claimed to have been defrauded by the seller given that the seller did not own the property and therefore could not sell it to the buyer.

The Court of Appeals rejected that argument.    The seller had in fact recorded a copy of the lease and its assignment of the lease with the appropriate county recorder.   The Court of Appeals found that the buyer knew, or should have known, that it was buying an assignment of the lease and was not buying the actual real estate.    The Court of Appeals noted that when a lease is recorded as required, that recording is constructive notice of its existence, and anyone seeking an interest in the real estate after that is on constructive notice of the lease’s existence and is “charged with notice of all that is shown by the record, including any terms contained in the lease that is recorded.”

The Court of Appeals went on to say that actual notice may be inferred from the fact that a person who had a duty to search the records had the means of knowledge that he did not use.

Whatever fairly puts a reasonable, prudent person on inquiry is sufficient notice to cause that person to be charged with actual notice, where the means and knowledge are at hands and he omits to make the inquiry from which he would have ascertained the existence of a deed or mortgage.  Thus, the means of knowledge combined with the duty to utilize that means equates with knowledge itself.  Whether knowledge of an adverse interest will be imputed in any given case is a question of fact to be determined objectively from the totality of the circumstances.

In summary, the court was not going to allow the buyer, who easily had the ability to find out the real status of what it was buying, to get out of the contract (or after the fact rationalize why it quit paying on the contract) because it chose not to do some due diligence prior to entering the contract.   In this case, the court went past the actual terms of the contract and looked at some other issues raised by the transaction, including the means by which the parties could have ascertained what was really going on.   In this way the court was trying to fashion a just result under the circumstances, and was not going to allow the buyer to get out of its contract by simply remaining blissfully ignorant.